ML17279A764

WPPSS,1987 Annual Rept. W/880108 Ltr

ML17279A764
Person / Time
Site:	Columbia, Satsop
Issue date:	12/31/1987
From:	HALVORSON C M, MAZUR D W, SORENSEN G C WASHINGTON PUBLIC POWER SUPPLY SYSTEM
To:	NRC OFFICE OF ADMINISTRATION & RESOURCES MANAGEMENT (ARM)
References
NUDOCS 8801120270
Download: ML17279A764 (80)

Text

'REGUL/MY INFORMATION D ISTF(I BUTI SYSTEM (R IDS)A%CESSION NBR: 880)120270 DOC.DATE: 87/12/3),NDTAR IZED: NO DOCKET FACIL: 50-397 WPPSS Nuclear Pro Jectp Unit 2p Washington Public Powe-05000397 50-4b0 WPPSS Nuclear Pro Jectp Unit 1.Washington Public Powe 05000460 STN-50-508 WPPSS Nuclear Pro Jectp Unit 3p Washington Public 05000508 AUTH.NAME AUTHOR AFFILIATION HALVORSONp C.M.Washington Public Power Supply System MAZURp D.W.Washington Public Power Supply System SORENSEN)G.C.Washington Public Power Supply System RECIP.NAME RECIPlENT AFFILIATION baa 4 a i,.l A=Via

SUBJECT:

"Washington Public Power Supply Sgsp 1987 Annual Rept"/'80108 ltr.DISTRIBUTION CODE: MOOAD COPIEB RECEIVED: LTR J ENCL Q SIZE: TITLE: 80.7)(t>Annual Financial Rap ant NOTES: Standardized Plant.App{'-or permit renewal.Requested exp date 890701.c 05000508 REC IP IENT ID CODE/NAME PD5 PD PD5 PM COPIES LTTR ENCL 1 1 0 RECIPIENT ID CODE/NAME SAMWORTHI R COPIES LTTR ENCL 1 0 INTERNAL'EOD/DOA NRR/PMAS/PTSB EXTERNAL: LPDR*EO~PAB EG LE'1 NRC PDR 1 1 1 1 TOTAL NUMBER OF COPIES REQUIRED'TTR 10 ENCL, I J WASHINGTON PUBLfC POWER SUPPLY SYSTEM P.O.Box 968~3000 George Washington Way~Richland, Washington 99352 Docket Nos: 50-397 50-508 50-460 January 8, 1988 Document Control Desk Office of Nuclear Regulatory Commission Washington, D.C., 20555 Gentlemen:

Subject:

NUCLEAR PROJECTS NOS.1, 2 8 3 ANNUAL FINANCIAL REPORT Enclosed for your information, as required by 10CFR 50.71, ar e three (3)copies of the Washington Public Power Supply System's 1987 Annual Report.The financial statements of the Supply System's Nuclear Projects are not certified by our auditor (Ernst 8 Whinney)in view of certain facts discussed in the Annual Report, with which the Nuclear Regulatory Commission is already familiar.Very truly yours, G.C.Sorensen, Manager Regulatory Programs Encl osur es cc: RM Boucher/PP8L*

WJ Finnegan/PSPEL*

JR Lewis/BPA*

G Knighton/NRC JB Martin/REG V LS Rubenstein/NRC NS Reynolds/BCP8R WL Bryan/WWP*

RE Dyer/PGE*C Bosted/Resident Inspector/901A

• w/o enclosure (copy sent under separate cover)g I po I 0 S c'i 8~0>>20270 87123k~D~CK 05000397 I PDR tag'NOTICE-THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL.THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY BRANCH 016.PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL.REMOVAL OF ANY PAGE(S)FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.

WAS HING TON PUBLIC POWER SUPPLY SYSTEM DEADLINE RETURN DATE-8 1'7 QW m(l 2.~2 Pn<=.~~49./g>s/P, 8i~kUO'g~(ggI',I,'::.

".-: RECORDS FACILITY BRANCH~Y ANNUAL REPORT THE COVER s a 30-year member of the public utility family, the%'ashington Public Power Supply System has played a vital role in the Pacific Northwest's energy supply.Electric generating plants, such as the Packwood Lake Hydroelectric Project, help supply the energy needs of eight million utility customers served by the Bonneville Power Administration.

1987 in Review 2 Looking Ahead 4 Plant Operations 6 Health and Safety 8 Future Resources 10 Supply System Boards 12 Financial Section 13

()significant increase in overall power production, with a corresponding decrease in the unit price of electricity, is evidence of the Supply System's sound financial condition in Fiscal Year 1987.As of Junc 30 Dollars in millions FY 1987 NUCLEAR NANFORO PACKWOOD PLANT GENERATING LAKE OPERATING PROJECTS NO.2 PROJECT PROJECT FY 1986 NUCLEAR NANFORD PACKWOOO PLANT GENERATING LAKE NO.2 PROJECT PROJECT inancia and Operating Highlights Total annual cost Net generation/gWh Cost mills/kWh Fiant availability

(%)Fiant capacity (%)%32.3$33.5$1.1 5520 1749 78 78.3 19.1 14.2 73.2 99.6 100 57.6 23.2 32.2$421.5$36.0$0.9 4360 2583 90 96.6 13.9 10.3 74.5 100 100 45.5 34.5 37.5 NON-OPERATING PROJECTS NUCLEAR PROJECT NO.1 NUCLEAR PROJECT NO.3 NUCLEAR PROJECTS NO/S 4/S NUCLEAR PROJECT NO.1 NUCLEAR NUCLEAR PROJECf PROJECTS NO.3 NO:S 4/S Total annual cost$204.3$171.0$20.6$192.6$169.8$19.8 TOTAL SUPPLY SYSTEM Investment income Rate of return (%)$62.3 7.8$75.1 9.1 1987 IN REVIE%'Fiscal Year 1987, the Washington Public Power Supply System celebrated its 30th year as a member of the nation's public power family.National and inter-national events continued to im-pact the operation and the future of the Supply System and its public utility partners.The historic Tax Reform Act of 1986, the aftermath of the nuclear power plant accident at Chernobyl, and the extended depression of petroleum prices all had a direct bearing on the Supply System.Through it all, the Supply System Executive Board exercised its stewardship over an$8 billion public investment in three opera-ting plants and two deferred nuclear construction projects, while steadi-ly working on pending legal mat-ters including those resulting from the default in 1983 on bonds for WNP-4 and WNP-5.We have also continued our efforts to achieve a major regional goal of refinancing a portion of the outstanding bonds for WNP-1, 2, and 3.Pacific Northwest ratepayers could save hundreds of millions of dollars on their electric bills if the higher interest bonds could be replaced with lower interest rate securities.

That is why the Supply System continues to have such keen interest in the Tax Reform Act passed by Congress in 1986.The bill places many new restric-tions on issuing tax-free bonds.Under the law, the Supply System can issue tax exempt bonds for completing construction on WNP-1 and WNP-3 and for current re-funding of WNP-2 bonds.We were successful in having more favorable language inserted in the proposed technical corrections to the Tax Reform Act that allows the Supply System to current refund bonds for Plant 2 and ad-vance refund, prior to 1992, WNP-1 and WNP-3 bonds as long as the advance refunding bonds do not exceed$2 billion.Of course, current legal dif-ficulties must be resolved before we can regain a credit-rating and return to the market to refinance this debt.An encouraging step was taken in the WNP-0/5 securities litigation when a partial settlement was reached with bond under-writers.I can only hope that this important milestone is the begin-ning of the end of this expensive and time-consuming lawsuit.Additional progress was made in several cases where the Supply System has taken the lead in seeking to collect damages from some contractors associated with constructing the plants.The most important development during the past year was the filing of a com-plaint against the General Electric Company alleging violations of the Racketeer Influence and Corrupt Organizations Act (RICO).This expands our lawsuit filed in January 1985 over design and con-struction deficiencies at Plant 2 that were corrected at great expense prior to commercial operation.

In the aftermath of the nuclear accident at Chernobyl in the Soviet Union, the spotlight continues to focus on the U.S.Department of Energy's N Reactor and if it will be allowed to restart and continue operating.

This is important to the Supply System because N Reactor supplies steam to operate our 860-megawatt Hanford Generating Project.There is continued federal in-terest in possibly acquiring WNP-1 at Hanford as a replacement for N Reactor.The Supply System cooperated with the technical feasi-bility study, released in January, that showed the government could convert the 63-percent complete project to a defense production reactor for one-third the cost and complete it in half the time required to build a new plant.Institutional studies are currently underway to determine the legal and contractual feasibility of acquiring the project to support national defense.The Executive Board remains fully cognizant of the responsibilities and legal ob-ligations it has to the ratepayers of the Northwest and to the holders of WNP-1 bonds to preserve the plant for eventual completion.

In the worldwide energy picture, depressed oil and natural gas prices contributed to a weak domestic market for surplus elec-tricity that strained the financial health of the Bonneville Power Administration.

Although the Supply System again underran its overall budget, BPA's fiscal short-fall has resulted in isolated, but vocal, calls to reduce costs further by terminating WNP-1 and WNP-3.The Executive Board is determined to reduce the cost of preserving these plants as low as is consistent with maintaining the construction permits and licensa-bility.Significant cuts are being made in the budgets for WNP-1 and WNP-3, insuring that pres-ervation costs are reduced to the absolute"rock bottom." The current fiscal year budget calls for annual preservation expenditures of$8 million at WNP-1 and$8.7 million at WNP-3.We plan to reduce these costs even further over the next 12 months, to about$5 million a year for each plant.We remain convinced that both projects should be preserved as the most cost-effective means of meeting the region's future energy needs.In the meantime, the Supply System, with funds from participating utilities through the Bonneville Power Administration, will continue to meet its financial commitments to the holders of bonds for WNP-1, 2, and 3.At the same time, we are actively participating with other public utilities in finding a solution to the problems resulting from the WNP-0/5 default that is fair to our participating utilities, their ratepayers and the people who invested in our securities.

Carl M.Halvorson Executive Board Chairman LOOKING AHEAD he Supply System's primary mission is operating its publicly owned generating facilities safely, dependably and efficiently for the region's public utilities and their ratepayers.

In Fiscal Year 1987, we lived up to that responsibility by reliably generating more than 7.3 billion kilowatt-hours of reasonably priced electric power while remaining well under budget.Increasing our overall power production by more than 1 billion kilowatt-hours over 1986 brought us closer to achieving the standards of excellence we have set for our-selves.The Supply System's drive to establish itself as a leader in the power generation industry is most evident at Plant 2, where the plant capacity factor was up more than 26 percent, while the unit cost of electricity dropped 19 percent.These statistics are indicative of Plant 2's overall success, but do not illustrate our continuing efforts to boost efficiency in several areas.These efforts were best demon-strated during the spring refueling and maintenance outage.By any measure, the 60-day outage was large and complex, involving more than 850 workers.Major jobs in-cluded redesigning and rebuilding defective reactor recirculation pumps, which had limited plant output to 72 percent of capacity;dismantling, cleaning, inspecting and modifying two of the low-pressure turbines;placing new corrosion-resistant tube bundles in the moisture separator-reheaters; making a major modification to the circulating water system, and performing hundreds of corrective and preventive maintenance tasks.Our workers met a tight schedule, working literally around the clock to wrap up the outage in mid-June, but it was well into July before Plant 2 was again operating reliably.We had five unplanned, automatic shutdowns, or scrams, during one 10-day period, promp-ting me to order the plant to remain shut down pending a thorough review of plant opera-tions.The review revealed that the five scrams were caused by an unfortunate sequence of equipment failures that, for the most part, could not have been anticipated.

A thorough, self-critical examination lead to several changes in operating procedures, resulting in a stronger operations organization and a more solid-running plant.The performance-oriented attitude of Supply System employ-ees was further demonstrated in achieving stringent safety goals.Guided by the philosophy that a safe workplace is an efficient one, we have implemented an ambitious program to minimize on-the-job radiation exposure to our own and to contractor employees.

Last year, Plant 2 was at the head of its class with the best record of limiting worker radiation exposure of any U.S.boiling water reactor.Our recirculation pump problems led to higher-than-expected radiation exposures during this year's outage, but Plant 2 continues to stay well ahead of rapidly improving industry trends.Our lost-time accident rate and recordable injury rate are much better than industry averages as our industrial safety program shows steady improvement towards a tough, but achievable goal.Emergency planning is another area where our goals are being met.Annual emergency exercises demonstrate our ability to safeguard the health and safety L LP c>I', of the public in any kind of emergency.

The Supply System, with excellent cooperation from local, state and federal officials, showed it is prepared to deal with an emergency at Plant 2 when these diverse agencies came together this year in a joint effort that won the praise of both the Federal Emergency Management Agency and the Nuclear Regu-latory Commission.

Operations at t'e Supply System's other generating plants, the Packwood Lake Hydroelectric Project and the Hanford Gener-ating Project, were curtailed by events beyond our control.A pro-longed drought limited available water for generation at Packwood while the Hanford Generating Proj-ect, the electric generating arm of the federally-owned N Reactor at Hanford, ended FY 1987 with its future in doubt.Last year we com-memorated 20 years of consistent and reliable power production at HGP, which has maintained an en-viable record of being available to generate electricity 99 percent of the time when steam was available from N-Reactor.

Unfortunately, safety questions and political con-siderations have kept N Reactor in a prolonged shutdown since January 1987 and its future remains uncertain.

HGP continues to be a reliable and valuable regional asset and preliminary studies are under-way to find an alternate source of steam to keep the plant generating electricity well into the future.At WNP-1 and WNP-3, we are completing the transition to a long-term preservation program that will give the region confidence that these valuable generating resources will be available when needed in the future.The Supply System finished FY 1987 on solid financial and operational footing and is well equipped to meet the challenges of the future.We are serious about meeting our performance-based goals.Progress was made in 1987 and I am confident we will attain our ultimate goal of establishing the Supply System in the top 10 percent of the nation's electric utilities.

Donald W.Mazur Managing Director PLANT OPERATIONS O ur Goal: To achieve a standard of excellence in safe, efficient and reliable operations.

hen Plant 2 joined the Hanford Generating Project and the Packwood Lake Hydro-electric Project three years ago as a publicly owned generating resource, the Supply System set out to become one of the top performers in the electric utility industry.The Supply System staff is dedicated to achieving its opera-tions goals.Plant 2 fuel costs remained among the lowest in the industry, while power generation in 1987 was up more than 26 percent due to steps taken to increase generating capacity and plant reliability.

The most important factor in the increased electricity production was the repair of a generic design defect in the plant's two reactor recirculation pumps, a problem that has plagued Plant 2 for most of its operating life.The defect was corrected during this spring's main-tenance and refueling outage, when the pumps were rebuilt using newly designed components.

More than 850 workers took part in the annual outage, completing 6,000 preventive maintenance tasks and 1,200 plant modifications and improvements within a tight schedule.The largest job was removing the 100-ton rotors from two of the plant's three low-pressure turbines.The turbines, which convert the heat energy in the steam to the spinning motion needed to drive the electric generator, were modified to in-crease their performance and durability.

Other jobs ranged from the exotic, such as installing a process computer originally designed to track space satellites to help monitor and control plant opera-The Pacific Northwost's public utllitios receive the 1,100 megawatts of electricity generated by Plant 2.tions, to the mundane, such as testing lubricating oil in thousands of electric motors.In July, Plant 2 returned to operation at its full 1,100-megawatt capacity after eight months of operating at reduced power.The plant continues to run solidly at full power, setting new Supply System generation records.With the Department of Energy's N Reactor, which supplies steam to the Hanford Generating Project, shut down for safety improvements and the Packwood Project idling through a low water year, the people of the region are looking to Plant 2 to continue pro-viding reliable, reasonably priced electricity.

The Supply System in 1987 lived up to its responsibility as a major supplier of electricity to the Pacific Northwest, while moving closer to realizing its goal of being recognized as an industry leader.

Abovot Plant 2 safety and eHicloncy is enhanced by a now plant monitoring computer that helps operators identify trends that could load to problems in plant systems.This spring's maintenance and rofuoling outage included dismantling and inspecting two of Plant 2's low pressure turbines.

HEALTH AND SAFETY~e are committed to maintaining a safe and healthy environment, safe operation is an efficient one-that is the philos-ophy that guides the Supply System in its efforts to protect the health and safety of its workers and the public.This responsibility is evident in the Supply System's"Fitness for Duty" program, that ensures employees work in an atmosphere free of alcohol and drugs.The pro-gram survived a court challenge this year, when the judge agreed that the program is fair and sen-sitive to the concerns of individual employees and is necessary to assure the public that our plants are operated by sound minds and steady hands.The Supply System's regard for its employees is also evident in its ALARA program.ALARA, which stands for As Low As Reasonably Achievable, is the philosophy which governs the radiation protection program at Plant 2.Last year, Plant 2 workers had the lowest radiation exposure of any nuclear power plant of its type.While worker exposure in-creased in 1987 due to a greater-than-anticipated outage workload, the Supply System's record is still one of the best in the industry.Being prepared for a poten-tially serious accident at Plant 2 is a responsibility shared with local, state and federal governments.

It requires teamwork and coopera-tion to bring together more than 600 employees and representatives of outside agencies into one cohesive, effective organization that is capable of coping with all kinds of emergencies.

The Nuclear Regulatory Commission and the Federal Emergency Management Agency continue to give the Plant 2 ls situated ln Washington State's Columbia Basin, whoro abundant water and inexpensive electricity have helped transform mllllons of acres of arid desert Into productive farmland.Supply System good marks for timely notification of the public and for successful recovery operations in annual plant emergency excercises.

The quality of life in the rural area surrounding Plant 2 is assured by constant monitoring by environmental scientists and biologists.

Environmental studies in the surrounding area are routinely conducted on milk and farm crop samples, soil, vegetation, water from the nearby Columbia River, and aquatic and terrestrial animal life, to make sure plant operations have minimal impact on the environment, The public places its trust in the Supply System and its employees.

The Supply System is committed to doing everything possible to live up to its respon-sibilities to protect its neighbors and its employees.

Ir r ('r.rr(r~rt l., p4(" pe%Above: Worker exposure to radiation at Plant 2 is minimized through a program that Is among tho best in the industry.Tho noarby Columbia River and the surrounding countryside are routinely monitored to assure that Supply System operations have mlnlmal impact on tho onvironmont.

FUTURE RESOURCES Lt he Supply System is poised to meet the challenges of the future.ublic utilities will face new challenges in the next 30 years as the industry evolves.Supply System initiatives in employee training, preserving WNP-1 and WNP-3 for future completion and extending the life of the Hanford Generating Project are evidence of the organization's commitment to the future.The future of the Pacific Northwest's energy supply is being safeguarded by the Supply System's efforts to preserve Nuclear Projects 1 and 3 for eventual completion.

Construction was halted at WNP-1 in 1982 and at WNP-3 in 1983, but the mostly completed plants are still in superb condition.

A two-year design asset preservation program was begun in FY 1987 to protect the completed design work and to ensure that continuity is maintained in the engineering ef-fort during the delay period.The readiness review program, a joint effort with the Nuclear Regulatory Commission to inspect and approve construction work done to date, was halted due to budget cuts, but the groundwork was laid to resume the program at a later date.The goal of the preservation program is to make sure WNP-1 and 3 are available when needed, since they remain the region's least expensive source of new electrical generation.

Another valuable regional resource, the Hanford Generating Project, remains in top working condition following 20 years of economical and reliable service.However, its steam source, the US.Department of Energy's N Reactor, is nearing the end of its operating life.Keeping HGP as a viable source of low-cost electricity is a high priority and efforts are under-way to find a new, dependable heat source.j (a long.term presorvation of WNP-1 and WNP-3 Is being acbiovod offi~ciontly and economically.

0 (The Supply System's most valuable resource is its employees.

As a fully accredited member of the National Academy for Nuclear Training, the Supply System has developed training programs that ensure workers are motivated, qualified and skilled in their jobs.Performance-based training is continually conducted in reactor operations, health physics and chemistry, decontamination, maintenance, safety, first aid, fire protection, emergency procedures and security.With training pro-grams complementing on-the-job experience, employees are kept abreast of new concepts and work practices.

The region's public utilities will be hard-pressed in the future to maintain the Pacific Northwest's supply of abundant, low-cost elec-tricity.The Supply System is deter-mined to help meet this challenge with reliable generation at its operating plants and responsible preservation of its deferred projects.10 Above: Completion of WNP-l and 3 is tho most cost.effective means of supplying futuro noods.'.vg Il~Tho Supply Systom's training programs are fully accredited by tho National Academy for Nucloar Training, onsuring that workers meet the highest standards.

EXEC UTI VE BOARD VERA CLAUSSEN (Assistant Secretary)

Commissioner Grant County PUD KENNETH R.COCHRANE Commissioner Franklin County PUD CORNELIUS R.DUFFIE (Secretary)

Consultant Portland PARKER L.KNIGHT Commissioner Skamania County PUD PAUL J.NOLAN (Vice Chairman)Attorney Tacoma WILLIAM D.SCOTT Commissioner Chelan County PUD SAM J.FARMER Director Battelle Seattle Research Center SYDNEY STEINBORN Consultant Seattle CARL M.HALVORSON (Chairman)

President HalvorsonMason Corporation Portland FRANK N.WARD Commissioner Klickitat County PUD LOUIS H.WINNARD Senior Management Consultant Los Angeles BOARD OF DIRECTORS VERA CLAUSSEN (Secretary)

Commissioner Grant County PUD DONALD R.CLAYHOLD Manager Benton County PUD RALPH E.OLSON Commissioner Grays Harbor County PUD ELMER E.ROLOFF Commissioner Pacific County PUD EDWARD E.COATES Director Department of Public Utilities City of Tacoma KENNETH R, COCHRANE Commissioner Franklin County PUD RANDALL W.HARDY Superintendent Seattle City Light PARKER L.KNIGHT (Vice President)

Commissioner Skamania County PUD WILLIAM G.KUEHNE Commissioner Ferry County PUD DAVID LEE MYERS Commissioner Wahkiakum County PUD 12 JAMES G.ROWLAND Commissioner Okanogan County PUD PAUL L.RUNYAN (Assistant Secretary)

Commissioner Clark County PUD WILLIAM D.SCOTT Commissioner Chelan County PUD KEITH SEDORE Energy Services Director City of Richland ROGER C.SPARKS (President)

Commissioner Kittitas County PUD FRANK N.WARD Commissioner Klickitat County PUD Raymond E.Colbert and Lois M.Poweli served on the Executive Board and Board of Directors through 12/31/86.

REPORT OF INDEPENDENT ACCOUNTANTS Executive Board Washington Public Power Supply System Richland, Washington We have examined the individual financial statements, as listed in the finan-cial statements section of the table of contents, of Washington Public Power Supply System's Nuclear Plant No.2, Hanford Generating Project, Packwood Lake Hydroelectric Project, Nuclear Project No.1, Nuclear Project No.3, Nuclear Projects No.'s 0 and 5, and the Agency Clearing Account for the year ended June 30, 1987.Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

As discussed in Note E to the financial statements, Washington Public Power Supply System Nuclear Projects No.'s 1 and 3 are involved in disputes con-cerning costs shared with Washington Public Power Supply System Nuclear Projects No.'s 0 and 5.Additionally, disputes arising from the extended con-struction delay of Washington Public Power Supply System Nuclear Project No.3 have been tentatively settled;however such settlement is subject to approval by the Court.The ultimate amount of additional costs, if any, to be borne by Nuclear Projects No.'s 1 and 3 due to these matters is not determinable at the present time.As discussed in Note E to the financial statements, creditors of Nuclear Projects No.'s 4 and 5 have threatened to attempt to obtain payment from assets or funds held by other projects of the Supply System or the revenues pledged thereto.Supply System management is of the opinion that creditor Report of Independent Accountants 14 Financial Statements:

inancia Section Balance Sheets 16 Statements of Operations 18 Statement of Changes in Deficiency in Assets 18 Statements of Changes in Financial Position 19 Outstanding Long-Term Debt 20 Notes to Financial Statements 23 Statement of Debt-Service Requirements 34 13 claims can only be realized from the assets, funds or revenues of the projects to which such claims relate.If it is found that creditors are not limited to payment of their claims from the project to which such claims relate, it will have a material adverse impact on the Supply System.As explained in Note D, accrued liabilities have been reflected in the accom-panying balance sheets for estimated contract settlement and termination costs.Due to the nature of the settlement process, the ultimate amounts owing to creditors are not fully determinable at the present time.In addition, as explained in Note E, there are various other matters of litigation for which the outcome is not presently known.In view of the significance of the matters discussed in the preceding para-graphs, we are unable to express, and we do not express, an opinion on the financial statements of the Supply System's Nuclear Plant No.2, Hanford Generating Project, Packwood Lake Hydroelectric Project, Nuclear Project No.I, Nuclear Project No.3, Nuclear Projects No.'s 0 and 5, and Agency Clearing Account referred to above.Seattle, Washington September 11, 1987, except as to the eighth and ninth paragraphs of Note D as to which the dates are October 21 and 8, 1987, respectively.

BALANCE SHEETS As of June 30, l987 Dollars in thousands~~I ASSETS NUClEAR HANFORD PACKWOOD NUClEAR NUCLEAR NUCLEAR AGENCY PLANT GENERATING LAKE PROJECT PROJECT PROJECTS CLEARING NO.2 PROJECT PROJECT NO.I NO.3 NO.'S SIS ACCOUNT CURRENT ASSETS-OPERATING FUND Cash and investments Accounts receivable Inventories Prepaids and other assets Due from participants Due from other projects and agency clearing account Due from other funds$5,514 4,872 18,592 997 584 854 29,246 382 484 179 27 137 15Z 180 898 29 1,430 14 29, 195 30 568$3,501$1,038$8,069$7,742$$4,242 211 847 995 60 659 5,444 I 245 38,846 38 490 6,295 RESTRICTED ASSETS Notes B and C Special funds Cash and investments Receivable from joint owners Due from other projects and agency clearing account Accounts receivable Prepaids and other assets Due from other funds 30,391 30,391 3,191 3,191 295 125,773 29,478 6,302 7,035 138 7,822 251 17,443 3,431 4,002 593 68 49 19 614 15,795 295 137,708 56,610 24,495 Revenue fund Cash and accounts receivable Due from other projects Chemical Bank fund accounts Debt service funds cash and investments UTILITY PLANT AND EQUIPMENT Note B In service Improvements to U.S.government facilities Less allowance for depreciation and amortization 844 349 2,687+3,264,681 67,546 12,354 11,242 16,528 (274,369 (61 350)(6 047)(1,612)2,990,312 22,724 6,307 9,630 114,534 4 272 712 229,718 181,813 105,637*144,925 7 463 1,007 367,426 238,423 134,012 20,036 (12,183)7 853 Construction work in progress Construction work in progress-deferred projects Costs of terminated projects Nuclear fuel and prepaid enrichment services Less amount charged to joint owners Less allowance for estimated unrecoverable costs 7,268 104,108 Z,237,558 2,420,686 3,118,530 260,837 53,967 (622,154)(87,468)(3,019,007)

OTHER ASSETS AND DEFERRED CHARGES Unbilled reimbursable costs Unamortized debt expense TOTAL ASSETS 3, 101,688 22,724 6,307 2,508,025 1,852 499 12 055 7 853 3,169 2,687 81 19 3 264 2 386$3,310,441$35,712$11,265$Z,917,561$2, 131,798$146,067$14,148~Assets under control of Chemical Bank 16 LIABILITIES NUCLEAR PLANT NO.2 HANFORD PACKWOOD GENERATING lAKE PROJECT PROJECT NUCLEAR PROJECT NO.I NUCLEAR PROJECT No.2 NUCLEAR PROJECTS NO/S S/S AGENCY ClEARING ACCOUNT CURRENT LIABILITIES-OPERATING FUND Accounts payable and accrued expenses Amounts withheld from contractors Advance payments from participants Due to other projects and agency clearing account Amounts due power purchasers Amounts due other funds 1,408 1,388 3,162 2,037 326 31,387 1,536 364 1,100 32,050 13,'398 614 20 035$23,150$44$30$20$21$$8,838 1,002 57,659 1,944 1,130 35,846 35,491 9,840 LIABILITIES

-PAYABLE FROM RESTRICTED ASSETS Notes B and C Special funds Accounts payable and accrued expenses Amounts withheld from contractors Due to other projects and agency clearing account Due to other funds Revenue fund accounts payable and accrued expenses Debt service funds Accrued interest payable Due to other funds-net Chemical Bank fund accounts Accounts payable and accrued expenses DEBT IN DEFAULT, CURRENTLY PAYABLE Revenue bonds payable Subordinated revenue notes 2,510 24 881 27,391 4,364 4,364 31,755 691 691 258 207 465 1,156 8,153 9,013 25,797 3,143 8,434 6,303 17,280 8,034 15 22,950 18,883 15 34,246 53,610 40 134 160 122 103,326 82,500 806,814 6,244',446 122 109,570 89 946 806 814 137 143,816 143 556 847,208 2,250,000 67,866 2,317,866 LONG-TERM DEBT Note C Revenue bonds payable Less unamortized discount on bonds-net OTHER LIABILITIES AND DEFERRED CREDITS Unearned revenue Costs reimbursed under net billing Deferred gain on redemption of revenue bonds Advances and other 2,233,775 23,820 9,978 2, 109,560 1,583,830 (64,153)(446)(74)(49 199)(36 148)2,169;622 23,374 9,904 2,060,361 1,547 682 1,008,157 6,653 674,538 402,069 1,185 94 43,248 1,400 3,000 3,000 4 308 1,051,405 9,238 94 677,538 405,069 4,308 TOTAL LIABILITIES Deficiency in assets TOTAL LIABILITIES AND DEFICIENCY IN ASSETS 3,310,441 35,712 11 265 2,917,561 2,131,798 3,165,074 14,148 (3,019,007)

$3,310,441$35,712$11,265$2,917,561$2,131,798$146,067$14,148 17 STATEMENTS OF OPERATIONS For the year ended June 30, 1987 Dollars in thousands NUCLEAR PLANT NO.2 HANFORD GENERATiNG PROJECT PACKWOOD LAKE PROJECT OPERATING REVENUES$432,271$33,540$1,101 OPERATING EXPENSES Nuclear fuel Waste disposal Decommissioning Reactor availability Depreciation and amortization Operations and maintenance Administrative and general Taxes NET OPERATING REVENUE/(LOSS) 23,387 5,499 941 103,504 75,630 21,890 1,967 232 818 199,453 31,485 2,381 3,132 761 (3 900 33 859 (319)264 508 106 3 220 OTHER INCOME AND EXPENSE Investment income Interest expense and discount amortization NET REVENUE 16,639 (216,092)$$1,239 (920)151 (371)STATEMENT OF CHANGES IN DEFICIENCY IN ASSETS For the year ended June 30, 1987 Dollars in thousands NUCLEAR PROJECTS NO:S 4/S BALANCE AT JULY 1, 1986 ADDITIONS/(DEDUCTIONS)

Interest expense Net increase in costs related to terminated nuclear projects Administrative costs associated with asset disposition Received from asset sales Investmcnt income Increase in recoverable value estimates BALANCE AT JUNE 30, 1987$2,817,154 198,194 15,012 3,075 (2,162)(8,289)(3,977)$3,019,007 18 STATEMENTS OF CHANGES IN FINANCIAL POSITION For the year ended June 30, 1987 Dollars in thousands OPERATiNG PROJECTS SOURCE OF FUNDS Operations-net revenue Items not affecting working capital Depreciation and amortization Increase/(decrease) in costs reimbursable from power purchasers Less gain on redemption of revenue bonds Total from Operations TOTAL SOURCE OF FUNDS NUClEAR PlANT NO.2$129,584 (59,863)69,721$69,721 HANFORD GENERATING PROJECT 2,444 1,919 (445)3,918$3,918 PACKWOOD lAKE PROJECT (10)(72)186$186 USE OF FUNDS Construction and capital Fuel Net improvements Cost of revenue bonds purchased and retired Increase (decrease) in restricted assets Changes in working capital Cash and investments Receivables and other Payables and other Net increase in working capital TOTAL USE OF FUNDS$21,611 23,185 24,925 69,721 (17,051)(10,696)27,747$69,721$31 (16)6,616 (2,713)3,918 (1,836)(520)2,356$3,918 111 71 186 (21)(85)106$186 NON-OPERATiNG PROJECTS SOURCE OF FUNDS Collected under net billing Interest income Charged to joint owners Due from participants Received from asset sales Net decrease in restricted funds NUClEAR pRD JEcr NO.I$228,700 23,529 4,926 8,863 NUClEAR PROJECT NO.3$177,259$12,494 5,129 3,438 NUClEAR PROJECTS NO.'S 4/S 8,789 (99)2,162 206,497 TOTAL SOURCE OF FUNDS$266,018$198,320$217,349 USE OF FUNDS Costs related to construction or termination Interest expense Nuclear fuel Financing, trustee and paying agent expenses Bonds redeemed Revaluation of investments Net transfers to Hanford Generating Project Administrative costs associated with asset disposition Net increase in restricted funds$15,747 206,652 2,998 127 14,855 90 25,549$21,335 165,001 2,938 25 6,530 96 2 395$(1,223)198,194 16,804 499 3,075 TOTAL USE OF FUNDS$266,018$198,320$217,349 19 OUTSTANDING LONG-TERM DEBT Dollars in thousands NUCLEAR PLANT NO.2 EFFECTIVE DATE INTEREST OFFERING SERIES OF SALE RATE(8)PRICES COUPON RATESERIAL OR TERM MATURITIES JUNE SO, 19S7 Revenue Bonds (excludes$2,400,000 due July 1, 1987)Revenue Bonds (excludes$1,800,000 due July 1, l987)Revenue Bonds (excludes$1,500,000 due July 1, 1987)Revenue Bonds (excludes$1,500,000 due July l, 1987)Revenue Bonds (excludes$1,320,000 due July 1, 1987)Revenue Bonds (excludes$3,245,000 due July 1, 1987)Revenue Bonds (excludes$2,535,000 due July 1, 1987)Revenue Bonds (excludes$2,785,000 due July 1, 1987)Revenue Bonds (excludes$2,000,000 due July I, 1987)1973 6-26-73 5.66%1974 7-23-74 7.21 1974 A.11-26-74 7.67 1975A 3.6-75 6.71 1976 6-3-76 6.63 1976A 11-18-76 5.87 1978 7-11-78 6.71 1979 3-13-79 6 49 1979A 10.17-79 7.69 (A)100 (A)100 100 (A)100 100 (A)100 100 (A)99.25 100 (A)100 99.50 (A)100 100 (A)100 100 (A)100 100 5.00-5.10%5.70 6.50-6.90 7.00 7.375 7.20 740 7.75 6.60 6.60 6.875 5.50-6.25 6.625 6.75 5.50-5.875 6.00 6.00 5.50-6.60 6.80 6.875 5.50-6.00 640 6.75 6.60-7.30 7.60 7.75 7-148/1991 7-1-2012 7-148/1994 7-1-1999 7-1-2012 7-148/1994 7-1-1999 7-1-2012 7-148/1994 7-1-1999 7-1-2012 7-148/1998 7-1-2006 7-1-2012 7-148/2002 7-1-2007 7-1-2012 7-148/2000 7-1-2006 7-1-2012 7-148/1999 7-1-2004 7-1-2012 7-14S/1999 7-1-2004 7-1-2012 11,200 124,400 135,600 16,200 15,000 37,000 68,200 14,000 15,000 78,000 107,000 12,800 15,000 78,000 105,800 21,445 42,300 49 860 113,605 76,800 44,815 60,990 182,605 55,540 45,520 66,230 167,290 48,315 33,490 83,605 165,410 34,375 23,050 57,000 114,425 Revenue Bonds (excludes$1,855,000 due July 1, 1987)1980 10-2140 9.36 (A)100 100 (A)(A)9.30 9.60 9.25 8.25 7-1-2001 7-1-2006 7-1-2011'-1-2012 8.90-10.90.

7-148/1997 31,675 23,735 46,070 75,045 19,920 196,445 Revenue Bonds 1981A 9-441 12 44 100 57.895 99 100 H.375 8.25 14.50 13.25 7-1-2001 7-1-2003 7-1-2006 7-1-2012 30,000 100,000 30,000 50,000 Z10,000 Revenue Bonds (excludes$1,780,000 due July 1, 1987)1982A 2-11-82 14.76 100 10.50-13.75 100 14.50 99.25 14.75 7-148/1996 7-1-2002 7-1-2012 29,945 51,665 215,000 296,610 (A)Various Prices (B)Based on original issue 20 EFFECTIVE DATE INTEREST OFFERING COUPON SERIES OF SALE RATE(8)PRICES RATE SERIAL OR TERM MATURITIES JUNE 30, 1981 Revenue Bonds (excludes$2,205,000 due July I, 1987)1982B 5-2042 13.82%100 10.50-13.00%100 13.875 7-148/1996 7-1-2012$35,185 139,320 174,505 Revenue Bonds 1982 C 5-2042 13.89 100 100 13.50 13.875 7-1-2002 7-1-2012 56,960 139,320 196,280$2,233,775 HANFORD GENERATING PROJECT Revenue Bonds 1963 5-8-63 3.26 98 3.25 9-1-1996$23 820$23,820 PACKWOOD LAKE PROJECT Revenue Bonds (includes$190,000 due within one yeat at June 30, 1987)1962 3-20-62 3.66 99 425 3.625 1965 11-4-65 3.76 100.5 3.75 3-1-2012 3-1-2012$7,553 2 525$9,978 NUCLEAR PROJECT NO.I Revenue Bonds (includes$1,500,000 due July I, l987)Revenue Bonds (includes$1,665,000 due July I, 1987)1975 9-18-75 7.73 1976A 2-4-76 6.84 (A)6.25-7 40 7-1-87/2000 100 7.70 7-1-2010 100 7.75 7-1-2017 (A)6.00-6.25 7-147/1998 100 6.90 7-1-2010 100 7.00 7-1-2017$35,000 58,300 74,700 168,000 28,710 66,485 76,495 171,690 Revenue Bonds (includes$I,940,000 due July I, l987)Revenue Bonds (includes$2,450,000 duc July I, 1987)Revenue Bonds (includes$1,980,000 due July I, 1987)1976B 8-31-76 6.37 (A)5.00-5.90 7-147/1998 100 6.50 7-1-2010 99.50 6.50 7-1-2017 1978A 3-21-78 5.69 (A)5.00-5.50 7-147/2002 100 5.80 7-1-2010 100 5.875 7-1-2017 1978B 12-5-78 6.61 (A)5.50-6.00 7-147/1998 100 6.35 7-1-2003 100 6.60 7-1-2009 99.50 6.80 7-1-2017 31,910 66,940 71,235 170,085 57,635 50,920 64,810 173,365 33,035 22,305 38,190 81,150 174,680 Revenue Bonds (includes$1,435,000 due July I, 1987)1979 6-19-79 6.64 (A)100 100 100 6.00 640 6.70 6.80 7-147/1998 7-1-2003 7-1-2009 7-1-2017 25,625 18,560 32,370 69 685 146,240 Revenue Bonds (includes$4,500,000 due July I, 1987)1980A 8.5-80 8.87 (A)7.00-8.25 100 9.00 100 9.ZO 99.00 9.25 (A)7.75 7-147/1995 7-1-2002 7-1-2005 7-1-2013 7-1-2017 51,000 37,000 16,950 70,550 30 000 205 500 21 OUTSTANDING LONG-TERM DEBT Dollars in thousands~~EFFECTIVE DATE INTEREST SERIES OF SALE RATE($)OFFERING PRICES COUPON RATE SERIAL OR TERM MATURITIES JUNE 30, 1987 Revenue Bonds Revenue Bonds Revenue Bonds Revenue Bonds Revenue Bonds 1981A 4-1341 11.30 1981B 4-1341 11.30 198 1C 4.13-81 10.29 198 1D 9841 14.78 1982 A 2-11-82 14.79%(A)100 (A)100 100 57.895 100 100 100 99.25 11.30-13.00%

11.625 10.00 10.25 14.375 8.25 15.00 10.50-13.75 14.50 14.75 7-1-96/2003 7-1-2012 7-1-2016 7-1-2015 7-1-2001 7-1-2003 7-1-2017 7-148/1996 7-1-2002 7-1-2017 2S,580 91,420 120,000 40,000 40,000 20,000 30,000 265 000 315,000 29,355 50,645 305,000 385,000$2,309,5M NUCLEAR PROJECT NO.3 Revenue Bonds (includes$1,200,000 due July l, 1987)Revenue Bonds (includes$965,000 due July 1, 1987)Revenue Bonds (includes$2,825,000 due July 1, 1987)Revenue Bonds (includes$1,910,000 due July 1, 1987)Revenue Bonds (includes$2,025,000 duc July 1, 1987)Revenue Bonds Revenue Bonds Revenue Bonds Revenue Bonds (A)Various Prices (B)Based on original issue 22 1975 12-3-75 7.87 1976 4-13-76 6 48 1977 9-12-77 5.71 1978 9-12-78 6.27 1981A 2-1141 10.80 1981 B 9441 14.80 198 2 A 2-11-82 14.83 1982 B 5-2042 13.95 1982C 5-20-82 13.63 (A)100 100 (A)99.625 100 (A)99.50 99.50 (A)100 99 (A)100 99.50 88.50 88.50 57.895 99 100 100 100 99.25 100 99.50 6.00-7.25 7.875 7.875 5.50-6.00 6.50 6.60 5.00-5.50 5.70 5.80 5.90-6.00 6.375 6.40 9.50-12.50 11.125 11.125 9.75 9.75 8.25 14.50 15.00 10.50-13.75 14.50 14.75 10.50-13.00 13.875 13.50 7-1-87/1998 7-1-2010 7-1-2018 7-147/1998 7-1-2010 7-1-2018 7-147/2000 7-1-2009 7-1-2018 7-1-87/2004 7-1-2010 7-1-2018 7-147/2001 7-1-2005 7-1-2010 7-1-2017 7-1-2018 7-1-2003 7-1-2006 7-1-2018 7-1-88/1996 7-1-200 Z 7-1-2018 7-1-88/1996 7-1-2018 7-1-2002 22,125 52,695 71,160 145,980 16,230 35,100 45,295 96,625 53,960 63,535 107,160 224,655 62,955 42,985 90,630 196,570 64,375 40,535 80,310 18,950 20 830 225,000 20,000 20,000 185,000 225,000 6,055 10,445 148,500 165,000 9,195 280,925 290,120 14,880$3,583,830 NOTES TO FINANCIAL STATEMENTS NOTE A-GENERAL The Washington Public Power Supply System was organized in 1957 as a municipal corporation and joint operating agency of the State of Washington.

It is empowered to acquire, construct and operate facilities for the generation and transmission of electric power.On June 30, 1987, its membership consisted of 13 public utility districts and three municipalities that own and operate electric systems within the state of Washington.

The Supply System constructed and is operating Nuclear Plant No.2, the Hanford Generating Proj-ect, and the Packwood Lake Hydroelectric Project.Nuclear Project No.1 is in the sixth year of an ex-tended construction delay, Nuclear Project No.3 is in the fifth year of an extended construction delay, and Nuclear Projects No.'s 4 and 5 were termin-ated on January 22, 1982.Nuclear Plant No.2, the Hanford Generating Proj-ect, the Packwood Lake Hydroelectric Project, and Nuclear Projects No.'s 1 and 4 are wholly owned by the Supply System.Nuclear Project No.3 is jointly owned by the Supply System (70 percent)and four investor-owned utilities (30 percent).Nuclear Project No.5 is jointly owned by the Sup-ply System (90 percent)and one investor~wned utility (10 percent).Each joint owner is responsible for its share of the costs of construction, operation or termination, and is entitled to its share of the projects'perating capability.

The Supply System is currently unable to obtain additional financing through the sale of bonds due to pending litigation.

Nuclear Project No.1 preser-vation costs are currently funded by proceeds from bonds sold in February, 1982, while Nuclear Proj-ect No.1 debt service is funded by project par-ticipants and Bonneville Power Administration under net-billing agreements (See Note C, Security-Agreements and Contracts).

The Supply System's 70 percent share of Nuclear Project No.3 preservation costs and debt service applicable to the Supply System's ownership share of Nuclear Project No.3 are currently funded by project par-ticipants and Bonneville Power Administration under net-billing agreements.

Nuclear Projects No's.4 and 5 termination costs are paid by Chemical Bank, bond fund trustee, from funds re-maining at the time of project termination (See Note D)and from asset sales revenues.NOTE B-

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES The Supply System has adopted accounting policies and practices that are in accordance with generally accepted accounting principles applicable to utilities and governmental organizations.

Separate books of account are maintained for each project, except that Nuclear Projects No.'s 4 and 5 are accounted for as a single entity, due to the legal separateness of each utility system as established by bond resolutions.

In addition, the Supply System maintains an Agency Clearing Account for centralized control and accounting of certain fixed assets, such as data processing equipment, and for payment and ac-counting of internal services, payrolls, benefits, administrative and general expenses, and certain common contracted services on a cost-reimbursable basis.Assets of the Agency Clearing Account are owned by Supply System projects and are held in trust by the Agency Clearing Account.Deprecia-tion relating to fixed assets is charged to the appropriate projects directly or indirectly based on actual usage.Liabilities of the Agency Clearing Account represent accrued payrolls, vacation pay, employee benefits, and common accounts payable which have been charged directly or indirectly to projects and will be funded by projects when paid.Net amounts owed to or from Supply System proj-ects are recorded under Current Liabilities

-Due To Other Projects, or Current Assets-Due From Other Projects on the Agency Clearing Account balance sheet.CURRENT MATURITY OF REVENUE BONDS Current assets and liabilities in the accompanying balance sheets exclude current maturities of revenue bonds and accrued interest because debt service funds are provided for their payment.23 NOTES TO FINANCIAL STATEMENTS

~t~RESTRICTED ASSETS In accordance with project bond resolutions and related agreements, separate restricted funds are established for each of the projects.The assets held in these funds are restricted for specific uses in-cluding construction, debt service, capital addi-tions, extraordinary operation and maintenance, termination, and decommissioning.

Cash and investments in the Operating Fund of Nuclear Plant No.2 and in Special Funds of Nuclear Projects No.'s 1, 3, 4, and 5 include$18,744,149 retained in escrow for contractors as of June 30, 1987.CASH AND INVESTMENTS Cash and investments for Nuclear Plant No.2, the Hanford Generating Project, the Packwood Lake Hydroelectric Project, and Nuclear Projects No.'s 1 and 3 are maintained separately.

Cash and investments for Nuclear Projects No.'s 4 and 5 are pooled.All investments are held in the Supply System's name by safekeeping agents.INVESTMENT INCOME Investment income consists of interest earned on investments, realized gains and losses resulting from the sale of investments, and unrealized losses applicable to certain investments.

Investment in-come relating to operating plants is recorded as a credit to operating costs.With respect to Nuclear Projects No.'s 1 and 3, income earned on any con-struction fund investments is recorded as a credit to Construction Work in Progress-Deferred Proj-ects, shown on the balance sheet, and income earned on investments held in all other funds is treated as a reduction of funding required under the net-billing agreements.

Investment income relating to Nuclear Projects No.'s 4 and 5 is credited to Costs of Terminated Projects, shown on the balance sheet.UTILITY PLANT AND EQUIPMENT-DEPRECIATION AND AMORTIZATION Utility plant and equipment are stated.at original cost, and are depreciated by the straight-line method over their estimated useful lives.The Supply System's deposits at year-end were en-tirely covered by federal depository insurance or by a pool of public funds through the Washington Public Deposit Protection Commission.

Statutes authorize the Supply System to invest in obligations of the United States Treasury, United States government agencies, banks, savings and loan corporations, and corporate mortgage com-panies.Supply System investment policies limit investment authority to obligations of the United States Treasury, Federal National Mortgage Association, Federal Home Loan Banks, and Federal Home Loan Mortgage Corporation.

Investments held in the Bond Fund Reserve Ac-counts (included in Debt Service Funds)and Reserve and Contingency Funds (included in Special Funds)are stated at the lower of purchase price, par value, amortized cost or market as re-quired by bond resolutions.

All other investments are stated at amortized cost and include accrued interest.The combined carrying value of invest-ments for all projects at year-end (including ac-crued interest)approximates the market value.Improvements to U.S.governmentwwned facilities are amortized over the period covered by the con-tract for dual-purpose operation of the U.S.Department of Energy's New Production Reactor.CAPITALIZATION OF CONSTRUCTION COSTS AND EXPENSES During the normal construction phase of a project, it is the Supply System's policy to capitalize all costs relating to the project, including interest (net of interest income), administrative and general expense, amortized financing expense and certain other expenses.Interest expense (net)during con-struction is allocated to nuclear fuel and plant based on cumulative cash utilization.

Admin-istrative and general expenses and overhead expenses are allocated to projects on the basis of direct usage or direct salary cost.As of July 1, 1984, the Supply System discon-tinued capitalizing interest expense (net)applicable to Nuclear Projects No.'s I and 3 because of the extended delay of these projects.The interest ex-pense, which is funded by payments under net-24 billing agreements, will not be capitalized during the delay period.Such net interest expense totaled$191,147,375 and$152,625,365 for Nuclear Projects No.'s 1 and 3, respectively, for the year ended June 30, 1987.COSTS OF TERMINATED PROJECTS For Nuclear Projects No.'s 4 and 5, the costs of construction through January 22, 1982, the date of termination, and the costs of termination and other related costs subsequent to that date are shown at their estimated net realizable value in the accompanying balance sheets as of June 30, 1987, based on Supply System staff estimates.

The amount estimated for unrecoverable costs ($3,019,007,240) has been reflected as Allowance for Estimated Unrecoverable Costs and as Deficien-cy in Assets in the accompanying balance sheets.FINANCING EXPENSE AND BOND DISCOUNT Financing expense and bond discount applicable to each project are amortized by the straight-line method over the period of each respective bond issue to project capital cost or operating cost, as appropriate, during plant construction or operation.

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

Payments received for debt service during construc-tion under Nuclear Plant No.2 net-billing agree-ments are recorded as Unearned Revenues on the balance sheet and will be reported as Revenues over the operating life of the project.Payments received during construction under Nuclear Proj-ects No.'s 1 and 3 net-billing agreements have been reclassified as Costs Reimbursed Under Net Billing because of the uncertainty as to when these projects will be operational, as explained in Note E.For Nuclear Plant No.2, Hanford Generating Project and Packwood Lake Hydroelectric Project, the difference between cumulative depreciation and amortization cost, and cumulative amounts receiv-ed for payment of long-term debt is reflected as Unearned Revenue or Unbilled Reimbursable Costs, as appropriate, which will be amortized over the operating life of the project.NUCLEAR FUEL EXPENSE Nuclear Plant No.2 capitalized nuclear fuel cost is amortized to nuclear fuel operating expense on the basis of quantity of heat produced for genera-tion of electric energy.Current period operating expenses also include a charge for future spent nuclear fuel storage and disposal to be provided by the Department of Energy in accordance with the Nuclear Waste Policy Act of 1982.Such charge is based on energy generated.

DECOMMISSIONING Estimated Nuclear Plant No.2 decommissioning costs are being accrued and funded currently.

Monthly payments are made into a sinking-fund which, with accumulated interest, will be adequate to fund decommissioning costs at the end of the 00-year plant operating life.Sinking-fund re-quirements are currently based on estimated decommissioning costs of$114 million (in 1982 dollars).Payments to the decommissioning fund for Nuclear Plant No.2 for fiscal year 1987 aggregated

$941,242.RETIREMENT PLAN The Supply System participates in the Public Employees'etirement System of the State of Washington which provides for retirement benefits to eligible employees based on compensation and length of service.The cost of the plan to the Supply System is determined by the retirement system's board.The actuarially computed value of pension benefits exceeds the fund assets for the retirement system.However, because the retire-ment system is a multi-employer system, the amount of any excess that relates to the Supply System is not available.

The Supply System's required contribution was$5,114,396 during the year ended June 30, 1987.25 NOTES TO FINANCIAL STATEMENTS NOTE C-LONG-TERM DEBT Except for Nuclear Projects No.'s 4 and 5, which were financed together as one utility system, all Supply System projects are financed separately.

The revenue bonds issued for each project are payable solely from the revenues of that project.Outstanding revenue bonds of the various projects as of June 30, 1987, are presented on pages 20 through 22.SECURITY-AGREEMENTS AND CONTRACTS Project participants have purchased the Supply System's ownership share of project capability of Nuclear Plant No.2, Nuclear Projects No.'s 1 and 3, and the Hanford Generating Project.The U.S.Department of Energy, acting by and through the Bonneville Power Administration (BPA), has in turn acquired the entire capability from the project participants under various net-billing and exchange agreements.

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

See Note E for a discussion of the Hanford Generating Project and its relation-ship to Nuclear Project No.1.In connection with the issuance of the generating facilities revenue bonds for Nuclear Projects No.'s 4 and 5, the Supply System pledged the revenues to be derived under participants'greements with 88 utilities operating principally in the Northwest.

The participants'greements provided that each participant pay its respective share of annual costs, including debt service on the bonds, whether or not the projects were completed, operable, or operating and notwithstanding the suspension, interruption, interference, reduction or curtail-ment of the projects'utput.

Payments from the participants for Nuclear Projects No.'s 4 and 5 termination costs and debt service were due begin-ning on January 25, 1983.Payments due under the participants'greements have not been forthcom-ing (see Note D)and an event of default, as defined in the bond resolution, occurred on July 22, 1983, and is continuing.

In connection with the issuance of the Nuclear Projects No.'s 4 and 5 subordinated revenue notes ($60,000,000 due July 1, 1984, and$7,865,502 due June 30, 1983), the Supply System pledged to set aside money for payment of such obligations from funds to be ac-cumulated in the Revenue Fund.Payments under the participants'greements to be accumulated in the Revenue Fund were not made and therefore the subordinated revenue notes were not paid.See Note E for a discussion of default on Nuclear Proj-ects No.'s 4 and 5 subordinated revenue notes.NOTE D-TERMINATION OF NUCLEAR PROJECTS NO.'S 4 AND 5 AND DEFAULT UNDER BOND RESOLUTION On January 22, 1982, the Supply System's Nuclear Projects No.'s 4 and 5 were terminated.

Construc-tion was 24 and 16 percent complete, respectively, at the time.The participants'greements (discussed in Note C under Security-Agreements and Contracts) pro-vided that each participant pay its respective share of the debt service on the bonds and termination costs beginning January 25, 1983.Payments due under the participants'greements were not made pending a judicial determination of the partici-pants'uthority and obligation to pay.On June 15, 1983, and again on November 6, 1984, the Washington State Supreme Court ruled that Washington municipal utilities did not have statutory authority to enter into the participants'greements thus invalidating those agreements as to the cities and public utility districts of the state of Washington, which collectively hold approx-imately 68 percent of the participants'hares of Nuclear Projects No.'s 4 and 5.In addition, on November 6, 1984, the Washington State Supreme Court ruled that, because of the invalidity of the participants'greements entered into by the Washington municipal utilities, all of the remain-ing participants'greements were unenforceable 26 as well.Chemical Bank and the Supply System petitioned the U.S.Supreme Court for grant of a writ of certiorari by which the state court decision might be reviewed by that court.Grant of the writ was denied by the U.S.Supreme Court on April 29, 1985.On July 22, 1983, the Supply System acknowl-edged that it could not meet all Nuclear Projects No.'s 0 and 5 obligations as they became due.This admission represented an event of default under the Nuclear Projects No.'s 4 and 5 bond resolution.

On July 25, 1983, Chemical Bank, as bond fund trustee, demanded that all remaining project funds be transferred to it to be held in a special account.Under Section 11.4 of the Nuclear Projects No.'s 4 and 5 bond resolution, Chemical Bank, as bond fund trustee, or a duly constituted bondholders'ommittee, is entitled, to the extent permitted by law, to take possession of the business and proper-ties of Nuclear Projects No.'s 4 and 5.At present, the Supply System is continuing to manage the contract termination and asset disposal activities.

Chemical Bank disburses the funds for payment of Nuclear Projects No.'s 0 and 5 termination ac-tivities in accordance with the payment priorities established in the bond resolution.

Since total obligations currently exceed available cash and revenues, certain lower priority obligations (as defined in the bond resolution) are not being paid.On August 18, 1983, Chemical Bank declared the principal of all Nuclear Projects No.'s 4 and 5 revenue bonds and interest accrued thereon to be due and payable immediately.

Since the participants'greements have been held to be invalid, the assets of Nuclear Projects No.'s 0 and 5 have been reduced to their estimated net recoverable value, resulting in a deficiency in assets.Such recoverable value is based on Supply System staff estimates.

However, the ultimate recoverability cannot presently be determined.

The Supply System's current estimate of termina-tion costs ($22,850,720), including costs of con-tract settlements and other termination costs, has been accrued as Accounts Payable and Accrued Expenses in the accompanying balance sheets.Although management of the Supply System is satisfied that its estimates are reasonable, the final settlement for termination costs and the cost of dismantling the projects cannot be determined at this time.Certain physical assets of Nuclear Proj-ects No.'s 4 and 5 are being maintained for a period to maximize their sales value upon disposal.In August 1983, Chemical Bank filed a lawsuit in U.S.District Court, Western District of Wash-ington, which is now pending against the Supply System, all participants in Nuclear Projects No.'s 4 and 5 and Supply System member utilities.

The lawsuit alleges violations of federal and state securities statutes, fraud, misrepresentation, bad faith, negligence, and unjust enrichment, and seeks monetary damages, rescission and restitution.

In addition, numerous lawsuits have been brought against the Supply System and others alleging claims and seeking relief, similar to those alleged and sought in the Chemical Bank case.Certain of these cases have been transferred to the U.S.District Court, Western District of Washington, and most have been consolidated with the Chemical Bank case under the caption MDL 551i ln re WPPSS Securities Litigation.

Discovery in the consolidated cases is virtually complete and the court has set a September I, 1988 trial date for these cases.Another lawsuit has been filed against the Supply System and others in a state court of the state of Washington by a number of Nuclear Projects No.'s 0 and 5 bondholders alleging substantially the same allegations as have been made in the federal cases.The case is not yet in the discovery phase, and no trial date has yet been set.The lawsuits described in the two preceding paragraphs seek to recover the bondholders'n-vestment in the principal amount of$2.25 billion, plus unspecified damages, interest, costs and attorneys'ees.

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

27 NOTES TO FINANCIAL STATEMENTS Pursuant to state law and resolutions of the Sup-ply System's Executive Board, the Supply System has agreed to indemnify its directors for certain of the acts which have been alleged in complaints relating to the Nuclear Projects No.'s 4 and 5 securities litigation.

The Supply System is obligated for associated costs (including legal defense costs)to the extent such costs are not covered by direc-tors and officers insurance.

The primary carrier of directors and officers liabili-ty insurance has paid up to the limit of primary coverage for defense of Supply System directors.

The excess carrier filed a suit in September 1985 seeking a declaration that it has no obligation under the policy because of the alleged failure of the Supply System to disclose facts known to it which, if known to the insurer, would have resulted in it not issuing the policy.The suit has been stayed pending trial of the securities litiga-tion.The excess carrier has agreed to pay defense costs of Supply System directors during the period of stay.No opinion can be given as to the ultimate out-come of this litigation.

NOTE E-COMMITMENTS AND CONTINGENCIES HANFORD GENERATING PROJECT AND ITS RELATIONSHIP TO NUCLEAR PROJECT NO.1 The U.S.Department of Energy (DOE)owns and operates the New Production Reactor (NPR), which provides by-product steam to the Hanford Generating Project.The Supply System's current agreement with the DOE provides for the con-tinuation of the dual-purpose operation of the reactor through June 1993.In accordance with cer-tain other project agreements, the operating costs of the project will be offset by payments from cer-tain public and investorwwned utilities in return for the power generated.

Public participants cur-rently fund debt service and 72 percent of the operating costs and two investorwwned utilities fund 28 percent of the operating costs.It was initially intended that Nuclear Project No.I be constructed next to the Hanford Generating Project to provide the energy source to operate the project when the DOE ceased operation of the New Production Reactor.To allow for construc-tion of Nuclear Project No.1, it would have been necessary to shut down the Hanford Generating Project on October 31, 1977.Because studies at that time indicated that generating resources in the Pacific Northwest would be inadequate in the late 1970s and early 1980s, the Supply System and BPA determined that the Hanford Generating Project should be kept available for power produc-tion.Therefore, the Nuclear Project No.)net-billing, exchange and project agreements were amended to provide for the separation of Nuclear Project No.1 from the Hanford Generating Project.The amended agreements provide that Hanford Generating Project costs, to the extent not otherwise provided for, be treated as Nuclear Project No.1 costs with Hanford Generating Project having a first claim on the revenues of that project.The amended agreements provide for the payment of all debt service costs, net of investment income, of the Hanford Generating Project by Nuclear Project No.I participants, beginning July 1, 1980, regardless of continued operation of the reactor.If the reactor ceases operations, revenues to the Hanford Generating Project arising from these payments will nevertheless be recorded each year thereafter in amounts that will result in full realiza-tion of the carrying value of the plant.The U.S.government has an option to acquire ownership of the Hanford Generating Project upon congressional approval.If the government exercises its option, it must assume all rights and obligations of the project, including the obligation to pay all revenue bonds.The Hanford Generating Project Statement of Operations for the year ended June 30, 1987, reflects unusually low revenues of$33,540,035 as a result of the NPR shutdown for safety modifi-cations since January 1987.There is uncertainty as to when the NPR will be restarted due to cer-tain budgetary and legal issues which are being 28 addressed by the DOE and are not within the control of the Supply System.The Hanford Generating Project operating costs for the year reflect a credit of$3,900,000 for public utility tax applicable to outwf<tate sales of elec-tricity.The tax had been assessed by the state of Washington and was accrued as a liability as of June 30, 1986.In 1987, this accrual was reversed because the United States Supreme Court has ruled that certain taxes relating to interstate com-merce transactions, such as Hanford Generating Project out-of-state energy sales, are unconstitu-tional.NUCLEAR PROJECTS NO.'S 1 AND 3 CONSTRUCTION DELAY On April 29, 1982, the Supply System, upon the recommendation of BPA, approved an extended construction delay of Nuclear Project No.I, and on July 8, 1983, the Supply System, also upon the recommendation of BPA, approved an extended construction delay of Nuclear Project No.3.Dur-ing the construction delay, the Supply System will endeavor to preserve plant assets and maintain project licenses.On January 23, 1986, the Northwest Power Plan-ning Council (Council)released its 1986 Northwest Conservation and Electric Power Plan (Plan).In the Plan, the Council indicated that Nuclear Proj-ects No.'s 1 and 3 are cost effective, However, the Council did not include Nuclear Projects No.'s 1 and 3 in its resource portfolio, citing legal and other uncertainties.

The Council does view Nuclear Projects No.'s I and 3 as energy options for the future after the current uncertainties are removed.standpoint of economic risk management.

BPA concluded that preservation of both Nuclear Proj-ects No.'s I and 3 is the prudent course of action at this time.This conclusion will be reviewed again pending the resolution of several critical issues.Continued funding of preservation costs is included in BPA's rates for their fiscal years 1988 and 1989.The Supply System is currently unable to predict when Nuclear Projects No.'s I and 3 will be completed.

The U.S.Department of Energy is currently study-ing acquisition of all or a part of Nuclear Project No.I for completion as a strategic material pro-duction facility.Whether such an acquisition will occur, what the timing might be, and what form it might take, are unknown.Any such acquisition would require payment of just compensation to the Supply System for assets acquired.Payment of all outstanding Nuclear Project No.I obliga-tions, including debt service on outstanding bonds, would continue to be made pursuant to the Nuclear Project No.I net-billing agreements.

NUCLEAR PROJECTS NO.'S 4 AND 5 SUBORDINATED REVENUE NOTES In conjunction with the construction stoppage of Nuclear Projects No.'s 0 and 5 during 1981, certain project participants, investorwwned utilities and industrial customers of BPA agreed to loan Nuclear Projects No.'s 0 and 5 funds to underwrite a pro-gram to preserve the assets of those projects.These loans, called bridge loans, consisted of$60,000,000 in subordinated revenue notes, bearing a stated maturity date of July I, 1984, and bearing interest to due date at an annual rate of 15 percent.On May I, 1987, BPA released its 1987 Resource Strategy.In the 1987 Resource Strategy, BPA focused on the economics and institutional ques-tions surrounding Nuclear Projects No.'s I and 3.A significant part of the study sought a conclusion as to whether Nuclear Projects No.'s I and 3 should be preserved, terminated, or completed on a fixed schedule.BPA found that there is no com-pelling case for or against continued preservation on a net present value basis, and that preservation of both projects is somewhat favorable from the Subsequently, when a decision was made to terminate Nuclear Projects No.'s 4 and 5, a number of project participants agreed to loan Nuclear Projects No.'s 4 and 5 funds to assist in avoiding an uncontrolled termination of the proj-ects.These loans, called termination loans, con-sisted of$7,865,502 in subordinated revenue notes bearing a stated maturity date of June 30, 1983, and bearing interest to due date at an annual rate of 15 percent.29 NOTES TO FINANCIAL STATEMENTS Because Nuclear Projects No.'s 4 and 5 do not have sufficient funds to underwrite payment of the subordinated revenue notes, the notes have not been redeemed.Sixteen participants and investorwwned utilities filed lawsuits against the Supply System for pay-ment of the notes, with Chemical Bank named as codefendant in several of them;one case was dismissed.

In 13 cases, summary judgments have been rendered against the Supply System, and in certain cases the judgments stated that the obliga-tion to pay the notes was not restricted to the funds of Nuclear Projects No.'s 4 and 5.Some of these cases were subsequently appealed to the Washington State Supreme Court and on September 5, 1985, the Court upheld previous rul-ings that the Supply System must repay the bridge and termination loans, but ruled that repayment must be made only from funds of Nuclear Projects No.'s 0 and 5.Plaintiffs motions for reconsidera-tion were denied, and modified judgments, restricted in collectibility, have been entered as to all but two plaintiffs.

Proceedings are pending concerning the form of modified judgment to be entered in all other appealed cases.In the BPA v.Supply System case, the three investor-owned utility lenders have moved for summary judgment on their bridge loans and for the right to set off a bridge loan judgment against any cost-sharing obligation to Nuclear Projects No.'s 4 and 5.No resolution has been reached as to the setoff issue and no opinion can be expressed as to the possible outcome of that matter.NUCLEAR PROJECT NO.5 OWNERSHIP AGREEMENT Under the terms of the ownership agreement with Pacific Power and Light Company (Pacific), Pacific is obligated to fund its respective ownership share of Nuclear Project No.5 termination costs begin-ning January 25, 1983, and continuing until all costs of termination have been paid.Ten percent of the funds received from sales of Nuclear Project No.5 assets are applied as a reduction of Pacific's obligation for termination costs.Pacific has stated to the Supply System that it con-siders the termination of Nuclear Project No.5 to be a breach of the Nuclear Project No.5 owner-ship agreement and has reserved its rights to pur-sue appropriate remedies with respect to such breach.On June 16, 1983, Pacific advised the Supply System that, due to the Washington State Supreme Court ruling that certain participants'greements were invalid (as described in Note D)and other related actions by the Supply System, Pacific would no longer fund 10 percent of the Nuclear Project No.5 termination costs.It is the position of the Supply System that the termination of Nuclear Project No.5 does not constitute a breach of the Nuclear Project No.5 ownership agreement and that Pacific is responsi-ble under the Nuclear Project No.5 ownership agreement for payment of its 10 percent share of the costs of termination of such project.Pacific has made payments prior to June 16, 1983, under the Nuclear Project No.5 ownership agree-ment pursuant to reservations of rights to sue the Supply System for damages for failure to complete the project.Pacific's claim would presumably be about$150 million-its investment in the project.Such a claim could be a general claim against the assets of the Supply System.The claim is currently inactive.No opinion can be expressed as to the ultimate outcome of this claim.INTER-PROJECT CLAIMS AND CLAIMS AGAINST GENERAL ASSETS As discussed above, Nuclear Projects No.'s 4 and 5 are currently unable to meet Nuclear Projects No.'s 0 and 5 debts as they become due.Creditors have threatened to attempt to obtain payment from assets or funds held for the benefit of other proj-ects of the Supply System or the revenues pledged thereto.Such creditors include those described in the Notes to Financial Statements and others who may assert claims in the future against the Supply System and/or its projects.Bond counsel to the Supply System are of the opinion that neither holders of bonds issued to 30 finance the construction of Supply System's Nuclear Projects No.'s 4 and 5, nor creditors of the Supply System whose claims arose from the furnishing of goods or services with respect to Nuclear Projects No.'s 0 and 5, will be able to realize upon revenues or funds held in trust for Supply System Nuclear Projects No.'s 1, 2 and 3 or for holders of bonds issued by the Supply System to finance construction of such projects except to the extent they might obtain rights through a valid exercise of the sovereign police power of the state of Washington or of the constitutional powers of the United States of America, or by a voluntary bankruptcy of the Supply System.Bond counsel also are of the opinion, based upon Lampson Universal Rigging, lnc.v.Washington Public Poiver Supply System, 105 Wash.2d.376, that a court should hold that neither holders of bonds issued to finance the construction of the Supply System's Nuclear Projects No.'s 0 and 5, nor creditors of the Supply System whose claims arose from the furnishing of goods or services with respect to Nuclear Projects No.'s 0 and 5, will be able to realize upon the assets of Supply System Nuclear Projects No.'s 1, 2 and 3 that are necessary for the purposes of such projects or the Supply System, except to the extent they might obtain rights through a valid exercise of the sovereign police power of the state of Washington or of the consti-tutional powers of the United States of America, or by a voluntary bankruptcy of the Supply System.Bond counsel's opinion as to the ability of bond-holders or other creditors to realize upon assets of Supply System Nuclear Projects No.'s 1, 2 and 3 is limited to those assets located within the state of Washington, or as to which a court would apply the law of the state of Washington, and the opi-nion excludes assets that are not necessary for the purposes of Supply System Nuclear Projects No.'s 1, 2 and 3 or the Supply System.Bond counsel is not able to determine at this time how a court of a state other than the state of Washington would treat assets of Supply System Nuclear Projects No.'s 1, 2 and 3 located outside the state of Washington, if such court were to apply the law of a state other than the state of Washington.

Bond counsel has not undertaken an investigation of the issues discussed above with respect to the Packwood or Hanford Generating Projects.However, they believe that upon full investigation the same opinions could be rendered with respect to assets of the Packwood and Hanford Generating Projects and revenues or funds held in trust or relating to such projects or for the holders of bonds issued by the Supply System to finance the construction of such projects.Supply System management is of the opinion that creditor claims can only be realized from the assets, funds or revenues of the projects to which such claims relate.The Supply System will utilize all legal remedies to defend their position.If it is found that creditors are not limited to payment of their claims from the project to which such claims relate, it will have a material adverse impact on the Supply System.SHARED COSTS The termination of Nuclear Projects No.'s 0 and 5 creates an uncertainty as to how certain com-mon services and facilities are to be shared with Nuclear Projects No.'s 1 and 3, respectively.

In August 1982, the participants of Nuclear Projects No.'s 0 and 5 presented a claim to Nuclear Proj-ects No.'s 1 and 3 to reimburse Nuclear Projects No.'s 4 and 5 for a portion of the costs of shared services and facilities paid by the projects before July 1, 1981.The claim requested immediate payments of$75 million and$86 million plus interest from Nuclear Projects No.'s 1 and 3, respectively, plus amounts that may be determined in the future.The claim is based on a method of calculating shared costs that is different from the method adopted by the Supply System.The Supply System has reviewed its cost-sharing policy from inception of the projects to determine if costs were allocated properly.As of June 30, 1987,$16,974,827 is due Nuclear Project No, 5 from Nuclear Project No.3;$8,112,268 is due Nuclear Project No.1 from Nuclear Project No.0;and$162,975 is due Nuclear Project No.0 from Nuclear Plant No.2 for shared costs.These 31 NOTES TO FINANCIAL STATEMENTS liabilities have been recorded in the accompanying balance sheets as of June 30, 1987.An undeter-mined amount of interest may also be due.The results of the aforementioned review are subject to audit by BPA and the investorwwned utilities hav-ing ownership shares in Nuclear Projects No.'s 3 and 5 and are subject to the litigation described below.On October 26, 1982, the Supply System filed a legal action against BPA, the four investorwwned utilities who are joint owners of Project No.3, the participants of Nuclear Projects No.'s 0 and 5, (the court has since allowed Chemical Bank to in-tervene in this suit)and the construction fund trustee for Nuclear Project No.1 seeking a judicial determination of past and future shared costs among Nuclear Projects No.'s 1 and 0 and Nuclear Projects No.'s 3 and 5.(The court has since restructured the case as BPA v.Supply System, et al., wherein BPA is now the plaintiff and the Sup.ply System and other aforementioned parties are defendants.)

The lawsuit does not specify the amounts of money that the parties believe should be reallocated.

The method used to calculate the aforementioned claim is an issue in the lawsuit.On September 2, 1986, BPA, the four investor-owned utilities, and certain project participants of Nuclear Projects No.'s 1 and 3 moved for an or'der dismissing Chemical Bank's claims against them or, in the alternative, for summary judgment.On October 31, 1986, Chemical Bank moved for sum-mary judgment against the Supply System.'The motions were argued on May 13, 1987, and are presently under advisement.

The Supply System's position in this litigation is essentially neutral, considering the Supply System's fiduciary obligations to Nuclear Projects No.'s 1 and 3, as well as to Nuclear Projects No's 4 and 5.In the event the court should rule that Nuclear Projects No.'s 1 and 3 are obligated for costs shared and previously paid, in part, by Nuclear Projects No.'s 4 and 5 the potential liability to Nuclear Projects No.'s 1 and 3 is in excess of$400 million.The Supply System is unable to predict the out-come of this litigation.

NUCLEAR PROJECT NO.3 CLAIMS In July and August 1983, the four investorwwned utilities who own 30 percent of Nuclear Project No.3 filed claims against BPA, the Supply System and Nuclear Project No.3 participants arising out of the extended construction delay at Nuclear Proj-ect No.3.The claims were filed in the action entitled BPA v.Supply System, et al.(See"Shared Costs").Included are claims for injunctive and declaratory relief, damages, rescission of the Nuclear Project No.3 ownership agreement and recovery of the total amount of payments made under the agreement to date.In October 1983, BPA amended its complaint to resolve the Nuclear Project No.3 dispute.Final agreements permitting settlement of the con-struction delay claims were executed by the Supply System on September 13, 1985, and by BPA and the investor-owned utilities on September 17, 1985.Pursuant to those agreements the parties ex-changed covenants not to sue and asked the court to enter an order of dismissal of their delay claims.The court has not yet ruled on this matter.A number of the Nuclear Project No.3 partici-pants oppose the settlement and have filed sup-plemental pleadings asserting challenges to the set-tlement agreements and have also filed complaints for direct review in the Ninth Circuit Court of Appeals invoking that court's original jurisdiction under the Northwest Regional Power Act.Certain participants have also filed amended pleadings asserting mothballing claims unrelated to the set-tlement.The parties signing the settlement agreements filed motions in the district court to dismiss the claims attacking the settlement agreements for lack of jurisdiction, lack of indispensable party, and mo-tions for summary judgment.On July 3, 1986, the court granted BPA's motion to dismiss the settle-ment claims for lack of jurisdiction for the reason that jurisdiction more properly lies in the Ninth Circuit.Certain settlement claims against the IOUs and mothballing claims not related to the settlement remain pending in the district court but further proceedings were stayed on July 3, 1986, 32 C~~~<y~pending a resolution by the Ninth Circuit of the claims under its original jurisdiction.

The parties who signed the settlement agreements also filed motions in the Ninth Circuit cases to dismiss some of the claims of the Nuclear Project No.3 participants for lack of jurisdiction.

The mo-tions have not yet been resolved.Subsequent to the court's resolution of the motions regarding jurisdiction, the Ninth Circuit will resolve some or all of the challenges to the settlement agreement.

If the settlement is overturned, the investorwwned utilities may renew their request for an order granting them the right to rescind the Project: Ownership Agreement and possible termination of the project.The investorwwned utilities have waived any claim to monetary damages against the Supply System.NET-BILLING AGREEMENTS The parties to the net-billing agreements are BPA, the Supply System, and the participants of Nuclear Projects No's.1, 2 and 3.The agreements provide that BPA is obligated to pay the participants, and the participants are obligated to pay the Supply System their pro rata shares of the total annual costs of the projects, including debt service on the bonds, whether or not the projects are completed, operable, or operating, and notwithstanding the suspension, reduction, or curtailment of the proj-ects'utput.

However, the agreements also provide that they shall not be binding on any of the aforementioned parties if they are not binding on all the parties.The validity of the net-billing agreements was challenged in November, 1982.In May 1983, the U.S.District Court of Oregon declared that the net.billing agreements were binding.In February 1985, this decision was upheld by the Ninth Cir-cuit Court of Appeals, and in January 1986 the United States Supreme Court denied a petition for certiorari, ending proceedings in the case.SECURITIES AND EXCHANGE COMMISSION INVESTIGATION In January, 1984, the Securities and Exchange Commission commenced a formal investigation in-to allegations of securities violations by the Supply System and others.Documents have been pro-duced to the commission pursuant to subpoena, and the commission staff has taken depositions of numerous individuals, including present and former Supply System personnel.

Further produc-tion of documentary and testimonial materials and submission to the commission may occur.The commission has not yet indicated what further action, if any, it may take in this matter.LIABILITY INSURANCE The Price-Anderson Act currently limits the public liability claims that could arise from a nuclear incident to$710 million.The Supply System has purchased the maximum available private insurance of$160 million and the excess of$550 million of coverage is provided by secondary financial protection.

Under secondary financial protection, coverage would be funded by a mandatory program of retrospective premiums assessed against all owners of licensed reactors.In the event of nuclear inci-dents at facilities covered under the Price-Anderson Act, the Supply System could be assessed up to$5 million per incident but not more than$10 million in a calendar year.New legislation relating to nuclear liability insurance is pending.All proposals currently before Congress include substantially increased retrospective premium limits.OTHER LITIGATION AND COMMITMENTS The Supply System is involved in various claims, legal actions and contractual commitments not mentioned above as both a plaintiff and a defen-dant and in certain claims and contracts arising in the normal course of business for a large construc-tion program.Although some suits, claims and commitments are significant in amount, final disposition is not determinable.

In the opinion of management, the outcome of any such litigation, claims or commitments will not have a material adverse effect on the financial positions of the projects.The estimated cost of the projects may either be increased or decreased as a result of the outcome of these matters.33 STATEMENT OF DEBT-SERVICE REQUIREMENTS Dollars in thousands~~NUCLEAR PLANT NO.2*FISCAL YEAR PRINQPAL INTEREST TOTAL HANFORD GENERATING PROJECT PRINQPAL INTEREST TOTAL PACKWOOD LAKE PROJECT PRINQPAL INTEREST TOTAL 1988$26,645$1989 28,510 1990 30,555 1991 32,800 1992 35,260 1993 37,980 1994 40,950 1995 44,225 1996 47,825 1997 65,575 1998 71,955 1999 79,330 2000 85,795 2001 93,290 2002 101,635 2003 93,055 2004 97,375 2005 106,765 2006 117,225 2007 128,850 2008 141,675 2009 155,940 2010 171,820 2011 189,510 2012 209,230 2013 2014 2015 2016 2017 2018 211,686 209,818 207,778 205,540 203,080 200,383 197,445 194,227 190,678 186,769 180,399 173,291 166,572 159,093 150,766 141,479 133,671 124,280 113,821 102,201 89,370 75,104 59,226 41,538 21,8H$238,331 238,328 238,333 238,340 238,340 238,363 238,395 238,452 238,503 252,344 252,354 252,621 252,367 252,383 252,401 234,534 231,046 231,045 231,046 231,051 231,045 231,044 231,046 231,048 231,044$774$774 3,485 680 4,165 3,455 567 4,022 5,065 411 5,476 5,585 233 5,818 5,835 45 5,880 395 2 397$190$362$552 195 355 550 265 347 612 275 338 613 290 327 617 300 317 617 315 305 620 330 294 624 340 282 622 360 269 629 380 256 636 400 241 641 465 226 691 490 209 699 515 191 706 540 171 711 565 151 716 590 130 720 615 109 724 640 86 726 665 62 727 690 38 728 353 17 370 150 6 156 60 2 62$2,233,775$3,740,029$5,973,804$23,820$2,712$26,532$9 978$5 091$15 069 34 FISCAl YEAR PRINCIPAL INTEREST TOTAL NUCLEAR PROJECT NO.1*PRINOPAL INTEREST TOTAL NUCLEAR PROJECT NO.3*NUCLEAR PROJECTS NO.'5 4/5%*PRINCIPAL TOTAL 1988$18,055$205,729 1989 18,970 204,564 1990 21,465 203,320 1991 22,560 201,877 1992 23,755 200,326 1993 25,560 198,647 1994 26,985 196,784 1995 28,550 194,767 1996 30,745 192,580 1997 38,080 190,049 1998 41,565 186,562 1999 45,455 182,673 2000 49,465 178,663 2001 53,920 174,204 2002 58,885 169,242 2003 51,135 163,703 2004 55,430 159,406 2005 60,600 154,237 2006 66,320 H8,515 2007 72,665 H2,171 2008 79,705 135,131 2009 87,525 127,313 2010 96,220 118,618 2011 105,855 108,983 2012 116,610 98,229 2013 128,635 86,204 2014 142,155 72,680 2015 157,820 57,014 2016 175,395 39,441 2017 194,005 20,831 2018$223,784 223,534 224,785 224,437 224,081 224,207 223,769 223,317 223,325 228,129 228,127 228,128 228,128 228,124 228,127 214,838 214,836 214,837 214,835 214,836 214,836 214,838 214,838 214,838 214,839 214,839 214,835 214,834 214,836 214,836$10,555$11,315 12,145 13,050 14,045 15,125 16,310 17,615 19,045 22,595 24,605 26,810 29,020 31,475 34,180 37,095 42,730 45,995 49,615 49,675 54,485 59,810 65,710 72,265 80,365 89,490 99,770 111,370 124,455 139,235 154 950 164,368 163,579 162,760 161,901 160,961 159,932 158,798 157,546 156,163 154,637 152,628 150,427 H8,218 145,773 143,068 140,057 136,746 132,503 127,908 122,946 118,136 112,810 106,909 100,355 92,250 83,126 72,846 61,252 48,165 33,382 17,665 174,923 174,894 174,905 174,951 175,006 175,057 175,108 175,161 175,208 177,232 177,233 177,237 177,238 177,248 177,248 177,152 179,476 178,498 177,523 172,621 172,621 172,620 172,619 172,620 172,615 172,616 172,616 172,622 172,620 172,617 172,615$2,317,866$2,317,866$2,094,090$4,512,463$6,606,553$1,574,905$3,847,815$5,422,720$2,317,866$2,317,866*Excludes payments of bond principal and interest made on July 1, 1987.**Refer to Note D-Termination of Nuclear Projects No.'s 4 and 5 and Default Under Bond Resolution, page 26 and Note E-Commitments and Contingencies, page 28.35 7~~~y he Supply System operates two visitors centers for the public, one at Plant 2, about 12 miles north of Richland, and another near Elma, Washington, at the WNP-3 project.Displays in the visitor centers illustrate how plant design, construction and operation have been planned with the public's well-being in mind.The Plant 2 Visitors Center offers a videotape"arm-chair" tour of the plant as well as information on nuclear power issues such as radiation, nuclear waste and plant operator training.Tours of the WNP-3 construction site are offered by appointment by calling (206)482-%28, ext.5052.Tours of the WNP-1 site are available by appointment by calling (509)372-5860.36 TURBINE ROTORS INCREASING PlANT 2'S OUTPUT BOND SALE SUCCESS REFINANCING PAYS DIVIDENDS QUALITY IMPROVEMENT EMPHASIZING PROBlEM PREVENTION WASHINGTON PUBLIC POWER SUPPLY SYSTEM ON THE COVER: Boosting Plant 2's 1, 100-megawatt output by 13.7 megawatts, increasing reliability and cutting mainte-nance costs are the goals of a$23 million contract signed in fiscal year 1989.Purchasing and installing three new low.pressure turbine rotors in 1991 will solve a major plant maintenance problem by replacing the current rotors, which suffer from a generic design defect.CONTENTS: Letter from the Chairman of the Executive Board 2 Letter from the Managing Director 4 The Supply System: Here for the Long Run 6 Governing Boards 12 Financial Information 13 FINANCIAL AND OPERATING HIGHL/GHTS For Jbeyear ended june 30 Dollars in millions OPERATING STATISTICS NV GEAR PROJKT NO.2 FY 1989 PACKWOOD IAKE PROJKT NVCJEAR PROJKT No.2 FY 1988 PACKWOOD IAKE PROJKT Total annual cost Net generation/gWh Cost in mills/kiv/h Plant availability Plant capacity$454.5 6034 75.3 66.5%62.9/o$1.2 91 12.6 100/o 37.7/o$4453 5945 7g 9 65.1%61.8%%d%%d

$1.1 14.9 100o/o 30.8%INVESTMENT INCOME-ALL PROjECTS Total investment income Rate of return$62.9 8.5o/o$55.2 7.2%PlANT 2 NET ElECTRIC GENERATION PIANT 2 CAPACITY FACTOR 0 Vl C 0 FY86 FY87 FY88 FY89 FY86 FY8/FY88 FY89 LHTER FROM THE EXECUTIVE BOARD CHAIRMAN 37K~+~~~a=~Q The Supply System returned to the bond market in September, when it sold$721 million in bonds to rel'und high-interest Nudear Project l and 3 bonds.The refunding is expected to save Pacific Northwest ratepayers

$25 million annually for the next 20 years.s V~/y ince 1985, we have conscientiously been working on many fronts preparing to re-enter the bond market.This year that objective came to fruition in September when we had our first bond sale in seven years.We originally contemplated a bond issue of@50 million, but when a marketing tour prior to the sale indicated a much larger market, we raised the amount to$612 million.Buyer acceptance of the bonds was very strong on the sale day, so we added an additional

$109 million, winding up with a sale of$721 million.The true interest cost for this first refinancing issue was less than 7.7 percent, a far cry from rates as high as 15 percent on the issues being refunded.This sale will save the Bonneville Power Administration's ratepay-ers more than$24 million in debt service annually for the next 20 years-a total of M80 million.Our overall refunding program, which includes current refunding of Plant 2 bonds in 1991 and 1992, could potentially save$70-to-$80 million per year, for a total savings of about$1.6 billion.Refinancing is proceeding through a cooperative region-wide effort between the Supply System Executive Board, management and staff, the Bonneville Power Administration, and its public utility customers.

The refinancing team, composed of investment bankers, bond counsel and financial representatives from both BPA and the Supply System, worked for more than a year assembling the required information and dealing with residual historical and legal problems so that this refinancing effort could be initiated.

Members of the Northwest Congressional Delegation were essential partners in our refinancing effort.They helped enact amend-ments to municipal bankruptcy Laws last year that strengthened the legal wall between our projects, precluding the possibility of WNPA/5 creditors acquiring the assets of the Supply System's net-billed projects.With this legislation in place, three rating agencies, Standard 8-Poors, Moody's, and Fitch Investor Service, reinstated investment grade ratings for all Supply System bonds, except WNP-4/5.

Our Nottlnvest Congressional Delegation was also instrumental in ensuring that Projects 1 and 3 were included in the tax corrections bill passed last fall by Congress.This legislation, amending the Tax Reform Act of 1986, authorizes the Supply System to issue up to$2 billion in advance refunding bonds for WNP-1 and WNP-3 before 1992.Current refunding capability is in place for WNP-2 bonds.All told, these efforts allowed us to take advantage of this summer's low interest rates and begin reducing the Supply System's annual$578 million debt service payments.Reduced debt service payments will lower Supply System annual budgets and help lower BPA's total revenue requirements.

The benefits of the program will be equitably spread to affected BPA ratepayers and, through the exchange agreement, to resi-dential and small farm ratepayers of participating investor-owned utilities.

Much has been accomplished, but there is more to do to reach our$2.8 billion refunding objective.

We plan to return to the market before the end of 1989 for another major sale and conclude the advance refinancing of Projects 1 and 3 bonds in 1990.We continue to value the close relationship between ourselves and the Bonneville Power Administration.

Bonneville Administrator Jim Jura and his team have ever been supportive of the safe, eAicient operation of our plants as well as thc refinancing activity.With the settlement of the MDL-551 litigation, we arc close to putting the court-induced 1983 default on WNP-4/5 bonds behind us.We are all looking forward to bringing the remaining cost-sharing litigation to a close and to the sale of the remaining WNPA/5 assets, ending a difficult chapter in the Supply System's history.As I look to the future, I see a bright road ahead.Carl M.Halvorson Executive Hoard Chairman LETTER FROM THE MANAGING DIRECTOR The Supply System's Goals and Objectives progrom keeps employees informed about the organization's direction and priorities ond reminds them that they are a vital link in the chain ofsuccess.

he Supply System is an ever-evolving organization.

During the past several years, it has evolved from a construction entity to an operating utility.Having made that difficult transition, our highest priority is to operate Plant 2 safely, reliably and economically, while continuing efforts to reduce the cost of operation and increase plant availability.

We have continued to improve Plant 2's performance since it began operating five years ago.The Supply System's Executive Board has made hard decisions necessary to provide the resources we need to meet our high expectations for the plant.Those efforts are meeting with suc-cess.In every year of its operating life, Plant 2 has generated more elec-tricity than in the previous year.In fiscal year 1989, we exceeded the six billion kilowatt-hour mark, generating 6.03 billion kilowatt-hours for the Bonneville Power Administration.

That is enough electricity to provide the annual needs of about 350,000 all-electric Pacific Northwest homes.Plant availability and capacity were also up from previous years, and we have cut down significantly on the number of unplanned shutdowns.

Our improvement is the result of a renewed commitment to quality, manifested in a formal Quality Improvement Program that involves employees at all levels in achieving quality.The program stresses a style of management that encourages employee participation to assure that all components of the organization are supporting our overall efforts.It also encourages employees to be constantly on the lookout for ways to prevent and correct problems and make improvements.

All Supply System managers have attended Quality Improvement training to learn concepts of leadership, openness, teamwork and em-ployee involvement.

Employees are also being introduced to these con-cepts and are being formed into Quality Action Teams to address prob-lems in selected areas, such as the organization's goals and objectives, access to vital areas of Plant 2 during maintenance outages, and accredited training of maintenance personnel.

The Quality Improvement program is not a quick fix or a magical road to our goal of continually improving operating performance.

It is a long-range, strategic approach that will make the Supply System stronger, more quality-conscious, and morc responsive to the demands and changes we will face in our quest to remain a competitive regional supplier of electricity.

The bottom line is that the Quality Improvement process will make the Supply System a better regional asset, capable of providing solutions to regional energy problems.Achieving our operating performance goal means consistently meeting high safety and quality standards.

Recent assessments of the Supply System's performance show that progress is being made.The Nuclear Regulatory Commission's Plant 2 performance ratings indicate improved performance over last year in plant operations, engineering/technical support, and emergency preparedness while performance remained satisfactory in four other key areas.Another assess-ment by an industry peer group, the Institute of Nuclear Power Operations, also shows we are on the right track.As we concentnte on fine-tuning the organization, we are keeping an eye to the future.Equipment reliability prob-lems at Plant 2 have been disappointing, but decisions made in 1989 on long-mnge plant modifications and improvements will have a big payoff.The most significant is the signing of a$23 million contract with Westinghouse Electric to replace Plant 2's three low-pressure turbine rotors.This action is the t start of a major upgrade of Plant 2's turbine-generator that, when coupled with other plant improvements, will result in a minimum 100-megawatt increase in the plant's capacity over the next five-to-six years.The work we are doing today will have a significant impact on the region as we get closer to electric load-resource balance.The same quality-improvement techniques being applied at Plant 2 are also being used in the preservation of Projects 1 and 3 and the Hanford Generating Project.As the Supply System evolves into a stronger organization, the value of these potential resources will be enhanced to the benefit of the Supply System's public power members and all BPA customers.

Donald.azur Managing Director I 989 OPERATIONS REVIEW o business is more complex or scrutinized more thoroughly than the commercial nuclear power industry.In today'environment, where internal and external forces continually pressure utilities to do more and do it better, it is essential that the Supply System demonstrate sustained improvement in Plant 2 operations.

Opemtions are monitored and evaluated by a wide variety of entities, such as the Nuclear Regulatory Commission, the state Energy Facility Site Evaluation Council, the Bonneville Power e Administntion, Northwest Power Planning Council, member utilities and utilities participating in Supply System projects, industry peer groups, such as the Institute of Nuclear Power Operations, and members of Congress and the state legislature.

These entities use"performance indicators" to gauge progress.The most important of these, the amount of electricity delivered to the Bonneville Power Administration's transmission grid from Plant 2, was 6.03 billion kilowatt-hours (net)in fiscal year 1989, an increase of about two percent over 1988, and the fourth consecutive year that generation has increased.

That is enough electricity to supply the needs of about 350,000 all-electric Pacilic Northwest homes.XVe also made progress in boosting Plant 2's capacity factor-the ratio of how much power the plant produced relative to how much could have been generated had it run continuously at full power, was 62.9 percent in fiscal year 1989, up from 61.8 percent in 1988.The increase in the plant's capacity factor was helped by our efforts to limit the number of automatic shutdowns or unplanned"scrams".There were two unplanned scrams at Plant 2 in fiscal year 1989.The annual goal was to have no more than three scmms per year.(contintted) lMPSQKM87CNES ggggggoOjgJggtj GE0 Qjgggieg)geeigQo~o~~'~~~g3ZR Sdh>a@W.RdR9$SC23GKKEKb I If%II he Supply System paid nearly$2.3 mi%I'on in generation taxes in fiscal year 1989 on the value of electricity generated by the plant.Since the plant began operotion in 1 984, the stato has received$8.l million in generation taxes, which is shared with statewide schools and local taxing entities in tho vicinity of Plant 2.The state also receives sales and use taxes on nuclear fuel, materials and services purchased by the Supply System, generating

$3.2 million for state coffers in fiscal year 1989.These taxes, in addition to a$66 million annual payroll, make the Supply System an important economic force in Woshington state.

Nearly 1,000 workers took part in Plant 2's annuol maintenance and refueling outage.The planned 65-day outage was 83 days due to increased work on a low-pressure turbine and two emergency electricol systems.The outage put the plant in mndition to operate efficiently and reliably during the coming year.Accomplished were:~2,000 maintenance tasks~136 of 764 fuel assemblies replaced~Four main steam isolation valves overhauled

~Two reactor feedwoter pump turbines overhauled Operation and maintenance costs are another important indicator.

Plant 2's operating and maintenance costs in 1988 were about eight percent less than the industry average for U.S.boiling water reactors, and the Supply System paid less than half what the average plant did in fuel costs.These indicators show that Plant 2 is moving in the right direction.

The Supply System's challenge is to keep improving.

Several initiatives are under way in training, plant improvements, and overall organization that are expected to foster this trend.The Supply System is recognized throughout the nuclear industry as having a highly qualified staff.Management's task is to help employees, and the organization, realize their potential.

A Quality improvement program was instituted in fiscal year 1989 that recognizes the individual skills and talents of each employee and encourages them to use those talents to better the overall performance of the organization.

The Quality Improvement program is a long-range, strategic approach tltat will help build mutually supportive relationships among all employees and help the Supply System meet the needs and expectations of its customers, whether that customer is BPA, the region's ntepayers, or another Supply System employee.Plans are in place to further strengthen these relationships by improving the facilities housing the plant's highly trained technical and engineering support personnel.

The new Plant 2 Support Facility, a steel-and-concrete, two-story building of approximately 100,000 square feet that will be completed in 1991, will house technical and engineering department employees.

The$10.5 million Support Facility will house the team that provides technical support for plant modifications and mainte-nance activities, and will contain a technical library, computer facilities, conference rooms and a security ggggoogQo+~Qog I~QQ eanCxkMlCo 05NeSCe+Cgc4ctQQMFmRtm 89$8$ZCl 558igg%89 Nbaqp, 8 omsm@xSI KRRH86HKil 8RPS&%t I7%i'l he simulator, a full-scale, computerized replica of the plant's control room, provides handswn trainingin an environment that closely mimics the control room.It responds exactly as the plant would to normal and abnormal operating procedures during reactor startup, increasing and decreasing reactor power, and plant shutdown.The Nuclear Regulatory Commission uses control room simulators to examine reactor operotor candidates and to give annual requalificotion examinotions to licensed opercrtors.

Simulator.Iraimng is conducted one week out of eveiy five to keep their knowledge and skills fine-tuned.

The Supply System is replacing its present simulotor in 1991 to keep its training program vp to date and maintain the accuracy and realism of simulator training scenarios.

control point for access to Plant 2.Keeping technical and engineering personnel readily available for testing, reporting and design modification programs will help increase plant reliability and keep maintenance costs down.The Supply System's Executive Board made a major commitment to reactor operator training in 1989 when it approved a$14.7 million contract with Westinghouse Electric Corp.to build a new Plant 2 control room simulator.

A full-scale computerized mock-up of the plant's actual control room, the new simulator will meet Nuclear Regulatory Commission 1991 certification requirements and enhance the Supply System's training capabilities by providing a more realistic training arena.The long-range benefits of this upgrade will be increased reliability and safety.Another major commitment made by the Executive Board this year is the decision to replace Plant 2's three Being prepared for an emergency at Plant 2 is a responsibility the Supply System shares with local, state and federol governments.

It requires teamwork and cooperation to bring together more than 600 employees and representatives of outside agencies into one cohesive, effective organization that is capable of coping with all kinds of emergencies.

The Nuclear Regulatory Commission, in its annual assessment of the Supply System's performance, gave the highest grado possible to emergency planning, citing timely notificotion of the public and successfvl recovery operations in annual plant emergency exercises.

The Packwood take Hydro-electric Project has been a reliable, low-cost power generator for 25 years.In 1989, it recovered from several years of drought and generated nearly 20 percent more electricity than it did the previous year, far exceeding budget forecasts.

The Hanford Generoting Project remains in top working condition following 20 years of economical and reliable service, generating 860 megawatts of electricity from steam supplied by the U.S.Department of Energy's N-Reactor.

Maintaining the Hanford Generating Project as a viable future resource now that the N.Reactor is dosed remains a high priority.high-pressure turbine, will further increase reliability and electrical output.Other 1989 initiatives included reviewing, updating and rewriting opentions and maintenance procedures; creating a new planning and scheduling group to schedule and prioritize plant work;cross-tnining of managers and supervisors; and placing additional emphasis on employee safety.Evaluations made the past year by regulatory agencies and industry peer groups show that progress is being made in several areas.Major improvements have been made in employee perform-ance and equipmcnt reliability, but continued improvement is needed.Downtime must be reduced and the capacity factor boosted during Plant 2's 10-month openting cycle if the Supply System is to meet its goals.The Supply System will continue to support the Bonneville Power Administntion's efforts to maintain low electric ntes for its public utility customers while ensuring the safe, reliable and cost-effective opention of Plant 2.QIIBRISI jijloootl 0Qsl g3CGCICggB cd CB~QKQRt0 Ib~tiNQeegeee

~)fjsctgeie 6Mhmxf@(m@ykkm though construction on the two AI 1,200-megawatt plants wos halted in 1982 and 1983, Nuclear Projects 1 and 3 remain in sound condition.

The mosHy completed projects wem maintained in fiscal year 1989 for a total cost of$10.5 million.Tho design and physical assets of the projects are being preserved using a Nuclear Regulatory Commission-approved program that is a model for the rest of the nuclear industry.The preservation programs are funded at a minimum level, bvt constant monitoring and budget adjustments aro preventing deterioration of plant structures and equipment.

As tho Bonnevillo Power Administration and the region's public utilities begin looking for new sources of electric generation, they can be confident that their$5 bi%I'on investment in WNP-1 and WNP-3 has been protected at the lowest possible cost to the consumer and tho projects will be available when needed to meet their energy needs.low-pressure turbine rotors.Plant 2's turbine, which converts the heat energy of steam produced in the nuclear reactor to the spinning motion to drive the 1,100-megawatt (net)electric gcnentor, consists of a single high-pressure stage and three low-pressure stages.A contract was signed with Westinghouse Electric Corp.in 1989 to supply and install new low-pressure turbine rotors at a cost of$23 million.Installation of the new turbine rotors in 1991 will solve a major plant maintenance problem by replacing the current rotors, which suffer from a generic de'sign defect.Millions of dollars have been spent inspecting and repairing the low-pressure turbine rotors since the plant began operation in 1985.The new turbine rotors will cut maintenance costs, increase plant reliability and increase Plant 2's electrical output by 13.7 megawatts.

Future turbine improvements, including replacing the 10 Nuclear Projects 1 and 3 have been in extended construction delay since 1982 and 1983 respectively.

WNP-1 is 65 percent complete and WNP-3is 75 percent complete.

EXECUTIVE BOARD Vera Claussen Qssfstant Secretary)

Commissioner Grant County PUD Parker Knight Commissioner Skamania County PUD Kenneth Cochrane Commissioner Franklin County PUD John Cockburn (Secretary)

Investor/Consultant Seattle Paul Nolan (Vice Chairman)Attorney Tacoma William Scott Commissioner Chelan County PUD Sam Farmer Consultant Battelle Memorial Institute Seattle Ray Foleen Consultant Portland Carl Halvorson (Chairman)

President FlalvorsonMason Corporation Portland Sydney Steinborn Consultant Seattle Frank Ward Commissioner Klickitat County PUD Cornellus Du+e, a Ponland consultant screed on tbe Evecutfrre Board through Dec.31, 1988.BOARD OF DIRECTORS Don Carter Energy Services Director City of Richland Parker Knight (Vlcc Presfdent)

Commissioner Skamania County PUD Tom Casey Commissioner Grays Harbor County PUD Vera Claussen (Secretary)

Commissioner Grant County PUD William Kuehne Commissioner Ferry County PUD James Rowland Commissioner Okanogan County PUD Donald Clayhold Manager Benton County PUD William Scott Commissioner Chelan County PUD Edward Coates Director Department of Public Utilities City of Tacoma Kenneth Cochrane Commissioner Franklin County PUD Randall Hardy Superintendent Seanle City Light Roger Sparks g resfderrt)

Commissioner Kittitas County PUD Ame Torget Qsst.Secretary)

Commissioner IVahkiakum County PUD Frank Ward Commissioner Klickitat County PUD Clarl.County PUD resfgned fts mernber-ship in the Supply System in Dec.1988 arrd Pacfjic County PUD resigned in June 1989.12 D BOD FINANCIAL INFORMATION Management Report on Responsibility for Financial Reporting 14 Audit, Legal and Finance Committee Chairman's Letter 14 Report of Independent Auditors 15 Financial Statements Balance Sheets 16 Statements of Operations 18 Statement of Terminated Project Costs and Deficiency in Assets 18 Statements of Changes in Financial Position 19 Outstanding Long-Term Debt 20 Notes to Financial Statements 23 Statement of Debt-Service Requirements 34 WASHINGTON PUBLIC POWER SUPPLY SYSTEM NANAGENENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING The management of the Supply System is responsible for preparing the accompanying financial statements and for their integrity.

The statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis, and include amounts that are based on management's best estimates and judgements.

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

Management has established and maintains a system of internal control that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from un-authorized use or disposition, and the prevention and detection of fraudulent financial reporting.

The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures.

The Supply System maintains an ongoing internal auditing program that provides for independent assessment of the effectiveness of internal controls, and for recommendations of possible improvements thereto.In addition, Ernst k Young has completed a study and evaluation of selected internal accounting controls.Management has considered recommendations made by the internal auditor and Emst K Young concerning the system of internal control and has taken appropriate action to respond to the recommenda-tions.Management believes that as of June 30, 1989, the system of internal control is adequate.D.W.N zu Managing Director J.D.Perko Chief Financial Officer AUDIT, LEGAL AND FINANCE CONNITTEE CHAIRNAN'S LHTER The Executive Board's Audit, Legal and Finance Committee is composed of five independent directors.

Members of the Committee are: Sam J.Farmer, Chairman;Vera Claussen;Paul J.Nolan;william D.Scott;John F.Cockburn;and Carl M.Halvorson, Ex Officio.The committee held twelve meetings during the fiscal year ended June 30, 1989.The Committee oversees the Supply System's financial reporting process on behalf of the Executive Board.In fulfilling its responsibility, the Committee recommended to the Executive Board the selection of the Supply System's independent auditors, discussed with the internal auditor and the independent auditors the overall scope and specific plans for their respective audits, and reviewed the Supply System's financial statements and the adequacy of the Supply System's internal controls.The Committee met regularly with the Supply System's internal auditor and independent auditors to discuss the results of their examinations, their evaluations of the Supply System's internal controls, and the overall quality of the Supply System's financial reporting.

The meetings were designed to facilitate any private communication with the Committee desired by the internal auditor or independent auditors.Sam.Farmer Chairman, Audit, Legal and Finance Committee Id REPORT OF INDEPENDENT AUDITORS Executive Board Washington Public Power Supply System Richland, Washington We have audited the accompanying individual balance sheets of Washington Public Power Supply System's Nuclear Project No.2, Hanford Generating Project, Packwood Lake Hydroelectric Project, Nuclear Project No.1, Nuclear Project No.3, and Nuclear Projects Nos.4 and 5 as of June 30, 1989, and the related statements of operations for Nuclear Project No.2, Hanford Generating Project, and Packwood Lake Hydro-electric Project, the statement of terminated project costs and deficiency in assets for Nuclear Projects Nos.4 and 5, and the statements of changes in financial position for all individual projects for the year then ended.These financial statements are the responsibility of Washington Public Power Supply System's management.

We conducted our audit in accordance with generally accepted auditing standards.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit includes examining, on a test basis, evidence sup-porting the amounts and disclosures in the financial statements.

An audit also includes an assessment of the accounting principles used and significant estimates made by management, as well as an evaluation of the overall financial statement presentation.

As further discussed in Note E to the financial statements, Washington Public Power Supply System Nuclear Projects Nos.1 and 3 are involved in disputes concerning costs shared with Washington Public Power Supply System Nuclear Projects Nos.4 and 5.The ultimate amount of additional costs, if any, to be borne by Nuclear Projects Nos.1 and 3 due to this matter is presently indeterminable.

As further discussed in Note E to the financial.

statements, some creditors of Nuclear Projects Nos.4 and 5 have attempted to obtain payment from assets or funds held by other projects of the Supply System or the revenues pledged thereto.Supply System management is of the opinion that creditor claims can only be realized from the assets, funds, or revenues of the projects to which such claims relate.If it is found that creditors are not limited to payment of their claims from the project to which such claims relate, it will have an impact on the individual projects of the Supply System in amounts which are presently indeterminable.

As further discussed in Note E, there are various claims and matters of litigation, the outcome of which is presently indeterminable.

Because of the possible material effects on the individual projects'inancial statements referred to above of the matters described in the three preceding paragraphs, we are unable to, and do not, express an opinion on these financial statements.

Seattle, Washington September 1, 1989, except as to the thirteenth paragraph of Note D, as to which the date is September 5, 1989.15 BAtANCE SHEETS As ofiune30, 1989 Dollars in JbousaJJds NUQEAR PROJECT No.2 HANFORD PACKWOOD NUQEAR NUQEAR NUQEAR GENE RATNG lAKE PROJECT PROJECT PROJECTS PROJECT PROJKT No.I No.3 NOS.4/5 ASSETS UTILITy'IANT (NOTE Bj In service Improvements to U.S.government facilities Allowance for depreciation and amortization

$3,308,001 S 67,624 22,922 (495,506)(72,490)$12,409 S 12,086 S 2,060 (6,780)(2,875)(1,362)Nuclear fuel Allowance for nuclear fuel amortization Construction work in progress Construction work in progress-deferred projects Costs of terminated projects Amount charged to joint owners Allowance for estimated unrecoverable cost 2,812,495 18,056 5,629 159,459 (72,087)87,372 7,563 9,211 698 257,492 34,831 257,492 34,831 2,249,018 2,447,931 S 3,559,725 (622,230)(87,395)(3,467,270) 2,907,430 18,056 5,629 2,515,721 118611230 5,060 RESTRICTED ASSETS (NOTE Bj Special funds Cash and investments Receivable from joint owners Due from other projects Accounts receivable Prepayments and other Due from other funds Debt service funds cash and investments 37,939 3,181 37,939 3,181 113,311 4,348 151,250 7,529 280 122,934 23,181 586 5,679 65 8,113 18,530 1,263 1,684 1,242 76 77 , 16 452 13,906 280 132,838 44,527 20,439 698 231,987 180,648 61,483 978 364,825 225,175 81,922 CURRENT ASSETS Cash and investments Accounts receivable Materials and supplies Prepayments and other Due from participants Due from other projects Due from other funds 10,909 2,623 30,813 1,776 716 29,539 2,999 374 4 21 1 133 1,185 7,621 7,161 3 307 4 1,660 35 29,711 23,614 76,376 4,531 1,534 38,992 30,775 DEFERRED CHARGES Unbilled reimbursable costs Unamortized debt expense 2 915 2,915 2,823 45 16 3 044 2 230 45 2,839 3,044 2,230 TOTAL ASSETS$3,137,971 S 30,161$10,980$2,922,582$2,119,410 S 86,982 16 NUQEAR PROJKT No.2 HANTORD GENERATING PROJECT PACKWOOD IAKE PROJECT NUQEAR PROJKT No.T NUQEAR PROJKT No.3 NUQEAR PROJECTS NOS.4/S LIABIUTIES DEFICIENCY IN ASSETS (NOTE BJ UNEARNED REVENUE COSTS REIMBURSED UNDER NET BILQNG ADVANCES FROM PARTICIPANTS S s63,66s S 8,630 43,248 S 716,911$430,162 3,000 3,000$8,467,270)

LONG-TERM DEBT (NOTE CJ Revenue bonds payable 2,178,620 17,105 Unamortized discount on bonds-net (59,021)(250)2,119,599 16,855 DEBT IN DEFAULT, CURRENTLY PAYABLE (NOTE DJ Revenue bonds payable Subordinated revenue notes S 9,390 (64)2,076,035 (45,874)1,564,350 83,796)9,326 2,0301161 1,530,554 2,250,000 66,652 2,316,652 LIABILITIES-PAYABLE FROM RESTRICTED ASSETS (NOTE BJ Special funds Accounts payable and accrued expenses Amounts withheld from contractors Due to other projects Due to other funds 8,541 26,398 3,689 2,739 24,705 515 1,138 389 321 18,639 8,113 23,654 19,011 34,939 28,179 41,527 33,207 Debt service funds Accrued interest payable Accounts Payable Due to other funds CURRENT LIABILITIES Accounts payable and accrued expenses Amounts withheld from contractors Advance payments from participants Due to other projects Due to power purchasers Due to other funds 3,141 38,080 37,119 492 2,696 291 32,778 185 451 1,318 42 1,680 309 46 1 16 3,370 3,008 1,373 32,169 10,845 452 13,906 114 102,282 81,789'1,201>641 2,752 35 6,057 4,603 149 136,518 127,919 1,237,600 DEFERRED CREDITS Deferred gain on redemption of revenue bonds 73,376 2,031 927 1,419 35,992 27,775 COMMITMENTS AND CONTINGENCIES (NOTE EJ TOTAL LIABIOTIES

$3,137,971$30,161$10,980$2,922,582$2,119,410 S 86,982 17 STATEN ENTS OF OPERATIONS For tbepear ended June 30, 1989 Dollars in thousands NIJC LEAR PROJKT NO.2 HANFORJJ PACKWOOO GENERAllNG IAJtE PROJKT PROJECT OPERATING REVENUES OPERATING EXPENSES$454,537$2,352$1,151 Nuclear fuel Fuel disposal fee Decommissioning Depreciation and amortization Operations and maintenance Administrative and general Taxes 25,231 6,052 1,057 104,712 93,143 26,476 2,286 2,465 134 72 421 454 110, 3 NET OPERATING REVENUE/(LOSS)

OTHER INCOME AND EXPENSE Investment income Interest expense and discount amortization Other NET REVENUE 258,957 2,671 988 195,580 819)163 18,850 1,024 190 (212,511)(705)(353)(1,919)0$0$0, STATEMENT OF TERNINATED PROJECT COSTS AND DEFICIENCY IN ASSETS For tbepvar ended June 30, 1989 Dollars in thousands NUCJEAR PROJECTS NOS.4/5 TERMINATED PROJECT COSTS Interest expense Net increase in costs related to terminated nuclear projects Administntive costs associated with asset disposition Receipts from asset sales Investment income Decrease in recovenble value estimates TOTAL TERMINATED PROJECT COSTS$-198,313 25,132 3,174 8,872)6,207)4,460 S 222,000 DEFICIENCY IN ASSETS Balance July 1, 1988 Balance June 30, 1989$3,245,270 83,467,270 STATEMENTS OF CHANGES IN FINANCIAL POSITION For tbepear ended Jane 30,/989 Dollars trr thorrsands NVQEAR HANT ORD PACKWOOD PROJKT GENERAlrNG tAKE No.2 PROJKT PROJECT OPERATING PROJECTS SOURCE OF FUNDS Operations

-net revenue Items not affecting working capital: Depreciation and amortization Increase/(decrease) in unearned revenue Gain on redemption of revenue bonds TOTAL SOURCE OF FUNDS APPIJCATION OF FUNDS'S 0 S 0 S 0 132,636 2,514 425 (70,285)973 055)(103)(56)S 62,351$3,384$214 Additions to utility plant Nuclear fuel purchases Cost of revenue bonds purchased and retired Advances returned to power purchasers Increase/(decrease) in restricted assets S 11,905 21,936 28,510 S (77)S (5)176 3,759 1,000 (298)43 Changes in working capital: Cash and investments Materials and supplies Receivables and other Payables and other liabilities Decrease in working capital TOTAL APPLICATION OF FUNDS 62,351 4,384 214 (6,371)(830)286 8,487 (1)1,787 28 (15)8,903)097)(271)0 (1,000)0 S 62,351$3,384$214 PROJECTS IN DElAYED CONSTRUCTION AND TERMINATED PROJECTS SOURCE OF FUNDS NVQEAR PROJECT No.1 NVQEAR PROJECT NO.3 NVQEAR PROJKTS NOS.4/S Collections under net-billing agreements Collections under exchange agreements Investment income Revaluation of investments Sales of equipment Charged to joint owners Net decrease in restricted funds TOTAL SOURCE OF FUNDS APPLICATION OF FUNDS$147,345$167,556 67,573 24,573 13,963$4,985 222 3,872 1,712 184 218,754 S 239,491$183,231$228,017 Costs related to construction or termination Interest expense Nuclear fuel additions/(deletions)

Trustee and paying agent expenses Bonds redeemed Nct transfers to Hanford Generating Project Administrative costs associated

~vith asset disposition Increase in amounts due from participants Net iticrease in restricted funds S 6,368 204,564 8,155)1,352 18,055 2,568 3,584 6,155 S 6,484 163,579 105 1,349 10,555 399 760 S 1,798 198,313 23,518 1,214 3,174 TOTAL APPLICATION OF FUNDS$239,491$183,231$228,017 I9 OUTSTANDING LONG-TERM DEBT 41s of june 30, 1989 Dollars fn Lbousands SERIES DATE OF SALE EFFECTIVE INTEREST RATE ls)INITIAL OFFERING PRICES SERIAL OR TERM MAIURIIIES NUCLEAR PROJECT NO.2 Revenue Bonds (excludes$2,700,000 duc July 1, 1989)Revenue Bonds (excludes$2,100,000 duc July 1, 1989)Revenue Bonds (excludes$1,700,000 duc July 1, 1989)Revenue Bonds (excludes$1,600,000 duc July 1, 1989)Revenue Bonds (cxclu des$1,485,000 duc July 1, 1989)Revenue Bonds (excludes$3,580,000 duc July 1, 1989)Revenue Bonds (excludes$2,955,000 duc July 1, 1989)Revenue Bonds (excludes$3,075,000 duc July 1, 1989)Revenue Bonds (excludes$2,220,000 due July 1, 1989)Revenue Bonds (excludes$2,215,000 duc July 1, 1989)Revenue Bonds Revenue Bonds (excludes$2,205,000 duc July 1, 1989)1973 6-26-73 5.6404'974 7-23-74 7.80 1974A 11-26-74 7.67 1975A 3-6-75 6.98 1976 6-3-76 6.63 1976A 11-18-76 5.86 1978 7-11-78 6.71 1979 3-13-79 6.49 1979A 10-17-79 7.69 1980 10-21-80 9.63 1981A 94-81 14.67 1982A 2-11-82 15.04 (A)100 (A)100 100 Go 100 100 (A)100 100 (A)99.25 100 (A)100 99.50 (A)100 100 (A)100 100 (A)100 100 (A)100 100 00 (A)100 57.895 99 100 100 100 99.25 5.100/o 5.70 6.7o-690 7.00 7.375 7.20 7.40 7.75 6.60 6.60 6.875 5.70-6.25 6.625 6.75 5.50-5.875 6.00 6.00 5.6o-6.6o 6.80 6.875 5.50-6.00 640 6.75 6.75-7.30 7.60 7.75 8.90-10.90 930 9.60 9.25 8.25 14.375 8.25 14.50 13.25 11.50-13.75 14.50 14.75 7-1-90/1991 7-1-2012 7-1-90/1994 7-1-1999 7-1-2012 7-1-90/1994 7-1-1999 7-1-2012 7-1-90/1994 7-1-1999 7-1-2012 7-1-90/1998 7-1-2006 7-1-2012 7-1-90/2002 7-1-2007 7-1-2012 7-1-90/2000 7-1-2006 7-1-2012 7-1-90/1999 7-1-2004 7-1-2012 7-1-90/1999 7-1-2004 7-1-2012 7-1-90/1997 7-1-2001 7-1-2006 7-1-2011 7-1-2012 7-1-2001 7-1-2003 7-1-2oo6 7-1-2012 7-1-90/1996 7-1-2002 7-1-2012$5,900 124,400 130,300 12,200 15,000 37,000 64,2oo 10,700 15,000 78,000 103,700 9,700 15,000 78,000 102,700 18,520 42,300 49,860 110,680 69,820 44,815 60,990 175, 25 49,845 45,520 66 230 161 595 42,310 33,490 83,605 159,405 30,050 23,050 57,000 110,100 27,430 23,735 46,o7o 75,045 19 920 192 200 30,000 100,000 30,000 50,000 210 000 25,765 51,665 215 000 292 430 20 (A)Vnrlous prices (8)Based on original issue DATE OF SALE EFFECTIVE NITIAL INTEREST OFFERING RATE gl)PRICES SERIAL OR TERM MATURfIIES Revenue Bonds (excludes$2,675,000 due July 1, 1989)1982B 5-20-82 13.929o 100 11.50-13.00/o 100 13.875 7-1-90/1996 7-1-2012$30,085 139 320 169 405 Revenue Bonds 1982C 5-20-82 14.11 100 100 13.50 13.875 7-1-2002 7-1-2012 56,960 139 320 196,280$2,178,620 HANFORD GENERATING PROJECT Revenue Bonds 1963 5-8-63 3.26 98 PACKWOOD LAKE PROJECT 3.25 9-1-1996$17 105$17,105 Revenue Bonds includes$70,000 due within one year at June 30, 1989)1962 3-20-62 3.66 99.425 1965 11-4-65 3.76 100.5 3.625 3.75 3-1-2012 3-1-2012$7,120 2,270$9,390 NUCLEAR PROJECT NO.I Revenue Bonds (includes$1,700,000 due July 1, 1989)1975 9-18-75 7.73 (A)100 100 6 40-7 40 7.70 7.75 7-1-89/2000 7-1-2010 7-1-2017 31,900 58,300 74,700 164,900 Revenue Bonds Oncludes$1,870,000 due July 1, 1989)Revenue Bonds (includes$2,145,000 due July 1, 1989)Revenue Bonds (includes$2,740,000 due July 1, 1989)Revenue Bonds (includes$2,215,000 due July 1, 1989)Revenue Bonds Gncludes$1,640,000 due July 1, 1989)Revenue Bonds (includes$4,500,000 due July 1, 1989)1976A 2A-76 6.84 (A)100 100 1 976 B 8-31-76 6.37 (A)100 99.50 1978A 3-21-78 5.70 (A)100 100 1978B 12-5-78 6.60 (A)100 100 99 50 1979 6-19-79 6.64 (A)100 100 100 1980A 8-5-80 9.15 (A)100 100 99.00 (A)6.00-6.25 6.90 7.00 5.00-5.90 6.5o 6.50 5.00-5.50 5.80 5.875 5.5o-6.oo 6.35 6.60 6.80 6.oo 640 6.7o 6.80 7.00-8.25 9.00 9.20 9.25 7.75 7-1-89/1998 7-1-2010 7-1-2017 7-1-89/1998 7-1-2010 7-1-2017 7-149/2002 7-1-2010 7-1-2017 7-149/1998 7-1-2003 7-1-2009 7-1-2017 7-1-89/1998 7-1-2003 7-1-2009 7-1-2017 7-1-89/1995 7-1-2002 7-1-2005 7-1-2013 7-1-2017 25,285 66,485 76,495 168~25 27,935 66,94o 71 235 166 110 52,590 50,920 64 810 168 320 28,960 22,305 38,190 81,150 170 605 22,660 18,560 32,370 69,685 143,275 42,000 37,000 16,950 70,550 30 000 196 500 21 OtJTSTANDlNG LONG-TERM DEBT 4Es of Jane 30, 1986I Dollars tn tboI4sands Eff KcnvE DATE INTEREST oF sALK RATE is)LNIIIAL OFFERING PRICES SERIAl OR TERM MATURmES AMOUNT Revenue Bonds Revenue Bonds Revenue Bonds Revenue Bonds Revenue Bonds (includes$2,160,000 due July 1, 1989)NUCLEAR PROJECT NO.3 Revenue Bonds (includes$1,390,000 due July 1, 1989)1981A 4-13-81 11.92%1981 B 4-13-81 11.67 1981 C 4-13-81 10.41 1981 D 9441 15.42 1982A 2-11-82 15.13 1975 12-3-75 7.87 (A)100 (A)100 100 57.895 100 100 100 99.25 (A)100 100 11.30-13.00%

11.625 10.00 10.25 14.375 8.25 15.00 10.50-13.75 14.50 14.75 6.15-7.25 7.875 7.875 7-1-96/2003 7-1-2012 7-1-2016 7-1-2015 7-1-2001 7-1-2003 7-1-2017 7-149/1996 7-1-2002 7-1-2017 7-1-89/1998 7-1-2010 7-1-2018 S 28,580 91 420 120 000 40,000 20,000 30,000 265,000 315,000 27,415 50,645 305 000 383 060 82,076,035 S 19,635 52,695 71 160 143,490 Revenue Bonds (includes$1,075,000 due July I, 1989)Revenue Bonds (includes$3,065,000 due July 1, 1989)Revenue Bonds (includes$2,195,000 due July 1, 1989)Revenue Bonds (includes$2,445,000 due July 1, 1989)Revenue Bonds Revenue Bonds (includes$445,000 due July 1, 1989)1976 4-13-76 6 48 1977 9-12-77 5.71 1978 9-12-78 6.27 1981A 2-11-81 11.18 1981 B 9A-81 15.43 1982A 2-11-82 15.22 (A)99.625 100 (A)99.50 99 50 (A)100 99 (A)100 99 50 88.50 88.50 57.895 99 100 100 99.25 5.50-6.00 6.50 6.60 5.00-5.50 5.70 5.80 5.90-6.00 6.375 6.40 9.50-12.50 11.125 11.125 9.75 9.75 8.25 14.50 15.00 10.50-13.75 14.50 14.75 7-1-89/1998 7-1-2010 7-1-2018 7-1-89/2000 7-1-2009 7-1-2018 7-1-89/2004 7-1-2010 7-1-2018 7-1-89/2001 7-1-2005 7-1-2010 7-1-2017 7-1-2018 7-1-2003 7-1-2006 7-1-2018 7-1-89/1996 7-1-2002 7-1-2018 14,250 35,100 45 295 94 645 48,'190 63,535 107 160 218 885 58,995 42,985 90 630 192,610 60,125 40,535 80,310 18,950 20,830 220,750 20,000 20,000 185 000 225,000 5,655 10,445 148,500~14,600 Revenue Bonds (includes$700,000 due July 1, 1989)Revenue Bonds 1982 B 5-20-82 14.24 F 1982 C 5-20-82 13.85 100 99.50 10.50-13.00 13.875 13.50 7-'1-89/1996 7-1-2018 7-1-2002 8,565 280 925 289 490 14 880 81,564,350 22 (A)VartoI4sprtces (8)Based on origina tssI4c NOTES TO FINANCIAL STATEMENTS Note A-General ORGANIZATION The Washington Public Power Supply System (Supply System), a inunicipal corporation and joint operating agency of the State of Washington, was organized in 1957.It is empowered to finance, acquire, construct and operate facilities for the generation and transmis-sion of electric power.Its membership consists of 10 public utility districts and the cities of Richland, Seattle, and Tacoma.All members own and operate electric systems within the state of Washington.

The Supply System has no taxing authority.

SUPPLY SYSTEM PROJECTS The Supply System is currently operating Nuclear Project No.2, a 1,100 MWe generating plant com-pleted in 1984, and the Packwood Lake Hydroelectric Project (Packwood), a 27.5 hPVe plant completed in 1964.The Hanford Generating Project (HGP), a 860 MWe plant which utilizes byproduct steam from the Depart-ment of Energy's dual-purpose New Production Reactor (N-Reactor), was completed in 1966 and was in normal operation through 1986.In January 1987, the N-Reactor was shut down for safety improve-ments.In February 1988, the Department of Energy placed the N-Reactor in standby status for an undeter-mined length of time, eliminating the HGP's present energy source.Nuclear Project No.1, a-1,250 MWe plant, is 65 percent complete and is in the eighth year of a construction delay.Nuclear Project No.3, a 1,240 MWe plant, is 75 percent complete and is in the seventh year of a construction delay.Nuclear Project No.1 is wholly owned by the Supply System.Nuclear Project No.3 is jointly owned, 70 percent by the Supply System and 30 percent by four investor-owned utilities (Pacific Power S Light Company, Portland General Electric Company, Puget Sound Power 8t Light Company, and The Washington Water Power Company).Nuclear Projects Nos.4 and 5 were terminated on'January 22, 1982 and are currently in an asset sales phase.The asset sales program is expected to be completed by June 30, 1990.Nuclear Project No.4 is wholly owned by the Supply System.Nuclear Project No.5 is jointly-owned, 90 percent by the Supply System and 100/0 by Pacific Power&.Light Company, an investor-owned utility.Each Supply System project is financed and accounted for as a utility system separate from all other current or future projects, with the exception of Nuclear Projects Nos.4 and 5 which are treated as one utility system.Over 100 Northwest utilities participating in Nuclear Projects Nos.1, 2 and the Supply System's 70 percent ownership share of Nuclear Project No.3 have purchased all project capability of the Supply System's ownership share of each project.Pursuant to the terms of their purchase agreements, they are obligated to pay the annual costs of each project, including debt service, whether or not the project is completed, operable or operating and notwithstanding the suspension, reduction or curtailment of project output.These project participants have resold such capability to the Bonneville Power Administration (BPA)and in return BPA is obligated to pay annual costs of these projects, including debt service, by a procedure referred to as net-billing.

Under net-billing, project participants pay the Supply System their respective shares of annual costs and BPA pays project partici-pants identical amounts by reducing amounts due to BPA by participants under power sales agreements.

Eighty-eight project participants in Nuclear Projects Nos.4 and 5 were originally obligated by contract to pay annual costs of Nuclear Projects Nos.4 and 5, including debt service, whether or not the projects were completed.

However, these contracts have been declared invalid.BPA has no obligation with respect to annual costs of Nuclear Projects Nos.4 and 5.The Supply System does not own electrical distribu-tion facilities.

All electrical energy produced by Supply System projects is delivered to electrical distribution facilities owned and operated by BPA as part of the Federal Columbia River Power System.BPA in turn distributes the electricity to electric utility systems throughout the Northwest, including participants in Supply System projects, for ultimate distribution to consumers.

BPA is obligated by law to establish rates for electric power which will recover the, cost of acquisition (including all payments under net-billing agreements), and its other costs.23 NOTES TO FINANCIAL STATEMENTS Note J3-Summary of Si ni scant Accountin Policies$149,620,565 for Nuclear Projects Nos.1 and 3, respectively, for the year ended June 30, 1989.BASIS OF ACCOUNTING The Supply System has adopted accounting policies and practices that are in accordance with generally accepted accounting principles applicable to utilities and governmental organizations.

Accounts are main-tained in accordance with the uniform system of accounts of the Federal Energy Regulatory Commis-sion, even though the Supply System is not a regu-lated rate-making utility.Separate books of account are maintained for Nuclear Projects Nos.1.2, 3, HGP and Packwood as separate utility systems, and for Nuclear Projects Nos.4 and 5 as one utility system.Financial statements are issued separately for each utility system and are not consolidated.

Bond resolu-tions require that funds be maintained separately for each utility system.Payment of obligations of one utility system with funds of another utility system is prohibited, and would constitute violation of bond resolution covenants.

UTIUTY PLANT IN SERVICE Utility plant is stated at original cost, and is depreci-ated by the straight-line method over the estimated useful lives of the various classes of plant in service.Improvements to U.S.government-owned facilities are amortized over the period covered by the contract for dual-purpose operation of the U.S.Department of Energy's N-Reactor.

CAPITALIZATION OF CONSTRUCTION COSTS AND EXPENSES During the normal construction phase of a project, it is the Supply System's policy to capitalize all costs relating to the project, including interest (net of interest income), administrative and general expense, and certain other expenses.Interest expense during construction is allocated to nuclear fuel and plant based on cumulative cash utilization.

Administrative, general and overhead expense are allocated to projects on the basis of direct usage or direct salary cosL As of July 1, 1984, the Supply System discontinued capitalizing interest expense (net)applicable to Nuclear Projects Nos.1 and 3 because of the extended delay of these projects.The interest expense, which is funded by payments under net-billing agreements, will not be capitalized during the delay period.Such net interest expense totaled$187,033,261 and COSTS OF TERMINATED PROJECTS Due to the termination of Nuclear Projects Nos.4 and 5, the asset values of these projects have been re-duced to estimated net realizable values, which are based on Supply System staff estimates.

Such revalu-ation, totaling$3,467,269,848 at June 30, 1989, has created a negative equity position, reflected as defi-ciency in assets on the balance sheet.Contractor claims liabilities totaling$21,859,364 in-cluding interest, are accrued as of June 30, 1989.No source of funds is available to pay these obligations.

NUCLEAR FUEL Nuclear fuel is stated at cost.Nuclear Project No.2 nuclear fuel cost is amortized to nuclear fuel operating expense on the basis of quantity of heat produced for generation of electric energy.Current period operating expenses also include a charge for future spent nuclear fuel storage and disposal to be provided by the Department of Energy in accordance with the Nuclear Waste Policy Act of 1982.Such charge is based on energy generated.

RESTRICTED ASSETS In accordance with project bond resolutions and related agreements, separate restricted funds are established for each of the projects.The assets held in these funds are restricted for specific uses including construction, debt service, capital additions, extraordi-nary operation and maintenance, termination, and decommissioning.

CASH AND INVESTMENTS Cash and investments for Nuclear Projects Nos.1, 2 and 3, HGP, and Packwood are maintained separately.

Cash and investments for Nuclear Projects Nos.4 and 5 are pooled.All investments are held in the Supply System's name by safekeeping agents.The Supply System's deposits are entirely covered by federal depository insurance or by a pool of public funds through the Washington Public Deposit Protec-tion Commission.

Statutes authorize the Supply System to invest in obligations of the United States Treasury, United States government agencies, banks, savings and loan corpo-rations, and corporate mortgage companies.

Supply System investment policies limit investment authority 2d to obligations of the United States Treasury, Federal National Mortgage Association, Federal Home Loan Banks, and Federal Home Loan Mortgage Corporation.

Investments held in the Bond Fund Reserve Accounts (included in Debt Service Funds)and Reserve and Contingency Funds (included in Special Funds)are stated at the lower of purchase price, par value, amortized cost or market as required by bond resolu-tions.All other investments are stated at amortized cost and include accrued interest.The combined carrying value of investments for all projects at year-end (including accrued interest)approximates market value.CURRENT MATURITY OF REVENUE BONDS Current maturities of revenue bonds payable are reflected in Long-Term Debt, Revenue Bonds Payable.Funding of current maturities is reflected in Restricted Assets-Debt Service Funds.FINANCING EXPENSE AND BOND DISCOUNT Financing expense and bond discount applicable to each project are amortized to project capital cost or operating cost, as appropriate, by the straight-line method oyer the period of each respective bond issue.REVENUES In accordance with covenants of bond resolutions, the Supply System is authorized to recover actual cash requirements for operations and debt service for each project over the life of the project.Accordingly, the Supply System's revenues equal its operating costs for each period.No income or loss is realized, and no equity is accumulated.

Payments received during construction under Nuclear Project No.2 net-billing agreements were recorded as Unearned Revenues on the balance sheet and will be recognized as Revenues over the operating life of the project.Payments received during construction under Nuclear Projects Nos.1 and 3 net-billing agreements have been reclassified from Unearned Revenues to Costs Reimbursed Under Net Billing because of the uncertainty as to when these projects will be open-tional, as explained in Note E.DECOMMISSIONING Decommissioning costs are charged to operations over the operating life of each project, starting at the time of commercial operation.

Estimated Nuclear Project No.2 decommissioning costs are being accrued and funded currently.

Monthly payments are made into a sinking fund which, with accumulated interest, is expected to be adequate to fund decommissioning costs at the end of the 40-year plant operating life.Sinking-fund requirements through June 30, 1989 have been based on estimated decommissioning costs of$114 million (in 1982 dollars).Payments to the decommissioning fund for Nuclear Project No.2 for the year ended June 30, 1989 aggregated

$1,057,287.

Effective July 1, 1989, sinking fund requirements will be based on revised estimates of decommissioning costs of$403 million (in 1987 dollars).INVESTMENT INCOME Investment income consists of interest earned on investments, realized gains and losses resulting from the sale of investments, and unrealized losses appli-cable to certain investments.

Investment income relating to operating plants is recorded as a credit to operating costs.With respect to Nuclear Projects Nos.1 and 3, income earned on construction fund invest-ments, if any, is recorded as a credit to Construction Work in Progress-Deferred Projects, and income earned on investments held in all other funds is treated as a reduction of funding required under the net-billing agreements.

Investment income relating to Nuclear Projects Nos.4 and 5 is credited to Costs of Terminated Projects.RETIREMENT PLAN Substantially all the Supply System's full-time employ-ees participate in the statewide local government Public Employees'etirement System (PERS).PERS is a contributory multi-employer cost-sharing retirement system administered by the State of Washington through the Department of Retirement Systems.In addition to the state itself, there are approximately 1,200 local government employer members in the system.PERS contains two plans.Plan I members (employed on or before September 30, 1977)may retire with full benefits at age 60 with at least five years of credited service, at age 55 with 25 years of service, or upon reaching 30 years of service regardless of age.Plan II members (employed after September 30, 1977)may retire with full benefits at age 65 with at least five years of credited service.or with actuarially reduced benefits at age 55 with 20 years of service.Pension plan provisions have been established by statute.25 1 NOTES TO FINANCIAL STATEMENTS Actuarially determined requirement 8.199o$1,161,068 6.79/o$3,432,894 Actual Supply System contribution

'.96o/o$844,929 6.00olo$3,033,485 Employee Contributions:

Actuarially determined requirement 4.67o/o$2,361,062 Actual Supply System contribution 6 00o/o$850,621 4.90o/o$2,477,535 Note C-Lon-Term Debt Except for Nuclear Projects Nos.4 and 5, which were financed together as one utility system, all Supply System projects are financed separately.

The resolu-tions of the Supply System authorizing issuance of revenue bonds for each project provide that such bonds are payable solely From the revenues of that project.26 The Office of the State Actuary, using methods prescribed by statute, determines actuarially required contribution rates.However, the rates actually levied are determined by the legislature.

Contribution rates are not necessarily adequate to fully fund the plan.While the Supply System's contributions for the year ended June 30, 1989 of$3,878,414 on a covered payroll of$64,734,739-represent its full liability under the system, any unfunded future pension benefit obli-gation could be reflected in future years as higher contribution rates.As of December 31, 1987 (the latest actuarial valuation date), the pension benefit obliga-tion of PERS, which is the actuarial present value of credited projected benefits adjusted for the effects of projected salary increases, was$5.9 billion.As of the same date the value of net assets available to satisfy present and future pension benefit obligations was$4.9 billion.Historical trend information showing PERS progress in accumulating sufficient assets to pay benefits when due is presented in the State of Wash-ington's June 30, 1988 comprehensive annual report.Contributions for the year ended June 30, 1989 were as follows: Plan I Plan H Rate Amount Rate Amount Employer Contributions:

Outstanding Long-Term Debt of the various projects as of June 30, 1989 is presented on pages 20 through 22.SECURITY-NUCLEAR PROJECTS NOS.I, 2 AND 3 Project participants have purchased all of the project capability of Nuclear Projects Nos.1 and 2 and the Supply System's 70 percent ownership share of project capability of Nuclear Project No.3.The U.S.Depart-ment of Energy, acting by and through BPA, has in turn acquired the entire project capability from the project participants under contracts referred to as net-billing agreements.

Under the net-billing agreements for each of the projects, project participants are obligated to pay the Supply System their pro rata share of total annual costs of the respective projects, including debt service on bonds relating to each project, and BPA in turn is obligated to pay the participants identical amounts by reducing amounts due to BPA by participants under BPA power sales agreements.

The net-billing agreements provide that project participants and BPA are obligated to make such payments whether or not the projects are completed, operable or operating and notwithstanding the suspension, interruption, interference, reduction or curtailment of the projects'utput.

The validity of the net-billing agreements was challenged in November 1982.In May 1983, the U.S.District Court of Oregon declared that the net-billing agreements were binding, and this decision was upheld on appeal.SECURITY-NUCLEAR PROJECTS NOS.4 AND 5 In connection with the issuance of the generating facilities revenue bonds for Nuclear Projects Nos.4 and 5, the Supply System pledged the revenues to be derived under participants'greements with 88 utilities operating principally in the Northwest.

The partici-pants'greements provided that each participant pay its respective share of annual costs, including debt service on the bonds, whether or not the projects were completed, operable, or operating and notwith-standing the suspension, interruption, interference, reduction or curtailment of the projects'utput.

Payments from the participants for Nuclear Projects Nos.4 and 5 termination costs and debt service were due beginning on January 25, 1983'.As a result of a ruling by the Washington State Supreme Court declar-ing the participants'greements invalid, payments due under the participants'greements were not made and an event of default, as defined in the bond resolution, occurred on July 22, 1983 (see Note D).

SECURITY-HANFORD GENERATING PROJECT It was initially intended that Nuclear Project No.1 be constructed next to HGP to provide the energy source to operate the project when the DOE ceased opera-tion of the N-Reactor.

To allow for construction of Nuclear Project No.1, it would have been necessary to shut down HGP on October 31, 1977.Because studies at that time indicated that generating resources in the Pacific Northwest would be inadequate in the late 1970s and early 1980s, the Supply System and BPA determined that HGP should be kept available for power production.

Therefore, the Nuclear Project No.1 net-billing, exchange and project agreements were amended to provide for the separation of Nuclear Project No.1 from HGP.The amended agreements provide for the payment of all debt service costs, net of investment income, of HGP by Nuclear Project No.1 participants, beginning July 1, 1980, regardless of continued operation of the reactor, and that other costs, to the extent not other-wise provided for, be treated as Nuclear Project No.1 costs with HGP having a first claim on the revenues of that project.SECURITY-PACKWOOD HYDROELECTRIC PROJECT Under power sales agreements, 12 member purchasers have purchased all of the project capability of Pack-wood.The member purchasers are obligated to pay annual costs of the project, including debt service, whether or not the project is operable, until outstand-ing bonds are paid or provision is made for their.retirement in accordance with provisions of the bond resolution.

Note D-Nuclear Projects Nos.4 and 5 7ennination Bond De quit and liti ation In January 1982;the Supply System's Nuclear Projects Nos.4 and 5 were terminated when construction was 24 percent and 16 percent complete, respectively.

The Supply System had previously issued$2.25 billion of bonds to pay costs of the projects.The participants'greements (discussed in Note C under Security-Nuclear Projects Nos.4 and 5)pro-vided that each participant pay its respective share of the debt service on the bonds and termination costs beginning January 25, 1983.Payments due under the participants'greements were not made pending a judicial determination of the participants'uthority and obligation to pay.On June 15, 1983, and again on November 6, 1984, the Washington State Supreme Court ruled that Washington municipal utilities did not have statutory authority to enter into the participants'greements, thus invalidating the agreements.

The Supply System and Chemical Bank, trustee for Nuclear Projects Nos.4 and 5 bondholders, petitioned the U.S.Supreme Court for grant of a writ of certiorari by which the state court decision might be reviewed by that court.Grant of the writ was denied by the U.S.Supreme Court on April 29, 1985.On July 22, 1983, the Supply System acknowledged that it could not pay Nuclear Projects Nos.4 and 5 obligations as they became due.This admission represented an event of default under the Nuclear Projects Nos.4 and 5 bond resolution.

On July 25, 1983, Chemical Bank, as bond fund trustee, demanded that all remaining project funds be transferred to it to be held in a special account.On August 18, 1983, Chemical Bank declared the principal of all Nuclear Projects Nos.4 and 5 revenue bonds and interest accrued thereon to be due and payable immediately.

In early 1983, a number of securities fraud class actions were filed in federal courts on behalf of purchasers of Nuclear Projects Nos.4 and 5 bonds.Other suits by plaintiffs on their own behalf were filed in federal and state courts.The defendants named included the Supply System, its member utilities, and Nuclear Projects Nos.4 and 5 participants.

The lawsuits alleged violations of federal and state securi-ties law, fraud, misrepresentation, negligence and breach of contract, and sought monetary damages, rescission and restitution.

The federal actions were consolidated in a single multidistrict proceeding in tlie United States District Court for the Western District of Washington under the caption In re lPPPSS Securftfes Lftfgatfon, MDL 551 (MDL 551).In August 1983, Chemical Bank filed a lawsuit in United States District Court for the Western District of Washington, on behalf of all Nuclear Projects Nos.4 and 5 bondholders, against the Supply System, all Nuclear Projects Nos.4 and 5 participants, and Supply System member utilities.

The lawsuit alleged claims and sought relief similar to that alleged and sought in the MDL 551.Another lawsuit, Habennan v.1PPPSS, et af.(Haber-man), was filed against the Supply System and others in Washington State Superior Court by a number of Nuclear Projects Nos.4 and 5 bondholders alleging substantially the same matters as were made in the federal cases.The lawsuits described above sought to recover the bondholders'nvestment in the principal amount of 27 NOTES TO FINANCIAI.

STATENENTS

$2.25 billion, plus unspecified damages, interest, costs and attorney'ees.

In September 1988, the Supply System's Executive Board approved an agreement in principle to settle claims against the Supply System in MDL 551, the Chemical Bank litigation, and related litigation includ-ing the Haberman action.A definitive agreement has been executed.The agreement provides for entry of judgment dismissing with prejudice any and all claims which have been, could have been, or might in the future be asserted against the Supply System by members of the classes in MDL 551, by Nuclear Projects Nos.4 and 5 bondholders represented by Chemical Bank, or by bond purchasers in any other action arising out of the subject matter of MDL 551.The agreement calls for the Supply System to consent to future entry of a judgment on the contract claim on the Nuclear Projects Nos.4 and 5 bonds brought by MDL 551 class plaintiffs and Chemical Bank.All other claims against the Supply System are to be dismissed.

The amount of said judgment shall be equal to the aggregate unpaid principal amount of the Nuclear Projects Nos.4 and 5 bonds and accrued interest thereon at the time the judgment is entered.As of July 1, 1989, the amount of such accrued interest was approximately

$1.127 billion.That judgment shall be entered only upon a final judgment or final settlement of all claims in MDL 551 and the Chemical Bank litigation.

Recourse for satisfaction of the judgment is expressly limited as provided in the Nuclear Projects Nos.4 and 5 bond resolution to the funds and assets of the Supply System pledged to secure the Nuclear Projects Nos.4 and 5 bonds.All defendants in MDL 551 and the Chemical Bank litigation have reached agreements to settle claims against them.The total amount to be paid under these settlements in MDL 551 approximates 8650 million, not including past payments by the Supply System and future payments from the proceeds of asset sales of Nuclear Projects Nos.4 and 5, and not including proceeds of certain insurance claims assigned by defendants to plaintiffs.

In April 1989, certain present holders of Nuclear Projects Nos.4 and 5 bonds served the Supply System and others with notice of a suit, entitled Heerey v.Supply System gIeerey), in New York State Supreme Court for the County of New York which seeks S750 million and other relief.The plaintiffs in Hery allege that the Supply System and other defendants are liable to the plaintiffs for nonpayment of interest and principal on the Nuclear Projects Nos.4 and 5 bonds, based on common law fraud and other theories.The district court in MDL 551 and the Chemical Bank litigation has previously ruled that Chemical Bank represents all of the holders of Nuclear Projects Nos.4 and 5 bonds.In another lawsuit entitled Ho+er v.State of 1Pashtng-ton, certain purchasers of Nuclear Projects Nos.4 and 5 bonds have filed claims on behalf of all bondholders against the State of Washington, the state auditor and other elected officials, asserting that the state is liable to the plaintiffs for damages.The State of Washington has advised the Supply System that if the litigation against the State of Washington is not resolved, it will file crossclaims against the Supply System and the other MDL 551 defendants.

All of the settlements were approved by the court on September 5, 1989.The court's ruling permanently bars Chemical Bank and all Nuclear Projects Nos.4 and 5 bond purchasers from commencing, prosecut-ing, or continuing any action against the Supply System arising out of or relating to the allegations or subject matter of the litigation.

The ruling, however, will not preclude Chemical Bank from continuing with the cost sharing litigation described in Note B below.The court further found that Chemical Bank repre-sented all Nuclear Projects Nos.4 and 5 bondholders in the litigation.

The court's ruling is subject to appeal and the Supply System anticipates that one or more appeals will be filed.In the opinion of Supply System Special Counsel and Chief Counsel, the court's ruling, unless modified or reversed on appeal, would bar the Heerey litigation and the Haberman litigation, and would provide for the release of claims asserted in the Ho+er litigation.

IF the Supply System's settlement is modified or reversed, or if the district court's ruling that the Chemical Bank represents all of the Nuclear Projects Nos.4 and 5 bondholders is not upheld, the Supply System is unable to predict the outcome of MDL 551, the Chemical Bank litigation, Haberman, Heerey, or Hoger.The excess carrier of directors'nd officers'iability insurance filed a lawsuit in September 1985, seeking a declaration that it has no obligation under the insur-ance policy because of the alleged failure of the Supply System to declare facts which if known to the insurer, would have resulted in it not issuing the policy.The court in MDL 551 has approved a settle-ment between the Supply System's directors and the 28 plaintiffs in MDL 551, which dismisses all claims against the directors in return for a payment by the carrier.The court's approval is subject to appeal.When finalized, this settlement will end the litigation involving the insurance carrier and the directors.

Note L Commitments and Contin encies NUCLEAR PROJECTS NOS.4 AND 5 BRIDGE AND TERMINATION LOANS In conjunction with the construction stoppage of Nuclear Projects Nos.4 and 5 during 1981, certain project participants, investor-owned utilities and industrial customers of BPA agreed to loan Nuclear Projects Nos.4 and 5 funds to underwrite a program to preserve the assets of those projects.These loans, called bridge loans, consisted of 860,000,000 in subordinated revenue notes bearing a stated maturity date of July 1, 1984, and bearing interest to due date at an annual rate of 15 percent.Subsequently, when a decision was made to terminate Nuclear Projects Nos.4 and 5, a number of project participants agreed to loan Nuclear Projects Nos.4 and 5 funds to assist in avoiding an uncontrolled termination of the projects.These loans, called termination loans, consisted of$7,865,502 in subordi-nated revenue notes bearing a stated maturity date of , June 30, 1983, and bearing interest to due date at an annual rate of 15 percent.The Supply System defaulted on all of the loans at the same time it defaulted on Nuclear Projects Nos.4 and 5 bonds in 1983.Most of the lenders have sued the Supply System and all but three of the suits have been reduced to judg-ment.Some of the lenders obtained general judgments against any Supply System assets, whether for Nuclear Projects Nos.4 and 5 or another project.The Supply System appealed these judgments, and in 1985 the Washington State Supreme Court reversed, holding that the terms of the loans limited recovery to funds and assets of Nuclear Projects Nos.4 and 5.INTER-PROJECT ClAIMS AGAINST REVENUES AND OTHER ASSETS Some creditors of Nuclear Projects Nos.4 and 5 have attempted, and others have threatened to attempt, to obtain payment from the physical assets of other projects of the Supply System or from the revenues pledged as security for the Supply System bonds issued in connection with, and revenues pledged for the payment of costs of, such other projects.Such creditors include present and former holders of the Nuclear Projects Nos.4 and 5 bonds and others who may assert claims in the future against the Supply System and/or its projects.Bond Counsel and Chief Counsel to the Supply System are of the following opinions with respect to the ability of various classes of claimants, creditors, and future creditors to realize upon the revenues or physical assets of Nuclear Projects Nos.1, 2 and 3.First, with respect to the revenues, income, receipts, profits, and other moneys held under each of the net-billed resolutions and pledged thereby for the pay-ment of the related net-billed bonds and for the payment of all other costs of the related net-billed

.project (collectively, the"Pledged Revenues"), Bond Counsel and Chief Counsel to the Supply System are of the opinion that holders of Nuclear Projects Nos.4 and 5 bonds, creditors of the Supply System whose claims arose from the furnishing of goods or services with respect to Nuclear Projects Nos.4 and 5, and creditors whose judgments derived from other con-tract claims against the Supply System that do not arise from actions or failures to act relating directly or indirectly to such net-billed project will not be able to realize upon such pledged revenues.Second, with respect to the pledged revenues relating to a particular net-billed project, while the specific issue has not been decided by the Supreme Court of the State of Washington, Bond Counsel and Chief Counsel to the Supply System are of the opinion that creditors of the Supply System whose judgments derive from tort claims against the Supply System that do not arise from actions or failures to act relating directly or indirectly to such net-billed project will not be able to realize upon such pledged revenues and Bond Counsel and Chief Counsel to the Supply System believe that, if presented with the question, a court would so hold.Third, with respect to the physical assets of the net-billed projects that are necessary for the purposes of such projects, while the specific issue has not been decided by the Washington State Supreme Court, Bond Counsel and Chief Counsel to the Supply System are of the opinion that holders of Nuclear Projects Nos.4 and 5 bonds, creditors of the Supply System whose claims arose from the furnishing of goods or services with respect to Nuclear Projects Nos.4 and 5, and creditors whose judgments derive from other contract or tort claims against the Supply 29 NOTES TO FINANCIAL STATEMENTS System that do not arise from actions or failures to act relating directly or indirectly to the net-billed projects will not be able to realize upon such assets;and Bond Counsel and Chief Counsel to the Supply System believe that, if presented with the question, a court should so hold.The above opinion as to the ability of bondholders or other creditors to realize upon the physical assets of the net-billed projects is limited to those assets located within the State of Washington, or as to which a court would apply the law of the State of Washington.

The above opinions exclude claims against the Supply System arising from a valid exercise of the sovereign police power of the State of Washington or of the constitutional powers of the United States of America.In order to express the legal conclusions set forth in the foregoing opinions, Bond Counsel and Chief Counsel to the Supply System have assumed that the activities giving rise to the claims described in such opinions were not directly or indirectly related to any net-billed project.In any given suit or proceeding, however, the questions of whether a particular activity does or does not relate to a net-billed project is a factual matter to be determined by the judge or jury, as the case may be.No assurance can be given that in any such suit or proceeding there will not be a finding that the complained-of activity relates to one or more of the net-billed projects.If such a finding is made, the claimant may be able to realize on the pledged revenues or physical assets of one or more of the net-billed projects.If it were determined that a claim is an obligation of one or more of the net-billed projects, the claim would be paid in the same manner as other obliga-tions of those projects.Bond Counsel and Chief Counsel to the Supply System have not undertaken an investigation of the issues discussed above with respect to the Packwood Lake Hydroelectric Project or Hanford Generating Project.However, they believe that upon full investi-gation the same opinions could be rendered with r'espect to assets of the Packwood Lake Hydroelectric Pioject and Hanford Generating Project and revenues or funds held in tr'ust or for the holders of bonds issued by the Supply System to finance the construc-'ion of such projects.f If it is found that creditors are not limited to payment of their claims from the project to which such claims relate, it will have a material adverse impact on tlie Supply System.COST SHARING UTIGATION Nuclear Projects Nos.1 and 4 are of substantially the same design and are referred to as"twin units." Nuclear Projects Nos.3 and 5 are also twin units of substantially the same design.Architect-engineer services, construction management, and certain common equipment used in construction of twin units benefited both units and costs are sharable by the twin units.The Supply System allocated such shared costs on the basis of respective benefit to the projects involved.In August 1982, the Participants'ommittee for Nuclear Projects Nos.4 and 5, on behalf of the project participants, demanded that the Supply System reallocate

$161 million, plus interest, in shared costs previously paid by Nuclear Projects Nos.4 and 5, based on a revised formula for sharing of costs.The demand indicated this was not the total extent of claims which could be made by the Nuclear Projects Nos.4 and 5 participants.

The investor-owned utilities (IOUs)owning 30 percent of Nuclear Project No.3 have asserted that they are entitled to set off the amounts owed by the Supply System on loans made for Nuclear Projects Nos.4 and 5 in 1981, totaling$12 million plus interest, against any cost-sharing obligation.

In October 1982, the Supply System filed a complaint for declaratory judgment in United States District Court for Western Washington, naming the participants in Nuclear Projects Nos.1, 2, 3, 4 and 5, BPA, the four IOUs owning shares of Nuclear Project No.3, and the bond fund trustees for Nuclear Projects Nos.1 and 3 as defendants, and asking the court to declare the rights and obligations of the parties with regard to the allocation of costs among the projects.In May 1983, the court designated BPA as the plaintiff and all other parties as defendants.

The case is captioned BPA v.Supply System, et al.Certain other claims have been filed as part of this action.In June 1983, Chemical Bank filed a motion to inter-vene as bond fund trustee on behalf of the Nuclear Projects Nos.4 and 5 bondholders.

The motion was granted.Chemical Bank's position is that the Supply Systein's allocations of costs among the twinned projects were improper and that repayment to the Nuclear Projects Nos.4 and 5 bond fund is required for such costs allegedly improperly allocated.

In May 1989, the court ruled that Chemical Bank has a lien on any funds which may be determined in the 30

~re to have been improperly expended as a result of costs misallocated to Nuclear Projects Nos.4 and 5, but the court stated that any enforcement of the lien must await resolution of the issue of whether there was any improper allocation.

By agreement among the Supply System, BPA and Chemical Bank signed August 29, 1989 and approved by the court, BPA agreed that any final, nonappeal-able judgment entered in cost sharing litigation granting relief to Chemical Bank for costs misallocated from Nuclear Projects Nos.1, 2 or 3 to Nuclear Projects Nos.4 or 5 would be payable by BPA under net-billing agreements.

In return, Chemical Bank released the lien on proceeds of any Nuclear Projects Nos.1, 2 or 3 refunding bonds to be issued in the future, and any other funds disbursed to pay amounts properly payable prior to a judgment in the cost sharing litigation.

However, the release by Chemical Bank does not apply to any funds disbursed after a judgment in the cost sharing litigation.

If, after such judgment in the cost sharing litigation Chemical Bank seeks to enforce a lien on the Nuclear Projects Nos.1, 2 or 3 bond funds or revenue funds, Bond Counsel and Chief Counsel to the Supply System are of the opinion that a court should hold that any such lien would be subordinate to the lien of Nuclear Projects Nos.1, 2 or 3 bondholders.

Counsel for Chemical Bank has estimated the potential recovery for Nuclear Projects Nos.4 and 5 at$1 billion, including interest.If a judgment were awarded in favor of Chemical Bank, and costs previ-ously allocated to Nuclear Projects Nos.4 and 5 were allocated to other Supply System projects, such amounts would be construction costs of such projects.The Supply System is unable to predict the outcome of this litigation.

NUCLEAR PROJECT NO.5 TERMINATION ClAIM Under the terms of the Nuclear Project No.5 owner-ship agreement between the Supply System and Pacific Power and Light Company (Pacific), Pacific is obligated to fund its respective 10 percent ownership share of Nuclear Project No.5 termination costs beginning January 25, 1983, and continuing until all costs of termination have been paid.Ten percent of'he funds received from sales of Nuclear Project No.5 assets are applied as a reduction of Pacific's obligation for termination costs.Pacific has refused to pay its share of Nuclear Project No.5 termination costs since Junc 1983.In August 1983, Pacific filed a counterclaim in BPA tr.Supply System, et al asserting that termination of Nuclear Project No.5 was a breach of the ownership agree-ment between Pacific and the Supply System.Pacific seeks damages in an unspecified amount.Such amount would presumably be approximately

$150 million and could be a general claim against assets of the Supply System.Actions on that claim'ave been stayed since 1983.The Supply System is unable to predict the outcome of this litigation.

NUCLEAR PROJECTS NOS.4 AND 5 SITE RESTORATION No provisions have been made for site restoration of Nuclear Projects Nos.4 and 5, which is governed by the site certification agreement between tlie Supply System and the State of Washington and regulations adopted by the-Washington State Energy Facility Site Evaluation Council (EFSEC).It is not known at this time what actions will be necessary to comply with EFSEC's requirements.

Because the site certification agreement for Nuclear Project No.1 also covers Nuclear Project No.4, and the agreement for Nuclear Project No.3 also covers Nuclear Project No.5, EFSEC might assert that Nuclear Projects Nos.1 and 3 are obligated to pay the cost of site restoration for Nuclear Projects Nos.4 and 5.Such costs are estimated to be in the range of$45 million to$77 million (in 1989 dollars).NUCLEAR PROJECTS NOS.I AND 3 CONSTRUCTION DEIAY In April 1982, the Supply System commenced a construction delay of Nuclear Project No.1, and in July 1983, it commenced a construction delay of Nuclear Project No.3.These projects are currently in an extended delay mode.Plant assets are being preserved and project licenses are being maintained during the delay period in order to enable the Supply System to resume construction of the projects at such time as that action is determined appropriate.

In the 1986 Northwest Conservation and Electric Power Plan, issued by the Northwest Power Planning Council (Council)in January 1986, the Councilindicated that Nuclear Projects Nos.1 and 3 can be cost-effective for the region and should be preserved as potential resource options.However, the Council did not include Nuclear Projects Nos.1 and 3 in its resource portfolio due to legal and other uncertainties.

In April 1989, the Council stated that it would reassess the status of Nuclear Projects Nos.1 and 3 during 1989 for its 1990 resource portfolio.

31 NOTES TO FINANCIAL STATEMENTS In its May 1987 Resource Strategy, BPA indicated that a study of Nuclear Projects Nos.1 and 3 options found that there was no compelling case for or against continued preservation of Nuclear Projects Nos.1 and 3 on a net present value basis, and that preservation of both projects was somewhat favorable from the standpoint of economic risk management.

BPA concluded that preservation of Nuclear Projects Nos.1 and 3 was the prudent course of action at that time.In its July 1988 Resource Program, BPA indicated that its assessment of the need for the projects remains essentially the same as indicated in the 1987 Resource Strategy.BPA is monitoring current issues relating to Nuclear Projects Nos.1 and 3, and will undertake a new study when appropriate.

Continued funding of preservation costs is included in BPA's rates for fiscal year 1990, and is expected to be included in BPA's proposed rates for fiscal years 1991 and 1992.The Supply System is currently unable to predict whether or when Nuclear Projects Nos.1 and 3 will be completed.

NUCLEAR PROJECT NO.3 DElAY LITIGATION In July and August 1983, the four IOUs owning 30 percent of Nuclear Project No.3 filed claims against BPA, the Supply System and the Nuclear Project No.3 participants asserting that they suffered damages as a result of the extended construction delay of Nuclear Project No.3.The claims were filed in United States District Court for Western Washington in the pending action entitled BPA v.Supply System, et aI.(See"Cost Sharing Litigation" above.)Included are claims for injunctive and declaratory relief, damages, rescission of the Nuclear Project No.3 ownership agreement and recovery of the total amount of payments made under the Nuclear Project No.3 ownership agreement to date.The Supply System executed agreements to dismiss the construction delay claims with BPA and with each of the IOUs owning shares of Nuclear Project No.3 on September 17, 1985.Pursuant to those agreements, the Supply System and each of the other parties exchanged convenants not to sue with respect to the construction delay.BPA also executed settlement agreements with each of the IOUs.Pursuant to the various agreements, the Supply System, BPA and the IOUs asked the court to enter an order dismissing their construction delay claims.A number of the Nuclear Project No.3 participants have opposed the settlement and dismissal of claims.In October 1985, the participants filed supplemental pleadings in the Federal district court asserting challenges to the Nuclear Project No.3 settlement agreements between BPA and the IOUs.None of the agreements executed by the Supply System has been challenged.

However, the supplemental pleadings filed by some participants also include claims against the Supply System, the IOUs and BPA unrelated to the validity of the settle-ment.In July 1986, the district court dismissed for lack of subject matter jurisdiction the claims challenging BPA's authority to enter into the Nuclear Project No.3 settlement agreements with the IOUs and stayed all other claims relating to or arising out of the construc-tion delay or the settlement.

These participants also filed an original proceeding in the United States Court of Appeals for the Ninth Circuit, challenging BPA's settlements with the IOUs as exceeding BPA's statutory authority.

In January 1989, the United States Court of Appeals for the Ninth Circuit rejected all statutory challenges to BPA's settlements, affirmed BPA's authority to enter the settlements, and dismissed other claims, including claims against the IOUs and the Supply System, for lack of jurisdiction.

In May 1989, the district court dismissed the claims of all but nine of the Nuclear Project No.3 participants against the Supply System, BPA, and the IOUs relating to or arising out of the construction delay of Nuclear Project No.3 or the settlement, pursuant to a stipula-tion of the parties.The claims of the nine participants who did not enter into the stipulation include, among others, claims that the settlement agreements between BPA and the IOUs are invalid and unenforceable because performance of the Nuclear Project No.3 settlement agreement would breach contractual rights of the participants under the Nuclear Project No.3 net-billing agreements, ownership agreement and project agreements and because the settlement contravenes public policy of the State of Washington; a demand that the Supply System give notice of termination of Nuclear Project No.3;and a claim for a declaratory judgment that construction costs for Nuclear Project No.3 cannot be net-billed on a current basis.In May 1983, the Nuclear Project No.3 IOUs filed complaints in state courts in King County, Washing-ton, and Multnomah County, Oregon, seeking similar declarative and equitable relief and damages because of the Nuclear Project No.3 construction delay as claimed by them in BPA v.Supply Syste>n, et aL They 32 filed these cases as a precaution against any determi-nation that the federal District Court lacked jurisdic-tion to try the Nuclear Project No.3 construction delay claims.Proceedings in these state court cases have been stayed by stipulation of the parties.In the settlement agreements between the Supply System and each of the IOUs, the parties agreed not to proceed further against each other on the claims in the state court cases, and agreed to dismiss these state court cases after final dismissal of the parallel claims in the federal court and the final dismissal of any claims challenging the Nuclear Project No.3 settle-ment agreements.

If the settlement agreements between BPA and the IOUs are determined to be invalid or unenforceable, the IOUs might renew their claim that they are entitled to rescission of the Nuclear Project No.3 ownership agreement.

However, the IOUs have agreed in their settlement agreements with the Supply System not to assert any claim against the Supply System for money damages, restitution or injunctive relief.The Supply System is unable to predict what results will be reached with respect to these claims.HANFORD GENERATING PROJECT HGP has generated power from steam supplied by the Department of Energy (DOE)N-Reactor since 1966.In January 1987, the N-Reactor was shut down for safety improvements, and in February 1988 the DOE placed the N-Reactor in a cold standby status for an undeter-mined length of time, while maintaining the capability to restart within a two-to-three year period.It is not known whether or when the N-Reactor will resume operations.

In 1989, the Supply System and DOE entered into a supplemental agreement that provided for DOE to pay certain Supply System operating costs in exchange for the Supply System maintaining HGP in a condition capable of accepting steam energy from the N-Reactor within two years after notice by the DOE that the N-Reactor would resume operation.

The term of this agreement contin-ues through September 30, 1991.The U.S.government has an option to acquire owner-ship of HGP upon Congressional approval.If the government exercises its option, it must assume all rights and obligations of the project, including the obligation to pay all outstanding revenue bonds.The Supply System has completed a review of altern-tive steam sources and BPA has completed a study to determine if conversion to an alternative steam source warrants preservation of HGP.Results of the BPA study indicate that from a risk management stand-point, it would not be prudent to terminate this project unless there was a substantial indication that it had no value as a power resource.Debt service costs of HGP are paid by Nuclear Project No.1 participants and BPA under net-billing agree-ments, regardless of continued operation of the project.See Note C-Long-Term Debt, Security-Hanford Generating Project.For accounting purposes, HGP was treated as an operating project for the year ended June 30, 1989.NUCLEAR OABIOTY INSURANCE Based on current provisions of the Price-Anderson Act, public liability claims that could arise from a nuclear incident are limited to$7.807 billion.The Supply System has purchased the maximum available private insurance of$200 million and the excess of$7.607 billion of coverage is provided by secondary financial protection.

Under secondary financial protection, coverage would be funded by a mandatory program of retrospective premiums assessed against all owners of licensed reactors (currently 115).In the event of nuclear incidents at facilities covered under the Price-Anderson Act, the Supply System could be assessed up to$63 million per incident, payable at a rate not to exceed$10 million per year for each incident.OTHER LITIGATION AND COMMITMENTS The Supply System is involved in various claims, legal actions and contractual commitments not mentioned above as both a plaintiff and a defendant and in certain claims and contracts arising in the normal course of business.Although some suits, claims and commitments are significant in amount, final disposi-tion is not determinable.

In the opinion of manage-ment, the outcome of such litigation, claims or commitments will not have a material adverse effect on the financial positions of the projects or the Supply System as a whole.The estimated cost of the projects, however, may either be increased or decreased as a result of the outcome of these matters.33 L STATEMENT OF DEBT-SERVICE REQUIREMENTS hs of June 30, 7989 Doltaa tn tboI sands PRINCIPAL INTEREST TOTAL NUCLEAR PROJECT NO.2'ANFORD GENERATING PROJECT PRINOPAL INTEREST TOTAL PACKWOOD lAKE PROJECT PRINCIPAL INTEREST TOTAL 1990 S 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 30,555 32,800 35,260 37,980 40,950 44,225 47,825 6s,s7S 71,955 79,330 85,795 93,290 101,635 93,055 97,375 106,765 117,225 1%,850 141,675 155,940 171,820 189,510 209,230 S 207,778 205,540 203,080 200,383 197,445 194,227 190,678 186,769 180,399 173,291 166,s72 159,093 150,766 141,479 133,671 124,280 113,821 102,201 89,370 75,104 59,226 41,538 21,814 S 238,333 238,340 238,340 238,363 238,395 238,452 238,503 252,344 252,354 252,621 252,367 252,383 252,401 234,534 231,046 231,045 231,046 231,051 231,045 231,044 231,046 231,048 231,044 s ss6 s ss6 S 5,065 419 5,484 5,585 240 5,825 5,835 52 5,887 620 3 623 S 70 S 343 275 337 290 327 300 316 315 305 330 294 340 281 360 269 380 255 400 241 465 226 490 209 515 190 540 171 565 151 590 130 615 108 640 , 86 665 62 690 37 340 17 150 6 65$413 612 617 616 620.624 621 629 635 641 691 699 705 711 716 720 723 726 727 727 357 156 67$2,178,620$3,318,525$5,497,145$17,105$1,270$18,375$9,390$4,363$13,753 NUCLEAR PROJECT NO.1'UCLEAR PROJECT NO.3'UCLEAR PROJECTS NOS.4/5" FISCAL YEAR PRINQ PAL INTEREST TOTAL PRIMO PAL INTEREST TOTAL PRINQPAL TOTAL 1990 S 21,465 S 1991 22,560 1992 23,755 1993 25,560 1994 26,985 1995 28,550 1996 30,745 1997 38,080 1998 41,565 1999 45,455 2000 49,465 2001 53,920 2002 58,885 2003 51,135 2004 55,430 2005 60,600 2006 66,320 2007 72,665 2008 79,705 2009 87,525 2010 96,220 2011 105,855 2012 116,610 2013 128,635 2014 142,155 2015 157,820 2016 175,395 2017 194,005 2018 203,320 S 201,877 200,326 198,647 196,784 194,767 192,580 190,049 186,562 182,673 178,663 174,204 169,242 163,703 159,406 154,237 148,515 142,171 135,131 127 313 118,618 108,983 98,229 86,204 72,680 57,014 39,441 20,831 224,785 224,437 224,081 224,207 223,769 223 317 223,325 228,129 228,127 228,128 228,128 228,124 228,127 214,838 214,836 214)837 214,835 214,836 214,836 214,838 214,838 214,838 214,839 214,839 214)835 214,834 214,836 214,836$12,145 13,050 14,045 15,125 16,310 17,615 19,045 22,595 24,605 26,810 29,020 31,475 34,180 37,095 42,730 45,995 49,615 49,675 54,485 59,810 65,710 72,265 80,365 89,490 99,770 111,370 124,455 139,235 154,950 S 162,760 161,901 160,961 159,932 158,798 157,546 156,163 154,637 152,628 150,427 148,218 145,773 143,068 140,057 136,746 132,503 127,908 122,946 118,136 112,810 106,909 100,355 92,250 83,126 72,846 61,252 48,165 33,382 17,665 S 174,905 174,951 175,006 175,057 175,108 175,161 175,208 177 232 177 233 177,237 177,238 177,248 177,248 177,152 179,476 178,498 177,523 172,621 172,621 172,620 172>619 172,620 172,615 172>616 172,616 172,622 172,620 172,617 172,615$2,316,652$2,316,652$2,057,065$4,102,170$6,159,235$1,553,035$3,519,868$5,072,903$2,316,652$2)316,652'xcludes payments of bond prtnctpal and tnterett made on July 1, 1989.-Refer to h"ote D-Ãuclear PmJece h'as.4 and 5 Termtnatton, Bond Default, and Litigatton, page 27, and h'ote 8-Comm!tmentt and Contingenctet, page 29.35 VlSITOR FACILITIES The Supply System operates two visitors centers for the public, one at Plant 2, about 12 miles north of Richland, and another near Elma, Washington, at the WNP-3 project.Displays in the visitors centers illustrate how plant design, con-struction and operation have been planned with the public's well-being in mind.The Plant 2 Visitors Center offers a video-tape"armchair" tour of the plant as well as infor-mation on nuclear power issues such as radiation, nuclear waste and plant operator training.Tours of the WNP-3 construction site are offered by appointment by calling (209 482-4428, ext.5052.Tours of the WNP-1 site are available by appointment by calling (509)372-5860.36