ML20151Z844

Southern CA Public Power Authority 1996-97 Annual Rept

ML20151Z844
Person / Time
Site:	Palo Verde
Issue date:	12/31/1997
From:	Palk B, Waters D SOUTHERN CALIFORNIA PUBLIC POWER AUTHORITY
To:
Shared Package
ML17313A590	List: ML20151Z784 ML20151Z831 ML20151Z844
References
NUDOCS 9809220151
Download: ML20151Z844 (79)

Text

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What is S C P P A 7 1 Presnient's Letter. 2 Executive Director's Ierter 3 Evuhaion of an Industry. 5 Operations and Fuunculs 8 No Verde Nuc! car Generanng Stanon 8 San Juan Generanng Stanon 10 Mead-Phocran/ Mead-Adelanco Transnussion Projects 10 }kxwcr Upraang Project 12 Southern Transnussion System 12 Legalauve Advocacy 14 Report of Independent Accountants 17 Con 6ined N!ance Sheet 18 Gunbined Statenrnt of Operanons. 20 Combined Scarenwnr of Cd Flows 22 Notes to Financial Scarements 24 Supplenwncal FinanculInformanon. 35

' The Southern California Public Power Authority (SCPPA) is a joint powers authority consisting of 10 municipal utilities and one irrigation district, who deliver electricity to 2 million customers over an area of 7,000 square miles, with a total population of 4.8 million. The members are the municipal utilities of the cities of Anaheim, Azusa, Banning, Burbank, Colton, Glendale, Los Angeles, Pasadena, [semumecas j cny w uum Riverside, and Vernon, and the Imperial Irrigation District. cay

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SCPPA was formed in cny, - ~.,, ,,m,.m. yo, ri.; ; ety w Coton s in 1 1980 to finance the c,,, _ j w ana. 7.,, ye.,- Importal irrigation District Y , p[' Los Mgeles Department of 3Cguisition of gener-i. I ufan :,1 l ~* Water And Power y P ~ i L".* *.c cry of Pasadena 7t *' ' ' m J',*afd 4 1 atton and trans-41. * *

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. g,g 4 y v7(,~o -m cny a vemon ~ p-Inission resollTCes '""'M as [ o I.. - *- w / o m .t..n m. a= aa " *. "'N "" Y X"5O for it's members. 'ma mmL".4 . %4,: ;Jg Transtmasion System . p en -. .;e L,urrently, SC, PPA p .,.,,, u,mn,, Transmission Project em see 1Aead-Adelanto T,an, mission P,opot has three generan.on projects and three g Palo Verde Nuclear g,"*"*"''"" transmission projects, bringing power from Arizona, New Mexico, Utah, Project 0 5" *'aa C-"#as and Nevada. Station o member a encies s The projects were financed through the issuance of tax-exempt bonds, backed by the combined credit of the SCPPA members participating in each project. As of June 30,1997. SCPPA had issued $8.45 billion in bonds, including reftmding bonds, of which $3.16 billion in principal was outstanding. SCPPA's role has evolved over the years to include advocacy at the state and national levels, and cooperative efforts to reduce member costs and improve efficiency.

Cooperation among SCPPA members reached new levels this year, and paid Bernard V. Pak Persese high dividends. Facing the enormous challenges of industry deregulation, we realized that common problems could have conunon solutions, and that by presenting a unified position, we could best in0uence the course of events to protect our customer / owners. SCPPA became the local forum for discussion, and the conduit for infor-mation to and from Sacramento. SCPPA Directors were heavily involved in shaping the legislation which will change the way we do business in California, and we are represented on the Boards of both the Independent System Operator and the Power Exchange. We are working together to reduce debt service costs and operating costs on our SCPPA generating projects, and are working individually to reduce local operating costs and to improve customer service. The individual SCPPA members will decide if and when open access is in the best interests of our individual utilities and customers, but we will con-tinue to search for areas where cooperation and joint action can benefit us all. This year proved the power of cooperation. Next year holds new chal-lenges, and SCPPA will provide the mechanism to address many of them cooperatively. BERNARD V. PALK President

3 u Dani.i w. w.tm Restructuring dominated the Califi>rnia electric utility industry this year, ,_~n. and it certainly dominated my schedule. Along with many of the SCPPA Directors, I was heavily involved in the debate leading up to the enactment of AB 1890 in September 1996. SCPPA and its members continued to be very active in the creation of the Power Exchange and the Independent System Operator. Protecting our member utilities and their customers has I been our prime goal, and we feel proud of our success. Public power will not be harmed by this very political process which was driven by the large industrial customers of the Califi>rnia investor-owned utilities. Throughout the restructuring process, SCPPA worked closely with the California Municipal Utilities Association (CMUA) and the Northern Califi>rnia Power Agency (NCPA). The successful teamwork on restructuring has led to cooperative efforts in other areas. Nine SCPPA members, eight NCPA members, and the Sacramento Municipal Utility District are working together to develop a Public Power Restructuring Education Program to help educate their customers about Califi>rnia's emerging electric market. In addition, five SCPPA members and seven NCPA members are cooperating on the development of new Customer Information Systems. We will be watching for other areas where North-South cooperation will yield common benefits. SCPPA completed refundings fl>r the Palo Verde Project and the Southern Transmission Project during this fiscal year, lowering costs for

SCPPA Directors 11 ^

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/ Daniel W. Waters L.a.uw Ikmw i Bernard V. Palk o,,uhr Joseph F. Hsu li.,1%ht Eldon A. Cotton

unw, both projects. At year's end, we were working toward a major restructuring of all the Palo Verde fixed-rate debt, with the goal of lowering the project cost to market value by 2004.

This was an exciting, challenging year. Cooperation among SCPl% members, and with our public power cousins in the North, has helped us shape the immediate future. SCPl% will continue to serve as the hub and cataly.st for the joint actions which will help our members to meet the even greater challenges to come. 1 77 DANIII W. WAIIxs Executue Director

tvoiunon in an inaustry u. 1 When SCPPA was formed in 1980, many of its members were effectively " land-locked", completely dependent on Southern California Edison fbr their generation and transmission requirements. Membership in SCPPA allowed them to become generation and transmission ownc-rhis made their power costs lower and more predictable, gave them more independence and local control, and gave them a voice in regional planning and development. In the 1980's and early 1990's, environmental constraints, uncertain price and avail-ability of oil and natural gas, and continuing load growth led to investment in nuclear and coal plants by most Califbrnia utilities. Diversity of fuel type and firm transmis-sion access were thought to be the route to stable rates in the long term. Conventional wisdom also said that spreading the cost out over the entire life of the resource was the most fliir to our customers who paid the bills. In recent years, natural gas has been abundantly available and relatively inexpensive. New technology and this low fuel cost make it possible to generate electricity at a much lower cost than our older power plants. The potential for these lower costs is driving the deregulation of our industry. Beginning in 1998, Califbrnia will experience radical change. The investor-owned utilities will divest a significant portion of their fbssil-fueled generation, sell all their generation into and supply all their needs from a Power Exchange, and turn their trans-mission over to an Independent System Operator.They will give residential and small commercial customers a 10% rate decrease, through the sale of billions of dollars

Edward K. AgNayan s truxiunon has defend the Anaheim Puldu UsArws suwe as uwep- '"'""""i'"d',",',d"",""","",l worth of " rate reduction bonds". Perhaps most importantly, they will lose ,d for de intrucited Caldonua electne axlwary. Anahrun Pulac Unlaws' their service area monopoly, and customers will be free to choose any reami,mi m. s,,28mr iu dw rwigid mng competa.ws". nul dw Imt three comnwraal/m.bnal rate dangn luw tan deacaws. In adh noWer stIDDIier. tum. Analwim hade Utsun ha f A a entered mto a punt wenure whwh edi alkw Arulwnn to tramw dw fmr ary SL, PPA members, as consumer-owned utilities, are not mandated to m de,mn. n w,d, a rauy wn,a. pwately-nm filwr.opuc artwork nerv-uy the cuy. b b b U Cunismen sermi.. 105.743 n,wer rmwrmed and h,Amed (m Megaurl k n) grant customers tlle riglit to clloose their electricity supplier. SCPPA s<lffnerae,a 670.471 bachmed. 2.240KI Ttnal. .2.911.342 Tumnusuim (m mda).. .l.4 26 men 1bers are taking aClion on many fronts to make (beir rates Competitive Toral Rrwinws (Utub).. $244.195 ogsrunng LLsis ((XXb) .5214.323 by the turn of the century, when the full force of competition is expected to hit. The customers of California's consumer-owned utilities already enjoy lower aver-age retail rates tilan Cttstomers of (lle neighboring investor-owned utilities, [Cityfof Azusa Joseph F. Hsu., Tir aiv's ciennt urdai. in addition to Ibe benefits of local Contro}, }oCal employment, and Contri-== nuMd m 1895 I arxl ti.r naar of as lusro- " ry Anna puduwd elcernary wholesale butions to their cities' general funds. r-i s=1 - cu=== fu s - dw nu419%. dumyh succeulid hug > ta,n agurut ILhm on truwnsm The electric utility industry is evolving. SCPPA and its members are [,"';,^"",',3",",'t" d*",'i,'"d, m.u m rren scmuy r,nerug m Palo Verde Nuclear Cwncunng also evolving. Starting as a tool for joint financing, SCPPA has become a s o,en. n.~r n wkxtnc isnt. r .a sm um c-mn,y sim - un,

1. 3. By hairy tbc abday to dnm4v as catalyst and a vehicle for cooperative long-range planning, problem solv-r~ -n',ir "i~"~ ^=~ h-nm,nmura,s,ema mre, du i983 Irwt 'nn owngtune rxes wdl hrlp ing, and political advocacy. Based on a firm belief in the value of public d" "'/dj,"g,d,,'"*"""

power, SCPPA will continue to evolve in response to its members' needs. ["""'";"3,,a ng,,j '4576 d (m Megawat4 hn) sdignermed 0 haduwd. 4(tu69 %Ies !< eud 210.7M) Whokd 178.956 Total Rewnurs ((X ab) $23.786* operatuy Costs (lR Xb).. $24.lW' 't ' maked a

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c era 1 ions @nU r iIi dia ri(, a cs i 3 kJ As,qs As g Gmber 31, !99 7 (bemudq Eganw Awingr fnut Mo4's Neer Sunds4 & SCPPA BONDS se crmi lam, ses) 19) M.-,,, 3,~, s'. Ilo wr Upranry Project S 30.490 6.2% 13 2 on 2017 Aa3 AA-5=a6rn Trananumiun Syuem $ l.166.240 43% - 7.2% 21.4 My 2023 Aa3 A+ Semor (.wn bxis Aaa/VMIGl AAA/A-l+ Sulxmluute 1.acn Nnds' Palo Verde Npt' $ 974,495 4.4% 7.7% 436 My 2017 A2 AA-Senmir uen Nexis Aaa/VMIGl AAA/A4 + Suhmfanate Lien 16b Muinple Pnya Rewnur bxb' Mead AJelargo $ 106.7tX) 7.1% 11.1 My 2013 A3 A Med.Ih ms $ 3 8.8i10 7.1% 11.1 My 2013 A3 A Muhy4e Priya $ 259.l00 7.1% 17.0 My 2020 A3 A Mead-Adeloso Rc(urdng' $ 173355 5.3% 18.8 My 2015 Aaa AAA Mead 4bmz Refmang' $ 51.835 5.3% 18.8 July 2015 Aaa AAA kn hun Umc 3' $ 231.340 5.6% 14.2 lan 2020 Aaa AAA 'Im.va 1991 )=hweem lawWr Am be (AMA4Q.1996 kJerdween % A Ama CW11/A'.1996 S4er4=w firwWe Aer W 8 b6 (FLU 'Imund 199d 1rn.er inn h6 (AM&tG.1993 L4nenise ad JClQ,1996 SJerdans W A (AMAtQ.199ti SJurJamer lenWr A.ar % B and C kb (AMMG, l'r4 ? %=sous % A ed B kk @L4) 'v. n.a .,4 as., ,,.a. -,,~,- [ City of Ban,ning_ r 't,,,.a em w A ans, gMaun ' m,na 1991 % A M6 <M1stA. p y i Duldahed m 1913, dw { lhnmng cicancal sys ~ tem mm scrws an area Palo Urde Operations -This was a year of new records at Palo Verde.

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,s 3 and a pornon of Mead.Adelanto and Mead 4%ma transmission laws - 29,8 million MWH's produced - a new site record uw ser.ie is enwia,a to ainn, custonwrs t}vough the Cay owned dutnbunon syvem. Wah a pnmn ~~"i d - -klar d* car - day refueling outage for Unit 1 - a new site record mated to conunur to provide qualay service to both preuni and future cus- ';"" %',f;"""*8 "",2 - 37.5-day refueling outage for Unit 3 - another new site record pentm deregulated envmmment. Unit 2 ended the year having been operational every day of the year, on C"""";","~f,,g,,,,f34* (in Megawan4Liurs) Self-gerwrated. .0 its way to a new record of 490 davs continuous operation. This was the wh-a . i20.c5 4 Total .120.475 e Tranumaion (in miles) .12 2 Tnl Rewnun GXXh).. $13.009 ninth longest uninterrupted run ever recorded by a U.S,. nuclear plant. o mon,C-s%000s). $12320 r PRODUCTION COST 1996-97 OPERATIONS (< spr.wei nd M.mer w=< p4u NEIrn Iath Ceneracim Capairy Ch Cetas (Millums of Unluatkin Year per kWh Mwiis) (%) 1993 2.02 Una 1 9.3 86.5 1994 1.93 Una 2 11.0 102.5 iN5 1.61 Una 3 9.5 88.1 19' 6 1.45 Aggregate 29.8 92.4 19 7 1.35 (urgeo Industry average 70.3 l l

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Ronsid V. Stzssi. Burbank's Isble serme j Departowns legan serv-s j mg t=ah water and elec-These records are the measurabic results of the reengineering of work tm a.r-m i9a aaa suiwd on-ste pneratmn m rnponse to a surge in mdustrial and rendennal I,"~[' 7,C.'"",f3 processes and organization begun by the Operating Agent (Arizona Public SCPl% proicas. as well as firrn aal meerruptd>le supphes froc. c.ther urd-S,ervice) m 1993. Improvements m teamwork and morale, and reduced ows ana,-,nmen, agna,s. ana contmues to operme us own local poner plant. production Cost are [tiftber evidence of effeClive management. Customm scrwd.... 51.189 Ibwer Crneraard and hadmed (m M<gawatt&rs) gy d gilxo San Juan Unit 3 Operations - Unit 3 at the San Juan Generating Station Toral. .l.062.000 Trmanuumn (in nules) .398 in New Mexico performed well this year, as it has each year since SCPPA Ta n,wr-s oixs)..sussi opersing Cimes GKMh).. $90.983 purchased a 41.8% share in 1993. Its availability factor was 96.7% and the five SCPPA participants took nearly 1.7 million MWH's, the highest yet. The Limestone Conversion Project is well under way, and running under budget. When complete, the 5-p c project will improve the removal of sulfur dioxide from the flue gasses, and save SCPPA $3 million per year in operating and Lcyof cotton-Thomas K. CIMe j Tiw Cohon nu 4 maintenance Costs. i cleanc uul. .as estabbshed 895. Interim Invoicing Agreements contintic to encotirage high capacity '?,7,73s.,,, '[<,CT37T s 7 chanpd from bemg solely depenJent on Southern Cahfnua Eden for ns factors and lower per unit coal costs, and negotiations are proceeding on a ru,au,,a n~r to. mg aanwir engard m padusmg power from uv-cral diferent sources, acluevmg ugnif- '"a"" - "c'ad r - long-term coal supply contract. Both the Operating Agent (Public Service Customm serwd .15AX1 hwr Crnermed axi1%rdusni Company of New Mexico) and the coal company realize that an economic oadg,7,",1j-) huderd 212.3W Toul. 212.300 fliel slipply is vital to the competitive ftittire of both the plant and the Trm---n on nuws). m Total Rewnues J1th). . $23.98) operaung Gats pu). $23.693 coal mine. hirad-Phoenix /hfrad-Adelanto Transmission Projuts - Nine SCPPA members own roughly one-fifth of Mead-Phoenix and one-third of Mead-Adelanto through SCPPA. The two 500-kV AC transmission lines carry power between the Phoenix area, the

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Las Vegas area, and Southern California. Both lines successfully completed their first year of operation. Hour Uprating Projut -The Uprating Project, which increased the rated city of %ndaleT ~l e.ik ! s.rnard v. ca,n u, n.a a,e capacity at Hoover Power Plant by 35 percent, continues to be an econom-Incorporat<d m 1906.! clecinc unday m 19W. of,cumng p=cr fnun uutade supph-m a iu,,.a,o n,n r Im,n ical, renewable resource for nine SCPPA members, six of which financed u na,,,,ni m a,a m y o,a aw 6nt una of n own neun ynna-mg pai, m i941. s aia a" their participation through SCPPA. SCPPA is participating in efforts to Craywn h.er Plant, this facdity today has righi generanng umts. identify and mitigate effects on endangered species in the lower Colorado Glend.de cnntunees to purdase 85 p,m,m of. p. fmm m.a, 60tutf1 %,'"E",'","fa,avua_f2 River area, and is closely monitoring proposals regarding the sale of the (If1 b!(gAWJft l hKlis) Srlf-gennmed .14 4.M6 'gj-d .. fll;22 Federal Power Marketing Administrations. Trmanumni(m mdes) 72 final Rrwnues gn xh) -, $l22.m8 Southern Transmission Systnn (SIS) - The STS is a 488-mile long opnm,ns -s onm. soss23 a 500-kV DC transmission line and associated converter stations which delivers power Los Angeles Department _ _ _ _ from the Intermountain C,onverter S,tation in Utah to the Adelanto of water and Power Eldon A. Cotton ; Converter Station in Southern California. In its usual "ho-hum" fashion, the '" '"l,' ["Zl'" mg.in..a e,wn va-ch.ued from dw Pauk-na Mosucipal STS delivered nearly 14 million MWH in fiscal year 1996-97, with 99.62% h.c Pun. ma o, uh mg r, uuipamed us fir t gnwraung capacny a San l'ranempuio h=n Pimu Na 1. '= '*22 d '"> rea-d aw -n==>- availability. mg dmnt=anm sperm of Smdwrn CahtornialiimnGmip w wahm dw cuy limas It is exw the 1.uyest muruc-spally.mned <lectnc utday in dw nanon.uwt n uixiergomg a punt lxm-new resinatunng procns to prepare for upsmung deregulatuut Guionwn scrwd USMMU hmer Crnnaied and hadwd un Megawan I te) &lfpirrated .10.626AnU Purdu3cd .15.401.tu n ) Txd 26.027.0io 1ragunuswwii.m mdes) .3.743 T4d Rrwrurs @n nk) 52.017.11 0 operaung Guis guh ;. S t.447.(no

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LNNE Keruth S. Nollsr. IID entered dw pier. industry m 1936 armi Throughout fiscal year 1996-97, SCPPA closely monitored the legislative 'fg,r'f,jy,,7 y cratmg remrces Among IIIhwned resources are 24 MW of low head activities at the state and federal levels and played an active role m. educating hya,o u,,u aion, dw ili inwncan Canal. 307 MW of gas 4 ired seam i and combmed cycle units. and 162 elected officials and staff on the unique services, needs, and concerns of Mwer aintesnaminaa-r tion to IID's share of SCPPA resources compnsmg 104 MW at san public power systems. As federal lawmakers and regulators continue to [,,'"y".M* *' ",;d V"d'j 7 long-term purthase contracts advance proposals to restructure the electric utility industry, these activities C-i - rwa..... 88.533 her Cwswrued and Pwchased (m Mepwatt-f lours) SelfGncemed .606.068 will be increasingly important. P,a-a . ie55.n 5 Total .2.661.183 Trmwmssion I acihtws SCPPA emerged as a serious player in the debate leading up to t,i Lnue,gm). ;$#8 operanng Casu (OUus) $201.388 California's restructuring legislation, and the final bill bears the marks of SCPPA's influence. Restructuring was also one of the hot issues on Capitol Hill in 1997, and promises to be a major legislative issue during 1998. Members of Congress heard from hundreds of witnesses, including SCPPA, who testified before the Senate Energy and Natural Resources Committee on several issues key to public power's ability to compete. As Congress debates the merits of retail competition, one of the most hotly con-Otiif Pasadena-R tested issues is the b3rivate-use limitation on tax-exemk3t bonds. Throub>hout Rufus Hightower Dublahed m 1906. dw ',"Y ,"y",f'"',*l[' the 105th Congress, investor-owned utilities actively lobbied Congress, p m 1907 mwl t<wk mer operauon of su mumapal servet hghong fnnn EL,n F.lecinc. In 1909. Pasadena began the Charging that tax exempt bonds and the tax exemption of public power sys-extenson of in opersions to com-uwrcial and reudennal cusomen that tems give public power an unfair advantage in a competitive market. SCPPA resmha m ar,epixe,,wnt s ai lam electne service in dw city ly 1920. In 1996-97. I%sadena pur-d ased a unnacly 85 percem of in g Customers served. .57.978 p,$"",*d "f"**". I85.085 aggressively educating Members of Congress and Administration officials d Selfpnermed Ptahwd .106,627 on tlic rationale and need to orotect the status of tax exemnt bonds for 'I.Toul - - i 254 712 rmwrussion t.acilaws (m emln) 57 a r Total Rewmws (000s) . $111.969 operanng Cosu (OtW) $45.654 muntCipal titility systems in a Competitive eftvironment.

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Other issues of interest to SCPIM and its members indule: ci deregulated enemmnwnt. the new I%er and ransmas.um costs conau-nice aw t.a or a,rs r_a on,o Nudear Mste Disposal-SCPPA and its allies in Washington will con-our custonwes through rates. Coat reduction and restructunng efforts at scw4 u. ha ngnif-, i-P=" aa tinue to work with covernment leaders to develoo an effective and safe o I Rrrerude Pulac Uutines' efforu m nwetmg our k>=er oper4mg cost tar. gets. Addinonal efforts, especially at Palo Verde Nuclear Generanng nuclear Waste storage program. Stauon, wdl be respured fin Rmrude to compete m future yem Sale of the Power hfarketing Administrations (PhiA's) -In contrast to prior cu.,omns.nnd.... n.56, IWn Grnnated and Nrchased (m Megawart4 toun) gry,2ted ,j27g years, sale of the federal PMAs was not a legislative priority in 1997. Total .1.723.540 Trainnusuon (m nules) .2.085 However, the issues of PMA rates and federal ownership may well become { rma R,.oues cua, .$it3.ii7 opennng Cmis (aW) .5167,327 M part of the restructuring debate in 1998. Telnemmunications - As part of its legislative strategy, SCPPA is continuing its dialogue with officials of the Federal Communications Commission to ensure that im ilementation of the 1996 Telecommunications Act reserves the ri ht of M". De Dario-b Kenneth J Vnnon's Light and Ihr f" " "'f8'",""j [ municipal utilities to Compete in the telecommunications arena. m i933. with compicuon of in dwul grwraung plant. In ad&non to su in addition to legislative issue areas, SCPPA hosted for the third straight o.n r, s,m a i u,uu rius recently uutalled gas nubuws. Vernon now receiws p>=n b>m Palo Verde, year a group of congressional staff on a fact-finding tour of SCPPA facil- % ~.ad - ="I'" 1-ims APS. Cl%vR. SRP. BPA and Eason. Customers wrwd... 2.045 ities. The tour was designed to increase the staff members' knowledge and 5-rc--daaNa-d (m Mepwatt4 Enars) Sdf.pnerated 5.345 Pur based. 1.112.655 understanding of how the legislative debate on restructuring, taxes and other Tma uis.ao Transmmuon (m nulesj. . 2.4 Total Revenuen ln). $53.7M o r*"""" '"" (" ") 53"" enerW, issues affect SCPPA and its members. um PERCENTAGE OF SCPPA MEMBER PARTICIPATION IN SCPPA'S INTEREST M' M M u M i-M sm - M g= g*== =79 ' = ~ " M M M M M M M M M M M M M M M M M M M M M M J M M M M M M M l' M L .. E4.5 5 .L :. E _b# L M M M M i M . I..T_4.. .I .t.. o. g g. . ! =._- g c.--i ai- -l-

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1 l i l i l REPORT OF INDEPENDENT ACCOUNTANTS i l Septemln r l1,1997 To the Ibard of Directors of the Southern Cahfornia Public Power Authoeity in our opinion, the accompanying combined balance sheet and the related combined statements of operations and of cash flows after the restatements desenbed in Note 9, present fairly, in all material respects, the financial position of the Southern Cahlbrnia Public Pourr Authority (Authorny) at June 30,1997 and 1996, and the results of its operations and its cash flows 1 fhr the years then ended in confbrmity with generally accepted accounting principles. These financial statements are the respon-sibility of the Authority's management; our responsibility is to express an opmion 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 perfhrm the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examinmg, on a test basis, evidence supporting the amounts and disclosures in the financial state-ments, assessing the accounting principles used and significant estimates made by management, and evaluating the intrail financial statement prescotation. We believe that our audits pnnide a reasonable basis Ihr the opinion expressed above. In our opinion, the accompanying separate balance sheets and the related separate statements of cash flows of the Authority's Palo Verde Project, Southern Transmission System Project, Homer Uprating Project, hicad-Phoenix Project hicad-Adelanto j Project, hiuhiple Project Fund and San Juan Project and the separate statements of operations of the Authority's Palo Verde Project, Southern Transmission System Project. Hoover Uprating Project, Nicad-Phoenix Project, hicad-Adelanto Project and San Juan Project, after the restatements described in Note 9, present fairly, in all material respects, the financial position of each of the Projects at June 30,1997 and 1996, and their cash flows, and the resuhs of operations of the Authority's Palo Verde Project, Southern Transmission System Project, Hoover Uprating Project, hicad-Phoenix Project, hicad-Adelanto Project and San Juan Pmject for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Authority's management: our responsibility is to express an opinion on these financial statements ba3cd on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards whidi require that we plan and perthrm the audit to obtain reasonable assurance about whether the financial statements are free of material misstate-ment. 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 estinutes made by management. and evaluating the twerall financial state. ment presentation. We believe that our audits pnwide a reasonable basis for the opinion expressed above. Our audits wrre conducted for the purpose of thrming an opinion on the basic financial statements taken as a whole. The supplemental financial information, as listed on the accompanying index, is presented for purposes of additional analysis and is not a required part of the basic financial statements. This infbrm,ition is the responsibility of the Authonty's management. Such infbrmation has been subjected to the auditing pmcedures applied in the audits of the basic financial statements and, in out opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. fl w [ L.- Price Waterhouse LLP Los Angeles, Califhtnia l SCP' PAW l

SOUTHERN CAllFORNIA PUBLIC POWER AUTHORITY COMBINED BALANCE SHEET (in thwan& furu 11), I9')7 .%uthens Pnytai Iblo Imnsnnsswa llwwr %J %d Mainf e Snn Suai4zatum l Urk Sweem l'pmwg 1%mx Ahlanto Pnwa Juan and (kker Pws Pws Pwa twwt Pwn f und Pwa funk hual ASSETS Unbry plant-Pn.xiuction 5 615.214 $ 183208 5 798,422 TransnsWon. 14.153 $ 674.606 5 51.189 $ 170.895 910,843 Cwneral 2.6,5(. 18.893 2.627 335 7,865 32.376 632.023 693.499 53.816 171.230 191.073 L741.641 Leu-AccumularcJ Jcpucianon 279.927 213.844 2.202 5.828 43.112 544.913 352.096 479.655 51.614 165,402 147.961 1,196.728 Gmstrucnon wrk m pnyren 10.026 210 10.236 Nucicar ftwl ar anornud cost 13.514 13.514 Net unbry plan 375.636 479.655 51.614 165.402 148 171 1220.478 S vaal limd.s i Available for sale a f.ur vake (Note 2): thmumwonmg fund 43.943 43.943 1,wnrnwm> 155.763 138.550 5 4.906 18.586 58.380 5 252.779 37.431 $ 4.442 670.837 1:scn= account 15.484 15.484 Advance to Intermount.un her Agency 11.550 11.550 AJsanco for capaaty arxl enegy. rwt 24.526 24.526 Internt ncewalde 1.946 583 6 6% 2.057 9.288 134 7 14.711 Ca.*h and cash equnalents 27.396 32.442 2.503 2.[6] 4.229 73 7.503 10.463 87.370 229.048 198.fo) 31.941 22.037 64.666 262.140 45.068 14.912 868.421 Account > recewable 2.878 2.12 2 5.386 (7,345) 31M1 Mmenals and supplas 7.511 3,494 11.005 Costa recmcralde fnim (m excru of) future bilhnp to partiapants 230.497 241.326 (7.042) 4 163 14.544 33.706 517,194 UnreahuJ low (gam) on imesmwnes m funds avalable for sale 733 (1.116) 74 1 3 115 (190) Unar wnerJ Jcbt capemes. len accinnulated amurruanon of $118.434 182.491 197.675 3.058 9.368 26.639 2.805 422.036 5 1.028."'94 5 1.116.149 5 28.031 $ 89.304 5 276.638 5 254.795 5 233.247 5 15.027 $ 3.N1.985 l LMBILmES Long. term Jebt $ 965.151 $ l.065.877 $ 26.999 $ 86.570 $ 268.456 5 243.466 $ 216.496 $ 2.873.015 Deferrrd cudis 112 3.073 3.185 Current habihtiet Loregaerm Jcbr an mdun one par 28.570 21.360 515 6.275 56.720 Accrued micent 22.660 24.394 402 2.588 7.884 8.256 5.873 72.057 Ascounts payalde ext acertwJ expenws 12.413 4406 115 146 293 4NU $ 15.027 37.008 Total current habihncs 63.643 50.160 1.032 2.734 8.182 8.256 16.751 15.027 165.785 Comnutnwnts and conungenews $ l.028.794 5 1.116.149 5 28.031 5 89.3N 5 276.638 5 254.795 5 233.247 5 15.027 5 3.N I.985 w,, -, an mmi e.., p.>,-.a - R$3 D 3]

SOUTHERN CALIFORNIA PUDLIC POWER AUTHORITY COMBINED BALANCE SHEET ,In Anuank l l lww 10. I'rni boudr 'n IWe Immnumen fixwr Ld - Ld-Wir$ Mn M b amo l *puq l%m Mlanue Pwn Juan Pww Pwe Pww Pna P,tva iund 1%1 Taal ASSETS Unlay pleu: Prakweken $ 613/4E $ 183.309 $ 796.917 T rmumi. won 14.146 $ 674.600 $ 48.A17 $ 1711168 MM.127 G ncrat 2.569 18.893 1.971 164 8.613 32.210 63).323 693.499 50.278 171.232 191.922 1.737.254 Lea - Acannulmed depercunon _ 250.021 194.127 346 1.255 36.622 482.871 j 380J02 4993 72 49.432 169.977 155.3m 1.254383 G.wnertwenm wink in pnigren 9.503 3.116 3.501 16J20 Nixlear fuel ai.umrtved amt 13,225 13.225 Ner uniny plant 403.0 4) 499 3 72 52.548 169.977 158.801 1.283.728 Specul funds: Anulable for sale at far vahw (Nore 2 ): Deconunmbunng fund 33.474 33.474 Inmenwnti 115,746 102.842 5 9.628 21.591 62.562 $ 250.M8 34.170 597.427 lisen= account. Cnwsiwer wrws 343.898 343.898 AJvance to Internxiuncan l\\wer Agency 19,550 19.550 AJvances for ca]wny and energy. rwt 25.183 25.183 Inrcrest remv.ib!c 1.512 2,169 6 841 2.285 9.220 67 16,100 Canh aml cash eqmvalenu. 67.879 90J24 1.997 1.548 4.5W 7.546 173.798 _ 218 611 558.783 36.8_14_ 23,980 69351 260.R)8 __._4_1.783 1.209.430 i Acnona recnvable 738 2.687 19 1.750 4.741 (6.402) 945 4.478 M.nenals ami suppfws 9.240 3.569 12.8L M Gau renwerable fnwn (m exccu of) ftaure bilhngs to parnapants 217.926 215.490 (7.526) 1394 4383 31,780 463.447 Unrealued Liu on imestnwnis m fmals availal,lc fiw sale 456 2.865 3 9 28 4 3.365 Prepaid capenw' 26 66 92 Un.unortucJ debt expenws, leu accumulated.unwtuanon of $139.796 191.712 IM.ON 3307 9.888 28.123 31190 399.199 $ 11)41.713 $ 1.442.276 5 32.617 $ 89.595 $ 276M9 $ 251706 5 239.972 $ 3376.548 LIABILITIES Long-term delv $ 981.155 $ 1.045.292 5 30.981 86.417 $ 268915 $ 242.786 $ 222.444 $ 2.877.(00 Subindmaic Refundmg Cnewer Senes 347.388 347.388 lkferred credus 2.664 2.664 Gwn nt lialulairs Long term JAx due wnhm one vrar 25,690 10.843 11m3 6.035 43.655 Accrtud inscrest 24.535 38.436 489 2.588 7.884 8.256 5.994 88J82 Accmmts gu3alde and accrued expnmes 10.333 315 62 590 780 5.499 17.579 Unal current lubilmes 60.558 49.596 1.636 3.178 8.664 8.256 17.528 149.416 Gunmuninus and conungencws $ l.041.713 $ l.442.276 $ 32.617 $ 89.595 $ 276M9 $ 253.706 $ 239.972 $ 337e.548 11v svwpmvg mmw magulpr 4 a!<wJioumul sums [$ C P P..A L1

a SOUTHERN CAllFORNIA PUBliC POWER AUTHORITY COMDINED STATEMENT OF OPERATIONS (in tkank) h,Inkdfune 10. I997 kuriren Ikh 1,unumum lloews %b %I- %n irrde kern Upu,,g 1%nn Aklanto pan Pwt P,ept Pnyra Pwt 1%a l' reya 1: sal Opranng revemws: Sales of tlcernc ei.crgy $ 119.507 5 2.521 5 58.017 5 180.045 Sales of tr.msnus6m services $ 85.054 3.282 8.194 96.530 Reimburwnwn to parncipanti (8AXX4 (8JXXI) Tcnal oprarmg revenues 119.507 77.054 2.521 3.282 8.194 58.0l7 268.575 Opremg cignses: Anortuatum of nuclear ftwl 7.755 7.755 Oilwr 3wrainiris 21.411 9.997 2.082 507 875 257 35.I29 Mamtmure. 5.818 4.460 73 207 37.181 47.739 Deprenarum 18.371 19.717 l356 4.573 9.139 53.156 Drcumnussuung. 11.593 3.113 14.706 'liwal operarmg caprurs 64.948 34.174 21182 1.936 5.655 49.690 158.485 Opranng income 54.559 42.880 439 1.346 2.539 8.327 110ANO Investnwns inconw 11.423 17.150 140 1.482 4.313 2.241 36.749 incmw twfive dels empnse 65.982 60.030 579 2.828 6.852 10.568 146.839 iMit expnw 78.553 85.866 IJL3 5.597 17.013 12.494 200.586 Cms reann alile inun future lxllmgs to parncipants ($ 12.571) ($ 25.836) t$ 484) ($ 2.769) ($ 10.161) ($ 1.926) ($ 53.747) j l Ibwnv vug noen a,v an emeg at pers et th),:amW usu,,vwi

f l SOUTHERN CAUFORNIA PUBLIC POWER AUTHORITY COMBINED STATEMENT OF OPERATIONS [In hw& l kr InhJJune us.1996 %rMn Ihle lennmn,n llocur %d %). %n irode Svann ( 'powng 1%nn A&nno ju.in Pems Pnv r Pnvr Pwr Prewer Pemu Iml Operanng revenu<r Lles of clutne energy. $ 135.464 3.349 50.117 5 188.930 N!es of transnusuon wrvwes 5 85_297 5 226 $ 172 85.695 Taal o}wratmg reveniri 135.464 85.297 3.349 226 172 50.117 274.625 Operanng ripen. sex Arnortuanon of nular furl 7,949 7.949 Oilwr operanons 25.815 10.192 2.200 213 145 314 38,879 M.nn<rnarve. 6.317 5.236 13 27 35.760 47.353 Ikpreciation 18.425 20.329 342 1.132 9.W5 49.323 i 1)ccoswnnuonmg 12.497 3.Il3 15.610 ~Iotal o}wratmg ex;wnses 71.003 35.757 2.2txj 568 1.304 48.282 159.114 Ogwratmg uwonw (lim) 64.4til 49.540 1.149 (342) (1.132) 1.835 115.511 invesinwns uwonw 10.886 28.993 874 410 1.174 2.062 44.399 Inconw twf.ne it.14 en;wnse 75.347 78,533 2.023 68 42 3.897 159.910 Ikbc expense 82,777 102,710 1.370 1.462 4.425 12.614 205.358 Cats farcmerable fnnn) m curu of future bdimgs to partw' ranis ($ 7.4R ($ 24.177; $ 653 ($ 1.394) ($ 4.383) ($ 8.717) ($ 45.448) 11, an=nweg n.=s n v an iris <g ist <r et thie.6,w,=wl swe=<,rrs f l [S C P.P_ A' ?) l l

a e $00THERN calif 0RNIA PUBUC POWER AtlTHORITY COMBINED STATEMENT OF CASH FLOWS ,in A A funr 1419>. kukn Pwpti ikk lanmuumm llawr Med Med Multr;4 kn SsAshmn Usk Svnron Upong 1%ms Ab Pnyt lwn aml Oh Pnya Pnyt Pnys Pnwa %a land Ma fumb l.ul Ceh ihws innn oprimmg acnvirwn. O wremg incone 5 54.559 5 42.880 $ 439 $ 1346 5 2.539 8327 $ Il0JNO l Adjustnwnts to reninede ogwraimg maiw to irt cah pnm&d ly operatmg aamtws. Drpreamion 18.371 19.717 f.356 4.573 9.139 53.156 l Decominmknung i1.593 3,113 14,706 Advances fin capm:ay and energy, twt 1.710 1.710 Arcornutam of nuticar fini 7.755 7.755 Reimlursenwn to parricipanis 8/ino 8 000 Clunges in aucts md lialnlaacs: Accmmes reawalde (2.140) 2.687 19 (372) (646) 945 493 Maien.ds arnt upplws 1.729 75 1.804 Other aurts 25 26 66 117 Acamnin guyalde mul accnwJ expense. 2.080 4.203 53 y) (482) (896) 4.514 Net cuh pnwided by operumg actmews 93,972 77.487 2.221 1.912 6.050 20,703 202345 Cmh laws from noncarnal financmg actmnes: $ 16,835 16.835 Ahances inun parnapants Paniopmu wahdrawals. (2.149) (2.149) Net cash pnmded by noncapual financmg aamtics 14.686 14.686 Cash flows fnun capual mal retxed founcmg acudwr l'aynwnts for construction of faninws (10.325) (422) (1,623) (12.370) Pavnwnts of interest on kmg tenn &bt (51.12 7) (74.876) (1.784) (4.924) (15.077) ($ 16.512) (12.m2) (176 302) Procce& fnwn sale of imis. 153.034 199.739 352.773 1ransfm from escnw account - Cnewer sencs 343.898 343.898 Pavnwnt for defruance/rr&mption of revenue lunds (157.015) (561.565) (3.637) (722.217) Rcraynwne of pnnapal on knpterm &bt (25.690) (10.845) (1.085) (6.035) (43.655) Denmmuuunung ftmJ (10.469) (10.469) Pavnwne for lumd mue cosa (3.558) _ (2.250) (5.808) Net cah und for cainial and rdmed financmg actmtws (105.150) (105,899) (6.506) j53346) (15.077) (16.512) jl9.6N)) j274.150) Cab flows fnnn uwestmg actmurs: Interest recmed on mvestments 10.989 17.741 140 1.633 4.541 18.475 2.174 219 55.912 Purchases of umstnwnts (111.714) (161.198) (10h63) (939) (9.276) (2,030) (25.553) (6,767) (328,140) Pwrch fnnn salc/nuunnty of uwestment3. 71.420 113.987 15314 3.953 13.487 140 22.293 2325 242.919 Net cash pnwuled by (uwd for) uweinng actmtws (29.305) (29.470) 4.791 4.647 8.752 16.585 (l.086) (4.223) (29309) Net merroc (decreer) m cash and cash c<imvaltnis (4d483) (57.882) 506 1.213 (275) 73 (43) 10.463 (86.428) Cash and cah eqmvalents at begmning of yra 67.879 90.324 1.997 1.548 4.504 7.546 173.798 Cmh and cash eqmvalents at end of par $ 27396 5 32.442 $ 2.503 $ 2.761 5 4.229 5 73 $ 7.503 $ 10.463 $ 87370 % arwmpnyny me er an nwgalpet of dnfmemul amments I l l l

SOUTHERN calif 0RNIA PUBLIC POWER AUTHORITY COMBINED STATEMENT OF CASH FLOWS

In ManJC

%r indd jmv 10.1946 htken 1610 Inmomune llows Mead-Mrad - M.Jsp kn Wde % mi (&q 1%cmx Aidene Pnwa fun Pnya Pvs Pwa Pnwa 1%wa lumi Pn,ini k.J rash (Lma (n.m ogwraimg actmtwr Operarmg uwone (L,ss) 5 M.461 5 49.540 5 1.149 ($ 342) (5 1.132) 5 1435 5 115.511 AJpatnwnts to reamnic operatmg unoriw (kes) to swa cah pnwuled by operaimg utmews. !)rprecunon 18.425 20J29 342 1.132 9 095 49.323 Decmnnumoning 12.497 3.113 15.610 Amornzanon of ruwlcar firl 7,949 7,949 Advances fbr capanty and erregy, twt 1,7M 1.7M Wnic-off of constnweam wwk m pn.grru costs 1J13 IJ13 (Lnges m asets and lubihner Accoursts receivalde 174 (218) (19) 213 (72) 946 1.024 Matenals and sup;4 cs 378 110 488 Otirr a*scis 55 1.977 3.467 56 5.555 Aconnus payabic and ucnwd ex;wnwa [6.437) (1.943) g) 556 745 1.482 d5g)4) Net ceh pnmJed by operanng actmnn 97.502 69.021 2.907 2.746 4.140 16.637 192.953 Cah the inun noncapual fmarwmg utmna Coh fkm from capual and relaird financmg utmner Paynwnts lhe construcnon of fxthews (10.892) (13.208) (15,652) (1,938) (41.690; Paynwnes of mrcrne on long term &bt (64,499) (88370) (1.979) (1295) (3.944) (5 16.512) (l1.988) (188.587) Pnecca (nnn sale of bonds 229.483 229,483 15ynwn for defcame of revenue luna. (233,632) (233.632) Decmunuuionmg fund. (8.971) (8.971) Rrpayment of prnwipal on kmg-tenn &bt (23.855) (14.325) (610) (38.790) Paynwns ihr lund imw nuts (4.832) (4.832) Ncr cash used the cagwtal and eclatcJ fin.uwmg acimnes (117.198) (102.695i (2.589) (14.503) n9.596) (16.512) (13.926) (287.019; Cah fke fnwn uwnnng acimtics: Inicent recewed on uwninwnis 10.597 28.631 894 815 1.865 18380 2.064 63.246 Purchaws of uwnmients (154M5) (154.904) (22.665) (3.264) (9.lM) (1.868) (14370; (360,940) Pnweeds inwn sale /marunty of unanrrnts 182309 195.593 20.705 14.474 23.000 8367 444.948 Net cah pnmJed by (used for) uwnnng actmews 38.221 _ 69320 j l.066) 12.025 15.681 16.512 (3.439) 147.254 Net mereaw (decicac) m cash anJ cah niuivalents 18.525 35646 (748) 268 225 (728) 53.188 Cah and cash equwalents at twgmnmg of par 49.354 54.678 2.745 1280 4.279 8.274 120.610 Cash and enh equivalents ai cnd of vcar 5 67.879 5 90324 5 1997 5 1.548 5 4.504 5 - 5 7.546 5 173.798 Tk enmpmq nem err an mup!p<r of hefmamulummus iS C.'P P.A E ~

l l l l SOUTHERN CALIFORNLA Pt.tBLIC POWER AUTHORIT't NOTES TO FINANCIAL STATEMENTS l Nota l - Organization And Pwpose: Cahfornia. The Authority entered into an agreement also dated as l Southern Cahfornia Public Power Authority (Authority), a pubbe cf hiay 1,1983 with six of its participants pursuant to which each entity organized under the laws of the State of Cahfbtnia, was formed member assigned its entitlement to capacity of STS to the Authority by a joint Powers Agreement dated as of Ntwember 1,1980 pursuant in return for the Authority's agreement to make payments-in-aid to the Joint Excicise of ihrrs Act of the State of Califbtnia. The of construction to IPA. STS commenced commercial operations in Authority's par ticipaat membership consists of ten Southern July 1986. The Department of Water and Power of the City of Cahfornia cities and one pubhc district of the State of Cahlbrnia.The los Angeles (LADWP), a member of the Authority, serves as project Authority was fbrmed fbr the porpose of planning, fmancing. develop-manager and operating agent of the Intermountain Iwer Project i ing, acquiring, conuruning operanng and mamtaining projects (br the (IPP). generation and transmission of electric energy for sale to its partici-II" U"d'mt */a -The Authority and six panicipants entered into l P pants.The Joint Powers Agreement has a term of fifty years. The members have the (b! lowing participation percentages in the an agreenwnt dated as of h1 arch 1,1986, pursuant to which each par-Authority's interest in the projects at June 30,1997 and 1996: tiapant assigned its entitlement to capacity and associated firm energy to the Authority in return for the Authority's agreement to make advance payments to the United States Burrau of Reclamation (USBR) Palo son hw he me San on behalf of such paiticipants.The USBR has declared that the Project p-twants vwe spt n upratins eno. nix wanto Juaa cny or im Angin 67m, 59.5 % 24 8 % 353 % is substantially complete.The Authority has an 18.68% interest in the cny a Analwnn 17.6 42eo 24.2 13 5 contingent capacity of the i loover Uprating Project (HU). All seven-Lny o( Rmrude 54 10.2 319 4.0 115 d" generators of the HU have commenced commercial Ingwnal irryamm Ibinci 6.5 5to"o OPCfdfi"US-cavo(%nnm 49 Cny 4 Ama to 42 1.0 2.2 14 7 M'dd-IbN I*ftf-The Authority entered into an agreement dated as c n of amnny to 21 to i.3 9.8 of December 17,1991 to acquire an interest in the Mead-Phoenix cy s colum to 12 to 2+ 14 5 Project (MP), a transmission line extending between the Westwing cny s nort,ank 4.4 4.5 16.0 15.4 n.5 substuion in Arizona and the Marketplace substation in Nevada.The cny s caendak 44 2.3 14.8 ill 9.8 cavs h kn 4.4 59 118 8+ Imwides the Authority with an 18.31% intercsr in the agreement Westwing-Mead project component, a 17,76%, m.terest in the Mead axum io us axum lo us unum. 10tum Substation project component and a 22.4PL m.terest in the Mead-Mr.idhuenix gurncigunon rideca riure owirrdup cornierierin (we l*lM Marketplace project component.The Authority has entered into trans-Tlw nwmlwn parncipair m elw i%ycti scaNlvanon i msl lw maing degwa to rtw lund ar ilwir mission service contracts for the entire capability of its interest with nine members of the Authority on a "take or pay" basis. In addition, Tiw nwmlwn do not cunculv parncquic m ett Muingde l%nt Iwwl a n we nul4 dwd to i nrnive resIionsibility for accountinS or f pnmde funJmg for ungwcifwd 6,ure pnirca. the separate ownership interest in the project by Western Area l ILlo lirJe Prepct -The Authority, pursuant to an assignment agreement Power Administration (WAPA), who is pnwiding separate funding l dated as of August 14,1981 with the Sali River Project (Salt River), ($73,0ll,(XX) and $72,874,(XX) at June 30,1997 and 1996, respec-l purchased a 5.91% interest in the Palo Verde Nuclear Generating rively) fbr its interest. Commercial operations of MP commenced in l Station (PVNGS), a 3,810 megawatt nuclear-fueled generating station April 1996. Funding was pnwided by a transfer of fimds from the i near Phoenix, Arizona, and a 6.55% share of the right to use certain Muhiple Project Fund (Note 4). l portions of the Arizona Nuclear Powrr Project Vallev Transmission System (collectively, the Palo Verde Project). ~ Edl-Al'Id"'"I*F--The Authority entered into an agreement dated as f December 17,1991 to acquire a 67.92% interest in the Mead-As of July 1,1981, ten participants had entered into power sales contracts with the Authority to purchase the Authoritv's share of Adelanto Project (MA), a transmission line extending between the PVNGS capacity and energy. Units 1,2 and 3 of the Palo Verde Adelanto substation in Southern Cahfornia and the Marketplace sub-Project began commercial operations in January 1986 September station in Nevada.The Authority has entered into transmission service 1986, and January 1988, respectiveh. c ntracts for the entire capability of its interest with nine members of the Authority on a "take or pay" basis. In addition, the Authority has Simthem Dansmissen System Pmycr-The Authority, pursuant to an agree-administrative responsibility fbr accounting thr the separate ownership ment dated as of May 1,1983 with the Intermountam Power Agency interea in the project by WAPA, who is pnwiding separate funding (IPA), has made payments-in-aid of construction to !PA to defray all ($17,088,0(X) at June 30,1997 and 1996) (br its in crest. Funding the costs of acquisition and construction of the SouthernTransmission was pnwided by a transfer of fbnds from the Multipl Project Fund System Project (STS), which pnwides (br the transmission of energy (Note 4). Commercial operations conunenced in April 1996. LADWP from the Intermountair. Generating Station in Utah to Southern serves as Imth construction manager and operations ma uger. El $ 1 P_PZAl

5fulupk Pnya f uni-During 6 scal yrar 1990, the Authority issued ex}vnse of the statement of operations. Each imner of the jointly- ! Multiple Project Revenue Ikmds for net proceeds of approximately owned projects is required to pnwide their own financing. SNm nullion to pnwide funds to finance costs of construaion and f"I"Y Pld"' - The Autimrity's share of all expendaures, induJing acquisinon of ownership interests or capacav rights in one or more then unspecified projects for the generation or transmission of electric general admmistratne anJ other ostrhead expenses payments-in-aid of construction, mterest net of related investment income, deferred cost ene g., """" "" '"d 'h' Idi' '3I"# I5' imer generawd and delivered to In August 1992, the Authority's Ikurd of Directors appnned a res-olution authorizing the use of certain proceeds of hiultiple Pmject the paniapants an capita! Led as unhty plant construction work in Revenue Bonds to finance the Authority's ownership interests in the P*R" """1 a faahty annnwnes conunnaal operanon. MeaJ-Phoenn and Mead-Adelanto projects.Transfirs made from the 'I he Authority's share of construction and betterment costs associ-Muhiple Project Fund are sufficient to pnnide for the Authorit A share awd w nh PVNGS is induJed as utdity plant. Depreciation expense is of the estimated costs of acquisition ami construct;on of th'ese two computed using the straight-line method based on the estimated projects, induding reimbursement of planning development and other senice hfi of thinpfiw yrats. Nudear fuel is amortiecd and charged related costs.

• C*P'"',e on the basis of actual thermal energy produced relative to total thermal energy expected to be produced owr the hfe of the fuel.

San Juan Pryut - Effective July 1,1993, the Authority purduscJ a Under the pnwisions of the Nuclear Waste Pohey Act of 1982. the 41.80% interest in Unit 3. a 488 megawatt unit and related common Authority is charged one null per kilowatt-bour, by the federal ginrrn-facihties, of the San Juan Generating Station (SJGS) from Century ment, on its share of electriary produced by PVNGS, and such fimds Pimrr Corporation. Unit 3 is one unit of a fbur-unit coal-fired will eventually be utilized by the federal genrrnment to pnwide lbr power generating station in New hicxico.The Authority alh>cated the PVNGS' nudcar waste disposal.The Authority records this charge as a $193 milhon purchase pric-to the estimated fair value of the utihty current yrar expense. l plant ($190 million) and to materials and supplies ($3 milhon). The The Authority's share of construction and betterment costs associ-purchase has been financed through the issuance of appnuimately aied with STS hip, MA and SJGS are included as unhry plant. $237 milhon (par value) of San Jtun Project Revenue 1 onJs. The Depreciation expense is computed using the. straight-line method based Authority has entered mto pimer sales contracts (br the entire capa-on the estimated service lives, pnneipally thirty-five years for STS, h1A bihty of its interest with five members of the Authority on a "take or and h1P and twenty-one years Ihr SJGS. pay" basis. Interest costs incurred by the MP and hiA projects through the date commercial operations commenced (April 1996) are capitahzed as Proym'SuMuanon f und -. In fiscal 1997 the Authority authori/cd the mihty plant. Interest costs capir lieed in fiscal 1996 were $11,827 000 ctration of a Projects' Stabih/ation Fund. Deposits may be made int for 5 MA project and $3hl 000 lbr the MP project. the fund from budget under-runs, after authorization of indnidual par-ticipants. and by direct contributions from the participants. Alanusfor Capaaty and _ng - Advance payments to USBR lbr the Participants have discretion our the use of their deposits to pay costs uprating of the 17 g scramrs at the Hoiwer Power Plant are induded and expenses of Authonty rdated projects.This fbnd is not a project-in aJvances ihr capacity and energy.These advances are being reduced related fund, therefore, it is not gswerned by any project Indenture of by the pnncipal portion of the credas on billings to the Authority for Trust. energy and capacity. L&ar lhemnnmonmg - Decommissioning of PVNGS is projected to Note 3 - Summary Of Significant Accounting Policies: commence subsequent to the year 2022. Based upon an updated study The financial statements of the Authority are presented in conformity performed by an independent engineering firm. the Authority's share of ? with generally accepted accounting pnnciples, and substantially in the estimated deconunissioning costs is $85.5 million in 1995 dollars confbrmity with accounting principles ptrsenbed by the Federal ($390 million in 2022 dollars assuming a 6% esumated annual infla. Energy Regulatory Commission and the Cahtbrnia Public Unhties tion rate). The Authority is pnwiding fhr its share of the estimated Commission.The Authority is not subject to regulation by either of future decommissioning costs twer the remaining hfe of the nuclear these regulatory bodies, pmer plant (25 to 27 years) through annual charges to expense which The Authority complies with all applicable pronouncements of the amounted to $11.6 million and $12.5 million in fiscal 1997 and 1996, Gowrnmental Accounting Standards Board (G ASB). In accordance respectively.The decommissioning liabihty is indudcJ as a component with GASB Statement No. 20, " Accounting and Financi;d Reporting of accumulated depreciation and was $99.7 million and $88.1 million ihr Proprietary 1:unds and Other Giwernmental Entities That Use at June 30,1997 and 1996, respecti.cly. Pmprietary Fund Accounting," the Authority also comphes with A Deconunissioning Fund has been established and partially Ibnded authoritative pronouncements applicabic to nongovernmental entities at $43.9 million at June 30,1997.The Decommissioning Fund earned (i.e., Financial Account;ng Standards Board statements) which do not interest income of $2,690.000 and $1.341,000 during fiscal 1997 and conflict with GASB pronouncements. 1996, respectively. The financial statements represent the Authority's share in each "f" """ """""#"- Demohnon and sne ud.un.ubn of W jointiv-owned project. The Authonty's share of direct cycnses of jointl'-owned projects are mdaded 'in the correspondmg operating winch inmlws wenng the sac to a inen" condaion which existed y l SCPPA M l i i

prior to S]GS construction. is projected to commence subsequent to the years thereafter.The Authority made a payment of $3.8 million at the year 2014. Ibsed u;un a study pedormed by an independent enginecr-end of the initial rebate period during fiscal year 1995.The next rebate ing firm, the Authority's slure of the estimated denwhtion and site payment io the IRS is due in fiscal year 20tX). As of June 30,1997 and reclamation costs is $18.7 million in 1992 dollars ($65.3 million in 1996 the Authority had no liability relating to Arbitrage Rebate. 2014 dollars using a 6 stimated annualinflation rate).The Authority M*f'""*"5 - Certain reclassifications have been made in the fiscal is pnwiding for its share of the estimated future demolition costs our year 1996 financial uatements to confonn to the 6 scal year 1997 the remaining hfe of the power plant (18 years) through annual clurges to ex[vnse of $3.1 milhon. The demolition liabihty is included as a presentanon. com;unent of accumulated depreciation and was $12.5 million and y,yj g,,,,,,5 -The preparation of 6nancial staicments in conformity $9.3 million at June 30,1997 and 1996, respectively, with perMly xcepted accounting principles requires management to As of June 30,1997, the Authority has not billed participants for nu estinutes and assumptions that affect the reported amounts of the cost of demolition nor has it established a demolition fund. assets and liabihties and disclosure of contingent assets and liabilities t the date of the Gnancial statements and the reported amounts of Unamorturd IMt Expus - Unamortized debt issue costs, including the rnenues and expenses during the reporting period. Actual results could loss on refundings, are being amortiecd over the shorter of the terms differ from those estinutes. of the respective issues or the remaining terms of,he bonds refunded, and are reported net of accumulated amortization. Total deferred loss on reflindinb's, net of accumulated amortization, was $395,095,(XX) Note 3 - Special Funds: and $378,070,(XX) at June 30,1997 and 1996, respectively. The ik>nd Indentures f.or the six projects and the Multiple Project Inwstments - Investments include United States Gwernment and Fund require the following special funds to be estabbshed to account for governmental agency securitics and teputduse agreements which are the Authority} receipts and disbursements.The moneys and investments collaterahzed by such securities. Additionally, the Mead-Phoenix held in these funds are restricted in use to the purposes stipulated in the Project, the Mead-Adelanto Project and the Multiple Project Fund's Ikind indentures. A sumnury of these funds folk)ws: investments are comprised of an investment agreement with a financial mstitution eatmng a guaranteed rate of return. The Southern t G,nstnicnon To Jntone fana for the acqmsaum and cormtructam of l . Transmission b.ystem Project has debt senice reserve funds associated 3 p,y with the 1991 anJ 1992 Subordinate Refunding Series Ikinds invested Debt Service .lo pay minnt and pnnapal relawd to the Revemw lbna. with a f.mancul institution under a specific investment agreement Revenue To mmally recnve all rnenues and Jnimne them to other alkmed under the Ikind Indenture earning a guaranteed rate of return. fa Investments available for sale are carried at aggregate fair value and Operanng To pay operanng eqwnset clunges in unreali/cd net gains or losses are recorded separatch'. Rewrve and To pay capual unpnwements anJ make up Jeficwnce m Imestments are reduced to estimated net realizable value when neces-34,3 g,nn, saO for declines in value considered to be other than temIera9. Gains G ncral Rncrve .l.o make up any Jcficwncws m other fimA. and losses realized on the sale of investments are generally determined AJunce 1%nwnra lo Jnturw funa lbr the cosi of acqumnon of capaarv. using the specific identification method. As discussed in Note 3, all of "I ^**"' 'E*' the investments are restricted as to their use. Pn9ut Revenue Knxit Cad and Od fpwaltnu - Cash and cash equivalents mclude cash and thrnmp Account To reenvc mvntment earnmp on the Mulople Pnyect R*""' h"*k all investments with origmal maturities less than 90 days. Revolvmg i und Ib pay the Auehanryk operanng ripenset Stmmc5 - Revenues consist of billings to participants for the s alte of Decomnunmnmg Lund To accumulate funa related to tlw future JccomnuNnmg electric energy and of transmission service in accordance with th pir-of PWh ticipation agreements. Generally, revenues are fixed at a level to reco"cr I sur i und To mmally recnvc pledgd revenun anocutcJ wuh ilw all operating and debt service costs over the cornmercial life of tht applicable sutordnuicd refundmg senes'inJenture of Tnur and pay the ulatcJ mnw.md pnnard property (see Note 6). ikn= account. To mmally reenvc picJgd revenun awocured wuh Ikht Lpenst - Dcht expense includes inte' at on debt and the amorti- %Ivedmate Component 3 of the NO SuivrJmarc RcfimJmg Cn%wer zation of bond discounts, debt issuance expense and loss on refunding RefunJmg Senn'Indenmrc of Tnnt and pay the ut. uni mrcrnt Cnw=n Senn and pnnapal costs. Acqumnon Account To A.imrw tima for ilw acqumnon and construction of ilw Arbitrqr Rdaft-A rebate payable to the internal Revenue Service (IRS) or Prva 1:und Mod-Phoenn. MeaJ-AJelanto and San Juan pnyas results from the investment of the proceeds from the Mul iple Pmject Surgus l umi lo make up anv defiacnon m oJwr runa of ti, Meaa t Revenue Ikmd offering in a taxable financial instrument that vicids a AdeLnto and Mead Phorna prnets. biglict' fate of tute!vst income than tbc cost of the associated [unds. The excess of interest income over costs is payable to the IRS within All of the funds listed above, except ihr the Rcrolving Fund, are fke years of the date of the bond offering and each consecutive five held by the respective trustecs. m W M A!

l blo Ur4 Prgut - The balances of the funds required by the IbndIhr Urratmg Pnya -The balances in the special funds required by the l Indenture are as folkws, in thousands: Ibnd Indenture are as folkws, in thousands: l Hm 5,,n m f iw7 tw6 tw7 Im j Amant,ard im Amswd im A.newd f a, A,mnewd In t Gw un ( mi un Gw un Gw \\h i Drbi kena Furd. Operatmg -Workmg Capual l und $ 1.724 $ l.721 804 5 804 [%t Sernce Account $ 42.377 $ 41,695 $ SlJ86 $ 51,394 Nw &rnce Fund - [We Scrnce Rcwrw Account 67,317 67.332 74.420 74.160 Debt Service Accmuu 753 753 2,390 2J90 i Rcwenn Fund 1 1 5 5 (Mt &rnce Reserw Account 3.12 6 .,081 3.122 3.121 Operasing Find 25.812 25,830 20.130 20.134 Grnnal Rewrve I sud 1.871 1.845 5.318 5J16 j Rewrw ard Conrmgency Fund 24.911 24.982 25.924 26.107 Rcvolvuy Fund 15 15 J Ikcommimonmg Trust Fund 44399 44.418 34131 33.740 $ 7.489 $ 7.415 $ 11.634 $ 11.631

l. sue fund 24.912 24,738 13,026 13,026 U""""'I"'*""";

i Rrvulvmg Fu xl 52 52 45 45 Wuhm one pu $ 7.489 $ 7,415 $229.781 $229.048 $219fb7 $ 218.611 l ' Contractual nutuntics: Witlun one yen $ 80.473 $ 81.458 1 After my pu duuugh live yens 136,250 134.524 In addition, at June 30,1997 and 1996, the Authority had advances Atin rive pm thnmgh ten yean 3.238 3.246 to USBR of $24,526,000 and $25,183,000, respectively. J Atier een pan 9.820 9.820 $ 229.781 $229.048 3ftad-Phwmx Pmjut -The balances in the special funds trquired by the Ibnd Indenture are as folkus, in thousands: Southern Transmisswn System Pwpa - The balances in the special funds i un w' l required by the Bond Indenture are as follows, in thousands: iw i. A.c.a tm Aom a tm 1 lwn m Gw \\h Gw un Acqumton Accoime $ 12,830 $ 12.830 $ 12.571 $ 12,571 A

m. a tm 4.c.a n.,

nw u, n,, u, [%t &rvice Furd - IWe krnce Accourn 2.904 2,9N 4.976 4.967 , g ,, g, l Inuiallacihews Account $ 246 $ 246 $ 235 5 235 4 rna cwne Au unt 6.132 6,132 6.133 6d33 nnnwFund 64 64 1 Debt krnce Fund - l IMt Scrvicc Account 2.587 2.587 21.921 21.896 Opnanng Fund N N W M I b"'P"'I""d 88 88 ~ IMt krvice Rcwrw Accmuu 21,339 21J79 86.220 86,189 nng i und 4 4 6 6 Operanng Fund 6.545 6.545 6.015 6J107 r Cwirral Rncrw I und i1,772 11.772 '194 4.194 5 22.037 $ 22.037 $ 23.989 $ 23.980 l bur Fund 128.000 129 031 024 76.794 Contractual matuntes: Escrow Account. Sulcrdmate Wuhm one pu $ 2.763 $ 3.451 Refurdmg Cnmeer Series 15,439 15.484 346,474 343.903 Afin one year through five yean l Revolving Fund 15 15 15 15 After ten years 19.274 18.586 $185.943 $ 187.059 $542 098 $539.233 $ 22.037 5 22.037 I Contruttud matuntws: l Wuhm one pu $ 62,972 $ 63.412 3ffaj-Adlanto Prnut -The balances in the special funds required by the j After one year thrrmgh five yens 28.819 28.402 In h r u O's b hmE After live yens thnmgh ten yens 43,031 44.123 After ten pas 51.121 51.122 9, m $ 185.943 $ 187.059 I"' 3* A,mnewd Fm A.med im Gw un G= un In addition, at June 30,1997 and 1996, the Authority had non-Z.,,,,, g,,,,,, g 39,333 g 39,337 3 33,979 g 33,979 l intetrst bearing advances outstanding to IPA of $11,550,000 and [wi sernu Fund - I- $19,550,000, respectively, IMt Servi Aummt 8,322 8322 15.194 15,166 l%: krvice Rewrve Account 16.865 16.865 16.865 16.865 Revenue l'und 71 71 Operanng Fund 264 264 Sirplus Fund 88 88 i Revolvmg Fund 4 4 6 6 $ 64.665 $ 64.666 $ 69379 $ 69351 Conirutual mamntro j Wuhm one year $ 4.230 $ 6.287 After oir year through five yem 3.349 3.349 Atier ten yem 57.086 51030 $ 64.665 $ 64.666 [S C P PfA. E ~ l

l 4 mInf,lc />9ut l'und JI he balances in the special funds rntuired by the the Authonty payabic solely from and secured solely by (1) proceeds ik>nd indenture are as fblkws, in thousands: from the sale of bonds, (2) all rnenues, incomes, rents and receipts attributable to the Palo Verde Project (see Note 6) and interest on ali ~- moneys or securities (other than in the Construction I:und) held pur-suant to the Bond Indenture and (3) all funds cuablished b) the Ibnd 4 .-a n, &,--a o,, o., u. u u., Indenture

• I'naced= Anonni

$256,903 52563A)3 $2 s6.830 $256,830 At the option of the Authority, all outstandtng Power Project Ikrnmgs Aasunt 5.237 5.2 17 3.278 3.278 RC'C""# Ih"d5 and Subordinate RefundmgTerm ikands are subject to 5262.140 s 262.14o 52suod 52uuos wdernpoon prior to matunty, acept for the 1996 Subordinate ninuunut m non, Refunding Series A and portions of the 1989A,1992A,1992B and Ahn n n yrm 5262.HO $262.40 1993A Series bonds which are not redeemable. San han 1%ut - The balances in the special funds n quired by the Ibnd The Ibnd indenture requires nundatory sinking fiind instaffments Indenture are as follows, in thousands: to be nude bepnning in fncal >w 2n)3 (1986 Snies A Ibnds and 1987 Series A lbnds),2005 (1989 Series A lbnds),2010 (1993 Series A lbnds), and 2008 (1996 Subordinate Refunding Series B). Scheduled 4,,,,,d ~ i n 4,,-, [ T7 principal maturities ihr the Palohle Project during the five fiscal years fbl!owing June 30,1997 are $28.570fxX) in 1998, $30,1951X)0 in o, vu o," Operanng Aummt 5 1.932 $ 1.932 5 1.238 5 1.238 1999, $32.(40.00) in 2R X), $33.815.000 in 2001 and $34.765,000 in 2 52[ 2W2. He avnage inwas rate on outuanding Mn during fiscal year ss 35 52 1997 and 1996 was 5.2% and 5.8% respectively. Iwi.is m eiuna. Debt Nrnce Auount 9,088 9,068 8.f07 8.597 Sent hannnen.%n @ut -Tb f nance paymemsdn-ad of con-Iktn krnce Reserve Aumma IA026 IA026 18.031 18D31 Reserve and Commgwy 15.455 15.452 13.377 13.381 struc; ion to IPA for construction of the STS. the Authority issued Revolvmg 10 10 Transmission Project Revenue Ibnds pursuant to the Authority's $ 4s.07i 5 4sar.8 5 41.787 5 41.783 Indenture of Trust dated as of May 1,1983 (Senior Indenture), as ( conuacnut mamnio amended and supplemented. The Authority also has issued and has wnhin on, ye, 5 12n84 s 12.183 outstanding Transmission Project Revenue Ibnds 1991 and 1992 Afier one yra through the ycx, 14.961 14.859 Subordinate Refunding Series issued under indentures of Trust dated Ann un yrm _l8 026 18D26 as of March 1,1991 and June 1,1992, respectivelv.The 1991 and 1992 subordinated bonds were issued to advance refim[i certain lunds previ-5 4sn7: 54%8 ously issued under the Senior Indenture. l l'rejuristalulcaten lund - At jun-30,1997, the Projects' Stabihzation Tk bond indentures provide that the Revenue Bonds and l Fund invesanents had amortiecd cost and fair value of $14.986.000 the Subordinate Refunding Series Ibnds shall be special, limited oblig-and $14.871,000, respectisely. All contractual nuturities are within one aions of the Authority payable solely from and secured solely l$y l FC"' (1) proceeds fmm the sale of bonds (2) all revenues, incomes. rents and l' qui irnestment Sah -There were no proceeds fiom sales of invest _ receipts attributable to STS (see Note 6) and intenst on all moneys or l ments during fiscal 1997 or 1996. mities (otha than in the Construction Fund) held pursuant to the l Bond indenture and (3) all funds estabhshed by the Ibnd Indenture. At the option of the Authority, all outstanding Tiansmission Note 4 - Long-term Debt: Project Revenue and Refimding Bonds are subject to redemption prior Reference is made below to the Combined Schedule of Long-term to nuturity. ncept fbr the 1996 Subordinate Refbndmg Series A which Debt at June 30.1997 for detads related to all of the Authority's out-is not redeemable. st ndmg innds. The Bond Indenture requires mandatory sinking fimd installments to be made beginning in fiscal year 2019 (for the 1996 Series B Bonds). Iblo lirle Pnyut -To finance the purchase and construction of the Scheduled principal maturities fbr STS during the five fiscal years fbl-Authorit/s share of the P26 ble Project, the Authority issued Power lowing June 30.1997 are $21,360,000 in 1998, $21,970.RK) in 1999 Project Revenue Ibnds >..suant to the Authority's Indenture of Trust $23,l'10.000 in 2000, $24.455 mx) in 2001 and $26.040,NO in dated as of July 1,1981 (Senior Indenture), as amended and supple-2002.The unage imnea rac on omaanding debt dming fiscal ycx mented. The Authority also has issued and has outstanding Ibwer 1997 and 1996 was 5.1% and 5.6% respectiv Iv. Project Subordinate Reibndmg Series Ibnds issued under an Indenture of Trust dated as of January 1,1993 (Suborthnate Indenture). The Hwr Gratmg Pnyut - To finance advance payments to USBR lbr Subordinate Refbnding lbnds were issued to advance refund certain application to the costs of the Hoover Uprating Project. the Authority bonds previously issued under the Senior indenture. issucJ Hydroelectric Power Project Revenue Ibnds pursuant to the The bond mdentures pr wide that the Res enue Ibnds and Authority's indenture of Tiust dated as of March 1,1986 (Ibnd Subordinate Refunding Ibnds shall be special, hmited obligations of Indenture). I N,$'ClP_P Ai

The Ikoi Indentutt pnwides that the Revenue Ibnds shall be re-outstanding $51.835.m10 of hiead-l%enix Revenue Ibnds under an cial, hmited obligations of the Authonry payable solely from and Indenture of Trust dated as of January 1,1994 (ibnd Indenture). The i i secured solely by (1) the proceeds fn>m the sale of C bonds. (2) all proceeds from the Restnue IbnJs, together with drawdowns from revenues fnnn sales of energy to participants (see Nott a), (3) interest the 1)ebt Service I und and Project Acquisition Fund, wrte used to or other receipts derived from any moneys or securities held pursuant advance refund $64.840JKX) of the Niuluple Project Resenue Ibnds to the Ibnd Indereure and (4) all funds estabbshed by the Ibnd previously tramferred to the hicaJ-Phoenix Pn> ject, indenture (except for the Interim Adsance Payments Account m the The Ibnd Indenture pnwides tlut the Restnue Ibnds shall be Advance Payments Fund). special, hmited obhgations of the Authonty payable solely fmm, and At ihe option of the Authority, all outstanding i lydroelectric Iber secured solely by,(1) proceeds from the sale of bonds, (2) all revenues, Project Revenue Ibnds are subject to redemption pnor to maturity. incomes, rents and receipts attributable to Mead-Phoenix (see Note 6) The Ibnd indenture requires inandatory sinking fund installments and mterest on all monep or securines and (3) all funds established by j to be nude beginning in fiscal year 2007 for the 1991 Series A lbnds the Ibnd Indenture. i nuturing on Octobet 1,2010 anJ fiscal year 2011 for the 1991 Series At the option of the Authonty, all outstandmg Nicad-Phoenix A lbnJs maturing on October 1,2017. Scheduled principal maturities Resenue Ibnds are subject to redemption prior to maturity. for the Iloover Uprating Project dunng the five fiscal years following The Ibnd Indenture requires mandatory sinking fund installments June 30,1997 air $515jXX) in 1998, $5501kX) m 1999, $580,0X) to be inade beginning in fiscal rar 2018 for the 1994 Series Ibnds. 3 in 2mn), $615/XX) in 2001 and $650,000 in 20)2. The average The first scheduled principal nutt.nties thr the Nicad-Phoenix Revenue interest rate on outstandmg debt during fiscal yrar 1997 and 1996 was Ibnd.s for fiscal years fbliowing June 30,1997 are $2.160fKK)in 2aX), 6.2% and 6.8%, respectively. $2.3201X)0 in 2001 and $2,480.WX)in 2002.The average interest rate 1)uring fiscal 1997, the Authority rcJecmed $3,565J100 of out-on outstanding debt during tiscal yrar 1997 and 1996 was 6.3% standing iipiroclectric Power Project Revenue Ibnds with funds in the Debt Service Fund. Af<divlMa* Pnyut -To finance the Authority's ownership interest in the estimated cost of the project, $285,0101X10 of the hiuhiple 3fulnple Pnyut f,md 'lo finance costs of construction and acquisi-Project Revenue Ibnds wrre transferred to the hicad-Adelanto Project tion of ownership interests or capacity rights in one or moir projects in October 1992. In hiarch 1994, the Authority issued and has out-expected to be undertaken within five years after issum.cc, the Authority standmg $173,955AXX) of NicaJ-Adelanto Revenue Ibnds und r an issued hiuhiple Pmject Revenue Ibnds pursuant to the Authority's Indenture of Trust dared as of January 1,1994 (Ibnd Indenture).The Indenture of Trust dated as of August 1,1989 (Ibnd Indenture), as proceeds of the Revenue Bonds, together with drawdowns from the amended and supplemented. Debt Service Fund and Project Acquisition Fund, were used to advance The Ibnd Indenture provides that the Revenue Ibnds shall be refund $178,310ax) of the hiulople Project Revenue Ibnds previ-special. limited obhgations of the Authority payable solely from, and ously transferred to the hiead-Adelanto Project. 3ecured solely by,(l) proceeds from the sale of bonds,(2) with respect The Ibnd Indenture provides that the Revenue Ibnds shall be to each authoriecd project, the revenues of such authori/ed project, and special, limited obligations of the Authority payable solely from, and (3) all funds estabhshed by the Ibnd Indenruir. securcJ solely by (1) proceeds from the sale of Imnds, (2) all revenues, in October 1992, $103,640J100 and $285,010J100 of the incomes, rents and receipts attributable to hicad-Adelanto (see Note 6) hiuhiple Project Revenue IbnJs were transferred to the Nicad-Phoenix and interest on all moneys or securities and (3) all funds established by Project and the hicad-Adelanto Project, respectively, to finance the the Ibnd Indenture. estimated costs of acquisition and construction of the projects. At the option of the Authonty, all outstanding Nicad-Adelanto A total of $153,500,000 of the outstanding hiultiple Project Revenue Ibnds are subject to redemption prior to matunty. Revenue IbnJs are not subject to redemption prior to maturity. At The Ibnd Indenture requires mandatory sinking fund installments the option of the Authonty, the balance of the outstandmg bonds are to be made beginning in fiscal year 2018 for the 1996 Series Ibnds. subject to redemption prior to maturity. The first schedulcJ principal maturities for the hicad-Adelanto The Ibnd indenture requires nundato7 inking timd installments Revenue Ibnds lbr fiscal years fbliowing June 30,1997 are $5.940.000 to be made beginning in fiscal year 2006 for the 1969 Series IbnJs. in 20G), $6,380AXX) in 2001 and $6.8201)00 in 2002.The average The first scheduled principal maturities for the hiultiple Proicci interest rate on outstandmg debt during fiscal year 1997 and 1996 was Revenue Ibnds fbr fisc.d years followmg June 30,1997 are $5.400,000 5.6 % in 20m), $5,800,000 m 2001 and $6,200J00 in 2002.The aserage interest rate on outstandmg debt during fiscal year 1097 and 1996 was sm / nan Pnyut - Ib finance the costs of acquisition of an ownership ~ I 6.4 % interest in Unit 3 of the SJGS. the Authority issued San Juan Project Revenue Ibnds pursuant to the Authority's Indenture of Trust datcJ as I l 3feal-Nmx Pnyut -To finance the Authority's ownership interest in of January 1.1993 (Ibnd Indenture). the estimated cost of the project, $103,6401XX) of the hjultiple The Ibnd Indenture provides that the Resenue Ibnds shall be Project Revenue Ibnds were transferred to the hicad-Phoenix Project special. hmited obhgations of the Authority payable solely from, and in October 1992. In hiarch 1994, the Authonty issucJ and has secured solely by, (1) proceeds from the sale of bonds,(2) all revenues.

S_C P P.A @

incomes, rents and receipts attnbutable to San Jum (see Note 6) and Series B Ibnds to refund $18,555,000 and $40,315.aU of previously inter st on all moneys or securities and (3) all funds established by the issued Palo Verde 1986 Refunding Series B and 1987 Refimdmg Ibnd Indenture. Series A lbnds, respectively.The refunding is expected to reduce total 13 years by approximately At the option of the Authority, all outstanding San Juan Project debt service papnents over the next Revenue Ibnds are subject to redemption prior to maturity. $50,967,000(the difTerence between the debt service payments on the The Ibnd indenture requires mandatory sinking fund installments old and new debt) and is expected to result in a net present value to be made beginning in fiscal year 2012 for the 1993 Series A lbnds. savings of approximately $29,537,000. The scheduled principal maturities for the San Juan Project Revenue On July 1,1995, the crossmer date fi>r the Palo Verde Special ibnds during the five fiscal years following June 30,1997 are Obligation Bonds Series A, trust assets in escrow of $7,131,000 were $6,275,00 in 1998, $6,540,000 in 1999, $6,825,000 in 2000, used to advance refund $7,125,000 of previously issued bonds. 57,140,000 in 2001 and $7,480,000 in 2002.The average interest rate in March 1994, the Authonty issued $51,835,000 of Mead-on outstandmg debt during fiscal year 1997 and 1996 was 5.3%. Phoenix Project Revenue Ibnds and $173,955,0(U of Mead-Adelanto Project Rnenue 11onds to refund $243,150,000 of previously issued Refwdmg lbnh - In July 1992, the Authority issued $475,000.000 Multiple Project Revenue Ibnds which were transferred to the Mead-of Southern Transmission Project Revenue Ibnds to refund Phenix and Mead-Adelanto projects during fiscal year 1993. The $385,385,00 of prniously issued bonds. Principal and interest with iM mfunding of 6 origimi issue within five years of its issuance respect to the 1992 bonds were allocated into four separate comp - triggered a recalculation of the arbitrage yield. The recalculation nents. Each of components 1,2 and 3 were secured by, and payable usulted m a higher ubirrage yield which reduced the rebate liability of from, investments in its esemw fi nd until scheduled crossover dates. & Aahority. At June 30,1997, cumulative savings due to the rebate Component 4 proceeds of $14,100,000 were used to advance reflind calculation amounted to $7,345,000. This amount was allocated approximately $9,000,R)0 of bonds in fiscal year 1993. On the $1,959,000 and $5,386,000 to the Mead-Phoenix and Mead-Adelanto Component 1 Crossover date (January 1,1994), Component 1 proceeds Projects, respectively, and is recorded as accounts receivable in the of $13,959,000 were used in fiscal 1994 to advance refimd accompanying combined balance sheet. $13.455,000 of previously issued bonds. On the Component 2 AtJune 30,1997 and 1996, the aggregate amount of debt in Crossover date (January 1,1995), Component 2 proceeds of Al projects considered to be defcased was $3,543,995,000 and $5,519,000 were used in fiscal 1995 to advance refimd $5,335,000 of $3,535,075,000, respectively. previously issued lends. On the Component 3 Crossover date (July 1, 1996), Con.ponent 3 proceeds of $321.069,000 were used in fiscal hamst Rate Swup - In fiscal year 1991, the Authority entered into an 1997 to advance refimd $313.050,000 of previously issued bonds. Interest Rate Swap agreement with a third paety for the purpose of In September 1996, the Authority issued $42,245,000 of Southern hedging against interest rate fluctuatin,s arising from the issuance of Transmission Project Revenue Bonds,1996 Subordinate Refundmg the Southern Transmission Project k e Ibnds,1991 Subordinate Series A and $121,065,000 of SouthernTransmission Project Revenue Refunding Series as variable rate oblipm The notional amount of Ibnds,1996 Subordinate Refunding Series B to reftmd $68,720,000 the Swap Agreement is equal to the ;r value of the bond and $127,R10,000 of the STS 1986 Refundmg Series A and '3, respec-($291,000,000 and $291,700,000 at June o0,1997 and 1996, respec-tively.The refunding is expected to reduce total iebt senice payn.ents tively). The Swap Agreement provides for the Authority to make over the next 26 years by approximately $125,382,000 (the difference pavments to the third party on a fixed rate basis at 6.38%, and for the between the debt service payments on the old and new debt) and is third party to make reciprocal payments based on a variable rate basis expected to result in a net present value savings of approximately (3.9% and 3.1% at June 30,1997 and 1996, respectively).The Exmds $32,526,000. mature in 2019. In January 1992, $70,680,000 of Palo Verde 7pecial Obligation Crossover Series Ibnds, were issued, the proceeds of which were placed in an irrevocable trust to redeem $69.125,000 of previously issued bonds. On July 1,1996, trust assets held in escrow of $63,415,000 were used to advance refund $62.000,000 of previously issued bonds. In August 1996, the Authority issued $89,570,000 of Palo Verde 1996 Subordinate Refundmg Scries C bonds to refund $95,015,000 of 1986 Reftmding Series B bonds.The refimding is expected to reduce total debt service payments mer the next 20 yrars by approximately l $24,713,000 (the difference between the debt service payments on the ( old and new debt) and is expected to result in a nei present value sav-1 ings of approximately $16,955,000. In April 1996, the Authority issued $152,905,000 of Palo Verde 1996 Subordinate Refimding Series A lbnds to refund $163.355,000 of previously issued Palo Verde 1987 Refimding Series A lbnds and issued $58,870,000 of Palo Verde 1996 Subordinate Refunding M $ 1 P_P AJ

COMBINED SCHEDULE OF L'"iG TERM DEDT AT JUNE 30,19: 7 (la rkm.L> lue trane kf.way on Pnya hrs 4 54 Intewa R.a HvI Tal Vnswiyal Pak,Verdr 1%yect Revenue and Hrfundmg Ih4 1986A 03/13/86 82% 1997 co 2006 5 7.765 1987A 02/11/87 6.9% 1997 to 2017 40.140 1989A 02/15/89 7.2'E 1997 to 2015 281.585 1992A 01/01/92 61y% 1997 to 2010 7.155 19928 01/01/92 6HL 1997 to 20tb 63.415 1992C 01/01/92 6.0% 1917 to 2010 10.635 199 h b 03/01/93 5.5% 1997 to 2017 98.200 1993A 03/01/93 5.5% 1997 to 2017 2M,710 1996A 02/13/96 4.4% 1997 o 2017 152.905 19968 02/29/96 4.4% 1997 to 2017 58.870 19%C 08/22/96 42% 20l6 to 2017 89.570 1.078.950 Nuntwrn Ir.umnuwon Spirm ikyrct Revenue and Rchalmg iknb 1988A 11/22/M 7.2% 1997 to 2015 154.085 1991A N/17/91 6.4% 2019 291.000 1992 Comp 1. 2. 4 07/20/92 61% 1997 to 2021 35.705 1992 Comp 3 07/20/92 6.1% 1997 to 2021 423.559 1993A 07/01/93 5.4% 1997 to 2023 119.940 i 1996A 09/12/96 49% 1997 to 2006 42.245 1996B 09/12/96 4.3% 2011to 2023 1211 5 5 1.187,599 Herr Upratmg Pnyect Revenue and Refinhng iknb PMI 08/01/91 6.2% 1997 to 2017 31.005 I Mulople Pnneci Revenue the Mead Pluwmx Pnyect 1989 01/04/90 7.1% 1999 to 2013 38.800 Mead-AJ<lanio Pnyect 1989 01/04/90 7.1% 1999 to 2013 106.700 Muluple Pnvct 1989 Ol/N/90 7.1% 1999 to 202C 259.hk) 404Rx) Mead Pixwmx Project Revenue the 1994A 03/01/94 5.3% 2(116 to 2020 51.835 MealAdelanto Pnyect Revenue lhe 1994A 03/01/94 53% 2006 to 2020 173=955 San Juan Pngect Re snue Iknb 1993 06/01/93 5.6% 1997 to 2020 231.340 Total prmey al amount 3.159.284 linamortued bond diwount: PaloVenic Pnvet (85.229) Sunlwrn Tranmumun System ikyrci (100.362; Hawer Upratmg Pnyeci (3.491) MealPlarms Pngect (4.065) Mca&Addanto Pnnect (12.199) Muluric Pnyrct I:und (15,634) San Juan Pnyect (8.569) hwal unamornnd bond Jiwouni (229.549) long.icrm delv Jur withm one year (56.720) j Lual long-scrm dcht, net 5 2.873.015 l .% - h.6 M 6 6 paJnt.in nM mw ser uW4 l l [ $ C. PE P. A' B

l Note 5 - Disclosurn about Fair Value of Financial instmments senice on Transmission Pioject Revenue Ibnds and other debt. TN The folhaving methods and assmnptions were used to estimate the fair contracts expire in 2027 and, as long as any Transmission Pmject l l value of each class of financial instruments lbr which it is practicable Revenue Ibnds are outstanding, cannot be terminated or amended in to estimate that value: any manner which willimpair or adversely afTect the rights of the bond-bokiers. l Cash and <a3h cyu,wi<nts - The carrying value approximates fair value In March iW6, the Authority entered into Pwer sales contracts because of the short maturity of those insnaments widi six panicipants of the F LSer Upreting Project (see Note 1). Investments /lbumimemng fund /Isrew auewn: - Sardmait Refulng Under the terms of the contraas, the participants are entitled to capac-Creserr Sm<s/Crnsewr rurkv auennis - The fair values of investmentsity and awociated finn energy of the Hawer Uprating Project and are are esumated based on quoted market prices foi the same or similar obligated to make payments on a "take or pay" basis for their propor-nonate share of opaanng and maintenance expenses and debt service investment s. whether or not the Ilooser Uprating Project or any part thereof has to,g-term debr/Sprnal OMpen Cresseur Smes Ibis /Suberdmat< Refmidmg been completed, is operating or n operabic, or its senice is suspended, crossever Smes -The fair value of the Authonty's debt is estimated based interfered with, reduced or curtailed or tenninated in whole or in part. on the quoted market prices for the same or simdar issues or on the cur-The contracts expire in 2018, and as long as any Hydmelectric Power rent average rates offered to the Authority for debt of appmximately Project Revenue Ibnds are outstanding, cannot be terminated or l the sar..e remaining matunties. net of the effect of a related interest rate amended in any manner which will impair or adversely affect the rights l swap agreement. of the bondholders. The fair values of the Authority's financialinstrmnents are as follows In August 1992, the Authority entered into transmission senice (in thousands): contracts with nine participants of the Mead-Phoenix Project (see Note 1). Under the terms of the contrans, the participants are entitled to transmission service utilizing the Mead-Phoenix Project and are w u' *., obligated to make payments on a "take or pay" buis for their propor-sm-a w An-i o,,, u,, o tionate share of operating and maintenance expenses and debt service Cah anJ c wh equwalenn 5 87.37n 1 87.37n 5 173.798 5 173.79t, on the Multiple Project and Mead-Phoenix Revenue Ibnds and other bcniw accoimt Sulionlmaic debt, whether or not the Mead-Phoenix Project or any part thereof has Refundmg Cnmur kne. 15439 15.484 346.468 343.898 been completed, is operating and operable, or its service is suspended, Decommwonmg fund 43.924 43.963 33.865 33.474 nterfered with, reduced or curtaded or terminated in whole or in part, invomwnu 670.711 6U.837 507.831 597.427 The contracts expire in 2030 and, as long as any Multiple Project anJ IwMm Mead-Phoenix Revenue Bonds are outstanding, cannot be terminated Delii 2329,735 1211927 2320735 3.210.790 or amended in any manner which will impair or adversely affect the %IwJmarc Rehaang Cn e ur 9nes 347.3M 385.516 "5' In August 1992, the Authority entered into transmission service op m h tomul comraas with nme participants of the Mead.Adelanto Project (see Ioteganon Note 1). Under the tenns of the contracts, the participants are entitled Cn -rsenn wh 6141s 67.739 to transmission service utiliemg the Mead-Adelanto Project and are Cn,- m n mcamn 61849 6u49 obligated to make payments on a "take or pay" basis lbr their propor-tionate share of operating anJ maintenance expenses and debt service on the Muhiple Project anJ Mead-Adelanto Revenue Ibnds and other Note 6 - Power Sales and Transmission Serv 6ce Contracts: debt, whether or not the Mead-Adelanto Project or any part thereof The Authonty has power sales contracts with ten participants of the has been completed, is operating and operable, or its service is sus-Palo Verde Project (see Note 1). Under the tenus of the contraas, the pended, interfered with, reduced or curtailed or terminated in whole or participants are entitled to power output fmm the PVNGS and are in part. The contraas expire in 2030 and, as long as anv Multiple obligated to make payments on a "take or pay" basis for their propor-Project and Mead-Adelanto Revenue Ibnds are outstandmA cannot be tionate share of operating and maintenance expenses and debt service tenainated or amended in any manner which will impair or adversely on Power Project Revenue Ibnds and other debt The contraas expire affect the rights of the bondh'olders. in 2030 and, as long as any Power Project Revenue Ibnds are out-In January 1993, the Authority entered into power sales contracts l standing, cannot be terminated or amended in any manner which will with five parncipants of Unit 3 of the San Juan Project (see Note 1). impair or adversely affict the rights of the bondhokiers. Under the terms of the contracts, the participants are enntled to their The Authority has transmission senice contraas with sb partici-pmportionate share of the power output of the San Juan Project and pants of the Southern Transmission System Project (see Note 1)- are obligated to make pavments on a "take or pay" basis for their pro-Under the terms of the contracts, the participants are entitled to trans-ponionhte share of operanng and maintenance c<penses and debt mission service utilieing the SouthernTransmission System Pmject and service on the San Juan Revenue Ibnds, whether or not Unit 3 of the are obligated to make pavments on a "take or pay" basis fbr their San Juan Projea or any part thereof is operating or operable. or its ser-propornonate share of operating and maintenance expenses and debt vice is suspended. interfered with, reduced or curtailed or terminated in n $1c P.PLAl

• hole or in part..The contracts expire in 2030 and, as long as any independent transmission system established by the legislation.The Bill w

San Juan Revenue Bonds are outstanding, cannot be terminated or aho mandates the collection of a public benefit charge from all electric amended in any manner which will impair or adversely affect the rights utdity customers in the state. Although these funds (currently estimated of the bondhoklers. at 2.5% of gross rnenues) must be spent on renewable resources, conservation, research and development, or low income rate subsidies, the gmrrning authority of each consumer-owned utility will control Note 7 - Costs Recoverable imm Future BHngs to

Participants:

actual expenditures. Billings to participants are designed to recmyr " costs" as defined by the The Price-Anderson Act (the "Act") requires that all utilities with purr sales and transmission service agreements.The billings are struc-nudear generating facdities share in payment for claims resulting from tured to systematically prmide for debt scryice tequirements, operating a nudcar incident. The Act limits liability from thini-party daims fimds and reserves in acconlance with these agreements. Those to $8.9 billion per incident. Participants in the Palo Verde Nudear expenses, according to generally accepted accounting principles Generating Station currently insure potential claims and liability (GAAP), which are not induJed as " costs" are deferred to such periods through conunercial insurance with a $200 million limit: the remain-when it is intended that they be tecmered through billings for the repay-der of the potential liability is covered by the industry-wide retrospec-ment of pnncipal on related debt. tive assessment program pnwided under the Act.This program limits Costs reemtrable from lhture billings to participants are comprised assessments to $79.3 million for each licensee for each nadear incident of the following (in thousands): occurring at any nudear reactor in the United States; payments under the program are limited to $10 million, per incident, per year. Based

9. x sw7 k,x on the Autlioritv's 5.9PL interest in Palo Verde, the Authority would

^"" he responsible for a maximum assessment of $4.7 million,lirnited to GAAP iirmont induded m bilhnp to paniemain Eayments of $591,000 #r incident, I,er Irar. f Deprecurmn d pl.un $ 397,651 $ 53.156 5 450.807 The Authority is mohed in various legal actions. In the opinion of. Anortuaiam of bed dmcount. management, the owne of such litigation or daims will not have a dat imue cmts, and cost of material effect on the fmancial position of the Authority or the respec-refurdng 268.899 57,968 326.867 tive rate %ds. Nuclear fuel anunuation 19.548 19,548 Deconmuunnung expene 82.843 6.702 89.545 Inten,i expense 30,899 9.760 40.668 Note 9 - Restatement of Prior Years Comparative Financial Statements Ibnd miuiremenu included m bilh"P br Qrq Py The Authority has restated prior year compara-hr tiw financial statements fm the Flower Uprating Pmject to ieflect d mainunana, net of inmimeni momw (5 8.uls) 03.955) 002.270) the application of credits on billings to participants fbr energy and cma of aainsaxm 4 caiway - sTs 0 8.350) 08,350) capacity which reduce advance payments made to USBR (Note 2) in Redxton in dei wma bdhne accordance with Procedures and Practices for the Administration of an, to transfer of exun nmds 67,539 99 67.658 Section 6.5 of the Electric Service Contracts dated June 1996. The efTea of the restatunent on Costs reetwerable from future billings to p pants in the statement oNperadons Me px enMune 3R 5 463.447 s 53.747 5 517.194 1996 is as folknvs (m. thousands): In March 1997, the Palo Venle Project participants appn*cd a Project board resolution which instructs the Authority to increase fiscal 1998 C"' ""* *"' '"* """ K*P '" I"" d '"'" P and future bilhngs to Palo Verde participants so as to fidly amorti7e the a prevuuly reponed ($239) current costs recoverable from filture bilh.ngs to participants balance of ""2 $230,497,000 at June 30,1997 by June 30,2003 and to prevent the lbrther accumulation of costs reemrrable from future billings to Ca@c==Ne fmm)in ex a of furun bilhnp to parucipants as adjusted $ 653 participants, Advances fbr capacity and energy, net and Costs recmtrable from Note 8 - Commitments and Contingencies: future billings to participants at July 1,1995 have also been increased j In September 1996, Assembly Bill 1890 (Bill) was g m final appnwal. and reduced, respectively, by $14.172,000 to reflect the retmactive efTect l e The Bill, whidi pnwides for broad deregtdation of the power generation of the restatement on beginning Advances fbr capacity and energy, net industry in California, requires the participation of the state's imutor. and Costs recmtrable from future billings to participants. owned utilities. Consumer-owned utilities can participate on a voluntary MMP -Tk Moriy b ed prior w copiw basis but must hold public hearings as part of their decision making financial statements thr the Palo Venie Project to reficct amortization process.The Bd!, which was supported by the Authority, authorizes the over the remaining lif.e of the bond of debt issue costs associated with collection of a transition charge fbr generation when a consumer-owned the issuance of the Palo Verde Refundmg Bond Series 1985 A and 11 l utility opens its senice area to competition and participates in the [S C P.PfA 1 ^

Unamurti/cd debt expensn and Costs reantrable frmn future billings Note 10 - Subsequent Event (Unaudited); to participants at July 1.1995 have been reduced and increased, respec-On October 9,1997, the Authonty issued $375.650A110 in Palo \\etdc tively, by $12,981JXX) to reflect the retroacnvc effect of the irstatement Project lunds as part of a comprehensive Restructuring Plan.The bonds on beginning Unamortized debt expenses and Costs ircoverabic consist of $29,975fXX) of tax-exempt lunds with an effectise interest from finure bilhngs to participants.The restatement had no effect on rate of 4.4% 1997 Series A, and $345,675fxxl of taxalde Innds with Costs recoverable from fiiture billings to participants for the year ended an eflective interest rate of 71)%,1997 & ries lithe Scrics A lunds will be used to advance n fiind $25,7451Xx) of 1989 Refimdmg Series A and June 30,1996. $2,945/XX) of 1992 Refimdme Series C.Whereas,1997 Series B will be Smir/rrn Dan >mmen Swtcm l'nyut-The Authority has restated prior year used to refimd $9,895AX) oil 992 Refundh Sa-ics B: $1.980310 of comparative financial statements for the SouthernTransmission System 1992 Refunding Senes C: $238.295JX10 of 1993 Refunding Series A: Project to reflect amortization mrr the trmaining hfe of the bond $98,2(x)JX10 cf 1993 Sulurdnute Refundtng Scries: and 574,475,000 of debt issue costs associated with the issuance of the Southern of l996 Stdurdinate Refitnding Scries A; which are restricted fmm being Transmission System Project Refundmg Ibnd Series 1985A. The refunded on a tax-exempt basis.These lunds will tv defiased to matu-Authority has ako restated prior year comparative financial statements rity with the proceeds from the taxable lund issue, The taxable bonds Ihr the SouthernTransmission System Project to reflect bond discount wrre structwrd as a bullet term tend nuturing in 2017. amortization over ihe hfe of the SonthernTransmission System Project Refimdmg Bond Series 1992 Com}unent 3. The effect of the restatements on Costs reawcrable from future bilhngs to participants in the statement of operations fbr the year ended June 30,1996 is as folhiws (in thousands): Souttom Transmission System Project _ cmi, recmruble Innn tune odhnp to parnapana as prnun!y repwied ($ 20.633) AJ muncnr ihr etfut of resuicmeni (3.544; Cmis reemruble innn Ihrure Inihnp to participants a adpared ($ 24177) Unamorti/ed debt expenses, Unamortized lund discount and l Costs reccwcrable from future billings to participants at July 1,1995 l have ah,o been (reduced)/ increased by ($559fX10), ($7,600,(XX)) and l $8,159,0lX), respectively, to reflect the retroactive efTect of the restate-l ment on beginning Unamorti/cd debt expenses, Unamortized bond discount and Costs rec werable f^ rom future billings to participants. Cemhmed Ltal - The effect of these rescatements on the combined total of Costs recoverable from fliture billings to participants in the statement of' operations Ihr the year ended June 30,1996 is as follows l (in thousands): Combined Total Coars recorubic fnnu thrure bdhnp to part apants as prenously rrportcJ ($ 42.N6s AJpntment for rticct of rnutement (2.M2; Cmri recerable from thture bdhnp to participu t$ as aJpated ($ 45.44C Advances fbr capacity and energy, net. Unamortized debt expenses, Unamortieed bond discount and Costs recoverable from future billings to participants at July 1,1995 have also been increased (ttduced) by i $14,172.000. ($13,540JXK)), ($7AX)JXX)) and $6,9683X)0, respec-tively, to reflect the retroactive effect of the restatement on beginning Advances Ihr capacity and energy, net, Unamortized debt expenses. Unamortized bond discount and Costs recoverable from futt.re bdlings 1 to partiapants. M s c P. P A '

a e SOUTHERN CALIFORNIA PUBLIC POWER AUTHORITY SUPPLEMENTAL FINANCIAL INFORMATION INDEX Palo yms Projat Supplemental Schedule of Receipts and Distursements in Funds Required by the Ik>nd Indenture for the Year Ended June 30,1997 Southern Transtnission System Project Supplemental Schedule of Receipts and Distursements in Funds Required by the Ikind Indenture for the Year Ended June 30,1997 Hmm Upratingpmlnt Supplemental Schedule of Receipts and Dislutsements in Funds Required by the ik>nd Indenture fnr the Year Ended June 30,1997 Mea 4 Phoenix Project Supplemental Schedule of Receipts and Disbursements in Funds Required by the Ikind Indenture for the Year Ended June 30,1997 Mea &Adelanto P,Lojet Supplemental Schedule of Receipts and Distursements in Funds Required by the Ikind Indenture for the Year Ended June 30,1997 Muhiple Projet Fund Supplemental Schedule of Receipts and Distursements in Funds Required by the Ik>nd Indenture ihr the Year Ended June 30,1997 San Juan Project Supplemental Schedule of Receipts and Disbursements in Funds Required by the Ikand Indenture for the Year Ended June 30,1997 1 1 ISC'PPAG \\

e SOUTHERN Calif ORNIA PUBLIC POWER AUTHORITY PALO VERDE PROJECT SUPPLEMENTAL SCHEDULE OF RECEIPTS AND DISBURSEMENTS IN FUNOS REQUIRED BY THE BOND INDENf0RE FOR THE YEAR ENDED JUNE 30,1997 (in hunds) in.mn-- le Lvew & mmog Serwr Rewmu Dyrratog Gwangem huv funa led fud lud fud fud I & ll Twl Balarwe ar Jmw 30.1996 5 124.685 5 4 5 19,949 5 25.582 5 13.017 5 33.530 5 216,767 AJJumns: Irwennwns carnup 3.944 34 1.134 1.110 663 lh30 8.5l5 [hsintornm of uwennwnt esnings. (4.722) 8.191 (1.153) (1.538) (778) thwount on umsinwne purcimes 723 30 96 432 115 853 2.249 Revemw fran power saks - 81 121.355 19 24 121.479 Dinnlunion of revemws 51.719 (126.281) 40.679 2.3N 23.583 7.996 Transfers so cicn= for refundmgs (7.649) (3.333) 258 (1.000) 5.433 (6.291) Transfer fnnn cien= fur pnncipal and mieren paynwnes 717.338 717.338 Tural 761.434 (4) 41.033 1.332 29.016 10.479 843.290 Deducuons: 2.363 2.363 Gwurnatum ex;wndaurcs 27.368 104 5 27.477 Operasmg exprulames I twl costs 8.044 8N4 lbul tsun cons 1.585 1.585 154yment of pnneigul 25h90 25.600 Inscrest pa J 35.019 15.w3 50.622 Prenman and interest paid on mvestments 24 6 118 148 Paynwns of pnncip.d and interest on esen= l*nwis 717.338 717.338 Tinal 778.071 35.412 2.363 17.298 123 833.267 lialewe at June 30.1997 5 108.N 8 5 -- 5 25.570 5 24.551 5 24.735 5 43.886 5 226.790 hs adwJule mmunanas ilw remic and dulurunwnts m fmwin reqmrrd under ilw Ikws! InJenmre and lus been prrpued (nwn the crust sutenwnts.Tlw balswes m the fiasis canst of cash and umn-nwnes a ongmal ami Tirst tulauen do run urlude accnnd uncren recewalde of $1.471 mai 51.245 amt Drawnmmammg hux! acennd mierest accewable nf 5475 arw! $267 at June 30.1997 and 19 respectmly, mw do alwy uw!wir t xal umnuud net uwennwnt discounts of $1.045 and 57M at Jmw30,1997 am' 1996. respectwely. Thew lulances also do nix uwiude unrralued km on mvenments m fursh avalalde for sale of 5733 mal 5456 as June 30.1997 aml 1996, resinctwely. i l 1 i

SOUTHERN CALIFORNIA PUBL!C POWER AUTHORITY SOUTHERN TRANSM!SSION SYSTEM PROJECT SUPPLEMENTAL SCHEDULE OF RECEIPTS AND DISBURSEMENTS IN FUNDS REQUIRED BY THE BOND INDENTURE FOR THE YEAR ENDED 3UNE 30,1997 (in ke# Giurnuru. f ud Imiwl

ik6, (W

farlum icevue Opr ws g Arw w bur Im A.amnr fud Iud Iud Iud Iud hul Balance ar Jurw30.1996 234 $ 106.411 6.051 4.157 76.219 $ 343.874 5 536.946 Additiinu: Ikal unenu recened 254 254 Irwrument earninp 11 3.639 450 328 6.964 11.392 lbinlmiam of awcunwnt carrung (3.238) 10.499 (327) 15.897 (22.831) Revenaw fnnn tranunission sales 91.689 91.689 Disinimnon of nvenue (26.158) (87.758) 7.561 86.415 19.940 Trarufer fnwn ricn= f.w pnncipal and interrst paymrnes 202.372 202.372 Other necipts 55 42 12 109 'Iotal 11 176.670 14.922 7.562 109.542 (2.891) 305.816 [kducnons: 0;<ratmg esl<nses 14.437 14.437 Paynwns of pnncipal 10.845 10.845 Interest paid 25.507 47.682 73,189 Paynwnt for defcas.mcc of rrvenir lxwwls 31.310 326,539 357.849 Pavment of prmcipal amt mieren on esciw luixb 202.372 202.372 Prrnuum and inscrest paid on imestnwn pinchaus 172 59 231 Ikwwl imw cosis 174 3.228 3.402 Lwal 259.535 14.437 61.814 326.539 662.325 lblance at June 30,1997 245 $ 23.546 6.536 11.719 $_123 947 $ 14.444 $ 180.437 Tius selwdule summarucs etw tricipis and dalmrwnwnis in finis regmred inter the Ital indenrun and hu twen prepand imm the trusi vaienwnts.The klances in the fumh consist of cash amt uwes - ments at ongmal cou. Thew W1.uwes do not mchule accned micrest recewalde of $583 aral 52.169 ai lune 30.1997 and IM, res;wanely. nor do tlwy mchale toi I annierciud rict iriwstnwn disciiiiiirs of $4.923 and $2.983 4i June 30.1997 and 1996. rnivcowly.Tirse balances do not mchale unrealiud (gam) kas on inwuments in fink availalde for sale of ($1.116) and $2.865 at June 30.1997 aial 1996 rnlwcovely.

$ C P P A $

SOUTHERN CALIFORNIA PUBLIC POWER AUTHORITY HOOVER UPRATING PROJECT SUPPLEMENTAL SCHEDULE OF RECEIPTS AND DISBURSEMENTS IN FUNDS REQUIRED BY THE BOND INDENTURE FOR THE YEAR ENDED JUNE 30.1997

In kwsL) labr AAww My In Gwd

Ilivnent, Gyewy Rnenw Caput

%e tswrw Rearw fud fud fud lud Aaount Asam fud Lul fulance at June 30.1996 5 - 5 238; 5 - 1 SN) 5 2.3 71 5 3.083 5 5.259 5 11.511 AJJitsuw Irwunwrw earnenp N) 5 27 36 25 153 thsenlution of uwestnwtu carnmp (60) 476 (58) (178) (180) 31 142 155 328 Ibcount on ununwns punhaws Revemic fnnn power ules 2.553 2.553 Dntnburne of rrvemws 508 (2.014) 1.284 222 Transfer (non escniw fin narresi paynwnis 30.260 30.2N) Macrilaneous trumfers 804 (1.020j 3.852 (3M6) Tiwal 1,312 35.396 (3.414) 33.294 DrJiiciaww: Payment of prus, pal 4.650 4.650 Admini.uranve experminures 335 335 Interesi pad. 1.855 1.855 Paynwne of uncrest on es nw tunxl> 30.260 30.2N) Otlwr 43 252 295 Total 378 37.017 37.395 thlaace at Jurw 30,1997. 5 - 5 1.172 5 SN) 5 750 5 3.083 5 1.845 5 7.410 Tius sdwJule uunnwues clw receipu and Asturwnwna m fmsb mpum! unJc the Ikal Indenture and has twrn preparcJ inan tlw mise natemenu.Tlw balances m the (wxis conun of c.ph and mven-menu ai onpnal cost. Tirw idances do inn mchnic acenwd interen recewable or $6 m imw 30.1997 and IW6. ruw do thry mclude tiwal answiurd net unument &scount of 573 and $117 at hur 30. lW7 and IW6, respeciwly I'twse lulances aim do not mdude unrealued != on uwennwna m funds avalalle for ule of $74 anxi 53 at huw 30.1997 and 1996, respectively. M f C P.~.IZA]

SOUTHERN CALIFORNIA PUBLIC POWER AUTHORITY MEAD PHOENIX PROJECT SUPPLEMENTAL SCHEDULE OF RECEIPTS AND DISBURSEMENTS IN FUNDS REQUIRED BY THE DOND INDENTURE FOR THE YEAR ENDED JUNE 30,1997 (b. ak=w& Ih6 les kms A..peuusue $rewe ben hwnw law Operewg hwplw Aime A,mnr A,mns Innd fund lud led T.ul N!ance at how X),1996 12,0*) 2,367 5.916 65 $ 2.525 237 $ -. 5 23.190 AJ4u ww invennwne carnup 950 145 435 3 82 14 2 1.631 Tran&r of invranwnn (9M) (435) 1.365 Reimimrwnwnc fnnn WAPA 222 222 Trarumimon reventw 2.912 2.912 Transfer of nonchly transnussion costs (502) 416 86 'Ir.uafer of furwh. 2.550 (2.700) 150 Tmal 950 1.765 (65) 1.447 580 88 4.765 Deducnors Coniertwemn exiwnJuures 364 3M Inscrrst paid. 2.642 2.534 5.176 thrnuum and inscrest paid on uwestnwnr purch.ucs 58 58 0;icraimg expenses 289 739 1.028 Total 653 2.642 2.592 739 6.626 Nlarwe at June 30,1997. $ 12.377 5 1.490 5.916 - 5 1.380 5 78 $ 88 5 21.329 ~I ha schcaile summaners ilw receipts aiwi Jatonements m (wsts reymred unJa ilw Ibral indemure and has been prepared in,m the enas statenwnis. Tlw tulances in the furwh cormsr of cash and uwes:- nwnc at onguul ceint.Tiwse tul.mces Jo noi nwiude anrucJ micten mcwabic of $690 and $841 ai juiw30.1997 and 1996. respeenvely, rme Jo they uwlude tocal anorund rwt mvesenwns escount of $13 and prenmun of $42 as Jmw 30,1997 and 1996, re*prenvely Tlww lulaiwes Jo not mcliule unrealved Las on inveunwnu m fwsk available for sale of $9 ai jww 30.1996. i l I [s c PJPiA M

e SOUDIERN CALIFORNIA PUBLIC POWER AUTHORITY MEAD-ADELANTO PROJECT SUPPLEMENTAL SCHEDULE OF RECElPTS AND DISBURSEMENTS IN FUNDS REQUIRED BY THE BOND INDENTURE FOR THE YEAR ENDED JUNE 30,1997 (in dauund,) la 14 srevur Aq=mene sowc Amrw (Wng luar Anun. SurpIm Amnt Amor Aount fund fund fund fund Tal Iblowe at June 30.1996. $ 35.665 6.497 16.267 263 $ 8.474 5 71 $ 67.237 Addiennu: Inwanwns carnup 2.667 384 1.196 14 274 8 2 4.545 Tramfer of uwritment carnmgs 1.196 (1.196) Rrimime.ctncnt (nun WAPA 15 15 Tranafm of timds 3.048 150 4.301 (7.585) 86 Traninussmn rewrnw 7.943 7.943 Trarmfer of monthly trammissen amts 452 (452) Total 2.667 4.628 616 4.575 (71) 88 12.503 Drawtuum: Girvenwrmn ex}wrwiirures (1) (1) Interru pad. 7.270 8.505 15.775 Prenuum and mreress paul on irwrsinwn piiraaws (1) 195 194 Operatmg npemes 365 851 1.216 Total 364 7.269 851 8.700 17.184 lblance ar June 30.1997. $ 37.968 3.856 16.267 5 28 5 4 349 5 - 5 88 5 62.556 This sdelule sumnurucs ilw reccitu ami diamrwnwnn m fumla mpumt under t:w Ibnd liwieniure and bm twen pnpml inwn the trust warenwnts.The lulances m the finis amsist of cash and imest. rnents as ongutal ans.Tiwse batars do rmt uwiude accrued micern recenahic of 52.057 and $2.285 at hur 30,1997.uwt 1996, respectmly, nor Jo c}wy ulude toul anorturd net uwestnwns esamni of $53 ml pwmmm of 5143 ai june 30.1997 aral 1996 respecovely.Tiww balances Jo run uwlude unreaturJ lims on unrunwnes in fumis avadabic for s.de of $1 aml 528 at June 30.1997 and 1996. resperrmly. l l l l l l 1 l l l l l l l I l l l l l uXWm 1 L

O SOUTHERN CALIFORNIA PUBLIC POWER AUTHORITY l MULTIPLE PROJECT FUND SUPPLEMENTAL SCHEDULE OF RECE! PTS AND DISBURSEMENTS IN FUNDS REQUIRED BY THE BOND INDENTURE FOR THE YEAR ENDED JUNE 30.1997 (In Amwdn I la 1%rth Senw Lamm Ama Amns Amm Tonel ibl.ince as Jusw 30. )W6 249.423 1465 250.888 i Allienms: Inventnwra carning. 18.208 268 18.476 Trmafer to enning accinua (18.208) 18.208 Tran.fer en debt wrvice ucuina 16.512 (16.512) ~Ibral 16.512 1.964 18.476 Ikductuww Inscresi gwd 16.512 16.512 Orlwr traufers (1.696) 1.696 l Total (1.696) 16.512 1.696 16.512 Ibl.uxe at Jinw30.1997 247.727 5.125 252.852 i Thw sclwdule minmurues dw reenpis aml adusenwnrs in (tuwl mpurniinsler dw lbwl Imlenture assi has twen prepared horn dw tru sutenwnes.The Mance in dr fumt. curr.ist of unstnwnts at orepul co.i.T1wse Mancri do ma usimle accrued uwerrst treewalde of $9.288 and $9.220 at Jurw30.1997 and 1+)6, respectively. I I l l i l l l I i l (.S.C P[P_~A G l

• s e

s SOUTHERN CA!!f0RNIA PUBUC POWER AUTHORITY SAN JUAN PROJECT SUPPLEMENTAL SCHEDULE OF RECEIPTS AND DISBURSEMENTS IN FUNDS REQUIRED BY THE BOND INDENTURE FOR THE YLAR ENDED JUNE 30.1997 (7,i knudp ( ps,y IA Ravnw (eng Amw Pnyn le hr Amw& fnd A.mvir An=ar ind San *< Amw Gange v bl M.uwe at June 30.1996. - 5 1.253 5 5 5 y $ 8.521 5 18.025 5 13.321 5 41.651 AJJitunw Innsanent earnmp 42 60 25 38 1.066 534 1.765 Disenluum of inwsmwne earning 2.221 (73) (2) (311) (1,066) (769) Dncount un mwicment purdunes 7 1 279 241 528 Rewmr from p=cr sales 56.866 56.866 Distnlunon of rewnues (56,330) 35.689 18.514 2.127 Trander of unintwn carnmgs (2) 2 Murtlarwous er,uwfers (2.797) 2,797 Total 38.480 26 18.520 2.133 59.159 DrJuctawis: AJnumstraiwe eniwnditures 37.794 37.794 Interest paul. 11.988 11.988 Prenuum aisi mrerest on mustnwnt pudunes 6 110 116 Prurval paynwn 6.035 6.035 Total 37.794 18.029 110 55.933 Mance at June 30.1997. 1.939 5 5 $ 552 5 9.012 5 18.025 5 15.344 5 44.877 This m-hedule suinmarues die receipts assi didurwnwnts m fuswis repred under tlw Ibnd trannue.uwt h.u tven prep.ared fnmn de trust staienwnts.11e lulaiwes in che fmwls consw of cuh and inw*ments at onput cost.Tirse balances do noi uwhde ucnnd mierni recewable of 5134 anxi 567 at jurw30.1997 and 1996, resivenwly, nor do ilwy uxtude rotal anxwnard net inwsonent duient of $60 and 569 at June 30.1997 and 19% rnycenwly.11ww balarwes do not uxiuJr unrealued != on mwsinwnis m funds avaitalde for sale of $3 and $4 ar June 30.1997 and 1996, respectiwly. l l l 42 TfEP31 +

I NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES BUSINESS REPLY Mall ~ ~ FIRST CLASS PERMIT NO. 4014 PASADENA. CA POSTAGE WILL BE MD BY ADDRESSEE Southern California Public Power Authority 225 South Lake Avenue, Suite 1410 Pasadena, Cahfctnia 91101-3005 11.1... 11..1111.....11.11.11...ll... l.l.II...I m-

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s i i 1 1 1, J i c a C. s s a. .s; j OS Akbf 4 s I 1' FIN ANCIAL STATEMENTS i d ) Im:s 4 '. 14"l I, I n i o i' u ' ! 1 \\\\ ' u t. i l'.!r i j l.. ' \\... l i 1 ~ ( ll; 1 i I Wit h r e port by l l' R I C E W A T E R H O U S E L L r SIMPSON & SIMPSON

.__...m f SOARD OF WATER AND POWER COMMf 5540NER5 Rick J. CARusO Pressdens M Ancr A F. VOL rE RT Wce President JOst DE JEsos LEG ASI'l KENNETH T. LOMB AR D i i juor M. MILLER 1RENE N. KisHi j Sec e ary I DEPARTMENT Of WATER AND POWER 1 S. D Avto FRELM AN General Manager ) ll ARRY M. SlHMORE j Chief Operating Officer I ELoON A. COTTON Assistant General Manager-Excernal Asse Managemeni l J AMEs F. WiersER Assistan: General Manager-Water Sersices THOM As M. McCtosxty Assistant General Manager-Marketing and Customer Seriece FavE WASHINGTON Assistant General Manager-Chief Administrarite Officer T HOM As C. IlOKINSON Chief Assistant City Accorney for Water and Power j PHyttis E. CURRIE l Chief Financial Officer l l l

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4 5 5 501I $ h y sori W PriceIHiterhouseLto A joint senture 400 South Hope Street Los Angeles. CA 900712889 Telephone 213 236 3000 Renort ofIndeoendent Accountants September 10,1997 To the Board of Water and Power Commissioners Department of Water and Power City ofLos Angeles In our opinion, the accompanying balance sheet and the related statements ofincome, of retained income reinvested in the busir.ess and of cash flows present fairly, in all material respects, the financial position of Water Services of the Department of Water and Power of the City ofLos Angeles at June 30,1997 and 1996, and the results ofits operations and its cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Department'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 material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. an MY .g &*.5

I t LOS ANGELES DEPARTMENT OF WATER AND POWER - Water Seriices Balance Sheet (in thousands) June 30. 1997 1996 ASSETS Utility Plant, at original cost $ 275.24I $ 266,771 Source of water supply 159,777 156,149 Pumping 186,063 177,672 Purification 1,882,597 1,750,008 Distribution 286.753 267,746 General 2,790,431 2,618,346 Less Accumulated depreciation 941.059 875.295 1,849,372 1,743,051 Construction work ir; progress 140.307 146.981 1.989,679 _ 1,890,032 Net utility plant Escrow Accounts Advance refunding bonds 157,272 173.613 Current Assets Cash and cash equivalents 102,366 89,242 Customer and other accounts receivable, net of $7,250 and $8,000 allowance for losses 53,594 65,831 Due from Energy Services 14,426 17,665 Accrued unbilled revenue 40,834 44,314 Materials and supplies, at average cost 12.093 15,544 Prepayments and other current assets 38,685 26,447 Receivable from U.S. Government - FEMA 6.373 9.772 Total current assets 268.371 268.815 5 2.415.322 5 2,332.460 P CAPITALIZATION AND LIABILITIES Equity Retained income reinvested in the business S 866,513 $ 798,508 Contributions in aid of construction 533,009 506.734 1,399,522 1,305,242 Long-term debt 668,409 682,351 Advance refunding bonds 153.100 170.220 l Total capitalization 2.221.031 2,157,813 Current Liabiliues l Long-term debt due within one year 15,430 14,280 Accrued interest 14,267 14.674 Accounts payable and accrued expenses 90,003 82,493 Over-recovered costs 34,849 19,029 Customer deposits 39,742 44,171 Total current liabilities 194.291 174,647 Commitments and Contingencies (see Note 7) $ 2.415.322 1 2.332.460 The accompanying notes are an integral part of these financial statements. f

.m_. ____....m.___._ LOS ANGELES DEPARTMENT OF WATER AND POWE'R Water Services l Statement ofIncome (in thousands) Year Ended June 30, 1997 19 % 1995 Operating Revenues Residential 168,643 166,627 150,790 Commercial and industrial 224,930 230,477 228,611 Other 24,698 25.772 25.529 j 418.271 422.876 404.930 Operating Expenses Purchased water 35,530 47,285 64,662 l- ' Other operating expenses 131,302 102,683 144,310 Maintenance 60,390 62,261 35,824 Depreciation 61,881 58,730 56,173 10.436 Focused separation program 289,103 270,959 311,405 l - Operating income 119,168 151,917 93.525 Other income and Expenses, Net 6,606 15,168 6.324 Income before debt expenses 135,774 167,085 99,849 Debt Expenses Interest on debt 48,532 48,417 46,810 Allowance for funds used during construction (1,907) (1,213) (1,110) l 46,625 47,204 45,700 l Net locome 89,149 119,881 54.149 Statement of Retained Income Reinvested in the Business (in thousands) Year Ended June 30, 1997 19% - 1995 Balance at beginning ofyear 5 798,508 698,874 5 684,725 l - Net income for the year 89.149 119,881 54,149 887,657 818,755 738,874 Less - Transfers to the reserve fund of the City of Los Angeles 21,144 20,247 40,000 Balance at end of year 5 866,513 5 798,508 5 698.874 l-e s A i 4 The accompanying notes are an integral part of these financial statements, 1 +

LOS ANGELES DEPARTMENT OF WATER AND POWER Water Services Statement of Cash Flows (in thousands) Year Ended June 30, 1997 I996 1995 Cash Flows From Operatmg Activities: Operating income 5 129,168 5 151,917 5 93,525 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 61,881 58,730 56.173 Provision for losses on customer and other accounts receivable 1,522 8,161 5,352 Other (1,855) 8,099 2,708 Changes in assets and liabilities Customer and other accounts receivable 10,715 (7,367) (16,696) Due from (to) Energy Services 3,239 3,870 (49) Accrued unbilled revenue 3,480 (6,343) (2,377) Materials and supplies 3,451 (1,321) 2,887 Prepayments and other current assets (12,238) (6,929) (6,490) Receivable from U.S. Government FEMA 3,399 (2,731) 859 Accounts payable and accrued expenses 7,510 3,255 13,586 Over-recovered costs 15,820 (9,842) 29,867 Customer deposits (4,429) 712 (274) 221.663 200.211 I79.071 Cash Flows From Noncapital Financing Activities: Payments to the reserve fund of the City of Los Angeles (21,144) (20.N7) (34,000) Cash Flows From Capital and Related Financing Activities: Additions to plant and equipment, net (159,621) (152,599) (140,353) 99,000 Sale of revenue bonds Payment ofinterest on revenue bonds (48,661) (49,874) (46,475) Amount received from escrow account 16,341 43,304 19,394 Contributions in aid of construction 26,275 21,773 16,221 Reduction oflong-tenn debt (12,792) (l1,183) (l3,282) long-term debt redeemed, including call premium (17.120) (45,220) (17.887) (195.578) (193.799) (83,382) Cash Flows From '.nvesting Activities: Investment income received 8.183 7.625 4,730 Cash and cash equivalents: Net increase (decrease) 13,124 (12,210) 66,419 Beginning of year 89.242 101,452 35,033 End of year 5 102,366 5 101.452 l l i l i The accompanying notes are an integral part of these financial statements. l

LOS ANGELES DEPARTMENT OF WATER AND POWER Water Services Notes to Financial Statements NOTE 1: Summary of Significant Accounting Policies The Department The Department of Water and Power of the City of Los Angeles (the Department) exists as a separate proprietary agency of the City of Los Angeles (the City) under and by virtue of the City Charter enacted in 1925. Water Services is responsible for the procurement, quality and distribution of water for sale in the City. Methodofaccounting The accounting records of Water Services are maintained in accordance with generally accepted accounting principles (GAAP) applicable to governmental utilities. The Department applies all statements issued by the Government Accounting Standards Board (GASB) and all statements and interpretations issued by the Financial Accounting Standards Board (FASB) which are not in conflict with statements issued by the GASB. The accounting records generally follow the Uniform System of Accounts for Public Utilities and Licensees prescribed by the Califomia Public Utilities Commission (CPUC), except for the method of accounting for contributions in aid of construction described below. The Department's rates are subject to review and approval by the City Council. As a regulated enterprise, the Department's financial statements are prepared in accordance with Statement of Financial Accounting Standards No. 71," Accounting for the Effects of Certain Types of Regulation"(SFAS 71), which requires that the effects of the ratemaking process be recorded in the financial statements. Such effects primarily concem the time at which various items enter into the determination of net income in order to follow the principle of matching costs and revenues. Accordingly, Water Services records various regulatory assets and liabilities to reflect the regulator's actions. Management believes that Water Services meets the criteria for continued application of SFAS 71, but will contir.ue to evaluate its applicability based on changes in the regulatory and competitive environment. Utilityplant-The costs of additions to utility plant and replacements of retired units of property are capitalized. Costs include labor, materials, an allowance for funds used during construction, and allocated indirect charges such as engineering, supervision, transportation and construction equipment, retirement plan contributions, health care costs, and certain admmistrative and general expenses. The costs of maintenance, repairs and minor replacements are charged to the appropriate operation and maintenance expense accounts. The original cost of property retired, plus removal cost, less salvage, is charged to j accumulated depreciation. 4

LOS ANGELES DEPARTMENT OF WATER AND POWER Water Services Notes to Financial Statements (continued) NOTE 1: (continued) Depreciation Depreciation expense is computed using the straight-line method based on service lives. Estimated service lives range from 5 to 70 years. Depreciation expense as a percentage of average depreciable utility plant in service was 2.7% for each of the fiscal years 1997,1996 arid 1995. Cash andcash equivalents The Department's cash is deposited with the City Treasurer who invests the funds in securities under the City Treasurer's pooled investment program. Under the program, available funds of the City and its independent operating departments are invested on a combined basis. These investments are valued at cost, which approximates market. At June 30,1997 and 1996, cash and cash equivalents included $12 and $11 million, respectively, ofintemally-designated balances relating to bond redemption and interest funds and a self-insurance fund. In addition, as of June 30,1996, cash and cash equivalents included $4 million designated for retiree health care costs. These funds were transferred to a separate trust during fiscal year 1997 (see Note 6). The Department considers all investments with an original maturity of three months or less to be cash equivalents. Contributions in aid ofconstruction Under the provisions of the City Charter, amounts received from customers and others for constructing utility plant are combined with retained income reinvested in the business and represent equity for purposes of computing Water Services' borrowing limits. Accordingly, contributions in aid of construction are shown in the accompanying balance sheet as a component of equity. Revenues Revenues consist of billings to customers for water consumption and include amounts resulting from a cost adjustment formula designed to permit the full recovery of purchased water and other expenditures specifically approved for inclusion by rate ordinance. Beginning in February 1993, the Department was also authorized to collect certain demand-side management and water reclamation expenditures, and expenditures to upgrade water quality and to improve facilities to meet State and Federal water quality standards; a substantial part of these revenues relate to billings for water reclamation and water quality expenditures and j i are dedicated to those capital projects. The Department estimates these costs to establish the l above cost recovery component of customer billings and any difference between billed and actual costs, resulting in over-or under-recovery of such costs, is adjusted in subsequent l billings. l Page 2

LOS ANGELES DEPARTMENT OF WATER AND POWER Water Services Notes to Financial Statements (continued) NOTE 1: (continued) Water Services' rates are established by a rate ordinance which is approved by the City Council. Water Services sells water to other City departments at rates provided in the ordinance. Water Services recognizes costs in the period incurred and accrues for estimated water sold but not yet billed. l Debt expenses 1 Debt premium, discount and issue expenses are deferred and amortized to expense over the lives of the related debt issues. Allowanceforfunds used during construction (AFUDC) AFUDC represents the cost of borrowed funds used for the construction of utility plant. Capitalized AFUDC is shown as part of the cost of utility plant and as a reduction of debt expenses. The average AFUDC rates were 6.4%,6.4% and 6.3% for fiscal years 1997,1996 and 1995, respectively. Reclassifcation Certain financial statement items for fiscal years 1996 and 1995 have been reclassified to conform to the 1997 presentation. Use ofestimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2: Escrow Funds The Department accounts for investments in accordance with Statement of Financial Accounting Standards No.115," Accounting for Cenain Investments in Debt and Equity ' Securities." This statement requires that investments be classified as held-to-maturity, available-for-sale or trading. Allinvestments held by the Department are classified as held-to-maturity and are reported at amortized cost as the Department has the ability and the intent to hold the investments within these funds to thei scheduled maturity. i f Page 3

1 i LOS ANGELES DEPARTMENT OF WATER AND POWER Water Services Notes to Financial Statements (continued) NOTE 2: (continued) The contractual maturities ofinvestments at June 30,1997 are as follows (amounts in millions): June 30, Maturing in: 1997 Less than one year 5 22 One to five years 135 157 All escrow accounts are held in extemal trust funds to be used for calling revenue bonds at scheduled maturity dates. NOTE 3: Long-term Debt and Advance Refunding Bonds Water Services' long-term debt and advance refunding bonds consisted of the following (amounts in millions): June 30, Maturine in fiscal year Effective interest rate 1997 1996 14 1997 3.6 % - 7.8 % 1998 - 2002 4.1 % - 7.8 % 106 108 2003 - 2007 5.1 % - 7.8 % 143 146 2008 2012 5.1 % - 7.5 % 154 157 2013 - 2017 5.2 % - 7.2 % 152 155 2018 - 2022 5.3 % - 7.2 % 126 130 2023 -2077 5.3 % - 7.1 % 96 97 2028-2032 5.3 % - 7.1 % 65 65 2033 - 2035 6.1 % - 6.3 % 7 7 Total principal amount 849 879 Unamortized premium and discount (12) (12) Long-term debt due within one year (15) (14) 822 853 i I Escrow funds available to call certain of the I above bonds at scheduled crossover dates 157 174 l l Page 4 l i

1 LOS ANGELES DEPARTMENT OF WATER AND POWER Water Services l I Notes to Financial Statements (continued) L NOTE 3: (continued) l Long-Te~t Debt and Advance Refunding Bonds { Long-term debt outstanding at June 30,1997 consisted of revenue bonds due serially in varying annual amounts through 2035. The revenue bonds generally are callable ten years after issuance. Scheduled annual principal maturities during the five years following June 30, 1997 are $15, $19, $22, $24 and $25 million, respectively. Revenue bonds are secured by the future revenues of Water Services. The Dep iment has agreed to certain covenants with respect to bonded indebtedness. Significant covenants include the requirement that Water Services' net income, as defined, will be sufficient to pay certain amounts of future annual bond interest and of future annual aggregate bond interest and principal maturities. During fiscal year 1997, bonds with a par value of $16 million were refunded using proceeds from the balance in the escrow accounts. The remaining balance in the escrow accounts of $157 million will be used to refund bonds presently included in long-term debt with a par value of $154 million at scheduled crossover dates. The balance of $153 million of advance refunding bonds will be reclassified to long-term debt at the time that the bonds to be refunded are called. Interest expense from refunding bonds and interest income earned on related escrow accounts are included in Other income and Expenses, Net. NOTE 4: Earthquake Damage On January 17,1994, a 6.7 magnitude earthquake centered in Northridge, California caused significant damage to Department facilities and major service interruption in Water Services' territory. Cost estimates as of June 30,1997 for capital replacements and improvements and repairs to Water Services' facilities total approximately $47 million. Through June 30,1997, Water Services has spent $24 million for repairing facilities damaged by the earthquake and charged $.4, $1 and $1 million to expense during fiscal years 1997,1996 and 1995, respectively. The Department has applied for reimbursement for a significant portion of the earthquake costs from the Federal Emergency Management Agency (FEMA). NOTE 5: Shared Operating Expenses Water Services shares certain admmistrative functions with the Department's Energy Services. Generally, the costs of these functions are allocated on the basis of the benefits provided. Operating expenses shared with Water Services were $522, $501 and $277 million for fiscal years 1997,1996 and 1995, respectively, of which $184, $162 and $90 million were allocated to Water Services. Page 5

LOS ANGELES DEPARTMENT OF WATER AND POWER Water Services Notes to Financial Statements (continued) NOTE 6: Empicyee Benefits Retirement, disability and death benefit insurance plan The Retirement Board of Administration is the administrator of the Water and Power Employees' Retirement, Disability and Death Benefit Insurance Plan which is subject to provisions of the Charter of the City of Los Angeles and the regulations and instructions of the Board of Water and Power Commissioners. The plan is considered an independent pension trust fund of the Department. The Department has a funded contributory retirement, disability and death benefit insurance plan covering substantially all ofits employees. Plan benefits are generally based on years of service, age at retirement and the employees' highest 12 consecutive months of salary before retirement. The Department funds the retirement plan on an entry age normal method as determined by the plan's independent actuary. For funding purposes, prior service costs relating to the plan are amortized over a 30-year period ending June 30,2003. Total fiscal year benefit plan costs for Water Services include the following (amounts in millions): Year Ended June 30, 1997 1996 1995 Service cost 15 12 13 Interest cost 64 59 55 Actual retum on plan assets (200) (122) (128) Net amortization and deferral 135 66 83 Net retirement plan cost 14 15 23 Disability and death benefit plan costs and adrninistrative expenses 4 4 3 18 19 26 Amounts capitalized S 6 8 Employee contributions to plan S 7 7 6 Total covered payroll 144 132 110 e Page 6

a i l l \\ LOS ANGELES DEPARTMENT OF WATER AND POWER Water Services Notes to Financial Statements (continued) NOTE 6: (continued) The following schedule reconciles the funded status of the plan with amounts reported in the financial statements (amounts in millions): June 30, July 1, 1997 1996 Actuanal present value of benefit obligations: Accumulated benefit obligation S 765 727 Effect of projected future compensation levels 126 123 Projected benefit obligation 891 850 Plan assets at fair value 1.089 900 Plan assets in excess of projected benefit obligation (198) (50) Unrecognized prior service cost (4) (5) Unrecognized net gain and effects of changes in assumptions 201 79 Unrecognized net obligation at July 1,1987 (recognized over 15 years) (35) (42) Prepaid pension asset 5 (36) (18) The discount rate used in determining the plan's projected benefit obligation was 7.5% in both fiscal years 1997 and 1996. The assumed rate ofincrease in future compensation levda and the long-term rate of return on plan assets were 5.5% and 8.0%, respectively, in both fiscal years 1997 and 1996. Plan assets consist primarily of corporate and government bonds, common stocks, mortgage-backed securities and short-term investments. Health care costs The Department provides certain health care benefits to active and retired employees and their dependents. The cost to Water Services of providing such benefits amounted to $29, $29 and $24 million for fiscal years 1997,1996 and 1995, respectively. Of these costs, $10, $7 and $8 ( million were capitalized as Construction Work in Progress and the remainder wm charged to ( expense for fiscal years 1997,1996 and 1995, respectively. The total number of active and l retired participants entitled to receive benefits was approximately 4,000 at June 30,1997. l l Page 7

LOS ANGELES DEPARTMENT OF WATER AND POWER Water Services Notes to Financial Statements (continued) NOTE 6: (continued) The Department accounts for post-retirement benefits based on Statement of Financial Accounting Standards No.106," Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires that the cost of postretirement benefits be recognized as expense over employees' service periods. Water Services is amortizing its actuarially determined transition obligation related to prior service over 20 years. The total fiscal year postretirement benefit costs included in health care benefits above, is summarized as follows (amounts in millions): Year Ended June 30, 1997 1996 1995 Service cost Y 2 2 5 2 Interest cost 7 7 7 Amortization of transition obligation 4 4 4 13 13 13 The accrued postretirement liability is as follows (amounts in millions): June 30, July 1, 1997 1996 Accumulated postretirement benefit obligation (AP) u). Active employees S 49 5 38 Retirees and surviving spouses 50 50 99 88 Plan assets at fair value 14 APBO in excess of plan assets 85 88 Unrecognized net gain 7 8 i Unrecognized trusition obligation (65) (69) Acenied postretirement liability 5 27 27 i I 1 l l Page 8

LOS ANGELES DEPARTMENT OF WATER AND POWER Water Services ~ Notes to Financial Statements (continued) NOTE 6: (continued) The assumed health care cost trend rate was 5.5% per year for both fiscal years 1997 and 1996. Increasing the health care cost trend rate by one percentage point would in. crease the APBO as of June 30,1997 by $13 million and periodic cost by $2 million. The discount rate used in determining the plan's accumulated postretirement benefit obligation was 7.5% in both fiscal years 1997 and 1996. Plan assets were contributed in June 1997 and no long-term return on plan assets was considered in the computation of fiscal year 1997 postretirement benefit costs. As of June 30,1997, plan assets consist primarily of short-term treasury obligations. No funding policy has been established for the future benefits to be provided under this plan. 4 NOTE 7: Commitments and Contingencies Transfers to the reservefund ofthe City ofLos Angeles Under the provisions of the City Charter, Water Services transfers funds at its discretion to the reserve fund of the City of Los Angeles. Pursuant to covenants contained in the bond indentures, the transfers may not be in excess of net income of the prior fiscal year. Such payments are not in lieu of taxes and are recorded as distributions of retained income. The Depanment made payments of approximately $21 million in fiscal year 1997 from Water Services to the reserve fund of the City of Los Angeles. The Department expects to make : transfer declaration of $21 million during fiscal year 1998. Environmentalmatters New regulations concerning filtration of surface water supplies will require increased commitment of resources by the Department. Major capital expenditures will be necessary to comply with the filtration requirements at open distribution reservoirs because of the State of Califomia Surface Water Treatment Rule (S%TR). The Department has four major reservoirs subject to SWTR, which became effective in June, 1993. Planning studies and discussions with local community representatives are ongoing to determine the system improvements necessary to bring these reservoirs into compliance. The Department has entered into an agreement with the State Department of Health Services that established a time schedule to come into compliance with the SWTR. Under the terms of this agreement, the four reservoirs are scheduled to be in compliance by 2003. As of June 30,1997, capital expenditures of approximately $44.5 million had been incurred which primarily related to preliminary engineering. The estimated total capital cost of the SWTR compliance program is approximately $425 million. Page 9

LOS ANGELES DEPARTMENT OF WATER AND POWER Water Services Notes to Financial Statements (continued) NOTE 7: (continued) Litigation During July 1997, the Great Basin Air Pollution Control District (the District) adopted a State implementation Plan (SIP) and an implementing order which, if finally approved, would require the Department to initiate remediation activities, as defined in the SIP, to control dust from the Owens Lake bed. Estimates of the cost of the remediation activities in the SIP range up to $300 million. It is management's belief that the proposed remediation measures imposed by the SIP are both unproven and inefficient and that no enforceable obligation exists until the California Air Resources Board and the courts have completed their hearings on he c matter, which may not occur until the third quarter of fiscal year 1998. Management believes r that additional research is required to determine the best means of remediation and has committed to continue to undertake reasonable mitigation actions as currently required by a 1983 state law. Due to uncertainties involved with the methods to be used to control the dust, it is management's belief that a reasonable estimate of the cost necessary to control the dust can not be made at this time. A number of claims and suits are pending against the Department for alleged damages to persons and property and for other alleged liabilities arising out ofits operations. In the opinion of management, any ultimate liability which may arise from these actions will not materially affect Water Services' financial position as of June 30,1997. Risk management Water Services is subject to certain business risks common to the utility industry. The majority of these risks are mitigated by extemal insurance coverage obtained by Water Services. For other significant business risks, however, Water Services has elected to self-insure. It is management's opinion that exposure to loss arising out of self-insured business risks will not materially affect Water Services' financial position as of June 30,1997. NOTE 8: Fair Value of FinancialInstruments In accordance with the requirements of SFAS No.107," Disclosures about Fair Value of Financial Instruments," the Department has provided the estimated fair value of financial instruments using available market information at June 30,1997 and 6, and the valuation methodologies described below. Page 10

LOS ANGELES DEPARTMENT OF WATER AND POWER Water Sen' ices Notes to Financial Statements (continued) NOTE 8: (continued) The carrying amounts and estimated fair values of the Depanment's financial instruments at. June 30,1997 and 1996 are as follows (amounts in millions)- June 30. 1997 I996 Carrying Fair Carrying Fair Amount Value Am_._qunt y.g[gg investments 157 155 174 169 ) - Cash and cash equivalents S 102 5 102 S 89 S 89 Customer and other accounts receivable S 54 S 54 5 66 66 Long-term debt and advance refunding bonds (including current portion) J 837 912 867 924 The methods and assumptions used to estimate the fair value of financial instruments are summarized as follows: Cash andcash equivalents The carr/ ng amount of cash and cash equivalents approximates fair value due to the short i maturity of these investments. Investments The fair value ofinvestments is based on quoted market prices. Customer and other receivables The carrying amount of customer and other receivables approximates fair value due to the short maturity of these investments. Long-Term Debt and Advance Refunding Bonds The fair value oflong-term debt, including the current portion, and advance refunding bonds is based upon estimates which represent the present value ofinterest and principal payments on the long-term debt and advance refunding bonds discounH using current interest rates obtainable by the Department for debt of similar quality and maturities. Page 11

4 0 . ENERGY S E R VIC E S

_____.m PriceIHiterhoriseLLe b ' T O' T h1) soit i A joint senture 400 South Hope Street Los Angeles, CA 900712889 Telephone 213 236 3000 Reoort ofindanendant Accountants September 10,1997 To the Board of Water and Power Commissioners l Department of Water and Power City ofLos Angeles In our opinion, the accompanying balance sheet and the related statements ofincome, i of retained income reinvested in the business and of cash flows present fairly, in all material respects, the financial position of Energy Services of the Department of Water and Power of the City ofLos Angeles at June 30,1997 and 1996, and the resuhs ofits 4 operations and its cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Department's management; our responsibility is to say, as an opinion on these financial statements based on our audits. We conducted 4-our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain raa-mmble assurance about whether the E= Mal statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence suiryvrdug 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 thu our audits provide a reasonable basis for the opinion exyi.35.4 above. ,w u, 4.L l 4

LOS ANGELES DEPARTMENT GF WATER AND POWER Energy Services Balance Sheet (in thousands) June 30, 1997 1996 ASSETS Utility Plant, at original cost $ 2,291,327 $ 2,275,269 Generation 760,255 758,085 Transmission 3,111,691 3,020,680 Distribution 796,819 761,913 General 6,960,092 6,815,947 2.633.322 2,4I8,937 Less-Accumulated depreciation 4,326,770 4,397,010 214,909 203,705 Construction work in progress 10,774 11,748 Nuclear fuel, at amortized cost 4,552,453 4.612.463 Net utility plant Restricted and Trust Funds 138,043 Cash and cash equivalents 1,286,792 1,151,649 Investments 1,424,835 1,151.649 Current Assets 282,055 343,003 Cash and cash equivalents Customer and other accounts receivable, net of 198,654 195,801 $13,200 allowance for losses I13,384 106,477 Accrued unbilled revenue 86,793 89,016 Materials and supplies, at average cost 13,312 29,825 Fuelinventory 97,704 66,606 Prepayments and other current assets 791,902 830,728 Total current assets 5 6.769,190 $ 6,594,840 CAPITALIZATION AND LIABILITIES Equity $ 2,093,260 $ 2,017,075 Retained income reinvested in the business 244,074 225,261 Contributions in aid of construction 2,337,334 2,242,336 2,716,554 2,622,327 Long-term debt 1.075,490 1,112,469 Advance refunding bonds 6,129,378 5,977,132 Total capitalization Current Liabilities 71,650 64,910 Long-term debt due within one year 90,000 90,000 Revenue certificates payable 65,420 66,525 Accrued interest 227,815 236,626 Accounts payable and accrued expenses 14,426 17,665 Due to Water Services 130,192 99,851 Over-recovered energy costs 31,448 33,270 Deferred credit. Intermountain Power Agency 8,861 R,861 Due to the reserve fund of the City of Los Angeles 639,812 617,708 Total current liabilities Commitments and Contingencies (see Note 13) $ 6,769.1% $ 6,594.840 l The accompanying notes are an integral part of these financial statements,

LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Statement ofIncome l (in thousands) Year Ended June 30, i l 1997 1996 1995 l-Operating Revenues Residential 599,914 580,011 5 591,176 Commercial and industrial 1,303,665 1,275,843 1,275,970 l-Other 113,487 90,997 105.640 2,017,066 1,946,851 1,972,786 l Operating Expenses I Fuel for generation 156,427 151,039 239,005 i-Purchased power 751,380 707,938 659,612 Other operating expenses 358,876 353,820 459,873 L Maintenance 178,613 188,955 156,431 l Depreciation 239,693 231,847 203,758 - Focused separation program 1,690 33,564 1,686,679 1,633.599 1,752,243 i Operating Income 330,387 313,252 220,543 Other income and Expenses, Net 31,038 24,161 21,816 l Loss on Abandoned Projects (12,784) (28.694) Income before debt expenses 348,641 308,719 242,359 Debt Expenses l Interest on debt 179,527 181,200 186,225 l Allowance for funds used during construction (4,414) (5,191) (3,783) 175,113 176,009 182.442 Net income 173,528 132,710 59,917 l l l Statement of Retained Income Reinvested in the Business (in thousands) l. Year Ended June 30, 1997 1996 1995 Balance at beginning ofyear 5 2,017,075 $ 1,944,282 $ 1,953,674 Net income for the year 173,528 132,710 59,917 2,190,603 2,076,99 I 2,013,591 Less Transfers to the resene fund of the City of Los Angeles 97,343 59,917 69,309 i Balance at end of year 5 2,093,260 5 2,017,075 5 1,944,282 r i l-i i The accompanying notes are an integral part of these financial statements, 1

LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Statement of Cash Flows (in thousands) Year Ended June 30, 1997 1996 1995 Cash Flows From Operating Activities: 5 330,387 5 313,252 5 220.543 Operating income Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 239,693 231,847 203,758 Amortization of nuclear fuel 7,500 6,792 7,698 Abandoned projects (12,784) (28,694) Provision for losses on customer and other accounts receivable 16,873 16,954 20,993 Other 4,761 3,717 6,266 Changes in assets and liabilities Customer and other accounts receivable (19,726) (12,776) 11,349 Accrued unbilled revenue (6,907) 3,887 (2,530) Materials and supplies 2,223 5,462 19,632 Fuelinventory f 6,513 11,258 33,041 Prepayments and other current assets (29,302) (17,873) (28,358) Accounts payable and accrued expenses (8,811) 6,834 (280) Due (from) to Water Services (3,239) (3,870) 49 Over-recovered energy costs 30,341 31,894 9,992 Deferred credit. Intennountain Power Agency (1,822) (1,024) (24.626) 565,700 567,660 477,527 Cash Flows From Noncepital Financing Activities: Payments to the reserve fund of the City ofles Angeles (97,343) (62.717) (131.648) Cash Flows From Capital and Related Financing Activities: Additions to plant and equipment, net (182,769) (182,285) (230,002) Additions to investments (173,955) (l1,747) (3,702) Sale of revenue certificates, net 162,100 Payment ofinterest ca revenue bonds (181,470) (l84,757) (l91,306) Reduction oflong-term debt (61,133) (65,986) (55,247) Contributions in aid of construction 18,813 9,933 24,493 Amount received from escrow account 38,812 96,799 78,288 leng-term debt redeemed, includmg call premium (38,775) (95,5841 (75,552) (418.377) (433,627) (453,028) l l Cash Flows From Investing Activities: l Investment income received 27.115 21,934 17,720 l Cash and cash equivalents: Net increase 77,095 93,250 (89,429) Beginning of year 343,003 249,753 339,182 End of year 5 420.098 5 343,003 5 249,753 i l l Cash and cash equivalents: Restricted and trust funds 5 138,043 5 5 . Current assets 282,055 343,003 249,753 5 420,098 5 343,003 5 249,753 l l The accompanying notes are an integral part of these financial statements,

l LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financial Statements NOTE 1: Summary of Significant Accounting Policies The Department The Department of Water and Power of the City of Los Angeles (the Department) exists as a separate proprietary agency of the City of Los Angeles (the City) under and by virtue of the City Charter enacted in 1925. Energy Services is responsible for the generation, transmission and distribution of electric power for sale in the City. Methodofaccounting De accounting records of Energy Services are maintained in accordance with generally accepted accounting principles (GAAP) applicable to governmental utilities. The Department applies all statements issued by the Government Accounting Standards Board (GASB) and all statements and interpretations issued by the Financial Accounting Standards Board (FASB) which are not in conflict with statements issued by the GASB. The accounting records generally follow the Uniform System of Accounts for Public Utilities and Licensees prescribed by the Federal Energy Regulatory Commission (FERC) and the California Public Utilities Commission (CPUC), except for the method of accounting for contributions in aid of construction described below. He Department's rates are subject to review and approval by the City Council. As a regulated enterprise, the Department's financial statements are prepared in accordance with Statement of Financial Accounting Standards No. 71," Accounting for +' e Effects of Certain Types of Regulation"(SFAS 71), which requires that the effects of the ratemaking process be recorded in the financial statements. Such effects primarily concem the time at which various items enter into the determination of net income in order to follow the principle of matching costs and revenues. Accordingly, Energy Services records various regulatory assets and liabilities to reflect the regulator's actions. Management believes that Energy Sersices meets the criteria for continued application of SFAS 71, but will continue to evaluate its 1 applicability based on changes in the regulatory and competitive environment (see Note 2). Utilityplant The costs of additions to utility plant and replacements of retired units of property are ) capitalized. Costs include labor, materials, an allowance for funds used during construction. ) and allocated indirect charges such as engineering, supervision, transportation and constmetion equipment, retirement plan contributions, health care costs, and certain administrative and general expenses. The costs of maintenance, repairs and minor replacements are charged to the appropriate operation and maintenance expense accounts. The original cost of property retired, plus removal cost, less salvage, is charged to accumulated depreciation.

LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financial Statements (continued) NOTE 1: (continued) Depreciation Depreciation expense is computed using the straight-line method based on service lives for all projects completed after July 1,1973, and for all office and shop structures, related furniture and equipment, and transportation and construction equipment. Depreciation for facilities completed prior to July 1,1973 is computed using the 5% sinking fund method based on estimated service livc3. Estimated service lives range from 5 to 75 years. Depreciation expense as a percentage of average depreciable utility plant in service was 3.7%,3.7% and 3.4% for fiscal years 1997,1996 and 1995, respectively. Nuclear decommissioning The total cost to decommission the Department's 5.7% direct ownership interest in the Palo Verde Nuclear Generating Station (PVNGS) is estimated to be $82 million in 1995 dollars over a fourteen year period beginning in 2024. This estimate is based on a site specific study prepared by an independent consultant, assuming the prompt removal / dismantlement method of decommissioning authorized by the Nuclear Regulatory Commission (NRC). Estimated decommissioning costs are accrued over the estimated useful life of the PVNGS. Decommissioning expense was $11, $11 and $3 million for fiscal years 1997,1996 and 1995, respectively. The Department contributes to extemal trusts set up in accordance with the ANPP l participation agreement and NRC requirements. Decommissioning funds of approximately $44 million, stated at market, as of June 30,1997, are held in the trusts and are classified as restricted funds in the accompanying balance sheet (see Note 5). i Nuclearfuel Nuclear fuel is amortized and charged to Fuel for Generation on the basis of actual thermal l energy produced relative to total thermal energy expected to be produced over the life of the fuel. Under the provisions of the Nuclear Waste Policy Act of 1982, the federal government assumed responsibility for the future disposal of spent nuclear fuel and assesses each utility with nuclear operations, including the Department, $1 per MWH of nuclear generation to fund this ruture disposal. l l l l l Page 2

LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financial Statements (continued) NOTE 1: (continued) Cash andcash equivalents j The Department's cash is deposited with the City Treasurer who invests the funds in securities under the City Treasurer's pooled investment program. Under the program, available funds of the City and its independent operating departments are invested on a combined basis. These investments are valued at cost, which approximates market. At June 30,1997 and 1996, cash and cash equivalents included $64 and $62 million, respectively, ofintemally-designated balances relating to bond redemption and interest funds, a energy cost stabilization fund, and a self-insurance fund. In addition, as of June 30,1996, cash and cash equivalents included $14 million and $94 million designated for retiree health care costs and debt reduction funds, respectively. These funds were transferred to separate trusts during fiscal year 1997 (see Notes 5 and 10). The Department considers all investments with an original maturity of three months or less to be cash equivalents. Fuelinventory Coal inventories are stated at average cost. Fuel oil inventories are stated at lower of cost or market. Contributions in aid ofconstruction Under the provisions of the City Charter, amounts received from customers and others for constructing utility plant are combined with retained income reinvested in the business and represent equity for purposes of computing Energy Services' borrowing limits. Accordingly, contributions in aid of construction are shown in the accompanying balance sheet as a component of equity. Revenues Revenues consist of billings to customers for consumption of electric energy and include amounts resulting from an energy cost adjustment formula designed to permit the full recovery of energy costs, funding requirements of nuclear plant decommissioning costs and ' the costs of funding certain conservation programs intended to reduce current and future energy consumption. The Department estimates these costs to establish the energy cost recovery component of customer billings and any difference between billed and actual costs, resulting in over-or under-recovery of such costs, is adjusted in subsequent billings. Energy Services' rates are established by a rats ordinance which is approved by the City Council. Energy Services sells electric energy to other City departments at rates provided in the ordinance. Energy Services recognizes energy costs in the period incurred and accrues for estimated energy sold but not yet billed. Page 3

LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financial Statements (continued) NOTE 1: (continued) Debt expenses Debt premium, discount and issue expenses are deferred and amortized to expense over the lives of the related debt issues. Allowanceforfunds used during construction (AFUDC) AFUDC represents the cost of borrowed funds used for the construction of utility plant. Capitalized AFUDC is shown as part of the cost of utility plant and as a reduction of debt expenses. The average AFUDC rate was 6.0% for fiscal years 1997,1996 and 1995. Reclassification Certain financial statement items for fiscal years 1996 and 1995 have been reclassified to conform to the 1997 presentation. Use ofestimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2: Regulatory Matters In September 1996 Assembly Bill 1890 (AB 1890) was approved by the Oovernor and became law. AB 1890 legislates significant structural changes to California's electric power industry including mandated direct access, development of a Power Exchange to facilitate the sale of generation, and creation of an Independent System Operator (ISO) to manage transmission assets. AB 1890 also permits the recovery of stranded investment through the assessment of a non-bypassable competition transition charge (CTC). California's three investor-owned utilities (IOUs) are required to comply with the provisions of AB 1890; however, this legislation does not compel participation by publicly-owned utilities, such as the Department. Although publicly-owned utilities are not required to comply with AB 1890, utilities that do not elect to participate in direct access and the ISO will not be entitled to recovery of stranded investment through the non-bypassable CTC. Management is currently considering the issues involved with the decision to participate in direct access and the ISO. 1 Page 4

~ t l LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services l l Notes to Financial Statements (continued) NOTE 2: (continued) If the Department chooses to offer a direct access program to it customers, it is likely that its generation business will no longer qualify for accounting under SFAS 71. Management has evaluated its generation assets and the potential " stranded investment" that would arise in the event of offering direct access to customers and consequently ceasing to apply SFAS 71 to the generation business. Management estimates that the total ofits stranded costs and obligations, including obligations related to its purchase power contracts, is approximately $4 billion. This estimate is based on the assumption that the market clearing price for energy t will be 2.4 cents per kilowatt hour; differences between the assumed market price of energy and actual prices in the competitive market could result in material changes to the above estimate of stranded costs and obligations. Although AB 1890 provides for the recovery of stranded investment through a competition transition charge, at this time management is unable to predict if the implementation of a l direct access program will have a material adverse effect on its financial pcsition and results l ofoperations. NOTE 3: Jointly-Owned Utility Plant Energy Services has undivided interests in several electrical generating stations and transmission systems which arejointly-owned with other utilities. Each project participant is responsible for financing its share of construction and operating costs. Energy Services' ownership interest in each jointly-owned utility plant, as included in the balance sheet at June 30,1997, is as follows (dollar amounts in millions): Plant in Service Share of ( Ownership Capacity Accumulated Work in j Proiects Interest (MWm Cost Depreciation Progress Palo Verde Nuclear l Generating Station 5.7% 21,7 5 512 138 1 Navajo Generating Station 21.2 % 477 202 118 73 Mohave Generating Station 20.0% 316 106 54 12 Pacific Intertie DC Transmission Line 40.0% 1,240 190 40 8 Other transmission I systems Various 76 27 S 1.086 S 377 94 l 4 l Page 5 l

LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financial Statements (continued) NOTE 3: (continued) Energy Services will incur certain minimum operating costs on the jointly-owned facilities, regardless of the amount of energy generated or its ability to take delivery ofits share of - energy generated. Energy Services' proportionate share of the operating costs is included in the appropriate categories of operating expenses. NOTE 4: Purchase Power Commitments The Department has entered into a number of energy and transmission service contracts which involve substantial commitments, scheduled to expire from 2027 to 2030, as follows (dollars in millions): Department Department Commitment Share of Entitlement Expiration Total Bonds Capacity 6 fen.cy Interest Date Outstandine MWH ec Intermountain Power Project IPA 66.8 % 2027 $ 4,076 1,068 Palo Verde Nuclear Generating Station SCPPA 67.0 % 2030 994 151 Mead-Adelanto Project SCPPA 35.7 % 2030 268 291 Mead-Phoenix Project SCPPA 24.8 % 2030 86 148 Southern Transmission l System SCPPA 59.5 % 2027 5 1,087 1,142 IPA: The Intermountain Power Agency is a Utah State Agency established to own, acquire, construct, operate, maintain, and repair the Intermountain Power Project (IPP). Energy Services serves as the Project Manager and Operating Agent ofIPP. SCPPA: The Southern California Public Power Authority, a California Joint Powers Agency. The above agreements require Energy Services to make certain minii....m payments, which are based mainly upon debt service requirements. In addition to fixed charges of l approximately $380 million in each of the next five years, the Department is required to pay for operating and maintenance costs related to actual deliveries of energy under these agreements (approximately $220 million in each of the next five years). Total payments under these agreements were approximately $570, $550 and $540 million in fiscal years 1997, l 1996 and 1995, respectively. These aggregate purchased power costs are currently recovered through the energy cost recovery component of customer billings. Page 6 i

LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financial Statements (continued) NOTE 4: (continued) The Department also has a contract through 2017 with the U.S. Department of Energy for the purchase of available energy generated at the Hoover Power Plant. The Department's share of capacity at Hoover is approximately 500 megawatts. The cost of power purchased under this contract was $11, $11 and $12 million in fiscal years 1997,1996 and 1995, respectively. NOTE 5: Restricted and Trust Funds A summary of Energy Services' restricted and trust funds is presented below (amounts in millions): June 30, 1997 1996 Cash andcash equivalents Debt reduction trust fund S 138 investments j Escrow accounts - advance refundk bonds 1,081 1,120 Revenue certificate trust fund 162 Nuclear decommissioning trust funds 44 32 1,287 1,152 1,425 S 1,152 The Department accounts for investments in accordance with Statement of Financial Accounting Standards No. I15, " Accounting for Certain Investments in Debt and Equity Securities." This statement requires that investments be classified as held-to-maturity, available-for-sale or trading. All investments held by the Department are classified as held-to-maturity and are reported at amortized cost as the Department has the ability and the intent ~ to hold the investments within these funds to their scheduled maturity. The contractual maturities ofinvestments at June 30,1997 are as follows (amounts in millions): June 30, Maturing in: 1997 Less than one year S 333 One to five years 954 1,287 4 Page 7

LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financial Statements (continued) NOTE 5: (continued) All restricted and trust funds are held in external accounts to be used for a designated pu. pose as follows: Debt reduction The debt reduction trust fund was established during fiscal 1997 to provide for the payment of principal and interest oflong-term debt obligations and purchase power obligations arising from its participation in the Intermountain Power Project and the Southern California Public Power Authority (see Note 4). Available funds from operations are transferred to this account upon approval by the Board of Water and Power Commissioners. In July 1997, the Department transferred an additional $89 million to this account. Escrow accounts Escrow accounts are held to be used for calling revenue bonds at scheduled maturity dates. Revenue certificate trustfund The revenue certificate trust fund was established during fiscal 1997 with $162 million received from the issuance of revenue certificates. These funds are held for calling specified revenue bonds and revenue certificates at scheduled maturity dates. Nuclear decommissioning Nuclear decommissioning trust funds will be used to pay the Department's share of decommissioning the Palo Verde Nuclear Generating Station at the end ofits useful life. L l l l l l Page 8 l

LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financial Statements (continued) NOTE 6: Long-term Debt and Advance R: funding Bonds Energy Services' long-term debt and advance refunding bonds consisted of the following (amounts in millions): June 30. Maturing in fiscal Effective interest rate 1997 1996 1997 3.6 % - 7.8 % 5 5 65 1998 -2002 4.0 % - 7.8 % 432 432 2003 -2007 4.8 % - 7.8 % 574 580 2008-2012 4.8 % - 7.8 % 669 678 2013 2017 4.8 % - 7.8 % 627 635 2018 - 2022 4.8 % - 7.5 % 554 562 2023 -2027 5.2 % - 7.5 % 506 511 2028-2032 5.2 % - 7.5 % 353 353 2033 -2035 5.2 % - 6.1 % 25 25 Total principal amount 3,7d0 3,841 Revenue certificates 252 90 0 Unamortized premium and discount (38) (41) Current portion of revenue certificates (90) (90) Long-term debt due within one year (72) (65) $ 3,792 S 3,735 Escrow funds available to call certain of the above bonds at scheduled crossover dates 1.081 1,120 Long-Term Debt and Advance Refunding Bonds Long-term debt outstanding at June 30,1997 consisted of revenue bonds due scrially in varying annual amounts through 2035. The revenue bonds generally are callable ten years after issuance. Scheduled annual principal maturities during the five years following June 30, 1997 are $72,577, $84, $96 and $103 million, respectively. Revenue bonds are secured by the future revenues of Energy Services. The Department has agreed to certain covenants with respect to bonded indebtedness. Significant covenants include the requirement that Energy Services' net income, as defined, will be sufficient to pay certain amounts of future annual bond interest and of future annual aggregate bond interest and principal maturities. I Page 9

s V LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financir.1 Statements (continued) NOTE 6: (continued) During fiscal year 1997, bonds with a par value of $39 million were refunded using proceeds from the balance in the escrow accounts. The remaining balance in the escrow accounts of j $1,081 million will be used to refund bonds presently included in long-term debt with a par value of $1,062 million at scheduled crossover dates. The balance of $1,075 million of advance refunding bonds will be reclassified to long-term debt at the time that the bonds to be refunded are called. Interest expense from refunding bonds and interest income eamed on reltted escrow accounts are included in Other Income and Expenses, Net. Revenue Certificates As of June 30,1997, the Department has ou: standing commercial paper of $252 million bearing interest at an average rate of 4.10%. The commercial paper matures not more than 173 days from the date ofissuance. The Department intends and has the ability to refinance $162 million of the outstanding revenue certificates upon their maturity and, therefore, has included this portion of the balance outstanding in long-term debt at June 30,1997. The commercial paper is an unsecured obligation of the Department. Letter ofCredit and Reimbursement Agreement During fiscal 1997, the Department arranged a $432 million multi-year letter of credit. The letter of credit is available for refinancing a portion of Energy Services' commercial paper program and may be utilized on a revolving basis through June 1999, l NOTE 7: Deferred Credit-Intermountain Power Agency As of July 1,1988, an amendment to an Intermountain Power Agency bond resolution provided for the retum of surplus construction funds from the Intermountain Power Project to the participants. Pursuant to a City Ordinance of January 2,1991, the Department established an energy cost adjustment stabilization account with its share of the excess funds from IPA. At the discretion of management, funds may be transferred from this account to reduce l purchased power costs. In accordance with the ordinance, the balance of these funds must be transferred by January 2,1998. l Page 10

i LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financial Statements (continued) NOTE 8: Earthquake Damage l On January 17,1994, a 6.7 magnitude earthquake centered in Northridge, California caused significant damage to Department facilities and major service interruption in Energy Services' territory. Cost estimates as of June 30,1997 for capital replacements and improvements and repairs to Energy Services' facilities total approximately $161 million. Through June 30, 1997, Energy Services has spent $82 million for repairing facilities damaged by the earthquake and charged $1, $2 and $2 million to expense during fiscal years 1997,1996 and 1995, respectively. The Department has applied for reimbursement for a significant portion of the earthquake costs from the Federal Emergency Management Agency (FEMA). NOTE 9: Shared Operating Expenses Energy Services shares certain administrative functions with the Department's Water Services. Generally, the costs of these functions are allocated on the basis of the benefits provided. Operating expenses shared with Water Services were $522, $501 and $277 million for fiscal years 1997,1996 and 1995, respectively, of which $338, $339 and $187 million were allocated to Energy Services. NOTE 10: Employee Benefits Retirement, disability and death benefit insurance plan The Retirement Board of Administration is the administrator of the Water and Power Employees' Retirement, Disability and Death Benefit Insurance Plan which is subject to provisions of the Charter of the City of Los Angeles and the regulations and instructions of the Board of Water and Power Commissioners. The plan is considered an independent pension trust fund of the Department. The Department has a funded contributory retirement, disability and death benefit insurance plan covering substantially all ofits employees. Plan benefits are generally based on years of service, age at retirement and the employees' highest 12 consecutive months of salary before retirement. The Department funds the retirement plan on an entry age normal method as determined by the plan's independent actuary. For funding purposes, prior service costs relating to the plan are amortized over a 30-year period ending June 30,2003. i Page 11

i l LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financial Statements (continued) l t f NOTE 10: (continued) Total benefit plan costs for Energy Services include the following (amounts in millions): l Year Ended June 30, l 1997 1996 1993 5 41 39 5 45 Service cost 214 198 185 Interest cost l Actual return on plan assets (667) (407) (431) 453 221 277 l Net amortization and deferral 41 51 76 J Net retirement plan cost Disability and death benefit plan costs 8 9 11 and administrative expenses 5 49 60 87 10 13 18 Amounts capitalized Employee contributions to plan 15 16 18 l l 321 309 370 Total covered payroll The following schedule reconciles the funded status of the plan with amounts reported in the financial statements (amounts in millions): June 30, July 1, 1997 1996 Actuarial present value of benefit obligations: Accumulated benefit obligation' 2,562 $ 2,434 Effect of projected future compensation levels 421 410 Projected benefit obligation 2,983 2,844 Plan assets at fair value 3,til9 3.015 Plan assets in excess of projected benefit obligation (636) (171) Unrecognized prior service cost (14) (15) Unrecognized net gain and effects of changes in assumptions 673 264 Unrecognized net obligation at July 1,1987 (recognized over 15 years) (116) (139) Prepaid pension asset 5 (93) 5 (61) Page 12

O LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financial Statements (continued) NOTE 10: (continued) The discount rate used in determining the plan's projected benefit obligation was 7.5% in both fiscal years 1997 and 1996. The assumed rate ofincrease in future compensation levels and the long-term rate of retum on plan assets were 5.5% and 8.0%, respectively, in both fiscal years 1997 and 1996. Plan assets consist primarily of corporate and government bonds, common stocks, mortgage-backed securities and short-term investments. Health care costs The Department provides certain health care benefits to active and retired employees and their dependents. The cost to Energy Services of providing such benefits amounted to $66, $68 and $80 million for fiscal years 1997,1996 and 1995, respectively. Of these costs, $14, $18 and $17 million were capitalized as Construction Work in Progress and the remainder was charged to expense for fiscal years 1997,1996 and 1995, respectively. The total number of active and retired participants entitled to receive benefits was approximately 12,000 at June 30,1997. l The Department accounts for post-retirement benefits based on Statement of Financial Accounting Standards No.106," Employers' Accounting for Postretirement Benefits Other i Than Pensions," which requires that the cost of postretirement benefits be recognized as expense over employees' service periods. Energy Services is amortizing its actuarially determined transition obligation related to prior service over 20 years. The total fiscal year postretirement benefit costs included in health care benefits above, is summarized as follows (amounts in millions): Year Ended June 30. 1997 1996 1995 Service cost 7 7 s 7 Interest cos; 20 21 21 Amortization of transition obligation 14 14 14 41 42 5 42 l l Page 13

LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financial Statements (continued) NOTE 10: (continued) The accrued postretirement liability is as follows (amounts in millions): June 30, July 1, 1997 1996 j Accumulated postretirement l benefit obligation (APBO): Active employees 132 119 Retirees and surviving spouses 168 167 300 286 Plan assets at fair value 48 APBO in excess of plan assets 252 286 Unrecognized net gain 21 26 Unrecognized transition obligation (216) (230) Accrued postretirement liability 57 82 The assumed health care cost trend rate was 5.5% per year for both fiscal years 1997 and i i 1996. Increasing the health care cost trend rate by one percentage point would increase the APBO as of June 30,1997 by approximately $38 million and periodic cost by approximately $4 million. The discount rate used in determining the plan's accumulated postretirement benefit obligation was 7.5% in both fiscal years 1997 and 1996. Plan assets were contributed in June 1997 and no long term return on plan assets was considered in the computation of l fiscal 1997 postretirement benefit costs. As of June 30,1997, plan assets consist primarily of short-term treasury obligations. No funding policy has been established for the future benefits to be provided under this plan. l NOTE 11: Separation Programs During 1997, the Board of Water and Power Commissioners approved a Targeted Separation Program (the T9P) offering monetary compensation and other benefits to a se. ; group of Energy Serm u,' employees. A total of 50 employees of Energy Services accepted the TSP. All payments dut under the TSP will be made in fiscal year 1998. In 1995, the Board of Water and Power Commissioners approved a Focused Separation Program (the FSP) offering monetary compensation and other benefits to employees who voluntarily terminated employment by resignation or retirement. The FSP principally included a cash payment based on years of service, a health care subsidy and life insurance for a specified perbd. A total of 1,203 employees of the Department accepted the FSP. All payments due under the FSP were made in fiscal year 1996. Page 14

l LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financial Statements (continued) NOTE 12: Loss on Abandoned Projects In fiscal years 1997 and 1996, management formally abandoned several projects and reported losses on abandonment of $13 million and $29 million, respectively. Projects abandoned during fiscal year 1997 were information technology and construction related; projects abandoned during fiscal year 1996 included studies and research related to construction projects. NOTE 13: Commitments and Contingencies Transfers to the reservefund ofthe City ofLos Angeles Under the provisions of the City Charter, Energy Services transfers funds at its discretion to the reserve fund of the City of Los Angeles. Pursuant to covenants contained in the bond indentures, the transfers may not be in excess of net income of the prior fiscal year. Such payments are not in lieu of taxes and are recorded as distributions of retained income. 1 The Department made payments of approximately $97 million in fiscal year 1997 from Energy Services to the reserve fund of the City of Los Angeles. The Department expects to make a transfer declaration of $85 million during fiscal year 1998. Palo Verde Nuclear Generating Station The Price-Anderson Act (the "Act") requires that all utilities with nuclear generating facilities share in payment for claims resulting from a nuclear incident. The Act limits liability from third-party claims to $8.9 billion per incident. Participants in the Palo Verde Nuclear Generating Station currently insure potential claims and liability through commercial insurance with a S200 million limit; the remainder of the potential liability is covered by the industry-wide retrospective assessment program provided under the Act. This program limits - assessments to $79.3 million for each licensee for each nuclear incident occurring at any nuclear reactor in the United States; payments under the program are limited to $10 million, i per incident, per year. Based on the Department's 5.7% direct interest and its 3.95% investment interest through SCPPA, the Department would be responsible for a maximum assessment of $7.7 million, per incident, limited to payments of $1 million, per incident, per year. i l i Page 15

\\ LOS ANGELES DEPARTMENT OF WATER AND POWER Energy Services Notes to Financial Statements (continued) NOTE 13: (continued) Environmentalmatters Numerous environmental laws and regulations affect Energy Services' facilities and operations. Pursuant to regulations of the South Coast Air Quality Management District in Southem California, Energy Services is committed to annual reductions in emission limits of its generating stations in the Los Angeles Basin until the final limit is reached in 2003. Compliance with the annual limits will be accomplished through retrofitting nitrogen oxide controls on generating units and/or purchasing Regional Clean Air Incentive Market (RECLAIM) trading credits from the marketplace. As of June 30,1997, capital expenditures of approximately $84 million have been incurred to retrofit units at the Haynes and Scattergood Generating Stations. Based on the current resource plan, these retrofit pollution controls are projected to shieve compliance with emission limits through year 2005. Litigation A number of claims and suits are pending against the Department for alleged damages to persons and property and for other alleged liabilities arising out ofits operations. In the opinion of management, any ultimate liability which may arise from these actions will not materially affect Energy Services' financial position as of June 30,1997. Risk management Energy Sersices is subject to certain business risks common to the utility industry. The majority of these risks are mitigated by external insurance coverage obtained by Energy Services. For other significant business risks, however, Energy Services has elected to self-insure. It is management's belief that exposure to loss arising out of self.nsured business i risks will not materially affect Energy Services' financial position as ofJune 30,1997. NOTE 14: Fair Value of FinancialInstruments In accordance with the requirements of SFAS No.107," Disclosures about Fair Value of Financial Instruments," the Department has provided the estimated fair value of fmancial instruments using available market information at June 30,1997 and 1996, and the valuation methodologies described below. l l l Page 16

s l LOS ANGELES DEPARTMENT OF WATER AND PO%TR Energy Services l Notes to Financial Statements (continued) NOTE 14: (continued) The carrying amounts and estimated fair values of the Department's financial instruments at June 30,1997 and 1996 are as follows (amounts in millions): June 30. 1997 1996 Carrying Fair Carrying Fair Amount Value Amount Value Investments $ 1,287 $ 1,280 $ 1,152 $ 1,132 Cash and cash equivalents S 420 420 343 343 Customer and other accounts receivable 199 199 196 196 Long-term debt and advance refunding bonds (including current ponion) $ 3,863 $ 3,883 $ 3,799 $ 3,900 Revenue cenificates payable 90 90 90 90 The methods and assumptions used to estimate the fair value of financial instruments are summarized as follows: Cash andcash equivalents The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of these investments. Investments The fair value ofinvestments is based on quoted marke't prices. Customer andother receivables The canying amount of customer and other receivables approximates fair value due to the short maturity of these investments. Long-Term Debt and Advance Refunding Bonds The fair value oflong-term debt, including the current portion, and advance refunding bonds is based upon estimates which represent the present value ofinterest and principal payments on the long-term debt and advance refunding bonds discounted using current interest rates obtainable by the Department for debt of similar quality and maturities. Revenue certificatespayable The carrying amount of revenue certificates payable approximates fair value due to the short maturity of these habilities. Page 17 l}}