ML17278A614

Wppss 1985 Annual Rept. W/860225 Ltr

ML17278A614
Person / Time
Site:	Columbia, Satsop
Issue date:	12/31/1985
From:	Halvorson C, Mazur D, Sorensen G, Sorenson G WASHINGTON PUBLIC POWER SUPPLY SYSTEM
To:	Harold Denton Office of Nuclear Reactor Regulation
References
GO1-86-0042, GO1-86-42, GO2-86-171, GO3-86-119, NUDOCS 8603030247
Download: ML17278A614 (44)

Text

REGULATOR> NFORI lATION DISTRIBUTION 8 EV (RIDS>

ACCESS ION NBR: 8603030247 DOC. DATE: 85/12/31 Prospects NOTARIZED: NQ DOCKET 0 F*CIL: 50-397 NPPSS Nuclear Unit 2f Washington Public Powe 0500035'7 50-460 WPPSS Nuclear Prospect Unit 1f Washington Public Powe 05000460 STN-50-508 NPPSS Nuclear Prospects Unit 3> Washington Public 05000508 AUTH. NANE AUTHOR AFFILIATION SQRENSQN, G. C. Washington Public Power Supply System NAZURl D. W. Nashington Public Power Supply System HALVORSONf C. M. Washington Public Power Supp lg System RECIP. NANE RECIPIENT AFFILIATION DENTONf H. R Office of Nuclear Reactor Regelation Director (post 851125 r~ <4:f<

SUBJECT:

"NPPSS 1985 Annual Rept. " N/860225 ltr.

DISTRIBUTION CODE: N004D COPIES RECEIVED: LTR ENCL SIZE:

TITLE: Annual Financial Reports NOTES: StandaT di zed Plant. o5ooo5a8 RECIPIENT COPIES RECIPIENT CQP IES ID CODE/NANE LTTR ENCL ID CODE/NANE LTTR ENCL BNR PD3 PD 1 0 PWR-B PD6 PD 0 PNR-B PD7 PD 1 0 BWR PD3 LA Ol 1 1 PNR-B PD6 LA 01 1 1 PWR-B PD7 LA Ol 1 1 BRADFUTEf J 0 DlCK. G 1 0 SINGHf B 1 0 INTERNAL REG FIL a4 1 1 EXTERNAL: 24X 1 1 LPDR 03 NRC PDR 02 1 TOTAL NUMBER OF COPIES REQUIRED: LTTR 15 ENCL

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Washington Public Power Supply System P.O. Box 968 3000 George Washington Way Richland, Washington 99352 (509) 372-5000 Docket Nos: 50-460 - G01-86-0042 50-397 - G02-86-171 50-508 - G03-86-119 February 25, 1986 Mr. Harold R. Denton, Director Office of Nuclear Reactor Regulation U. S. Nuclear Regulatory Commission Washington, D. C. 20555

Subject:

NUCLEAR PROJECTS NO. 1, 2 and 3 ANNUAL FINANCIAL REPORT Enclosed for your information, as required by 10CFR 50.71, are three (3) copies of the Washington Public Power Supply System's 1985 Annual Report. The financial statements of the Supply System's Nuclear Projects are not certified by our auditor (Ernst and Whinney) in view of certain facts discussed in the Annual Report, with which the Nuclear Regulatory Commission is already familiar.

Very truly yours, G C. Sor ensen, Manager Regul atory Programs Enclosures cc: JO Bradfute/NRC G. Dick/NRC T. Michaels/NRC NS Reynolds/BLCPR RM Boucher/PPSL* WL Bryan/WWP*

RV Myers/PSPSL* BD Withers/PG8E*

JR Lewis/BPA*

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On the cover:

ater vapor rises from the cooling towers at the Washington Public Power Supply System's Plant 2 at Hanford. The 1,100-megawatt nuclear power plant sits amid the agricultural environment of Washington State's Columbia Basin, where abundant water and inexpensive i electricity have transformed millions of acres of this arid region into productive farmland.

Letter from the Chairman of the Board 3 Letter from the Managing Director g The Year in Review 5 Executive Board 33i Board of Directors 33 Executive Board Committees 39 Financial Section 3g

1985 ANNUALREPORT UPDATE Following completion of the 1985 Annual Report, the U.S. Supreme Court on Jan. 13, 1986 issued an order upholding the validity of the net-billing agreements with the Bonneville Power Administration on Nuclear Projects No.'s 1, 2, and 3.

The order denied a Writ of Certiorari in DeFazio vs. Washington Public Power Supply System and finalizes the 9th U.S. Circuit Court of Appeals decision of Feb. 4, 1985 and affirms the May 16, 1983 judgement of the U.S. District Court for Oregon. Those rulings declared that the more than 100 utilities participating in Nuclear Projects No.'s 1, 2, and 3 had the legal authority to enter into the net-billing agreements.

This positive development makes some statements in the Financial Section obsolete, specifically the fourth paragraph on page 14, "Report of Independent Accountants," angl the section titled "Net-Billing Agreements" in Note E, pages 32 and 33, which discusses uncertainties in the outcome of the case.

The favorable conclusion of this important litigation removes one of.

the major impediments to the Supply System returning to the financial markets and clears away some of the uncertainty clouding the future of WNP-1 and WNP-3.

Sincerely, D.W. Mazur Managing Director

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LET2"ER FROM THE CHAIRMANOF THE EXECUTIVE BOARD f 1983 was the most turbulent year in Supply System history, then 1984 was its stabilizing year and 1985 can be considered its turnaround year. With three Supply System plants operating commercially, the focus of its Executive Board has shifted to operations and resolving the preservation and engineering issues at WNP-1 and WNP-3.

It's an important job because the ratepayers already have invested nearly $ 5 billion in these two unfinished plants. The board members are convinced that growth will occur in our region. It's only a ques-tion of how we most reasonably manage the projects in the interim.

In 1986, the Executive Board will be re-evaluating the Supply System's preservation programs keeping in mind that the power picture could change very rapidly. For example, the Northwest Power Planning Council was created in 1980 to manage a power shortage. By the time it was institutionalized in 1982, it was dealing with a surplus.

In the 1980s, the Northwest power planners are facing the realiza-tion that they had drastically overestimated the region's electrical needs. The natural inclination would be to overcompensate for past errors by using the most conservative projections. But everyone recognizes the jeopardy to the Northwest if we were to pull back too far and fail to maintain adequate cost-effective energy options.

Current economic studies show that the two unfinished Supply System nuclear projects WNP-1 and, WNP-3 meet all the criteria for cost-effectiveness. According to the Power Council, completing these plants would cost less than any new thermal power resource.

We are aware that there are pending legal issues and political actions that make the Supply System's re-entry into financial markets very difficult. But as litigation is concluded and we experience a continued period of stable operation, these obstacles will be eliminated.

The Supply System has a strong and perceptive Executive Board made up of members appointed by Washington State's governor and by the Supply System's Board of Directors. Collectively, the two boards have experience in all facets of the Supply System's business.

Working together, our job is to make certain that when our region needs additional power, Supply System resources will be ready to supply that need in an efficient and timely manner.

Sincerely, Carl M. Halvorson Chairman, Executive Board

LETTER FROM THE MANAGINGDIRECTOR uring Fiscal Year 1985, the Supply System exhibited increased strength and corporate maturity and continued to meet performance-based objectives set in the pursuit of excellence.

Due to strong management commitment and a concerted effort by all employees, we were able to complete the year while expending less than 90 percent of the $ 358 million operating and construction budgets that were authorized by our Executive Board.

This significant accomplishment came about through greater efficiencies and the utilization of fewer facilities, equipment and manpower, and demonstrates the commitment and willingness of the Supply System to challenge its own initiatives and motivation in the best interests of the region's electric ratepayers.

Following through on this theme of fiscal responsibility, we developed and implemented a budget for our current 1986 Fiscal Year that is $ 25 million less than the one for FY 1985.

The major priority for FY 1985, reliable commercial operation of the 1,100-megawatt Plant 2, was accomplished. After completing its first scheduled maintenance outage in May and June, Plant 2 was available (along with our 860-megawatt Hanford Generating Project and the 27.5-megawatt Packwood Lake Hydroelectric Project) to help meet the electrical needs of the region during one of the driest summers in recorded history. At the end of the fiscal year, these three plants had produced a combined lifetime output of over 67 billion kilowatt-hours of electricity enough power to provide the annual average needs of three million Pacific Northwest all-electric homes.

Meanwhile, preserving the assets of Supply System projects WNP-1 at Hanford and WNP-3 at Satsop continued to be a major concern of the Supply System. The NRC has accepted a pioneering Readiness Review Program, the first in the United States nuclear power industry, which calls for the approval of work already completed at the two plants. Such approval would mean that, when construction resumes, we will have a solid foundation to start from.

That assurance will allow us to direct our full attention to completing the projects.

In this area, we are clearly a leader in the industry and lessons Total FY 1985 that we learn from our readiness review effort will be shared with Funding Sources lS in millions) other utilities in the United States which also have nuclear power plant projects that are in extended construction delays.

An additional benefit of our Readiness Review Program is financial. Its successful completion will eliminate many questions about the eventual licensability of the plants, and should be viewed by the financial community as a strong commitment to future financing and completion of WNP-1 and WNP-3.

Due to the current surplus of electrical supplies in the Pacific Northwest, it is not clear at this time when work will resume on WNP-1 and WNP-3. However, when the Executive Board gives the order to restart construction, efforts already undertaken by the Supply System or scheduled for implementation will assure that these cost-effective facilities will be available to meet the needs of the region. 84% Net Billing-$709 11% I.O.U.'s '-$ 93 One of our key priorities in 1985 was the possibility of 3% Bonds-$ 27 refinancing a portion of the outstanding bonded indebtedness on 2% Chemical Bank-S19 WNP-1/3 and Plant 2. The region's ratepayers could save hundreds of millions of dollars if we could refinance existing bonds that were issued at higher interest rates. The Supply System presently cannot Total FY 1985 obtain access to financial markets. In addition, congressional tax Expenditures simplification initiatives underway could impact tax-exempt iS in millions/

financing and advanced refinancing if enacted as written. However, our commitment to the region's ratepayers demands that we work to remove these impediments.

The Supply System had a good year in 1985. We are an organization that is achieving its goals by capitalizing on strong management, fiscal accountability and good people. I look forward to helping guide the Supply System and seeing it grow as one of the nation's best operating utilities, generating needed electricity safely and economically for the Pacific Northwest.

60% Debt Service-$ 508 17% Construction-$ 141 21% Operating-$ 180 2% Termination-$ 19 D.W. Mazur Total: $ 848 Managing Director

'nvestor.Owned Utilities

THE YEAR IN REVIEW he Washington Public Power Supply System in 1985 was a stronger 6SThe summer of 1985 brought dry organization, better geared to doing its job supplying weather and one of the lowest water reliable, reasonably priced elec- years in the Columbia River System.

tricity to the ratepayers of the Pacific Northwest. With our hydroelectric system straining With the commercial opera- to meet power sales obligations, we called tion of Plant 2, the company is now a full-fledged nuclear utili- on Plant 2 to provide sorely needed ty and is living up to its name generation. This energy saved water in as a major supplier of electricity in the Pacific Northwest. In reservoirs and enabled BPA to avoid fact, the Supply System has the largest generating capacity of costly purchases outside of the region to any regional public utility. meet power needs.>>

The addition of Plant 2's 1,'100 megawatts of thermal Peter T. Johnson, Administrator, capacity couldn't have come at Bonneville Power Administration a more opportune time for the Bonneville Power Administra-tion. An expected power up when a dry spring and a hot plants that had remained idle surplus in the federal summer combined to shrink for years joined Plant 2 in marketing agency's service normally abundant water providing base-load capacity to area literally dried supplies for hydroelectric Bonneville, keeping power sales generators. With increased de- revenue flowing to the agency mand in the region and in the and paying the costs of Southwest, even high-cost coal operation.

Low water supplies added a sense of urgency to Plant 2's first year of operation. Plant n staff was not accorded the lux-ury of working out the bugs, but rather was challenged to keep the plant on-line as much as possible. The plant's first scheduled maintenance outage began May 3 with a list of li problems requiring

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't/ 0 The Nuclear Safety Assurance Group worhs independently from the plant staff, reviewing industry events and site activities and maltfng recommendations to enhance nuclear safety at Plant 2.

The group includes lleft to right]

Sandy Rounds, Herb McGilton and Bob Da Valle.

0 A Cascade Afountains reservoir shows the effects of this summer's prolonged dry spell.

troubleshooting. When the Regulatory Commission) was dous flow of water through the outage ended on schedule declared when lubrication oil reactor core continued to June 29, the continuing dry caught fire following a bearing vibrate following efforts to re-spell was placing even more failure in a reactor feedwater pair it during the maintenance strain on BPA to meet its power pump. Although the fire was outage. Although not a safety commitments. quickly extinguished, the loss of problem, both recirculation The first few weeks of one of the two pumps cut pumps are needed to produce operation after the outage were power production by one-half. enough steam for full anything but smooth. On its The reactor feedwater pump 1,100-megawatt generation.

first day back in operation an was subsequently repaired and With only one pump working, Unusual Event Ithe lowest of returned to service, but another Plant 2 has been forced to four emergency classifications pump has proved troublesome. operate at about 800 megawatts, maintained by the Nuclear One of two reactor recirculation or about 72 percent of capacity.

pumps, used to drive a tremen-

THE YEAR IN REVIEW jcontinued)

A four-to-six week outage to repair the recirculation pump was scheduled for the fall, but ~4Plant 2's operators impressed me as it was postponed because of continued dry weather and having a professional attitude... if the delays in obtaining needed public had the chance to see them in parts. Repairs will be made during the 1986 annual spring action, they mould have a higher maintenance outage when confidence level. SS Plant 2 is shut down at the re-quest of BPA due to abundant hydroelectric supplies. A deci- Lando W. Zech, Jr., Commissioner, sion will also be made early in U.S. Nuclear Regulatory Commission 1986 as to whether Plant 2's first refueling will occur during U.S. Nuclear Regulatory N-Reactor was shut down for the outage. About one-quarter Commission gave the Supply refueling and maintenance.

of the 764 fuel assemblies System good marks for timely The N-Reactor's primary would be replaced during notification of the public and mission is producing special refueling, but it may be more for managing the simulated nuclear materials for the cost-effective to delay until the recovery operations. government. By-product steam spring outage of 1987. At the Hanford Generating from the nuclear reactor is Despite the recirculation Project a history of reliable low- purchased by the Supply pump, Plant 2 has continued to cost power production con- System for generating be a reliable source of electric tinues, as it steadily supplies electricity.

power for the region. The plant 860 megawatts of electricity to Since beginning operation in set a generation record on the BPA transmission system. 1966, HGP has generated a net November 12, after operating HGP underwent an annual total of 62 4 billion kilowatt-100 continuous days without maintenance outage, beginning hours of electricity, enough to shutting down. in September, when the U.S.

During 1985 the Supply Department of Energy's System successfully completed its third annual emergency preparedness exercise at Plant 2. The annual emergency exercise, required under Plant 2's operating license, was W((~Pig~p.

conducted in cooperation with local, state and federal agencies to demonstrate that a serious A v ~" 'Ijti accident can be handled with-out harm to the public. The v,,>faux.

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,v,vs 0 Noreen Irwin and John Arbuchle are part of the Plant 2 quality assurance organization, charged with enhancing safety and reliability by verifying that activities meet plant procedures and regulatory requirements.

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%' 'Llll 0 The plant operating crews at Plant 2 are achnowledged to be among the most experienced in the industry. Pictured are Bill Shaeffer fforegroundj and left to right Steve Hutchinson, Arlen Herrington and John Dabney.

supply over 3.1 million all- very low-cost electricity. Physical preservation efforts electric homes for a year. With With construction at a made since WNP-1 was its continued operation assured virtual standstill, the Supply mothballed in 1982 and WNP-3 through 1993 and possibly System's efforts at Nuclear beyond, HGP will continue to Projects 1 and 3 (WNP-1 and -3I be a source of cheap, reliable are concentrated on preserving electricity for the Pacific these valuable resources to Northwest. meet future electric needs. The The Supply System's oldest Supply System has become an generating plant, the 27.5-mega- industry leader in this area.

watt Packwood Lake Hydro-electric Project, stayed in opera-tion through the low-water year at reduced capacity, continuing to be a reliable producer of

$1Jh y~V D Steve Rejnialt (leftj and Ron Utter are developing an interactive computer program to replace the traditional classroom lecture on radiological protec.

lion and safety practices.

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THE YEAR IN REVIEW (continued j in 1983 have paid offresearch into corrosion rates at the two projects has proved that main- SSThe competence of the Supply System to taining equipment and facilities is no longer a major concern.

pull off the preservation of WNP 1-and A major milestone was met M%I'-3 is not an issue... this organization last fall at WNP-3 when the containment vessel, a steel shell has impressed the council, more than that surrounds the nuclear steam supply system and any utility or rate group in the region, isolates it from the environ- with its honesty, candidness and ment, successfully passed a professionalism. S>

pressure test. Huge air com-pressors were used to bring the Charles T. Collins, Former Chairman, pressure inside the containment Northwest Power Planning Council vessel to over 50 pounds per square inch, satisfying regulatory agencies as to the work done to date at WNP-1 of the BPA, which is depending strength and tightness of the (63 percent complete) and on the plants to meet its future structure. WNP-3 (76 percent complete). generating needs. However, the While preservation and The program, expected to take Northwest Power Planning testing efforts continued, a new two years or more, will assure Council, an advisory group program was instituted at that licensing and operation of made up of representatives of WNP-1 and -3. Called the the plants will not be impacted the four Northwest states, "Readiness Review Program," by quality concerns over con- removed WNP-1 and -3 from a it is a joint effort with the struction completed before the list of future "firm resources" Nuclear Regulatory Commission delays. and instead listed them as to inspect and approve The Readiness Review "resource options" in its Program has the full support 20-year energy plan. The coun-

,j/(i/j t cil's study found the projects to be cost-effective resources that Wp~ would pay substantial dividends to the region's ratepayers if completed and strongly recom-mended that they be preserved to meet future demand.

The decision was based on "barriers" to their completion, 0 The Human Resources and Legal departments team up to aggressively pursue corporate affirmative action goals. /left to rightJ Mo Larson, Etna May Ahre and Craig Matheson.

such as litigation and its effect on the Supply System's present inability to finance construction.

The BPA continues to pay through its rates the preserva-tion costs on WNP-3 and the debt service on the $ 3.7 billion in outstanding bonds on both projects. WNP-1 preservation costs are paid from the project's construction fund with pro-ceeds from the last bond sale in 1982. The BPA has no plans at this time to finance construc-tion through its electric rates.

The Supply System's Executive Board is deliberating on when to resume construction.

Meanwhile the WNP-4/5 Termination Program staff continued its efforts to dispose of the salable assets of the two uncompleted projects, which were terminated in 1982. Sales revenue in 1985 exceeded

$ 9 million with proceeds going to Chemical Bank, bond trustee for WNP-4/5. The majority of sales continue to be to other U.S. utilities with operating power plants, with the most significant being the sale of an emergency diesel generator to a Utah utility for about

$ 1.2 million.

Although litigation and its impact on financing continues to influence the direction of the Washington Public Power Supply System, the organization is on a stable foundation and is steering its own course into the future.

0 As part of the maintenance team at the Hanford Generating Project, (left to right/ Alonzo Maganas, Bill Benson and Frank Schneider keep the turbine generators spinning smoothly.

EXECUTIVE BOARD As ofjune 30, l98R Robeit E. Berney Ronald D. Mayo'ayo Professor of Economics Associates Washington State University Seattle, Washington Donald R. Clayhold Paul J. Nolan (Assistant Secretary J Director Manager Department of Public Utilities Benton County PUD City of Tacoma Raymond E. Colbert Lois M. Powell Commissioner Commissioner Okanogan County PUD Grays Harbor County PUD Cornelius R. Duffie Sydney Steinborn (Secretary J Consulting Engineer Consultant Seattle, Washington Portland, Oregon Franh N. Ward Carl M. Halvorson jVice ChairmanJ fChairman J Commissioner President Klickitat County PUD HalvorsonMason Corporation Portland, Oregon Louis H. Winnard Senior Management Consultant Los Angeles, California

'On October 2, 1985, the governor appointed Sam J. Farmer to the Executive Board.

He replaced Ronald D. Mayo, whose appointment expired on June 13, 1985.

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BOARD OF DIRECTORS As ofJune 30, 1985 Donald R. Clayhold Roger C. Sparks Manager Commissioner Benton County PUD Kittitas County PUD William D. Scott Frank Ward Commissioner Commissioner Chelan County PUD Klickitat County PUD Paul L. Runyan Raymond E. Colbert (Assistant Secretary j Commissioner Commissioner Okanogan County PUD Clark County PUD Elmer E. Roloff Larry J. Nickel Commissioner Councilman Pacific County PUD City of Ellensburg Keith Sedore William G. Kuehne Energy Services Director Commissioner City of Richland Ferry County PUD Randall W. Hardy Kenneth R. Cochrane Superintendent (President I Seattle City Light Commissioner Franklin County PUD Parker L. Knight

/Vice President j Vera Claussen Commissioner

[Secretaryj Skamania County PUD Commissioner Grant County PUD Paul J. Nolan Director Lois M. Pouell Department of Public Utilities Commissioner City of Tacoma Grays Harbor County PUD David L. Myers Commissioner Wahkiakum County PUD These utilities withdrew their membership in the Supply System during fiscal year 1985, bringing the board to its current 17-member level.

Douglas County PUD Mason County PUD No. 3 Clallam County PUD Lewis County PUD Cowlitz County PUD Snohomish County PUD 11

EXECUTIVE BOARD COMMITTEES As ofJune 30, 1985 Administrative (Per formance J Functions as the prime working interface between the Executive Board Audit Committee and the Administrative Auditor.

Sydney Steinborn (Chairman J Pranh N. Ward Paul J. Nolan Carl M. Halvorson (Ex OfficioJ Ronald D. Mayo Administrative and Public Responsible for personnel matters and matters relating to administration Responsibility Committee of the Supply System and its relations with the general public, other public agencies and other outside entities.

Paul J. Nolan (Chairman J Sydney Steinborn Robert E. Berney Carl M. Halvorson (Ex OfficioJ Lois M. Powell Audit, Legal and Finance Responsible for review and oversight of Supply System activities relating Committee to its financial needs, financial management system, finance and investment policies, budget and budget amendments, financial and fiscal auditing activities, real estate activities, insurance activities and legal strategies and policies.

Louis H. Winnard (Chairman J Paul J. Nolan Robert E. Berney Lois M. Powell Donald R. Clayhold Carl M. Halvorson (Ex OfficioJ Ronald D. Mayo Construction Committee Responsible for review and oversight activities of construction of Supply System projects such as budgets, schedules, contracts and change orders, safety, licensing, planning, contracting methods, and design and field engineering.

Donald R. Clayhold (Chairman J Ronald D. Mayo Raymond E. Colbert Sydney Steinborn Neil R. Duffie Carl M. Halvorson (Ex OfficioJ Operations Committee Responsible for reviewing activities related directly to the operation of the Supply System power plants such as licensing, safety, operating schedules and plans, and contracts.

Neil R. Duffie, (Chairman J Raymond E. Colbert Ronald D. Mayo 12

1985 ANNUALREPORT

~ QasQt~m Report of Independent Accountants 14-15 Financial Statements:

Balance Sheets 16-I of Changes in Financial Position 18 7'tatement Statement of Operations 19 Outstanding Long-Term Debt 20-22 Notes to Financial Statements 23-33 Statement of Debt Service Requirements 34-35

REPORT OF INDEPENDENT ACCOUNTANTS Executive Board Washington Public Power Supply System Richland, Washington We have examined the individual financial statements, as listed in the financial statements section of the fable of contents, of Washington Public Power Supply System's Hanford Generating Project, Packwood Lake Hydroelectric Project, Nuclear Project No. 1, Nuclear Project No. 2, Nuclear Project No. 3, Nuclear Projects No.'s 4 and 5, and the Internal Service Fund for the year ended June 30, 1985. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

As discussed in Note E to the financial statements, Washington Public Power Supply System Nuclear Projects No.'s 1 and 3 are negotiating with their contractors and suppliers to settle contract claims associated with extended construction delays of those projects. Due to the preliminary status of the settlement process, the ultimate amounts of such costs are not fully determinable at the p'resent time.

As discussed in Note E,to the financial statements, Washington Public Power Supply System Nuclear Projects No.'s 1 and 3 are involved in, disputes concerning costs shared with Washington Public Power Supply System Nuclear Projects No.'s 4 and 5. Additionally, disputes arising from the extended construction delay of Nuclear Project No. 3 have been tentatively settled; however, such settlement is subject to approval by the court. The ultimate amount of additional costs, if any, to be borne by. Nuclear Projects No.'s 1 and 3 due to these matters is not determinable at the present time.

As also discussed in Note E to the financial statements, Washington Public Power Supply System is a party to ]itigation in which the Springfield ratepayers are challenging the decision of the U.S. District Court for Oregon, rendered on May 16, 1983, that all parties to the net-billing agreements had authority to enter into them. This decision has been appealed to the U.S. Supreme Court. Supply System counsel cannot predict the outcome of this litigation.

During August 1984, agreements between Bonneville Power Administration and the Washington Public Power Supply System were executed providing for the assignment of project capability (assignment agreements) of Nuclear Projects No.'s 1 and 2 and 70 percent of Nuclear Project No. 3 to Bonneville Power Administration. Under these agreements, the Washington Public Power Supply System has assigned to Bonneville all rights and interests in the Supply System's ownership share of project capability that the Supply System now has or hereafter may obtain if the courts determine that the net-billing agreements are invalid and participants are not obligated to pay for any interest in project capability. Bonnevifle 'roject

would pay directly'to the Supply System the amounts that would have been payable under the net-billing agreements for such project capability. The validity of the assignment agreements may be challenged in the courts.

As discussed in Note E to the financial statements, creditors of Nuclear Projects No.'s 4 and 5 have threatened to attempt to obtain payment from assets or funds held by other projects of the Supply System or the revenues pledged thereto. This year, except as discussed in Note E to the financial statements, bond counsel has rendered no opinion with respect to the rights of creditors of the Supply System to realize upon the assets, funds, or revenues of Nuclear Projects No.'s 1, 2, 3, the Packwood Project, the Hanford Generating Project, or the Internal Service Fund. Supply System management is of the opinion that creditor claims can only be realized from the a)sets, funds, or revenues of the projects to which such claims relate. If it is found that creditors are not limited to payment of their claims from the project to which such claims relate, it will have a material adverse impact on the Supply System.

As explained in Note D, participants agreements pertaining to Washington Public Power Supply System Nuclear Projects No.'s 4 and 5 have been held to be invalid. Therefore, the Supply System is unable to'recover the costs of Nuclear Projects No.'s 4 and 5 from the participants and has reduced such costs to their estimated recoverable values in the accompanying balance sheets as of June 30, 1985. The ultimate recovery of such estimated amounts cannot presently be determined. In addition, as further discussed in Note D, accrued liabilities have been reflected in the accompanying balance sheets for estimated contract settlement and termination costs. Due to the preliminary nature of the settlement process, the ultimate amounts owing to creditors are not fully determinable at the present time. In addition, as explained in Note E, there are various other matters of litigation for which the outcome is not presently known..

In view of the significance of the matters discussed in the preceding paragraphs, we are unable to express, and we do not expressan opinion on the financial statements of the Supply System's Han'ford Generating Project, Packw'ood Lake Hydroelectric Project, Nuclear Project No. 1, Nuclear Project No. 2, Nuclear Project No. 3, Nuclear Projects No.'s 4 and'5, and the Internal Service Fund referred to above.

Seattle, Washington.

September 13, 1985, except as to the tenth paragraph of Note D as to which the date is October 7, 1985, and as to Note E, the fourth paragraph of Nuclear Projects No.'s 1 and 3 Construction Delay, the date is November 22, 1985, and the fourth paragraph of Nuclear Project No. 3 Claims, the date is September 30, 1985.

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BALANCESHEBT 1une 30, 1985(sin thousandsl NUCLEAR HANFORD PACKWOOD NUCLEAR NUCLEAR NUCLEAR INTERNAL PROISCT GENERATING LAKE PROIECT PROJECT PROJECTS SERVfCS Assets NO, 2 PROJECT PROJECT NO. 1 NO. 3 NO,'8,4/5 FUND Current Assets Operating Fund Cash and investments.......... $ 11,724 $ 3,649 $ 1,603 $ 10,129 $ 27,405 $ $ 18,194 Accounts receivable ........... 36 1 190 502 Prepaid and other, . . ~........

~ 12,767 1,048 19 2,049 Due from participants........, . 1,606 24139 863 -792 Due from other projects and internalservicefund........... 10,227 164 180 Due from other funds 48 254 1 631 48 32 182 28 184 84614 8 632 1 860 43 354 56 381 20 745 Restricted Assets Notes B and C Special funds (primarily for construction)

Cash and investments........, ~ 44,710 38489 302 149,619 30,836 7,611 Receivable from joint owners ... 11,513 1,471 Advance to internal service fund . 825 1,721 222 Due from other projects ~....,, . 10,596 1'6,899 Other assets.....,.... 252 235 84 Due from other funds-net,..... 23 554 44 710 3 489 302 161 292 67 859 26 287 Revenue fundcash ........,.... 11 Accounts receivable ~....,... ~...

'26 Chemical Bank fund accounts..., . 31,339 Debt service funds '60 cash and investments....,....... 117 195 7 516 227 642 181 882 90 076 11005 249 741 148 539

'62 161 905 388 934 VtilityFiant and Equipment

-Note B In service . 3,236,122 67,635 12,371 11,242 14,797 Improvements to U.S.

government facilities ....,..... 15,789 Less allowance for depreciation and amortization...,.......... 70 173 ~56 662 ~5541 ~896 8 563 3 165 949 26 762 6 830 10 346 6 234 Construction work in progress... 5,703 Construction work in progress-deferred plants ............ . 27219 923 2 373 025 Costs of terminated plants ...... 2,718,025 Nuclear fuel and prepaid enrichment services ........... 82,326 258,756 50,972 Buildings and equipment-net...

Less amount charged to joint owners,... ..,.... .,...

~ ~ (608,689) [88,802)

Less allowance for estimated unrecoverable cost ~....,....., ~2622 739 3 253 978 26 762 6 830 2 489 025 1 815 308 6 931 6 234 Other Assets and Deferred Charges Unbilled reimbursable costs.... 2,734 Unamortized debt expense.... 3 422 115 22 3 486 2 541 20 Total Assets .............. $ 3,503,919 $ 46,514 $ 12,408 $ 2,924,799 $ 2,123,971 $ 155,470 $ 26,999

'ssets under control of Chemical Banh 16

NUCLEAR HANPORD PACKWOOD NUCLEAR NUCLEAR NUCLEAR INTERNAL PROJECT GENERATING LAKE PROJECT PROIECT . PROJECTS SER VICE Liabilities NO. 3 PROJECT, PROJECT NO, I NO.3 NO.'S4/5 FUND Current Liabilities-Operating Fund Accounts payable and accrued expenses,,........... $ 27,874 $ 4,331 $ 239 $ 49 "

$ 6 $ $ 10,196 Advance payments from, participants........,..... 1/609 2,808 2,891 Due to other projects and internal service fund...,....... 2,800 180 7,883 Amounts due power purchasers . 49,331 621 1/506 37,497 26,930 Amounts due other funds....... 23 554 81 614 5 132 1 745 40 354 53 381 18 079 Liabilities-Payable from Restricted Assets Notes Band C Special funds tprimarily for construction)

Accounts payable and accrued expenses ...., ~.....,. 482 12,165 20,636 33,699 Amounts withheld from contractors .............. 10,574 9,251 7/612 Due to other projects and internal service fund ....... 16,707 8,005 Duetootherfunds-net ...... 41 228 990 22 23 109 18 264 41,710 990 22 45 848 64 858 49 316 Debt service funds Accrued bond and note interest payable. ~......, . 4 366 127 104,105 82,846 410,646 Due to other funds-net ........ 7 026 642 26 9 073 9 920 7 026 1 008 153 113 178 92 766 410 646 Chemical Bank fund accounts Accounts payable and accrued expenses ........., .. 382 48,736 1 998 175 159 026 157 624 460 344 Debt in Default, Currently Payable Revenue bonds payable ...,.... 2,250,000 Subordinated revenue notes..... 67 865 2 317 865 Long-Term Debt Note C Revenue bonds payable ..... 2,281,995 34,080 10,469 2,134,200 1,596,535 Less unamortized discount on bonds-net ..... ~69 286 2 212 709

~631 33 449

~83 10 386

~52 523 2 081 677

~38 1

500 558 035 Other Liabilities and Deferred Credits Unearnedrevenue ....,,...... 1,117,612 3,091 Costs reimbursed under net.billing 640,742 351,931 Deferred gain on redemption of revenue bonds ... 1,444 102 Due to other projects........... 5/110 Advances and other ....,...... 43 248 1 400 3 000 3 000 3 810 1 160 860 5 935 102 643 742 354 931 8 920 Total Liabilitles ~ ~ ~ ~ ~ ~ ~ ~ - ~ ~ 3 503 919 46 514 12 408 2 924 799 2 123 971 2 778 209 26 999 Deficiency in assets ...,...... ~2622 739 2'otal Liabilities and Deficiency in Assets ~ ~ ~ $ 3,503,919 $ 46,514 $ 12,408 $ 2,924,799 $ 2,123,971 $ 155,470 $ 26,999

STATEMENT OF CHANGES INFINANCIALPOSITION For the year ended june 30, 1985 fs in thousands(

NUCLEAR HANPORD PACK WOOD PRO)ECT GENERATING LAKE Operating Projects PROJECT PROJECT Source of Funds Operations Net revenue r S $ .0- $ Items not affecting working capital:

Depreciation and amortization ......, ~........., 80,559 2,393 258 Decrease in costs reimbursable from power purchasers . 86,572 2,099 118

~ 8 ~

Less gain on redemption of revenue bonds......... ~129 ~294 Total from Operations ~ ~ 167,131 4,363 172 Total Source o fFunds... $ 167,131 $ 4,363 $ 172 Use of Funds Construction and capital ~..., $ 150,489 Net improvements .. 1,142 Cost of revenue bonds purchased and retired ....... 16,925 3,125 1,68 Increase (decrease) in restricted assets ...,......., .. ~233 96 4 167,131 4 363 172 Changes in working capital Cash and investments $ 5,769 (9,306) 20 Receivables and other 23,598 2,382 (392)

Payables and other ~29 367 6 9Z4 372 Net increase in working capital......... ~ 0- Total UseofFunds,..... $ 167,131 $ 4,363 $ 172 NUCLEAR NUCLEAR NUCLEAR PROJECT PROJECT PROJECTS Son-Operating projects NO. r NO. 3 NO.'3 4/5 Source of Funds Collected under net.billing $ 255,287 $ 203,649 Interest income, 32,775 17143 12,167 Charged to joint owners . 11,839 (678)

Net decrease in restricted funds ....., ....... 15,942 187,167 Received from sale of fuel 401 Revaluation of investments 4,818 4,145 1,260 Reduction of estimated cost of termination ., ~ 4 ~ ~ ~ ~ 2,340 Asset sales,...........,.....,...,...... 8,880 Other,............. ~ . ~ ~ 447 Total Source of Funds.........,...,....., $ 309,223 $ 236,776 $ 211,583 Use of Funds Construction costs . 33,339 41,154 Interest expense 208,211 165,692 198,084 Nuclear fuel (2,167) 25 Financing, trustee and paying agent expenses 197 228 13,499 Bonds redeemed 9,245 1,785 Due to participants . 9,372 23,502 Net transfers to Hanford Generating Project . 51,026 Net increase in restricted funds 4 399 Total Use of Funds....,..., $ 309,223 $ 236,776 $ 211,583

STA'1'EMENT OF OPERATIONS For the year ended june 30, L985P in thousandsl NUCLEAR HANPORD PACKWOOD PROJECT GENERATING LAKE NO4 2 PROJECT PROJECT Operating Revenues $ 2391954 $ 67,761 $ 824 Operating Expenses Nuclear fuel. 11,346 Waste disposal...,,..... ....,... 2,661 Decommissioning . 482 Reactor availability 62,599 Depreciation and amortization. 67,729 2,326 254 Power production and transmission 27,465 1,833 409 Maintenance .. ~.... ~...,

~ 12,834 889 98 Administrative and general . 9,606 800 82 Taxes 903 6 Net operating revenuel(loss'33 026 106 928 ~686 68 447

~26 849 Other income and Expense Investment income 13,400 1,867 419 Interest expense and discount amortization .... ~,.... .. ~120 328 ~1181 ~394

¹t

~

Revenue . $ $ -0. $

OUTSTANDINGLONG-TERMDEBT /$ in thousands)

EFFECTIVE SBRIAI DATE INTBRE5T OFFERING, COUFON OR TERM SERIES OF SAIJS RATS FRICE5 RATB hfATURITIES JUNB 30, I 985 Nuclear Project No, 2 Revenue Bonds.............., 1973 6-26-73 5.66% (Al 5.00-5. 10% 7-1-87/1991 $ 13,600 100 5,70 7-1-2012 124 400 138 000 Revenue Bonds............... l974 7-23.74 7.21 (A) 6.50-6.90 7-1-87/1994 18,000 100 7.00 7-1-1999 15,000 100 7.375 7-1-2012 37 000 70 000 Revenue Bonds....,.. 1974A 11-26-74 7.67 (A) 7.20 7-1-84/1994 18,000 (excludes $ 2,500,000 due 100 7.40 7-1-1999 15,000 July 1, 1985) 100 7.75 7-l-2012 78 000 111 000 Revenue Bonds............... 1975A 3.6.76 6.71 (A) 6.60 7-1-84/1994 18,600 (excludes $ 3,900,000 due 100 6.60 7-1-1999 15,000 100 6.875 7-1-2012 78 000 July 1, 1985) 111 600 Revenue Bonds....... 1976 '6-3-76 6.63 (Al 5.40-6.25 7-1-84/1998 23,955 (excludes $ 1,095,000 due 99.25 6.625 7-1-2006 42,300 100 6.75 7-1-2012 49 860 July 1, 1985) 116 115 Revenue Bonds........ ~.... ~ . 1976A 11-18-76 5.87,, (A) 5.50-5.875 7-1-84/2002 7-1-2007 83,140 44,815 (excludes $ 2,950,000 due 100 6.00 1, 1985) 99.50 6.00 7-1-2012 60 990 July 188 945 Revenue Bonds....... 1978 7-11-78 6.71 (A) 5.50-6.60 7-1-84/2000 60,430 (excludes $ 2,190,000 due 100 6.80 7-1-2006 45,520 100 6,875 7-1-2012 66 230 July 1, 1985) 172 180 Revenue Bonds. ~ .,.....,...,. 1979 3-13-79 6.49 (A) 5,50-6.00 7-1-84/1999 7-1-2004 53,735 33,490 (excludes $ 2,490,000 due 100 6.40 100 6.76 7-1-2012 83 605 July 1, 1985) 170 830 Revenue Bonds........... 1979A 10-17-79 7.69 (A) 6.40-7.30 7-1-84/1999 38,275 (excludes $ 1,800,000 due 100 7.60 7-1-2004 23,050 July I, 1985) 100 7.75 7-1-2012 57 000 118 325 Revenue Bonds.... 1980 10-21-80 9.36 (A) 8.90-10.90 7-1-86/1997 35,230 100 9.30 7-1-2001 23,735 100 '.60 7-1-2006 46,070 (A) 9.25 7-1-2011 75,045 (A) 8.25 7-1-2012 19 920 2M 000 Revenue Bonds......... 1981A 9.4-81 12.44 100 14.375 7-1-2001 30,000 57.895 8.25 7-1-2003 100,000 99 14.50 7-1-2006 30,000 100 13.25 7-1-2012 50 000 210 000 Revenue Bonds. ~.........,... 1982A 2-11-82 14.76 100 9.50 13.75 7-1-86/1996 33,335 100 14.60 7-1-2002 51,665 99.25 14.75 7-1-2012 215 000 300 MO 20

8 ~

EFFECTIVE SERIAL DATE INTEREST OFFERING COUPON OR TERI/f SBRIBS OF SALB RATE PRICES RATE MATURITIBS JUNE 30, 1985 Revenue Bonds....,......., .. 1982B 5-20.82 13.82% 100 9.00-13.00% 7-1-86/1996 $ 39,400 100 13.875 7-1-2012 139 320 178 720 i

Revenue Bonds......,....,... 19820 5-20.82 13.89 100 13.50 7-1-2002 56,960 100 18.875 7-1-2012 139 320 196 280

$ 2,281,995 Hanford Generating Project Revenue Bonds..........,....

(includes $ 3,240,000 due within one year at June 30, 1985) 1963 5-8-63 3.26 "

98, (A) 2.90-3.10 3.25 9-1-84/1986 9-1-1996 6,495 27 585 34,080 Packwood Lake Hydroelectric Project Revenue Bonds.. ~ .,....,...,. 1962 3-20-62 3.66- 99.425 3.625 3-1-2012 $ 7,929 (includes $ 175,000 due within 11-4-65 3.76 100.5, 3.75 3-1-2012 2 540 ouc year at June 30, 1985) 3 10,469 Nuclear Project No. 1 Revenue Bonds......,......., 1975 9-18-75 7.73 (A) 5,75-7.40 7-1-84/2000 $ 37,700 (includes $ 1,300,000 due 100 7.70 7-1-2010 58,300 July 1, 1985) 100 7.75 7-1-2017 74 700 170 700 Revenue Bonds....,....... 1976A 2-4-76 6.84 (A) 6.00-6.25 7 1-84/1998 31,775 (includes $ 1,490,000 due 100 6.90 7-1-2010 66,485 100 " 7.00 7-1-2017 76 495 July 1, 1985) 174 755 Revenue Bonds....,....,.... ~ 1976B 8.31>>76 6.37 (A) 5.00-5.90 7-1-84/1998 '35,515 (includes $ 1,760,000 duc 100 6.50 7-1-2010 66,940 Ju(y 1, 1985) 99.50 6.50 7-1-2017 71 235 173 690 Revenue Bonds.... ~.....,.... 1978A 3-21-78 5.69 (A) 5.00-5.50 7-1-84/2002 62, 170 (includes $ 2,210,000,due 100 5.80 7-1-2010 50,920 July .1, 1985) 100 5,875 7-1-2017 64 810 177 900 Revenue Bonds....... 1978B 12-5-78 6.61 (A) 5.50-6.00 7-1-84/i998 36,680 (includes $ 1,770,000 due 100 6.35 7-1-2003 22,305 July 1, 1985) 100 6.60 7-1-2009 38,190 99.50 6.80 7-1-2017 81 150 178 325 Revenue Bonds........,..., .. 1979 6.19-79 6,64 (A) 6.00 7-1-84/1998 28/215 (includes $ 1,255,000 due 100 6.40 7-1-2003 18,560 ,

July 1, 1985) 100 6.70 7-1-2009 32,370 100 6.80 7-1-2017 69 685 148 830 Revenue Bonds.....,......... 1980A 8-5-80 8.87 (A) 7.00-10.00 7-1-86/1995 55,500 100 9.00 7-1-2002 37000 100 9.20 7-1-2005 16,950 99,00 9.25 7-1-2013 70,550 (A) 7.75 7-1-2017 30 000 210 000

/A/ Various prices

OUTSTANDINGLONG-TERM DEBT /$ in thoi8sandS/

EFFECTIVE SERIAL DATE INTEREST OFFERING COUPON OR TERhf SERIES OF SALE RATE PRICES RATE hIATURITIES jUNE 30, I 985 Revenue Bonds........ 1981A 4-13-81 11.30% (A) 11.30-13.00% 7-1-96/2003 $ 28,580 100 11.625 7-1-2012 91 420 120 000 Revenue Bonds...... 1981 B 4-13-81 11.30 10.00 7-1-2016 40 000 Revenue Bonds... 1981C 4-13-81 10.29 100 10.25 7-1-2015 40 000 Revenue Bonds....,... 1981 D 9.4-81 14.78 " 100 14.375 7-1-2001 20,000 57.895 8.25 7-1-2003 30,000 100 15.00 7-1-2017 265 000 315 000 Revenue Bonds.............. 198ZA 2-11-82 14.79 100 10,50-13.75 7-1-88/1996 7-1-2002 29,355 50,645 100 14.50 99.25 14.75 7-1-2017 305 000 385 000

$ 2,134,200 Nuclear Project No. 3 Revenue Bonds....... 1975 12-3-75 7.87 , (A) 5.40 7.25 7-1-84/1998 $ 24,280 100 7.875 7-1-2010 52,695 (includes $ 1,040,000 due 100 7.875 7-1-2018 71 160 July 1, 1985) 148 135 Revenue Bonds........,...... 1976 4-13-76,6.48 (A) 5.50-6.00 7 1-84/1998 18(005 99.625 6.50 7-1-2010 35,100 (includes $ 865,000 due 45 295 100 6.60 7-1-2018 July 1, 1985) 98 400 Revenue Bonds....... 1977 9-12-77 5.71 (AI 5.00-5.30 7-1-85/2000 59,305 99.50 5.70 7-1-2009 63,535 (includes $ 2,620,000 due 107 160 99.50 5.80 7-1-2018 July 1, 1985) 230 000 Revenue Bonds....... 1978 9-12-78 6.27 (A) 5.90-6.00 7-1-85/2004 66,385 100 6.375 7-1-2010 42,985 (includes $ 1,650,000 due 99 6.40 7-1-2018 90 630 July 1, 1985) 200 000 Revenue Bonds.............. ~ 1981A 2-11-81 10.80 (A) 9.50-12.50 7-1-87/2001 64,375 h

100 11.125 7-1-2005 40,535 99.50 11.125 7-1-2010 80,310 88.50 9.75 7-1;2017 18,950 88.50 9.75 7-1-2018 20 830 225 000 Revenue Bonds........,...... 1981B 9-4-81 14.80 57.895 8.25 7-1-2003 20,000 99 14.50 7-1-2006 20,000 100 15.00 7-1-2018 185 000 225 000 Revenue Bonds, ........... ~ 1982A 2-11-82 14.83 100 10.50-13.75, 7-1-88/1996 7-1-2002 .

6,055 10,445 100 14.50 99.25 14.75 7-1-2018 148 500 165 000 Revenue Bonds......,...,.... 1982B 5-20-82 13.95 100 10.50-13.00 7-1-88/1996 9,195 280 925 99;50 13.875 7-1-2018 290 120 Revenue Bonds,.............. 1982C 5-20-82 13.63 100 13.50 7-1-2002 14 880

$ 1,596,535

/A/ Vanous pncss 22

'VOXZS TO FINANCIALSTATEMENTS Note A Organization share of Nuclear Project No. 3 have been funded since September 1983 and May 1984, respectiv'ely, by pay-ments under the net-billing agreements for those projects.

The Washington Public Power Supply System was organized in 1957 as a municipal corporation and joint operating agency of the State of Washington. It is em- Note 8 Summary of Significant powered to acquire, construct and operate facilities for Accounting Policies the generation and transmission of electric power. On July 1, 1984, its membership consisted of 19 public utility districts and four municipalities that own and The Supply System has adopted accounting policies operate electric systems, within the state of and practices that are in accordanc'e with generally ac-Washington. During fiscal year 1985, six public utility cepted accountin'g principles applicable to the utility districts withdrew from membership, reducing total industry. Separate books of account are maintained for membership from 23 to 17. These actions do not affect each project except for Nuclear 'Projects No.'s'4 and 5, the rights and obligations of the six utilities and the which are accounted for as a single entity. In addition, the Supply System maintains an internal service fund Supply System under the various contracts executed between the utilities and the Supply System relating to for payment and accounting of payrolls, administrative Nuclear Projects No,'s 1, 2, 3, 4, 5,,the Hanford and general expenses, and certain common goods and Generating Project or the Packwood Lake Hydroelec- services procured for the projects on a cost-tric Project. I reimbursable basis.

W

-The Supply System constructed and is operating the Bestricted Funds Packwood Lake Hydroelectric Project, the Hanford In accordance with project bond resolutions and Generating Project and Nuclear Project No. 2, which related agreements, separate restricted funds must be went into commercial operation on December 13, established for each of the projects. The assets held in 1984. The Supply System's Nuclear Project No. 1 is in these funds are restricted for specific uses, including the fourth year of an extended construction construction, termination, debt'service and other Project No. 3 is in the third year of an special reserve requirements. Restricted funds are delay,'uclear extended construction delay; and Nuclear:Projects identified on the balance sheet as Special Funds, No.'s 4 and 5 were terminated on January 22, 1982. Revenue Fund Cash, Accounts Receivable, Chemical Bank Fund Accounts, and Debt Service Funds.

Nuclear Projects No.'s 1, 2 and 4 are wholly owned by the Supply System. Nuclear Project No. 3 is jointly Cash and investments in the Operating Fund of owned by the Supply System (70 percent) and four Nuclear Project No. 2 and in Special Funds of Nuclear investor-owned utilities f30 percent). Nuclear Project Projects No.'s 1, 3, 4 and 5 include $ 30,615,720 No. 5 is jointly owned by the Supply System (90 per. retained in escrow for contractors as of June 30, 1985, cent) and one investor-owned utility )10 percent). Each I joint owner is responsible for its own financing costs Current Assets and Current Liabilities and share of the costs of construction, operation and Assets and liabilities shown as current in the termination and is entitled to its ownership share of accompanying balance sheets exclude current the projects'perating capability. maturities on revenue bonds and accrued interest be-cause debt service funds are provided for their pay-The Supply System is currently'nable to obtain ment..

additional financing through the sale of bonds due to pending litigation'. Therefore, construction completion Investments costs for Nuclear Project No. 2 and project Investments include time certificates of deposit and maintenance costs for the Supply System's 70 percent 23

NOTES TO FINANCIAL STATEMENTS United States government and government agencies Project No.'s 1 and 3 because of the extended delay of securities. Investments are stated at cost or amortized these projects. The interest expensewhich is funded by cost, as appropriate, and include accrued interest. payments under net-billing agreements, will not be capitalized during the delay; Such net interest expense Investments held in the Bond Fund Reserve Accounts totaled $ 188,304,934 and $ 148,568,714 for Nuclear Proj-(included in Debt Service Funds) and Reserve and ects No.'s 1 and 3, respectively, for the year ended June Contingency Funds (included in Special Funds) are 30, 1985. Capitalization of interest expense will resume stated at the lower of amortized cost or market as pro- when construction is restarted.

vided by bond resolutions.

UtilityPlant and Equipment The market value of investments (including accrued Depreciation and Amortization interest) approximates the carrying value.

Buildings and equipment are depreciated by the Investment Income straight-line method over their estimated useful lives.

'Investment income consists of interest earned on in- Improvements to U.S. government-owned facilities are vestments and gains or losses resulting from the sale of being amortized over the period covered by the investments. Investment income relating to operating contract for dual-purpose operation of the U,S, plants is recorded as a credit to operating costs. With Department of Energy's New Production Reactor.

respect to Nuclear Projects No.'s 1 and 3, income earned on any construction funds is recorded as a credit Revenues to Construction Work in Progress-Deferred Plants During the construction phase of a project, monies shown on the balance sheet, and income earned on all received under net-billing agreements, which are other funds is treated. as a reduction of funding required utilized to fund debt service or other project expen-under the net-billing agreements. Investment income ditures, are recorded as Unearned Revenues on the relating to Nuclear Projects No.'s 4 and 5 is credited to balance sheet and are amortized to Revenues over the Costs of Terminated Plants shown on the balance sheet. operating life of the project.

Capitalization of Construction Costs and Expenses As explained in Note E, there is uncertainty as to During the normal construction phase of a project it is when Nuclear Projects No.'s 1 and 3 will be the Supply System's policy to capitalize all costs relating operational. For this reason, monies received under to the project, including interest (net of interest Nuclear Projects No,'s 1 and 3 net-billing agreements income)general and administrative expense, amortized previously classified as Unearned Revenues are now financing expense and certain other expenses. Interest classified as Costs Reimbursed Under Net-Billing.

expense (net) during construction is allocated to nuclear For Nuclear Project No. 2, Hanford and Packwood fuel and plant based on cumulative cash utilization.

General and administrative expense and overhead ex- Projects, the difference between cumulative operating costs, including depreciation and amortization and pense are allocated to projects primarily on the basis of cumulative payments, including debt service but direct usage or direct salary cost. Financing expense ap-excluding depreciation and amortization, is reflected as plicable to each project is amortized by the straight-line Unearned Revenues or Unbilled Reimbursable Costs, method over the period of each respective bond issue, as appropriate, to project capital cost or operating cost, as appropriate, during plant construction or operations. In accordance with covenants of bond resolutions, the As of July 1, 1984, the Supply System discontinued Supply System is authorized to recover actual cash re-capitalizing interest expense (net) applicable to Nuclear quirements for operations and debt service for each project over the life of the project, Accordingly, the

Supply System records revenues equal to operating vides retirement benefits to eligible employees, The costs for each period. No income or loss is realized, cost of the plan to the Supply System is determined by and no equity is accumulated. the retirement system's board. The actuarially com-puted value of pension benefits exceeds the fund Nuclear Fuel Cost assets for the retirement system. However, because Nuclear Project No, 2 capitalized nuclear fuel cost is the retirement system is a multi-employer system, the amortized to nuclear fuel operating expense on the amount of any excess that relates to the Supply System basis of quantity of heat produced for electric genera- is not available. The Supply System's required con-tion. Current period nuclear fuel operating expense tribution was $ 4,187,316 during the period ended June also includes a charge. for future spent nuclear fuel 30, 1985.

storage and disposal to be provided by the Department of Energy in accordance with the Nuclear Waste Policy Act of 1982. Such charge is based on one mill Note C Long-Term debt per kilowatt-hour of energy generated.

Except for Nuclear Projects No.'s 4 and 5, which were-Decommissioning financed together as one utility system, all Supply Estimated Nuclear Project No. 2 decommissioning System projects are financed separately. The revenue costs are being currently funded under the sinking- bonds issued for each project are payable solely from fund method. Monthly payments are made into a sink-- the revenues of that project.

ing fund which, with accumulated interest, will be adequate to fund decommissioning costs at the end of Outstanding revenue bonds of the various projects as the 40-year plant operating life, Sinking-fund re- of June 30, 1985, are presented on pages 20 through 22.

quirements are currently based on estimated decom- Security Agreements and Contracts missioning costs of $ 114 million I1982 dollars).

Payments to the decommissioning fund for Nuclear Project participants have purchased the Supply Project No. 2 for fiscal year 1985 aggregated $ 482,326. System's ownership share of project capability of Nuclear Project No.'s 1, 2 and 3, and the Hanford Cost Related to Construction and Termination Generating Project. The U.S. Department of Energy, of Nuclear Power Plants acting by and through the Bonneville Power Ad-For Nuclear Projects No.'s 4 and 5, the costs of con- ministration (BPA), has in turn acquired the entire struction through January 22, 1982, the date of ter- capability from the project participants under various mination, and the costs of termination and other net-billing and exchange agreements. BPA is obligated related costs subsequent to that date are shown at to pay the participants and the participants are their estimated net recoverable value in the accom- obligated to pay the Supply System their pro rata panying balance sheets as of June 30, 1985, based on share of the total annual costs of the projects, in-Supply System staff estimates. The amount estimated cluding debt service on the bonds', whether or not the for unrecoverable costs ($ 2,622,739,057) has been projects are completed, operable or operating and not-.

reflected as Allowance for Estimated Unrecoverable withstanding the suspension, reduction or curtailment Cost and as Deficiency in Assets in the accompanyirig of the projects'utput. See Note E for a discussion of balance sheets to reduce the capitalized utility plant the Hanford Generating Project and its relationship to value to net realizable value. Nuclear Project No. 1.

Retirement Plan In connection with the issuance of the generating facilities revenue bonds for Nuclear Projects No.'s 4 The Supply System participates in the Washington and 5, the Supply System pledged the revenues to be-State Public Employees'etirement System that pro- derived under participants'greements wjth 88

NOTES TO FINANCIALSTATEMENTS utilities operating principally in the Pacific Northwest. the accompanying balance sheets. Although manage-The participants'greements provided that each par- ment of the Supply System is satisfied that its ticipant pay its respective share of annual costs, in- estimates are reasonable, the final settlement for ter-cluding debt service on the bonds, whether or not the mination costs and the cost of dismantling the projects projects were completed, operable, or operating and cannot be determmed at this time. Certain physical nofwithstanding the suspension, interruption, in- assets of Nuclear Projects No.'s 4 and 5 are being terference, reduction or curtailment of the maintained for a period to maximize their sales value Payments from the participants for Nuclear projects'utput.

upon disposal.

Projects No.'s 4 and 5 termination costs and debt ser-vice were due beginning on January 25, 1983. The participants'greements (discussed in Note C Payments due under the participants'greements have under Security) provided that each participant pay its not been forthcoming (see note D) and an event of respective share of the debt service on the bonds and default, as defined in the bond resolution, occurred on termination costs beginning January 25, 1983.

July 22, 1983, and is continuing. On August 18, 1983, Payments due under the participants'greements were Chemical Bank (Nuclear Projects No.'s 4 and 5 bond not made pending a judicial determination of the par-fund trustee) declared the principal of all Nuclear Proj- ticipants'uthority and obligation to pay. On June 15, ects No,'s 4 and 5 revenue bonds and accrued interest 1983, and again on November 6, 1984, the Washington due and payable immediately. See Note D for a discus- State Supreme Court ruled that Washington municipal sion of the termination of Nuclear Projects No.'s 4 and utilities did not have statutory authority to enter into participants', agreements and, thus, that those

'he 5related challenges to the participants'greements and default on the bonds. agreements are invalid as to the cities and public utili-ty districts of the state of Washington, which collec-In connection with the issuance of the Nuclear Proj- tively hold approximately 68 percent of the par-ects No.'s 4 and 5 subordinated revenue notes ticipants'hares of Nuclear Projects No.'s 4 and 5. In

($ 60,000,000 due July 1, 1984, and $ 7,865,502 due addition, on November 6, 1984 the Washington State June. 30, 1983), the Supply System pledged to set aside Supreme Court also ruled that, because of the invalidi-money for payment of such obligations from funds to ty of the participants'greements entered into by the be accumulated in theRevenue Fund. Payments under Washington municipal utilities, all of the remaining the participants'greements to be accumulated in the participants'greements are unenforceable as well.

Revenue Fund were not made and therefore the Chemical Bank and the Supply System petitioned the subordinated revenue notes were not paid. See Note D U.S. Supreme Court for grant of a writ of certiorari by for a discussion of default on Nuclear Projects No.'s 4 which the state court decision might be reviewed by and 5 subordinated revenue notes. that court. Grant of the writ was denied by the U.S.

Supreme Court on April 29, 1985.

Note D Termination of Nuclear Frojects Since the participants'greements were ruled invalid,

¹.'s 4 and 5 and Default payments due under the agreements were not made and under Bond Resolution there is a deficiency in the Reserve and Contingency Fund'and Bond Fund Interest and 'Reserve Accounts.

On January 22, 1982, the Supply System's Nuclear On July 22, 1983, the Supply System acknowledged that, Projects No.'s 4 and 5 were terminated. Construction it could not meet all Nuclear Projects No.'s 4 and 5 was 24 and 16 percent complete, respectively, at the obligations as they became due. This admission time. The Supply System's current estimate of termi- represented an event of default under the Nuclear Proj-nation costs ($ 31,917,338), including costs of contract ects No.'s 4 and 5 bond resolution. A deficiency in the settlements and other termination costs, has been ac- bond fund also existed at this time.

crued as Accounts'Payable and Accrued Expenses in 26

As authorized under Section 11.3 of the bond resolu- ticipants in Nuclear Projects No.'s 4 and 5, Supply tion, Chemical Bank demanded that remaining funds in System member utilities and certain directors, BPA and the Construction Fund ($ 23,193,264), Construction Trust other individuals. The lawsuit alleges violations of Account ($ 723,256) and Revenue Fund ($ 1,648,568) be federal and state securities statutes, fraud, misrepresen-transferred to it to the credit of the Washington Public tation, bad faith, negligence, and=unjust enrichment, Power Supply System Section 11.3 Account. This and seeks money damages, rescission and restitution.

transfer was made on July 25, 1983. In addition, on This suit is currently in the discovery phase.

July 1, 1983, Chemical Bank transferred a security with In addition, numerous lawsuits have been filed against a book value of $ 8,823,598 from the Bond Fund Reserve the Supply System and numerous other individuals and Account to a newly established Trustee Legal Fee entities by individuals purporting to represent classes of Escrow Account. The purpose of this transfer was to set bondholders. The lawsuits allege violations of federal aside funds to pay for Chemical Bank's legal fees as and state securities statutes, negligent misrepresenta-well as a portion of Supply System legal fees. Under Section 11A of the Nuclear Projects No.'s 4 and 5 bond tion, common law fraud and deceit, gross negligence, and breach of contract, and seek monetary damages for Jesolution, Chemical Bank, as bond fund trustee, or a losses allegedly sustained by the purported classes.

duly constituted bondholders'ommittee is entitled, to These cases have been transferred to the U.S. District the extent permitted by law, to take possession of the Court, Western District of Washington, and most have business and properties of Nuclear Projects No.'s 4 been consolidated for pretrial purposes. All of these and 5. At present, the Supply System is continuing to cases are in the discovery phase of litigation.

manage the contract termination and asset disposal ac-tivities. Supply System management plans to continue Another lawsuit, Haberman v. Washington Public Power the asset disposal activities through at least June 1986. Supply System, has been filed by certain bondholders in Chemical Bank disburses the funds for payment of King County Superior Court asserting claims substan-Nuclear Projects No.'s 4 and 5 termination activities in tially similar to those alleged in the other class actions.

accordance with the payment priorities established in On October 7,1985, the court dismissed all claims in the the bond resolution. Since total obligations currently ex- action, The plaintiffS have appealed this decision to the ceed available cash and revenues, certain lower priority Washington Court of Appeals.

obligations (as defined in the bond resolution) are not being paid. The lawsuits described in the three preceding paragraphs seek to recover the bondholders'nvestment in the On August 18, 1983, Chemical Bank declared the prin- amount of $ 2.25 billion, plus interest, costs; attorneys cipal of all Nuclear Projects No."s 4 and 5 revenue fees and damages.

bonds and interest accrued thereon to be due and payable immediately. The Supply System cannot predict the outcome of the above litigation.

Since the participants', agreements have been held to be invalid, the assets of Nuclear Projects No.'s 4 and 5 Pursuant to state law and resolutions of the Supply have been reduced to their estimated net recoverable System's Executive Board, the Supply System has value, resulting in a deficien'cy in assets. Such agreed to indemnify its directors for certain of the acts recoverable value is based on Supply System staff which have been alleged in the complaint. The Supply estimates. However, the ultimate recoverability cannot System is obligated for associated costs (including legal presently be determined. defense costs) to the extent such costs are not covered by directors and officers insurance.

In August 1983, Chemical Bank filed a lawsuit in U.S.-

District Court, Western District of Washington, which In a recently filed suit, the excess carrier of directors is now pending against the Supply System, all par- and officers liability insurance for the Supply System seeks an adjudication that it has no liability as a result 27

NOTES TO FINANCIALSTATEMENTS of the alleged failure of the Supply System to disclose Hanford Generating Project by Nuclear Project No. 1 facts known to it which, if known to the insurer, would participants, beginning July 1, 1980, regardless of con-have resulted in its not issuing the policy. Although this tinued operation of the reactor. IF the reactor ceases suit is not for money damages, it could have a serious operations, revenues to the Hanford Generating Proj-financial impact on the Supply System. ect arising from these payments will nevertheless be recorded each year thereafter in amounts that will result in full realization of the carrying value of the Note E Commitments and Contingencies plant.

Hanford Generating Project and its Relationship The U.S. government has an option. to acquire owner-to Nuclear Project No. I ship of the Hanford Generating Project upon congres-sional approval. IF the government exercises its option, The U.S. Department of Energy )DOE) owns and it must assume all rights and obligations of the project, operates the New Production Reactor. This reactor including the obligation to pay all revenue bonds.

provides by-product steam to the Hanford Generating Project. The Supply System's current agreement with Under the Hanford Generating Project agreements, the DOE provides for the continuation of this dual- public participants were entitled to 50 percent of the purpose operation of the reactor through June 1993. In output of the project and five,investor-owned utilities accordance with certain related agreements, the were entitled to 50 percent. All power was exchanged operating costs of the project will be offset by to BPA for firm power. During fiscal year 1984, three payments from certain-public and private utilities in of the five investor-owned utilities withdrew their of-return for the power generated, fer to purchas'e their entitlement to output from the

'anford Generating Project. The power from the plant It was initially intended that Nuclear Project No. 1 be is currently being distributed by BPA on the basis of constructed next to the Hanford Generating Project to 72 percent to public participants and 28 percent to the provide the energy source to operate the project when remaining two investor-owned utilities.

the DOE ceased operation of the New Production Reactor. To allow for construction of Nuclear Project Nuclear Projects No.'s I and 3-Construction Delay No. 1, it would have been necessary to shut down the On April 29, 1982, the Supply System, upon the Hanford Generating Project on October 31, 1977. recommendation of BPA, approved an extended con-Because studies at that time indicated that generating struction delay of Nuclear Project No. 1, and on July

. resources in the Pacific Northwest would be inade- 8, 1983, the Supply System, also based on BPA's quate in the late 1970s and early 1980s, the Supply recommendation, approved an extended construction System and BPA determined that the Hanford , delay of Nuclear Project No. 3. During the construc-Generating Project should be kept available for power tion delay, the Supply System will endeavor to production. Therefore, the Nuclear Project No. 1 net- preserve plant assets and maintain project licenses.

billing,.exchange.and project agreements were amended to provide for the'eparation of Nuclear Proj- On November 1, 1984, BPA released a study of ect No. I from the Hanford Generatirig Project. The Nuclear Projects No.'s 1 and 3 construction schedule amended agreements provide that Hanford Generating and financing assumptions. The study recommended Project costs, to the extent not otherwise provided for, that 1) BPA should not include funds for construction be treated as Nuclear Project No. 1 costs with the for Nuclear Projects No.'s 1 and 3 in its budget for Hanford Generating Project having a first claim on the fiscal years 1986 and 1987; 2) BPA should use a mid-revenues of that project. range estimate of preservation cost in its rates and budgets; 3) BPA should work with the Supply System, The amended agreements provide for the payment of the other Nuclear Project No. 3 owners, the Northwest all debt service costs, quiet of investment income, of the Power, Planning Council (council) and other ap-28

propriate parties in defining and perfecting preserva- The obligations of BPA and the participants under the tion plans and restart assumptions; and 4) BPA should net-billing agreements are not affected by the extended perform periodic reviews of Nuclear Projects No.'s 1 construction delays of Nuclear Projects No.'s 1 and 3.

and 3 consistent with BPA resource planning and See "Nuclear Project No. 3 Claims" for a discussion of budgeting to assure scheduling is consistent with the investor-owned utilities'laims of breach of the regional resource requirements. Ownership Agreement based on the Nuclear Proj-ect No. 3 construction delay.

On August 7, 1985, the council released its 1985 Draft Northwest Conservation and Electric Power Plan The Supply System's current estimates of costs to iDraft Plan). The final 1985 power plan is scheduled settle terminated and delayed contracts for Nuclear to be completed in February'986. In the Draft Plan, Projects No.'s 1 and 3 are $ 4,777,000 and $ 5,263,000, the council indicated that Nuclear Projects No.'s 1 and respectively, and these costs have b'een accrued as 3 are cost effective. However, the council did got Accounts Payable and Accrued Expenses in the accom-include Nuclear Projects No.'s 1 and 3 in its resource panying balance sheets. The Supply System's portfolio, citing present legal and other barriers. The management is satisfied that these estimates are council does view Nuclear Projects No.'s 1 and 3 as reasonable. However, the final settlement costs cannot energy options for the future when the current be determined at this time.

barriers are removed.

Nuclear Frojects No.'s 4 and 5 On November 22, 1985, BPA released its 1986 Draft Subordinated Revenue ¹tes Resource Strategy. The Final Resource Strategy is In conjunction with the mothballing of Nuclear Proj-slated for publication in February 1986. The 1986 ects No.'s 4 and 5, certain project participants, investor-resource strategy process primarily focused on the owned utilities and industrial customers of BPA agreed proper level of preservation program costs for to loan Nuclear Projects No.'s 4 and 5 funds to Nuclear Projects No.'s 1 and 3. The draft BPA report underwrite a program to preserve the assets of those recommends that the Supply System maintain a projects. These loans, called bridge loans, consisted of preservation program that includes a technical pro- $ 60 million in subordinated revenue notes, bearing a gram that would, allow cost-effective, earned-value stated maturity date of July 1, 1984, and bearing work to continue. The Supply, System has ongoing interest to due date at a rate of 15 percent.

detailed programs to physically preserve the equip-ment at the plants, and a technical program for Subsequently, when a decision was made to terminate',

earned-value work. Nuclear Projects No.'s 4 and 5, a number of project par-ticipants agreed to'loan Nuclear Projects No.'s 4 and 5 The Supply System is currently unable to predict funds designed to assist in avoiding an uncontrolled ter-when Nuclear Projects No.'s 1 and 3 will be com- mination of the projects. These loans, called termination pleted. However, BPA has recommended that for the loans, consisted of $ 7,865,502 in subordinated revenue Supply System's fiscal year 1987 financial planning notes bearing a stated maturity date of June 30, 1983, process, the Supply System assume a restart of con- and bearing interest to due date at a rate of 15 percent.

struction of one unit in 1994 and restart of construc-tion of the other unit in 1996. BPA further stated there Because Nuclear Projects No.'s 4 and 5 do not have is approximately a one-in-three chance that restart of sufficient funds to underwrite payment of the construction would be needed during or before 1992 subordinated revenue notes, they have not been for one unit, and approximately a one-in-four chance redeemed.

that restart of construction would be needed during or before 1992 for the second unit to meet regional load Fifteen participants and investor-owned utilities have growth. filed lawsuits against the Supply System for payment of the notes, with Chemical Bank named as codefendant in 29

NOTES TO FINANCIALSTATEMENTS several of them. In 12 cases, summary judgments have payments. As stated above, it is the Supply System's been rendered against the Supply System, and in certain position that Pacific is responsible for its 10 percent cases the judgments stated that the obligation to pay the share of termination costs. Until Pacific resumes notes was not restricted to the funds of Nuclear Projects payments, the Supply-System is withholding Pacific's No.'s 4 and 5. These cases were subsequently appealed 10 percent share of revenue received from Nuclear Proj-to the Washington State Supreme Court and on ect No. 5,asset sales. As of June 30, 1985, Pacific's September 5, 1985, the court upheld previous rulings 10 percent share of Nuclear Project No, 5 accrued ter-that the Supply System must repay the bridge and mination costs was $ 1,471,588. Of this amount, $ 449,265 termination loans, but ruled that repayment must be is currently due and has been presented to Pacific for made only from funds'of Nuclear Project No.'s 4 and 5. payment. The remaining amount represents the Supply Motions for reconsideration are now'pending. System's estimate of future termination costs.

Nuclear Project ¹. 5 Ownership Agreement Pacific has made payments prior to June 16, 1983, under the Nuclear Project No. 5 ownership agreement Under the terms of the ownership agreement with Phcific Power and-Light Company {Pacific), Pacific is pursuant to reservations of rights to its potential claim obligated to fund its respective ownership share of to sue the Supply System for damages for failure to Nuclear Project No. 5 termination costs beginning complete the project. Pacific's claim would presumably January 25, 1983, and continuing until all costs of be about $ 150,000,000 its investment in the project.

termination have been paid. Ten percent of the funds Such a claim could be a general claim against the assets received from the sale of Nuclear Project No. 5 assets of the Supply System.

reduce Pacific's obligation for termination costs. Inter-Froject Claims and Claims Pacific has stated to the Supply System that it considers Against General Assets the termination of Nuclear Project No. 5 to be a breach As discussed above, Nuclear Projects No.'s 4 and 5 are of the Nuclear Project No, 5 ownership agreement and currently unable to meet Nuclear Projects No.'s 4 and has reserved its rights to pursue appropriate remedies 5 debts as they become due. Creditors have threatened with respect to such breach. It is the position of the to attempt to obtain payment from assets or funds Supply System that the termination of Nuclear Project held for the benefit of other projects of the Supply No. 5 does not constitute a breach of the Nuclear Proj- System or the revenues pledged thereto. Such creditors ect No. 5 ownership agreement and that Pacific is include those described in the Notes to Financial responsible under the Nuclear Project No. 5 ownership Statements and others who may in the future assert agreement for payment of its 10 percent share of the claims against the Supply System and/or its projects.

costs of termination of such project.

In the opinion of bond counsel, neither the holders of On June 16, 1983, Pacific advised the Supply System the bonds issued to finance the construction of the that due to the Washington Supreme Court ruling that Supply System's Nuclear Projects No.'s 4 and 5 nor certain participants'greements were invalid (as the creditors of the Supply System whose claims arose described in Note D) and other related actions by the from the furnishing of goods or services with respect Supply System, Pacific would no longer fund 10 percent to Nuclear Projects No.'s 4 and 5 will be able to of the Nuclear Project No. 5 termination costs. Pacific realize upon monies held in trust by the respective also advised that it would not make further termination bond fund trustees in the bond funds created by the cost payments until the Supply System adequately respective bond resolutions for payment of debt assures that it can re-establish and maintain controlled service to the holders of. bonds issued by the Supply termination of the project in accordance with the System to finance the construction of the Supply agreements. The Supply System is currently working System's Nuclear Projects No.'s 1, 2 and 3, except to with Pacific to resolve this matter and resume the extent they might obtain rights through a valid exercise of the sovereign police power of the state of 30

Washington or of the constitutional powers of,the creates an uncertainty as to how certain common ser-United States of America, or by a voluntary bankrupt- vices and facilities are to be shared with Nuclear Proj-cy of the Supply System, ects No.'s 1 and 3, respectively; In August 1982, the participants of Nuclear Projects No.'s 4 and 5 presented Bond counsel has not investigated the issues discussed a claim to Nuclear Projects No.'s 1 and 3 to reimburse above with respect to the Packwood or Hanford Nuclear Projects No,'s 4 and 5 for a portion of the costs Generating Projects. However, they believe that upon of shared services and facilities paid by the projects full investigation, the same opinion could be rendered before July 1, 1981. The claim requested immediate with respect to such monies held in trust by the bond payment of $ 75,000,000 and $ 86,000,000 plus interest fund trustees in the bond funds created by the respec- from Nuclear Projects No.'s 1 and 3, respectively, plus tive bond resolutions of the Supply System for the amounts that may be determined in the future. The payment of debt service to the holders of bonds issued claim is based on a method of calculating shared costs by the Supply System to finance the construction of that is different from the method adopted by the Supply such projects. System.

In the opinion of bond counsel, the Nuclear Projects The Supply System has reviewed its cost-sharing policy No.'s 4 and 5 bondholders seeking to recover from the from inception of the projects to determine if costs were Supply System upon their bonds will be restricted to allocated properly, As of June 30, 1985, about collecting any amounts in the bond fund for Nuclear $ 16,962,000 plus interest is due Nuclear Project No. 5 Projects No,'s 4 and 5 and will not be able to enforce a from Nuclear Project No. 3; about $ 8,000,000 plus judgment against any of the assets, funds or revenues interest is due Nuclear Project No. 1 from Nuclear for Nuclear Projects No.'s 1, 2 and 3, except to the ex- Project No. 4; and about $ 163,000 plus interest is due tent such holders of bonds might obtain rights through .

Nuclear Project No. 4 from Nuclear Project No. 2 for a valid exercise of the sovereign police power of the shared costs. These amounts (excluding accrued state of 'Washington or of the constitutional powers of interest) have been recorded in the accompanying the United States of America, or by a voluntary balance sheets as of June 30, 1985. The results of the bankruptcy of the Supply System. aforementioned review are subject to audit by BPA and This year-, except as stated in the preceding the investor-owned utilities in Nuclear Projects No.'s 3 and 5. Because of the preliminary nature of the paragraphs, bond counsel has rendered no opinion with respect to the rights of creditors of the Supply aforementioned findings, the uncertainty over the System to realize upon the assets, funds or revenues of shared cost policies adopted by the Supply System, and Nuclear Project No. 1, Nuclear Project No. 2, Nuclear since the matter of proper allocation of shared costs is Project No. 3, the Packwood Project, the Hanford currently in litigation (as described below), the ultimate Generating Project, or the Internal Service Fund. allocation of shared costs is uncertain.

On October 26, 1982, the Supply System filed a legal Supply System management is of the opinion that creditor claims can only be realized from the assets, action against BPA, the four investor-owned utilities funds or revenues of the projects to which such claims who are joint owners of Nuclear Project No. 3, the par-relate. The Supply System will utilize all legal ticipants of Nuclear Projects No.'s 4 and 5, (the court has since allowed Chemical Bank to intervene in this remedies to defend its position. If it is found that creditors are not limited to payment of their claims suit) and the construction fund trustee for Nuclear Proj-from the project to which such claims relate, it will ect No. 1 seeking a judicial determination of past and have a material adverse impact on the Supply System.

future shared costs among Nuclear Projects No.'s 1. and 4 and Nuclear Projects No.'s 3 and 5. (The court has

, Shared Costs since restructured the case wherein BPA is now the termination of Nuclear Projects No.'s 4 and

'he 5

plaintiff and the Supply System and other afore-

NOTES TO EINANCIAISTATEMENTS mentioned parties are defendants.) Although the lawsuit utilities would provide BPA 1) payments equal to about does not specify the amounts of money that the parties $ 700 million (present value) over the life of the agree-believe should be reallocated, the method used to ment based on the costs of operating and maintaining calculate the aforementioned claim is an issue in the the surrogate plants (or Nuclear Project No. 3 if it is lawsuit. operated); 2) the opportunity to use their combustion turbines if needed;,and 3) the opportunity to complete, Nuclear Project No. 3 Claims operate and use their 372-megawatt share of Nuclear In July and August 1983, the four investor-owned Project No. 3 if it is later determined to be both needed utilities who own 30 percent of Nuclear Project No. 3 and cost-effective.

filed claims in the cost-sharing lawsuits against BPA, the Supply System and Nuclear Project No. 3 par- Final agreements permitting settlem'ent'f the construc-ticipants arising out of the extended construction delay tion delay claims were executed by the Supply System at Nuclear Project No. 3. Included are claims for injunc- on September 13, 1985, and by BPA and the investor-tive and declaratory relief, damages, rescission of the owned utilities on September 17, 1985. Pursuant to Nuclear Project No. 3 ownership agreement and those agreements the parties exchanged covenants not recovery of the total amount of payments made under to sue and asked the court to enter an order of dismissal the agreement to date. In October 1983, BPA amended of their delay claims. On September 30, 1985, the court its complaint to resolve the Nuclear Project No. 3 entered an order requiring that parties wishing to op-dispute. pose the settlement file claims to that effect, Briefing willbe concluded on January 28, 1986. Upon completion In November 1984, the court issued an order on the of that schedule, the court will be in a position to rule parties'ross-motions for summary judgment holding upon the settlement. In the absence of a settlement, and that the Supply System and BPA violated the terms of if the investor-owned utilities were to prevail in theii; their contracts by not continuing construction and in- request for an order granting a right to rescind the cluding the costs in an annual budget to be paid ownership agreement and a right to recover payments through net billing. The court reserved for trial the made thereunder, the Supply System could face a loss issues of whether the contracts were materially contingency of some $ 2 billion plus possible termination breached and whether the investor-owned utilities re- of the project. In December 1985, three participant main obligated to pay further Nuclear Project No. 3 groups filed complaints in the Ninth Circuit Court of

'osts. The judge on this case subsequently excused Appeals, asking that the settlement be declared illegal himself from the case. On May 16, 1985, the newly ap- and void.

pointed judge vacated the summary judgment ruling made in November 1984, but retained the summary Net-Billing Agreements 'n judgment motions under advisement. November 15, 1982, the city of Springfield, Oregon, filed a complaint against the Supply System, BPA, the During the period. November 1984 through August investor-owned utilities owning 30 percent of Nuclear 1985, BPA and the four investor-owned utilities Project No. 3, and all other parties to the net-billing negotiated a proposed settlement of the construction agreements pertaining to Supply System Nuclear Proj-delay claims. BPA described the settlement as follows. ects No.'s 1, 2 and 3. The complaint alleged that the BPA and the four utilities would enter into an agree- Lane County Circuit Court's decision in DeFazio versus ment to exchange energy. BPA would exchange an Washington Public Power Supply System had created amount of power to be determined by the performance controversy and uncertainty about the contractual of four surrogate nuclear plants similar in design to obligations of Oregon public participants and their Nuclear Project No. 3. If these plants perform as ex- authority under Oregon law to enter into the net-billing pected, BPA could exchange to the utilities about 193 .agreements. It also alleged that members of Oregon average megawatts of energy each-year. In return, the public utility boards are exposed to personal liability for

any payments of public money not authorized by law. ply System has assigned to BPA all rights and interests The complaint sought a declaratory judgment that it and in the Supp]y System's ownership share of project other Oregon public participants had legal authority to capability that the Supply System now has or hereafter enter into the net-billing agreements, or if they did not, , may obtain if the courts determine that the net-billing that BPA is liable to make contract payments. In their agreements are invalid and project participants are not responses to the complaint, BPA and the Supply System obligated to pay for any interest in project capability, asked for a declaration that all signatories to the net- BPA would pay directly to the Supply System the billing agreements had legal authority to, enter into amounts that would have been payable under the net-them. Springfield ratepayers who were parties to billing agreements for such project capability. The DeFazio intervened in the action claiming that the validity of the assignment agreements may be plaintiff did not have authority to enter into the challenged in the courts.

agreements under Oregon law.

net-'illing If a final judicial determination were rendered that the The parties to the net-billing agreements are BPA, the net-billing agreements are not enforceable against the Supply System, and the participants. The agreements parties and that the assignment agreements are not provide that BPA is obligated to pay the participants, valid, such determination would result in default on and the participants are obligated to pay the Supply Nuclear Projects No.'s 1, 2 and 3, and would have a System their pro rata shares of, the total annual costs of material adverse impact on the financial condition of the projects, including debt service on the bonds, the Supply System.

whether or not the projects are completed, operable, or Securities and Exchange Commission Investigation operating, and notwithstanding the suspension, reduc-tion, or curtailment of the projects'utput. However, On January 12, 1984, the Supply System was advised the agreements also provide that they shall not be that the Securities and Exchange Commission had binding on any of the aforementioned parties if they are started a formal investigation into the circumstances not binding on all the parties. surrounding the default on Nuclear Projects No.'s 4 and 5 revenue bonds. The investigation is continuing and On May 16, 1983, the U.S. District Court for Oregon the Supply System cannot predict what further action entered a judgment declaring that all parties to the net- the commission may take as a result of the billing agreements had legal authority to enter into investigation.

them. Its decision was appealed by the ratepayers to the Ninth Circuit Court of Appeals in July 1983 and was Other Litigation and Commitments argued before the court on May 10, 1984. On The Supply System is involved jn various claims', legal February 4, 1985, the Court of Appeals affirmed the actions and contractual commitments not mentioned judgment of the district court. The court subsequently above as both a plaintiff and a defendant and in certain denied the appellant's petition for rehearing. On claims and contracts arising in the normal course of August 16, 1985, the appellant filed a petition for writ business for, a large construction program. Although of certiorari with the United States Supreme Court. It is some suits, claims and commitments are significant in not known whether or not the United States Supreme amount, final disposition is not determinable. In the Court will accept review of this matter. opinion of management, the outcome of any such litiga-During August 1984agreements between BPA and the tion, claims or commitments will not have a material adverse effect on the financial positions of the projects.

Supply System were executed providing for the assign-ment of project capability (assignment agreements) of The estimated cost of the projects may either be in-creased or decreased as a result of the outcome of these Nuclear Projects No.'s 1 and 2 and 70 percent of Nuclear matters.

Project No. 3 to BPA. Under these agreements, the Sup-

. STATEMENT OF DEBT SER VICE REQUIREMENTS (Sin thoasandsj "

Nuclear Project No. 2 Hanford Generating Project Pac1cwood Lulte Project PISCAL YEAR PRINCIPAL INTEREST TOTAL PRINCIPAL INTEREST TOTAL INTEREST TOTAL

"'RINCIPAL 1986 $ 23,295 $ 215,015 $ 238,310 $ 3,240 $ 1,014 $ 4,254 $ 175 $ 383 $ 558 1987 24,925 213,399 238,324 3,255 913 4168 180 376 556 1988 26,645 211,686 238I331 3,360 806 4,166 190 370 560 1989- 28,510 209,818 238,328 3,485 693 4(178 195 363 558 1990 30,555 207,778 238,333 3,455 580 . 4,035 265 355 620 1991 82,800 205,539 288,339 5I065 425 5,490 275 346 621 1992 35,260 196,455 231,715 5,585 246 5,831 290 336 626 1993 37,980 193,758 231(738 5,835 58 5,893 300 325 625 1994 40,950 190,820 231,770 800 4 804 315 - 314 629 1995 44,225 187,602 231,827 330 303 633 1996 47,825 184,053 231,878 340 291 631 1997 65,575 180(144 245,719 360 278 638 1998 71,955 173,774 245,729 380 265 645 1999 79,330 166,666 245i996 400 251 651 2000 85,795 159,947 245,742 465 237 702 2001 93,290 152,468 245,758 490 220 710 2002 101,635 144,141 245,776 515 202 717 2003 93,055 134,854 227,909 540 183 723 2004 97,375 127,046 224,421 565 163 728 2005 106,765 117,655 , 224,420 590 142 732 2006 117,225 107,196 224,421 615 121 736 2007 122,655 95,576 218,231 640 99 739 2008 134,755 83,566 218,321 665 75 740 2009 148,200 70,217 218,417 690 51 741 2010 163,170 55,365 218,535 484 26 510 2011 179,835 38,822 218,657 150 8 158 2012 198,410 20,380 218,790 65 2 67 2013 2014 2015 2016 2017 2018

$ 2,281,995 $ 4,043,740 $ 6,325,735 $ 34,080 $ 4,739 $ 38,819 $ 10,469 $ 6,085 $ 16,554

'Excludes payments of bond principal and interest made on July I, t 985

FISCAl nuclear Project No. I Nuclear Project No, 8 Nuclear Projects No.'s 4/5 YEAR PRINCIPAL INTEREST TOTAL PRINCIPAL INTRRRST TOTAL -

PRINCIPAL TOTAL 1986 $ 14,855 $ 207,674 $ 222,529 $ 6,530 $ 165,357 $ 171,887 $ 2,317,865 $ 2I317,865 1987 15,470 206,652 222(" I22 8,925 165,001 173,926 1988 18,055 205,729 223,784 10,555 164,368 174,923 1989 18,970 204,564 223,534 11,315 163,579 174,894 1990 21,465 203,320 224,785 12,145 162,761 174,906 1991 62,560 201,877 264,437 13,050 161,901 174,951 1992 23(755 196,226 219,981 14,045 160,961 175,006 1993 25,560 194,547 220,107 15(125 159,932 175,057 1994 26,985 192,684 219,669 16,310 158,798 175(108 1995 28,550 190,667 219(217 17,615 157,546 175,161 1996 30,745 188,480 219,225 19,045 156,163 175,208 1997 38,080 185,949 224,029 22,595 154,637 177,232 D-Refer to Note 1998 1999 41,565 45,455 182,462 178,573 224,027 224,028 24,605 26,810 152,628 150,427 177(233 177,237 f

Termination o Nuclear Projects No.'s 4 and 5 and Default Under 2000 49,465 174,563 224,028 29,020 148,218 177,238 Bond Resolution, page 26, 2001 53I 920 170,104 224,024 31,475 145,773 177,248 and Note E-2002 Commitments and Contingencies, 58,885 165,142. 224,027 34,180 143,068 177,248 page 28, 2003 51,135 159,602 210,737 37,095 140,057 177,152 2004 55,430 155,305 210,735 42,730 136,746 179,476 2005 60,600 150,137 210,737 45,995 132,503 178,498 2006 66,320 144,415 210I735 49,615 127I908 177I523 2007 72,665 138,071 210,736 49,675 122,946 172,621 2008 79,705 131,031 210736 54,485 118,136 172,621

'2009 87,525 123,213 210,738 59,810 112,810 172,620.

2010 96,220 114,518 210,738 65,710 106,909 172,619 2011 105,855 104,883 210,738 72I265 F00,355 172,620 2012 116,610 94,129 210,739 80,365 92,250 172,615 2013 118,635 82,105 200,740 89,490 83,126 172,616 2014,127,155 69,605 196,760 99,770 72,846 172,616 2015 142,820 55,476 198,296 II I,370 61,252 172,622 2016 175,395 39,441 214/836 124,455 48,165 172(620 2017; 194,005 20,831 214,836 139,235 33,382 172,617 2018 15( 950 17 665 172 615

$ 2,124,415 $ 4,831,975 $ 6,956,390 $ 1,590,360 $ 4,178,174 $ 5,768,534 $ 2,317,865 $ 2,317,865

he Supply System operates two'visitor centers for the public, one at Plant 2, about 12 miles north of Richland, and another in Elma, Washington, near the WNP-3 project.

Displays in the visitor centers illustrate how plant design, construction and operation have been planned with the public's well-being in mind, The Plant 2 Visitors Center offers a videotape "arm-chair" tour of the plant, as well as information on nuclear power issues such as radiation, nuclear waste and plant operator training.

Tours of the WNP-3 construction site are offered by appointment by calling (206) 482-4222. Tours of the WNP-1 site are available by appointment by calling (509) 372-5408.

36