ML17278B173

WPPSS Annual Rept 1986

ML17278B173
Person / Time
Site:	Columbia, Washington Public Power Supply System, Satsop
Issue date:	12/31/1986
From:	Halvorson C, Mazur D WASHINGTON PUBLIC POWER SUPPLY SYSTEM
To:
Shared Package
ML17278B172	List: GO2-87-002, Forwards WPPSS Annual Rept 1986. Financial Statements Not Certified by Auditor,Ernst & Whinney,In View of Facts Discussed in Rept ML17278B173
References
NUDOCS 8701280297
Download: ML17278B173 (38)

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On the cover:

As a member ofa large family ofpublic utilities, the Washington Public Power Supply System plays a vital role in the Pacific Northwest s energy supply. Since 1957, employees lihe Senior Buyer Penney Enyeart and retiree Glenn Quinley have helped meet the energy needs ofeight million public utility customers served by the Bonneville Power Administration.

Letter from the Chairman of the Board 2 Letter from the Managing Director 4 Individual Commitment to Quality 7 Preparing for the Future 9

Striving for a Common Goal 11 Executive Board and Board ofDirectors 12 Financial Information 18

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LETTER FROM THE EXECUTIVE BOARD CHAIRMAN

'arl M. Halvorson Executive Board Chairman In Fiscal Year 1986, important events happening in the world around us continued to directly impact the operation and the future of the Supply System. The historic Tax Reform Act of 1986, the nuclear power plant accident at Chernobyl, and the collapse of petroleum prices all had a direct bearing on the Supply System.

Through it 'all the Supply System Executive Board exercised its stewardship over an $8 billion public investment in three operating plants and two deferred nuclear construction projects, while steadily working on pending legal matters, including those resulting from the default in 1983 on bonds for WNP-4 and WNP-5.

Much of its efforts concentrated on a major Supply System goal of refinancing a portion of the outstanding bonds for WNP-1, 2, and 3.

Pacific Northwest ratepayers could save hundreds of millions of dollars ifthe higher interest bonds could be rolled over with lower interest rate securities. That is why the Supply System had such a keen interest in the Tax Reform Act passed by Congress in 1986. The bill, as finally enacted, contains many new restrictions on issuing tax-free bonds.

Under the new law, the Supply System can issue tax exempt bonds for completing construction on WNP-1 and WNP-3 and for current refunding of WNP-2 bonds. However, advance refunding with tax exempt securities, plus current refunding of WNP-1 and WNP-3 bonds, is not covered in the language of the bill. The Supply System willhave to wait until next year to try to get revised legislation passed in Congress to allow refunding of Plant 2 bonds.

Of course, current legal difficulties must be resolved before we can regain a credit rating and refinance this debt. During the fiscal year, important progress was made toward this goal when the U. S. Supreme Court declined to review the so-called "Springfield III"lawsuit, affirming the authority of utilities participating in WNP-1, 2, and 3 to enter into the net-billing agreements with the Bonneville Power Administration.

Other legal successes came in several cases where the Supply System has taken the lead in seeking to obtain monetary damages from some contractors associated with constructing the plants. The most important resulted in a $25 million settlement the largest in state

historyfrom six major electrical firms accused of engaging in a national conspiracy to rig bids.

The nuclear accident at Chernobyl in the Soviet Union also had direct repercussions on the Supply System, some unfavorable but others possibly favorable to our operations. The accident threw a spotlight on the Department of Energy's N-Reactor at Hanford, because of perceived similarities in design with the Russian reactor, and raised the question of how long it would be allowed to continue to operate. This is important to the Supply System because N-Reactor supplies steam to the 860-megawatt Hanford Generating Project.

The Chernobyl accident created federal interest in possibly acquiring WNP-1 as a replacement for N-Reactor. The Supply System is cooperating with the technical and institutional studies currently underway to determine the feasibility of converting one of the projects to nuclear materials for national defense. While it is too early to predict an outcome, the Executive Board remains fullycognizant of the responsibilities and legal obligations it has to the ratepayers of the Northwest and to the holders of Supply System bonds.

In the worldwide energy picture, the dramatic fall in oil and natural gas prices strained the budget of the Bonneville Power Administration. The resulting budget shortfall in turn has resulted in pressure to reduce costs by terminating one or both of the Supply System's deferred projects.

The Executive Board remains convinced that both projects should be preserved as the most cost-effective means of meeting the region's future energy needs. At the same time, the board is determined to reduce the cost of preserving these plants to as low as is consistent with maintaining the construction permits and licensability.

During the year, we have taken several steps to reduce preservation costs to the absolute "rock bottom." The current fiscal year budget calls for annual expenditures of $ 11.3 million at WNP-1 and

$ 16.7 million at WNP-3. We plan to reduce these costs furtherto about

$ 15 million for both plants during the next 18 months.

Meanwhile, the Supply System continues to meet its financial commitments to the holders of bonds for WNP-1, 2, and 3. At the same time, we are actively participating in finding a solution to the problems resulting from the WNP4/5 default that is fair to both the ratepayers and the people who invested in our securities.

LETTER FR OM THE MANAGING DIRECTOR Donald W. Mazur Managing Director l am proud of the Supply System's many accomplishments in FY 1986. We lived up to our regional responsibilities by safely and reliably generating 7 billion kilowatt-hours of reasonably priced electric power, while remaining sensitive to public concerns by keeping spending well under budget.

The continued safe and efficient operation of our three power plants is due to the skills and attitudes of the plant operators, technicians, and support people. These qualities are most evident at Plant 2, which completed its first fullyear of commercial operation in December 1985 after producing more than five billion kilowatt-hours of electricity.

Our experience operating a commercial nuclear power plant has been a mixture of successes and some disappointments.

The biggest success was completing two 1004ay periods of uninterrupted operation one of many and longer periods of smooth power production in the years to come. Our biggest disappointment was the inability to run at fullpower much of the year because of vibrations in one of the plant's two reactor recirculation pumps. Despite that setback, the plant ran solidly at 72-percent of capacity, proving to be a reliable source of electric power during the cold winter months.

We fixed that problem during last spring's scheduled two-month maintenance and refueling outage, returning to full 1,100-megawatt production in June. This complex outage, which included our first refueling, was completed under a tight 45-day schedule. Its successful completion, including the replacement of one-fifth of the fuel core, required extensive advance planning and is a tribute to the skill and dedication of the more than 800 plant and contractor people involved.

Maintaining this high level of competence is a continuing effort.

We have an extensive operator training program that was accredited this year by the National Academy for Nuclear Training, an arm of the Insti-tute of Nuclear Power Operations. I was pleased to award certificates of achievement this year to the first graduates of this program and I look forward to next year when our remaining training programs are accredited.

We realize that an organization must look out for the safety of its own employees ifit is to be trusted with the safety of the general public. That's why the Supply System has implemented an extensive

and ambitious program to minimize on-the-job radiation exposure, to our own and to contractor employees. We have set, and are meeting, a goal of accumulating no more than 230 man-rem of radiation for all our employees.

Radiation exposure industry-wide is on the decline and we plan to stay ahead of the trend. Considering that the workers in an average nuclear power plant of Plant 2's class accumulate about 800 man-rem of radiation exposure a year, this is a very challenging goal.

The Supply System this year also instituted a "Fitness for Duty" program for all employees to help ensure they work in an atmosphere free of alcohol and drugs and to assure the public that our plants are operated by sound and steady hands. We believe our program is fair, effective and sensitive to the concerns of individual employees.

During the fiscal year the Supply System, with excellent cooperation from local, state and federal officials, continued to demonstrate that it is prepared to deal with any emergency. In our annual emergency exercise, these diverse agencies came together in a joint effort that won the praise of both the Federal Emergency Management Agency and the Nuclear Regulatory Commission.

While Plant 2 gets much of our attention, I cannot fail to mention the contributions made by the people who work at our two other operating plants, the Packwood Lake Hydroelectric Project and the Hanford Generating Project, as well as those who are stewards of our deferred construction projects, WNP-1 and WNP-3.

In the past year, we saluted the Hanford Generating Project on its 20th anniversary as the electric power generating arm of the federally owned N-Reactor at Hanford. The "Heck-of-a-Good Plant" celebration commemorated the years of consistent and reliable produc-tion of electric power since HGP went into operation on April 8, 1966.

Since then, the 43 people who work at the Hanford Generating Project have maintained an enviable record of having the plant available to generate electricity 99 percent of the time when steam was available from the nearby N-Reactor. Many of these people have been part of the Supply System family from the start of operation.

The Supply System finished FY 1986 on a solid operational footing. We have the people and organization to meet our prime objectivesupplying the people of the Pacific Northwest with low-cost, reliable power. I expect to see great strides made in the coming year toward our goal of becoming one of the nation's top operating utilities.

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INDIVIDUAL COMMITMENT TO Q UALITY Jack Baker's small farm was part ofa vast desert before abundant irrigation water and inexpensive electricity transformed Washington state' Columbia Basin into productive farmland.

When Jack Baker visited Washington a few years ago to apply for a job at the state's only commercial nuclear power plant, he fell in love with the area. His free time is now spent raising a family on a small farm just 12 miles from Plant 2 while his days are committed to his job as assistant plant manager.

The Supply System has been operating electric generating plants for over 20 years, but Plant 2 has been in commercial operation only since 1984. Yet, due to the technical and administrative skills of a dedicated team of individuals, its record is a successful one.

Baker, with his 12 years of operating experience, was one of the few on the plant staff who had been through a major maintenance and refueling outage when the first one was tackled last spring. They faced several formidable tasks: rebuilding a troublesome reactor recirculation pump that limited plant output to 72-percent power; preventive maintenance on the turbine-generator; removing the first spent fuel assemblies from the reactor and refueling it, and completing hundreds of corrective maintenance and surveillance tasks.

The work was finished within the 45-day schedule, allowing Plant 2 to return to full 1,100-megawatt operation. This accomplishment cannot be attributed to a long operating history at an established plant, but rather to the individual dedication to quality of the Plant 2 staff.

The plant's first operating cycle ended with a notable record of two back-to-back, 100-day generation runs. Now that the plant is in reliable continuous generation, the challenge is to fine-tune procedures and operating practices while continuing to supply the Bonneville Power Administration with dependable power at the lowest possible cost.

Plant 2 continues to run solidly, supplying the people of the Pacific Northwest with reliable electric power, while the plant staff prepares for next spring's maintenance and refueling outage.

"Our people have the resources and capabilities to meet the Supply System's goal of being in the top 10 percent of operating nuclear utilities," Baker said. "Now it's a matter of effort, desire and commitment. Ifour employees bring the values they live by at home and in the community to jobs they truly enjoy, we can't help but succeed."

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'PREPARING FOR THE F UT URE Yvonne Derrer volunteers her free time to share her expertise on energy issues with area students.

Educating others is a big part of Yvonne Derrer's life, both on the job and away from the work place. The senior training specialist devotes much of her free time to working with students in the community, educating them on energy issues. At work she joins 43 other professionals who have trained a plant operations staff that is known in the nuclear industry as one of the most experienced and knowledgeable in the nation.

Training programs ensure that Plant 2 workers have the necessary qualifications and skills to protect the public safety through safe and reliable operation. Workers are trained in the varied areas of health physics and chemistry, decontamination, maintenance,

safety, first aid, fire protection, emergency procedures and security. Whatever the area, the Supply System's training programs are designed to produce talented, competent and motivated people to operate Plant 2 at the highest standards of safety and reliability.

A specially designed, statecf-the-art training facility located near Plant 2 contains sophisticated training aids, including a computerized control-room simulator. This simulator, a duplicate of the Plant 2 control room, allows operators to hone their skills in routine operating procedures and to learn to deal with abnormal events and simulated accidents. The Supply System employs six rotating shifts of reactor operators to meet the requirements of 24-hours-a-day, seven1ays-a-week operations. Plant operators spend one week of every six in rigorous training, continually increasing their level of knowledge.

Derrer and her fellow instructors complement on-the-job experience with training programs based on an analysis of the job tasks.

This performance-based training, conducted on a continual basis, keeps employees abreast of new concepts and changing job practices. It is a concept that has had a measurable impact in the workplace.

"I believe training just for the sake of training is totally ineffective," Derrer says. "But if a trainer can analyze the tasks required and develop an interesting program based on the individual's level of knowledge, you can make the difference between satisfactory and superior performance."

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'S TRI VING FOR A COMMON GOAL Fred E!auss led his

'Tri-QtyExpress" soccer team to an undefeated season and the state finals by coaching cooperation and teamwork.

When Fred Elauss is on the field coaching, he is part of a team effort where the players must support each other ifthey are to succeed.

He demonstrates that same commitment to team work in his job as emergency planner, where he is the liaison between Plant 2 and community agencies.

Being prepared for a potentially serious accident at Plant 2 is a responsibility the Supply System shares with local, state and federal government. Law enforcement agencies and community volunteer

agencies, such as the American Red Cross, are also involved. This responsibility requires teamwork and cooperation to ensure that an accident can be handled without harm to the public.

The Nuclear Regulatory Commission and the Federal Emergency Management Agency continue to give the Supply System good marks for timely notification of the public and for successful recovery operation in annual emergency exercises. These simulated emergencies bring together more than 600 employees and representatives of outside agencies into one cohesive, effective organization.

The objective is clear: protect the health and safety of the public. It is through the commitment and enthusiasm of the individual participants that this objective has been met.

Members of the Supply System's emergency planning organization bring these qualities into the community as they carry out their broad community responsibilities. They help with local agencies to develop procedures to respond to an emergency, train their staff and offer other assistance as needed. Meeting with residents living within 10 miles of Plant 2 to educate them on plant operations and supply them with special radios that automatically activate in an emergency is another responsibility of the emergency planning staff. They also fulfill their responsibility to recreational users of the Columbia River by maintaining a sophisticated siren system to warn fishermen and boaters of an emergency at the plant.

"The people of this community place their trust in us, just as they trust their elected government officials," Elauss said. "Our job is to live up to this trust by working with local leaders to be prepared at any given time, on any day, to rally together as a team to effectively handle any emergency."

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EXECUTIVE BOARD VERA CLAUSSEN (Assistant Secretaryj Commissioner Grant County PUD KENNETHR. COCHRANE Commissioner Franklin County PUD RAYMONDE. COLBERT Commissioner Okanogan County PUD CORNELIUS R. DUFFIE (Secretaryj Consultant Portland SAMJ. FARMER Director Battelle Seattle Research Center CARLM. HALVORSON (Chairmanj President HalvorsonMason Corporation Portland PARKER L. KNIGHT Commissioner Skamania County PUD PAULJ. NOLAN (Vice Chairman)

Tacoma LOIS M. POWELI Commissioner Grays Harbor County PUD SYDNEYSTEINBORN Consultant Seattle Robert E. Berney and Franh N. Ward served on the Executive Board until 6/17/86.

LOUIS H. WINNARD Senior Management Consultant Los Angeles BOARD OF DIRECTORS VERA CLAUSSEN (Secretaryj Commissioner Grant County PUD DONALDR. CLAYHOLD Manager Benton County PUD EDWARD E. COATES Director Department of Public Utilities City of Tacoma KENNETHR. COCHRANE (Presidentj Commissioner Franklin County PUD RAYMONDE COLBERT Commissioner Okanogan County PUD RANDALLW. HARDY Superintendent Seattle City Light PARKER I,. KNIGHT (Vice President j Commissioner Skamania County PUD WILLIAMG. KUEHNE Commissioner Ferry County PUD DAVIDL. MYERS Commissioner Wahkiakum County PUD LOIS M. POWELL Commissioner Grays Harbor County PUD ELMER E. ROLOFF Commissioner Pacific County PUD PAUL L. RUNYAN (Assistant Secretaryj Commissioner Clark County PUD WILLLAMD. SCOTT Commissioner Chelan County PUD KEITHSEDORE Energy Services Director City of Richland ROGER C. SPARKS Commissioner Kittitas County PUD FRANKN. WARD Commissioner KlickitatCounty PUD 12

'FINANCIAL INFORMATION Report ofIndependent Accountants 14-15 Financial Statements:

Balance Sheets 16-17 Statements of Operations 18 Statement of Changes in Deficiency in Assets 18 Statements of Changes in Financial Position 19 Outstanding Long-Term Debt 20-22 Notes to Financial Statements 23-33 Statement ofDebt Service Requirements 34-35 13

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 table of contents, of Washington Public Power Supply System's Nuclear Plant No. 2, Hanford Generating Project, Packwood Lake Hydroelectric Project, Nuclear Project No. 1, Nuclear Project No. 3, Nuclear Projects No.'s 4 and 5, and the Internal Service Fund for the year ended June 30, 1986. 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 Project No. 3 is negotiating with its contractors and suppliers to settle contract claims associated with extended construction delays of that project. Due to the nature of the settlement process, the ultimate amounts of such costs are not fully determinable at the present 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, ifany,'o be borne by Nuclear Projects No.'s 1 and 3 due to these matters are not determinable at the present time.

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. Supply System management is of the opinion that creditor claims can only be realized from the

assets, funds or revenues of the projects to which such claims relate. Ifit is found that creditors are not limited to payment of their claims from the project to which such claims relate, it willhave a material adverse impact on the Supply System.

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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. 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 nature of the settlement process, the ultimate amounts owing to creditors are not fullydeterminable 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 express, an opinion of the financial statements of the Supply System's Nuclear Plant No. 2, Hanford Generating Project, Packwood Lake Hydroelectric Project, Nuclear Project No. 1, Nuclear Project No. 3, Nuclear Projects No.'s 4 and 5, and the Internal Service Fund referred to above.

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Seattle, Washington September 12, 1986 15

BALANCE SHEETS AsofJunC30, IBEG, Dollars in thousands ASSETS NUCLEAR PLANT NO. 2 HANFORD PACKWOOD NUCLEAR NUCLEAR GENERATING LAKE PROJECT PROJECT PROJECT PROJECT NO. I NO. 3 NUCLEAR INTERNAL PROJECTS SERVICE NO.'S 4/5 FUND CURRENT ASSETS OPERATING FUND Cash and investments Accounts receivable Accounts receivable-antitrust settlement Inventories Prepaid and other Assets Due from participants Due from other projects and internal service fund Due from other funds 6,397 14,002 395 1,612 351 360 139 28 232 44,114 89,564 404 1,210 7,800 32 28,840 26,556 1,351 43,231 36,223 22,565

$ 5,336 1,059 13,827 9,125 479

$ 3,706 252 979 741 7,660 13,338 RESTRICTED ASSETS Notes B and C Special funds Cash and investments Receivable from joint owners Due from other projects and internal service fund Accounts receivable-antitrust settlement Prepaid and other assets Due from other funds-net 43,758 3,293 300 132,689 9,361 4,312 1,317 155 30,560 8,939 126 5,644 417 14,599 6,573 237 17,069 298 580 43,758 3,293 300 147,834 60,285 24,757 Revenue fund cash Accounts receivable Chemical Bank fund accounts Debt service funds cash and investments 114,965 7 270 158,723 10,563 161 3,852 17,044

'54 228,932 179,752 98,285

'54 376,766 240,037 144,099 UTILITYPLANTAND EQUIPMENTNote B In service Improvements to U.S.

government facilities Less allowance for depreciation and amortization 3,236,608 173,365 16,544 59,092 5,803 67,639 12,371 11,243 1,252 1,340 9,823) 1,340 16,461 3,063,243 25,091 6,568 9,991 6,638 Construction work in progress Construction work in progress-deferred plants Costs of terminated plants Nuclear fuel and prepaid enrichment services Less amount charged to joint owners Less allowance for estimated unrecoverable cost 16,230 104,310 257,838 51,030 2,912,131 (617,026)

(87,567) 2,817,154 2,227,501 2,398,100 3,183,783 25,091 6,568 2,495,330 1,832,104 7,410 OTHER ASSETS AND DEFERRED CHARGES Unbilled reimbursable costs Unamortized debt expense TOTALASSETS 3,296 2,677 104 20 3,375 2,464

$3,435,366

$43,558

$ 11,570

$2,918,702

$2,110,828

$ 151,509

$ 19,976

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LIABILITIES NUCLEAR PLANT NO. 2 HANFORD GENERATING PROJECT PA CFOOD LAKE PROJECT NUCLBAR NUCLEAR NUCLBAR INTERNAI PROIECT PROIBCT PROJECTS SBR VICE NO. I NO. 3 NO.'S 415 FUND CURRENT LIABILITIES OPERATING FUND Accounts payable and accrued expenses Amounts withheld from contractors Advance payments from participants Due to other projects and internal service fund Amounts due power purchasers Amounts due other funds 3,443 1,703 2 737 2,671 57,539 375 1,173 296 36,975 155 21,208

$ 3,925 63 69 1,789 16,835 14,599

$ 9,793 LIABILITIESPAYABLEFROM RESTRICTED ASSETS Notes B and C Special funds Accounts payable and accrued expenses Amounts withheld from contractors Due to other projects and internal service fund Due to other funds-net Debt service funds Accrued interest payable Due to other funds-net Chemical Bank fund accounts Accounts payable and accrued expenses DEBTINDEFAULT, CURRENTLYPAYABLE Revenue bonds payable Subordinated revenue notes LONGTERM DEBT Note C Revenue bonds payable Less unamortized discount on bonds-net 86,564 1,439 39,319 40,758 4,795 4,795 45,553 2,258,700 66,719 4,300 793 793 332 418 750 1,543 30,840 574 1,236 40,232 33,223 7,639 12,725 26,997 3,386 8,837 6,572 590 16,770 8,021 20 23,278 18,954 20 34,893 57,286 41,590 477 155 144,292 147,566 650,797 2,250,000 67,866 2,317,866 10,159 2,124,415 1,590,360 78 50,861 37,324 124 103,837 82,678 608,730 11 5,562 7,602 135 109,399 90,280 608,730 9,793 2,191 981 30,266 10,081 2,073,554 1,553,036 OTHER LIABILITIESAND DEFERRED CREDITS Unearned revenue Costs reimbursed under net billing Deferred gain on redemption of revenue bonds Due to other projects Advances and other 1,068,020 43,248 4,734 1,315 1,400 98 657,624 374,003 6,303 3,000 3,000 3,880 TOTALLIABILITIES Deficiency in assets TOTALLIABILITIESAND DEFICIENCYINASSETS 1,111,268 7,449 98 660,624 377,003 10,183 3,435,366 43,558 11,570 2,918,702 2,110,828 2,968,663 19,976 2,817,154

$3,435,366

$43,558

$ 11,570

$2,918,702

$2,110,828 151,509

$ 19,976 17

STATEMENTS OF OPERATIONS For the year ended june 30, '1986 r Dollars in thousands OPERATING REVENUES OPERATING EXPENSES Nuclear fuel Waste disposal Decommissioning Reactor availability Depreciation and amortization Operations and maintenance Administrative and general Taxes NET OPERATING REVENUE/(LOSS'THER INCOMEAND EXPENSE Investment income Interest expense and discount amortization NET REVENUE NUCLEAR PLANT NO. 2

$421,471 20,468 4,166 888 103,713 74,485 20,026 1,555 225,301 196,170 21,538 217,708

$ HANPORD GENERATtNG PROJECT

$36,000 26,129 2,430 3,013 808 3,900 36,280 280 1,361 1,081

$ PACKWOOD LAKE PROJECT

$933 262 485 88 2

837 285 381

$ STATEMENT OF CHANGES IN DEFICIENCY IN ASSETS For the year ended June 30, 1986 Dollars in thousands NUCLEAR PROJECTS NO.'3 4/5 BALANCEATJULY 1, 1985 ADDITIONS/(DEDUCTIONS)

Interest Expense Net increase in costs related to terminated nuclear projects Administrative costs associated with asset disposition Received from asset sales Investment income Decrease/(increase) in recoverable value estimates BALANCEATJUNE 30, 1986

$2,622,739 198,084 16,624 3,210 (7,900)

(10,233)

(5,370)

$2,817,154 18

"'S'ZATEMENTS OF CHANGES IN FINANCIALPOSITION For the year ended June 30, 1986 Dollars in thousands OPERATING PROJECTS SOURCE OF FUNDS Operations-Net revenue Items not affecting working capital Depreciation and amortization Increase/(decrease) in costs reimbursable from power purchasers Less gain on redemption of revenue bonds Total from Operations TOTALSOURCE OF FUNDS USE OF FUNDS Construction and capital Fuel Net improvements Cost of revenue bonds purchased and retired Increase (decrease) in restricted assets Changes in working capital Cash and investments Receivables and other Payables and other Net increase in working capital TOTAL USE OF FUNDS NUCLEAR PLANT NO. 2

$ 126,874 (49,592) 77,282

$ 77,282 11,534 42,453 23,295 77,282 10,840 (7,048) 3,792 $ 77,282 HANPORD GENERATlNG PROJECT

$ 2,497 1,643 (129) 4,011

$4,011 754 3,240 12 4,011 1,687 (2,519) 832 $4,011 PACKWOOD LAKE PROJECT

$ 266 57 (146) 177

$ 177 164 13 177 (544) 35 509 $ 177 NON-OPERATING PROJECTS SOURCE OF FUNDS Collected under net billing Interest income Charged to joint owners Net decrease in restricted funds Received from sale of fuel Revaluation of investments Reduction of estimated cost of termination Asset sales Other TOTALSOURCE OF FUNDS USE OF FUNDS Construction costs Interest expense Nuclear fuel Financing, trustee and paying agent expenses Bonds redeemed Due to participants Net transfers to Hanford Generating Project Net increase in restricted funds Administrative costs associated with asset disposition TOTAL USE OF FUNDS NUCLEAR PRO)ECT

$ 235,125 26,851 1,288 3

$263,267 14,203 207,674 370 (19) 9,785 (357) 29,045 2,566

$263,267 NUCLEAR PRO)ECT

$ 162,059 15,287 8,336 59

$ 185,741 24,011 165,357 57 (121) 6,175 (10,093) 355

$ 185,741 NUCLEAR PROJECTS NO.'S 4/5 10,216 (1,235) 194,894 17 5,912 7,900 447

$218,151 198,084 16,857 3,210

$218,151 19

OUTSTANDING LONGTERM DEBT Dollars in thous'ands r NUCLEAR PLANTNO. 2 Revenue Bonds Revenue Bonds Revenue Bonds (excludes

$2,500,000 due July 1, 1986)

Revenue Bonds (excludes

$4,300,000 due July 1, 1986)

Revenue Bonds (excludes

$ 1,190,000 due July 1, 1986)

Revenue Bonds (excludes

$3,095,000 due July 1, 1986)

Revenue Bonds (excludes

$2,355,000 due July 1, 1986)

Revenue Bonds (excludes

$2,635,000 due July 1, 1986)

Revenue Bonds (excludes

$ 1,900,000 due July 1, 1986)

Revenue Bonds (excludes

$ 1,700,000 due July 1, 1986)

Revenue Bonds Revenue Bonds (excludes

$ 1,610,000 due July 1, 1986)

BFFBCTIVB DATB INTBRBST SBRIBS OF SAIB RATB 1973 6-26-73 5.66%

1974 7-23-74 7.21 1974A 11-26-74 7.67 1975A 3-6-75 6.71 1976 6-3-76 6.63 1976A 11-18-76 5.87 1978 7-11-78 6.71 1979 3-13-79 6.49 1979A 10-17-79 7.69 1980 10-21-80 9.36 1981A 94-81 12.44 1982A 2-11-82 14.76 OFFBRING PRICBS (A) 100 (A) 100 100 (A) 100 100 (A) 100 100 (A) 99.25 100 (A) 100 99.50 (A) 100 100 (A) 100 100 (A) 100 100 (A) 100 100 (A)

(A) 100 57.895 99 100 100 100 99.25 COUPON RATB 5.00-5.10%

5.70 6.50-6.90 7.00 7.375 7.20 7.40 7.75 6.60 6.60 6.875 5.40-6.25 6.625 6.75 5.50-5.875 6.00 6.00 5.50-6.60 6.80 6.875 5.50-6.00 6.40 6.75 6.60-7.30 7.60 7.75 8.90-10.90 9.30 9.60 9.25 8.25 14.375 8.25 14.50 13.25 10.00-13.75 14.50 14.75 SBRIAI OR TBRM MATURITIBS 7-1-87/1991 7-1-2012 7-1-87/1994 7-1-1999 7-1-2012 7-1-87/1994 7-1-1999 7-1-2012 7-1-87/1994 7-1-1999 7-1-2012 7-1-87/1998 7-1-2006 7-1-2012 7-1-87/2002 7-1-2007 7-1-2012 7-1-87/2000 7-1-2006 7-1-2012 7-1-87/1999 7-1-2004 7-1-2012 7-1-87/1999 7-1-2004 7-1-2012 7-1-87/1997 7-1-2001 7-1-2006 7-1-2011 7-1-2012 7-1-2001 7-1-2003 7-1-2006 7-1-2012 7-1-87/1996 7-1-2002 7-1-2012 JUNB 30, I986

$ 13,600 124,400 138,000 18,000 15,000 37,000 70,000 15,500 15,000 78,000 108,500 14,300 15,000 78,000 107,300 22,765 42,300 49,860 114,925 80,045 44,815 60,990 185,850 58,075 45,520 66,230 169,825 51,100 33,490 83,605 168,195 36,375 23,050 57,000 116,425 33,530 23,735 46,070 75,045 19,920 198,300 30,000 100,000 30,000 50,000 210,000 31,725 51,665 215,000 298,390

/A/ Various prices 20

8t Revenue Bonds (excludes $2,010,000 due July 1, 1986)

Revenue Bonds 1982C 5-20-82 13.89 100 100 13.50 7-1-2002 13.875 7-1-2012 EFFECTIVE SBRIAI DATE INTBRBST OFFBRING COUPON OR TERM SERIES OF SALE RATB PRICES RATE MATURITIBS 1982B 5-20.82 13.82%

100 9.75-13.00%

7-1-87/1996 100 13.875 7-1-2012 JUNE 30, 1986 37,390 139,320 176,710 56,960 139,320 196,280 82,258,700 HANPORD GENERATING PROJECT Revenue Bonds (includes

$3,255,000 due within one year at June 30, 1986) 1963 5.8.63 3.26 IA) 98 3.10 3.25 9-1-1986 9-1-1996 3,255 27 585 8 30,840 PACKWOOD LAKE PROJECT Revenue Bonds (includes $ 180,000 due within one year at June 30, 1986) 1962 3-20.62 3.66 99.425 3.625 3-1-2012 1965 11-4.65 3.76 100.5 3.75 3-1-2012 7,684 2,475 8

10,159 NUCLEAR PROJECT NO. I Revenue Bonds (includes $ 1,400,000 due July 1, 1986)

Revenue Bonds (includes $ 1,575,000 due July 1, 1986)

Revenue Bonds (includes'$1,845,000 due July 1, 1986)

Revenue Bonds (includes $2,325,000 due July 1, 1986)

Revenue Bonds (includes $ 1,875,000 due July 1, 1986) 1975 9-18-75 7.73 1976A 2-4-76 6.84 1976B

=

8-31-76 6.37 1978A 3-21-78 5.69 1978B 12-5-78 6.61 (A) 6.10-7.40 7-1-86/2000 100 7.70 7-1-2010 100 7.75 7-1-2017 (A) 6.00-6.25 7-1-86/1998 100 6.90 7-1-2010 100 7.00 7-1-2017 (A) 5.00-5.90 7-1-86/1998 100 6.50 7-1-2010 99.50 6.50 7-1-2017 (A) 5.00-5.50 7-1-86/2002 100 5.80 7-1-2010 100 5.875 7-1-2017 (A) 5.50-6.00 7-1-86/1998 100 6.35 7-1-2003 100 6.60 7-1-2009 99.50 6.80 7-1-2017

$ 36,400 58,300 74,700 169,400 30,285 66,485 76,495 173,265 33,755 66,940 71,235 171,930 59,960 50,920 64,810 175,690 34,910 22,305 38,190 81,150 176,555 Revenue Bonds (includes $ 1,335,000 due July 1, 1986) 1979 6-19-79 6.64 (A) 100 100 100 6.00 6.40 6.70 6.80 7-1-86/1998 7-1-2003 7-1-2009 7-1-2017 26,960 18,560 32,370 69,685 147,575 Revenue Bonds (includes

$4,500,000 due July 1, 1986) 1980A 8-5.80 8.87 (A) 7.00-10.00 100 9.00 100 9.20 99.00 9.25 (A) 7.75 7-1-86/1995 7-1-2002 7-1-2005 7-1-2013 7-1-2017 55,500 37,000 16,950 70,550 30,000 210,000

/continued/

21

OUTSTANDING LONGTERM DEBT Dollars in thousaeh

~

Revenue Bonds Revenue Bonds Revenue Bonds Revenue Bonds Revenue Bonds EFFECTIVB DATE INTBRBST SERIES OF SAIB RATB 1981A 4-13-81 11.30%

1981B 4-13.81 11.30 1981C 4-13-81 10.29 1981D 9-4-81 14.78 1982A 2-11-82 14.79 OFFERING PRICES (A) 100 (A) 100 100 57.895 100 100 100 99.25 SBRIAI COUPON OR TERM RATE hfATURITIES 11.3013.00%

7-1-96/2003 11.625 7-1-2012 10.00 7-1-2016 10.25 7-1-2015 14.375 7-1-2001 8.25 7-1-2003 15.00 7-1-2017 10.50-13.75 7-1-88/1996 14.50 7-1-2002 14.75 7-1-2017 JUNB 30, I986 28,580 91,420 120,000 40,000 40,000 20,000 30,000 265,000 315,000 29,355 50,645 305,000 385,000

$2,124,415 NUCLEAR PROJECT NO. 3 Revenue Bonds (includes $ 1,115,000 due July 1, 1986)

Revenue Bonds (includes $910,000 due July 1, 1986)

Revenue Bonds (includes

$2,725,000 due July 1, 1986)

Revenue Bonds (includes

$ 1,780,000 due July 1, 1986) 1975 12-3-75 7.87 1976 4-13-76 6.48 1977 9-12>>77 5.71 1978 9-12-78 6.27 (A) 100 100 (A) 99.625 100 (A) 99.50 99.50 (A) 100 99 5.85-7.25 7-1-86/1998 7.875 7-1-2010 7.875 7-1-2018 5.50-6.00 7-1-86/1998 6.50 7-1-2010 6.60 7-1-2018 5.00-5.50 7-1-86/2000 5.70 7-1-2009 5.80 7-1-2018 5.90-6.00 7-1-86/2004 6.375 7-1-2010 6.40 7-1-2018 23,240 52,695 71,160 147,095 17,140 35,100 45,295 97,535 56,685 63,535 107,160 227,380 64,735

'42,985 90,630 198,350 Revenue Bonds 1981A 2-11-81 10.80 (A) 100 99.50 88.50 88.50 9.50-12.50 11.125 11.125 9.75 9.75 7-1-87/2001 7-1-2005 7-1-2010 7-1-2017 7-1-2018 64,375 40,535 80,310 18,950 20,830 225,000 Revenue Bonds Revenue Bonds Revenue Bonds Revenue Bonds

/A/ Various Prices 1981B 9-4-81 14.80 1982A 2-11-82 14.83 1982B 5-20-82 13.95 1982C 5-20-82 13.63 57.895 99 100 100 100 99.25 100 99.50 100 8.25 7-1-2003 14.50 7-1-2006 15.00 7-1-2018 10.50-13.75 7-1-88/1996 14.50 7-1-2002 14.75 7-1-2018 10.50-13.00 7-1-88/1996 13.875 7-1-2018 13.50 7-1-2002 20,000 20,000 185,000 225,000 6,055 10,445 148,500 165,000 9,195 280,925 290,120 14,880

$ 1,590,360 22

'N5 TES TO FINANCIAL S TATEMENTS Note AOrganization 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-powered to acquire, construct and operate facilities for the generation and transmission of electric power. On June 30, 1986, its membership consisted of 13 public utilitydistricts and three municipalities that own and operate electric systems within the state of Washington.

The Supply System constructed and is operating Nuclear Plant No. 2, the Hanford Generating Project and the Packwood Lake Hydroelectric Project. The Supply System's Nuclear Project No. 1 is in the fifth year of an extended construction delay, Nuclear Project No. 3 is in the fourth year of an extended construction delay, and Nuclear Projects No.'s 4 and 5 were terminated on January 22, 1982.

Nuclear Plant No. 2 and Nuclear Projects No.'s 1 and 4 are wholly owned by the Supply System. Nuclear Proj-ect No. 3 is jointly owned by the Supply System (70 per-cent) and four investor-owned utilities (30 percent).

Nuclear Project No. 5 is jointly owned by the Supply System (90 percent) and one investor-owned utility (10 percent). Each joint owner is responsible for its own financing costs and share of the costs of construction, operation and termination and is entitled to its ownership share of the projects'perating capability.

The Supply System is currently unable to obtain addi-tional financing through the sale of bonds due to pend-ing litigation. Project maintenance costs for Nuclear Project No. 1 are funded by proceeds from bonds sold during February 1982. Project maintenance costs for the Supply System's 70 percent share of Nuclear Project No. 3 and debt service for Nuclear Projects No.'s 1 and 3 are funded by payments under the net-billing agreements.

Note, BSummary ofSignificant Accounting Folicies The Supply System has adopted accounting policies and practices that are in accordance with generally accepted accounting principles applicable to the utilityindustry.

Separate books of account are maintained for each proj-ect except for Nuclear Projects No.'s 4 and 5, which are accounted for as a single entity. In addition, the Supply System maintains an internal service fund for payment and accounting of payrolls, administrative and general

expenses, and certain common goods and services pro-curred for the projects on a cost-reimbursable basis.

Restricted Assets In accordance with project bond resolutions and related agreements, separate restricted funds must be establish-ed for each of the projects. The assets held in these funds are restricted for specific uses including construc-tion, termination, debt service and other special reserve requirements.

Cash and investments in the Operating Fund of Nuclear Plant No. 2 and in Special Funds of Nuclear Projects No.'s 1, 3, 4 and 5 include $22,199,817 retained in escrow for contractors as of June 30, 1986.

Current Assets and Current Liabilities Current assets and liabilities in the accompanying balance sheets exclude current maturities on revenue bonds and accrued interest because debt service funds are provided for their payment.

Investments Investments include United States government and government agencies securities. Investments are stated at cost or amortized cost, as appropriate, and include accrued interest.

Investments held in the Bond Fund Reserve Accounts (included in Debt Service Funds) and Reserve and Con-tingency Funds (included in Special Funds) are stated at the lower of amortized cost or market as provided by bond resolutions.

The market value of investments (including accrued interest) approximates the carrying value.

Investment Income Investment income consists of interest earned on in-vestments and gains or losses resulting from the sale of investments. Investment income relating to operating plants is recorded as a credit to operating costs. With 23

NOTES TO FINANCIALSTATEMENTS respect to Nuclear Projects No.'s 1 and 3, income earn-ed on any construction funds is recorded as a credit to Construction Work in Progress-Deferred Plants, shown on the balance sheet, and income earned on all other funds is treated as a reduction of funding required under the net-billing agreements.

Investment income relating to Nuclear Projects No.'s 4 and 5 is credited to Costs of Terminated Plants, shown on the balance sheet.

Capitalization of Construction Costs and Expenses During the normal construction phase of a project it is the Supply System's policy to capitalize all costs relating to the project, including interest (net of interest income), general and administrative expense, amortized financing expense and certain other expenses.

Interest expense (net) during construction is allocated to nuclear fuel and plant based on cumulative cash utilization.

General and administrative expenses and overhead ex-penses are allocated to projects primarily on the basis of direct usage or direct salary cost. Financing expense ap-plicable to each project is amortized by the straight-line method over the period of each respective bond issue, to project capital cost or operating cost, as appropriate, during plant construction or operations.

As of July 1, 1984, the Supply System discontinued capitalizing interest expense (net) applicable to Nuclear Projects No.'s 1 and 3 because of the extended delay of these projects. The interest expense, which is funded by payments under net-billing agreements, willnot be capitalized during the delay. Such net interest expense totaled $ 189,719,354 and $ 150,080,085 for Nuclear Proj-ects No.'s 1 and 3, respectively, for the year ended June 30, 1986.

UtilityPlant and Equipment Depreciation and Amortization Buildings and equipment are depreciated by the straight-line method over their estimated useful lives.

Improvements to U.S. government-owned facilities are being amortized over the period covered by the contract for dual-purpose operation of the U.S. Department of Energy's New Production Reactor.

Revenues During the construction phase of a project, money received under net-billing agreements and utilized to fund debt service or other project expenditures is nor-mally recorded as Unearned Revenues on the balance sheet and is amortized to Revenues over the operating life of the project. However, money received under Nuclear Projects No.'s 1 and 3 net-billing agreements is classified as Costs Reimbursed Under Net Billingbe-cause of uncertainty as to when these projects willbe operational, as explained in Note E.

For Nuclear Plant No. 2, Hanford Generating Project and Packwood Lake Hydroelectric Project, the dif-ference between cumulative operating costs, including depreciation and amortization, and cumulative payments, including debt service, is reflected as Unearned Revenue or Unbilled Reimbursable Costs, as appropriate.

In accordance with covenants of bond resolutions, the Supply System is authorized to recover actual cash requirements for operations and debt service for each project over the life of the project. Accordingly, the Supply System records revenues equal to operating costs for each period. No income or loss is realized, and no equity is accumulated.

Nuclear Fuel Cost Nuclear Plant No. 2 capitalized nuclear fuel cost is amortized to nuclear fuel operating expense on the basis of quantity of heat produced for electric generation.

Current period nuclear fuel operating expense also in-cludes a charge for future spent nuclear fuel 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 millper kilowatt-hour of energy generated.

Decommissioning Estimated Nuclear Plant No. 2 decommissioning costs are being currently funded under the sinking-fund method. Monthly payments are made into a sinking fund which, with accumulated interest, willbe ade-quate to fund decommissioning costs at the end of the 40-year plant operating life. Sinking-fund requirements are currently based on estimated decommissioning costs of $ 114 million (1982 dollars). Payments to the decom-missioning fund for Nuclear Plant No. 2 for fiscal year 1986 aggregated

$888,000.

24

Cost Related to Construction and Termination ofNuclear Power Plants For Nuclear Projects No.'s 4 and 5, the costs of constructiori through January 22, 1982, the date of termination, and the costs of termination and other related costs subsequent to that date are shown at their estimated net realizable value in the accompanying balance sheets as of June 30, 1986, based on Supply System staff estimates. The amount estimated for unrecoverable costs ($2,817,153,800) has been reflected as Allowance for Estimated Unrecoverable Cost and as Deficiency in Assets in the accompanying balance sheets.

Retirement Plan The Supply System participates in the Washington State Public Employees'etirement System that provides retirement benefits to eligible employees. The cost of the plan to the Supply System is determined by the retirement system's board. The actuarially computed value of pension benefits exceeds the fund assets for the retirement system. However, because the retirement system is a multi-employer system, the amount of any excess that relates to the Supply System is not available.

The Supply System's required contribution was

$4,579,454 during the period ended June 30, 1986.

Note CLong-Term Debt Except for Nuclear Projects No.'s 4 and 5, which were financed together as one utilitysystem, all Supply System projects are financed separately. The revenue bonds issued for each project are payable solely from the revenues of that project.

Outstanding revenue bonds of the various projects as of June 30, 1985, are presented on pages 20 through 22.

SecurityAgreements and Contracts Project participants have purchased the Supply System's ownership share of project capability of Nuclear Plant No. 2, the Hanford Generating Project, and Nuclear Projects No.'s 1 and 3. The U.S. Department of Energy, acting by and through BPA, has in turn acquired the entire capability from the project participants under various net-billing and exchange agreements.

BPA is obligated to pay the participants and the participants are obligated to pay the Supply System their pro rata share of the total annual costs of the projects, including debt service on the bonds, whether or not the projects are completed, operable or operating and notwithstand-ing the suspension, reduction or curtailment of the projects'utput.

See Note E for a discussion of the Hanford Generating Project and its relationship to Nuclear Project No. 1.

In connection with the issuance of the generating facilities revenue bonds for Nuclear Projects No.'s 4 and 5, the Supply System pledged the revenues to be de-rived under participants'greements with 88 utilities operating principally in the Pacific Northwest. The par-ticipants'greements provided that each participant pay its respective share of annual costs, including debt ser-vice on the bonds, whether or not the projects were completed, operable, or operating and notwithstanding the suspension, interruption, interference, reduction or curtailment of the projects'utput. Payments from the participants for Nuclear Projects No.'s 4 and 5 termina-tion costs and debt service were due beginning on January 25, 1983. Payments due under the participants'greements have not been forthcoming (see Note D) and an event of default, as defined in the bond resolution, occurred on July 22, 1983, and is continuing.

In connection with the issuance of the Nuclear Projects No.'s 4 and 5 subordinated revenue notes t$60,000,000 due July 1, 1984, and $7,865,502 due June 30, 1983),

the Supply System pledged to set aside money for pay-ment of such obligations from funds to be accumulated in the Revenue Fund. Payments under the participants'greements to be accumulated in the Revenue Fund were not made and therefore the subordinated revenue notes were not paid. See Note D for a discussion of default on Nuclear Projects No.'s 4 and 5 subordinated revenue notes.

Note DTermination ofNuclear Projects No.'s 4 and 5 and Default Under Bond Resolution On January 22, 1982, the Supply System's Nuclear Projects No.'s 4 and 5 were terminated. Construction was 24 and 16 percent complete, respectively, at the time.

25

NOTES TO FINANCIALSTATEMENTS 1

~ I The participants'greements (discussed in Note C under Security) provided that each participant pay its respective share of the debt service on the bonds and termination costs beginning January 25, 1983. Payments due under the participants'greements were not made pending a judicial determinatibn of the participants'uthority and obligation to pay. On June 15, 1983, and again on November 6, 1984, the Washington State Supreme Court ruled that Washington municipal utilities did not have statutory authority to enter into the participants'greements and, thus, that those agreements are invalid as to the cities and public utility districts of the state of Washington, which collectively hold approximately 68 percent of the participants'hares of Nuclear Projects No.'s 4 and 5. In addition, on November 6, 1984, the Washington State Supreme Court also ruled that, because of the invalidity of the participants'greements entered into by the Washington municipal utilities, all of the remaining participants'greements are unenforceable as well.

Chemical Bank and the Supply System petitioned the U.S.'Supreme Court for grant of a writ of certiorari by which the state court decision might be reviewed by that court. Grant of the writ was denied by the U.S.

Supreme Court on April 29, 1985.

On July 22, 1983, the Supply System acknowledged that it could not meet all Nuclear Projects No.'s 4 and 5 obligations as they became due. This admission represented an event of default under the Nuclear Proj-ects No.'s 4 and 5 bond resolution.

On July 25, 1983, Chemical Bank, as bond fund trustee, demanded that all remaining project funds be transfered to a special account. Under Section 11.4 of the Nuclear Projects No.'s 4 and 5 bond resolution, Chemical Bank, as bond fund trustee, or a duly con-stituted bondholders'ommittee is entitled, to the ex-tent permitted by law, to take possession of the business and properties of Nuclear Projects No.'s 4 and

5. At present, the Supply System is continuing to manage the contract termination and asset disposal ac-tivities. Chemical Bank disburses the funds for payment of Nuclear Projects No.'s 4 and 5 termination activities in accordance with the payment priorities established in the bond resolution. Since total obligations currently ex-ceed available cash and revenues, certain lower priority obligations (as defined in the bond resolution) are not being paid.

On August 18, 1983, Chemical Bank declared the prin-cipal of all Nuclear Projects No.'s 4 and 5 revenue bonds and interest accrued thereon to be due and payable immediately.

Since the participants'greements have been held to be invalid, the assets of Nuclear Projects No.'s 4 and 5 have been reduced to their estimated net recoverable value, resulting in a deficiency in assets.

Such recoverable value is based on Supply System staff estimates. However, the ultimate recoverability cannot presently be determined.

The Supply System's current estimate of termination costs t$26,764,478), including costs of contract set-tlements and other termination costs, has been accrued as Accounts Payable and Accrued Expenses in the ac-companying balance sheets. Although management of the Supply System is satisfied that its estimates are reasonable, the final settlement for termination costs and the cost of dismantling the projects cannot be deter-mined at this time. Certain physical assets of Nuclear Projects No.'s 4 and 5 are being maintained for a period to maximize their sales value upon disposal. Supply System management plans to continue the asset disposal activities through at least June 1987.

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

District Court, Western District of Washington, which is now pending against the Supply System, all partici-pants in Nuclear Projects No.'s 4 and 5, Supply System member utilities and certain directors, BPA and other individuals. The lawsuit alleges violations of federal and state securities statutes, fraud, misrepresentation, bad faith, negligence, and unjust enrichment, and seeks money damages, rescission and restitution. This suit is currently in the discovery phase. Depositions began in January 1985 and are expected to continue through mid-1987. The court has set a trial date of September 1, 1988.

In addition, numerous lawsuits have been filed against the Supply System and numerous other individuals and entities by individuals purporting to represent classes of

bondholders. The lawsuits allege violations of federal and state securities statutes, negligent misrepresenta-tion, common law fraud and deceit, gross negligence, and breach of contract, and seek monetary damages for losses allegedly sustained by the purported classes.

These cases have been transfeired to the U.S. District Court, Western District of Washington, and most have been consolidated for pretrial purposes. Allof these cases are in the discovery phase of litigation.

Another lawsuit, Haberman v. Washington Public Power Supply System has been filed against the Supply System and others in a state court of the state of Washington by a number of Nuclear Projects No.'s 4 and 5 bondholders alleging substantially the same allegations as have been urged in the federal cases. Following oral decisions of the court on July 26, 1985, and, upon motions for recon-sideration, on October 7, 1985, all claims in the action against the Supply System have been dismissed. The court also indicated that it would stay the action pen-ding disposition of comparable state law claims in the federal actions. The court's rulings have been appealed by the bondholders to the Washington State Supreme Court.

The lawsuits described in the three preceding paragraphs seek to recover the bondholders'nvestment in the principal amount of $2.25 billion, plus unspecified damages, plus interest, costs and attorneys'ees.

The Supply System cannot predict the outcome of the above litigation.

Pursuant to state law and resolutions of the Supply System's Executive Board, the Supply System has agreed to indemnify its directors for certain of the acts which have been alleged in the complaint. The Supply System is obligated for associated costs {including legal defense costs) to the extent such costs are not covered by directors and officers insurance.

In a suit filed in September 1985, the excess carrier of directors and officers liabilityinsurance for the Supply System seeks an adjudication that it has no liabilityas a result of the alleged failure of the Supply System to disclose facts known to it which, if known to the in-surer, would have resulted in its not issuing the policy.

The primary carrier is currently paying costs of defense of the Supply System's directors in the securities litiga-tion, and the excess carrier agreed in June 1986 to pay such defense costs when the primary coverage is ex-hausted. Trial in this action willnot occur until the securities litigation is resolved. Although this suit is not for money damages, it could have a serious financial impact on the Supply System.

Note ECommitments and Contingencies Hanford Generating Proj ect and its Relationship to Nuclear Project No. 1 The U.S. Department of Energy (DOE) owns and operates the New Production Reactor (NPR), which pro-vides by-product steam to the Hanford Generating Proj-ect. The Supply System's current agreement with the DOE provides for the continuation of this dual-purpose operation of the reactor through June 1993. In accor-dance with certain other project agreements, the operating costs of the project willbe offset by payments from certain public and investor-owned utilities in return for the power generated.

Public participants cur-rently receive 72 percent of the power, and two investorwwned utilities receive 28 percent.

Total Hanford Generating Project revenues were $ 36 million during the year ended June 30, 1986, compared to $67.8 million for the previous year. The decrease in revenues relates to reduced power generation which resulted from a lower availability of steam provided by the DOE.

The Washington State Department of Revenue has assessed a manufacturers business tax and public utility tax on the value of Hanford Generating Project elec-trical energy sold to out-of-state participants and to BPA for resale to out-of-state, investorewned utilities and direct service industries. The potential tax liability, which totals $3.9 millionfor the period July 1, 1980, through June 30, 1986, has been recognized and is reflected in the Hanford Generating Project financial statements as of June 30, 1986. However, the Supply System believes that assessment of this tax is inap-propriate and has protested the assessment.

The 27

NOTES TO FINANCIALSTATEMENTS

~

I Washington State Department of Revenue is currently reviewing this matter.

It was initiallyintended that Nuclear Project No.

1 be constructed next to the Hanford Generating Project to provide the energy source to operate the project when the DOE ceased operation of the New Production Reac-tor. To allow for construction of Nuclear Project No. 1, it would have been necessary to shut down the Hanford Generating Project on October 31, 1977. Because studies at that time indicated that generating resources in the Pacific Northwest would be inadequate in the late 1970s and early 1980s, the Supply System and BPA determined that the Hanford Generating Project should be kept available for power production. Therefore, the Nuclear Project No. 1 net-billing, exchange and project agreements were amended to provide for the separation

~

of Nuclear Project No. 1 from the Hanford Generating Project. The amended agreements provide that Hanford Generating Project costs, to the extent not otherwise provided for, be treated as Nuclear Project No. 1 costs with HGP having a first claim on the revenues of that project.

The, amended agreements provide for the payment of all debt service costs, net of investment income, of the Hanford Generating Project by Nuclear Project No. 1 participants, beginning July 1, 1980, regardless of con-tinued operation of the reactor. Ifthe reactor ceases operations, revenues to the Hanford Generating Project arising from these payments willnevertheless be recorded each year thereafter in amounts that will result in full realization of the carrying value of the plant.

The U.S. government has an, option to acquire owner-ship of the Hanford Generating Project upon congres-sional approval. Ifthe government exercises its option, it must assume all rights and obligations of the project, including the obligation to pay all revenue bonds.

Nuclear Projects No.'s 1 and 3Construction Delay On April 29, 1982, the Supply System, upon the recom-mendation of BPA, approved an extended construction delay of Nuclear Project No. 1, and on July 8, 1983, the Supply System, also upon the recommendation of BPA, approved an extended construction delay of Nuclear Project No. 3. During the construction delay, the Supply System willendeavor to preserve plant assets and main-tain project licenses.

On January 23, 1986, the Northwest Power Planning Council (Council) released its 1986 Northwest Conserva-tion and Electric Power Plan (Plan.) In the Plan, the Council indicated that Nuclear Projects No.'s 1 and 3 are cost effective. However, the Council did not include Nuclear Projects No.'s 1 and 3 in its resource portfolio citing legal and other uncertainties. The Council does view Nuclear Projects No.'s 1 and 3 as energy options for the future after the current uncertainties are removed.

On March 21, 1986, BPA released its 1986 Resource Strategy. In the 1986 Resource Strategy, BPA recom-mended that a) the technical program, which would allow cost-effective earned-value work to continue, be delayed until the need for the projects is better known; b) spending on preservation be reduced to a minimum level by late 1988; c) BPA should not include funds for construction restart for Nuclear Projects No.'s 1 and 3 in its budget for fiscal years 1988 and 1989; and d) BPA should perform a new comprehensive review and analysis of possible future courses of action for Nuclear Projects No.'s 1 and 3 as part of BPA's 1987 and 1988 Resource Strategy.

The Supply System is currently unable to predict when Nuclear Projects No.'s 1 and 3 willbe completed.

However, BPA has recommended that for the Supply System's fiscal year 1987 financial planning process, the Supply System assume a restart of construction of one unit in 1994 and restart of construction of the other unit in 1996. BPA further stated there is approximately a one-in-three chance that restart of construction would be needed during or before 1992 for one unit and ap-proximately a one-in-four chance that restart of con-struction would be needed during or before 1992 for the second unit to meet regional load growth. However, consistent with its recommendations to assume a 1994 restart, BPA has included funding in its budget for fiscal years 1991 and 1992 for preconstruction engineering.

The U.S. Department of Energy is studying acquisition of all or a part of Nuclear Project No. 1 for completion as a strategic material production facility. Whether such 28

an acquisition willoccur, what the timing might be, and what form it might take are unknown. Any such ac-quisition would require payment of just compensation to the Supply System for assets acquired. Payment of all outstanding Nuclear Project No. 1 obligations, in'eluding debt service on outstanding bonds, would continue to be made pursuant to the Nuclear Project No. 1 net-billing agreements.

The Supply System's current estimate of costs to settle

.terminated and delayed contracts for Nuclear Project No. 3 is $4,944,226, and these costs have been accrued as Accounts Payable and Accrued Expenses in the ac-companying balance sheet. The Supply System's management is satisfied that this estimate is reasonable.

However, final settlement costs cannot be determined at this time.

Nuclear Projects No.'s 4 and 5 Subordinated Revenue Notes In conjunction with the mothballing of Nuclear Projects No.'s 4 and 5, certain project participants, investor-owned utilities and industrial customers of BPA agreed to loan Nuclear Projects No.'s 4 and 5 funds to under-write a program to preserve the assets of those projects.

These loans, called bridge loans, consisted of $ 60 million in subordinated revenue notes, bearing a stated maturity date of July 1, 1984, and bearing interest to due date at a rate of 15 percent.

Subsequently, when a decision was made to terminate Nuclear Projects No.'s 4 and 5, a number of project par-ticipants agreed to loan Nuclear Projects No.'s 4 and 5 funds designed to assist in avoiding an uncontrolled ter-mination of the projects. These loans, called termination loans, consisted of $7,865,502 in subordinated revenue notes bearing a stated maturity date of June 30, 1983, and bearing interest to due date at a rate of 15 percent.

Because Projects No.'s 4 and 5 do not have sufficient funds to underwrite payment of the subordinated revenue notes, they have not been redeemed.

Sixteen participants and investor-owned utilities filed lawsuits against the Supply System for payment of the notes, with Chemical Bank named as codefendant in several of them; one case was dismissed. In 13 cases, summary judgments have been rendered against the Supply System, and, in certain cases, the judgements stated that the obligation to pay the notes was not restricted to the funds of Nuclear Projects No.'s 4 and

5. Some of these cases were subsequently appealed to the Washington State Supreme Court and on September 5, 1985, the Court upheld previous rulings that the Sup-ply System must repay the bridge and termination loans, but ruled that repayment must be made only from funds of.Nuclear Projects No.'s 4 and 5. Plaintiff's motions for reconsideration were denied, and modified judgments, restricted in collectibility, have been entered as to all plaintiffs except the three investor-owned utility lenders.

In the BPA v. Supply System, et al case, these lenders have moved for summary judgment on their bridge loans and for the right to set off a bridge loan judgment against any cost-sharing obligation to Nuclear Projects No.'s 4 and 5. Responses were due October 1, 1986.

Nuclear Project No. 5 Ownership Agreement Under the terms of the ownership agreement with Pacific Power and Light Company (Pacific), Pacific is obligated to fund its respective ownership share of Nuclear Project No. 5 termination costs beginning January 25, 1983, and continuing until all costs of termi-nation have been paid. Ten percent of the funds receiv-ed from the sale of Nuclear Project No. 5 assets reduce Pacific's obligation for termination costs.

Pacific has stated to the Supply System that it considers the termination of Nuclear Project No. 5 to be a breach of the Nuclear Project No. 5 ownership agreement and has reserved its rights to pursue appropriate remedies with respect to such breach. On June 16, 1983, Pacific advised the Supply System that, due to the Washington State Supreme Court ruling that certain participants'greements were invalid (as described in Note D) and other related actions by the Supply System, Pacific would no longer fund 10 percent of the Nuclear Project No. 5 termination costs.

It is the position of the Supply System that the termina-tion of Nuclear Project No. 5 does not constitute a breach of the Nuclear Project No. 5 ownership agree-ment and that Pacific is responsible under the Nuclear Project No. 5 ownership agreement for payment of its 29

NOTES TO FINANCIALSTATEMENTS I

I p 10 percent share of the costs of termination of such project.

Pacific has made payments prior to June 16, 1983, under the Nuclear Project No. 5 ownership agreement pursuant to reservations of rights to its potential claim to sue the Supply System for damages for failure to complete the project. Pacific's claim would presumably be about $ 150,000,000-its investment in the project.

Such a claim could be a general claim against the assets of the Supply System.

Inter-Project Claims and Claims Against General Assets As discussed above, Nuclear Projects No.'s 4 and 5 are currently unable to meet Nuclear Projects No.'s 4 and 5 debts as they become due. Creditors have threatened to attempt to obtain payment from assets or funds held for the benefit of other projects of the Supply System or the revenues pledged thereto. Such creditors include those described in the Notes to Financial Statements and others who may in the future assert claims against the Supply System and/or its projects.

Bond counsel to the Supply System are of the opinion that neither holders of bonds issued to finance the con-struction of Supply System's Nuclear Projects No.'s 4 and 5, nor creditors of the Supply System whose claims arose from the furnishing of goods or services with respect to Nuclear Projects No.'s 4 and 5, willbe able to realize upon revenues or funds held in trust for Sup-ply System Nuclear Projects No.'s 1, 2 and 3 or for holders of bonds issued by the Supply System to finance construction of such projects except to the ex-tent they might obtain rights through a valid exercise of the sovereign police power of the state of Washington or of the constitutional powers of the United States of America, or by a voluntary bankruptcy of the Supply System.

Bond counsel also are of the opinion, based upon Lamp-son Universal Rigging, Inc. v. Washington Public Power Supply System (Supreme Court of Washington, Case No.

51619-7, March 20, 1986), that a court should hold that neither holders of bonds issued to finance the construc-tion of the Supply System's Nuclear Projects No.'s 4 and 5, nor creditors of the Supply System whose claims arose from the furnishing of goods or services with respect to Nuclear Projects No.'s 4 and 5, willbe able to realize upon the assets of Supply System Nuclear Projects No.'s 1, 2 and 3 that are necessary for the pur-poses of such projects or the Supply System, except to the extent they might obtain rights through a valid exer-cise of the sovereign police power of the state of Washington or of the constitutional powers of the United States of America, or by a voluntary bankruptcy of the Supply System.

Bond counsel's opinion as to the ability of bondholders or other creditors to realize upon assets of Supply System Nuclear Projects No.'s 1, 2 and 3 is limited to those assets located within the state of Washington, or as to which a court would apply the law of the state of Washington, and the opinion excludes assets that are not necessary for the purposes of Supply System Nuclear Projects No.'s 1, 2 and 3 or the Supply System.

Bond counsel is not able to determine at this time how a court of a state other than the state of Washington would treat assets of Supply System Nuclear Projects No.'s 1, 2 and 3 located outside the state of Washington, ifsuch court were to apply the law of a state other than the state of Washington.

Bond counsel has not undertaken an investigation of the issues discussed above with respect to the Packwood Lake Hydroelectric Project or Hanford Generating Proj-ect. However, they believe that upon full investigation the same opinions could be rendered with respect to assets of the Packwood Lake Hydroelectric Project and Hanford Generating Project and revenues or funds held in trust or relating to such projects or for the holders of bonds issued by the Supply System to finance the con-struction of such projects.

Supply System management is of the opinion that creditor claims can only be realized from the assets, funds or revenues of the projects to which such claims relate. The Supply System willutilize all legal remedies to defend its position. Ifit is found that creditors are not limited to payment of their claims from the project to which such claims relate, it willhave a material adverse impact on the Supply System.

Shared Costs The termination of Nuclear Projects No.'s 4 and 5 creates an uncertainty as to how certain common ser-vices and facilities are to be shared with Nuclear Proj-30

ects No.'s 1 and 3, respectively. In August 1982, the participants of Nuclear Projects No.'s 4 and 5 presented a claim to Nuclear Projects No.'s 1 and 3 to reimburse Nuclear Projects No.'s 4 and 5 for a portion of the costs of shared services and facilities paid by the projects before July 1, 1981. The claim requested immediate payment of $75,000,000 and $86,000,000 plus interest from Nuclear Projects No.'s 1 and 3, respectively, plus amounts that may be determined in the future. The claim is based on a method of calculating shared costs that is different from the method adopted by the Supply System.

The Supply System has reviewed its cost-sharing policy from inception of the projects to determine if costs were allocated properly. As of June 30, 1986, about

$ 17,793,952 plus interest is due Nuclear Project No. 5 from Nuclear Project No. 3; about $8,019,686 plus in-terest is due Nuclear Project No. 1 from Nuclear Project No. 4; and about

$ 162,975 plus interest is due Nuclear Project No. 4 from Nuclear Plant No. 2 for shared costs. These amounts (excluding accrued interest) have been recorded in the accompanying balance sheets as of June 30, 1986. The results of the aforementioned review are subject to audit by BPA and the investor-owned utilities in Nuclear Projects No.'s 3 and 5. Because of the preliminary nature of the aforementioned findings, the uncertainty over the shared cost policies adopted by the Supply System, and since the matter of proper allocation of shared costs is currently in litigation (as described below), the ultimate allocation, collectibility, and payment of shared costs is uncertain.

On October 26, 1982, the Supply System filed a legal action against BPA, the four investorwwned utilities who are joint owners of Nuclear Project No. 3, the par-ticipants of Nuclear Projects No.'s 4 and 5 (the court has since allowed Chemical Bank to intervene in this suit) and the construction fund trustee for Nuclear Proj-ect No. 1 seeking a judicial determination of past and future shared costs among Nuclear Projects No.'s 1 and 4 and Nuclear Projects No.'s 3 and 5. )The court has since restructured the case as BPA v. Supply System, et al., wherein BPA is now the plaintiffand the Supply System and other aforementioned parties are defen-dants.) Although the lawsuit does not specify the amounts of money that the parties believe should be reallocated, the method used to calculate the aforemen-tioned claim is an issue in the lawsuit. The case has been stayed since 1983.

On September 2, 1986, pursuant to an order partially lifting the stay, BPA, the four investor-awned utilities, and certain project participants of Nuclear Projects No.'s 1 and 3 moved for an order dismissing Chemical Bank's claims against them or, in the alternative, for summary judgment. Responses are due October 1, 1986.

Nuclear Project No. 3 Claims In July and August 1983, the four investor-owned utilities who own 30 percent of Nuclear Project No. 3 filed claims against BPA, the Supply System and Nuclear Project No. 3 participants arising out of the ex-tended construction delay at Nuclear Project No. 3. The claims were filed in the action entitled BPA v. Supply System (See "Shared Costs" ). Included are claims for in-junctive and declaratory relief, damages, rescission of the Nuclear Project No. 3 ownership agreement and recovery of the total amount of payments made under the agreement to date. In October 1983, BPA amended its complaint to resolve the Nuclear Project No. 3 dispute.

In November 1984, the court issued an interlocutory order on the parties'ross-motions for summary judg-ment holding that the Supply System and BPA violated the terms of their contracts by not continuing construc-tion and including the costs in an annual budget to be paid through net-billing. The court reserved for trial the issues of whether the contracts were materially breached and whether the investor-owned utilities remain obligated to pay further Nuclear Project No. 3 costs.

The judge on this case subsequently excused himself from the case. On May 16, 1985, the newly appointed judge vacated all of the original judge's prior rulings in-cluding the summary judgment ruling made in Novem-ber 1984.

The new judge allowed the parties to renew their prior motions without additional briefing. Allof the parties requested the court to reconsider their previous motions including the cross-motions for summary judgment. On July 10, 1985, the new judge reestablished all of the original judge's previous rulings except the motions on summary judgment regarding breach of the contracts.

Final agreements permitting settlement of the construc-

NOTES TO FINANCIALSTATEMENTS

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~

tion delay claims were executed by the Supply System on September 13, 1985, and by BPA and the investor-owned utilities on September 17, 1985. Pursuant to those agreements the parties exchanged covenants not to sue and asked the court to enter an order of dismissal of their delay claims. The court has not yet ruled on this matter.

BPA described the settlement as follows: BPA and the four utilities would enter into an agreement to exchange energy; BPA would exchange an amount of power to be determined by the performance of four surrogate nuclear plants similar in design to Nuclear Project No. 3; If these plants perform as expected, BPA could ex-change to the utilities about 193 average megawatts of energy each year. In return, the utilities would provide BPA: 1) payments equal to about $700 million (present value) over the life of the agreement based on the costs of operating and maintaining the surrogate plants (or Nuclear Project No. 3 ifit is operated); 2) the opportuni-ty to use their combustion turbines ifneeded; and 3) the opportunity to complete, operate and use their 372-megawatt share of Nuclear Project No. 3 ifit is later determined to be both needed and cost effective.

A number of the Nuclear Project 3 participants oppose the settlement and have filed supplemental pleadings asserting challenges to the settlement agreements and have also filed complaints for direct review in the Ninth Circuit Court of Appeals invoking that court's "original"jurisdiction under the Northwest Regional Power Act. Certain participants have also filed amended pleadings asserting mothballing claims unrelated to the settlement.

The parties signing the settlement agreements filed mo-tions in the district court to dismiss the claims attacking the settlement agreements for lack of jurisdiction, lack of indispensable party, and motions for summary judg-ment. On July 3, 1986, the court granted BPA's motion to dismiss the settlement claims for lack of jurisdiction for the reason that jurisdiction more properly lies in the Ninth Circuit. Certain settlement claims against the IOUs and mothballing claims not related to the settle-ment remain pending in the district court but further proceedings were stayed on July 3, 1986, pending a res-olution by the Ninth Circuit of the claims under its original jurisdiction. Cost sharing issues were allowed to proceed on a limited basis.

The parties who signed the settlement agreements also filed motions in the Ninth Circuit cases to dismiss some of the claims of the Nuclear Project No. 3 participants for lack of jurisdiction. The motions have not yet been resolved. Subsequent to the court's resolution of the motions regarding jurisdiction, the Ninth Circuit will resolve some or all of the challenges to the settlement agreement.

In the absence of a settlement and if the IOUs were to prevail in their request for an order granting them the right to rescind the Project Ownership Agreement and a right to recover payments made thereunder, the Supply System could face a loss contingency of some

$2 billion, plus possible termination of the project.

Net-BillingAgreements The parties to the net-billing agreements are BPA, the Supply System, and the participants. The agreements provide that BPA is obligated to pay the participants, and the participants are obligated to pay the Supply System their pro rata shares of the total annual costs of the projects, including debt service on the bonds, whether or not the projects are completed, operable, or operating, and notwithstanding the suspension, reduc-tion, or curtailment of the projects'utput. However, the agreements also provide that they shall not be binding on any of the aforementioned parties ifthey are not binding on all the parties.

On November 15, 1982, the city of Springfield, Oregon, filed a complaint against the Supply System, BPA, the investor-owned utilities owning 30 percent of Nuclear Project No. 3, and all other parties to the net-billing agreements pertaining to Supply System Nuclear Plant No. 2 and Nuclear Projects No.'s 1 and 3. The com-plaint alleged that the Lane County Circuit Court's deci-sion in DeFazio v. Washington Public Pouer Supply System had created controversy and uncertainty about the con-tractual obligations of Oregon public participants and their authority under Oregon law to enter into the net-billing agreements. It also alleged that members of Oregon public utilityboards are exposed to personal liabilityfor any payments of public money not authoriz-ed by law. The complainant sought a declaratory judg-32

~

~

ment that it and other Oregon public participants had legal authority to enter into the net-billing agreements, or ifthey did not, that BPA is liable to make contract payments. In their responses to the complaint, BPA and the Supply System asked for a declaration that all signatories to the net-billing agreements had legal authority to enter into them. Springfield ratepayers who were parties to DeFazio intervened in the action claim-ing that the plaintiffdid not have authority to enter into the net-billing agreements under Oregon law.

On May 16, 1983, the U.S. District Court of Oregon entered a judgment declaring that all parties to the net-billing agreements had legal authority to enter into them. Its decision was appealed by intervenors and two utilities to the Ninth Circuit Court of Appeals. On February 4, 1985, the Court of Appeals affirmed the judgment of the district court. The court subsequently denied the appellant's petition for rehearing. On January 13, 1986, the United States Supreme Court denied the intervenor's petition for certiorari, ending proceedings in the case.

Securities and Exchange Commission Investigation The Securities and Exchange Commission has for more than 30 months been conducting a preliminary inquiry into allegations of securities violations by the Supply System and others. In January of 1984, the commission opened a formal investigation as to these allegations.

Documents have been produced to the commission pur-suant'to subpoena, and the commission staff has taken depositions of numerous individuals, including present and former Supply System personnel. Further produc-tion of documentary and testimonial materials to the commission is anticipated. As the investigation remains in a stage of information gathering, it is too early to predict what further action the commission may take.

LiabilityInsurance The Price-Anderson Act currently limits the public liabilityclaims that could arise from a nuclear incident to $665 million. The Supply System has purchased the maximum available private insurance of $ 160 million and the excess of $505 million of coverage is insured by secondary financial protection. Under secondary finan-cial protection, coverage would be funded by a man-datory program of retrospective premiums assessed against all owners of licensed reactors. In the event of nuclear incidents at facilities covered under the Price-Anderson Act, the Supply System could be assessed up to $5 million per incident but not more than $ 10 million in a calendar year.

The Supply System is self-insured for automobile, general liabilityand directors and officers insurance.

Antitrust Litigation On August 16, 1983, the Supply System filed a lawsuit against nine corporations engaged in the electrical con-tracting business. The Supply System sought treble damages and attorneys'ees under the antitrust and racketeering laws, charging that defendants had engaged in bid-rigging.

The Supply System recently reached settlement with all defendants and stipulated orders of dismissal have been filed with respect to all of the defendants. The set-tlements total $23,123,292 in cash payments and con-struction claims releases.

The cash proceeds,

$20,464,200, willbe paid over the course of the next 10 years.

Net credits relating to these settlements are appropriate-ly reflected in the balance sheets as of June 30, 1986, as follows: Nuclear Project No. 1: $5,949,282; Nuclear Project No. 2: $6,396,583; Nuclear Project No. 3:

$5,644,043, and Nuclear Projects No.'s 4 and 5:

$ 1,319,174.

Other Litigation and Commitments The Supply System is involved in various claims, legal actions and contractual commitments not mentioned above as both a plaintiffand a defendant and in certain claims and contracts arising in the normal course of business for a large construction program. Although some suits, claims and commitments are significant in amount, final disposition is not determinable. In the opinion of management, the outcome of any such litiga-tion, claims or commitments willnot have a material adverse effect on the financial positions of the projects.

The estimated cost of the projects may either be in-creased or decreased as a result of the outcome of these matters.

33

STATEMENT OF DEBT SERVICE REQUIREMENTS Dollars in thousands NUCLEAR PLANTNO. 2*

PISCAL YEAR PRINCIPAL INTBRBST TOTAL HANFORD GENERATING PROJECT PRINCIPAL INTBRBST TOTAL PACKWOOD LAKEPROJECT PRINCIPAI INTBRBST TOTAL 1987 24,925 1988 26,645 1989 28,510 1990 30,555 1991 32,800 1992 35,260 1993 37,980 1994 40,950 1995 44,225 1996 47,825 1997 65,575 1998 71,955 1999 79,330 2000 85,795 2001 93,290 2002 101,635 2003 93,055 2004 97,375 2005 106,765 2006 117,225 2007 128,850 2008 141,675 2009 155,940 2010 171,820 2011 189,510 2012 209,230 2013 2014 2015 2016 2017 2018 213,399 211,686 209,818 207,778 205,540 203,080 200,383 197,445 194,227 190,678 186,769 180,399 173,291 166,572 159,093 150,766 141,479 133,671 124,280 113,821 102,201 89,370 75,104 59,226 41,538 21,814 238,324 238,331 238,328 238,333 238,340 238,340 238,363 238,395 238,452 238,503 252,344 252,354 252,621 252,367 252,383 252,401 234,534 231,046 231,045 231,046 231,051 231,045 231,044 231,046 231,048 231,044

$ 3,255 3,360 3,485 3,455 5,065 5,585 5,835 800 913

$ 4,168 806 4,166 693 4,178 580 4,035 425 5,490 246 5,831 58 5,893 4

804 180 190 195 265 275 290 300 315 330 340 360 380 400 465 490 515 540 565 590 615 640 665 690 359 150 55 371 365 358 351 341 331 320 309 298 286 273 260 246 232 215 197 178 158 138 116 94 70 46 21 8

2 551 555 553 616 616 621 620 624 628 626 633 640 646 697 705 712 718 723 728 731 734 735 736 380 158 57

$2,258,700

$3,953,428

$6,212,128

$30,840

$3,725

$34,565

$ 10,159

$5,584

$ 15,743

'Excludes payments ofbond principal and interest made on July I, 1986 34

NUCLEAR PROJECT NO.

1'ISCAL YEAR PRINCIPAL INTEREST TOTAL NUCLEAR PROJECT NO. 3'UCLEARPROJECTS NO'S. 4/5 PRINCIPAL INTEREST TOTAL PRINCIPAL TOTAL 1987 1988 1989,"',

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

'005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 15,470 18,055 18,970 21,465 22,560 23,755 25,560 26,985 28,550 30,745 38,080 41,565 45,455 49,465 53,920 58,885 51,135 55,430 60,600 66,320 72,665 79,705 87,525 96,220 105,855 116,610 128,635 142,155 157,820 175,395 194,005 206,652 205,729 204,564 203,320 201,877 200,326 198,647 196,784 194,767 192,580 190,049 186,562 182,673 178,663 174,204 169,242 163,703 159,406 154,237 148,515 142,171 135,131 127,313 118,618 108,983 98,229 86,204 72,680 57,014 39,441 20,831 222,122 223,784 223,534 224,785 224,437 224,081 224,207 223,769 223,317 223,325 228,129 228,127 228,128 228,128 228,124 228,127 214,838 214,836 214,837 214,835 214,836 214,836 214,838 214,838 214,838 214,839 214,839 214,835 214,834 214,836 214,836 8,925 10,555

.11,315 12,145 13,050 14,045 15,125 16,310 17,615 19,045 22,595 24,605 26,810 29,020 31,475 34,180 37,095 42,730 45,995 49,615 49,675 54,485 59,810 65,710 72,265 80,365 89,490 99,770 111,370 124,455 139,235 154,950 165,001 164,368 163,579 162,760 161,901 160,961 159,932 158,798 157,546 156,163 154,637 152,628 150,427 148,218 145,773 143,068 140,057 136,746 132,503 127,908 122,946 118,136 112,810 106,909 100,355 92,250 83,126 72,846 61,252 48,165 33,382 17,665

$2,317,866 2,317,866 173,926 174,923 174,894 174,905 174,951 175,006 175,057 175,108 175,161 175,208 177,232 177,233 177,237 177,238 177,248 177,248 177,152 179,476 178,498 177,523 172,621 172,621 172,620 172,619 172,620 172,615 172,616 172,616 172,622 172,620 172,617 172,615 Refer to Note D-Termination ofNuclear Projects No.'s 4 and 5 and Default Under Bond Resolution, page 25 and Note E-Commitments and Contingencies, page 27.

$2,109,560

$4,719,115

$6,828,675

$ 1,583,830

$4,012,816

$5,596,646

$2,317,866

$2,317,866 35

The 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 I206) 482-4428, ext. 5052. Tours of the WNP-1 site are available by appointment by calling (509) 372-5408.