ML17292B479

Washington Public Power Supply Sys 1998 Annual Rept. with 981215 Ltr

ML17292B479
Person / Time
Site:	Columbia, Washington Public Power Supply System, Satsop
Issue date:	12/31/1998
From:	Kucera G WASHINGTON PUBLIC POWER SUPPLY SYSTEM
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
G01-98-0048, G1-98-48, GO2-98-211, GO3-98-0223, GO3-98-223, NUDOCS 9812230169
Download: ML17292B479 (42)

Text

CATEGORY 1 .

l REGULAs.uRY INFORMATION DISTRIBUTIVE'YSTEM (RIDS) r j E-;: 'r:. DOCKET FACIL:50-397 WPPSS Nuclear Project, Unit 2, Washington Public Powe 05000397 50-460 WPPSS Nuclear Project, Unit 1, Washington Public Powe 05000460 STN-50-508 WPPSS Nuclear Project, Unit 3, Washington Public 05000508 AUTH. NAME AUTHOR AFFILIATION KUCERA,G.J. Washington Public Power Supply System RECIP.NAME 'ECIPIENT AFFILIATION

SUBJECT:

"Washington Public Power Supply Sys 1998 Annual Rept." With tr.

DISTRIBUTION CODE: N004D COPIES RECEIVED:LTR TITLE: 50.71(b) Annual Financial Report i ENCL 3 SIZE:

E NOTES:Standardized Plant. 05000508 App for permit renewal. Recpxested exp date 890701.

RECIPIENT COPIES RECIPIENT COPIES XD CODE/NAME LTTR ENCL ID CODE/NAME LTTR ENCL PD4-2 LA 1 ' DRPM/PDND LA 1 1 PD4-2 PD 1 1 DRPM/PDND 1 1 POSLUSNY,C 1 1 . MENDONCA, M 1 1 INTERNAL:

i CE 0 1 1 NRR/DRPM 1 1 I

NRR/DRPM/PGEB 1 1 EXTERNAL: NRC PDR 1 1 D

0 U

~ggq NOTE TO ALL "RIDS" RECIPIENTS:

PLEASE HELP US TO REDUCE WASTE. TO HAVE YOUR NAME OR ORGANIZATION REMOVED FROM DISTRIBUTION LISTS OR REDUCE THE NUMBER OF COPIES RECEIVED BY YOU OR YOUR ORGANIZATION, CONTACT THE DOCUMENT CONTROL DESK (DCD) ON EXTENSION 415-2083 TOTAL NUMBER OF COPIES REQUIRED: LTTR 10 ENCL

WASHINGTON PUBLIC POWER SUPPLY SYSTEM PO. Box 968 ~ Richland, Washington 99352-0968 December 15, 1998 GO1-98-0048 G02-98-211 G03-98-0223 Docket Nos: 50-460 50-397 50-508 U.S. Nuclear Regulatory Commission Attn: Document Control Desk Washington, DC 20555 Gentlemen:

Subject:

NUCLEAR PROJECTS 1, 2, gc 3 ANNUALFINANCIALREPORT Enclosed for your information, as required by 10 CFR 50.71(b), are three copies of the Washington Public Power Supply System Annual Report 1998.

Should you have any questions or desire additional information regarding this matter, please call me or RA Bresnahan at (509) 372-5730.

Respectfully, GJ Kucera Vice President, Administration/Chief Financial Officer Mail Drop 1396

Enclosure:

As stated CC: EW Merschoff - NRC RIV C Poslusny, Jr. - NRR w/o MM Mendonca - NRC w/o NRC Sr. Resident Inspector - 927N DL Williams - BPA/1399 w/o PD Robinson - Winston & Strawn w/o 98i2230ibq 98i23i0500039'7 l".'<

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Operating Highlights 1

Executive Board 2-3 A Journey to Excellence Louis H. Winnard, Chairman, Executive Board Joseph V. Parrish, Chief Executive Officer 4-5 Nuclear Operations 6-7 New Business Initiatives 8-11 Board of Directors 12 Financial Highlights 13-36 WASHINGTON PUBLIC POWER SUPPLY SYSTEM

4 COST OF POWER 3.5 3

5$ 4c 2$ 6c 2464 226 1094 1SSS 19SB 1001 2008 300 PUWT 2 COSTS 200 175 150

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50 25 0 6251 5222 SIN SII2 6165 1904 10SS 1006 1991 1000 160 RADIATIONEXPOSURE DURING OPERATION 100 I 60 C7 40 20 0 146 101 112 61 57

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1004 1095 1006 1990 2000 PLANT 2 STAFFING 1250 Q 1000 750 500 250 0 1646 1666 @04 1161 1077 1004 100$ 1006 1S01 1000

Louis H. Winnard Chairman Consuitant Windsor, CA

'&C E~ZZL G Washington Public Power Supply System Administrative and Public Responsibility Committee Vera Claussen, Chairman Audit, Legal and Finance Committee John Cockburn, Chairman Operations and Construction Committee Parker Knight, Chairman

pl P Darrel Bunch Don Carter Rudi Bcrtschi Commissioner Deputy City Manager for (Vice Chairman)

Okanogan County PUD Utilities and Physical Consultant Okanogan, WA Services Economic R Technical City of Richland, WA Analysis Group Seattle, WA

,~1 ply Vera Claussen Edward E. "Ted" Coatcs John Cockburn (Assistant Secretary) (Secretary) Retired Bank Executive Commissioner Retired UtilityExecutive Seattle, WA Grant County PUD Tacoma, WA Ephrata, WA Dan Gunkel Parker Knight Roger Sparks Commissioner Commissioner Commissioner Yiickitat County PUD Skamania County PUD Kittitas County PUD Goldendale, WA Carson, WA Elfensburg, WA

"Among our other successes are improved ratings from the Nuclear Regulatory Commission and the Institute of Nuclear Power Operations. The greatest endorsement we received this year came from the Nor thwest Power Planning Council's Cost Review Committee. Its regional study of the Bonneville Power Administration's costs gave us a strong endorsement as a vital component in the region's power system."

Chief Executive Officer Joseph V. Parrish "The Supply System is committed to building on the success of the past five years. The successes outlined here, as well as the new business initiatives discussed in this Annual Report, foretell a bright future for the Supply System and the Bonneville Power Administration as a whole as the electric utility industry restructures itself."

Executive Boar d Chair man Louis H. Winnard

~Ii Fr om its founding more than 40 years ago, through the turbulent 1970s and '80s and finally up to the present, the history of the Washington Public Power of the Supply System as a vital component in the region's power system.

The study recognized our success in making Plant 2 Supply System is a story of courage, hard work aod power competitive through cost cuts and increased dedication of its employees and public spirited policy reliability. We are confident that we can meet the

'makers. challenge to remain competitive in the future.

Fifteen years ago few people would have given the New initiatives, such as moving from a 12-month to a Supply System much chance of surviving. Looking back 24-month refueling cycle at Plant 2, will help meet that at the events of 1983 the failed construction program goal. We estimate that this efficiency improvement will that saw one of five nuclear plants completed, the legal save $ 120 million over the remaining 25-year life of the and financial crisis that spawned a $ 2.25 billion default plant.

on our Project 4/5 bonds, and the loss of faith that The Supply System has been instrumental in destroyed our credit rating it is a wonder the organiza- Bonneville's resurgence as the region's preferred tion survived. electricity provider. A few years ago critics predicted the This legacy is not mentioned with any sense of demise of the federal agency. They said BPA was too perverse pride. It is stated for only one reason: It is expensive, too bureaucratic, and would be unable to meet impossible to chronicle a long journey a journey to its fish. recovery obligations without large increases in the excellence without describing where it began. wholesale price of electricity. They said Bonneville was Five years ago our journey almost ended. Plant 2, doomed. Utilities began searching for other, lower cost our sole operating nuclear generating station, was over sources of power.

staffed, over priced, and under productive. The cost of But the critics were wrong.

power was too high, at 3.45 cents per kilowatt.hour, to Bonneville tightened its belt and cut the wholesale be competitive. The plant was unreliable, worker radia- price of electricity sold to its public power customers by tion exposure was too high and we were wasting far too 20 percent Utilities that only two years ago were much time working on the plant, rather than running it scrambling to abandon BPA now are pleading to come Management was faced with a clear choice: Cut costs back. BPA's next series of five-year power supply con-and increase reliability, or terminate the plant tracts, to go into effect in 2001, are already projected to Here is what we'e accomplished since 1994: be over subscribed.

~

Cut the cost of power from Plant 2 from 3.45 Bonneville's progress has been helped by the Supply cents per kilowatt hour to 2.2 cents in fiscal System's aggressive bond refinancing program. Early 1998. For fiscal 1999, our goal is to be below planning paid off handsomely as the Supply System, with 2 cents a kilowatt hour. Bonneville's cooperation, took advantage of favorable

~ Reduced the plant budget from $ 251 million credit ratings and low interest rates, thereby cutting the to $ 165 million. average interest rate on billions of dollars in outstanding bonds nearly in half since 1989, from 10.5 percent to

~ Oownsized our staff more than 35 percent 5.3 percent while cutting overtime expenditures from The result Northwest electricity consumers will

$ 10.9 million in fiscal 1994 to $ 2.7 million in save $ 1.83 billion because of this successful refunding fiscal 1998. program.

~ Increased plant reliability by virtually eliminat- The Supply System is committed to building on the ing forced outages. There was a time when success of the past five years. The successes outlined Plant 2 experienced five automatic shutdowns here, as well as the new business initiatives discussed in in as many days. In fiscal 1998 we had our this Annual Report, foretell a bright future for the Supply first forced outage in three years, System and the Bonneville Power Administration as a

~ Cut worker radiation exposure, a key indicator whole as the electric utility industry restructures itself.

of safety and efficiency, by 60 percent. Plant 2 The Supply System has come a long way since the is now among the best in the industry. dark days of 1983. While justifiably proud of our accom-Among our other successes are improved ratings plishments, we are at the same time very cognizant of from the Nuclear Regulatory Commission and the the challenges facing us. By keeping our costs in line and Institute of Nuclear Power Operations, but the greatest the price of our power competitive, we are looking toward endorsement we received this year came from the new opportunities and a bright future.

Northwest Power Planning Council's Cost Review Committee. Its regional study of the Bonneville Power Administration's costs resulted in a strong endorsement

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The Washington Public Power Supply System is

, on a journey, a journey to excellence that began five years ago when the organization was struggling to If+

survive, and will carry it into an unregulated future on a competitive footing.

The journey began in 1993 when the cost of power from Plant 2 was not competitive at 3.45 cents a kilowatt hour, the operating budget was bloated at $ 251 million a year and staffing had peaked at nearly 2,000 employees.

In contrast, in fiscal 1998 Plant 2 delivered more electricity to the Bonneville Power Adminis- Fnm lefu tration than in any year in its 14-year operating Vice President Operations Support/Public Information Officer Rad Wcbring history. And the price of that electricity, at 2.2 Vice President Nuclear Operations Paul Bernie Vice President Administration/Chief Financial Officer Jerry Kucera cents a kilowatt-hour, was competitive with other General Counsel Al Mouncer available resources. Vice President Resource Oavelopmenc Jack Baker Getting to this point of the journey was difficult radiation exposure, a key measurement of safety Gaining control of costs required setting priorities, and efficiency, although lower than the year before fixing problems in the plant and removing excuses was still higher than the established goal.

that kept the staff from realizing its potential. Cost The plant was prevented from reaching its cutting initiatives varied from the innovative to the annual generation goal by two events: An un-mundane: planned outage in March caused by a minor

~ Administrative costs were reduced $ 5 million equipment failure that ended a 243 day continuous over three years. generation run, and the extension of the spring maintenance and refueling outage caused by a

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Staffing was cut by 35 percent. broken valve in the plant's fire protection system.

Overtime expenditures were slashed 75 These were Plant 2's only forced outages in percent. more than three years.

With costs down and reliability up the Supply

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A $ 200,000 investment in a hand-geometry System is continuing to look for ways to increase access control system reduced the security efficiency. That's why the Supply System and force by sever al officers. Bonneville have agreed to transition Plant 2 to a

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A paper change in the plant's Nuclear Regula- 24-month refueling cycle.

tory Commission operating license gained Plant 2 is the only nuclear power plant in the more than 50 megawatts in plant capacity. nation still on a 12-month refueling cycle. Most Plant 2 is now licensed to run at more than plants operate on an 18-month cycle and about 1,200 megawatts. 20 percent run two years between refuelings.

Because Plant, 2 rests among some of the great-Innovative ways were found to give employees est hydroelectric producers in the world, the incentives to take ownership for plant performance. nuclear station has always followed the ebb and A significant portion of their compensation is in the flow of the Columbia River. Each spring, when form of incentive payments based on meeting key water was high and the region awash with hydro-Plant 2 cost and efficiency goals. The concept is electricity, Bonneville wanted Plant 2 offline and simple: If Plant 2 runs well and remains within refueling. The plant simply couldn't compete with budget, employees are rewarded at the end of the hydro power during periods of high water.

year. If the plant fails to meet its goals, some or all Now, with the incremental cost to Bonneville of of the incentive payment is forfeited. running the 1,200 megawatt Plant 2 (that's the In fiscal 1998 Plant 2 met its budget goal by cost for fuel, generation taxes and contributions to underrunning its $ 165 million annual budget the federal spent fuel fund) down to about a half-However, the plant fell short of meeting an ambi- cent a kilowatt hour, the economics have changed.

tious goal for net electrical generation. And worker

projects. If all Packwood's output is sold as "green," the foundation will gain about $ 750,000 a year. The Supply System and its Packwood partici-pants gain less, but it's significant up to

$ 300,000 a year.

The Supply System is discussing a two-year Packcuoocd pcuueekocm contract with BPA that calls for an additional 2.5 mills per kilowatt hour for any green power sold Changing to a 24-month refueling cycle is from the project. The contract would raise the expected to save between $ 100 million and $ 120 ceiling for firm energy from Packwood from 80 million over the life of Plant 2. The transition will gigawatt-hours to 86.75 gwh to allow more energy cost about $ 22 million, but if Plant 2 skips an to be marketed at the higher firm-power rate.

outage every other spring, the yearly average price Bonneville also would pay the cost, including for its power is likely to drop. And, by skipping every transmission losses, for transmitting Packwood other outage, Plant 2 will save about $ 15 million power 50 miles to BPA's system.

for each one missed. Another benefit to Packwood may come down Plant 2 has come a long way on its journey to the road. The project is up for relicensing in 2010.

excellence. It is a valued counterpoint to the Northwest's traditional reliance on low-cost hydro- Teaming up with potential intervenors, along with their recognition of Packwood as environmentally power. With its costs in line and reliability no longer friendly, could pay future dividends during the questioned, Plant 2 is competitive with new resources. And, as the Supply System continues relicensing process.

its long journey, Plant 2 is increasingly competitive with traditional resources as well.

The Applied Process Engineering Laboratory (APEL] was dedicated last spring. The $ 6 million lab is located in a former Supply System ware-For the Supply System, restructuring of the house in Richland. The lab is the only high-tech electrical industry means great change, and great business incubator of its kind in North America.

opportunity. After meeting the challenge of making It will create jobs in the Northwest and address Plant 2 more efficient and reliable, the Supply some of the most vexing environmental problems System is finding the opportunity to redefine itself. facing our planet, such as disposal of toxic wastes.

APEL is a joint venture of the Supply System, the

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Pschuoad P~ ~ gee~ Por t of Benton, the Pacific Nor thwest National Laboratory, the Department of Energy and others.

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A~k ~8 The Supply System's 27-megawatt Packwood Lake Hydroelectric Project capped off a strong generating year on an environmentally friendly note To expand into the energy services market, the when it became one of three regional generating Supply System in September became a marketing projects chosen by the Bonneville Power Adminis- affiliate of Hometown Connections, the American tration for its new Environmental Foundation. Public Power Association's new subsidiary. Home-The foundation is made up of three environmen- town Connections is a collection of ser vices tal groups teamed with Bonneville in a unique designed to make local public power retailing arrangement to market "green power" from utilities mor e competitive by using combined buying Packwood, the Idaho Falls Hydroelectric Project power to leverage better arrangements from and a Wyoming wind farm. vendors. Initially, the Supply System will market Northwest consumers will pay a premium for such ser vices and products as customer surveys, this green power, with most of the extra revenue customer information software, advanced meter.

going to the foundation to finance environmental reading products, workshops and energy services.

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, The Supply System is a vital component of a The Supply System continues to work with the consortium seeking to help rid the nation of surplus Satsop Redevelopment Project (SRP) to transfer

'lutonium by burning a portion of it in commercial some assets and real estate of Projects 3 and 5 for power reactors. The Supply System, Raytheon economic development in Grays Harbor County, in Engineers and Constructors and Battelle Memorial coastal Washington state. The Supply System has Institute, which operates the Pacific Northwest offered to pay SRP $ 15 million to take over the site.

National Laboratory, are members of the consor. The payments will be far less than if the Supply tium, which is led by Siemens Power Corp. System had retained ownership and was required, There are about 55 tons of weapons-grade under terms of its Ener gy Facilities Site Evaluation plutonium declared surplus in the United States. Of Council license, to return the site to its natural state.

that, about 35 tons is suitable for mixing with In return, SRP is expected to assume all liability for uranium to pr oduce mixed-oxide fuel. The National the site.

Academy of Sciences has said such surplus pluto- Because of the complex nature of past owner nium here and in the former Soviet Union is "a ship contracts, reaching a transfer agreement has clear and present danger" to global peace and been a complex matter, requiring time and great should be destroyed or made unsuitable for terror attention to detail. However, all parties have agreed ists to use. the Supply System would retain ownership of sites If mixed-oxide fuel is burned by the Supply projected for two natural gas-fired combustion System's Plant 2, it would mean a reduction in the turbines now licensed, but not yet built. One of the cost of power in the Northwest because of less 245 megawatt plants turbines is committed to the expensive fuel for the reactor or due to payments Bonneville Power Administration for operation by the to the consortium for disposing of the plutonium. Supply System. The other, if built, would be operated

. There are other proposed methods to make by the Supply System to meet the emerging energy plutonium terrorist-proof, but the mixed. oxide route needs of the West.

is the only one that would result in a substantial reduction in the amount of surplus plutonium.

The Supply System has leased a 40,000 square-foot; warehouse near Project 4 to Durametal Brake Co., a Portland, Oregon, company that manufactures brake drums for buses and lar ge trucks. The company is expected to create about 50 new jobs in the area.

A site near Project 1 has been identified by Mid-Columbia economic development leaders as the community's best location for an aluminum smelter proposed by a company called Columbia Ventures. The Supply System site was one of three finalists accepted by the company. Other candidate sites are in Oregon and British Columbia.

8~/A'left to right)

Robert Graves (President) Dan Gunkel Commissioner, Benton County PUD Conm~issioner, Klickitat County PUD Darrel Bunch (Assistant Secretary) Don Carter CoImnissioner, Okanogan County PUD Deputy City Manager for Utilities and Physical Services, Charles Buennagel City ofRichland Cotntnissioner, Wahkiakum County PUD Parker Knight Jnntes Todd Cotnmissioner, Skatnania County PUD Seattle City Light Dale Bly Beverley Cochrane (Vice President) CoInmissioner, Ferry County PUD Cotnmissioner, Franklin County PUD Town Casey Roger Sparks Coma>issioner, Grays Harbor County PUD Coinrnissioner, Kittitas County PUD Not Pictured:

Vera Claussen (Secretary) Mark Crisson Connnissioner, Grant County PUD Director of Utilities, Tacoma Power

One of the core values of the Washington Public Power Supply System is being a good local citizen by encouraging its 1,100 employees to become involved in community service. Among the many community activities employees support are the United Way, the March of Oimes and Head Start, en organiza-tion that offers preschool, health and social services to low-income children and their families.

Supply System employees have increased their per capita donations to the United Way each year for the past six years. The Supply System is one of the local agency's largest supporters.

Last year 77 Supply System employees raised nearly $ 13,000 in the annual March of Oimes WalkAmerica.

Supply System employees also carried on a long tradition of making Christ-mas special by throwing parties and distributing gifts to 394 Head Start chil-dren, as well as providing Christmas dinner for 25 needy families and raising

$ 18,600 for a new building at the Children's Center.

4W SUPPLY SYSTEM WASHINGTON PUBUC POWER SUPPLY SYSTEM PO. Box 968, Richland, Washington 99352 (509) 372-5000 WE 81.WNP2.COM ~

980260

FINANCIALOPERATING HIGHLIGHTS For the year ending/une 30, 1998 Dollars in millions NUCLEAR PROJECT NO. 2 OPERATING STATISTICS FY 1998 FY 1997 FY 1996 FY 1995 FY1994 Total production costs* $ 119.1 $ 119.5 $ 133.3 $ 139.9 $ '55.9 Net'eneration (millions of kWh)*" 7,502.0 6,965.3 7,703.6 6,942.7 7,288.8 Cost in cents/kWh* 1.59 1,72 1.73 2.02 2.14 Plant availability*** 77.9% 83.7% 79 7% 75.0% 79.5%

Plant capacity*".** 71.9% 60.0% 61.3% 67.9% 76.6%

Regional cost of power cents/kWh***** 2.20 2.46 2.56 3.34 3.45 PACKWOOD LAKE PROJECT FY 1998 FY 1997 FY 1996 FY 1995 FY 1994 Total production costs'et

$ 0.3 $ 0.4 $ 0.1 $ 1.0 $ 0.4 generation (millions of kWh) 123.1 125.4, 60.7 65.6 Cost in cents/kWh*

Plant capacity'**'8.4 Plant availability***

.25 92.2%

37.4%

.33 88.5%

51.1%,

.09 90.1%

51,9%

1.63 60.0%

22.9%

.67 90.0%

27.3%

INVESTMENT PERFORMANCE FY 1998 FY 1997 CHANGE Income $ 41.8 $ 41.4 0.1%

Average Balance $ 627.6 $ 701.3 -10.5%

Rate of Return 6.6S% S.9% +12.7%

BONDS OUTSTANDING FY 1998 FY 1997 CHANGE WNP-1 fixed $ 2,137.3 $ 2(160.6 -1.1%

weighted average 5.8% 6.0% -3.4%

variable $ 138.7 $ 142.6 -2.8%

average rate 3.6% 3.5% +2.896 WNP-2 fixed¹ $ 2,335.1 $ 2,491.7 -6.3%

weighted average¹¹ 5.6% 6.0% -6.7%

variable $ 120.9 average rate 3.7%

WNP-3 fixed ¹ $ 1,605.6 $ 1,623.8 -1.196 weighted average¹¹ 5.7% 6.0% -5.0%

variable $ 185.6 $ 190.0 -2.4%

average rate 3.6% 3.5% +2.896 PACKWOOD fixed $ 6.7 $ 7.1 -5.6%

weighted average 3.7% 3.7% 0.09o Excludes compound interest bonds accretion.

Excludes compound interest bonds.

i(rcludes operating, mah(tenance, and fuel amortization Plant capacity factoris the ratio of the actual energy costs per FERC report. production nil a ghen pe(tad of time to the maxhnum Inclurtes DPA economic dispatch generation (mttttons ofklVh) credit of532; 1,1S0.9; 1,759.21 nnd 480 in '"" energy production cnpability.

Regionnl cost ofpower uses a broader ineasure ofcost FY 1998, FY 1997FY 1996 and FY 199S, respectlwly. and is primarlly used by DpA and tfie Supply System Plant availability is de/lned ns the ratio of the sian of to evaluate cost competithn(ess.

source hours anrf reserve shut down hours to totnl period hours.

13

MANAGEMENTREPORT 6N RESPONSIBILITYFOR FINANCIALREPORTING The management of the Supply System Is responsible for preparing the accompanying financial statements and for their integrity. The statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis, and include amounts that are based on management's best estimates and judgements.

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

Management has established and maintains internal control procedures that provide reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting.

These control procedures provide for appropriate division of responsibility and are documented by written policies and procedures.

The Supply System maintains an ongoing internal auditing program that provides for independent assessment of the effectiveness of internal controls, and for recommendations of possible improvements thereto. In addition, PricewaterhouseCoopers LLP has considered the internal control structure in order to determine their auditing procedures for the purpose of expressing an opinion on the financial statements.

Management has considered recommendations made by the internal auditor and PricewaterhouseCoopers LLP concerning the control procedures and has taken appropriate action to respond to the recommendations. Management believes that, as of June 30, 1998, internal control procedures are adequate.

J. Vic Parrish G.J. Kucera Chief Executive Officer Vice President; Administration/

Chief Financial Officer AUDIT, LEGALAND FINANCE COMMITTEE CHAIRMAN'SLETTER The Executive Board's Audit, Legal and Finance Committee is composed of five independent directors.

Members of the Committee are John E Cockburn, Chairman, Rudi Bertschi, Vera Claussen, Roger Sparks, and Louis Winnard, Ex Officio. The Committee held 14 meetings during the fiscal year ended June 30, 1998.

The Committee oversees the Supply System's financial reporting process on behalf of the Executive Board. In fulfillingits responsibility, the Committee discussed with the internal auditor and the independent auditors, the overall scope and specific plans for their respective audits, and reviewed the Supply System's financial statements and the adequacy of the Supply System's internal controls.

The Committee met regularly with the Supply System's internal auditor and independent auditors to discuss the results of their examinations, their evaluations of the Supply System's internal controls, and the overall quality of the Supply System's financial reporting. The meetings were designed to facilitate any private communication with the Committee desired by the internal auditor or independent auditors.

John F. Cockburn Chairman, Audit, Legal and Finance Committee 14

REPORT OF INDEPENDENT ACCOUNTANTS Executive Hoard Washington Public Power Supply System Richland, Washington In our opinion, the accompanying individual balance sheets and the related statements of operations and of cash flows present fairly, in all material respects, the financial position of the Washington Public Power Supply System Nuclear Project No. 1, Nuclear Project No. 2, Nuclear Project No. 3 and Packwood Hydro-electric Project at June 30, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Washington Public Power Supply System's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mate-rial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

P~cmc~dm~p~ M~

Portland, Oregon August 27, 1998 15

BALANCESHEETS As ofJune 30, 1998 Dollars in thousands NUCLEAR PACKWOOD NUCLEAR NUCLEAR PROJECT LAKE PROJECT PROJECT NO.2 PROJECT NO.1 ¹ NO3 "¹ ASSETS UTILITYPLANT (NOTE, B)

In service $ 3,457,488 $ 12,788 Allowance for depreciation (1,414,922) (10,428) 2,042,566 2,360 Nuclear fuel, net of accumulated amortization 114,851 Construction work in progress 3 958 2,161,375 2,360 RESTRICTED ASSETS (NOTE B)

Special funds Cash 3 5 $ 5,264 $ 303 Available-for-sale investments 31.132 305 91,043 21,628 =

Accounts and other receivables 52,275 340 3,945 Due from other projects 800 402 Due from other funds 14,016 Prepayments and other 31 76 Debt service funds Cash 416 7 104 127 Available-for-sale investments 149,557 723 197,606 150,049 Other receivables 1,356 3.,189 1,296 234,739 1,040 296,377 191,842 .

LONG-TERM RECEIVABLES (NOTE B) 35,620 CURRENT ASSETS Cash 1,415 3 167 163 Available-for-sale investments 20,826 92 4,003 6,884 Accounts and other receivables 6,237 96 29 Due from participants 116 23 18 Due from other projects 575 195 120 Due from other funds 27,680 37 23,064 Materials and supplies 57,227 Prepayments and other 891 31 Nuclear fuel held for sale 9,304 Plant R equipment held for sale 5 97 100 114 392 834 42 753 7 314 DEFERRED CHARGES Costs in excess of billings 9,431 3,109 1,979,826 1,748,354 Unamortized debt expense 17,300 6 21,435 15,670 Other deferred charges 730 27 461 3 115 2001261 1 764024 TOTAL.ASSETS $ 2,573,587 $ 7,349 $ 2,340,391 $ 1,963,180

• Strpply Systetn's ownership share (Note A)

¹ Project recorded on a liquidation basis See notes to financial statetnents 16

NUCLEAR PACKWOOD NUCLEAR NUCLEAR PROJECT LAKE PROJECT PROJECT NO.2 PROJECT NO.1 ¹ NO.3 '¹ LIABILITIES UNREALIZED INVESTMENT GAINS $ 2,642 $ 1,619 $ 825 LONG-TERM DEBT (NOTE E)

Revenue bonds payable 2,397,505 $ 6,459 2,275,920 2,196,255 Unamortized discount on bonds - net (51,218) (24) (10/316) (307,640)

Unamortized loss on bond refundings 59,550 (67,097) 22,799 2,286,737 6,435 2,198,507 1,865,816 LIABILITIES-PAYABLE FROM RESTRICTED ASSETS (NOTE B)

Special funds Accounts payable and accrued expenses 54,221 5 53,250 40,152 Due to other funds 25,402 23 19,542 Debt service funds Accrued interest payable 317 82 62,814 41,922 Due to other funds 2,278 14 3,522 2,015 82,218 124 139,128 84,089 OTHER NONCURRENT LIABILITIES 10,091 CURRENT LIABIL'ITIES Current maturities of long-term debt 144,670 267 Accounts payable and accrued expenses 44,091 49 589 111 Due to participants 951 415 548 338 Due to other funds 12,001 Due to other projects 2,092 191,804 731 1.137 12,450 DEFERRED CREDITS Deferred gain on redemption of revenUe bonds Other deferred credits

'595 52 COMMITMENTSAND CONTINGENCIES (NOTE F)

TOTAL LIABILITIES $ 2,573,587 $ 7,349 $ 2,340,391 $ 1,963,180 17

0 STATEMENTS OF OPER4TIONS For the year ended June 30, 1998 Dollars in thousands NUCLEAR PACKWOOD NUCLEAR NUCLEAR PROJECT LAKE PROJECT PROJECT NO.2 PROJECT No.1¹ NO 3'¹ I

OPERATING REVENUES $ 424,651 $ =

1,214 OPERATING EXPENSES Nuclear fuel 24,037 Fuel disposal fee 6,611 Decommissioning 10,370 Depreciation and amortization 106,587 352 Operations and maintenance 101,102 583 Administrative R'eneral 24,858 101 Generation tax 2 432 21 Total operating expenses 275,997 1,057 NET OPERATING REVENUES 148,654 '57

'7,452 OTHER INCOME R EXPENSE Non-operating revenues Investment income Gain/(loss) on current bond redemption Interest expense and discount amortization Plant preservation and termination costs Write-off deferred regulatory studies (151,796) 71 28 (256)

$ 126,314 14,145 (137,855)

(3,139)

$ 105,163 8,755 (732)

(113,548)

(3,570)

(16,332)

Loss on fuel.sale (459)

Joint owners'hare of costs 746 Other 2,022 994 3,186 NET REVENUES 0 $ 0 $ 0 $

Supply System's o>ntership share (Note A)

¹ Project recorded on a liquidation basis See notes to financial statnnents 18

STATEMENTS OF CASH FLOWS For the year ended June 30, 1998 Dollars in thousaiids NUCLEAR PACKWOOD NUCLEAR NUCLEAR PROJECT LAKE PROJECT PROJECT No.z PRO ECT NO.1 ¹ NO.3 * ¹ CASH FLOWS I'ROM OPERATING AND OTHER ACTIVITIES Net operating revenues $ 148,654 $ 157 Adjustments to reconcile net operating revenues to cash provided by operating activities:

Amortized revenues (83,500) (324)

Depreciation and amortization 128,534 347 Decommissioning 10,370 Other 2,022 Change in operating assets and liabilities:

Accounts receivable,. (903) 222 Materials and supplies (1,087)

Prepaid and other assets 197 Due from/to other projects, funds and participants (3,106) (126)

Accounts payable (4,737) (672)

Non-operating revenue receipts $ 166,298 $ 117,774 Cash payments for preservation and termination expenses (4,453) (3,893)

Cash payments for other expenses 3,129 491 Net cash provided/(used) by operating and other activities 196,444 (395) 164,974 114,372 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from bond refundings 693,867 368,178 430,754 Refunded bonds escrow requirement (679,246) (367,410), (427,349)

Payment for bond issuance and financing costs (5,532) (3,027) (3,753)

Escrow restructuring receipts 1,028 3,188 Capital and nuclear fuel acquisitions (22,530) (135)

Cash payments for deferred programs (247)

Interest paid on revenue bonds (134,622) (256) (130,622) (92,557)

Principal paid on revenue bond maturities (75,225) (356) (53,165) (40,312)

Net cash used by capital and related financing activities (223,535) (747) (185,018) (130,029)

CASH FLOWS FROM INVESTING ACTIVITIES F

Purchases of investment securities (1,175,479) .

(6,019) (896,345) (571,581)

Sales of investment securities 1,185,607 7,052 895,110 574,748 Interest on investments 18,127 91 15,1j.1 8,221 Receipts from sales of plant assets R fuel 11,101 1,567 Net cash provided by investing activities 28,255 1,124 24,977 12,955 NET INCREASEi(DECREASE) IN CASH 1,164 (18) 4,933 (2,702)

CASH ATJUNE30, 1997 670 33 602 3,295 CASH AT JUNE 30, 1998 (NOTE 8) $ 1,834 $ 15 $ 5,535 $ 593 Si>pply Syst@n s omiership share (Note A)

Project recorded on a liquidation basis See notes to financial statenients 19

OUTSTANDING LONG-TERM DEBT As of/uue30, 1998 Dollars lu rhousarufs TRUE INITIAL SERIAL DATE INTEREST OFFERING 'OUPON OR TERM SERIES OF SALE COST (A) PRICES RATE MATURITIES AMOUNT 1990A 3-15-90 7.77% 97.125 7.25% 7-1-2006 5 35 790 85 790 1990C 11-01-90 7.84 7.00-7.50 7-1-1999/2002 148,810 (C) 7-1-2004/2005 18 054 166,864 1991A 9-26-91 6.81 6.20-6.60 7-1-1999/2004 103,770 (C) 7-1-2006/2007 13 431 117 201 1992A 10-02-92 6.19 (II) 5.30-6.30 7-1-1999/2009 146,790 97.230 6.25 7-1-2012 14,525 98.875 6.30 7-1-2012 50,000 (II) (C) 7-1-2010/2011 9,084 220,399 1993A 5-20-93 5.76 (B) 4.75-6.00 7-1-1999/2010 176,860 96.404 5.75 7-1-2012 42 105 218,965 19938 7-15-93 5.64 (8) 4.75-5.65 7-1-1999/2008 95,685 100 5.55 7-1-2010 51,000 97.775 5.625 7-1-2012 43 455 190 140 1994A 1-27-94 5.31 (II) 4.125-6.00 7-1-1999/2011 530,925 100 5.40 7-1-2012 100,200 100 (C) 7-1-2009 4 776 635 901 1996A 9-13-96 5.72 5.00-6.00 7-1-1999/2012 207 805 207 805 1997A 9-11-97 5.18 5.00-5.50 7-1-1999/2012 234 810 234 810 19978 9-19-I)7 5.37 5.00-5.50 7-1-1999/2011 76 155 76 155 1998A 12-18-97 5.1 4.50-5.75 7-1-1999/2012 231 085 231 085 (A) Based on original issue (B) Various prices (C) Compound Interest bonds (D) Excludes amounts due July 1, 1998 which were paid on June 30, 1998 (E) Includes amounts due July 1, 1998 (F) The estimated fair value shown has been reported to meet the disclosure requirements of Statement of Financial Accounting Standards (SFAS) 107 and does not purport to represent the amounts at which these obligations would be settled 20

OUTSTANDING LONG-TERM DEBT (corrtinrrect)

As of'/rrrre 30, 1998 Dollars in t)rousarrds TRUE INITIAL SERIAL DATE INTEREST OFFERING COUPON OR TERM SERIES OFSALE COST (A) PRICES RATE MATURITIES AMOUNT 1997-2A-1,2 4-02-98 NA NA Variable 7-1-1999/2012 $ 120,865 120,865 Compound interest bonds accretion 86 195 Revenue bonds payable $ 2,542,175(D)

Estimated fair value at June 30, 1998 $ 2,696,613(F) 1962 3-20-62 3.66% 99.425 3.625% 3-1-2012 $ 5,096 1965 11-04-65 3.76 100.5 3.75 3-1-2012 1 630 Revenue bonds payable $ 6,726 Estimated fair value at June 30, 1998 $ 6,387(F) 1989A 9-14-89 7.76 100 7.10-7,30 7-1-1998/2001 5 13 385 13 385 19898 12-07-89 7.44 100 7.00-7.15 7-1-1999/2001 14,8SS 98.533 7.125 7-1-2016 41 070 55 925 1990A 3-15-90 7.73 7.10-7.50 7-1-1998/2002 33 395 33 395 19908 6-07-90 7.75 (II) 7.00-7.20 7-1-1999/2003 24,495 97.979 7.25 7-1-2009 72 770 97 265 1990C 9-27-90 7.85 7.25-7.75 7-1-1998/2003 113 765 113 765 1991A 9-26-91 7.02 6.00-6.60 7-1-1998/2004 22 620 22 620 1992A 10-02-92 6.51 (II) 5.10-6.25 7-1-1998/2007 17,105 98 6.25 7-1-2017 68 015 85 120 (A) Based on orlglnal issue (B) Various prices (C) Compound interest bonds (D) Excludes amounts due July 1, 1998 which were paid on June 30, 1998 (E) Includes amounts due July 1, 1998 (F) The estimated fair value shown haS been reported to meet the disclosure requirements of SFAS 107 and does not purport to represent the amounts at which these obligations would be settled

OUTSTANDING LONG-TERMDEBT (co/itinuect)

As ofJune 30/ 1998 Dollars in thousanrts TRUE INITIAL SERIAL DATE INTEREST OFFERING COUPON OR TERM SERIES OF SALE COST (A) PRICES RATE MATURITIES AMOUNT 1993A 5-20-93 5.8696 (B) 4.625-7.009(7 7-1-1998/2008 $ 174,655 100 5.75 7-1-2011 80,000 99.75 6.05 7-1-2012 35,705 96.306 5.75 7-1-2013 37,970 96.566 5.70 7-1-2017 176 180 504 510 1993B 7-15-93 5.64 (B) 4.30-7.00 7-1-1998/2010 78,375 98.138 5.60 7-1-2015 94,885 173,260 1993C 9-10-93 5.47 (B) 4.10-5.30 7-1-1998/2010 20,865 100 5.40 7-1-2012 "

66,400 98.166 5.375 7-1-2015 75 650 162,915 1993-1A-1,2,3 12-15-93 NA NA Variable 7-1-1998/2017 138 660 138 660 1996A 9-10-96 5.77 (B) 5.00-6.00 7-1-1998/2012 354 935 354 935 1996B 9-13-96 5.72 (B) 5.00-6.00 7-1-1998/2005 30 250 30 250 1996C 10-07-96 5.71 (B) 4.50-6.00 = 7-1-1998/2015 91,525 96.170 5.50 7-1-2017 24 860 116 385 1997A 9-11-97 5.18 (B) 4.75-6.00 7-1-1999/2008 20 905 20 905 1997B 9-19-97 5.37 (B) 4.50-5.125 7-1-1998/2017,. 257 615 257 615 1998A 12-18-97 5.10 (B) 4.50-5.75 7-1-1998/2017 95 010 95 010 Revenue bonds payable $ 2,275,920(E)

Estimated fair value at June 30, 1998 $ 2,413,649(F)

(A) Based on original issue (B) Various prices (C) Compound interest bonds (D) Excludes amounts due July 1, 1998 which were paid on Junc 30, 1998 (E) Includes amounts due July 1, 1998 (F) The estimated fair value shown has been reported to meet the disclosure requirements of SFAS 107 and does not purport to represent the amounts at which these obligations would be settled 22

OU'ESTANDING LONG-TERM DEBT (contirn/ere)

As offane 30, 1998 Dollars in thousands TRUE INITIAL SERIAL DATE INTEREST OFFERING COUPON OR TERM SERIES OF SALE COST (A) PRICES RATE MATURITIES AMOUNT 1989A 9-14-89 7.436)6 100 7.20-7.30% 7-1-1998/2001 $ 12,985 (B) (C) 7-1-2003/2014 18 668 31 653 1989B 12-07-89 7.39 100 6.90-7.15 7-1-1998/2001 60,800 (B) (C) 7-1-2004/2014 71,321 98.533 7.125 7-1-2016 76,145 79.755 5.50 7-1-201,7 62,560 79.525 5.50 7-1-2018 65 905 336 731 1990B 6-07-90 7.57 (B) 7,10-7.25 7-1-1998/2000 54,830 (B) (C) 7-1-2001/2010 38,684 98.923, 7.375 7-1-2004 55 920 149 434 1991A 9-26-91 6.97 (B) 6.00-6.60 7-1-1998/2004 25 430 25 430 1992A 10-02-92 4.86 100 5.10 7-1-1998 2 710 2 710 1993B 7-15-93 5.64 (B) 4.30-7.00 7-1-1998/2010 121,400 97.775 5.625 7-1-2012 28,295 98.138 5.60 7-1-2015 49,095 98.058 5.60 7-1-2017 37,795 97.719 5.70 7-1-2018 20 605 257 190 1993C 9-10-93 5.47 (B) 4.10-7.50 7-1-1998/2010 160,890 100 5.40 7-1-2012 105,000 (B) (C) 7-1-2013/2018 25,248 98.166 5.375 7-1-2015 188,335 99.5 5.50 7-1-2018 20 805 500 278 1993-3A-3 12 15-93 NA NA Variable 7-1-1998/2018 26 080 26 080 1996A 9-10-96 S.71 (B) 5.00-6.00 7-1-1998/2009 32 345 32 345 1997A 9-11-97 5.18 (B) 4.50-6.00 7-1-1998/2018 112 030 112 030 1997B 9-19-97 5.37 101.888 5.00 7-1-2002 4 075 4 075 (A) Based on original issue (B) Various prices (C) Compound interest bonds (D) Excludes amounts due July 1, 1998 which were paid on June 30, 1998 (E) Includes amounts due July 1, 1998 (F) Thc estimated fair value shown has been reported to meet thc disclosure requirements of SFAS 107 and docs not purport'o represent the amounts at which these obligations would be settled 23

OUTSTANDINGLONG-TERM DEBT (conrirn/crt)

As ofJune 30, 1998 Dollars in thousands TRUE INITIAL SERIAL DATE INTEREST OFFERING COUPON OR TERM SERIES OF SALE COST (A) PRICES RATE MATURITIES AMOUNT 1998A 12-18-97 5.109o 4.50-5 12596 7-1-1998/2018 5 153 690 153,690 1998-3A 4-02-98 NA Variable 7-1-1999/2018 159 500 159,500 Compound interest bonds accretion 405,109 Revenue bonds payable $ 2,196,255 (E)

Estimated fair value at June 30, 1998 $ 2,193,456 (F)

(A) Based on original issue (B) Various prices (C) Compound interest bonds (D) Excludes amounts tlue July 1, 1998 which were paid on June 30, 1998 (E) Includes amounts due July 1, 1998 (F) The estimated fair value shown has been reported to meet the disclosure requirements of SFAS 107 and does not purport to represent the amounts at which these obligations would be settled 24

DES T SM VICE REQUIREMENTS As ofjune 30, 1998 Dollars in thousattds NUCLEAR PROJECT NO. 2 PACKWOOD LAKE PROJECT FISCAL YEAR PRINCIPAL INTEREST TOTAL PRINCIPAL INTEREST TOTAL 6/30/98 Balance* $ 317 $ 317 $ 133 $ 82 $ 215 1999 144,670 134,008 278,678 422 241 663 2000 142,630. 126,296 268,926 473 226 699 2001 178,580 118,074 296r 654 498 208 706 2002 96,750 107,349 204,099 524 190 714 2003 155,225 101,858 257,083 548 171 719 2004 163,609 105,079 268,688 573 15'1 724 2005 124,340 108,623 232,963 599 130 729 2006 140,186 91,291 231,477 623 108 731 2007 168,645 83,619 252,264 648 85 733 2008 595,865 61,560 257,425 674 62 736 2009 197,001 56,946 253,947 572 37 609 2010 210,174 50,273 260,447 274 '16 290 2011 173,680 39,542 213,222 '122 6 128 2012 364,625 20,138 384,763 43 2 45 2013 2014 2015 2016 2017 2018 Adjustment " 86,195 (86,195)

$ 2,542,175 $ 1,118,778 $ 3,660,953 $ 6,726 $ 1,715 $ 8,441 Bond fimd account balances less accmed investment income.

"Ad/ustment for compound interest bonds accretion; compound interest bonds are reflected at their face amount less discount on the balance sheet.

25

DEBT SERVICE REQUIREMENTS (conthtttert) ebs ofJune 30, 1998 Oollars in thousarufs NUCLEAR PROJECT NO. 1 , NUCLEAR PROJECT NO. 3 FISCAL YEAR PRINCIPAL INTEREST TOTAL PRINCIPAL INTEREST TOTAL 6/30/98 Balance:* $ 59,490 $ 62,814 $ 122,304 $

32,370 - $ 41,922 $ 74,292 1999 , 74,660 l27,611 202I271 71,225 89,398 160,623 2000 79,090 123,009 202,099 76,240 84,888 161,128

,2001 84,255 118,083 202,338 74,950 86,596 161,546 2002 79,635 112,668 192,303 78,457 82,803 161,260 2003 70,280 107,709 l77,989 80,057 81,645 161,702 2004 81,710 103,760 185,470 63,311 93,904 157,215 2005 73,765 98,991 172,756 64,471 92,125 156,596 2006 91,195 94,850 186,045 65,392 90,567 1551959 2007 96,495 89,425 185,920 60,176 90,969 151r 145 2008 102,580 83,414 185,994 63,330 87,906 151,236 2009 106,360 76,917 183,277 64,163 87,142 151,305 2010 113,015 70,553 183,568 66,572 84,932 151,504 2011 , 136c120 64,227 200,347 84,829 74,012 158,841 2012 144,100 56,605 200,705 98,322 70,380 168,702 2013 157;820 48,653 206,473 95,565 73,381 168,946 2014 166,340 40,245 206,585 98,435 70,663 169,098 2015 175,380 31,332 206,712 129,215 40,061 169,276 2016 175,460 21,746 197,206 133,689 35,734 169,423 2017 208,170 11,459 219,629 141,502 27,845 169)347 2018 148,875 20,641 169,516 Adj'ttstntent ** 405,109 (405,109)

$ 2I 275,920 $ 1,544,071 $ 3,819,991 $ 2,196,255 $ 1,102,405 $ 3,298,660

" Bond fund account balances less accnied investment income Adj ustment for componnd interest bonds accretioni compound interest borrds are reflected at their face amount less discount on the balance sheet 26

NOTES TO FINANCIALSTATEMENTS NOTE A - GENERAL Organization The Washington Public Power Supply System (Supply utilities and rural electric cooperatives located in the System), a municipal corporation and joint operating western United States who have entered into net-billing agency of the State of Washington,'as organized in agreements'with the, Supply System and BPA for participa-1957. It is empowered to finance, acquire, construct tion in one or more of the Supply System projects. BPA is and operate facilities for the generation and transmis- obligated by law to establish rates for electric power which sion of electric power. On June 30, 1,998, its member- will recover the cost of electric energy acquired from the ship consisted of 10 public utility districts and the cities Supply System and other sources as well as BPA's other of Richland, Seattle, and Tacoma. All members own and costs. See Note E, Security- Nuclear Projects Nos. 1, 2 and operate electric systems within the State of Washington. 3, for discussion of BPA's obligations with respect to The Supply System is exempt from federal income tax. Nuclear Projects Nos. 1, 2 and 3.

The Supply System has no taxing authority.

NOTL B -

SUMMARY

OF SIGNIFICANTACCOUNTING Supply Systein Projects POLICIES The Supply System operates Nuclear Project No. 2, a f Basis o Accounting 1,153 MWe (Design Electric Rating, net) generating plant completed in 1984, and the Packwood Lake The Supply System has adopted accounting policies and Hydroelectric Project (Packwood), a 27.5 MWe generat- practices that are in accordance with generally accepted ing plant completed in 1964. The Supply System has accounting principles. Accounts are maintained in obtained all permits and licenses required to operate accordance with the uniform system of accounts of the Nuclear Project No. 2 including a Nuclear Regulatory FERC. Separate funds and books of account are main-Commission (NRC) operating license which expires in tained for each utility system. Payment of obligations of December 2023. Packwood operates under a fifty-year one utility system with funds of another utilitysystem is license from the Federal Energy Regulatory Commission prohibited, and would constitute violation of bond (FERC) that expires on February 28, 2010. resolution covenants.

Nuclear Project No. 1, a 1,250 MWe plant, was placed in Pursuant to Statement No. 20 of the Governmental.

extended construction delay status in 1982, when it was Accounting Standards Board (GASB), "Accounting and 65 percent complete. Nuclear Project No. 3, a 1,240 Financial Reporting for Proprietary Funds and Other MWe plant, was placed in extended construction delay Governmental Entities That Use Proprietary Fund Ac-status in 1983, when it was 75 percent complete. On counting," the Supply System has elected to apply all May 13, 1994, the Supply System's Board of Directors Financial Accounting Standards Board statements and adopted resolutions terminating Nuclear Projects Nos. 1 interpretations except for those that conflict with or and 3 (see Note F - Nuclear Projects Nos. 1 and 3 contradict GASB pronouncements. Specifically, Statement Termination). Nuclear Project No. 1 is wholly-owned by of Governmental Accounting Standard No. 7 and No. 23 the Supply System. Nuclear Project No. 3 is jointly- conflict with Statement of Financial Accounting Standard owned, 70 percent by the Supply System and 30 percent No. 125. As such, the guidance under Statement of by four investor-owned utilities (PacifiCorp, Portland Governmental Accounting Standard No. 7 and No. 23 is General Electric Company, Puget Sound Power R Light followed.

Company and The Washington Water Power Com- The financial statements presented in this annual report pany). reflect the Supply System's 70 percent ownership of

'Each Supply System project is financed and accounted Nuclear Project No. 3 plant and equipment held for sale.

for as a utilitysystem separate from all other current or Assets, other than plant and equipment held for sale, and future projects. obligations of Nuclear Plant No. 3 in these financial All electrical energy produced by Supply System projects statements reflect the 100 percent ownership.

is ultimately delivered to electrical distribution facilities The preparation of the Supply System financial statements owned and operated by the Bonneville Power Adminis- in conformity with generally accepted accounting prin-tration (BPA) as part of the Federal Columbia River ciples necessarily requires management to make estimates Power System. BPA in turn distributes the electricity to and assumptions that directly affect the reported amounts electric utility systems throughout the Northwest, of assets and liabilities and the disclosure of contingent including participants in Supply System projects, for assets and liabilities at'he date of the financial statements ultimate distribution to consumers. Participants in and the reported amounts of revenue and expenses during Supply System projects consist of 104 publicly-owned the reporting period. Actual results could differ from these 27

estimates. Certain incurred expenses are allocated to uranium product, adjusted semiannually. The cost of the the projects based on specific allocation methods and loaned uranium, $ 19.0 million, is included in the carrying management considers the allocation methods to be amount of Nuclear Project No. 2 Nuclear Fuel.

reasonable. In fiscal year 1998, Nuclear Project'No. 2 purchased 95,500 pounds of UF6 and 23,700 SWU from Nuclear UtilityP/ant Project No. 1. The purchase price was $ 1.2 million for the UF6 and $ 1.9 million for SWU, for a total of $ 3.1 million.

Utilityplant is stated at original cost. Plant in service is depreciated by the straight-line method over the Restricted Assets estimated useful lives of the various classes of plant, which range from five to 40 years. In accordance with project bond resolutions, related Diiring the normal construction phase of a project, the agreements, or state law, separate restricted. funds have Supply System's policy was to capitalize all costs relating been established for each project. The assets held in these to the project, including interest expense (net of interest funds are restricted for specific uses including construc-income), and related administrative and general tion, debt service, capital additions, extraordinary opera-expense, tion and maintenance, termination, decommissioning Nuclear Projects Nos. 1 and 3 have been reduced to and workers'ompensation claims.

their net realizable values due to termination. A loss on the write-down of Nuclear Projects Nos. 1 and 3 was Long-Tenn Receivables recorded in fiscal year 1995 and is included in Cost in Excess of Billings. Plant and equipment held for sale Long-term receivables include minimum guaranteed includes management's best estimate of the net realiz- amounts adjusted annually pertaining to future discounts able value of the remaining inventories, buildings, for certain goods and services to be provided to Nuclear equipment, tools, materials and consumables, common Project No. 2 as the result of a litigation settlement and and operational spares, moveable equipment and land. subsequent revisions.

Interest expense, termination expenses and asset disposition costs for Nuclear Projects Nos. 1 and 3 have Deconunlssio ning been charged to operations.

The Supply System established a decommissioning fund Nuclear Fuel for Nuclear Project No. 2 and moneys are being deposited each year in accordance with an established funding plan.

All expenditures related to the purchase of nuclear fuel, The Supply System's current estimate of Nuclear Project including interest, are capitalized and carried at cost. No. 2 decommissioning costs is approximately $ 357 When the fuel is placed in the reactor, the fuel cost is million (in 1987 dollars). The plan continues to be based amortized to operating expense on the basis of quantity on the safe storage method of decommissioning. This of heat produced for generation of electric energy. current estimate continues to be based primarily on 'a Accumulated nuclear fuel amortization (the amortiza- draft report which was published in 1988 in connection tion of the cost of nuclear fuel assemblies in the reactor with a study commissioned by the NRC.

used in the production of energy) is $ 96.1 million as of The funding plan requires annual deposits through fiscal June 30, 1998 for Nuclear Project No. 2. Current period year 2024, the estimated end of commercial operation of operating expense for Nuclear Project No. 2 includes a Nuclear Project No. 2. The plan for subsequent annual

, charge for future spent nuclear fuel storage and disposal deposits calls for incremental increases of 596 per year.

to be provided by the Department Of Energy (DOE) in The plan assumes that such deposits will grow at a 396 real accordance with the Nuclear Waste Policy Act of 1982, rate of return and that the Project will be placed in a 30 and a charge by DOE for clean-up of its nuclear enrich- year safe storage until 2055, at whIch time decontamina-ment facilities, in accordance with the Energy Policy Act tion and dismantlement willbe initiated. Over the life of of 1992. No provisions have been made in fiscal year -the fund, deposits and the. earnings related to the rein-1998 for additional storage and disposal costs which vestment thereof, are expected to provide sufficient funds may be incurred in the future by the Supply System to cover the cash flow requirements to decommission prior to the transfer of spent fuel to DOE. Nuclear Project No. 2. This plan will be reexamined.every The Supply System has entered into an agreement to year and modified to assure that the projected fund transfer enriched uranium to General Electric Company balance complies with the then current estimates and in exchange for equivalent amounts of uranium at NRC requirements. Payments to the decommissioning reload enrichments in future years and usage/loan fees. fund have been made since January 1985, and the balance The Supply System has transferred approximately of cash and investment securities in the fund as of June 629,609 pounds of UF6 and 113,503 SWU of Nuclear 30, '1998 totaled approximately $ 52.3 million. Since July Project No. 2 uranium. The exchange agreement has 1990 these amounts have been held in an external been secured by an irrevocable letter of credit issued in decommissioning trust fund in accordance with NRC the amount of the replacement value of the loaned requirements.

28

Materials and Supplies Revenues Materials and supplies are valued at cost, using welghted- The Supply System accounts for revenue on an accrual average methods. basis and recovers, through various agreements, actual cash requirements for operations and debt service for each Financing Expense, Bond Discount, and Deferred Gain project over the life of that project. Accordingly, the and Losses Supply System recognizes revenues equal to expenses for each period. No net income or loss is recognized, and rio Financing expenses and bond discounts are amortized equity is accumulated.

over the terms of the respective bond issues using the The difference between cumulative billings received and bonds outstanding method. cumulative expenses is recorded as either billings in In accordance with the Statement of Governmental excess of costs giability) or as costs in excess of billings Accounting St'andard No. 23 effective for periods after (asset), as appropriate. Such amounts willbe recognized as revenues, or expenses, during future operating periods.

June 15, 1994, losses on debt refundings have been deferred and amortized as a component of interest expense over the shorter of the remaining life of the old Concentration of Credit Risk or, new debt. The balance sheet includes the original f deferred amount less recognized amortization expense Financial instruments which potentially subject the and is included as a reduction to the new debt. Supply System to concentrations of credit risk consist of available-for-sale investments, accounts receivable, other receivables, long-term receivables and costs in excess of f

Current Maturities o Revenue Boiuls billings. The Supply System invests exclusively in U.S.

Government securities and agencies. The Supply System's Current maturities of revenue bonds'payable from accounts receivable and costs in excess of billings are restricted assets are reflected in Long-Term Debt. Current concentrated with project participantS and BPA through maturities of bonds for which funds have not yet been the net billing agreements. See Note E, Security'- Nuclear restricted are reflected in Current Liabilities.

Projects Nos. 1, 2, and 3 and Security - Packwood Lake Hydroelectric Project. The long-term receivable is with a Accounts Payable large and stable company which the Supply System considers to be financially strong. Other receivables are Accounts payable and accrued expenses include payroll secured through the use of letters of credit and other and benefits related accruals for Nuclear Project No. 2 of similar security mechanisms or. are with large and stable

$ 23.6 million. Nuclear Project No. 2 includes a Personal companies which the Supply System considers to be Time Bank accrual of $ 10 million. Packwood includes an financially strong. As a consequence, the Supply System accrual for FERC 'Administrative charges of $ 25,000. considers the exposure of the projects to concentration of Nuclear Project No. 2 includes an accrual for $ 3.4 million credit risk to be limited.

for Arbitrage Rebate and $ 9.5 million for, operating and capital expenses. Stateinents of Cash Flows f

Fair Value o I'inancial Instnnnents For purposes of the statements of cash flows, cash in-cludes unrestricted and restricted cash balances. Short-The fair value of financial instruments has been estimated term, highly liquid investments are not considered cash using available market information and certain assump- equivalents.

tions. Considerable judgment is required in interpreting market data to develop fair value estimates and such NOTE C - CASH AND INVESTMENTS estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The Cash and investments for each utilitysystem are sepa-following methods and assumptions were used to esti- rately maintained. The Supply System's deposits are mate the fair value of each of the following financial insured by federal depository insurance or through the instruments. Washington Public Deposit Protection Commission.

Financial instruments for which the carrying value is Supply System resolutions and Investment policies limit considered a reasonable approximation of fair value investment authority to obligations of the United States include: cash, accounts receivable, accounts payable and Treasury, Federal National Mortgage Association and accrued expenses, other noncurrent liabilities and due to Federal Home Loan Banks. All investments are held for and from participants, other projects and other funds. the benefit of the individual Supply System projects by The fair values bf investments and revenue bonds payable safekeeping agents, custodians, or trustees.

have been estimated based on quoted market prices for Investments are classified as available-for-sale and are such instruments or based on the fair value of financial stated at fair value with unrealized gains and losses instruments of a similar nature and degree of risk. excluded from earnings and reported on the balance sheet 29

4 as unrealized investment gains/(losse's). Available-for-sale Employees'etirement System (PERS). PERS'is a contribu-investments are categorized below to give an indication tory multi-employer cost-sharing retirement system of the types and amounts of investments held by each established by the Washington State Legislature and project at year end. (See table below) administered by the State of Washington through the Department of Retirement Systems. For the year ended NOTE D - RETIREMENT BENEFITS June 30, 1998, the Supply System's payroll covered under PERS was $ 71.7 million, representing 95 percent of total Substantially all Supply System full-time employees participate in the statewide local government Public payroll.

AVAILABLE-FORSALEINVESTMENTS (Dollars in Thousand)

Amortized Cost Unrealized Gains Unrealized Losses Fair Value U.S. Government Securities $ 53,409 $ 1,461 $ 0 $ 54,870 U.S. Government Agencies 145,464 1,201 <20> 146 645 Total $ 198,873 $ 2,662 $ <20> $ 201,515 U.S. Government Securities $ 1,120 $ 0 $ 0 1,120 U.S. Government Agencies 0 0 0 0 Total $ 1,120 $ 0 $ 0 1,120 U.S. Government Securities $ 50,710 $ 1,407 $ <38> $ . 52,079 U.S. Government Agencies 240,323 293 <43> 240,573 Total $ 291,033 $ 1,700 5 <81> $ 292,652 1

U.S. Government Securities $ 35,416 $ 431 $ <8> $ 35,839 U.S. Government Agencies $ 142,320 $ 423 $ <21> $ 142,722 Total $ 177,736 $ 854 $ <29> $ 178,561 At June 30, 1998, the contractual maturities of available-for-sale investments are:

< 1 Year 1-5 Years 6-10 Years > 10 Years TOTAL U.S, Government Securities $ 3,237 $ 31,484 $ 4,768 $ 15,381

$ 54,870 U.S. Government Agencies $ 83,615 $ 46,146 $ 0 $ 16,884, $ 'l46,645 Maturities at Fair Value $ 86,852 $ 77,630 $ 4,768 $ 32,265 $ 201,515-U.S. Government Securities $ 1,120 $ 1,120 Maturities at Fair Value $ 1,120 $ 1,120 U.S. Government Securities $ 15,395 $ 13,627 $ 11,341 $ 5,716 $ 52,079 U.S. Government Agencies $ 215,170 $ 16,182 $ 7,739 $ 1,482 $ 240,573 Maturities at Fair Value $ 230,565 $ 29,809 $ 25,080 $ 7,198 $ 292,652 U.S. Government Securities $ 10,613 $ 19,186 $ 6,039 $ 0 $ 35,838 U.S. Government Agencies $ 115,061 $ 20,327 $ 5,002 $ 2,333 $ 142,723 Maturlties at Fair Value $ 125,674 $ 39,513 $ 11,041 $ 2,333 $ 178,561 30

PERS containS two plans. Plan I members (employed on PERS, the Supply System offers post-employment life or before September 30, 1977) may retire with full insurance benefits to retlrees who are eligible to receive benefits at age 60 with at least five years of credited pensions'under PERS Plan I and Plan II. One hundred service, at age 55 with 25 years of service, or upon forty-seven retirees have elected to participate in this reaching 30 years of service regardless of age. Plan II insurance. The Supply System's Board of Directors in members (employed after September 30, 1977) may retire 1994, approved provisions which continued the life with full benefits at age 65 with at least five years of insurance. benefit to retirees at 25 percent of the premium credited service, or with actuarially reduced benefits at for employees who retire prior to January 1, 1995 and age 55 with 20 years of service. The annual pension charged the full 100 percent premium to employees who benefits are generally based on a percentage of final retired after December 31, 1994. The life insurance average salary. benefit is equal to the employee's annual rate of salary at Required employer contributions for both plans, and Plan retirement for non-bargaining employees retiring prior to II employee contributions, are determined each bien- January 1, 1995. The cost of coverage for employees who nium by the Legislature. Employee contribution rates for retired prior to January 1, 1995 is $ 2.33 per $ 1000 of Plan I are established by legislative statute. The employer coverage. Employees who retired prior to January 1, 1995 and employee contribution rates for Plan II are developed contribute $ .58 per $ 1,000 of coverage while the Supply System pays the remainder.

by the Office of State Actuary to fully fund the system.

The methods used to determine the contribution require- At the time each employee retires, the Supply System accrues a liabilityfor the actuarial present value of ments were established by state statute.

estimated future premiums, net of retiree contributions.

As of December 31, 1996 (the latest actuarial valuation The total liability recorded at June 30, 1998 was date per the Department of Retirement Systems), the

$ 3 million for these benefits.

pension benefit obligation of PERS, which is the actuarial During fiscal year 1998, pension costs for Supply System present value of credited projected benefits adjusted for employees and post-employment life insurance benefit the effects of projected salary increases, was $ 17.1 billion costs for retirees were calculated and allocated to each and the value of net'assets available to satisfy present and project based on direct labor dollars. Approximately 95 future pension benefit obligations was $ 14.4 billion. The percent of all such costs were allocated to Nuclear Project pension benefit obligation is a standardized measure No. 2 during fiscal year 1998.

which enables readers of financial statements to assess the funding status of each system and progress made in NOTE E - LONG-TERM DEBT accumulating sufficient assets to pay benefits when due, and to make comparisons with other retirement systems. Each Supply System project is financed separately. The The standardized disclosure method is independent of resolutions of the Supply System authorizing issuance of the actuarial funding method used to determine contri- revenue bonds for each project provide that such bonds butions. are payable solely from the revenues of that project. All Supply System contributions for the year ended June 30, bonds issued under Resolution Nos'. 769, 640 and 775 for 1998, expressed both in dollar amounts and percentages Nuclear Projects Nos. 1, 2 and 3, respectively, have the of current year covered payroll, were as follows: same priority of payment within the projects. The variable rate debt issued for Nuclear Projects Nos. 1, 2 and 3 is Zlaal subordinate to the bonds stated above.

Rate Amount Rate Amount Emuhxa During the year ended June 30, 1998, the Supply System Gmrlrihitimrs issued $ 1,202.8 million in fixed rate bonds with an Actuarially determined average interest rate of 5.22 percent which refunded requirement 7.3296 $ 754,672 7.3296 $ 4,513,352 Actual Supply System $ 1,120.9 million of outstanding bonds with an average comtributions 7.596 $ 773,230 7.596 $ 4,624,337 interest rate of 6.83 percent. The net proceeds of the new Emulate issues were deposited in separate irrevocable trusts under Gantribiitimrs the control of escrow agents to provide for all future debt Actuarially determined service payments on the refunded bonds. As a result, the requirement N/A N/A 4.6596 $ 2,909,999 Actual employee refunded bonds are considered to be defeased and the contributions 6.0096'616,624 4.6596 $ 2,909,999 liabilityfor those bonds has been removed from long-

'ixed at 6.0096 term debt.

The Supply System also issued $ 120.9 million of variable The Supply System's actuarially determined employer rate bonds that have weekly floating rates which refunded contribution requirement represents approximately 0.7 $ 120.9 million of fixed rate outstanding bonds with percent of the total for all employers covered by PERS. an average interest rate o f 5.71 percent. A second Historical trend information showing PERS'rogress in variable rate bond issue of $ 159.5 million was issued to accumulating sufficient assets to pay benefits when due is refund $ 159.5 million of outstanding variable rate bonds presented in the State of Washington's June 30, 1997 and was executed to replace the underlying Letter of comprehensive annual financial report. Credit facilities of the refunded bonds with new credit In addition to the pension benefits available through . enhancements.

HSCAL YEAR 1998 BOND REFUNDINGS (Dollars in Thousands)

Bond Series 1997A 1997B 1998A 1997-2A 1998-3A Combined Size of issue $ 20,905 $ 257,615 $ 95,010 $ 373,530 Amount of bonds refunded 20,770 236,900 89,995 347,665 Deferred loss 1,776 18,382 8,956 29,114-Reduction in aggregate debt service 1,908 21,828 8,192 31,928 Size of issue 248,815 78,430 232,240 120,865 680,350 Amount of bonds refunded 229,805 73,705 216,500 120,865 640,875 Deferred loss 20,147 5,324 17,611 322 43,404 Reduction in aggregate debt service <3,989> <3,157> 7,165 19,840 19,859 Size of issue 112,030 4,075 153,690 159,500 429,295 Amount of bonds refunded 104,095 3,850 145,325 159,500 412,770 Deferred loss 10,665 222 10,220 496 21,603 Reduction in aggregate debt service 10,821 167 10,140 21,128 The change in the aggregate debt service payments for Security - Nuclear Projects Nos. 1, 2 and 3 Nuclear Projects Nos. 1, 2 and 3 and changes to debt service reserve fund balances resulted in an economic Project participants have purchased all of the project gain (the difference between the present values of the capability of Nuclear Projects Nos. 1 and 2 and the Supply debt service payments on the old and new debt) of $ 16.8 System's 70 percent ownership share of project capability million, $ 23.1 million and $ 13.7 million, respectively. of Nuclear Project No. 3. BPA has in turn acquired the The advance refundings resulted in a larger reacquisition entire project capability from the project participants price versus the net carrying amount of the old debt of under contracts referred to as net-billing agreements.

$ 29.1 million, $ 43.4 million and $ 21.6 million for Under the net-billing agreements for each of the projects, Nuclear Projects Nos. 1, 2 and 3, respectively. This project participants are obligated to pay the Supply difference is amortized over the life of the new debt System their pro rata share of total annual costs of the (which is the same as the remaining life of the old debt) respective projects, including debt service on bonds using the straight-line method. relating to each project, and BPA in turn is obligated to A summary of fiscal year 1998 Series 1997A, 1997B, 1998A, 1997-2A, and 1998-3A bond refundings by project pay the participants identical amounts by reducing amounts due to BPA by participants under BPA power is presented above.

sales agreements. The net-billing agreements provide In prior fiscal years, the Supply System defeased certain revenue bonds by placing the proceeds of new bonds in that project participants and BPA are obligated to make such payments whether or not the projects are com-irrevocable trusts to provide for all future debt service payments on the old bonds. Accordingly, the trust pleted, operable or operating and notwithstanding the account assets and the liability for the defeased bonds are suspension, interruption, interference, reduction or not included in the financial statements. Including the curtailment of the projects'utput.

fiscal year 1998 defeasements, approximately $ 1,317.3 On May 13, 1994, the Supply System's Board of Directors million, $ 1,321.0 million and $ 735.0 million of refunded adopted resolutions terminating Nuclear Projects Nos. 1 bonds were not called or had not matured at and 3. The Nuclear Projects Nos. 1 and 3 project agree-June 30, 1998 for Nuclear Projects Nos. 1, 2 and 3, ments and the net-billing agreements, except for certain respectively. sections which relate only to billing processes and accrued Outstanding revenue bonds of the various projects as of liabilities and obligations under the net-billing agree-June 30, 1998, are presented on pages 20 through 24, and ments, ended upon termination of the projects. The debt service requirements for these bonds are presented Supply System entered into an agreement with BPA to on pages 25 and 26. provide for continuation of the present budget approval, The Supply System expects to continue the refunding of billing and payment processes. With respect to Nuclear higher interest rate bonds when economically feasible. Project No. 3, the ownership agreement among the

0 Supp'ystem, Puget Sound Power 8r Light Company, planning of demolition activities for the Project. Preser-PacifiCorp, Portland General Electric Company and The vation activities have been continued for certain high-Washington Water Power Company remains in effect value assets to maximize the return on their expected following termination. resale. At this time, the eventual disposition of the Project is unknown. For further discussion, see informa-Security - Packivood Lake HydroelectricProject tion contained under Note F ("Nuclear Project Nos. 1, 3, 4, and 5 Site Restoration" ). The Supply System has The Supply System and BPA signed an agreement in April reduced the assets to their estimated net realizable value 1997 which became effective on October 1, 1996 for the and has accrued for the estimated cost of removal and site period through July 1, 2001, and states that BPA will pay restoration.

the Supply System in exchange for the project's total output of electric capacity and energy delivered from the Inter-Project Clahns Against Revenues and Other Assets project. BPA wiILpay 17.5 mills per kWh for the first 80,000 megawatt hours delivered to the interconnections Some creditors of Nuclear Projects Nos. 4 and 5 have and 5 mills per kWh for any energy delivered to the attempted, and others have threatened to attempt, to interconnections in excess of 80,000 megawatt hours obtain payment from the physical assets of other projects during the fiscal year. In addition, BPA pays to the Supply of the Supply System or from the revenues pledged as System their Lewis County I'UD No. 1 transmission costs security for the Supply System bonds issued in connection and the Supply System receives generation credit for spill Sith, and revenues pledged for the payment of costs of, requested by BPA. The Packwood participants are obli- such other projects. Such creditors include present and gated to pay annual costs of the project including debt former holders of the Nuclear Projects Nos. 4 and 5 bonds service, whether or not the project is operable, until the and others who may assert claims in the future against outstanding bonds are paid or provision is made for the the Supply System and/or its projects.

retirement in accordance with provisions of the bond The Supply System's management and legal counsel are of resolution.

the opinion that such creditors will only be able to realize upon the net assets of Nuclear Projects Nos. 4 and 5 and NOTE E - COMMITMENTSAND CONTINGENCIES will not be able to realize upon any net assets or future revenues of the Supply System and/or its other projects.

Nuclear Project No. 2 Terniination Nuclear Projects Nos. 1, 3, 4 and 5 Site Restoration On May 13, 1994, the Supply System's Board of Directors adopted a resolution terminating Nuclear Project No. I.

Site restoration requirements for Nuclear Projects Nos. 1, Since that date, the Supply System has been planning for the demolition of Nuclear Project No. 1 and restoration of 3, 4 and 5 are governed by site certification agreements the site recognizing the fact that there is no market for between the Supply System and the State of Washington the sale of the Project in its entirety and no viable and regulations adopted by the Washington Energy alternative use has been found. Funding for the Project Facility Site Evaluation Council (EFSEC), and additionally has continued for administrative efforts associated with for Nuclear Projects Nos. 1 and 4, by a lease agreement termination and planning of demolition activities for the with DOE. The Supply System submitted a site restora-Project. Preservation activities have been continued for tion plan to EFSEC on March 8, 1995, which complied certain high-value assets to maximize the return on their with EFSEC requirements to remove the assets and restore expected resale. At this time, the eventual disposition the sites by demolition, burial, entombment, or other of the Project is unknown. The Supply System has techniques such that the sites pose minimal hazard to the reduced the assets to their estimated net realizable value public. EFSEC approved the Supply System's site restora-and has accrued for the estimated cost of removal and tion plan on June 12, 1995. In its approval, EFSEC site restoration. recognized that there is uncertainty associated with the Supply System's proposed plan. Accordingly, EFSEC's Nuclear Proj ect No. 3 Tenuination conditional approval provided for additional reviews once the details of the plan are finalized.

On May 13, 1994, the Supply System's Board of Directors Based on current estimates for site restoration, the Supply adopted a resolution requesting that the Nuclear Project System has recorded accrued liabilities of $ 46 million for No. 3 Owners Committee declare the termination of the Nuclear Project No. 1 and $ 36 million for Nuclear Project Project. The Owners Committee voted unanimously to No. 3. Funding for these liabilities will be provided by terminate the Project in June 1994. Since that date, the BPA. No source of funding has been identified for site Supply System has been planning for the demolition of restoration of Nuclear Project No. 4 which is located the Project and restoration of the site under.its obligations approximately one-half mile from Nuclear Project No. 1.

to the State of Washington if no bona fide purchase offers No source of funding has been identified for site restora-are received. Funding for the Project has continued for tion of Nuclear Project No. 5 which is adjacent to Nuclear administrative efforts associated with termination and Project No. 3, sharing a turbine-generator building on the 33

same site. The Supply System believes that although insurance, and to license modification, suspension, Br Nuclear Projects Nos. 1 and 3 have no legal obligation to revocation or civil penalties in the event of violations of fund Nuclear Projects Nos. 4 and 5, respectively, it is various regulatory and license requirements.

possible that claims may be asserted against Nuclear The Price Anderson Act currently provides for nuclear Projects Nos. 1 and 3 to pay the costs of site restoration liability insurance of over $ 8.72 billion per incident, for Nuclear Projects Nos. 4 and 5, respectively. The which is covered by a combination of commercial nuclear Supply System currently estimates that the cost'of site insurance and mandatory industry self-insurance. The restoration for Nuclear Projects Nos. 4 and 5 is $ 20 Supply System has purchased the maximum commercial million and $ 10 million, respectively. As stated previ- insurance available of $ 200 million, which is the first ously under "Cost Sharing Litigation," Nuclear Projects layer of protection. The second layer of protection is Nos. 4 and 5 assets may, at some future time, be trans- provided through a mandatory industry self-Insurance ferred to Nuclear Projects Nos. 1 and 3, xespectively. plan wherein each licensed nuclear facility required to During 1995, a group from Grays Harbor County, Wash- participate in the plan (currently 110) may be assessed up ington, which is interested in economic development, to $ 79.275 million per incident, subject'o a maximum formed the Satsop Redevelopment Project. The Satsop annual assessment of $ 10 million per year.

Redevelopment Project introduced legislation with the Nuclear property damage and decontamination liability State of Washington under Senate Bill No. 6427 which insurance requirements are met through a combination of passed and was signed by the Governor of the State of commercial nuclear insurance policies purchased by the Washlniiton on March 7, 1996. The legislation enables Supply System and BPA. The total amount of insurance local governments and the Supply System to negotiate an purchased is currently $ 1.06 billion. The deductible for arrangement allowing such local governments to assume this coverage is $ 10 million, per occurrence.

an interest in the site on which Nuclear Project No. 3 exists for economic development by transferring owner- "Year 2000" glnaudited J ship of all or a portion of the site to local government entitles. This legislation also provides for the local The Supply System recognizes the need to ensure its government entitles to assume regulatory responsibilities operations will not be adversely affected by the impact of for site restoration requirements and control of water the "Year 2000" on both Information Technology and rights.

Non-information Technology resources. Failure of certain The Supply System'as entered into discussions with of the Supply System's resources due to processing errors representatives of Grays Harbor County about possible potentially arising from calculations using the year 2000 alternate uses for the site on which Nuclear Project No. 3 date are a known risk. The Supply System has developed exists. This may benefit Grays Harbor County in eco- a detailed plan for addressing the "Year 2000" issue and nomic development and may reduce the Supply System's has made satisfactory progress towards completing obligation for site restoration. The Supply System has conversions, replacements and temporary resolutions deferred the issuance of a formal Request for Proposals for such that management expects all critical systems and the demolition/site restoration contract while these most important systems willbe corrected prior to process-discussions are ongoing. ing problems occurring as a result of the year 2000.

A Task Force continues to meet regularly to monitor the Otlrer Litigation and Connnitnients status of the efforts of the Supply System's assigned staff and contractors in identifying, testing and remediating The Supply System is involved in various claims, legal "Year 2000" related issues. The Task Force is addressing actions and contractual commitments not mentioned additional "Year 2000" related issues including, but not above and in certain claims and contracts arising in the limited to, testing procedures and business continuation normal course of business. Although some suits, claims and other contingency planning. In addition, the Supply and commitments are significant in amount, final System is participating in a consortium of utilities,

- disposition is not determinable. In the opinion of including BPA, to coordinate efforts and issues arising management, the outcome of such litigation, claims or from the year 2000.

commitments will not have a material adverse effect on On or around June 1999, the Supply System plans to have the financial positions of the projects or the Supply completed conversions, replacements and temporary System as a whole. The future annual cost of the projects, resolutions for all critical systems and plans to have however, may either be increased or decreased as a result completed testing of "Year 2000" compliance for all majox of the outcome of these matters. systems. This target date maybe impacted by integration testing plans and scheduled generation outage decisions.

Nuclear Licensing and Insurance The costs to address the Supply System's "Year 2000" issues are estimated to be between $ 15 million and $ 18 The Supply System is a licensee of the Nuclear Regulatory million through fiscal year 2000. This total cost includes Commission and is subject to routine licensing and user hardware, software system updates and replacements, fees, to retrospective premiums for nuclear liability embedded system updates and replacements, outside 34

consultants, and labor. Total costs in fiscal year l998 associated with mission critical and known non-compli-have been approximately $ 2.7 million. The Supply ant resources.

System is working with major third party entities regard- The cost or consequences of a material incomplete or ing their preparedness for the year 2000 and has identi- untimely resolution of the "Year 2000" problem could fied no exposures which it believes create material adversely affect future operations; however, any costs probable exposure to Supply System operations. The related to such results would remain obligations of the Supply System will form a contingency planning team project participants and BPA as discussed in Note E, prior to the year 2000 to address unanticipated events for Security - Nuclear Projects Nos. 1, 2, and 3.

higher risk internal and external originated threats BOND RATINGS (Unaudited) rxumz aux~z Fitch ICBA, INC. AA- AA- Stable Moody's Investors Service, Inc. (Moody's) Aal Aal Standard and Poor's Rating Services (S St P) AA- AA- Stable Letter of Credit Banks Bank of America Long-Term AA- Aa3 Short-Term A-1 VMIG1 Morgan Guaranty Trust Company Long-Term AA+ Aal Short-Term A-1+ VMIG1 Bond Insurance (Long-Term)

MBIAInsurance Corporation Aaa Bank Credit Facility (Short-Term)

Credit Suisse First Boston A-1+ VMIG1 35