Tacoma Power Annual 2007 Financial Reportcms.cityoftacoma.org/Finance/Financial_Reports/Annuals/PowerAnn07.… · Financial Analysis of Tacoma Power Net assets may serve over time

2007Tacoma Power

FINANCIAL REPORT

annual

Public Utility Board

ROBERT CASEY Chair

TOM L. HILYARD Vice-Chair

LAURA FOX Secretary

DAVID CURRY

PETER THElN

WILLIAM A. GAINES Director of Utilities Chief Executive Officer

GARY ARMFIELD Superintendent

ROBERT K. BILES Finance Director

DEPARTMENT OF PUBLIC UTILITIES CITY OF TACOMA

CITY OF TACOMA. WASHINGTON DEPARTMENT OF PUBLIC UTII-ITIES

TACOMA POWER

TABLE OF CONTENTS

FINANCIAL DATA INDEPENDENT AUDITOR'S REPORT ................................................. 3

. MANAGEMENT'S DISCUSSION AND ANALYSIS ................................ 5 14

BALANCE SHEETS .............................................................................. 16 . 17

STATEMENTS OF REVENUES. EXPENSES

AND CHANGES IN NET ASSETS ...................................................... 19

STATEMENTS OF CASH FLOWS ....................................................... 20 . 21

NOTES TO FINANCIAL STATEMENTS ........................................ 22 . 39

STATISTICAL DATA (UNAUDITED) TEN-YEAR FINANCIAL REVIEW ......................................................... TEN-YEAR POWER SUMMARY .......................................................... GROSS GENERATION REPORT ........................................................ DEBT SERVICE REQUIREMENTS ...................................................... FUNDS AVAILABLE FOR DEBT SERVICE ......................................... ELECTRIC PLANT IN SERVICE . YEAR 2007 .................................... RESOURCES ....................................................................................... TAXES AND EMPLOYEE WELFARE CONTRIBUTIONS .................... 2007 ELECTRIC RATES ......................................................................

............................................................................................... GRAPHS

SUPERINTENDENT'S REPORT ............................................................... 61 . 72

FINANCIAL DATA

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MANAGEMENT’S DISCUSSION AND ANALYSIS The following discussion and analysis of Tacoma Power’s (the Utility) financial performance provides an overview of the financial activities for the years ended December 31, 2007 and 2006. This discussion and analysis is designed to assist the reader in focusing on the significant financial issues and activities and to identify any changes in the financial position. The information presented here should be read in conjunction with financial statements and accompanying notes taken as a whole. The management of the Finance Department of the City of Tacoma is responsible for preparing the accompanying financial statements and for their integrity. The statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis and include amounts that are based on management's best estimates and judgments. The basic financial statements, presented on a comparative basis for the years ended December 31, 2007 and 2006, include Balance Sheets, Statements of Revenues, Expenses and Changes in Net Assets, and Statements of Cash Flows. The Balance Sheets present information on all of the Utility’s assets and liabilities, with the difference between the two reported as net assets. The Statements of Revenues, Expenses and Changes in Net Assets report all of the revenues and expenses during the time periods indicated. The Statements of Cash Flows provide information on cash receipts and disbursements during the year and report changes in cash resulting from operations, investing and financing activities. The notes to the financial statements provide additional disclosures that are essential to a full understanding of the data provided in the financial statements. They are an integral part of the Utility’s presentation of financial position, results of operations, and changes in cash flows. Financial Highlights

• Tacoma Power reported an increase in net assets of $84.5 million or 15.7% in 2007, compared to $68.7 million or 15% in 2006, and $36.2 million or 8.4% in 2005.

• Tacoma Power’s operating revenues increased $3.3 million or 0.8% from 2006. Operating revenues increased $53.3 million or 15.5% in 2006 compared to 2005.

• Utility Plant in Service increased $40.6 million in 2007 and $89.1 million in 2006. • Construction work in progress increased $35.2 million in 2007 compared to a

decrease of $17.9 million in 2006. Overview of Financial Statements For 2007, Tacoma Power is reporting net operating income of $103.5 million compared to $97.1 million in 2006 and $67.9 million in 2005. Operating revenues increased $3.3 million during 2007 and operating expenses decreased $3.1 million. For the prior year, operating revenues increased $53.3 million compared to 2005, and operating expenses increased $24 million. Tacoma Power reported a change in net assets of $84.5 million in 2007 compared to $68.7 million in 2006 and $36.2 million in 2005.

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The following tables highlight Tacoma Power's past three years’ operating results and megawatt-hours billed. This activity represents the annual surplus of revenues over expenses (the change in net assets).

OPERATING RESULTS (in thousands)

07/06 06/05

Increase IncreaseCategory 2007 2006 2005 (Decrease) (Decrease)

Operating Revenues 400,159$ 396,872$ 343,610$ 3,287$ 53,262$ Operating Expenses 296,647 299,731 275,754 (3,084) 23,977

Operating Income 103,512 97,141 67,856 6,371 29,285 Net Non-Operating Expenses (5,782) (11,236) (23,802) 5,454 12,566 Capital Contributions 12,046 7,346 13,373 4,700 (6,027) Transfers Out (25,259) (24,557) (21,277) (702) (3,280) Change in Net Assets (Net Income) 84,517$ 68,694$ 36,150$ 15,823$ 32,544$

MEGAWATT-HOURS BILLED (in thousands)

07/06 06/05Increase Increase

Type of Customer 2007 2006 2005 (Decrease) (Decrease)Residential 1,885 1,822 1,760 63 62Commercial/Industrial 2,890 2,877 2,967 13 -90Public Street/Primary Power 37 37 35 0 2Bulk Power 1,982 1,953 1,037 29 916Total 6,794 6,689 5,799 105 890

Financial Analysis of Tacoma Power Net assets may serve over time as a useful indicator of a company’s financial position. Tacoma Power’s net assets increased from last year by $84.5 million. The following analysis highlights the changes for the last three years.

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0

50

100

150

200

250

300

350

400

$

07 06 05 04 03 02 01 00 99 98 97

OPERATING REVENUES(in millions)

Residential Comm/Ind Wholesa le and Other

BALANCE SHEET

(in thousands)

07/06 06/05Increase Increase

Description 2007 2006 2005 (Decrease) (Decrease)Net Utility Plant and Non-Utility Property 794,866$ 764,062$ 726,514$ 30,804$ 37,548$ Current and Other Assets,Special Funds and Deferred Charges 432,046 408,948 390,504 23,098 18,444

Total Assets 1,226,912 1,173,010 1,117,018 53,902 55,992 Net Assets:Invested in Capital Assets, Net of Related Debt 389,381 348,354 317,231 41,027 31,123 Restricted 27,469 25,999 23,824 1,470 2,175 Unrestricted 204,968 162,947 127,551 42,021 35,396 Total Net Assets 621,818 537,300 468,606 84,518 68,694

Long-Term Debt 517,834 543,900 568,212 (26,066) (24,312) Other Liabilities 87,260 91,810 80,200 (4,550) 11,610 Total Liabilities 605,094 635,710 648,412 (30,616) (12,702) Total Net Assets & Liabilities 1,226,912$ 1,173,010$ 1,117,018$ 53,902$ 55,992$

Revenues 2007 Compared to 2006 Operating revenues totaled $400.2 million in 2007 compared to $396.9 million in 2006, an increase of $3.3 million or 0.8% over 2006. Revenue from sales to residential customers increased $4.1 million or 3.4%. Revenue from sales to commercial and industrial customers increased $1.2 million or 1.1% over 2006. Telecommunications revenue increased $2.1 million over 2006. Residential sales accounted for 34% of total electric sales in 2007. Commercial and industrial revenues accounted for 38% of total electric sales in 2007. Wholesale power revenues represented 26% of total electric sales in 2007. All customer classes experienced relatively flat sales when compared to 2006 due to the mild weather conditions of 2007. Wholesale power sales in 2007 increased $2.1 million or 2.0% compared to 2006. The related Kwh increased 29,787,000 or 1.5%. Accrued but unbilled revenues were estimated at $25.2 million as of December 31, 2007 compared to the $25.1 million estimate for year-end 2006. This resulted in a very small increase in revenues earned by December 31, 2007 not yet billed of $0.05 million between 2006 and 2007.

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Other operating revenues increased $0.7 million or 2.1% over 2006. Included in this category is revenue from Click! operations, which increased $2.1 million when compared to the prior year. Cable TV revenues increased $922,780 or 7.5% compared to the prior year primarily due to the expansion of new products such as Video on Demand and high-definition cable TV. The increase is also due to continuing growth in ISP Advantage product (high-speed cable modem service through internet service providers) of $690,495 or 19%. The high-speed cable modem product grew due to increased speeds of existing levels of service and the addition of new residential and business levels of service. Other decreases in operating revenues from sources other than electric energy include wheeling revenues down $245,223 or 3.8%, and service fees and other revenues down $1,151,352 or 17.5% in 2007. 2006 Compared to 2005 Operating revenues totaled $396.9 million in 2006 compared to $343.6 million in 2005, an increase of $53.3 million. Total revenues from sales of electric energy increased $51.3 million, an increase of 16.4% over 2005, mainly as a result from increased wholesale power revenues of $35.9 million. Revenue from sales to residential customers increased $7.4 million or 6.4%. Revenue from sales to commercial and industrial customers increased $1.7 million or 1.3% over 2005. Residential sales accounted for 34% of total electric sales in 2006, down from 37% in 2005. Commercial and industrial revenues accounted for 38% of total electric sales in 2006, compared to 44% in 2005. Wholesale power revenues represented 26% of total electric sales in 2006, up from 19% in 2005. Wholesale power sales in 2006 increased $35.9 million or 59.5% compared to 2005. Total Kwh sales increased 916,138,000 or 88.4%. Hydro generation was lower during 2005, resulting in less energy available for sale. Accrued but unbilled revenues were estimated at $25.1 million as of December 31, 2006 compared to the $20.2 million estimate for year-end 2005. This resulted in an increase in revenues earned by December 31, 2006 not yet billed of $4.9 million between 2005 and 2006. Other operating revenues increased $2 million or 6.4% over 2005. Included in this category is revenue from Click! operations, which increased $1.6 million when compared to the prior year. Cable TV revenues increased $736,000 or 6.3% compared to the prior year primarily due to the expansion of new products such as Video on Demand and high-definition cable TV. The increase is also due to continuing growth in ISP Advantage product (high-speed cable modem service through internet service providers) of $519,000 or 16.7%. The high-speed cable modem product grew due to increased speeds of existing levels of service and the addition of new residential and business levels of service. Other miscellaneous Click! revenues, such as equipment rental, increased $244,000 or 38% due to the launching of advanced digital video recording receivers allowing customers to record multiple channels and store programming content. Click! Network wholesale broadband revenues showed an increase of $147,000 or 19.5% due to the addition of Gigabit Ethernet services for large telecommunication providers. Other increases in operating revenues from sources other than electric energy include wheeling revenues up $292,000 or 4.8%, and service fees and other revenues up $129,000 or 2% in 2006.

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Interest income increased $7.5 million compared to 2005 due to higher interest rates earned on cash balances during the year. Expenses 2007 Compared to 2006 Total operating expenses decreased $3.1 million or 1.0% from 2006 totaling $296.7 million in 2007. Purchased power expenses decreased $2.0 million or 1.7%. Power purchases from Bonneville Power Administration (BPA) decreased $1.8 million. Power purchases from Priest Rapids increased $1.2 million due to contract increases and payments to Columbia Irrigation District (SCBID) decreased $2.5 million. Administrative and general (A&G) expense decreased $674,975 or 1.7% in 2007 compared to 2006. Tacoma Power experienced a decrease of $442,930 in annual fees billed in 2007 from the Federal Energy Regulatory Commission (FERC). Other increases in A&G expense for 2007 compared to 2006 include A&G salaries for $260,626 and employee education, pensions and fringe benefits expense of $1,363,728. These increases in A&G expense are partially offset by an increase in costs transferred to capital and service division of $823,374. One additional major change impacting the administrative and general expenses was due to third party claims which impacted insurance expense decreasing it by $0.8 million in 2007. Distribution operations expense decreased $2.1 million or 15% in 2007 compared with 2006. Tacoma Power did not experience any major storm damage during 2007 which helped keep operation expenses relatively flat. Supervision and engineering are down $1.4 million, and meter expenses are down $766,829 from 2006. Other decreases in distribution operations expense for 2007 compared to 2006 were overhead line expense of $645,329. Transmission operations expense remained constant when compared to 2006. Generation operations expense decreased $1.0 million or 13.3% in 2007 compared with the prior year. The most significant reason is a $0.5 million reduction in payments to the Washington State Department of Fish and Wildlife for hatchery operations. Generation operations also saw an overall reduction in labor and supplies as more effort was spent on maintenance during 2007. Total maintenance expense decreased $1.0 million or 4.0% in 2007 compared with the prior year. Distribution maintenance expense decreased $0.9 million primarily due to no major storm damage in 2007. Click! Network commercial operations expense, comprised of cable TV, high-speed internet, and data transport services over fiber, increased $2.2 million or 14.8% from 2006. Contract services expense increased $1.0 million or 10.3%, representing new channel additions, increased programming costs and increased advertising expense. Salaries and wages increased $217,000 or 4.9% from 2006. The amount of A&G expense capitalized in 2007 was less compared to 2006, resulting in an increase to expense of $242,000 or 67.3%.

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Depreciation expense increased $1.1 million or 2.6% from 2006 due to the increase in plant in service activity in 2007. 2006 Compared to 2005 Total operating expenses increased $24 million or 8.7% from 2005 totaling $299.7 million in 2006. Purchased power expenses increased $12.7 million or 12.2%. Power purchases from Bonneville Power Administration (BPA) increased $5.3 million. Tacoma Power received $4.7 million in 2005 from BPA as a result of a settlement related to overcharges with a portion of our BPA purchases. Contract increases accounted for $600,000. Power purchases from Priest Rapids increased $4.4 million due to contract increases, and payments to Columbia Irrigation District (SCBID) increased $2.7 million because of true-up billings for incentive payments. Administrative and general (A&G) expense increased $4.1 million or 11.8% in 2006 compared to 2005. Uncollectible accounts expense increased $1.1 million in 2006. Tacoma Power experienced an increase of $970,000 in annual fees billed in 2006 from the Federal Energy Regulatory Commission (FERC). Other increases in A&G expense for 2006 compared to 2005 were maintenance of general plant for $901,000, A&G salaries for $521,000, general government assessments for $503,000, computer supplies for $167,000, license and maintenance fees for $157,000, advertising expense for $131,000, and travel and subsistence for $126,000. These increases in A&G expense are offset by an increase in costs transferred to capital of $401,000. Distribution operations expense increased $3.6 million or 34.5% in 2006 compared with 2005. Tacoma Power experienced wide-spread damage to its Transmission and Distribution system due to a severe windstorm in December 2006, contributing to the increases in distribution and transmission expenses, for both operations and maintenance expense. Supervision and engineering were up $1.4 million, and meter expenses up $763,000 over 2005. Other increases in distribution operations expense for 2006 compared to 2005 were station expense for $596,000, overhead line expense for $550,000, and load dispatching for $221,000. Fees collected from wiring inspections decreased $359,000 in 2006. Transmission operations expense increased $3.4 million or 24.5% in 2006 due to increased transmission costs from BPA of $1.5 million, Columbia Irrigation costs of $991,000 and other miscellaneous electricity transmission increases of $477,000. Generation operations expense increased $1.5 million or 23.2% in 2006 compared with the prior year. This included increased payments to the Washington State Department of Fish and Wildlife of $937,000 and other miscellaneous increased operating expenses at the hydro plants of $514,000. Other operations expenses were up $1.0 million, consisting of conservation and other customer assistance expenses up $717,000, and other production expenses up $331,000. Maintenance expense increased $2.9 million or 13.6% in 2006 compared with the prior year. Generation maintenance expense increased $1.7 million mainly due to Alder turbine generator repairs of $709,000 and work on the Mayfield Lake Park boat dock of $433,000. Distribution maintenance expense increased $1.2 million due to storm damage repairs.

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Click! Network commercial operations expense, comprised of cable TV, high-speed internet, and data transport services over fiber, increased $1.4 million or 10.9% from 2005. Contract services expense increased $1.4 million or 16.6%, representing new channel additions and increased programming costs. Salaries and wages increased $394,000 or 9.8% from 2005. The lower capitalization of new connections resulted in an increase to expense of $152,000. Partially offsetting these are decreases in general expenses such as operating supplies, office supplies and bad debt of $400,000. The amount of A&G expense capitalized in 2006 was more compared to 2005, resulting in a decrease to expense of $55,000. Depreciation expense decreased $2.5 million or 5.6% from 2005 due to an increase in fully depreciated assets and more retirements.

Customer Counts Tacoma Power's overall customer growth during the past 10 years has been at a relatively steady rate averaging between less than 1% and 3% per year. Growth for 2007 was 1.6% when compared to 2006. The customer count for 2007 is 165,113 compared to 162,589 in 2006, and compared to 159,180 in 2005.

Megawatt-hours Billed Megawatt-hours billed to residential customers increased 3.4% in 2007, while commercial/industrial billings decreased 0.01%. Sales to wholesale/other decreased 5.0%. Wholesale/other has wider swings from year to year because of variances in bulk power sales, which are included in this category. Bulk power sales are affected by precipitation and weather patterns and can vary significantly. Bulk power sales in 2007 were 1,982,545 megawatt-hours compared to 1,952,758 in 2006, an increase of 29,787 megawatt-hours or 1.5%. During 2007, hydro generation decreased 427,704 megawatt-hours compared to the previous year. Annual streamflows into Tacoma Power’s projects were slightly below average in 2007 (92% of average) compared to well above average in 2006 (120% of average).

0153045607590

105120135150165180

07 06 05 04 03 02 01 00 99 98 97

NUM BER OF CUSTOM ERS(in thousands)

Residentia l Comm/Ind Wholesale/Other

012345678

07 06 05 04 03 02 01 '00 99 98

MEGAWATT HOURS BILLED(in millions)

Residentia l Comm/Ind Wholesale/Other

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Sources of Power Tacoma Power's total resources for power supply to serve its retail and wholesale customers for the last two years are shown in the following graphs.

Total Utility Plant and Plant Additions Tacoma Power has $1.3 billion invested in its utility plant assets on a cost basis. The major portion is for the combined distribution and transmission business unit, closely followed by its generation (hydroelectric) business unit. The following graphs show the allocation of plant additions and total investment in plant.

Additions in 2007 of $19.9 million to distribution plant accounted for the largest portion of this year's plant additions. Other additions were to telecommunications plant of $9.4 million, general plant of $8.3 million, transmission plant of $1.9 million, and hydraulic production plant of $3.9 million.

Megawatt Hours Generated/Purchased - 2006

Cushman6%

Nisqual ly8% Cowlitz

27%

BPA50%

Others9%

Megawatt Hours Generated/Purchased - 2007

O the rs1 0%

N is qua lly7%

BPA54 %

Cu shm an6 %

Co wlitz23%

2007 TOTAL PLANT

Hydraul ic26%

Trans9%

Intangible Plant2%

Work in Progress

6% Telecomm13%

Distrib34%

Genera l10%

2006 TOTAL PLANT

Hydraulic27%

Trans10%

Intangib le Plant2%

Work in Progress

4% Telecomm13%

Distrib34%

Genera l10%

2007 PLANT ADDITIONS

Trans4%

Hydraul ic9%

Genera l19%

Intangible Plant0%

Distrib46%

Telecomm22%

2006 PLANT ADDITIONS

Trans16%

Hydraulic4%

General16%

Intangible Plant0%Distrib

39%

Telecomm25%

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Additions in 2006 of $37.3 million to distribution plant accounted for most of the plant additions. Other additions were to telecommunications plant of $24.1 million, general plant of $15.9 million, transmission plant of $15.2 million, and hydraulic production plant of $3.7 million. The following table summarizes Tacoma Power’s capital assets, net of accumulated depreciation, for the years ended December 31, 2007 through 2005.

Capital Assets, Net of Accumulated Depreciation (in thousands)

Net Utility Plant 2007 2006 2005 Increase Increase

(Decrease) (Decrease)Intangible Plant 27,346$ 28,129$ 28,595$ (783)$ (466)$ Hydroelectric Plant 205,411 206,193 207,379 (782) (1,186)Transmission Facilities 61,457 62,269 51,016 (812) 11,253Distribution Facilities 236,422 231,484 205,776 4,938 25,708General Plant 76,671 54,942 62,184 21,729 (7,242)Telecommunications Plant 101,663 125,020 97,608 (23,357) 27,412Construction Work in Progress 85,713 50,498 68,429 35,215 (17,931)Total Net Utility Plant 794,683$ 758,535$ 720,987$ 36,148$ 37,548$

Debt Administration At December 31, 2007 Tacoma Power had outstanding revenue bonds of $544.8 million, a decrease of $27.4 million from 2006. Tacoma Power issued $81.1 million of Electric System Refunding bonds in March 2007. At December 31, 2006 Tacoma Power had outstanding revenue bonds of $572.2 million, a decrease of $22.4 million from 2005. No new bonds were issued during 2006. All bonds are insured and rated Aa3 by Moody’s Investors Service, A+ by Standard & Poor’s, and A+ by Fitch, Inc. Additional information on Tacoma Power’s long-term debt can be found in Note 5 of the financial statements and also in the supplementary Statistical Data. Debt Service Coverage Tacoma Power is required by its bond covenants to maintain a times debt service coverage of 1.25. In 2007, principal and interest were covered 3.12 times, in 2006 they were covered 2.88 times, and in 2005 they were covered 2.21 times. Summary The management of the Finance Department of the City of Tacoma is responsible for preparing the accompanying financial statements and for their integrity. We prepared the financial statements according to generally accepted accounting principles, and they fairly portray Tacoma Power's financial position and operating results. The Notes to the Financial Statements are an integral part of the basic financial statements and provide additional financial information.

Management considers and takes appropriate action on audit recommendations. Management has established and maintains a system of controls which includes orgar~izational, administrative and accounting processes. These controls provide reasonable assurance that records and reports are complete and reliable, that assets are used appropriately and that business transactions are carried out as authorized.

Director of Utilities Chief Executive Officer

Robert K. Biles Finance Director

CITY OF TACOMA. WASHINGTON

DEPARTMENT OF PUBLIC UTILITIES

TACOMA POWER

BALANCE SHEETS

ASSETS

UTILITY PLANT

DECEMBER 31.

2007 2006

In Service. at Original Cost . . . . . . . . . . . . . . . . . . . . $1.267.075. 248 $1.226.434. 2 6 9

Less.. Accumulated Depreciation . . . . . . . . . . . . . . . . . (558 .104 . 768) (518.396. 746)

Total ......................................... 708.970. 480 708.037. 523

Construction Work in Progress . . . . . . . . . . . . . . . . . . . 85.712. 913 50.497. 498

Net Utility Plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . 794.683. 393 758.535. 0 2 1

NON-UTILITY PROPERTY. NET ........................ 182. 370 5.527. 350

SPECIAL FUNDS

Construction Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88.405. 6 0 1 104.312. 550

Debt Service Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,410, 963 37,941, 588

Special Bond Reserve Funds . . . . . . . . . . . . . . . . . . . . . . 26,592, 2 3 1 26,544, 122

Wynoochee Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . . 2,182, 840 2,062, 9 5 1

Total Special Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 155,591, 635 170,861, 2 1 1

OTHER ASSETS

Conservation Loans Receivable . . . . . . . . .

CURRENT ASSETS

Operating Funds Cash and Equity in

Pooled Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201.724. 1 2 7 162.356. 484

Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.345.233 . 34.904. 990

(Net of Allowance for Doubtful Accounts of $1.273. 4 6 1 in 2007 and $1.073. 664 in 2006)

Accrued Unbilled Revenue . . . . . . . . . . . . . . . . . . . . . . . . 25.178. 338 25.128. 962

Materials and Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . 6.913. 078 6.909. 430

Receivables from Affiliates . . . . . . . . . . . . . . . . . . . . . 1.459. 7 7 1 1.125. 808

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.738. 333 1.637. 903

Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . 271.358. 880 232.063. 577

DEFERRED CHARGES

Unamortized Debt Expense . . . . . . . . . . . . . . . . . . . . . . . . 2.355. 638 2.668. 780

Other Deferred Charges .......................... 1. 204 32. 1 8 8

Total Deferred Charges . . . . . . . . . . . . . . . . . . . . . . . 2.356. 842 2.700. 968

TOTAL ASSETS ..................................... $1.226.911. 856 $1.173.009. 727

The accompanying n o t e s a r e a n i n t e g r a l p a r t o f t h e s e f i n a n c i a l s t a t e m e n t s .

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NET ASSETS AND LIABILITIES

DECEMBER 31.

2007 2006

NET ASSETS Invested in Capital Assets. Net of Related Debt . . $389.381. 457

Restricted for:

Wynoochee Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . 2.182. 840

Debt Service Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.286. 044 Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204.967. 609

Total Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 621.817. 950

LONG-TERM DEBT. NET OF CURRENT MATURITIES ......... 517.834. 315

CURRENT LIABILITIES

Current Portion of Long-Term Debt . . . . . . . . . . . . . . . . Taxes and Other Payables . . . . . . . . . . . . . . . . . . . . . . . . . Purchased Power Payable . . . . . . . . . . . . . . . . . . . . . . . . . . Salaries. Wages and Fringe Benefits Payable . . . . . . Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued Compensated Absences . . . . . . . . . . . . . . . . . . . . . Customers' Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payables to Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Current Liabilities . . . . . . . . . . . . . . . . . . . . .

DEFERRED CREDITS

Deferred Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.872. 160

Other Deferred Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.940. 739

Total Deferred Credits . . . . . . . . . . . . . . . . . . . . . . . . . 5.812. 899

Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605.093. 906

TOTAL NET ASSETS AND LIABILITIES .................. $1.226.911. 856

CITY OF TACOMA. WASHINGTON DEPARTMENT OF PUBLIC UTILITIES

TACOMA POWER

STATEMENTS OF REVENUES. EXPENSES AND CHANGES IN NET ASSETS

YEAR ENDED DECEMBER 31. 2007 2006

OPERATING REVENUES ............................... $400.158. 895 $396.872. 077

OPERATING EXPENSES

Operations . . . . . . . . . . . . . . Purchased and Interchanged Power 114.772. 828

Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.688. 760

Transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.163. 734

Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.144. 805

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other 8.097. 483

Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.377. 460

Telecommunications Expense . . . . . . . . . . . . . . . . . . . . . . 16.725. 438

Administrative and General . . . . . . . . . . . . . . . . . . . . . . 38.412. 511

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.705. 705

Other Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.558. 011 15.233. 370

Total Operating Expenses . . . . . . . . . . . . . . . . . . . . 296.646. 735 299.730. 815

Net Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.512. 160 97.141. 262

NON-OPERATING REVENUES (EXPENSES)

Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.127. 012 9.745. 123

Contribution to Family Need . . . . . . . . . . . . . . . . . . . . (450. 000) (450. 000)

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.754. 339 2.842. 960

Interest on Long-Term Debt . . . . . . . . . . . . . . . . . . . . . (22.955. 214) (23.454. 964)

Amortization of Debt Premium. Discount. Expense and Loss on Refunding . . . . . . . . . . . . . . . . . . . . . . . . . 274. 567 80. 830

. . . . . . . . . . . . . . . . . . Gain on Sale of Utility Plant 1.467. 378 .

...... Total on-Operating Revenues (Expenses) (5.781. 918) (11.236. 051)

Net Income Before Capital Contributions and Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97.730. 242 85.905. 211

Capital Contributions Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.046. 164 7.345. 821

Tzansf ers

City of Tacoma Gross Earnings Tax . . . . . . . . . . . . . . (25.034. 239) (24.378. 937)

Transfers to Other Funds . . . . . . . . . . . . . . . . . . . . . . . (224. 710) (178. 031)

CHANGE IN NET ASSETS (NET INCOME) ................ 84.517. 457 68.694. 064

TOTAL NET ASSETS . BEGINNING OF YEAR ............. 537.300. 493 468.606. 429

. ................... TOTAL NET ASSETS END OF YEAR $621.817. 950 $537.300. 493

The accompanying notes are an integral part of these financial statements .

CITY OF TACOMA, WASHINGTON DEPARTMENT OF PUBLIC UTILITIES

TACOMA POWER

STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 3 1 .

CASH FLOWS FROM OPERATING ACTIVITIES

Cash from Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash Paid to Suppliers ............................ Cash Paid to Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conservation Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Cash From Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES

Transfer Out for Gross Earnings Tax . . . . . . . . . . . . . . . (25,034,239) (24,378,937)

Transfer to Fleet Services Fund . . . . . . . . . . . . . . . . . . . (224,710) (178,031)

Transfer to Family Need Fund . . . . . . . . . . . . . . . . . . . . . . (450,000) (450,000)

Net Cash From Non-Capital Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,708,949) (25,006,968)

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES

Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from Sale of Plant . . . . . . . . . . . . . . . . . . . . . . . Proceeds from Issuance of Long-Term Debt . . . . . . . . . . Debt Issuance Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal Payments on Long-Term Debt . . . . . . . . . . . . . . Payments for Early Extinguishment of Debt . . . . . . . . . Premium and Net Refunding . . . . . . . . . . . . . . . . . . . . . . . . . Interest Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contributions in Aid of Construction . . . . . . . . . . . . . . Change in Deferred Credits . . . . . . . . . . . . . . . . . . . . . . . . Net Cash From Capital and Related Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . .

CASH FLOWS FROM INVESTING ACTIVITIES

Interest Received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,127,012 9,745,123

Other Net Non-Operating Revenues and Expenses ..... 1,754,339 2,842,960

Change in Deferred Charges . . . . . . . . . . . . . . . . . . . . . . . . 30,984 (12,637)

Net Cash From Investing Activities . . . . . . . . . . . . . . 15,912,335 12,575,446

Change in Cash and Equity in Pooled Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,098,0,67 8,851,691

Cash and Equity in Pooled Investments at January 1 . . 333,217,695 324,366,004 Cash and ~quity in Pooled Investments at December 3 1 . $357,315,762 $333,217,695

The accompanying notes are an integral part of these financial statements.

YEAR ENDED DECEMBER 31.

Reconciliation of Net Operating Income to

Net Cash From Operating Activities:

Net Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Adjustments to reconcile net operating income

to net cash from operating activities:

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash from changes in operating

assets and liabilities: Accounts Receivable and Unbilled Revenue . . . . . . . . Conservation Loans Receivable . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . Receivables from Affiliates

Materials and Supplies and Other . . . . . . . . . . . . . . . . Taxes and Other Payables . . . . . . . . . . . . . . . . . . . . . . . . Purchased Power Payable . . . . . . . . . . . . . . . . . . . . . . . . . Salaries. Wages and Fringe Benefits Payable . . . . . Accrued Compensated Absences . . . . . . . . . . . . . . . . . . . . Customers' Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payables to Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net Cash From Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reconciliation of Cash and Equity in Pooled

Investments to Balance Sheets: Cash and Equity in Pooled Investments

in Special Funds ................................ $155.591. 635 $170.861. 211 Cash and Equity in Pooled Investments in Operating Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201.724. 127 162.356. 484 Cash and Equity in Pooled Investments at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $357.315. 762 $333.217. 695


TACOMA POWER

NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31,2007 AND 2006

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations of Tacoma Power. The Light Division, doing business as Tacoma Power (Tacoma Power), is a blended component unit of the City of Tacoma, Washington (the City), Department of Public Utilities (the Department). The Department consists of Tacoma Power, Tacoma Water, and Tacoma Rail and is governed by a five-member Public Utility Board (the Board) appointed by the City Council. Certain matters relating to utility operations, such as system expansion, issuance of bonds and fixing of utility rates and charges, are initiated and executed by the Board, but also require formal City Council approval. Tacoma Power owns and operates the City's electrical generation and distribution facilities and telecommunication infrastructure. Tacoma Power serves an average of 165,000 retail customers and has 798 employees. Tacoma Power is organized into five business units: Generation, Power Management, Transmission and Distribution, Click! Network and Energy Services.

Generation operates four hydroelectric generating projects (Cowlitz, Cushman, Nisqually and Wynoochee) and the associated recreational facilities, fish hatcheries and other project lands.

Power Management manages the power supply portfolio, markets bulk and ancillary power supply services, schedules and dispatches Division-owned generation and contract power supplies, and performs power trading and risk management activities. Revenues and the cost of electric power purchases vary from year to year depending on the electric wholesale power market, which is affected by several factors including the availability of water for hydroelectric generation, marginal fuel prices and the demand for power in other areas of the country.

Transmission and Distribution plans, constructs, operates and maintains the transmission and distribution systems including substations, the underground network system, system control and data acquisition (SCADA) systems, revenue metering facilities and all overhead transmission and distribution systems. Electricity use by retail customers varies from year to year primarily because of weather conditions, customer growth, the economy in Tacoma Power's service area, conservation efforts, appliance efficiency and other technology.

Click1 Network plans, constructs, operates and maintains a hybrid fiber coaxial (HFC) telecommunications network that supports the operation of Tacoma Power's electrical transmission and distribution system, provides retail cable TV and wholesale high-speed Internet services to residential and business customers, and data transport services to retail customers.

Energy Services plans and delivers energy services, including conservation, technical assistance and payment options for customers and ensures safe electrical installations. Energy Services ensures accurate communications between Tacoma Power and its retail customers.

Shared Services. Tacoma Power receives certain services from other departments and agencies of the City, including those normally considered to be general and administrative. Tacoma Power is charged for services received from other City departments and agencies and, additionally, must pay a gross earnings tax to the City.

Basis of Presentation. The financial statements of Tacoma Power are prepared under the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP) issued by the Governmental Accounting Standards Board (GASB) applicable to governmental entities that use proprietary fund accounting and the Financial Accountiqg Standards Board (FASB) that do not conflict with rules issued by the

TACOMA POWER NOTES TO FINANCIAL STATEMENTS

(continued)

GASB. Revenues are recognized when earned, and costs and expenses are recognized when incurred.

Tacoma Power follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). In general, SFAS No. 71 permits an entity with cost-based rates to defer certain costs or income that would otherwise be recognized when incurred to the extent that the rate-regulated entity is recovering or expects to recover such amounts in rates charged to its customers.

Tacoma Power's accounts are maintained substantially in accordance with the uniform system of accounts prescribed by the Federal Energy Regulatory Commission and the Division of Audits of the State Auditor's Office. Tacoma Power is exempt from payment of federal income tax.

Utility Plant and Depreciation. The cost of utility plant is stated at original cost (See Note 2), which includes both direct costs of construction or acquisition and indirect costs. The cost of maintenance and repairs is charged to expense as incurred, while the cost of replacements and betterments is capitalized.

Depreciation is recorded using the straight-line method based on estimated economic lives of related operating assets placed in service at the beginning of the year. The composite depreciation rates for 2007 and 2006 were 3.93% and 3.89%, respectively. The original cost of property together with removal cost, less salvage, is charged to accumulated depreciation at such time as property is retired and removed from service.

Management has evaluated the impact of SFAS No. 143, Accounting for Asset Retirement Obligations, and has concluded the impact of this standard is not material. Management will continue to assess the impact of this standard annually or as circumstances warrant.

Allowance for Funds Used During Construction (AFUDC). AFUDC represents the cost of borrowed funds used for the construction of utility plant, net of interest earned on unspent construction funds. Capitalized AFUDC is shown as part of the cost of utility plant and as a reduction of interest income and expense. Net interest income in 2007 and 2006 of $2.2 million and $1.8 million, respectively, was capitalized.

Asset Valuation. Tacoma Power periodically reviews the carrying amount of its long-lived assets for impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not deemed recoverable, the asset is adjusted to its estimated fair value. Fair value is generally determined based on discounted future cash flow.

Special Funds. In accordance with bond resolutions, agreements and laws, separate restricted funds have been established. These funds, which consist of cash and investments, are restricted for specific uses, including capital additions, debt service and extraordinary operations and maintenance costs.

Cash and Equity in Pooled Investments and Investments. Tacoma Power's cash and investments are deposited with the City Treasurer in the City's general investment pool for the purpose of maximizing interest earnings through pooled investment activities. Cash and equity in pooled investments in the City's general investment pool are reported at fair value and changes in unrealized gains and losses are recorded in the Statements of Revenues, Expenses and Changes in Net Assets. Interest earned on such pooled investments is allocated to the participating funds based on each fund's average daily cash balance during the allocation period.


(continued)

The general investment pool operates like a demand deposit account in that all City departments, including Tacoma Power, may deposit cash into the pool at any time and can also withdraw cash out of the pool without prior notice or penalty. Accordingly, balances are considered to be cash equivalents.

The City of Tacoma Investment Policy permits investments in certificates of deposit, obligations of the U.S. Treasury, agencies and instrumentalities, bankers' acceptances and repurchase and reverse repurchase agreements.

Repurchase agreements are settled delivered versus payment. The market value of collateralized securities must exceed the dollar amount of the repurchase agreement by 2% over the term of the agreement. Currently, the City participates only in overnight agreements. The underlying collateral must be an investment instrument that the City is authorized to purchase.

Tacoma Power's cash in banks held by the City Treasurer at December 31,2007 and 2006 are entirely covered by federal depository insurance or on deposit with financial institutions recognized as qualified public depositories of the State of Washington under RCW Chapter 39.

Materials and Supplies. Materials and supplies consist primarily of items for construction and maintenance of utility plant and are valued at the lower of average cost or market.

Accounts Receivable. Accounts receivable are recorded when invoices are issued and are written off when they are determined to be uncollectible. The allowance for doubtful accounts is estimated based on Tacoma Power's historical losses, review of specific problem accounts, the existing economic conditions and the financial stability of its customers. Generally, Tacoma Power considers accounts receivable past due after 30 days.

Bond Premium, Discount, Issuance Costs and Loss on Refunding. Bond premium, discount, issuance costs and loss on refunding are being amortized using the bonds outstanding method over the terms of the issues to which they pertain. Bond issuance costs are included in deferred charges with others recorded in long-term debt.

Compensated Absences. The City has two different policies for compensated absences. The City's original policy allows employees to accrue vacation based on the number of years worked with a maximum accrual equal to the amount earned in a two-year period. These employees also accrue one day of sick leave per month without any ceiling on the maximum accrued. The City implemented a new policy in 1998 allowing employees to earn PTO (personal time off) without distinction between vacation and sick leave. Employees who worked for the City prior to the change could choose to stay with the original policy or opt to convert to the new policy. The amount of PTO earned is based on years of service. The maximum accrual for PTO is 960 hours, and upon termination, employees are entitled to compensation for unused PTO at 100%. Vacation pay and PTO are recorded as a liability and expense in the year earned.

Employees in the original policy accumulate sick leave at the rate of one day per month with no maximum accumulation specified. In the case of termination, the employee receives 25% of the value at retirement or death or 10% upon termination for any other reason. The accrued liability is computed at lo%, which is considered the amount vested. Sick leave pay is recorded as an expense in the year earned.


(continued)

Capital Contributions. Tacoma Power adopted Governmental Accounting Standards Board (GASB) Statement 110. 33, "Accounting and Financial Reporting for Nonexchange Transactions", which requires capital grants and contributions to be reported as capital contribution revenue. Tacoma Power received capital contributions totaling $12.0 million and $7.3 million for the fiscal years ended December 31, 2007 and 2006, respectively.

Revenues. Service rates are authorized by the Tacoma City Council. Revenues are recognized as earned and include an estimate of revenue earned but not billed to customers as of year-end. Utility revenues are derived primarily from the sale and transmission of electricity. Utility revenue from power sales and power transmission is recognized when power is delivered to and received by the customer.

Family Need. In 2003, a new program called Family Need was instituted to assist households when available federal energy assistance funds have been exhausted. The Family Need program is designed to replace Project Need, created in 1983, as Tacoma Power's low income bill assistance program. Contributions are received from customers, employees, and Tacoma Power. The Family Need program is administered by the Metropolitan Development Council and Pierce County Community Services which identify and certify the eligibility of Tacoma Power customers for the program.

Use of Estimates. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Tacoma Power used estimates in determining reported unbilled revenues, allowance for doubtful accounts, accrued compensated absences, depreciation, self- insurance liabilities and other contingencies. Actual results may differ from these estimates.

Significant Risk and Uncertainty. Tacoma Power is subject to certain business risks that could have a material impact on future operations and financial performance. These risks include water conditions, weather and natural disaster-related disruptions, collective bargaining labor disputes, fish and other endangered species act issues, Environmental Protection Agency regulations, federal government regulations or orders concerning the operation, maintenance, and/or licensing of hydroelectric facilities and the deregulation of the electrical utility industry.

Net Assets. Net assets consist of the following components:

Invested in capital assets, net of related debt - This component of net assets consists of capital assets and unspent bond proceeds, net of accumulated depreciation and outstanding balances of any bonds and other borrowings that are attributable to the acquisition, construction, or improvement of capital assets. Restricted - This component consists of net assets on which constraints are placed. Constraints include those imposed by creditors, contributors, enabling legislation or by law. Unrestricted - This component of net assets consists of net assets that are available for use.

Reclassifications. Changes have been made to prior year account classifications as needed to conform to the current year presentation format.


(continued)

NOTE 2 UTILITY PLANT. A summary of the balances and changes in utility plant follows:

Balance Balance December 31, Transfers & December 31,

2006 Additions Retirements Adjustments 2007

Intangible Plant Hydraulic Production Plant

Transmission Plant Distribution Plant Regional Transmission General Plant Telecommunications

Plant Total Utility Plant In Service

Less Accumulated Depreciation

Construction Work In Progress

Net Utility Plant

NOTE 3 INVESTMENTS. Tacoma Power's investments are held by the Tacoma City Treasurer (Refer to Note 1). The investments held by the Tacoma City Treasurer outside of the general investment pool at December 31,2007 and 2006 were as follows:

lnvestments at December 31,2007 Carrying Value Weighted Average % of

Investment Type (Fair Value) Maturitv (in vears) Portfolio Repurchase Agreements $ 8,761,250 3.17 45% Commercial Paper 10,570,572 0.27 55% Total Investments $ 19.331.822 100%

lnvestments at December 31,2006 Carrying Value Weighted Average % of

Investment Type lFair Value) Maturitv (in vears) Portfolio Repurchase Agreements $ 8,761,250 3.63 45% Commercial Paper 10,570,777 0.27 55% Total Investments $ 19.332.027 100%

The "weighted average maturity in years" calculation assumes that all investments are held until maturity.

Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, longer term investments have greater exposure to changes in market interest rates. These investments are held in accordance with the Bond Indenture of Trust for the purpose of bond reserves. The repurchase agreements are fixed over the life of the contract.

TACOMA POWER NOTES TO FINANCIAL STATEIVIENTS

(continued)

NOTE 4 SPECIAL FUNDS. Cash and equity in pooled investments and investments included in Tacoma Power's Special Funds consist of:

Cash and Equity in Pooled 2007 2006 lnvestments Construction Funds $88,405,601 $1 04,312,550 Debt Service Funds 38,410,963 37,941,588 Wynoochee Reserve 2,182,840 2,062,951 Special Bond Reserve 7,260,409 7,212.095

Total 136,259,813 151,529,184 Investments Special Bond Reserve 19.331.822 19,332,027

Total $1 55.591.635 $1 70.861.21 1

NOTE 5 LONG-TERM DEBT. Long-term debt activity for the year ended December 31, 2007 was as follows:

Beginning Ending Due Within Balance Additions Reductions Balance One Year

Revenue Bonds $572,215,000 $81,130,000 $(I 08,500,000) $544,845,000 $25,275,000 Plus: Unamortized Premium 9,103,939 5,362,101 (2,368,795) 12,097,245

Less: Unamortized Discount (605,876) 171,901 (433,975)

Less: Loss on Refundings l12.633.520) 12.358.41 7) 1,592,982 J13.398.955)

Total Long-Term Debt $568.079.543$84.133.684$1109.103.912)$543.109.315$25.275.000

Tacoma Power's long-term debt at December 31 consists of the following payable from revenues of Tacoma Power:

1997 Refunding Bonds, with interest rates ranging from 5.125% to 6.0%, due in yearly installments of $1,270,000 to $27,750,000 refunded in 2007. $ - $ 84,320,000

1999 Revenue Bonds, with an interest rate of 5.5% due in one payment of $13,500,000 in 201 3. 13,500,000 13,500,000

2001A Refunding Bonds, with interest rates ranging from 4.0% to 5.75%, due in yearly installments of $5,390,000 to $8,195,000 through 2015. 54,560,000 59,950,000

2001 B Refunding Bonds, with an interest rate of 5.5%, due in yearly installments of $1 1,780,000 to $1 9,345,000 through 201 2. 78,800,000 90,580,000


(continued)

2004 Revenue Bonds, with interest rates ranging from 5.0% to 5.25%, due in yearly installments of $990,000 to $20,690,000 through 201 7.

2005A Revenue Bonds, with interest rates ranging from 3.5% to 4.3%, due in yearly installments of $100,000 to $30,530,000 through 2021.

2005B Refunding Bonds, with interest rates ranging from 3.0% to 5.0%, due in yearly installments of $855,000 to $30,100,000 through 2021.

2007 Refunding Bonds, with interest rates ranging from 4.0% to 5.0%, due in yearly installments of $1,095,000 to $27,050,000 through 201 5. 81,130,000

544,845,000 572,215,000

Unamortized premium Unamortized discount Unamortized loss on refundings Current portion

Scheduled principal maturities on the bonds and interest payments are as follows:

Principal 2008 $25,275,000 2009 $26,590,000 201 0 $30,820,000 201 1 $32,475,000 201 2 $34,235,000 201 3-201 7 $202,305,000 201 8-2021 $1 93,145,000

Interest $25,585,801 $24,229,426 $22,726,464 $21,066,870 $1 9,308,414 $67,017,853 $1 6,181,923

The fair value of Tacoma Power's long-term debt is based on quoted market prices. The fair market value of long-term debt at December 31, 2007 and 2006 was $581,297,330 and $650,122,531, respectively.

In March 2007, Tacoma Power issued $81,130,000 of Electric System Revenue Refunding Bonds, 2007. The bond proceeds were used to refund Tacoma Power's 1997 bonds maturing in years 2008 through 2015, as well as pay costs of issuance, bond insurance and underwriter's fees.

The advance refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $2.4 million. This difference is reported in the accompanying financial statements as a loss on refunding. Tacoma Power completed the advance refunding to reduce its annual debt service requirements by approximately $750,000 and to obtain an economic gain (difference between the present values of the old and new debt service payments) of $5.2 million.


(continued)

As of December 31, 2007, the following outstanding bonds were considered defeased:

Issue 1964 Refunding Bonds 1964 Light & Power Bonds 1965 Light & Power Bonds 1967 Light & Power Bonds - Series A & B 1969 Light & Power Bonds 1979 Light & Power Bonds Electric System Refunding Revenue Bonds, 1992A Electric System Refunding Revenue Bonds, 1992B Electric System Refunding Revenue Bonds, 1997 Electric System Refunding Bonds, 1999 Electric System Revenue & Refunding Bonds, 1999 Electric System Revenue Refunding Bonds, 2001

Amount $ 2,995,000

4,875,000 13,315,000 1 1,045,000 6,945,000

16,350,000 1 , I 35,000 1,905,000 1,920,000

17,545,000 5,000,000

125.270.000 $208.300.000

These refunded bonds constitute a contingent liability of Tacoma Power only to the extent that cash and investments presently in the control of the refunding trustees are not sufficient to meet debt service requirements, and are therefore excluded from the financial statements because the likelihood of additional funding requirements is considered remote. Tacoma Power's revenue bonds are secured by the net revenue of Tacoma Power and all cash and investments held in the bond and construction funds. The bonds are also subject to certain financial and non-financial covenants.

Conservation Project Revenue Bonds. On February 23, 1994, Tacoma Power and the Bonneville Power Administration (BPA) entered into a Conservation Project Agreement. The Conservation Project was created to develop cost-effective conservation resources within the service area of Tacoma Power. In the agreement, BPA is to acquire the conservation energy savings generated by the Conservation Project in return for paying all annual project costs.

In December 1994 to finance the Project, Tacoma Power and BPA joined in the sale of $22.2 million of Conservation Project Revenue Bonds for which BPA is obligated to pay debt service. The bonds are not reflected in Tacoma Power's financial statements because they are only special limited obligations of Tacoma Power and are payable from and secured solely by Conservation Project Agreement conservation revenues that do not include any revenue derived from the electric system of Tacoma Power.

The 2003 Bonds are special limited obligations of Tacoma Power payable from the revenues derived from the Conservation Project and were issued to provide funds necessary to refund the 1994 Bonds and to pay costs of issuance of the bonds. Like the 1994 Bonds, the 2003 Bonds are not reflected in Tacoma Power's financial statements and BPA is obligated to pay debt service.

Scheduled principal maturities on the bonds and interest payments are as follows:

Principal $1,380.000

Interest $485,065 $41 6,065 $358,515 $298,315 $247,000


(continued)

NOTE6 PURCHASED POWER. Tacoma Power purchases electric power and energy from the Bonneville Power Administration (BPA) under a long-term contract expiring in 201 1. The contract consists of a base rate per kwh, and certain cost-recovery adjustment clauses can be invoked under particular circumstances. The power received under this contract averaged approximately 428,399 and 400,450 kilowatts per hour for 2007 and 2006, respectively. Charges for the BPA purchased power are approximately $99 million and $1 01 million for 2007 and 2006, respectively, and are based. on the total amount of energy delivered and the monthly peak power demand.

Under fixed contracts with other power suppliers, Tacoma Power also has agreed to purchase portions of the output of certain generating facilities. Although Tacoma Power has no investment in such facilities, these contracts provide that Tacoma Power pay certain minimum amounts (which are based at least in part on the debt service requirements of the supplier) whether or not the facility is operating. The cost of power obtained under the contracts, including payments made when a facility is not operating, is included in operations expense in the Statements of Revenues, Expenses and Changes in Net Assets.

Information for the year ended December 31, 2007 pertaining to these contracts is summarized as follows:

Grand Coulee Grant County Tacoma Power's Current Project Hydro PUD - Priest

Share of Authoritv Rapids Energy Output ................................. 255,303 mWh 393,036 mWh

.......................... Megawatt Capacity 66 mW 63 mW Operating Costs .............................. $ 1,237,627 $ 11,791,871 Incentive Payments ......................... $2,298,531 $ 000,000 Contract Expiration Date ................. 5/9/2024 * * *

On October 29, 2003, Grant County PUD submitted a new license application to FERC for the Priest Rapids Project. The old license expired in 2005 and the project is now operating on an annual license which started on November 1, 2005 pending the issuance of the new permanent license expected in mid-2008. The terms of the new contracts are for the term of the new FERC license, which is expected to be 30-50 years. Tacoma Power's purchase quantity and costs are uncertain and will diminish with time as Grant County PUD loads increase. 3

Total expenses for payments made under the above contracts for the years 2007 and 2006 were $3,536,158 and $5,986,129, respectively, for Grand Coulee Project Hydro Authority and $1 1,791,871 and $7,624,448, respectively, for Grant County PUD - Priest Rapids.

In addition, Tacoma Power will be required to pay its proportionate share of the variable operating expenses of these projects.

Other Power Transactions. Other power transactions include purchases under short-term agreements and interchanges of secondary power between utilities in response to seasonal resource and demand variations. Fluctuations in annual precipitation levels and other weather conditions materially affect the energy output from Tacoma Power's hydroelectric facilities. Accordingly, the net interchange of secondary power in and out may vary significantly from year to year. A portion of the power purchases under short-term agreements represent purchases on the wholesale market on behalf of non-portfolio customers. Tacoma Power's trading activities are limited to purchasing power to meet native loads, optimizing the value of Tacoma Power's power supply portfolio and selling energy during times of surplus.


(continued)

In October 2002, the Emerging Issues Task Force (EITF) reached a final consensus in EITF Issue 02-03 "Accounting for Contracts in Energy Tradiug and Risk Management Activities" (EITF 02-03) eliminating mark to market accounting on non-derivative energy contracts, including transportation contracts. The energy contracts are fixed-price contracts. Tacoma Power records applicable energy contracts using accrual accounting and recognizes the revenue or expense at the time of contract performance, settlement or termination. Tacoma Power does not engage in derivatives trading, derivatives market making or other speculative activities.

For 2007, net interchange was (1,918,581,381) kilowatt-hours while in 2006 it was (2,135,324,008) kilowatt-hours. Tacoma Power's net power purchases or sales and interchanged activities are reflected in the Statements of Revenues, Expenses and Changes in Net Assets.

A breakdown of the net interchange in kilowatt-hours is as follows:

lnterchanae Summary 2007 2006 (in kwh) (in kwh)

Secondary Sales (1,980,124,000) (1,951,924,000) Portfolio Purchases 62,020,000 66,667,000 Miscellaneous Exchanges (2,378,000) (232,395,000) Other 1.900,619 (1 7,672.008) Net Interchange (1.918.581.381) (2.1 35.324.008)

NOTE 7 FLEET SERVICES FUND. The Department of Public Utilities has established a Fleet Services Fund to perform scheduled maintenance, repair and replacement of Department vehicles and related equipment. Transfers of vehicles and equipment from Tacoma Power to the Fleet Services Fund are accounted for as transfers.

Tacoma Power pays the Fleet Services Fund for its use of the vehicles and equipment to cover fleet operating expenses. Payments made by Tacoma Power in 2007 and 2006 were $7,163,762 and $6,644,630, respectively.

Fleet Services' management makes an annual assessment of the capital replacement reserve balance for appropriate funding levels. It is the Fund's policy to maintain the Fund's maximum balance at a level that will provide adequate purchasing power for a three-year cycle and to return any excess funds to customers based on their scheduled monthly payments. The solvency of the Replacement Fund also allowed Fleet Services to return a portion of interest earned on fund investments for the year to their customers. In 2007 and 2006, Fleet Services returned 75% of the interest earned to Tacoma Power's replacement fund. The amount of the refund was $540,352 and $402,613 for 2007 and 2006, respectively, which was used to offset the corresponding year's fleet expenses.

NOTE 8 SELF-INSURANCE FUND. The Department of Public Utilities maintains a self insurance program and insurance policies. The Department has established a self-insurance fund to insure Tacoma Power and other divisions within the Department for certain losses arising from personal and property damage claims by third parties. The major risks to Tacoma Power are flooding, wind damage, chemical spills and earthquakes. Mitigating controls and emergency and business resumption plans are in place. To the extent damage or claims exceed insured values, rates may be impacted.


(continued)

Tacoma Power is required to make payments to the Self-Insurance Fund to cover claims incurred by Tacoma Power and administrative expenses of the Fund. Tacoma Power's premium payments totaled $480,000 in 2007 and $1,460,000 in 2006. Liabilities have been accrued in the Self-Insurance Fund for environmental remediation costs expected to be incurred. No provision has been recorded for environmental remediation costs that could result from changes in laws or other circumstances currently not contemplated. Assets in the Self- lnsurance Fund total $4.8 million which exceeds accrued and incurred but not reported liabilities. Equity in the Self-Insurance fund is transferred to the appropriate operating divisions in accordance with GASB 10. Management believes Tacoma Power's investment in the Self- lnsurance Fund is more than adequate to settle all its known or estimated claims.

Performance and fidelity bonds covering all employees are provided in amounts up to $1 million (subject to a $50,000 deductible per occurrence). The insurance policies presently in effect include coverage on the Department's buildings and fleet vehicles as well as general liability and public official's liability. The current insurance policies have deductibles or self insured retentions of $100,000 for buildings and vehicles and $1,000,000 for general comprehensive liability. The public officials policy has a $200,000 deductible for employee practices liability and $1 00,000 deductible for all other issues. The general comprehensive liability policies provide $20 million of coverage. The City has a policy to cover extraordinary worker's compensation claims with a limit of $25 million ($1 million deductible).

NOTE 9 TACOMA EMPLOYES' RETIREMENT SYSTEM FUND (TERS). Employees of Tacoma Power are covered by the Tacoma Employes' Retirement System (the System), an actuarially funded system operated by the City. The following information is provided on a city-wide basis.

1. The System is a local single employer defined benefit pension retirement plan covering City of Tacoma employees and administered in accordance with Chapter 41.28, Revised Code of Washington, and Chapter 1.30 of the Tacoma City Code. There are 1,792 retirees and beneficiaries of deceased retirees currently receiving benefits and 317 vested terminated employees entitled to future benefits but not yet receiving them. Currently, 3,000 active members are part of the System.

2. Basis of Accounting: The financial statements are prepared using the accrual basis of accounting. Employee and employer contributions are recognized as revenues in the period in which employee services are performed, and expenses are recorded when the corresponding liabilities are incurred, regardless of when payment is made.

3. Investments: Equity securities, fixed income securities, real estate, and short-term investments are all reported at fair market value. Fair market value was determined by our custodian bank using standard industry practices and was verified by our performance consultant. No investment in any one corporation or organization exceeded 5% of net assets available for benefits.

4. Contracts: The System has no securities of the employer and related parties included in the plan assets. 'The System has not made any loans to the employer in the form of notes, bonds or other instruments.

5. Contribution Rates: Covered employees are required by Chapter 1.30 of the Tacoma City Code to contribute 6.44% of their gross wages to the System, and the employer contributes 7.56% for a total of 14.0% of gross wages contributed. Contributions city-wide in 2007 totaled $25.7 million ($13.6 million employer contributions and $12.1 million employee contributions). The employer contribution rate is determined by the actuarial funding method identified as the "entry age cost method."

TACOMA POWER NOTES TO FINAI\ICIAL STATEMENTS

(continued)

6. Pursuant to GASB Statement No. 27, the note disclosures above emphasize the City of Tacoma disclosures and detailed information presented in an independent Comprehensive Annual Financial Report issued by the Retirement System. Further detailed information regarding these disclosures can be found in that report, which can be obtained by writing to Tacoma Employes' Retirement System, 747 Market Street, Room 1544, Tacoma, Washington 98402.

7. Funding Status and Progress: Three-year historical trend information about TERS is presented here as supplementary information. This information is based on the most recent actuarial valuation performed dated January 1, 2007, and is intended to help assess TERS funding status city-wide on a going-concern basis, assess progress made in accumulating assets to pay benefits when due, and make comparisons with other public employee retirement systems.

8. Actuarial Methods and Significant Actuarial Assumptions:

Valuation Date: Actuarial Cost Method: Amortization Method:

Remaining Amortization Period: Asset Valuation Method:

Actuarial Assumptions: Investment Rate of Return Projected Salary lncreases Includes Inflation at Post-Retirement Benefit lncreases

January 1,2007 Entry Age Level Percentage of the System's Projected Payroll 30 years; open Assets are valued at market value, with a four-year smoothing of all market value gains and losses.

SCHEDULE OF FUNDING PROGRESS: ($ in millions)

Actuarial Accrued

Actuarial Actuarial Liability Valuation Value of (AAL)

Date Assets Entry Age (a) (b )

1 11 I03 $740.1 $686.8 1 11 105 $807.3 $754.3 1/1/07 $1,021.3 $895.8

UAAL as a Unfunded Percentage

AAL Funded Covered of Covered (UAAL) Ratio Payroll Payroll

(b-a) (alb) (c) (b-a/c) ($53.3) 107.8% $1 54.2 (34.6%) ($53.0) 107.0% $1 72.5 (30.7%)

($125.5) 114.0% $175.0 (71.7%)

ANNUAL PENSION COST AND NET PEI\ISION OBLIGATION: The City's annual pension costs and net pension obligation to the Retirement System for 2006 were as follows:

($ in millions) Annual Required Contribution (ARC) $13.2 Adjustment to ARC - Annual Pension Cost (APC) 13.2 Contributions made 13.2 Increase (Decrease) in Pension Obligation Net Pension Obligation at beginning of year - Net Pension Obligation at end of year $


(continued)

TREND INFORMATION ($ in millions)

Year Annual Pension % of APC Net Pension Endinq Cost (APC) Contributed Oblination

1 213 1 104 $1 3.0 100% ($0.4)

NOTE 10 OTHER POST EMPLOYMENT BENEFITS (OPEB)

Plan Description. The City charges some early retirees not yet eligible for Medicare a health premium based on the claims experience of both actives and retirees. Since health claims costs generally increase with age, retiree health premiums would be significantly higher if they were determined without regard to active claims experience. GASB 45 requires that the portion of age-adjusted expected retiree health claims costs that exceed the premium charged to retirees be recognized as a liability for accounting purposes.

Funding Policy. The City uses pay as you go funding; GASB 45 does not require contributions to a separate trust.

Annual OPEB Cost and Net OPEB Obligation. The Present Value of Benefits (PVB) is the present value of projected benefits discounted at the valuation interest rate. The valuation interest rate used is 4.00% based upon the expected return for short term fixed income securities. This rate is used as the required contributions net of benefits paid are not prefunded.

The Normal Cost is that portion of the City provided benefit attributable to employee service in the current year. The Actuarial Accrued Liability (AAL) is the portion of the present value of benefits attributed to past service only. The Annual Required Contribution (ARC) is the amount the City would be required to report as an expense for the year. The ARC is equal to the Normal Cost plus an amount to amortize the unfunded Actuarial Accrued Liability (AAL). The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover Normal Cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. Each year the ARC, less current year benefit payments, will accumulate as a liability, Net OPEB Obligation, on the balance sheet.

The following table is a summary of actuarial valuation results as of January 1, 2007.

Total Membership: Active employees 3,674 Terminated vested employees 247 Retired employees 729 Dependents 184

Total 48.34

Annual Benefit Payments $8,527,863

Discount rate 4.00%

Present Value of Benefits (PVB) $236,595,810

Actuarial Accrued Liability (AAL) $1 78,137,499

Normal Cost $4,949,734

Annual Required Contribution (ARC) $1 4.1 59,338

TACOMA POWER NOTES TO FINANCIAL STATEIWENTS

(continued)

The following table shows the City's Net OPEB Obligation broken down by the total value of the benefits provided, the member premiums and the City paid benefits.

Value of Subsidy at 4.00% Total Value of Member Paid City Paid Interest Rate Benefits Premiums Benefits

Present Value of Benefits (PVB) Active employees $233,919,911 $1 28,671,261 $1 05,248,650 Inactive employees 151,028,255 19,681,095 131,347.1 60

Total $384,948.1 66 $1 48.352.356 $236.595.81 0

Actuarial Accrued Liability (AAL) Active employees $94,449,644 $47,659,305 $46,790,339 Inactive employees 151,028.255 19,681,095 131,347.1 60

Total $245.477.899 $67.340.400 $1 78.137.499

Normal Cost $1 1,155,450 $6,205,715 $4,949,734

Annual Benefit Payments $1 1,074,373 $2,546,510 $8,527,863

The following table shows the calculation of the Annual Required Contribution and Net OPEB Obligation for the City and for Tacoma Power.

Determination of Annual Required Contribution City Tacoma Power

Normal Cost at Year-end Amortization of UAAL Annual Required Contribution (ARC)

Determination of Net OPEB Obligation Annual Required Contribution (ARC) $14,159,338 $1,243,763 Interest on prior year Net OPEB Obligation Adjustments to ARC Annual OPEB Cost $14,159,338 $1,243,763 Actual benefits paid 8.527.863 475.063 Increase in Net OPEB Obligation $ 5,631,475 $ 768,700

Net OPEB Obligation - beginning of year Net OPEB Obligation -end of year $- 5,631,475 $ 768,700

Funded Status and Funding Progress. The City uses pay as you go funding.

TACOMA POWER NOTES TO FlNAlVClAL STATENIENTS

(continued)

The following table shows the annual OPEB costs and net OPEB obligation for three years.

Annual OPEB Cost Percentage of OPEB Cost Net OPEB Obligation Tacoma Tacoma Tacoma

Year Ended City Power City Power City Power

12/31/2005 N/A NIA NIA NIA N/A NIA

12/31 12006 N/A NIA NIA N/A N/A NIA

1213 112007 $14,159,338 $1,243,763 $8,527,863 $475,063 $5,631,475 $768,700

Actuarial Methods and Assumptions. The actuarial' cost method used for determining the benefit obligations is the Entry Age Normal Cost Method. Under the principles of this method, the actuarial present value of the projected benefits of each individual included in the valuation is allocated as a level percentage of expected salary for each year of employment between entry age (defined as age at hire) and assumed exit (until maximum retirement age).

The portion of actuarial present value allocated to a valuation year is called the normal cost. The portion of this actuarial present value not provided for at a valuation date by the sum of (a) the actuarial value of the assets, and (b) the actuarial present value of future normal costs is called the Unfunded Actuarial Accrued Liability (UAAL). In determining the Annual Required Contribution, the UAAL is amortized as a level percentage of expected payrolls over 30 years for non-LEOFF (Law Enforcement Officers Fire Fighters) I groups: for LEOFF 1, the UAAL is amortized as a level dollar amount over 30 years.

Actuarial lblethods and Significant Actuarial Assumptions:

Valuation Date: Census Date: Actuarial Cost Method Amortization Method:

Remaining Amortization Period: Demographic Assumptions

Actuarial Assumptions: Discount Rate Health Cost Trend

Projected Payroll Increases

January 1,2007 July 31,2006 Entry Age Combination of level percentage and level dollar amount, see note above 30 years, open Demographic assumption regarding retirement, disability and turnover are based upon pension valuations for the various pension plans.

4.0% 10.0% in the first year (2007-08), 9% in the second year and graded down 1 % per year to 5% per year in the sixth and beyond. 4.0%


(continued)

Eligibility:

TERS members are eligible for retiree medical benefits after becoming eligible for service retirement pension benefits (either reduced or full pension benefits):

Age 55 with 10 years of service 20 years of service

Valuation of Retiree Premium:

The City uses the same premiums for retirees under age 65 as for active employees. Therefore, the retiree premium rates are being subsidized by the inclusion of actives in setting non-Medicare retiree rates. For TERS retirees, Regence developed monthly premium levels for 2007 and a projected claims cost per retiree under age 65.

PPO Selections

2007 Monthly Projected Claim Premium Levels Cost per Retiree

Value of Retiree Premium

NOTE 11 COMMITMENTS AND CONTINGENCIES

Capital Improvements. The financial requirement for Tacoma Power's 200712008 biennial Capital lmprovement Program is approximately $131 million and Tacoma Power has substantial contractual commitments relating to the program. At December 31, 2007, the remaining financial requirement was approximately $76 million. The remaining financial requirement for Capital lmprovement Programs relating to prior bienniums is approximately $70 million.

Cushman Federal Energy Regulatory Commission License. In 1974, Tacoma Power petitioned the Federal Energy Regulatory Commission (FERC) to relicense its Cushman Dam Project located on the Skokomish River near Hoodsport, Washington. The Skokomish Tribe, along with others, contested significant portions of Tacoma Power's proposal before FERC. FERC issued a license in 1998 for the Cushman Project, but the proposed conditions significantly increased the cost of operating the project.

Tacoma Power appealed the license conditions to the U.S. Court of Appeals for the D.C. Circuit. The D.C. Circuit remanded the license back to FERC for consultation under the Endangered Species Act (ESA) after several salmonid species, including Fall Chinook, Summer Chum and Bull Trout, were listed as threatened under the ESA in 1999. FERC issued a license order in June 2004 that incorporated conditions from ESA biological opinions issued by USFWS and NOAA Fisheries in March 2004. At the same time, FERC lifted a stay of interim conditions, thus requiring Tacoma Power to install a valve in Cushman No. 2, increase the amount of spill from the project to 240 cfs and construct a bridge on the Reichert ranch. On February 14, 2005, FERC denied rehearing and affirmed the License Order. Tacoma filed a petition for judicial review of the license in the D.C. Circuit and obtained a stay of the "interim conditions". The D.C. Circuit issued an opinion on August 22, 2006, remanding the license to FERC and lifting the stay on the interim conditions. None of the parties have appealed, therefore the case will proceed bef0r.e FERC. The parties are, however, exploring a mediated settlement option. Because the D.C. Circuit's license opinion also resolved issues raised in a separate appeal Tacoma Power filed challenging the biological opinions, Tacoma Power has voluntarily dismissed that appeal.


(continued)

Tacoma Power continues to operate the Cushman Project pursuant to the 1998 FERC license which is subject to a partial stay.

Federal Energy Regulatory Commission Refund Proceedings. In July 2001, Tacoma Power, along with Seattle, Eugene, Northern Wasco PLID, Snohomish PLID and the Port of Seattle, sought from the Federal Energy Regulatory Commission (FERC) refunds from the sellers of power who sold power at extremely high prices during the energy crisis (October 2000 through April 2001) (the "Puget" proceeding). The Puget proceeding is a case that was bifurcated from a much larger original refund proceeding referred to as the California Refund proceeding. In the Puget proceeding, Tacoma Power is requesting between $65 and $145 million in refunds arising from power being purchased at prices that were extremely unreasonable. FERC declined to grant refunds, stating that even assuming that the prices were unjust and unreasonable, relief could not be equitably granted because not all parties were subject to FERC jurisdiction, parties relying on the spot market would be rewarded over those choosing longer term purchases, there were too many transactions to trace, and not all upstream sellers might be identified. This matter was appealed to the U.S. Court of Appeals for the Ninth Circuit. On August 24, 2007, the Ninth Circuit issued a decision in the "Pacific Northwest Refund Proceeding" (Puget, FERC docket No. EL 01-10), granting in part the petitions for review and remanding for FERC to reconsider its 2003 order denying refunds for charges in the Pacific Northwest that allegedly exceeded just and reasonable levels. The Court found FERC failed to consider market manipulation evidence and improperly excluded potential refunds for CERS purchases in the Pacific Northwest for delivery to California. On remand, the Court required the FERC to "examine this ... evidence of market manipulation in detail and account for it in any future orders regarding the award or denial of refunds in the Pacific Northwest proceeding." Further, the Court strongly urged the FERC "to further consider its decision, on remand, in light of the related decisions of this court that followed FERC's final orders" in Puget.

The Ninth Circuit has also considered a consolidation of some 150 appeals of FERC orders in the original California Refund proceeding, and has issued three opinions coverirlg the major issues in the proceeding. The first of these opinions, in 2005, held that,FERC did not have refund jurisdiction over municipal entities, but that the plaintiffs were not barred from pursuing contractual remedies. After this first opinion was issued, the State of California filed "claims" against all the municipal entities involved in the California Refund proceeding, including Tacoma. Tacoma received a claim in the amount of $1.7 million on January 12, 2006. Tacoma has denied this claim, and it was not included in the suit filed by California against other municipalities.

Tacoma also intervened in three FERC investigative proceedings involving El Paso, Portland General Electric and Avista, pertaining to similar issues. Tacoma's appeal in the Avista matter in the Ninth Circuit Court of Appeals is stayed pending decisions in the California Refund proceeding. Tacoma Power also participates in consolidated "Gaming" and "Partnership" proceedings that FERC initiated in June 2003 to require a number of named entities to "show cause" why they ought not to be required to disgorge profits obtained as a result of market manipulation. After FERC settled with a number of parties, these proceedings largely focused on Enron. As did other parties, Tacoma reached a settlement with Enron in June 2006 in which Tacoma received the full amount of its bankruptcy claim against Enron, in the amount of $3,288,520 as an "allowed claim" in the Enron bankruptcy. Tacoma continues to participate in the proceeding in the event the distribution phase yields additional distributions of monies FERC has received through settlements with parties other than Enron in these proceedings. Tacoma expects to participate in a settlement of this distribution phase in April 2008.


(continued)

City of Tacoma v. East Columbia lrrigation Dist. et at. Together with Seattle, Tacoma Power brought suit against the East Columbia Basin, Quincy-Columbia Basin, and South Columbia Basin lrrigation Districts in April 2005, to enforce a dispute resolution clause in the contract with the Districts arising out of the District's calculation of the Cities' costs. Tacoma and Seattle entered into power purchase and sale agreements with the Districts in 1980, which contracts require Tacoma to pay the annual power costs for each of the hydroelectric projects covered by the agreements, plus an amount based on the City's Average Annual Resource Unit Cost (AARUC). The Districts,are using an inappropriate AARUC calculation to overcharge the cities. The Contract requires appointment of a project consultant to resolve these types of disputes, which consultant is to be appointed by the Superior Court for Spokane County if the parties cannot agree. The Court appointed a project consultant, who issued a decision in November 2006 that is unfavorable to the cities. Reconsideration was denied in February 2007, and in March 2007, the cities filed two motions with the court to vacate or partially vacate the decision of the project consultant, which were denied. Tacoma and Seattle have filed an appeal with the Court of Appeals, but now are attempting to initiate a mediation.

BPA Letter of Credit In 2006, Bonneville Power Administration (BPA) offered its wholesale power customers, including Tacoma Power, the option to participate in their Flexible PF Rate (Power Bill Liquidity) program. The program is designed to provide potential reductions in the rates and payments by reducing the need for BPA to retain additional cash reserves, and therefore, reducing the cost of BPA power to Tacoma Power's system. BPA requires each participant to provide a letter of credit to secure the participant's obligations under the program. In August 2006, Tacoma Power was issued a letter of credit (LOC) by Bank of America for an amount not to exceed $30,000,000. Any fees associated with establishing and maintaining the LOC will be reimbursed annually by BPA on Tacoma Power's power bills up to a maximum of one percent of the LOC face value.

People of the State of California A $1.7 million claim was filed in January 2006 seeking damages for overpayments for wholesale power sold by Tacoma Power during the 2001 Energy Crisis. The claim explicitly stated that the sought amount was exclusive of any offset amounts that might be claimed by Tacoma. The identical claim was filed against most of the entities that are municipalities that are involved in the California Refund case. After the Ninth Circuit ruled that refunds were not available against municipalities in the California Refund case (on the grounds that FERC did not have jurisdiction over said entities), California filed this claim to preserve a claim to refunds under a contract theory. Tacoma Power maintained that none of the factual predicates in the claim were applicable to Tacoma. California so far has decided not to file suit against Tacoma, even though it did initiate suit against many of the municipalities in federal district court in Northern California.

Shaw EDS There is a dispute over $867,216 in sales tax arising out of the approximately $12 million Tacoma Power Narrows Crossing Replacement project. Shaw claims Tacoma Power owes this amount in sales taxes, Tacoma Power asserts they were included in the design build price. Tacoma Power is attempting to settle this matter, and it is not in litigation.

STATISTICAL DATA (Unaudited)

CITY OF TACOMA, WASHINGTON


TACOMA POWER

TEN-YEAR FINANCIAL REVIEW

BALANCE SHEET 2007 2006 2005 2004

ASSETS

. . . . . . . . . . . Utility Plant - Net $794,683,393 $758,535,021 $720,986,622 $695,565,309

...... Special and Other Assets 158,512,741 179,710,161 215,078,980 154,710,321

. . . . . . . . . . . . . . . . Current Assets 271,358,880 232,063,577 178,212,328 162,898,923

. . . . . . . . . . . . . . Deferred Charges 2,356,842 2,700,968 2,740,302 3,898,476

. . . . . . . . . . . . . . . . Total Assets 1,226,911,856 1,173,009,727 1,117,018,232 1,017,073,029

. . . . . . . . . . . . . . . . . . . . . . NET ASSETS

LIABILITIES AND EQUITY Long-Term Debt . . . . . . . . . . . . . . . . Current Liabilities . . . . . . . . . . . Deferred Credits . . . . . . . . . . . . . . Equity . . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities and Equity

Total Liabilities . . . . . . . . . . . TOTAL NET ASSETS AND LIABILITIES

STATEMENT OF INCOME

OPERATING REVENUES

Residential . . . . . . . . . . . . . . . . . . . Commercial . . . . . . . . . . . . . . . . . . . . General . . . . . . . . . . . . . . . . . . . . . . . Contract Industrial ........... Bulk Power . . . . . . . . . . . . . . . . . . . . Unbilled ...................... Other . . . . . . . . . . . . . . . . . . . . . . . . . Total Electric Revenues . . . . .

Other Operating Revenue . . . . . . . Total Operating Revenues . . . .

OPERATING EXPENSES

Operation and Maintenance . . . . . Taxes . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . Loss on Asset Impairment . . . . . . Total Operating Expenses . . . .

NET OPERATING INCOME (LOSS) . . . . . NON-OPERATING REVENUES (EXPENSES)

Other Income and Expense (Net)

Interest Earned on Investments

........ Interest Charges (Net )

Contributions to Project Need . Gain on Sale of Utility Plant .

Net Income (Loss) Before Contributions, Transfers &

Extraordinary Items ............

Total Capital Contributions . . . . . 12,046,164 7,345,821 13,373,338 10,897,261

Transfers Out * * . . . . . . . . . . . . . . . . (25,258,949) (24,556,968) (21,277,277) (20,041,377)

Litigation Settlements ..........

NET INCOME (LOSS) ............... $84,517,457 $68,694,064 $36,150,326 $31,264,246

* Beginning with the 2001 results have been reclassified to conform to the new GASB No.'34, Financial Reporting Model for Local Governments.

* * Beginning in 2001, City Gross Earnings Tax is reported as a transfer out rather than an operating expense in accordance with GASB No. 34.

2001 * (As Restated) 2000



TACOMA POWER

TEN-YEAR POWER SUMMARY

(Unaudited)

2 0 0 7 2006 2005 2004

MWh Available

Generated

Nisqually . . . . . . . . . . . . . . . . . . . . . 515. 585 583. 204 429. 8 9 9 515. 613

Cushman . . . . . . . . . . . . . . . . . . . . . . . 381 . 1 9 3 421. 285 298. 3 0 6 250. 4 0 1

Cowlitz . . . . . . . . . . . . . . . . . . . . . . . 1.590. 7 1 9 1.914. 3 2 0 1.289. 934 1 .551 . 9 9 1

Wynoochee . . . . . . . . . . . . . . . . . . . . . 35. 518 33. 469 22. 3 1 7 28. 1 5 1

Hood Street . . . . . . . . . . . . . . . . . . . 3. 914 2. 354 2. 860 2. 894

Hydro Generated . . . . . . . . . . . . . 2.526. 929 2.954. 632 2.043. 3 1 6 2.349. 050

Centralia . . . . . . . . . . . . . . . . . . . . . - . . .

Steam Plant No . 2 . . . . . . . . . . . . . . . . .

NE Diesel Generation Farm . . . . . . . . .

Total Generated . . . . . . . . . . . . . 2.526. 9 2 9 2.954. 632 2.043. 316 2.349. 050

Purchased . . . . . . . . . . . . . . . . . . . . . . . 4.401. 097 4.125. 464 4.053. 3 8 9 4.069. 2 7 7

Interchange . Net . . . . . . . . . . . . . . . (1.918. 5 8 1 ) (2 .135 . 3 2 4 ) (1 .274. 3 8 7 ) (1 .680. 6 9 6 )

Losses . Net . . . . . . . . . . . . . . . . . . . . 1 2 . 433 17 . 834 16 . 899 3. 484

Total System Load . . . . . . . . . . . . . . . 5.021. 8 7 8 4.962. 606 4.839. 2 1 7 4.741. 1 1 5

MWh Billed

Residential . . . . . . . . . . . . . . . . . . . . . 1.885. 268 1.822. 4 3 8 1.760. 1 1 0 1.773. 2 7 5

Commercial/Other . . . . . . . . . . . . . . . . 363. 6 7 1 360. 595 353. 6 7 0 356. 1 4 0

Industrial . . . . . . . . . . . . . . . . . . . . . . 2.562. 8 7 0 2.553. 656 2.648. 906 2.515. 3 0 7

Total Firm MWh Billed . . . . . . . 4.811. 8 0 9 4.736. 689 4.762. 686 4.644. 722

MWh Available Over MWh Billed (Causes: Timing differences. internal use. and losses other than those reflected above.) . . . . . 210. 0 6 9 225. 917 76. 5 3 1 96. 393

Percent of Power Generated . . . . . . . . 50 - 3 2 % 59 .54% 4 2 . 2 2 % 4 9 . 5 5 %

Average Load Factor . . . . . . . . . . . . . . . 5 9 . 2 7 % 58 .12% 57.85% 56 .83%

Average Number of Billings . . . . . . . . 165 . 1 2 2 162 . 5 8 9 159 . 1 8 2 158. 926

Maximum Hourly Energy Load MWh . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . Date Time . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Maximum Daily Energy Load MWh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Date . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Minimum Hourly Energy Load MWh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Minimum Daily Energy Load MWh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Date . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Average Hourly Energy Load . . . . . . . .


TACOMA POWER

GROSS GENERATION REPORT . December 31. 2007 AND December 31. 2006

KWH GENERATED. PURCHASED AND INTERCHANGED . Gross Generated . LaGrande . . . . . . . . . . . . . . . . . . . . . . . . . . . Generated . Alder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL NISQUALLY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Generated . Cushman No . 1 . . . . . . . . . . . . . . . . . . . . . . Generated . Cushman No . 2 . . . . . . . . . . . . . . . . . . . . . . TOTAL CUSHMAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Generated . Mossyrock . . . . . . . . . . . . . . . . . . . . . . . . . . Generated . Mayfield . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL COWLITZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Generated . Wynoochee . . . . . . . . . . . . . . . . . . . . . . . . . . Generated . Hood Street . . . . . . . . . . . . . . . . . . . . . . . . TOTAL KWH GENERATED - TACOMA SYSTEM . . . . . . . . . .

Purchased Power Grant County PUD (Priest Rapids) . . . . . . . . . . . . . . BPA Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Grand Coulee Project Hydro Authority (GCPHA) . . Interchange Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL KWH GENERATED, PURCHASED AND INTERCHANGED . . Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Baldi Replacement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pierce County Mutual Inadvertent . . . . . . . . . . . . . . .

TACOMA SYSTEM FIRM LOAD . . . . . . . . . . . . . . . . . . . . . . . . . . Maximum Kilowatts (System Firm Load) . . . . . . . . . . . Average Kilowatts (System Firm Load) . . . . . . . . . . .

PIERCE COUNTY MUTUAL LOAD . . . . . . . . . . . . . . . . . . . .

KWH BILLED Residential Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contract Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public Street and Highway Lighting . . . . . . . . . . . . . Sales to Other Electric Utilities . . . . . . . . . . . . . .

TOTAL FIRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bulk Power Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL KWH BILLED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

DECEMBER 2007

DECEMBER 2006

2007

OVER (UNDER) 2006

YEAR TO DATE December 31, December 31,

2 0 0 7 2006

PERCENT CHANGE



TACOMA POWER

DEBT SERVICE REQUIREMENTS

DECEMBER 31. 2007

PRINCIPAL INTEREST TOTAL

The amounts above reflect debt service requirements. and do not include

the portion funded in the current year for $25.275.000 .



TACOMA POWER

FUNDS AVAILABLE FOR DEBT SERVICE

Total Income . . . . . . . $414 ,184 ,417 $407 ,630 ,323 $345 ,586 ,235 $331 ,225 ,343 $327 ,729 ,719

Less: Operating Exp 252 ,941 ,030 257 ,130 ,750 227 ,250 ,006 230 ,469 ,744 246 ,807 ,015

Income Available for Debt Service . . . . . . $161 ,243 ,387 $150 ,499 ,573 $118 ,336 ,229 $100 ,755 ,599 $80 ,922 ,704

Bond Redemption . . . . $25 ,275 ,000 $24 ,180 ,000 $23 ,972 ,500 $22 ,790 ,000 $18 ,205 ,000

Bond Interest . . . . . . 26 ,424 ,078 28 ,010 ,139 29 ,554 ,344 26 ,867 ,524 25 ,530 ,894

Debt Service Payable on All Debt . . . . . . . $51 ,699 ,078 $52 ,190 ,139 $53 ,526 ,844 $49 ,657 ,524 $43 ,735 ,894

Times Debt Service Covered . . . . . . . . . . . 3 . 1 2 2 .88 2 . 2 1 2 .03 1 . 8 5

Debt Service Payable on Jr Lien Bonds . .



TACOMA POWER

ELECTRIC PLANT IN SERVICE . YEAR 2007

PLANT ACCOUNTS

INTANGIBLE PLANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HYDRAULIC PRODUCTION PLANT . . . . . . . . . . . . . . . . . . . . . TRANSMISSION PLANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DISTRIBUTION PLANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . REGIONAL TRANMSSN-MKT OPER PLANT . . . . . . . . . . . . . . GENERAL PLANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TELECOMMUNICATIONS PLANT . . . . . . . . . . . . . . . . . . . . . . .

TOTAL ELECTRIC PLANT IN SERVICE . . . . . . . . . . . . . . . . CONSTRUCTION WORK IN PROGRESS . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL

Book Cost 1/1 /07

Additions 2007

DEPRECIATION ACCOUNTS

Depreciation Rate .

Accumulated Depreciation

1 / 1 / 0 7

Annual Accrual Cr .

INTANGIBLE PLANT . . . . . . . . . . . . . . . . . . . . HYDRAULIC PRODUCTION PLANT . . . . . . . . . . 1 .6097

. . . . . . . . . . . . . . . . . . TRANSMISSION PLANT 3.4000

DISTRIBUTION PLANT . . . . . . . . . . . . . . . . . . 3.6500

. . . . . . . . . . . . . . . . . . . . . . . GENERAL PLANT 5.2700

TELECOMMUNICATIONS PLANT . . . . . . . . . . . . 8.4759

TOTAL PLANT DEPRECIATION . . . . . .

1 . Total Electric Plant in Service includes non-depreciable land and land rights of $1.267.075.248 .

2 . Total Book Cost of Plant Retired . . . . . . . . . . . . ($3.735. 328)

Add: Cost of Land and Land Rights Sold: Distribution Plant . . . . . . . . . . . . . . . . . . . . 14

Amortization of Intangible Plant . . . . . . . . . . . . .

Total Retirements . . . . . . . . . . . . . . . . . . . . . . . . . . . ($3.735. 314)

Retirements 2007

Transfers &

Adjustments Book Cost 12/31/07

Book Cost of Plant Retired

Cost of Removal

Salvage, Transfers

and Adjustments

Accumulated Depreciation

12/31/07

GENERATING FACILITIES

Hydro :

Alder . . . . . . . . . . . . . . . . . . . LaGrande . . . . . . . . . . . . . . . .

. . . . . . . . . . . Cushman No. 1

. . . . . . . . . . . Cushman No. 2

Mayfield . . . . . . . . . . . . . . . . Mossyrock . . . . . . . . . . . . . . . Wynoochee . . . . . . . . . . . . . . . Hood Street . . . . . . . . . . . . .


TACOMA POWER

RESOURCES

AS OF DECEMBER 31, 2007

Total Hydro

GENERATING

UNITS

AGGREGATE

NAME PLATE

RATING (kW)

APPROX. RATED

4-YR. AVERAGE

ANNUAL OUTPUT

(1,000 kwh)

Tacoma Power and the City of Seattle Light Department have entered into a 40-year purchase power contract with three Eastern Washington irrigation districts that have combined to develop the Grand Coulee Hydroelectric project. Tacoma Power and the City of Seattle Light Department share equally the output of the project which has a combined capacity of 128,700 kW and an annual energy capability of about 476,000,000 kwh.

AVERAGE

CUSTOMERS BY CLASS

Residential . . . . . . . . . . . . . . . . . . . . . . . . . . Incidental . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General

Public Streets and Highways . . . . . . . . . . Total System . . . . . . . . . . . . . . . . . . . . .

AVERAGE

NUMBER BILLINGS

HOURLY ENERGY

(kw)

1.467

2 -494

106.532

5.093

Circuit Miles of Overhead Lines

4kV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 -50

12.5 and 13.8 kV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,190.20

52.5 kV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.90

115 kV . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................. 369.83 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 kV 44.57

Trench Miles of Residential and Commercial Underground . . . . . . . . . . . . 690.10


TACOMA POWER

TAXES AND EMPLOYEE WELFARE CONTRIBUTIONS

FOR THE YEAR 2007 (Unaudited)

FEDERAL

. . . . . . . . . . . . . . . . . . . . . . . Power Social Security (FICA) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

STATE OF WASHINGTON

Retail Sales and Use Taxes . . . . . . . . . . . . . . . . . . . . . . . . . Power Utilities and Business Operations Tax . . . . . . . . Power State Employment Security . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

COUNTY

. . . . . . . . . . . . . . . . . . . . Lewis County . In Lieu of Taxes Mason County . In Lieu of Taxes . . . . . . . . . . . . . . . . . . . . Pierce County School Support . Eatonville . . . . . . . . . . White Pass School Support . . . . . . . . . . . . . . . . . . . . . . . . . . Mossyrock School Support . . . . . . . . . . . . . . . . . . . . . . . . . . . Morton School Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . County Fire Patrol . Paid to State . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . Mason County Fire Protection District

. . . . . . . . . . . . . . Lewis County Fire Protection District

Pierce County Fire Protection District . . . . . . . . . . . . . Pierce County Drainage District . . . . . . . . . . . . . . . . . . . . Thurston County . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

M[TNICIPALITIES

City of Tacoma Power Gross Earnings Tax . . . . . . . . . . . . Click!Network Gross Earnings ~ax/~ranchise Fees . . . . City of Fife Power Gross Earnings Tax/Franchise Fee

City of University Place Power Administrative Fee . . City of Lakewood Power Administrative Fee . . . . . . . . . . City of Fircrest Power Administrative Fee . . . . . . . . . . City of Steilacoom Power Administrative Fee . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Taxes as a % of Total Revenues of $400.158. 895 . . . . . . .

EMPLOYEE WELFARE CONTRIBUTIONS

Power Industrial Ins . and M.A. . . . . . . . . . . . . . . . . . . . . . Power City of Tacoma Pension Fund . . . . . . . . . . . . . . . . . . Power Medical/Life Insurance . . . . . . . . . . . . . . . . . . . . . . . TOTAL EMPLOYEE WELFARE CONTRIBUTIONS . . . . . . . . . . . . .



TACOMA POWER

2007 ELECTRIC RATES

(Based on 2005 rate schedules)

RATE PER MONTH

Schedule A - 1 - Residential Service Customer Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5.50 per month

Customer Charge (for collectively metered apartments) $4.50 per month

Energy (all energy measured in kilowatt-hours) . . . . . $0.031081 per kwh

Delivery (all energy delivered in kilowatt-hours ) . $0.030981 per kwh

Schedule A-2 - Low-Income/Elderly/Handicapped Residential Service Seventy-five percent (75%) of the monthly bill as

calculated under Section 12.06.160 of the official

Code of the City of Tacoma, known as RESIDENTIAL SERVICE - SCHEDULE A-1.

Schedule B - Small General Service Customer Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9.00 per month

Customer Charge (for unmetered services) . . . . . . . . . . . $7.00 per month


Delivery (all energy delivered in kilowatt-hours) . . $0.030999 per kwh

Schedule G - General Service Customer Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $46.00 per month

Energy (allenergymeasuredinkilowatt-hours) . . . . . $0.032729perkWh

Delivery (all kilowatts of Billing Demand delivered) $5.73 per kW

Schedule HVG - High Voltage General Service Customer Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $210.00 per month


Delivery (all kilowatts of Billing Demand delivered) $3.61 per kW

Other schedules also now in effect are:

CP - Contract Industrial Service (major industrial power use - written contract required)

H-1 - Street Lighting and Traffic Signal Service

H-2 - Private Off-Street Lighting Service

Electric rates were established by Ordinance No. 27332 and became effective

April 4, 2005.

0

26

52

78

104

130

Dolla

rs(M

illio

ns)

RES COM GEN CP BULK OTHERS

Class of Customer

SALES OF ELECTRIC ENERGYYear to Date - December 2007 & 2006

YTD December 2007 YTD December 2006

0

400

800

1200

1600

2000

2400

KWH

(Mill

ions

)

RES COM GEN CP BULK OTHERS

Class of Customer

TOTAL POWER BILLEDYear to Date - December 2007 & 2006


- 55 -

SALES OF ELECTRIC ENERGYYear to Date - December 2007 ($366,419,326)

Bulk27%

Commercial6%

General28%

Contract Industrial4%

Residential & Other35%

SALES OF ELECTRIC ENERGYYear to Date - December 2006 ($363,817,574)

Bulk26%

Commercial6%

General28%

Residential & Other36%

Contract Industrial4%

- 56 -

0

400

800

1200

1600

2000

2400

2800

3200

3600

4000

Gen

erat

ion

in K

WH

(mill

ions

)

Nisqually Cushman Cowlitz BPA OthersGenerated By

(*) Interchange excluded

POWER SOURCES (*)Year to Date December 2007 & 2006


- 57 -

POWER SOURCES (*)Year to Date - December 2007

NISQUALLY7%

OTHERS9%

BPA55%

COWLITZ23%

CUSHMAN6%

POWER SOURCES (*)Year to Date - December 2006

COWLITZ27%

OTHERS9%BPA

50%

NISQUALLY8%

CUSHMAN6%

(*) Interchange excluded

- 58 -

TOTAL OPERATING EXPENSES *Year to Date - December 2007 ($296,646,735)

Hydraulic Power5%

Other Oper Exp11%

Other Prod Exp1%

Distr & Trans15%

Purchased Power38%

Depreciation15%

Admin & Pension9% Click! Network

6%

TOTAL OPERATING EXPENSES *Year to Date - December 2006 ($299,730,815)

Hydraulic Power6%

Admin & Pension10% Click! Network

5%

Other Oper Exp10%

Depreciation14%

Purchased Power39%

Distr & Trans15%

Other Prod Exp1%

* City Gross Earnings Taxes are not included in Total Operating Expenses.

-59-

POWER MANAGEMENT

Hydroelectric Resources Volatile weather impacted 2007, including heavy rainfall events in the winter, a warm and dry spring, and windstorms in the fall. Spring 2007 was the driest on record at the Cowlitz Project and the second driest on record at the Cushman Project. The major storm that hit western Washington in early December was perhaps the most notable weather event. This storm caused flooding on 17 rivers in the region with record water levels on the Chehalis, Skokomish and Elwha rivers. The governor declared a state of emergency for the region, and the president declared several counties a disaster area. Since storage reservoirs were relatively low prior to the storm, Tacoma Power's projects were able to contain the high flows without spill.

Annual streamflows into the Cowlitz, Nisqually and Cushman projects were 92 percent, 84 percent and 108 percent of average, respectively. At the beginning of the year, Riffe Lake was about three feet above the normal operating level, Alder Lake was 19 feet above normal, and Lake Cushman was seven feet above normal. Due to dry weather in the spring, Tacoma Power's storage reservoirs did not reach full levels in early summer. By the end of the year, however, Alder Lake was three feet above normal and Lake Cushman was one foot above normal. In preparation for the generator rebuild at Mossyrock, Riffe Lake ended the year five feet below the normal operating level.

The combined generation of our hydroelectric projects was 2,526,905 megawatt-hours, about 100 percent of average. The Cowlitz River Project generated 1,590,719 megawatt-hours, the Nisqually River Project generated 51 5,585 megawatt-hours, the Cushman Project generated 381,193 megawatt-hours, and the Wynoochee River Project generated 35,518 megawatt-hours.

Bonneville Power Administration In 2007 Tacoma Power purchased 3,752,800 megawatt-hours (428 aMW) of power from the Bonneville Power Administration (BPA) at a cost of $99,480,800 ($26.51/MWh). We are currently in the middle of what had been expected to be a three-year rate period. In May 2007, however, the Ninth Circuit remanded the Residential Exchange Program (REP) Settlement Agreements; the agreements had established the level of REP costs included in BPA's current rates. Settlement discussions began between certain public and investor-owned utilities in an attempt to resolve the REP issues. These discussions resulted in a framework for potential long-term settlement of the REP. Final outcomes - depend upon finalizing the current BPA rate case.

BPA's regional dialogue process began in 2006 with the purpose of redefining BPA's roles and responsibilities, services and pricing during the post-FY 201 1 20-year contract period; this dialogue continued to receive extensive attention during 2007. Tacoma Power staff is involved in the many BPA workshops, trade association working groups, and technical meetings. The policy and technical issues relate to BPA's Tiered Rates Methodology, products and contract development, conservation, and financial planning and review processes. The 20-year power contracts are expected to be in place by the end of 2008.

Late in 2007, BPA also began a public process to update the methodology for determining exchanging utilities' Average System Costs (ASC) under the REP.

PNCA Planning and Operations The Pacific Northwest Coordination Agreement (PNCA) parties continued to plan and operate their submitted resources for coordination under the agreement during 2007. The PNCA optimizes the planning and operation of the resources from a regional perspective and provides benefits to the parties that are downstream of the Columbia River Treaty projects. The purchase of Priest Rapids power is the only Tacoma Power resource in the PNCA.

Planning for the 2007-2008 contract year began in Febrl~ary and concluded by the start of the operating year on August 1. According to the PNCA planning studies for 2007- 2008, firm resource capabilities are based on an eight-month critical period (September 1, 2007 through April 30, 2008) under the worst regional water conditions from 1928 through 1998.

In actual operations, no interchange energy, storage energy, in-lieu energy or provisional energy was exchanged between Tacoma Power and any of the other parties. Studies determined that the PNCA reservoirs reached 107 percent of the target on July 31, which is about 3,028 megawatt-months below absolute full reservoirs.

Priest Rapids In 2007 Tacoma Power received 393,036 MWh from the Priest Rapids Project. Of this amount, 202,218 MWh was from the Displacement Product, while 190,818 MWh came from a combination of the Surplus Product, Conversion Product, and the Reasonable Portion Product. Tacoma Power Priest Rapids costs totaled $1 0,657,046 in 2007 ($27.1 11MWh).

Grand Coulee Project Hydroelectric Authority (GCPHA) Operations of the GCPHA plants were normal during a majority of the 2007 generating season. There were 51 0,607 MWh (Tacoma Power's 50 percent share totaling 255,304 MWh at a cost of $13.85/MWh) generated, which equates to 103 percent of GCPHA's 5- year rolling average.

Legal action concerning the contract dispute with GCPHA continued during 2007. On March 1, the City of Tacoma filed a motion with the Spokane Superior Court to vacate the Project Consultant's (PC) findings and arbitration award on the dispute; oral arguments on the matter were heard March 30,2007. On May I I, 2007 the Court found there were not sufficient grounds to modify or vacate the PC's decision. On May 29, 2007, the cities of Tacoma and Seattle filed a notice of appeal of Spokane Superior Court's decision to the Washington Court of Appeals. The appeal will be presented before the Appeals Court sometime in mid-2008. The Cities of Tacoma and Seattle have held a series of meetings with GCPHA in an effort to arrive at a negotiated settlement of the dispute. Despite some progress, at year's end a negotiated settlement had not been reached. The parties plan to continue negotiations.

A long-term power wheeling contract with Avista Corporation expired October 31. This contract provided for the transmission of power generated at GCPHA's two largest projects, Main Canal and Summer Falls, to the BPA system. An assessment of options to replace this contract led to examination of a joint operatinglownership arrangement

with Seattle City Light and BPA. The arrangement would aim to build a new transmission line and substation to interconnect with nearby BPA transmission lines. In parallel to developing the interconnection with BPA, Tacoma Power and Seattle City Light approached Grant County PUD and Avista Corporation in an attempt to develop a non- wires contractual workaround. Negotiations were successful with Grant and Avista; preparations were made for early 2008 final signature of new long-term transmission arrangements that would be in place through the Power Purchase and Sale Agreements with the Irrigation Districts for Summer Falls and Main Canal.

Tacoma Narrows Tidal Energy Project In January, we selected Puget Sound Tidal Power LLC as the best consultant to lead the second phase of tidal power feasibility studies. Tacoma Power received nearly $1 70,000 in grant funding from the Bonneville Power Administration's Technology Innovation Program to further investigate the feasibility of tidal power. The Public Utility Board approved the PSTP contract in IWarch, and Phase II work began in April. Phase II studies included field measurement of the tidal currents, gathering available historical data, computer modeling of the tidal currents, economic analysis, and permitting and envirorlmental impact analysis.

Puget Sound Tidal Power LLC completed the Tacoma Narrows Tidal Power Feasibility Study in November and delivered the final report to Tacoma Power at the end of the year. The results of the study showed that, at this time, tidal power is neither economically nor technically feasible. According to the best estimates of everyone involved in the study, tidal power will not be technically feasible for a minimum of eight to ten years. Economic feasibility remains to be seen. Using current technologies, power generated from the tidal currents in the Tacoma Narrows would cost an estimated $270/MWh.

lntegrated Resource Plan During 2007, Tacoma Power developed and conducted multiple analysis projects to support and develop its lntegrated Resource Plan (IRP). A draft IRP document is currently near completion. The general purpose of the IRP is to provide long-term power supply, energy efficiency acquisition, and general planning guidance to the utility. IRP related analyses particularly focused on two irnportant planning challenges: 1) a strategy for compliance with the state of Washington's new renewable portfolio standard, Initiative 937, and 2) decision support for a new Bonneville Power Administration contract product choice.

In November 2006 Washington voters passed Initiative 937, instituting a renewable portfolio standard. Staff conducted extensive studies on the potential effects of this initiative on future resource plan requirements. 'This initiative will require Tacoma Power to acquire additional renewable energy resources or equivalent renewable energy credits. Preliminary results of the IRP suggest a strategy focusing on the acquisition of renewable energy credits (as opposed to renewable power supply resources) for compliance with 1-937. The initiative also requires utili.ties to undertake all cost-effective energy conservation. The IRP recommends an energy conservation acquisition target of approximately 5.4 aMW per year, beginning in 201 0.

Tacoma Power's current contract with the Bonneville Power Administration (BPA), which provides more than half of our power supply, ends in September of 201 I. For the upcorrling contract period, Tacoma Power has a choice to either remain a Shaped Block

customer or become a Slice of the System customer. The Shaped Block provides a fixed, known-ahead-of-time quantity of power with heavy load shaping flexibility, whereas the Slice of System would provide a fixed percentage of Bonneville's generation output, dependent largely upon natural inflows and operations on the Federal Columbia River Power System. As part of the IRP process, staff has evaluated both BPA contract options to determine which product will be most beneficial in terms of cost and risk. Although a final decision on BPA contract choice must wait for BPA to define the final product parameters (expected late 2008), the IRP has provided a solid framework and focused direction for making this decision. Analysis of this very important question will continue throughout 2008, well after the expected IRP publication.

TRANSMISSION AND DISTRIBUTION

System Reliability The following table illustrates the reliability performance of the transmission and distribution system during 2007. These year-end reliability statistics are based on a five- year average, from Jan. 1,2003 through Dec. 31,2007.

Tacoma's largest outage in 2007 took place on Jan. 29 and 30 and affected 27,000 customers on the Cowlitz-LaGrande # I I I OkV line, including Collins, Crescent, Frederickson, Knoble, Elk Plain, Graham and Lacamas substations as well as several BPA stations, Pipeline and Elmhurst's Grazzini Substation. Failure of an overhead clamp on the transmission drop into Graham Substation caused a transmission line trip. After the cause was found and isolated, which took about 90 minutes, load restoration began although it was somewhat hampered by cold-load pick up. The first customers were re- energized in less than two hours and the last feeder was restored in less than seven hours.

StatisticlDescription Average number of customers out of service per outage

Average time, in minutes, required to restore service

Average frequency of sustained interruption per customer

This outage alone attributed 25 percent of the year's total affected customers in 2007 and 44 percent of the year's total customer outage n-~inutes.

Customer and System Response Connected 3,168 new services Installed and connected 805 temporary services and meters Handled 352 cases of self cut-ins and suspected meter tampering, resulting in the recovery of $49,000 in revenue

Goal 150 customers or

fewer

70 outage minutes or less average, per

customer 0.95 interruption or fewer average,

per customer

Actual 120 customers

73.73 outage minutes average,

per customer

0.8550 interruption

average, per customer

Responded to: 1 ,I 13 rental light repair requests 20,956 underground locate requests 1,448 trouble calls 162 disconnections at the pole 96 reconnects at the pole 479 service drops/reconnections for customers (electricians, tree services)

Financial Prepared and submitted $21.5 million in bid specifications Continued to provide power transfer service for BPA under the terms and conditions of Tacoma Power's wholesale transfer tariff. Entered into $1.45 million of agreements with three engineering firms to provide drafting and design expertise in the areas of substation, protection, metering, and line design

System Improvements Transmission and Power Plant Substations

Completed the new Narrows Crossing-Potlatch Line Upgrade and held a public dedication event lnstalled new generator, bus, and bank protection at the Mayfield Powerhouse Completed the Cowlitz metering upgrade project interfacing with BPA to comply with NERC requirements Designed and procured equipment for battery and DC system replacement at transmission substations and Generation switchyards Replaced the high-voltage circuit breaker at Cushman #2 switchyard lnstalled revenue metering at Cowlitz Substation on lines interconnecting with BPA Assembled new relay panels for Mayfield Powerhouse upgrade Removed Steam Plant Substation from the electrical system and prepared it for dismantling Rebuilt Tacoma Power's portion of Atlas Substation after a propane explosion caused significant damage Removed the 13,800-volt portion of Pioneer Substation in preparation for Port of Tacoma expansion lnstalled and tested a new communications network to support the plant control system at Mayfield hydroelectric facilities and linked the system to the existing SCADA facilities. Upgraded the microwave repeater at Weathetwax Ridge to improve path reliability to Wynoochee River Project Added fuel sensors and remote access equipment to mountaintop microwave sites to allow tracking of fuel level indications from Tacoma lnstalled new line protection relays on the Madigan-Ft. Lewis central line and on the Madigan-McChord line at Madigan Substation

Distribution Substations lnstalled SEL high-impedance fault detection relays at Crescent Substation Purchased, designed installation and commissioned two 25 MVA transformers for Highland and Hylebos substations

Designed and procured two circuit switchers for high-voltage fuse replacements at University and lbler~lo substations and commissioned Menlo Substation after construction Replaced tap changer controllers at Elk Plain and Cedar substations Replaced substation transformers at Hylebos and Highland substations lnstalled a new circuit switcher and dead-end tower at Menlo Substation Replaced the substation getaway cables at Cedar Substation for three feeders

Underground Projects Completed underground conversions at Dock Street from I I th to 15th Streets, Federal Express development in Fife and Nalley Valley overpasses at South Tacoma Way and Center Street. lnstalled underground cable near 56th Street to upgrade the serviceability of Tacoma Mall Boulevard between 47th and 66th Streets In conjunction with the Tacoma Mall remodel, relocated and rebuilt one-third of the Tacoma Mall power system Installed, terminated and energized more than 90,000 feet of primary underground cable in direct-buried projects and replaced deteriorated and leaking transformers at the time of re-cable Completed 83 residential projects with 2,357 single-family and multi-family lots Completed 43 commercial projects including the IKEA Distribution Center, Federal Express, and the Emerald Queen Casino Corr~pleted the underground feeder conversions for D Street and 70th Avenue lnstalled 81,900 feet of power cable, 394,000 feet of primary cable, 145,100 feet of secondary cable, 1,031 secondary splice boxes, and more than 266 new vaults in the underground system Participated in a joint trench with Click! and installed 4,980 feet of power conduit Replaced 12 mechanical network protector relays with new, microprocessor-based relays Completed Local Improvement District (LID) No. 7723 converting existing Tacoma Power's overhead primary electrical and communication lines to underground lnstalled a duct line through Wright Park in conjunction with a primary power line extension for Metro Parks

Overhead Projects Relocated a half-mile of transmission line to facilitate development of the Port Commerce Center Reconfigured lines at multiple locations throughout Tacoma to accommodate Sound Transit's service from Freighthouse Square to Lakewood Modified transmission lines to facilitate Franciscan Health System's development of a new hospital in Gig Harbor. Replaced and installed approximately 1,237 transmission and distribution poles. lnstalled 18 gang-operated switches and 30 overhead fault indicators as part of Tacoma Power's ongoing feeder sectionalizing program in the South Service area Trimmed trees on more than 400 line miles of transmission and distribution circuits

TPU Communication Infrastructure Negotiated a new telephone service contract for TPU through 2010 Supported Tacoma Water by implementing a new mobile radio system for the Green River Watershed and East Pierce County

Completed a three-year project plan for a new digital microwave system for Tacoma Water Implemented a new voice recording system for critical radio and telephone conversations, centralized for use by all divisions

System Monitoring Installed SCADA at Tideflats and Madigan substations. Built the Substation Automation Training Simulator test rack for the System Integration project Completed telemetering upgrade for BPA's Pierce County mutual utility customers to improve accuracy and responsiveness of interchange energy accounting Supported Generation's implementation of new plant control systems at the Cowlitz Hydroelectric Project

Safety and Work Practices Conducted monthly safety meetings for all Transmission & Distribution employees and provided safety and health training for new T&D employees Purchased automated external defibrillator (AED) units for high-voltage crews Provided high-voltage safety awareness training to non-electrical workers Conducted more than 200 crew safety inspections Worked proactively with legislators to pass HB 1251, which addresses the issue of stolen metal property. In 2007, Tacoma Power spent more than $200,000 to replace copper stolen from its system. Updated the Construction Standards manual and , distributed 137 manuals

Regulatory Requirements Prepared for and underwent the Western Electricity Coordinating Council (WECC) audit of Tacoma Power's compliance with the reliability standards developed by the North American Electric Reliability Council (NERC) and approved by Federal Energy Regulatory Commission (FERC). Through the preparation and audit process, identified 23 individual requirements in the standards with which Tacoma Power might not be in full compliance and submitted 19 self-report forms and mitigation plans to address corr~pliance Began developing an internal compliance program to ensure continual compliance with all standards Implemented a testing plan for every teleprotection circuit on Tacoma Power's system to comply with WECC requirements Met the control performance standards set by the hIERC Certified all system power dispatchers with NERC and WECC Prepared for and underwent a NERC Readiness Evaluation, which evaluates the utility's ability to respond to emergency situations.

Partnerships Sponsored Wast~ington State University's senior project which studied dynamic transmission line ampacity ratings on the LaGrande transmission lines. The team sponsored by Tacoma Power won first place in the event for its presentation and demonstration. Collaborated with Tacoma Water, Click!, Public Works, Puget Sound Energy, Comcast and Qwest on a joint design team for the Broadway Local Improvement District (LID) project to make the best use of the right-of-way and available space

Executed the Planning and Expansion Functional Agreement and the Developmental and Staffing Reliability Functional Agreement with ColumbiaGrid

Technology and Business Process Improvement Implemented the T&D Engineering Sharepoint site for project collaboration and workgroup partnership Released and received responses to a DistributionIOutage Management System Request for Proposal and formed a Selection Advisory Committee, which evaluated the proposals and created a short list Implemented the mobile solution for the pole inspection process Established rental lighting users group and work order instruction manual team to implement the recommendations resulting from the quality action team process Established pole replacement and new employee on-boarding process irr~provement teams to analyze existing processes, develop recommendations and identify next steps Participated in the development of a new customer service cost allocation methodology, which utilizes SAP master and transactional data

Plannillg for the Future Performed research and testing on new System Integration architecture Completed protection guidelines for unit sub-bank protection Built test rack for feeder control modernization project Conducted preliminary engineering for Cowlitz bus sectionalizing project and new St. Paul Substation Continued T&D1s engineering intern program by hiring five interns in 2007 Completed an interconnection study for the Simpson Tacoma Kraft co-generation project Completed a final draft system impact study for 8 MW of peak demand load increase at existing Simpson Tacoma Kraft plant Initiated an impact and facilities upgrade study to accommodate the Port of Tacoma's expansion in the Tideflats Completed a formal joint impact study with BPA to consider a longer period of transfer service (through 2024) for service to the Pierce County public utilities

Employee Relations Created a Core Values intranet site and Between the Lines newsletter, a T&D monthly communicationlinforrnation source

GENERATION . During 2007, the hydroelectric generating resources owned by Tacoma Power were available 99.1 percent of the time excluding maintenance and planned outages. This represents a forced outage rate of 0.9 percent.

Cowlitz River Project

Work continued on implementing the req~~irements of the Cowlitz River Project license, which was issued by the Federal Energy Regulatory Commission in 2003.

Submitted numerous reports to FERC on water flow and quality, fish handling and management, wildlife area management, cultural resources, and overall license implementation Submitted a revised Cultural Resource Management Plan to FERC. Installed fish guidance screen at Cowlitz Falls dam with disappointing results. Further improvements are planned for 2008.

Updated communication systems and ozone water treatment plant, replaced the river pump station emergency generator and transfer switch and partially netted the five-acre rearing lakes at the Cowlitz Trout Hatchery

Constructed new residence at the Salmon Hatchery in preparation of the remodel, which will include a new adult fish handling facility, offices, visitor center, renovated sorting facility, redesigned incubation rooms and water treatment systems, and renovated juvenile raceways

Began engineering on replacement of the secondary separator screens, redesign of the fish handling facility and reconstruction of the lower portion of the fish return system to the river at Mayfield Dam. Signed an option on one riverfront property along the lower Cowlitz River, which is intended to improve fish habitat by protecting it from development Commenced work on the new low-level boat launch near Taidnapam Park, the expansion of Taidnapam Park and extension of the Mossyrock Park boat launch. Completion of the park expansion and new boat launch is expected in 2008. Completed the first 10 miles of the Peterman Hill trail and installed an ADA fishing platform just below the salmon hatchery Continued design and manufacturing work on the Mossyrock Dam turbine and generator rebuild. Installed new plant control system for Mayfield Dam

Nisqually River Project In 2007 the Nisqually River Project maintained its certification as a low-impact hydropower project, allowing the generation to be marketed as green power.

Continued kokanee stocking and evaluation program and angler education program at Alder Lake and conducted kokanee spawning surveys at the lake's tributaries Entered into a cooperative effort with the Pierce County Weed Control Board and numerous other land owners to control knotweed along the Nisqually River, which required more than 200 hours of staff time Continued maintenance and monitoring of the elk forage fields, bluebird and wood duck nest boxes and bat boxes Installed gate and signs to improve access control on wildlife lands Updated the La Grande spillway program Logic Controller and associated computer programming

Cushman Hydroelectric Project Started mediation with the Skokomish Tribe in January to work toward an acceptable and economic license, and to pursue a settlement among all affected parties Initiated discussions and negotiations in August with the federal and state agencies involved in the Cushman license and provided quarterly progress updates to FERC

Worked cooperatively with the Skokomish Tribe and the Mason Conservation District to restore the tidelands on the Nalley Ranch and constructed new boardwalks to allow access to our transmission towers Made preparations for a new flow release valve at Cushman No. 2 dam which will allow the release of 240 cfs into the North Fork Skokomish River in March 2008

.Wynoochee River Project Completed improvements to the plant control system, including a manual mode that allows for increased plant reliability and availability by reducing outage time of the plant control system and auxiliary systems. Manual mode control also provides improvements for emergency intake gate closure and river restoration capabilities.

Engineering and Dam Safety Continued ongoing work to inspect, monitor and improve all of Tacoma Power dams to meet current FERC erlgineering guidelines Awarded contract and began work on construction of the Cushman No. 2 dam right abutment concrete infill, which will ensure the stability of the rock foundation of the arch dam under extreme seismic events Completed extensive, one-time potential failure mode analysis of Wynoochee dam, which revealed no significant issues

Tacoma Power Parks Took 7,569 reservations for individual campsites Installed new electric hookups at all campsites and the paved all roads at Mayfield Lake Park Paved ADA path near boat launch and replaced 100 picnic tables at Mossyrock Park Continued permitting and planning for the expansion of Taidnapam Park, which the Cowlitz license requires Opened new boat launch and completed ADA-accessible fishing platform at the barrier dam Constructed a new refuse transfer station and installed a new firewood processor at Alder Lake Park

Facilities Began construction of the new Administration Building South, a 1.1 0,000-square-foot addition to be connected to the existing Administration Building with a two-story bridge Continued design for the remodel of the remaining spaces in the existing Administration Building, with construction scheduled to start after the ABS is completely occupied in early 2008

CLICK! NETWORK

2007 was a year of revenue and customer growth, system enhancements and improved operational efficiencies, network expansion and success in a challenging regulatory environment for Click! Network, the telecorr~munications section of Tacoma Power.

Revenue and Customer Growth Continued to gain customers in its three commercial product lines: cable television, wholesale data transport and wholesale high-speed Internet service

Increased cable n/ customers to 24,864, 92% of which received digital signals after Click! successfully launched digital simulcast services, whereby both analog and digital signals were offered in preparation for an eventual all-digital environment Added Chicago Superstation WGN, PBS Kids Sprout and Shop NBC to its channel line-up and improved Click! 1, a channel focused on educating customers and promoting new cable services on the network Added free local video-on-demand programming through exclusive arrangements with The Grand Cinema, Tacoma's School of the Arts and Museum of Glass, and offered other free local VOD content to n/ Tacoma and Tacoma Public Utilities Added A&E, CNN and the History Channel video-on-demand Avoided a cable n/ rate increase and grew revenues from slightly under $1 8 million in 2006 to slightly over $20 million in 2007 Focused on improving customer support to the three high-speed Internet service providers: HarborNet, Net-Venture and Advanced Stream by forming a team of service personnel to improve communications between the lSPs and Click! and look for efficiency opportunities At the end of the year, 16,800 residential and business end users were connected to the network through the lSPs Grew wholesale data transport circuits to 322 and met all data connections within prescribed 15 and 30 day installation windows, providing valuable benefits in a competitive environment.

Operational Efficiencies Completed a two-year, four-phased network architecture enhancement project, which created a diverse, routed infrastructure for improved end user experience and future business growth Made redundancy improvements on specific components to ensure reliabili'ty. Converted to a new business system that allows nearly 25,000 customers to pay electronically, helps field staff with work management and provides better reporting Supported the installation of new, high-tech Gateway meters Worked with the Tacoma Power meter group to coordinate installations through the Click! commercial installation work group Assisted Tacoma Water with an automated meter reading pilot project over click!'^ coaxial network from the South Tacoma area to a collection point at the utility Earned a near-perfect rating on the Federal Communication Commission's required Cumulative Leakage Index fly-over test, which measures signal leakage from hundreds of points on the cable network. Results are critical in evaluating whether or not errant signals are leaking from the system.

Employee Development Continued focus on internal communications, employee development and specialized training by the leadership team Each employee received at least one review and development plan, a minimum of eight hours of business and technical training and quarterly newsletters from the general manager with comprehensive updates on progress related to click!'^ strategic plan and other business activities Held quarterly all employee meetings , Cross-functional Click! communications team met regularly throughout the year and

worked on ways to keep the lines of communication open Communication survey results in 2007 showed improvements over 2006

Network Expansion Continued expansion into Pierce County, following a successful franchise negotiation process Completed 90% of the fiber service rings serving neighborhoods in Pierce County North and 11 nodes were certified and active Participated in a comprehensive strategic planning effort related to automated metering information and smart grid initiatives

Regulatory Issues Called upon local and regional allies to assist in a complex FCC set-top box waiver process and received letters of support from local and national leaders, although the effort ultimately was not successful in receiving a waiver

Planning Continued to focus on strategic and tactical planning, tying every project, meeting and communication to seven key elements:

o Incorporate the customer in strategic initiatives o Grow financial strength o Refine operational excellence o Leverage technology to create a competitive advantage o Continuously improve internal and external communications o Enhance positive reputation in our corr~mur~ity o Foster employee development

RETAIL RATES

Tacoma Power did not adjust retail rates in 2007. A revenue requirements study based on the budget developed in 2008 for the 2009-2010 biennium will be completed to determine whether an electric retail rate increase is necessary in 2009.

GATEWAY PROJECT

At year end, more than 9,000 residential meters had been installed Connected more than 150 commercial five-minute interval data meters to the Click! Network telecommunications network Launched a Web site, tpugateway.com, so residential customer with Gateway meters can view their consumption history and see what their load has been for the previous intervals of 30 days, one week, one day and 10 minutes Continued the Pay-As-You-Go beta test, with more than 200 customers at year end. Customers can make payments in advance for electrical service and their account balance is displayed on an in-home device that is updated every hour.

Documents

Tacoma Power Annual 2007 Financial Reportcms.cityoftacoma.org/Finance/Financial_Reports/Annuals/PowerAnn07.… · Financial Analysis of Tacoma Power Net assets may serve over time