ML17278A614

Wppss 1985 Annual Rept. W/860225 Ltr

ML17278A614
Person / Time
Site:	Columbia, Satsop
Issue date:	12/31/1985
From:	HALVORSON C M, MAZUR D W, SORENSEN G C, SORENSON G C WASHINGTON PUBLIC POWER SUPPLY SYSTEM
To:	DENTON H R Office of Nuclear Reactor Regulation
References
GO1-86-0042, GO1-86-42, GO2-86-171, GO3-86-119, NUDOCS 8603030247
Download: ML17278A614 (44)

Text

REGULATOR>

NFORIlATION DISTRIBUTION 8 EV (RIDS>ACCESS ION NBR: 8603030247 DOC.DATE: 85/12/31 NOTARIZED:

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

SUBJECT:

"NPPSS 1985 Annual Rept." N/860225 ltr.DISTRIBUTION CODE: N004D COPIES RECEIVED: LTR ENCL SIZE: TITLE: Annual Financial Reports NOTES: StandaT di zed Plant.o5ooo5a8 RECIPIENT ID CODE/NANE BNR PD3 PD PNR-B PD7 PD PNR-B PD6 LA 01 BRADFUTEf J SINGHf B COPIES LTTR ENCL 1 0 1 0 1 1 0 1 0 RECIPIENT ID CODE/NANE PWR-B PD6 PD BWR PD3 LA Ol PWR-B PD7 LA Ol DlCK.G CQP IESLTTR ENCL 0 1 1 1 1 1 0 INTERNAL REG FIL EXTERNAL: 24X NRC PDR a4 02 1 1 1 1 1 LPDR 03 TOTAL NUMBER OF COPIES REQUIRED: LTTR 15 ENCL

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

Subject:

NUCLEAR PROJECTS NO.1, 2 and 3 ANNUAL FINANCIAL REPORT Enclosed for your information, as required by 10CFR 50.71, are three (3)copies of the Washington Public Power Supply System's 1985 Annual Report.The financial statements of the Supply System's Nuclear Projects are not certified by our auditor (Ernst and Whinney)in view of certain facts discussed in the Annual Report, with which the Nuclear Regulatory Commission is already familiar.Very truly yours, G C.Sor ensen, Manager Regul atory Programs Enclosures cc: JO Bradfute/NRC T.Michaels/NRC RM Boucher/PPSL*

RV Myers/PSPSL*

JR Lewis/BPA*

G.Dick/NRC NS Reynolds/BLCPR WL Bryan/WWP*

BD Withers/PG8E*

• Without attachment/copy being sent under separate cover

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-NOTICE-It THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE ,DIVISION OF DOCUMENT CONTROL.THEY HAVE BEEN'CHARGED TOYOU FOR A LIMITED TIME PERIOD AND IMUST BE RETURNED TO THE RECORDS FACILITY tBRAIA(CH 016.PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL.REMOVAL OF ANY'PAGiEIS)FROM DOCUMENT FOR REPRODUCTION MUST.BE REFERRED TO FILE PERSONNEL.

XINGTON PUBLIC POWER SUPPLY SYSTEM M'k~DEADLINE RETURN DATE~SO o Q tt(Jt I~M~C>3,.Q.g/~1 R6.re~fthm">FACILITY BRANCH (tt fj~o}rn)r(((pAt

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",PAN(EE.Eq L((kgt,@N (I",Mltj"gg.('trty r((, nlPP gE(~.(I p~>>t t<'(J ,if<1'I'yP, r T'1(t(N~l~if@NE'.(+i 8603030247 85i23i PDR ADQCg, 05000397 I PDR; On the cover: ater vapor rises from the cooling towers at the Washington Public Power Supply System's Plant 2 at Hanford.The 1,100-megawatt nuclear power plant sits amid the agricultural environment of Washington State's Columbia Basin, where abundant water and inexpensive electricity have transformed millions i of acres of this arid region into productive farmland.Letter from the Chairman of the Board 3 Letter from the Managing Director g The Year in Review 5 Executive Board 33i Board of Directors 33 Executive Board Committees 39 Financial Section 3g 1985 ANNUAL REPORT UPDATE Following completion of the 1985 Annual Report, the U.S.Supreme Court on Jan.13, 1986 issued an order upholding the validity of the net-billing agreements with the Bonneville Power Administration on Nuclear Projects No.'s 1, 2, and 3.The order denied a Writ of Certiorari in DeFazio vs.Washington Public Power Supply System and finalizes the 9th U.S.Circuit Court of Appeals decision of Feb.4, 1985 and affirms the May 16, 1983 judgement of the U.S.District Court for Oregon.Those rulings declared that the more than 100 utilities participating in Nuclear Projects No.'s 1, 2, and 3 had the legal authority to enter into the net-billing agreements.

This positive development makes some statements in the Financial Section obsolete, specifically the fourth paragraph on page 14,"Report of Independent Accountants," angl the section titled"Net-Billing Agreements" in Note E, pages 32 and 33, which discusses uncertainties in the outcome of the case.The favorable conclusion of this important litigation removes one of.the major impediments to the Supply System returning to the financial markets and clears away some of the uncertainty clouding the future of WNP-1 and WNP-3.Sincerely, D.W.Mazur Managing Director

~~

LET2"ER FROM THE CHAIRMAN OF THE EXECUTIVE BOARD f 1983 was the most turbulent year in Supply System history, then 1984 was its stabilizing year and 1985 can be considered its turnaround year.With three Supply System plants operating commercially, the focus of its Executive Board has shifted to operations and resolving the preservation and engineering issues at WNP-1 and WNP-3.It's an important job because the ratepayers already have invested nearly$5 billion in these two unfinished plants.The board members are convinced that growth will occur in our region.It's only a ques-tion of how we most reasonably manage the projects in the interim.In 1986, the Executive Board will be re-evaluating the Supply System's preservation programs-keeping in mind that the power picture could change very rapidly.For example, the Northwest Power Planning Council was created in 1980 to manage a power shortage.By the time it was institutionalized in 1982, it was dealing with a surplus.In the 1980s, the Northwest power planners are facing the realiza-tion that they had drastically overestimated the region's electrical needs.The natural inclination would be to overcompensate for past errors by using the most conservative projections.

But everyone recognizes the jeopardy to the Northwest if we were to pull back too far and fail to maintain adequate cost-effective energy options.Current economic studies show that the two unfinished Supply System nuclear projects-WNP-1 and, WNP-3-meet all the criteria for cost-effectiveness.

According to the Power Council, completing these plants would cost less than any new thermal power resource.We are aware that there are pending legal issues and political actions that make the Supply System's re-entry into financial markets very difficult.

But as litigation is concluded and we experience a continued period of stable operation, these obstacles will be eliminated.

The Supply System has a strong and perceptive Executive Board made up of members appointed by Washington State's governor and by the Supply System's Board of Directors.

Collectively, the two boards have experience in all facets of the Supply System's business.Working together, our job is to make certain that when our region needs additional power, Supply System resources will be ready to supply that need in an efficient and timely manner.Sincerely, Carl M.Halvorson Chairman, Executive Board LETTER FROM THE MANAGING DIRECTOR uring Fiscal Year 1985, the Supply System exhibited increased strength and corporate maturity and continued to meet performance-based objectives set in the pursuit of excellence.

Due to strong management commitment and a concerted effort by all employees, we were able to complete the year while expending less than 90 percent of the$358 million operating and construction budgets that were authorized by our Executive Board.This significant accomplishment came about through greater efficiencies and the utilization of fewer facilities, equipment and manpower, and demonstrates the commitment and willingness of the Supply System to challenge its own initiatives and motivation in the best interests of the region's electric ratepayers.

Following through on this theme of fiscal responsibility, we developed and implemented a budget for our current 1986 Fiscal Year that is$25 million less than the one for FY 1985.The major priority for FY 1985, reliable commercial operation of the 1,100-megawatt Plant 2, was accomplished.

After completing its first scheduled maintenance outage in May and June, Plant 2 was available (along with our 860-megawatt Hanford Generating Project and the 27.5-megawatt Packwood Lake Hydroelectric Project)to help meet the electrical needs of the region during one of the driest summers in recorded history.At the end of the fiscal year, these three plants had produced a combined lifetime output of over 67 billion kilowatt-hours of electricity

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

That assurance will allow us to direct our full attention to completing the projects.In this area, we are clearly a leader in the industry and lessons that we learn from our readiness review effort will be shared with other utilities in the United States which also have nuclear power plant projects that are in extended construction delays.An additional benefit of our Readiness Review Program is financial.

Its successful completion will eliminate many questions about the eventual licensability of the plants, and should be viewed by the financial community as a strong commitment to future financing and completion of WNP-1 and WNP-3.Due to the current surplus of electrical supplies in the Pacific Northwest, it is not clear at this time when work will resume on WNP-1 and WNP-3.However, when the Executive Board gives the order to restart construction, efforts already undertaken by the Supply System or scheduled for implementation will assure that these cost-effective facilities will be available to meet the needs of the region.One of our key priorities in 1985 was the possibility of refinancing a portion of the outstanding bonded indebtedness on WNP-1/3 and Plant 2.The region's ratepayers could save hundreds of millions of dollars if we could refinance existing bonds that were issued at higher interest rates.The Supply System presently cannot obtain access to financial markets.In addition, congressional tax simplification initiatives underway could impact tax-exempt financing and advanced refinancing if enacted as written.However, our commitment to the region's ratepayers demands that we work to remove these impediments.

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

Total FY 1985 Funding Sources lS in millions)84%Net Billing-$709 11%I.O.U.'s'-$93 3%Bonds-$27 2%Chemical Bank-S19 Total FY 1985 Expenditures iS in millions/60%Debt Service-$508 17%Construction-$

141 21%Operating-$

180 2%Termination-$

19 D.W.Mazur Managing Director Total:$848'nvestor.Owned Utilities THE YEAR IN REVIEW he Washington Public Power Supply System in 1985 was a stronger organization, better geared to doing its job-supplying reliable, reasonably priced elec-tricity to the ratepayers of the Pacific Northwest.

With the commercial opera-tion of Plant 2, the company is now a full-fledged nuclear utili-ty and is living up to its name as a major supplier of electricity in the Pacific Northwest.

In fact, the Supply System has the largest generating capacity of any regional public utility.The addition of Plant 2's 1,'100 megawatts of thermal capacity couldn't have come at a more opportune time for the Bonneville Power Administra-tion.An expected power surplus in the federal marketing agency's service area literally dried Peter T.Johnson, Administrator, Bonneville Power Administration up when a dry spring and a hot summer combined to shrink normally abundant water supplies for hydroelectric generators.

With increased de-mand in the region and in the Southwest, even high-cost coal n li<</plants that had remained idle for years joined Plant 2 in providing base-load capacity to Bonneville, keeping power sales revenue flowing to the agency and paying the costs of operation.

Low water supplies added a sense of urgency to Plant 2's first year of operation.

Plant staff was not accorded the lux-ury of working out the bugs, but rather was challenged to keep the plant on-line as much as possible.The plant's first scheduled maintenance outage began May 3 with a list of problems requiring 6SThe summer of 1985 brought dry weather and one of the lowest water years in the Columbia River System.With our hydroelectric system straining to meet power sales obligations, we called on Plant 2 to provide sorely needed generation.

This energy saved water in reservoirs and enabled BPA to avoid costly purchases outside of the region to meet power needs.>>'t/0 The Nuclear Safety Assurance Group worhs independently from the plant staff, reviewing industry events and site activities and maltfng recommendations to enhance nuclear safety at Plant 2.The group includes lleft to right]Sandy Rounds, Herb McGilton and Bob Da Valle.

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

When the outage ended on schedule June 29, the continuing dry spell was placing even more strain on BPA to meet its power commitments.

The first few weeks of operation after the outage were anything but smooth.On its first day back in operation an Unusual Event Ithe lowest of four emergency classifications maintained by the Nuclear Regulatory Commission) was declared when lubrication oil caught fire following a bearing failure in a reactor feedwater pump.Although the fire was quickly extinguished, the loss of one of the two pumps cut power production by one-half.The reactor feedwater pump was subsequently repaired and returned to service, but another pump has proved troublesome.

One of two reactor recirculation pumps, used to drive a tremen-dous flow of water through the reactor core continued to vibrate following efforts to re-pair it during the maintenance outage.Although not a safety problem, both recirculation pumps are needed to produce enough steam for full 1,100-megawatt generation.

With only one pump working, Plant 2 has been forced to operate at about 800 megawatts, or about 72 percent of capacity.

THE YEAR IN REVIEW jcontinued)

A four-to-six week outage to repair the recirculation pump was scheduled for the fall, but it was postponed because of continued dry weather and delays in obtaining needed parts.Repairs will be made during the 1986 annual spring maintenance outage when Plant 2 is shut down at the re-quest of BPA due to abundant hydroelectric supplies.A deci-sion will also be made early in 1986 as to whether Plant 2's first refueling will occur during the outage.About one-quarter of the 764 fuel assemblies would be replaced during refueling, but it may be more cost-effective to delay until the spring outage of 1987.Despite the recirculation pump, Plant 2 has continued to be a reliable source of electric power for the region.The plant set a generation record on November 12, after operating 100 continuous days without shutting down.During 1985 the Supply System successfully completed its third annual emergency preparedness exercise at Plant 2.The annual emergency exercise, required under Plant 2's operating license, was conducted in cooperation with local, state and federal agencies to demonstrate that a serious accident can be handled with-out harm to the public.The 0 Noreen Irwin and John Arbuchle are part of the Plant 2 quality assurance organization, charged with enhancing safety and reliability by verifying that activities meet plant procedures and regulatory requirements.

Lando W.Zech, Jr., Commissioner, U.S.Nuclear Regulatory Commission U.S.Nuclear Regulatory Commission gave the Supply System good marks for timely notification of the public and for managing the simulated recovery operations.

At the Hanford Generating Project a history of reliable low-cost power production con-tinues, as it steadily supplies 860 megawatts of electricity to the BPA transmission system.HGP underwent an annual maintenance outage, beginning in September, when the U.S.Department of Energy's N-Reactor was shut down for refueling and maintenance.

The N-Reactor's primary mission is producing special nuclear materials for the government.

By-product steam from the nuclear reactor is purchased by the Supply System for generating electricity.

Since beginning operation in 1966, HGP has generated a net total of 62 4 billion kilowatt-hours of electricity, enough to W((~Pig~p.

A v~"'Ijti v,,>faux..g'::~>J)I)>>-,v,vs~4Plant 2's operators impressed me as having a professional attitude...

if the public had the chance to see them in action, they mould have a higher confidence level.SS li1'(lljii'iii]

i'IQ~I~0 J 5,,~~0~+U J J1NW (liij'i A WI ligItp~QJ ,H/~1 If Ii~lg e e CP)LV)&iQI Ipgi03:0:P r~lf;ppjp>iQI l00 rr,'00 0Jbc~Qtg;~/Jr'E//Jgii~w jj'~~J)fili ji III i)./i 1 t--~r)%Llll 0 The plant operating crews at Plant 2 are achnowledged to be among the most experienced in the industry.Pictured are Bill Shaeffer fforegroundj and left to right Steve Hutchinson, Arlen Herrington and John Dabney.supply over 3.1 million all-electric homes for a year.With its continued operation assured through 1993 and possibly beyond, HGP will continue to be a source of cheap, reliable electricity for the Pacific Northwest.

The Supply System's oldest generating plant, the 27.5-mega-watt Packwood Lake Hydro-electric Project, stayed in opera-tion through the low-water year at reduced capacity, continuing to be a reliable producer of very low-cost electricity.

With construction at a virtual standstill, the Supply System's efforts at Nuclear Projects 1 and 3 (WNP-1 and-3I are concentrated on preserving these valuable resources to meet future electric needs.The Supply System has become an industry leader in this area.Physical preservation efforts made since WNP-1 was mothballed in 1982 and WNP-3 D Steve Rejnialt (leftj and Ron Utter are developing an interactive computer program to replace the traditional classroom lecture on radiological protec.lion and safety practices.

y~V$1Jh e THE YEAR IN REVIEW (continued j in 1983 have paid off-research into corrosion rates at the two projects has proved that main-taining equipment and facilities is no longer a major concern.A major milestone was met last fall at WNP-3 when the containment vessel, a steel shell that surrounds the nuclear steam supply system and isolates it from the environ-ment, successfully passed a pressure test.Huge air com-pressors were used to bring the pressure inside the containment vessel to over 50 pounds per square inch, satisfying regulatory agencies as to the strength and tightness of the structure.

While preservation and testing efforts continued, a new program was instituted at WNP-1 and-3.Called the"Readiness Review Program," it is a joint effort with the Nuclear Regulatory Commission to inspect and approve Charles T.Collins, Former Chairman, Northwest Power Planning Council of the BPA, which is depending on the plants to meet its future generating needs.However, the Northwest Power Planning Council, an advisory group made up of representatives of the four Northwest states, removed WNP-1 and-3 from a list of future"firm resources" and instead listed them as"resource options" in its 20-year energy plan.The coun-cil's study found the projects to be cost-effective resources that would pay substantial dividends to the region's ratepayers if completed and strongly recom-mended that they be preserved to meet future demand.The decision was based on"barriers" to their completion, work done to date at WNP-1 (63 percent complete)and WNP-3 (76 percent complete).

The program, expected to take two years or more, will assure that licensing and operation of the plants will not be impacted by quality concerns over con-struction completed before the delays.The Readiness Review Program has the full support ,j/(i/j t Wp~SSThe competence of the Supply System to pull off the preservation of WNP 1-and M%I'-3 is not an issue...this organization has impressed the council, more than any utility or rate group in the region, with its honesty, candidness and professionalism.

S>0 The Human Resources and Legal departments team up to aggressively pursue corporate affirmative action goals./left to right J Mo Larson, Etna May Ahre and Craig Matheson.

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

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

Meanwhile the WNP-4/5 Termination Program staff continued its efforts to dispose of the salable assets of the two uncompleted projects, which were terminated in 1982.Sales revenue in 1985 exceeded$9 million with proceeds going to Chemical Bank, bond trustee for WNP-4/5.The majority of sales continue to be to other U.S.utilities with operating power plants, with the most significant being the sale of an emergency diesel generator to a Utah utility for about$1.2 million.Although litigation and its impact on financing continues to influence the direction of the Washington Public Power Supply System, the organization is on a stable foundation and is steering its own course into the future.0 As part of the maintenance team at the Hanford Generating Project, (left to right/Alonzo Maganas, Bill Benson and Frank Schneider keep the turbine generators spinning smoothly.

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

'On October 2, 1985, the governor appointed Sam J.Farmer to the Executive Board.He replaced Ronald D.Mayo, whose appointment expired on June 13, 1985.10

~BOARD OF DIRECTORS As of June 30, 1985 Donald R.Clayhold Manager Benton County PUD Roger C.Sparks Commissioner Kittitas County PUD William D.Scott Commissioner Chelan County PUD Frank Ward Commissioner Klickitat County PUD Paul L.Runyan (Assistant Secretary j Commissioner Clark County PUD Larry J.Nickel Councilman City of Ellensburg William G.Kuehne Commissioner Ferry County PUD Kenneth R.Cochrane (President I Commissioner Franklin County PUD Vera Claussen[Secretaryj Commissioner Grant County PUD Lois M.Pouell Commissioner Grays Harbor County PUD Raymond E.Colbert Commissioner Okanogan County PUD Elmer E.Roloff Commissioner Pacific County PUD Keith Sedore Energy Services Director City of Richland Randall W.Hardy Superintendent Seattle City Light Parker L.Knight/Vice President j Commissioner Skamania County PUD Paul J.Nolan Director Department of Public Utilities City of Tacoma David L.Myers Commissioner Wahkiakum County PUD These utilities withdrew their membership in the Supply System during fiscal year 1985, bringing the board to its current 17-member level.Douglas County PUD Mason County PUD No.3 Clallam County PUD Lewis County PUD Cowlitz County PUD Snohomish County PUD 11 EXECUTIVE BOARD COMMITTEES As of June 30, 1985 Administrative (Per formance J Audit Committee Functions as the prime working interface between the Executive Board and the Administrative Auditor.Sydney Steinborn (Chairman J Paul J.Nolan Ronald D.Mayo Pranh N.Ward Carl M.Halvorson (Ex OfficioJ Administrative and Public Responsibility Committee Responsible for personnel matters and matters relating to administration of the Supply System and its relations with the general public, other public agencies and other outside entities.Paul J.Nolan (Chairman J Sydney Steinborn Robert E.Berney Carl M.Halvorson (Ex OfficioJ Lois M.Powell Audit, Legal and Finance Committee Responsible for review and oversight of Supply System activities relating to its financial needs, financial management system, finance and investment policies, budget and budget amendments, financial and fiscal auditing activities, real estate activities, insurance activities and legal strategies and policies.Louis H.Winnard (Chairman J Robert E.Berney Donald R.Clayhold Ronald D.Mayo Paul J.Nolan Lois M.Powell Carl M.Halvorson (Ex OfficioJ Construction Committee Ronald D.Mayo Sydney Steinborn Carl M.Halvorson (Ex OfficioJ Responsible for review and oversight activities of construction of Supply System projects such as budgets, schedules, contracts and change orders, safety, licensing, planning, contracting methods, and design and field engineering.

Donald R.Clayhold (Chairman J Raymond E.Colbert Neil R.Duffie Operations Committee Responsible for reviewing activities related directly to the operation of the Supply System power plants such as licensing, safety, operating schedules and plans, and contracts.

Neil R.Duffie, (Chairman J Raymond E.Colbert Ronald D.Mayo 12 1985 ANNUAL REPORT~QasQt~m Report of Independent Accountants 14-15 Financial Statements:

Balance Sheets 16-I 7'tatement of Changes in Financial Position 18 Statement of Operations 19 Outstanding Long-Term Debt 20-22 Notes to Financial Statements 23-33 Statement of Debt Service Requirements 34-35 REPORT OF INDEPENDENT ACCOUNTANTS Executive Board Washington Public Power Supply System Richland, Washington We have examined the individual financial statements, as listed in the financial statements section of the fable of contents, of Washington Public Power Supply System's Hanford Generating Project, Packwood Lake Hydroelectric Project, Nuclear Project No.1, Nuclear Project No.2, Nuclear Project No.3, Nuclear Projects No.'s 4 and 5, and the Internal Service Fund for the year ended June 30, 1985.Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

As discussed in Note E to the financial statements, Washington Public Power Supply System Nuclear Projects No.'s 1 and 3 are negotiating with their contractors and suppliers to settle contract claims associated with extended construction delays of those projects.Due to the preliminary status of the settlement process, the ultimate amounts of such costs are not fully determinable at the p'resent time.As discussed in Note E,to the financial statements, Washington Public Power Supply System Nuclear Projects No.'s 1 and 3 are involved in, disputes concerning costs shared with Washington Public Power Supply System Nuclear Projects No.'s 4 and 5.Additionally, disputes arising from the extended construction delay of Nuclear Project No.3 have been tentatively settled;however, such settlement is subject to approval by the court.The ultimate amount of additional costs, if any, to be borne by.Nuclear Projects No.'s 1 and 3 due to these matters is not determinable at the present time.As also discussed in Note E to the financial statements, Washington Public Power Supply System is a party to]itigation in which the Springfield ratepayers are challenging the decision of the U.S.District Court for Oregon, rendered on May 16, 1983, that all parties to the net-billing agreements had authority to enter into them.This decision has been appealed to the U.S.Supreme Court.Supply System counsel cannot predict the outcome of this litigation.

During August 1984, agreements between Bonneville Power Administration and the Washington Public Power Supply System were executed providing for the assignment of project capability (assignment agreements) of Nuclear Projects No.'s 1 and 2 and 70 percent of Nuclear Project No.3 to Bonneville Power Administration.

Under these agreements, the Washington Public Power Supply System has assigned to Bonneville all rights and interests in the Supply System's ownership share of project capability that the Supply System now has or hereafter may obtain if the courts determine that the net-billing agreements are invalid and'roject participants are not obligated to pay for any interest in project capability.

Bonnevifle would pay directly'to the Supply System the amounts that would have been payable under the net-billing agreements for such project capability.

The validity of the assignment agreements may be challenged in the courts.As discussed in Note E to the financial statements, creditors of Nuclear Projects No.'s 4 and 5 have threatened to attempt to obtain payment from assets or funds held by other projects of the Supply System or the revenues pledged thereto.This year, except as discussed in Note E to the financial statements, bond counsel has rendered no opinion with respect to the rights of creditors of the Supply System to realize upon the assets, funds, or revenues of Nuclear Projects No.'s 1, 2, 3, the Packwood Project, the Hanford Generating Project, or the Internal Service Fund.Supply System management is of the opinion that creditor claims can only be realized from the a)sets, funds, or revenues of the projects to which such claims relate.If it is found that creditors are not limited to payment of their claims from the project to which such claims relate, it will have a material adverse impact on the Supply System.As explained in Note D, participants agreements pertaining to Washington Public Power Supply System Nuclear Projects No.'s 4 and 5 have been held to be invalid.Therefore, the Supply System is unable to'recover the costs of Nuclear Projects No.'s 4 and 5 from the participants and has reduced such costs to their estimated recoverable values in the accompanying balance sheets as of June 30, 1985.The ultimate recovery of such estimated amounts cannot presently be determined.

In addition, as further discussed in Note D, accrued liabilities have been reflected in the accompanying balance sheets for estimated contract settlement and termination costs.Due to the preliminary nature of the settlement process, the ultimate amounts owing to creditors are not fully determinable at the present time.In addition, as explained in Note E, there are various other matters of litigation for which the outcome is not presently known..In view of the significance of the matters discussed in the preceding paragraphs, we are unable to express, and we do not expressan opinion on the financial statements of the Supply System's Han'ford Generating Project, Packw'ood Lake Hydroelectric Project, Nuclear Project No.1, Nuclear Project No.2, Nuclear Project No.3, Nuclear Projects No.'s 4 and'5, and the Internal Service Fund referred to above.Seattle, Washington.

September 13, 1985, except as to the tenth paragraph of Note D as to which the date is October 7, 1985, and as to Note E, the fourth paragraph of Nuclear Projects No.'s 1 and 3 Construction Delay, the date is November 22, 1985, and the fourth paragraph of Nuclear Project No.3 Claims, the date is September 30, 1985.'15 BALANCE SHEBT 1une 30, 1985(sin thousandsl Assets NUCLEAR HANFORD PACKWOOD NUCLEAR NUCLEAR NUCLEAR INTERNAL PROISCT GENERATING LAKE PROIECT PROJECT PROJECTS SERVfCS NO, 2 PROJECT PROJECT NO.1 NO.3 NO,'8,4/5 FUND Current Assets-Operating Fund Cash and investments..........

Accounts receivable

...........

Prepaid and other,.~.~........Due from participants........,.Due from other projects and internalservicefund...........

Due from other funds$11,724 36 12,767 1,606$3,649 1 1,048 24139$1,603 190 19 10,227 164 48 254 1 631 48 84614 8 632 1 860 863-792 180 32 182 28 184 43 354 56 381$10,129$27,405$$18,194 502 2,049 20 745 Restricted Assets Notes B and C Special funds (primarily for construction)

Cash and investments........,~Receivable from joint owners...Advance to internal service fund.Due from other projects~....,,.Other assets.....,....

Due from other funds-net,.....

44,710 38489 44 710 3 489 302 149,61930,836 11,513 825 1,721 10,596 252 235 23 554 302 161 292 67 859 7,611 1,471 222 1'6,899 84 26 287 Revenue fundcash........,....

Accounts receivable

~....,...~...Chemical Bank fund accounts...,.Debt service funds cash and investments....,.......

117 195 7 516 161 905 11005 11'26 31,339'60 227 642 181 882 90 076'62 388 934 249 741 148 539 Vtility Fiant and Equipment-Note B In service.Improvements to U.S.government facilities

....,.....

Less allowance for depreciation and amortization...,..........

3,236,122 70 173 3 165 949 67,635 12,371 15,789 11,242~56 662~5541~896 26 762 6 830 10 346 14,797 8 563 6 234 Construction work in progress...

Construction work in progress-deferred plants............

.Costs of terminated plants......Nuclear fuel and prepaid enrichment services...........

Buildings and equipment-net...

Less amount charged to joint owners,...

~..,....~.,...Less allowance for estimated unrecoverable cost~....,....., 5,703 27219 923 2 373 025 2,718,025 82,326 258,756 50,972 (608,689)[88,802)~2622 739 3 253 978 26 762 6 830 2 489 025 1 815 308 6 931 6 234 Other Assets and Deferred Charges Unbilled reimbursable costs....Unamortized debt expense....

Total Assets..............

3 422$3,503,919 115$46,514 2,734 22 3 486 2 541 20$12,408$2,924,799$2,123,971$155,470$26,999'ssets under control of Chemical Banh 16 Liabilities NUCLEAR PROJECT NO.3 HANPORD PACKWOOD GENERATING LAKE PROJECT, PROJECT NUCLEAR PROJECT NO, I NUCLEAR NUCLEAR INTERNAL PROIECT.PROJECTS SER VICE NO.3 NO.'S4/5 FUND Current Liabilities-Operating Fund Accounts payable and accrued expenses,,...........

Advance payments from, participants........,.....

Due to other projects and internal service fund...,.......

Amounts due power purchasers

.Amounts due other funds.......

$27,874$4,331$239$49"$6$1/609 2,808 2,891 2,800 49,331 180 621 1/506 37,497 26,930 23 554 81 614 5 132 1 745 40 354 53 381$10,196 7,883 18 079 Liabilities-Payable from Restricted Assets Notes Band C Special funds tprimarily for construction)

Accounts payable and accrued expenses....,~.....,.Amounts withheld from contractors

..............

Due to other projects and internal service fund.......Duetootherfunds-net

......482 41 228 41,710 990 990 12,165 20,636 10,574 9,251 16,707 22 23 109 18 264 22 45 848 64 858 33,699 7/612 8,005 49 316 Debt service funds Accrued bond and note interest payable.~......,.4 Due to other funds-net........366 642 7 026 7 026 1 008 127 104,105 82,846 26 9 073 9 920 153 113 178 92 766 410,646 410 646 Chemical Bank fund accounts Accounts payable and accrued expenses.........,..Debt in Default, Currently Payable Revenue bonds payable...,....Subordinated revenue notes.....

48,736 1 998 382 175 159 026 157 624 460 344 2,250,000 67 865 2 317 865 Long-Term Debt Note C Revenue bonds payable.....Less unamortized discount on bonds-net.....Other Liabilities and Deferred Credits Unearnedrevenue

....,,......

Costs reimbursed under net.billing Deferred gain on redemption of revenue bonds...Due to other projects...........

Advances and other....,......

Total Liabilitles

~~~~~~~~-~~Deficiency in assets...,......

2'otal Liabilities and Deficiency in Assets~~~2,281,995 34,080 10,469 2,134,200 1,596,535~69 286~631~83~52 523~38 500 2 212 709 33 449 10 386 2 081 677 1 558 035 1,117,612 3,091 640,742 351,931 1,444 102 43 248 1 400 1 160 860 5 935 3 503 919 46 514 3 000 3 000 102 643 742 354 931 12 408 2 924 799 2 123 971 2 778 209~2622 739$3,503,919$46,514$12,408$2,924,799$2,123,971$155,470 5/110 3 810 8 920 26 999$26,999 STATEMENT OF CHANGES IN FINANCIAL POSITION For the year ended june 30, 1985 fs in thousands(Operating Projects NUCLEAR PRO)ECT HANPORD GENERATING PROJECT PACK WOOD LAKE PROJECT Source of Funds Operations Net revenue r Items not affecting working capital: Depreciation and amortization

......,~........., Decrease in costs reimbursable from power purchasers

.~8~Less gain on redemption of revenue bonds.........

Total from Operations

~~Total Source o f Funds...S-0-80,559 86,572 167,131$167,131$.0-$-0-2,393 258 2,099~129 4,363 118~294 172$4,363$172 Use of Funds Construction and capital~..., 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 UseofFunds,.....

$150,489 16,925~233 167,131$5,769 23,598~29 367-0-$167,131 1,142 3,125 96 4 363 (9,306)2,382 6 9Z4~0-$4,363 1,68 4 172 20 (392)372-0-$172 Son-Operating projects NUCLEAR PROJECT NO.r NUCLEAR PROJECT NO.3 NUCLEAR PROJECTS NO.'3 4/5~4~~~~Source of Funds Collected under net.billing Interest income, Charged to joint owners.Net decrease in restricted funds.....,.......Received from sale of fuel Revaluation of investments Reduction of estimated cost of termination

., Asset sales,...........,.....,...,......

Other,.............

~.~~Total Source of Funds.........,...,.....,$255,287 32,775 15,942 401 4,818$309,223$203,649 17143 11,839 4,145$236,776 12,167 (678)187,167 1,260 2,340 8,880 447$211,583 Use of Funds Construction costs.Interest expense Nuclear fuel Financing, trustee and paying agent expenses Bonds redeemed Due to participants

.Net transfers to Hanford Generating Project.Net increase in restricted funds Total Use of Funds....,..., 33,339 208,211 (2,167)197 9,245 9,372 51,026$309,223 41,154 165,692 25 228 1,785 23,502 4 399$236,776 198,084 13,499$211,583 STA'1'EMENT OF OPERATIONS For the year ended june 30, L985P in thousandsl NUCLEAR PROJECT NO4 2 HANPORD GENERATING PROJECT PACKWOOD LAKE PROJECT Operating Revenues Operating Expenses Nuclear fuel.Waste disposal...,,.....

....,...Decommissioning

.Reactor availability Depreciation and amortization.

Power production and transmission Maintenance

~..~....~..., Administrative and general.Taxes$2391954 11,346 2,661 482 67,729 27,465 12,834 9,606 903$67,761 62,599 2,326 1,833 889 800$824 254 409 98 82 6 Net operating revenuel(loss'33 026 68 447 106 928~686 849~26 Other income and Expense Investment income Interest expense and discount amortization

....~,....~..¹t Revenue.13,400~120 328$-0-1,867~1181$-0.419~394$

OUTSTANDING LONG-TERM DEBT EFFECTIVE DATE INTBRE5T SERIES OF SAIJS RATS OFFERING, FRICE5 COUFON RATB SBRIAI OR TERM hfATURITIES

/$in thousands)

JUNB 30, I 985 Nuclear Project No, 2 Revenue Bonds.............., 1973 6-26-73 5.66%(Al 100 5.00-5.10%5,70 7-1-87/1991 7-1-2012$13,600 124 400 138 000 Revenue Bonds...............

l974 7-23.74 7.21 (A)100 100 6.50-6.90 7.00 7.375 7-1-87/1994 7-1-1999 7-1-2012 18,000 15,000 37 000 70 000 Revenue Bonds....,..(excludes$2,500,000 due July 1, 1985)1974A 11-26-74 7.67 (A)100 100 7.20 7.40 7.75 7-1-84/1994 7-1-1999 7-l-2012 18,000 15,000 78 000 111 000 Revenue Bonds...............

1975A 3.6.76 6.71 (excludes$3,900,000 due July 1, 1985)(A)100 100 6.60 6.60 6.875 7-1-84/1994 7-1-1999 7-1-2012 18,600 15,000 78 000 111 600 Revenue Bonds.......(excludes$1,095,000 due July 1, 1985)1976'6-3-76 6.63 (Al 99.25 100 5.40-6.25 6.625 6.75 7-1-84/1998 7-1-2006 7-1-2012 23,955 42,300 49 860 116 115 Revenue Bonds........

~....~.(excludes$2,950,000 due July 1, 1985)1976A 11-18-76 5.87,, (A)100 99.50 5.50-5.875 6.00 6.00 7-1-84/2002 7-1-2007 7-1-2012 83,140 44,815 60 990 188 945 Revenue Bonds.......(excludes$2,190,000 due July 1, 1985)1978 7-11-78 6.71 (A)100 100 5.50-6.60 6.80 6,875 7-1-84/2000 7-1-2006 7-1-2012 60,430 45,520 66 230 172 180 Revenue Bonds.~.,.....,...,.

1979 3-13-79 6.49 (excludes$2,490,000 due July 1, 1985)(A)100 100 5,50-6.00 6.40 6.76 7-1-84/1999 7-1-2004 7-1-2012 53,735 33,490 83 605 170 830 Revenue Bonds...........(excludes$1,800,000 due July I, 1985)Revenue Bonds....Revenue Bonds.........

1979A 10-17-79 7.69 1980 10-21-80 9.36 1981A 9.4-81 12.44 (A)100 100 (A)100 100 (A)(A)100 57.895 99 100 6.40-7.30 7.60 7.75 8.90-10.90 9.30'.60 9.25 8.25 14.375 8.25 14.50 13.25 7-1-84/1999 7-1-2004 7-1-2012 7-1-86/1997 7-1-2001 7-1-2006 7-1-2011 7-1-2012 7-1-2001 7-1-2003 7-1-2006 7-1-2012 38,275 23,050 57 000 118 325 35,230 23,735 46,070 75,045 19 920 2M 000 30,000 100,000 30,000 50 000 210 000 Revenue Bonds.~.........,...

1982A 2-11-82 14.76 100 100 99.25 9.50-13.75 14.60 14.75 7-1-86/1996 7-1-20027-1-2012 33,335 51,665 215 000 300 MO 20 8~DATE SBRIBS OF SALB EFFECTIVE SERIAL INTEREST OFFERING COUPON OR TERI/f RATE PRICES RATE MATURITIBS JUNE 30, 1985 Revenue Bonds....,.......,..1982B 5-20.82 13.82%100 9.00-13.00%

7-1-86/1996 100 13.875 7-1-2012$39,400 139 320 178 720 Revenue Bonds......,....,...

198205-20.82 13.89 100 100 i 13.50 7-1-2002 18.875 7-1-2012 56,960 139 320 196 280$2,281,995 Hanford Generating Project Revenue Bonds..........,....(includes$3,240,000 due within one year at June 30, 1985)1963 5-8-63 3.26" (A)2.90-3.10 9-1-84/1986 98, 3.25 9-1-1996$6,495 27 585$34,080 Packwood Lake Hydroelectric Project Revenue Bonds..~.,....,...,.

1962 (includes$175,000 due within ouc year at June 30, 1985)3-20-62 3.66-11-4-65 3.76 99.425 3.625 3-1-2012 100.5, 3.75 3-1-2012$7,929 2 540 3 10,469 Nuclear Project No.1 Revenue Bonds......,......., (includes$1,300,000 due July 1, 1985)Revenue Bonds....,.......(includes$1,490,000 due July 1, 1985)Revenue Bonds....,....,....

~(includes$1,760,000 duc Ju(y 1, 1985)Revenue Bonds....~.....,....(includes$2,210,000,due July.1, 1985)Revenue Bonds.......(includes$1,770,000 due July 1, 1985)1975 9-18-75 7.73 1976A 2-4-76 6.84 1976B 8.31>>76 6.37 1978A 3-21-78 5.69 1978B 12-5-78 6.61 (A)5,75-7.40 7-1-84/2000 100 7.70 7-1-2010 100 7.75 7-1-2017 (A)6.00-6.25 7 1-84/1998 100 6.90 7-1-2010 100" 7.00 7-1-2017 (A)5.00-5.90 7-1-84/1998 100 6.50 7-1-2010 99.50 6.50 7-1-2017 (A)5.00-5.50 7-1-84/2002 100 5.80 7-1-2010 100 5,875 7-1-2017 (A)5.50-6.00 7-1-84/i998 100 6.35 7-1-2003 100 6.60 7-1-2009 99.50 6.80 7-1-2017$37,700 58,300 74 700 170 700 31,775 66,485 76 495 174 755'35,515 66,940 71 235 173 690 62, 170 50,920 64 810 177 900 36,680 22,305 38,190 81 150 178 325 Revenue Bonds........,...,..1979 6.19-79 6,64 (includes$1,255,000 due July 1, 1985)(A)100 100 100 6.00 6.40 6.70 6.80 7-1-84/1998 7-1-2003 7-1-2009 7-1-2017 28/215 18,560, 32,370 69 685 148 830 Revenue Bonds.....,.........

1980A 8-5-80 8.87 (A)7.00-10.00 100 9.00 100 9.20 99,00 9.25 (A)7.75 7-1-86/1995 7-1-2002 7-1-2005 7-1-2013 7-1-2017 55,500 37000 16,950 70,550 30 000 210 000/A/Various prices OUTSTANDING LONG-TERM DEBT/$in thoi8sandS/

EFFECTIVE DATE INTEREST SERIES OF SALE RATE OFFERING PRICES SERIAL COUPON OR TERhf RATE hIATURITIES jUNE 30, I 985 Revenue Bonds........

Revenue Bonds......

Revenue Bonds...1981A 4-13-81 11.30%1981 B 4-13-81 11.30 1981C 4-13-81 10.29 (A)100 100 11.30-13.00%

7-1-96/2003 11.625 7-1-2012 10.00 7-1-2016 10.25 7-1-2015$28,580 91 420 120 000 40 000 40 000 Revenue Bonds....,...

1981 D 9.4-81 14.78" 100 57.895 100 14.375 7-1-2001 8.25 7-1-2003 15.00 7-1-2017 20,000 30,000 265 000 315 000 Revenue Bonds..............

198ZA 2-11-82 14.79 100 100 99.25 10,50-13.75 7-1-88/1996 14.50 7-1-2002 14.75 7-1-2017 29,355 50,645 305 000 385 000$2,134,200 Nuclear Project No.3 Revenue Bonds.......(includes$1,040,000 due July 1, 1985)1975 12-3-75 7.87 Revenue Bonds.......(includes$2,620,000 due July 1, 1985)1977 9-12-77 5.71 Revenue Bonds.......(includes$1,650,000 due July 1, 1985)1978 9-12-78 6.27 Revenue Bonds........,......

1976 4-13-76,6.48 (includes$865,000 due July 1, 1985), (A)100 100 (A)99.625 100 (AI 99.50 99.50 (A)100 99 5.40-7.25 7-1-84/1998 7.875 7-1-2010 7.875 7-1-2018 5.50-6.00 7 1-84/1998 6.50 7-1-2010 6.60 7-1-2018 5.00-5.30 7-1-85/2000 5.70 7-1-2009 5.80 7-1-2018 5.90-6.00 7-1-85/2004 6.375 7-1-2010 6.40 7-1-2018$24,280 52,695 71 160 148 135 18(005 35,100 45 295 98 400 59,305 63,535 107 160 230 000 66,385 42,985 90 630 200 000 Revenue Bonds..............

~1981A 2-11-81 10.80 h Revenue Bonds........,......

1981B 9-4-81 14.80 (A)100 99.50 88.50 88.50 57.895 99 100 9.50-12.50 11.125 11.125 9.75 9.75 8.25 14.50 15.00 7-1-87/2001 7-1-2005 7-1-2010 7-1;2017 7-1-2018 7-1-2003 7-1-2006 7-1-2018 64,375 40,535 80,310 18,950 20 830 225 000 20,000 20,000 185 000 225 000 Revenue Bonds,...........

~1982A 2-11-82 14.83 Revenue Bonds......,...,....

1982B 5-20-82 13.95 Revenue Bonds,..............

1982C 5-20-82 13.63/A/Vanous pncss 22 100 100 99.25 100 99;50 100 10.50-13.75, 7-1-88/1996 14.50 7-1-2002 14.75 7-1-2018 10.50-13.00 7-1-88/1996 13.875 7-1-2018 13.50 7-1-2002 6,055.10,445 148 500 165 000 9,195 280 925 290 120 14 880$1,596,535

'VOXZS TO FINANCIAL STATEMENTS Note A-Organization The Washington Public Power Supply System was organized in 1957 as a municipal corporation and joint operating agency of the State of Washington.

It is em-powered to acquire, construct and operate facilities for the generation and transmission of electric power.On July 1, 1984, its membership consisted of 19 public utility districts and four municipalities that own and operate electric systems, within the state of Washington.

During fiscal year 1985, six public utility districts withdrew from membership, reducing total membership from 23 to 17.These actions do not affect the rights and obligations of the six utilities and the Supply System under the various contracts executed between the utilities and the Supply System relating to Nuclear Projects No,'s 1, 2, 3, 4, 5,,the Hanford Generating Project or the Packwood Lake Hydroelec-tric Project.I-The Supply System constructed and is operating the Packwood Lake Hydroelectric Project, the Hanford Generating Project and Nuclear Project No.2, which went into commercial operation on December 13, 1984.The Supply System's Nuclear Project No.1 is in the fourth year of an extended construction delay,'uclear Project No.3 is in the third year of an extended construction delay;and Nuclear:Projects No.'s 4 and 5 were terminated on January 22, 1982.Nuclear Projects No.'s 1, 2 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 f30 percent).Nuclear Project No.5 is jointly owned by the Supply System (90 per.cent)and one investor-owned utility)10 percent).Each joint owner is responsible for its own financing costs and share of the costs of construction, operation and termination and is entitled to its ownership share of the projects'perating capability.

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

Therefore, construction completion costs for Nuclear Project No.2 and project maintenance costs for the Supply System's 70 percent share of Nuclear Project No.3 have been funded since September 1983 and May 1984, respectiv'ely, by pay-ments under the net-billing agreements for those projects.Note 8-Summary of Significant Accounting Policies The Supply System has adopted accounting policies and practices that are in accordanc'e with generally ac-cepted accountin'g principles applicable to the utility industry.Separate books of account are maintained for each project except for Nuclear'Projects No.'s'4 and 5, which are accounted for as a single entity.In addition, the Supply System maintains an internal service fund for payment and accounting of payrolls, administrative and general expenses, and certain common goods and services procured for the projects on a cost-reimbursable basis.W Bestricted Funds In accordance with project bond resolutions and related agreements, separate restricted funds must be established for each of the projects.The assets held in these funds are restricted for specific uses, including construction, termination, debt'service and other special reserve requirements.

Restricted funds are identified on the balance sheet as Special Funds, Revenue Fund Cash, Accounts Receivable, Chemical Bank Fund Accounts, and Debt Service Funds.Cash and investments in the Operating Fund of Nuclear Project No.2 and in Special Funds of Nuclear Projects No.'s 1, 3, 4 and 5 include$30,615,720 retained in escrow for contractors as of June 30, 1985, I Current Assets and Current Liabilities Assets and liabilities shown as current in the accompanying balance sheets exclude current maturities on revenue bonds and accrued interest be-cause debt service funds are provided for their pay-ment..Investments Investments include time certificates of deposit and 23 NOTES TO FINANCIAL STATEMENTS United States government and government agencies securities.

Investments are stated at cost or amortized cost, as appropriate, and include accrued interest.Investments held in the Bond Fund Reserve Accounts (included in Debt Service Funds)and Reserve and Contingency Funds (included in Special Funds)are stated at the lower of amortized cost or market as pro-vided by bond resolutions.

The market value of investments (including accrued interest)approximates the carrying value.Investment Income'Investment income consists of interest earned on in-vestments and gains or losses resulting from the sale of investments.

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

Investment income relating to Nuclear Projects No.'s 4 and 5 is credited to Costs of Terminated Plants shown on the balance sheet.Capitalization of Construction Costs and Expenses During the normal construction phase of a project it is the Supply System's policy to capitalize all costs relating to the project, including interest (net of interest income)general and administrative expense, amortized financing expense and certain other expenses.Interest expense (net)during construction is allocated to nuclear fuel and plant based on cumulative cash utilization.

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

As of July 1, 1984, the Supply System discontinued capitalizing interest expense (net)applicable to Nuclear Project No.'s 1 and 3 because of the extended delay of these projects.The interest expensewhich is funded by payments under net-billing agreements, will not be capitalized during the delay;Such net interest expense totaled$188,304,934 and$148,568,714 for Nuclear Proj-ects No.'s 1 and 3, respectively, for the year ended June 30, 1985.Capitalization of interest expense will resume when construction is restarted.

Utility Plant and Equipment-Depreciation and Amortization Buildings and equipment are depreciated by the straight-line method over their estimated useful lives.Improvements to U.S.government-owned facilities are being amortized over the period covered by the contract for dual-purpose operation of the U,S, Department of Energy's New Production Reactor.Revenues During the construction phase of a project, monies received under net-billing agreements, which are utilized to fund debt service or other project expen-ditures, are recorded as Unearned Revenues on the balance sheet and are amortized to Revenues over the operating life of the project.As explained in Note E, there is uncertainty as to when Nuclear Projects No.'s 1 and 3 will be operational.

For this reason, monies received under Nuclear Projects No,'s 1 and 3 net-billing agreements previously classified as Unearned Revenues are now classified as Costs Reimbursed Under Net-Billing.

For Nuclear Project No.2, Hanford and Packwood Projects, the difference between cumulative operating costs, including depreciation and amortization and cumulative payments, including debt service but excluding depreciation and amortization, is reflected as Unearned Revenues or Unbilled Reimbursable Costs, as appropriate, In accordance with covenants of bond resolutions, the Supply System is authorized to recover actual cash re-quirements for operations and debt service for each project over the life of the project, Accordingly, the Supply System records revenues equal to operating costs for each period.No income or loss is realized, and no equity is accumulated.

Nuclear Fuel Cost Nuclear Project No, 2 capitalized nuclear fuel cost is amortized to nuclear fuel operating expense on the basis of quantity of heat produced for electric genera-tion.Current period nuclear fuel operating expense also includes a charge.for future spent nuclear fuel storage and disposal to be provided by the Department of Energy in accordance with the Nuclear Waste Policy Act of 1982.Such charge is based on one mill per kilowatt-hour of energy generated.

Decommissioning Estimated Nuclear Project No.2 decommissioning costs are being currently funded under the sinking-fund method.Monthly payments are made into a sink--ing fund which, with accumulated interest, will be adequate to fund decommissioning costs at the end of the 40-year plant operating life, Sinking-fund re-quirements are currently based on estimated decom-missioning costs of$114 million I1982 dollars).Payments to the decommissioning fund for Nuclear Project No.2 for fiscal year 1985 aggregated

$482,326.Cost Related to Construction and Termination of Nuclear Power Plants For Nuclear Projects No.'s 4 and 5, the costs of con-struction through January 22, 1982, the date of ter-mination, and the costs of termination and other related costs subsequent to that date are shown at their estimated net recoverable value in the accom-panying balance sheets as of June 30, 1985, based on Supply System staff estimates.

The amount estimated for unrecoverable costs ($2,622,739,057) has been reflected as Allowance for Estimated Unrecoverable Cost and as Deficiency in Assets in the accompanyirig balance sheets to reduce the capitalized utility plant value to net realizable value.Retirement Plan The Supply System participates in the Washington State Public Employees'etirement System that pro-vides retirement benefits to eligible employees, The cost of the plan to the Supply System is determined by the retirement system's board.The actuarially com-puted value of pension benefits exceeds the fund assets for the retirement system.However, because the retirement system is a multi-employer system, the amount of any excess that relates to the Supply System is not available.

The Supply System's required con-tribution was$4,187,316 during the period ended June 30, 1985.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, 1985, 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 Project No.'s 1, 2 and 3, and the Hanford Generating Project.The U.S.Department of Energy, acting by and through the Bonneville Power Ad-ministration (BPA), has in turn acquired the entire capability from the project participants under various net-billing and exchange agreements.

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

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

The participants'greements provided that each par-ticipant pay its respective share of annual costs, in-cluding debt service on the bonds, whether or not the projects were completed, operable, or operating and nofwithstanding the suspension, interruption, in-terference, reduction or curtailment of the projects'utput.

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

On August 18, 1983, Chemical Bank (Nuclear Projects No.'s 4 and 5 bond fund trustee)declared the principal of all Nuclear Proj-ects No,'s 4 and 5 revenue bonds and accrued interest due and payable immediately.

See Note D for a discus-sion of the termination of Nuclear Projects No.'s 4 and 5related challenges to the participants'greements and default on the bonds.In connection with the issuance of the Nuclear Proj-ects 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 accumulated in theRevenue Fund.Payments under the participants'greements to be accumulated in the Revenue Fund were not made and therefore the subordinated revenue notes were not paid.See Note D for a discussion of default on Nuclear Projects No.'s 4 and 5 subordinated revenue notes.Note D-Termination of Nuclear Frojects¹.'s 4 and 5 and Default under Bond Resolution On January 22, 1982, the Supply System's Nuclear Projects No.'s 4 and 5 were terminated.

Construction was 24 and 16 percent complete, respectively, at the time.The Supply System's current estimate of termi-nation costs ($31,917,338), including costs of contract settlements and other termination costs, has been ac-crued as Accounts'Payable and Accrued Expenses in the accompanying balance sheets.Although manage-ment of the Supply System is satisfied that its estimates are reasonable, the final settlement for ter-mination costs and the cost of dismantling the projects cannot be determmed at this time.Certain physical assets of Nuclear Projects No.'s 4 and 5 are being maintained for a period to maximize their sales value upon disposal.The participants'greements (discussed in Note C under Security)provided that each participant pay its respective share of the debt service on the bonds and termination costs beginning January 25, 1983.Payments due under the participants'greements were not made pending a judicial determination of the par-ticipants'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'he participants', agreements and, thus, that those agreements are invalid as to the cities and public utili-ty districts of the state of Washington, which collec-tively hold approximately 68 percent of the par-ticipants'hares of Nuclear Projects No.'s 4 and 5.In addition, on November 6, 1984 the Washington State Supreme Court also ruled that, because of the invalidi-ty of the participants'greements entered into by the Washington municipal utilities, all of the remaining participants'greements are unenforceable as well.Chemical Bank and the Supply System petitioned the U.S.Supreme Court for grant of a writ of certiorari by which the state court decision might be reviewed by that court.Grant of the writ was denied by the U.S.Supreme Court on April 29, 1985.Since the participants'greements were ruled invalid, payments due under the agreements were not made and there is a deficiency in the Reserve and Contingency Fund'and Bond Fund Interest and'Reserve Accounts.On July 22, 1983, the Supply System acknowledged that, it could not meet all Nuclear Projects No.'s 4 and 5 obligations as they became due.This admission represented an event of default under the Nuclear Proj-ects No.'s 4 and 5 bond resolution.

A deficiency in the bond fund also existed at this time.26 As authorized under Section 11.3 of the bond resolu-tion, Chemical Bank demanded that remaining funds in the Construction Fund ($23,193,264), Construction Trust Account ($723,256)and Revenue Fund ($1,648,568) be transferred to it to the credit of the Washington Public Power Supply System Section 11.3 Account.This transfer was made on July 25, 1983.In addition, on July 1, 1983, Chemical Bank transferred a security with a book value of$8,823,598 from the Bond Fund Reserve Account to a newly established Trustee Legal Fee Escrow Account.The purpose of this transfer was to set aside funds to pay for Chemical Bank's legal fees as well as a portion of Supply System legal fees.Under Section 11A of the Nuclear Projects No.'s 4 and 5 bond Jesolution, 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 properties of Nuclear Projects No.'s 4 and 5.At present, the Supply System is continuing to manage the contract termination and asset disposal ac-tivities.Supply System management plans to continue the asset disposal activities through at least June 1986.Chemical Bank disburses the funds for payment of Nuclear Projects No.'s 4 and 5 termination activities in accordance with the payment priorities established in the bond resolution.

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

Since the participants', agreements have been held to be invalid, the assets of Nuclear Projects No.'s 4 and 5 have been reduced to their estimated net recoverable value, resulting in a deficien'cy in assets.Such recoverable value is based on Supply System staff estimates.

However, the ultimate recoverability cannotpresently be determined.

In August 1983, Chemical Bank filed a lawsuit in U.S.-District Court, Western District of Washington, which is now pending against the Supply System, all par-ticipants in Nuclear Projects No.'s 4 and 5, Supply System member utilities and certain directors, BPA and other individuals.

The lawsuit alleges violations of federal and state securities statutes, fraud, misrepresen-tation, bad faith, negligence, and=unjust enrichment, and seeks money damages, rescission and restitution.

This suit is currently in the discovery phase.In addition, numerous lawsuits have been filed against the Supply System and numerous other individuals and entities by individuals purporting to represent classes of bondholders.

The lawsuits allege violations of federal and state securities statutes, negligent misrepresenta-tion, common law fraud and deceit, gross negligence, and breach of contract, and seek monetary damages for losses allegedly sustained by the purported classes.These cases have been transferred to the U.S.District Court, Western District of Washington, and most have been consolidated for pretrial purposes.All of these cases are in the discovery phase of litigation.

Another lawsuit, Haberman v.Washington Public Power Supply System, has been filed by certain bondholders in King County Superior Court asserting claims substan-tially similar to those alleged in the other class actions.On October 7,1985, the court dismissed all claims in the action, The plaintiffS have appealed this decision to the Washington Court of Appeals.The lawsuits described in the three preceding paragraphs seek to recover the bondholders'nvestment in the amount of$2.25 billion, plus interest, costs;attorneys fees and damages.The Supply System cannot predict the outcome of the above litigation.

Pursuant to state law and resolutions of the Supply System's Executive Board, the Supply System has agreed to indemnify its directors for certain of the acts which have been alleged in the complaint.

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

In a recently filed suit, the excess carrier of directors and officers liability insurance for the Supply System seeks an adjudication that it has no liability as a result 27

-NOTES TO FINANCIAL STATEMENTS of the alleged failure of the Supply System to disclose facts known to it which, if known to the insurer, would have resulted in its not issuing the policy.Although this suit is not for money damages, it could have a serious financial impact on the Supply System.Note E-Commitments and Contingencies Hanford Generating Project and its Relationship to Nuclear Project No.I The U.S.Department of Energy)DOE)owns and operates the New Production Reactor.This reactor provides by-product steam to the Hanford Generating Project.The Supply System's current agreement with the DOE provides for the continuation of this dual-purpose operation of the reactor through June 1993.In accordance with certain related agreements, the operating costs of the project will be offset by payments from certain-public and private utilities in return for the power generated, It was initially intended that Nuclear Project No.1 be constructed next to the Hanford Generating Project to provide the energy source to operate the project when the DOE ceased operation of the New Production Reactor.To allow for construction of Nuclear Project No.1, it would have been necessary to shut down the Hanford Generating Project on October 31, 1977.Because studies at that time indicated that generating

.resources in the Pacific Northwest would be inade-quate in the late 1970s and early 1980s, the Supply System and BPA determined that the Hanford Generating Project should be kept available for power production.

Therefore, the Nuclear Project No.1 net-billing,.exchange.and project agreements were amended to provide for the'eparation of Nuclear Proj-ect No.I from the Hanford Generatirig 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 the 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, quiet of investment income, of the Hanford Generating Project by Nuclear Project No.1 participants, beginning July 1, 1980, regardless of con-tinued operation of the reactor.IF the reactor ceases operations, revenues to the Hanford Generating Proj-ect arising from these payments will nevertheless be recorded each year thereafter in amounts that will', result in full realization of the carrying value of the plant.The U.S.government has an option.to acquire owner-ship of the Hanford Generating Project upon congres-sional 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.Under the Hanford Generating Project agreements, public participants were entitled to 50 percent of the output of the project and five, investor-owned utilities were entitled to 50 percent.All power was exchanged to BPA for firm power.During fiscal year 1984, three of the five investor-owned utilities withdrew their of-fer to purchas'e their entitlement to output from the'anford Generating Project.The power from the plant is currently being distributed by BPA on the basis of 72 percent to public participants and 28 percent to the remaining two investor-owned utilities.

Nuclear Projects No.'s I and 3-Construction Delay On April 29, 1982, the Supply System, upon the recommendation of BPA, approved an extended con-struction delay of Nuclear Project No.1, and on July 8, 1983, the Supply System, also based on BPA's recommendation, approved an extended construction

, delay of Nuclear Project No.3.During the construc-tion delay, the Supply System will endeavor to preserve plant assets and maintain project licenses.On November 1, 1984, BPA released a study of Nuclear Projects No.'s 1 and 3 construction schedule and financing assumptions.

The study recommended that 1)BPA should not include funds for construction for Nuclear Projects No.'s 1 and 3 in its budget for fiscal years 1986 and 1987;2)BPA should use a mid-range estimate of preservation cost in its rates and budgets;3)BPA should work with the Supply System, the other Nuclear Project No.3 owners, the Northwest Power, Planning Council (council)and other ap-28 propriate parties in defining and perfecting preserva-tion plans and restart assumptions; and 4)BPA should perform periodic reviews of Nuclear Projects No.'s 1 and 3 consistent with BPA resource planning and budgeting to assure scheduling is consistent with regional resource requirements.

On August 7, 1985, the council released its 1985 Draft Northwest Conservation and Electric Power Plan iDraft Plan).The final 1985 power plan is scheduled to be completed in February'986.

In the Draft Plan, the council indicated that Nuclear Projects No.'s 1 and 3 are cost effective.

However, the council did got include Nuclear Projects No.'s 1 and 3 in its resource portfolio, citing present legal and other barriers.The council does view Nuclear Projects No.'s 1 and 3 as energy options for the future when the current barriers are removed.On November 22, 1985, BPA released its 1986 Draft Resource Strategy.The Final Resource Strategy is slated for publication in February 1986.The 1986 resource strategy process primarily focused on the proper level of preservation program costs for Nuclear Projects No.'s 1 and 3.The draft BPA report recommends that the Supply System maintain a preservation program that includes a technical pro-gram that would, allow cost-effective, earned-value work to continue.The Supply, System has ongoing detailed programs to physically preserve the equip-ment at the plants, and a technical program for earned-value work.The Supply System is currently unable to predict when Nuclear Projects No.'s 1 and 3 will be com-pleted.However, BPA has recommended that for the Supply System's fiscal year 1987 financial planning process, the Supply System assume a restart of con-struction of one unit in 1994 and restart of construc-tion of the other unit in 1996.BPA further stated there is approximately a one-in-three chance that restart of construction would be needed during or before 1992 for one unit, and approximately a one-in-four chance that restart of construction would be needed during or before 1992 for the second unit to meet regional load growth.The obligations of BPA and the participants under the net-billing agreements are not affected by the extended construction delays of Nuclear Projects No.'s 1 and 3.See"Nuclear Project No.3 Claims" for a discussion of the investor-owned utilities'laims of breach of the Ownership Agreement based on the Nuclear Proj-ect No.3 construction delay.The Supply System's current estimates of costs to settle terminated and delayed contracts for Nuclear Projects No.'s 1 and 3 are$4,777,000 and$5,263,000, respectively, and these costs have b'een accrued as Accounts Payable and Accrued Expenses in the accom-panying balance sheets.The Supply System's management is satisfied that these estimates are reasonable.

However, the final settlement costs cannot be determined at this time.Nuclear Frojects No.'s 4 and 5 Subordinated Revenue¹tes In conjunction with the mothballing of Nuclear Proj-ects No.'s 4 and 5, certain project participants, investor-owned utilities and industrial customers of BPA agreed to loan Nuclear Projects No.'s 4 and 5 funds to underwrite a program to preserve the assets of those projects.These loans, called bridge loans, consisted of$60 million in subordinated revenue notes, bearing a stated maturity date of July 1, 1984, and bearing interest to due date at a rate of 15 percent.Subsequently, when a decision was made to terminate', Nuclear Projects No.'s 4 and 5, a number of project par-ticipants agreed to'loan Nuclear Projects No.'s 4 and 5 funds designed to assist in avoiding an uncontrolled ter-mination of the projects.These loans, called termination loans, consisted of$7,865,502 in subordinated revenue notes bearing a stated maturity date of June 30, 1983, and bearing interest to due date at a rate of 15 percent.Because Nuclear Projects No.'s 4 and 5 do not have sufficient funds to underwrite payment of the subordinated revenue notes, they have not been redeemed.Fifteen participants and investor-owned utilities have filed lawsuits against the Supply System for payment of the notes, with Chemical Bank named as codefendant in 29 NOTES TO FINANCIAL STATEMENTS several of them.In 12 cases, summary judgments have been rendered against the Supply System, and in certain cases the judgments stated that the obligation to pay the notes was not restricted to the funds of Nuclear Projects No.'s 4 and 5.These cases were subsequently appealed to the Washington State Supreme Court and on September 5, 1985, the court upheld previous rulings that the Supply System must repay the bridge and termination loans, but ruled that repayment must be made only from funds'of Nuclear Project No.'s 4 and 5.Motions for reconsideration are now'pending.

Nuclear Project¹.5 Ownership Agreement Under the terms of the ownership agreement withPhcific Power and-Light Company{Pacific), Pacific is obligated to fund its respective ownership share of Nuclear Project No.5 termination costs beginning January 25, 1983, and continuing until all costs of termination have been paid.Ten percent of the funds received from the sale of Nuclear Project No.5 assets reduce Pacific's obligation for termination costs.Pacific has stated to the Supply System that it considers the termination of Nuclear Project No.5 to be a breach of the Nuclear Project No, 5 ownership agreement and has reserved its rights to pursue appropriate remedies with respect to such breach.It is the position of the Supply System that the termination of Nuclear Project No.5 does not constitute a breach of the Nuclear Proj-ect No.5 ownership agreement and that Pacific is responsible under the Nuclear Project No.5 ownership agreement for payment of its 10 percent share of the costs of termination of such project.On June 16, 1983, Pacific advised the Supply System that due to the Washington 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.Pacific also advised that it would not make further termination cost payments until the Supply System adequately assures that it can re-establish and maintain controlled termination of the project in accordance with the agreements.

The Supply System is currently working with Pacific to resolve this matter and resume payments.As stated above, it is the Supply System's position that Pacific is responsible for its 10 percent share of termination costs.Until Pacific resumes payments, the Supply-System is withholding Pacific's 10 percent share of revenue received from Nuclear Proj-ect No.5,asset sales.As of June 30, 1985, Pacific's 10 percent share of Nuclear Project No, 5 accrued ter-mination costs was$1,471,588.

Of this amount,$449,265 is currently due and has been presented to Pacific for payment.The remaining amount represents the Supply System's estimate of future termination costs.Pacific has made payments prior to June 16, 1983, under the Nuclear Project No.5 ownership agreement pursuant to reservations of rights to its potential claim to sue the Supply System for damages for failure to complete the project.Pacific's claim would presumably be about$150,000,000

-its investment in the project.Such a claim could be a general claim against the assets of the Supply System.Inter-Froject Claims and Claims Against General Assets As discussed above, Nuclear Projects No.'s 4 and 5 are currently unable to meet Nuclear Projects No.'s 4 and 5 debts as they become due.Creditors have threatened to attempt to obtain payment from assets or funds held for the benefit of other projects of the Supply System or the revenues pledged thereto.Such creditors include those described in the Notes to Financial Statements and others who may in the future assert claims against the Supply System and/or its projects.In the opinion of bond counsel, neither the holders of the bonds issued to finance the construction of the Supply System's Nuclear Projects No.'s 4 and 5 nor the creditors of the Supply System whose claims arose from the furnishing of goods or services with respect to Nuclear Projects No.'s 4 and 5 will be able to realize upon monies held in trust by the respective bond fund trustees in the bond funds created by the respective bond resolutions for payment of debt service to the holders of.bonds issued by the Supply System to finance the construction of the Supply System's Nuclear Projects No.'s 1, 2 and 3, except to the extent they might obtain rights through a valid exercise of the sovereign police power of the state of 30 Washington or of the constitutional powers of, the United States of America, or by a voluntary bankrupt-cy of the Supply System, Bond counsel has not investigated the issues discussed above with respect to the Packwood or Hanford Generating Projects.However, they believe that upon full investigation, the same opinion could be rendered with respect to such monies held in trust by the bond fund trustees in the bond funds created by the respec-tive bond resolutions of the Supply System for the payment of debt service to the holders of bonds issued by the Supply System to finance the construction of such projects.In the opinion of bond counsel, the Nuclear Projects No.'s 4 and 5 bondholders seeking to recover from the Supply System upon their bonds will be restricted to collecting any amounts in the bond fund for Nuclear Projects No,'s 4 and 5 and will not be able to enforce a judgment against any of the assets, funds or revenues for Nuclear Projects No.'s 1, 2 and 3, except to the ex-tent such holders of bonds 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.This year-, except as stated in the preceding paragraphs, bond counsel has rendered no opinion with respect to the rights of creditors of the Supply System to realize upon the assets, funds or revenues of Nuclear Project No.1, Nuclear Project No.2, Nuclear Project No.3, the Packwood Project, the Hanford Generating Project, or the Internal Service Fund.Supply System management is of the opinion that creditor claims can only be realized from the assets, funds or revenues of the projects to which such claims relate.The Supply System will utilize all legal remedies to defend its 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'he termination of Nuclear Projects No.'s 4 and 5 creates an uncertainty as to how certain common ser-vices and facilities are to be shared with Nuclear Proj-ects No.'s 1 and 3, respectively; In August 1982, the participants of Nuclear Projects No.'s 4 and 5 presented a claim to Nuclear Projects No.'s 1 and 3 to reimburse Nuclear Projects No,'s 4 and 5 for a portion of the costs of shared services and facilities paid by the projects before July 1, 1981.The claim requested immediate payment of$75,000,000 and$86,000,000 plus interest from Nuclear Projects No.'s 1 and 3, respectively, plus amounts that may be determined in the future.The claim is based on a method of calculating shared costs that is different from the method adopted by the Supply System.The Supply System has reviewed its cost-sharing policy from inception of the projects to determine if costs were allocated properly, As of June 30, 1985, about$16,962,000 plus interest is due Nuclear Project No.5 from Nuclear Project No.3;about$8,000,000 plus interest is due Nuclear Project No.1 from Nuclear Project No.4;and about$163,000 plus interest is due Nuclear Project No.4 from Nuclear Project No.2 for shared costs.These amounts (excluding accrued interest)have been recorded in the accompanying balance sheets as of June 30, 1985.The results of the aforementioned review are subject to audit by BPA and the investor-owned utilities in Nuclear Projects No.'s 3 and 5.Because of the preliminary nature of the aforementioned findings, the uncertainty over the shared cost policies adopted by the Supply System, and since the matter of proper allocation of shared costs is currently in litigation (as described below), the ultimate allocation of shared costs is uncertain.

On October 26, 1982, the Supply System filed a legal action against BPA, the four investor-owned utilities who are joint owners of Nuclear Project No.3, the par-ticipants of Nuclear Projects No.'s 4 and 5, (the court has since allowed Chemical Bank to intervene in this suit)and the construction fund trustee for Nuclear Proj-ect No.1 seeking a judicial determination of past and future shared costs among Nuclear Projects No.'s 1.and 4 and Nuclear Projects No.'s 3 and 5.(The court has since restructured the case wherein BPA is now the plaintiff and the Supply System and other afore-NOTES TO EINANCIAI STATEMENTS mentioned parties are defendants.)

Although 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.Nuclear Project No.3 Claims In July and August 1983, the four investor-owned utilities who own 30 percent of Nuclear Project No.3 filed claims in the cost-sharing lawsuits against BPA, the Supply System and Nuclear Project No.3 par-ticipants arising out of the extended construction delay at Nuclear Project No.3.Included are claims for injunc-tive and declaratory relief, damages, rescission of the Nuclear Project No.3 ownership agreement and recovery of the total amount of payments made under the agreement to date.In October 1983, BPA amended its complaint to resolve the Nuclear Project No.3 dispute.In November 1984, the court issued an order on the parties'ross-motions for summary judgment holding that the Supply System and BPA violated the terms of their contracts by not continuing construction and in-cluding the costs in an annual budget to be paid through net billing.The court reserved for trial the issues of whether the contracts were materially breached and whether the investor-owned utilities re-main obligated to pay further Nuclear Project No.3'osts.The judge on this case subsequently excused himself from the case.On May 16, 1985, the newly ap-pointed judge vacated the summary judgment ruling made in November 1984, but retained the summary judgment motions under advisement.

During the period.November 1984 through August 1985, BPA and the four investor-owned utilities negotiated a proposed settlement of the construction delay claims.BPA described the settlement as follows.BPA and the four utilities would enter into an agree-ment to exchange energy.BPA would exchange an amount of power to be determined by the performance of four surrogate nuclear plants similar in design to Nuclear Project No.3.If these plants perform as ex-pected, BPA could exchange to the utilities about 193 average megawatts of energy each-year.

In return, the utilities would provide BPA 1)payments equal to about$700 million (present value)over the life of the agree-ment based on the costs of operating and maintaining the surrogate plants (or Nuclear Project No.3 if it is operated);

2)the opportunity to use their combustion turbines if needed;,and 3)the opportunity to complete, operate and use their 372-megawatt share of Nuclear Project No.3 if it is later determined to be both needed and cost-effective.

Final agreements permitting settlem'ent'f the construc-tion delay claims were executed by the Supply System on September 13, 1985, and by BPA and the investor-owned utilities on September 17, 1985.Pursuant to those agreements the parties exchanged covenants not to sue and asked the court to enter an order of dismissal of their delay claims.On September 30, 1985, the court entered an order requiring that parties wishing to op-pose the settlement file claims to that effect, Briefing will be concluded on January 28, 1986.Upon completion of that schedule, the court will be in a position to rule upon the settlement.

In the absence of a settlement, and if the investor-owned utilities were to prevail in theii;request for an order granting a right to rescind the ownership agreement and a right to recover payments made thereunder, the Supply System could face a loss contingency of some$2 billion plus possible termination of the project.In December 1985, three participant groups filed complaints in the Ninth Circuit Court of Appeals, asking that the settlement be declared illegal and void.Net-Billing Agreements

'n November 15, 1982, the city of Springfield, Oregon, filed a complaint against the Supply System, BPA, the investor-owned utilities owning 30 percent of Nuclear Project No.3, and all other parties to the net-billing agreements pertaining to Supply System Nuclear Proj-ects No.'s 1, 2 and 3.The complaint alleged that the Lane County Circuit Court's decision in DeFazio versus Washington Public Power Supply System had created controversy and uncertainty about the contractual obligations of Oregon public participants and their authority under Oregon law to enter into the net-billing.agreements.

It also alleged that members of Oregon public utility boards are exposed to personal liability for any payments of public money not authorized by law.The complaint sought a declaratory judgment that it and other Oregon public participants had legal authority to enter into the net-billing agreements, or if they did not, that BPA is liable to make contract payments.In their responses to the complaint, BPA and the Supply System asked for a declaration that all signatories to the net-billing agreements had legal authority to, enter into them.Springfield ratepayers who were parties to DeFazio intervened in the action claiming that the plaintiff did not have authority to enter into the net-'illing agreements under Oregon law.The parties to the net-billing agreements are BPA, the Supply System, and the participants.

The agreements provide that BPA is obligated to pay the participants, and the participants are obligated to pay the Supply System their pro rata shares of, the total annual costs of the projects, including debt service on the bonds, whether or not the projects are completed, operable, or operating, and notwithstanding the suspension, reduc-tion, or curtailment of the projects'utput.

However, the agreements also provide that they shall not be binding on any of the aforementioned parties if they are not binding on all the parties.On May 16, 1983, the U.S.District Court for Oregon entered a judgment declaring that all parties to the net-billing agreements had legal authority to enter into them.Its decision was appealed by the ratepayers to the Ninth Circuit Court of Appeals in July 1983 and was argued before the court on May 10, 1984.On February 4, 1985, the Court of Appeals affirmed the judgment of the district court.The court subsequently denied the appellant's petition for rehearing.

On August 16, 1985, the appellant filed a petition for writ of certiorari with the United States Supreme Court.It is not known whether or not the United States Supreme Court will accept review of this matter.During August 1984agreements between BPA and the Supply System were executed providing for the assign-ment of project capability (assignment agreements) of Nuclear Projects No.'s 1 and 2 and 70 percent of Nuclear Project No.3 to BPA.Under these agreements, the Sup-ply System has assigned to BPA all rights and interests in the Supp]y System's ownership share of project capability that the Supply System now has or hereafter , may obtain if the courts determine that the net-billing agreements are invalid and project participants are not obligated to pay for any interest in project capability, BPA would pay directly to the Supply System the amounts that would have been payable under the net-billing agreements for such project capability.

The validity of the assignment agreements may be challenged in the courts.If a final judicial determination were rendered that the net-billing agreements are not enforceable against the parties and that the assignment agreements are not valid, such determination would result in default on Nuclear Projects No.'s 1, 2 and 3, and would have a material adverse impact on the financial condition of the Supply System.Securities and Exchange Commission Investigation On January 12, 1984, the Supply System was advised that the Securities and Exchange Commission had started a formal investigation into the circumstances surrounding the default on Nuclear Projects No.'s 4 and 5 revenue bonds.The investigation is continuing and the Supply System cannot predict what further action the commission may take as a result of the investigation.

Other Litigation and Commitments The Supply System is involved jn 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 for, a large construction program.Although some suits, claims and commitments are significant in amount, final disposition is not determinable.

In the opinion of management, the outcome of any such litiga-tion, claims or commitments will not have a material adverse effect on the financial positions of the projects.The estimated cost of the projects may either be in-creased or decreased as a result of the outcome of these matters.

Nuclear Project No.2 PISCAL YEAR PRINCIPAL INTEREST TOTAL Hanford Generating Project PRINCIPAL INTEREST TOTAL.STATEMENT OF DEBT SER VICE REQUIREMENTS (Sin thoasandsj

" Pac1cwood Lulte Project"'RINCIPAL INTEREST TOTAL 1986$1987 1988 1989-1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004-2005 2006 2007 2008 2009 20102011 2012 2013 2014 2015 2016 2017 2018 23,295 24,925 26,645 28,510 30,555 82,800 35,260 37,980 40,950 44,225 47,825 65,575 71,955 79,330 85,795 93,290 101,635 93,055 97,375 106,765 117,225 122,655 134,755 148,200 163,170 179,835 198,410$215,015 213,399 211,686 209,818 207,778 205,539 196,455 193,758 190,820 187,602 184,053 180(144 173,774 166,666 159,947 152,468 144,141 134,854 127,046 117,655 107,196 95,576 83,566 70,217 55,365 38,822 20,380$238,310 238,324 238I331 238,328 238,333 288,339 231,715 231(738 231,770 231,827 231,878 245,719 245,729 245i996 245,742 245,758 245,776 227,909 224,421 , 224,420 224,421 218,231 218,321 218,417 218,535 218,657 218,790$3,240 3,255 3,360 3,485 3,455 5I065 5,585 5,835 800$1,014 913 806 693 580 425 246 58 4$4,254 4168 4,166 4(178.4,035 5,490 5,831 5,893 804$175 180 190 195 265 275 290 300 315 330 340 360 380 400 465 490 515 540 565 590 615 640 665 690 484 150 65$383 376 370 363 355-346 336 325-314 303 291 278 265 251 237 220 202 183 163 142 121 99 75 51 26 8 2$558 556 560 558 620 621 626 625 629 633 631 638 645 651 702 710 717 723 728 732 736 739 740 741 510 158 67$2,281,995$4,043,740$6,325,735$34,080$4,739$38,819$10,469$6,085$16,554'Excludes payments of bond principal and interest made on July I, t 985 nuclear Project No.I FISCAl YEAR PRINCIPAL INTEREST TOTAL Nuclear Project No, 8 PRINCIPAL INTRRRST TOTAL Nuclear Projects No.'s 4/5-PRINCIPAL TOTAL 1986$14,855 1987 15,470 1988 18,055 1989 18,970 1990 21,465 1991 62,560 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 53I 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 118,635 2014,127,155 2015 142,820 2016 175,395 2017;194,005 2018$207,674 206,652 205,729 204,564 203,320 201,877 196,226 194,547 192,684 190,667 188,480 185,949 182,462 178,573 174,563 170,104 165,142.159,602 155,305 150,137 144,415 138,071 131,031 123,213 114,518 104,883 94,129 82,105 69,605 55,476 39,441 20,831$222,529 222(" I 22 223,784 223,534 224,785 264,437 219,981 220,107 219,669 219(217 219,225 224,029 224,027 224,028 224,028 224,024 224,027 210,737 210,735 210,737 210I735 210,736 210736 210,738 210,738 210,738 210,739 200,740 196,760 198,296 214/836 214,836$6,530 8,925 10,555 11,315 12,145 13,050 14,045 15(125 16,310 17,615 19,045 22,595 24,605 26,810 29,020 31,475 34,180 37,095 42,730 45,995 49,615 49,675 54,485 59,810 65,710 72I265 80,365 89,490 99,770 I I I,370 124,455 139,235 15(950$165,357 165,001 164,368 163,579 162,761 161,901 160,961 159,932 158,798 157,546 156,163 154,637 152,628 150,427 148,218 145,773 143,068 140,057 136,746 132,503 127I908 122,946 118,136 112,810 106,909 F00,355 92,250 83,126 72,846 61,252 48,165 33,382 17 665$171,887 173,926 174,923 174,894 174,906 174,951 175,006 175,057 175(108 175,161 175,208 177,232 177(233 177,237 177,238 177,248 177,248 177,152 179,476 178,498 177I523 172,621 172,621 172,620.172,619 172,620 172,615 172,616 172,616 172,622 172(620 172,617 172 615$2,317,865$2I317,865 Refer to Note D-Termination o f Nuclear Projects No.'s 4 and 5 and Default Under Bond Resolution, page 26, and Note E-Commitments and Contingencies, page 28,$2,124,415$4,831,975$6,956,390$1,590,360$4,178,174$5,768,534$2,317,865$2,317,865 he Supply System operates two'visitor centers for the public, one at Plant 2, about 12 miles north of Richland, and another in Elma, Washington, near the WNP-3 project.Displays in the visitor centers illustrate how plant design, construction and operation have been planned with the public's well-being in mind, The Plant 2 Visitors Center offers a videotape"arm-chair" tour of the plant, as well as information on nuclear power issues such as radiation, nuclear waste and plant operator training.Tours of the WNP-3 construction site are offered by appointment by calling (206)482-4222.Tours of the WNP-1 site are available by appointment by calling (509)372-5408.36