A n n u a l R e p o r t Tacoma Public Utilities

Transcription

1 A n n u a l R e p o r t Tacoma Public Utilities Balance

2 Tacoma Public Utilities will proide competitie, enironmentally responsible electric, water and rail serices through teamwork, technology and innoation Year in Reiew We beliee in and are committed to sering our customers, respecting our people, caring for our community and the enironment, achieing excellence, and operating safely. Director s Message 2 Public Utility Board 12 Management 12 Tacoma Power 14 Tacoma Water 18 Auditor s Report 22 Management Analysis - Tacoma Power 23 Management Analysis - Tacoma Water 31 Financial Information 38 Debt Serices Requirements 63

3 Director s Message Our ability to achiee our goals of financial strength, solid business practices and stable rates results from balancing our business objecties with the alues and principles that guide us. With financial stability comes enironmental responsibility. Strong leadership must be balanced with serice to our customers. Improing reliability requires the pursuit of innoation. Tacoma Public Utilities has a long history of achieing balance one that will continue well into the future. In Noember 2007 I was appointed by the Public Utility Board as the new Director and Chief Executie Officer for Tacoma Public Utilities, following a national search. My election to join TPU in 2006 after nearly 30 years of utility industry experience was based on the foundation of stability and financial strength laid down by my predecessors. It is a high honor to be asked to lead an organization that has a history of innoation and sound decision making reflecting its high-quality management team and dedicated and capable workforce. Former Power T+D Manager Gary Armfield has succeeded me as Tacoma Power Superintendent, while we work to further deelop our future leaders. Gary s complementary skills, strong management abilities, and organizational experience will help ensure a smooth transition. The strength of Tacoma Power, Tacoma Water and Tacoma Rail allow us to continue a stable operation while formulating strategies to guide the organization into the future. Looking ahead, economic conditions, enironmental mandates and technological deelopments present both challenges and opportunities for our organization. One of the most significant challenges we face is retaining and recruiting motiated and talented employees. In particular, Tacoma Power faces aggressie conseration and renewable resource acquisition goals. The Energy Independence Act, which Washington oters approed as Initiatie 937 in late 2006, requires us to increase our annual energy conseration saings by more than 400 percent, and increase the amount of renewable energy sources in our portfolio to 15 percent by Power also has opportunities for further deelopment and deployment of its broadband, automated metering and other technologies. Balancing the competing objecties of replacing aging infrastructure and keeping rates low will continue to challenge Tacoma Water. Besides those issues, water quality remains a top priority. We can anticipate stricter Federal requirements for storing and treating our water. Tacoma Rail continues to work closely with the Port of Tacoma to increase economic and operational efficiency in support of the Port s growth objecties. Both Tacoma Power and Tacoma Water continue to enjoy solid bond ratings. Tacoma Power successfully marketed an $82 million refunding issue in February. Bond rating agencies frequently cite our strong management team, prudent financial policies and sound financial performance as reasons for our high ratings. Tacoma Public Utilities continues to enjoy strong goernance and support from the Public Utility Board, and from the community at large. We will continue to sere its customers and owners and act as a drier for economic deelopment in Tacoma and Ta c o m a P u b l i c U T I L I T I E S Bill Gaines became the director of Tacoma Public Utilities in October 2007, after sering as Tacoma Power superintendent for a year. Bill has deeloped an exceptional record of success and accomplishment in the 30 years that he s been in the utility industry. He seres as a board member for seeral regional electric utility industry organizations and sits on the Board of the Tacoma/Pierce County Chamber of Commerce and the Pierce County Economic Deelopment Board. Pierce County. Reliable serice, stable rates, technological adances and outstanding customer serice ensure that we will meet new and existing customer needs. In 2007, we said goodbye to Mark Crisson, a widely recognized leader who sered as Director of Utilities for 15 years when he accepted a position as President and Chief Executie Officer of the American Public Power Association. Tacoma Power, Tacoma Water and Tacoma Rail flourished under his leadership, and I truly appreciate the solid foundation that he built and passed along to me. Bill Gaines, Tacoma Public Utilities Director / Chief Executie Officer Ta c o m a P u b l i c U T I L I T I E S

4 Balance. Stability. Responsibility. The word stability has defined Tacoma Public Utilities since Keeping our finances strong while balancing our responsibility to the enironment, ratepayers and the public hae been a key part of achieing that long-term stability. The result is a history of success we e come to enjoy and quality products and serices our community can be proud of.

5 Balance. Leadership. Serice. Tacoma Public Utilities has achieed excellence in serice through balance between our strong leadership and the character of the workforce. We set the standard for accountability and lead by example. The result is a united, caring and prosperous workforce that takes great pride in its commitment to our customers.

6 Balance. Reliability. Innoation. The reliability of Tacoma Public Utilities systems is based on solid infrastructure built many years ago. Our utilities balance that foundation with today s innoations, seeking adanced technology, processes and equipment. Doing so helps us continue to improe upon the serices our customers depend on while remaining a leader among our peers.

7 Maintaining a steady supply of power and water, working safely and supporting economic reliability in our region are the reasons we exist. To achiee that symmetry, we are adept leaders, committed conserationists, reliable economists and innoatie thinkers. Balance. We thrie on success and alue those who help achiee it. We competitiely seek the goal of proiding top-notch, reliable serice while keeping our costs low and our rates affordable.

8 Management Team Gary Armfield became the Tacoma Power superintendent in 2007 after sering as Transmission and Distribution manager for 20 years. He began his career with Tacoma Public Utilities in He has participated in many strategic initiaties and will continue to lead Tacoma Power through its current strategic planning process and implementation. John Kirner has been superintendent of Tacoma Water since 2004, but began his career with the utility in He has focused on long-term planning for the utility, using technology for greater efficiency and building regional relationships. He is actie in seeral regional water supply organizations. Steen Hatcher has sered as Tacoma Public Utilities Customer Serice manager since He has responsibility for front-line customer serice, meter reading, billing and implementing energy conseration programs for Tacoma Power. Interim Rail Superintendent Alan Hardy* has worked in the Rail industry for more than 34 years. He began his career at Tacoma Rail in 2004 and sered as the road master, and was in charge of the mechanical, construction and maintenance departments before being named deputy superintendent. Deputy Director Robert Mack joined Tacoma Public Utilities in 2007 to lead the organization s legislatie and communications actiities. Mack preiously proided legislatie expertise to Tacoma Public Utilities in his role as a principal in a Tacoma law firm. *Paula Henry sered as Tacoma Rail superintendent in Tacoma Public Utilities management team clockwise from top left: Gary Armfield, Tacoma Power superintendent; John Kirner, Tacoma Water superintendent; Robert Mack, deputy director; Alan Hardy, Tacoma Rail superintendent; Steen Hatcher, Customer Serice manager Public Utility Board Tacoma Public Utilities is goerned by a Public Utility Board, whose fie olunteer members are appointed by the City Council. The Board proides policy guidance and oersight for Tacoma Public Utilities. Certain matters, such as the budget and rates, require City Council as well as Board approal. The Board appoints the director of utilities, Public Utilities chief executie officer, to lead and manage the organization. 1 2 Ta c o m a P u b l i c U T I L I T I E S Tom Hilyard, Vice Chair Tom Hilyard is director of the Pierce County Department of Community Serices. He seres on the board of directors of the Pierce County Reading Foundation and has sered on the boards of the Center for Nonprofit Deelopment, Tacoma Urban League and Bates Technical College. Robert Casey, Chair Attorney Robert Casey is a partner with Eisenhower & Carlson, PLLC, where he sered as managing partner ( ) and is a member of the firm s executie committee. He has sered on the board of directors for the Tacoma-Pierce County Economic Deelopment Board, St. Patrick School Commission, the Master Builders Association and the Tacoma Lawn Tennis Club. Daid Curry Daid Curry is the executie director of the Tacoma Rescue Mission, an author and a public speaker. He is the founder of the Foundation for Grace. He is a member of Rotary and City Club of Tacoma. Laura Fox, Secretary Laura Fox is a commercial real estate sales professional with GVA Kidder Mathews. She is a member of Tacoma Rotary No. 8, the Transportation Club of Tacoma and the Tacoma-Pierce County Chamber of Commerce. Peter Thein Peter Thein is the executie director of the Washington State Transit Association. He is a member of the Transportation Choices Coalition.

9 Tacoma Power Achieing balance in 2007 meant welcoming changes in leadership while staying rooted in the solid business practices that hae led to countless utility successes in the past marked yet another year of improing the infrastructure that ensures Tacoma Power s reliable electric serice. The utility began the process of researching a new outage management system, which will improe reliability een more. Business say, powerful relationships Spirit of serice Strategy paes road for stability Enironmental responsibility continues After sering as Transmission and Distribution manager for nearly 20 years, Gary Armfield had the experience and knowledge needed to take on the role of Tacoma Power superintendent. With a strong leadership team, skilled workforce and deeloping business plan, he will continue to build on a solid foundation that will sere the utility for many years. By building better relationships, Tacoma Power moed closer to a solution for a 30-year problem: relicensing the Cushman Hydroelectric Project. In January, utility representaties began settlement discussions with the Skokomish Tribe a new direction that led to significant progress on key issues. Tacoma Power customers benefitted from solid business decisions this year. Rates did not increase in 2007 and no increase is planned for The utility launched a Pay-As-You-Go pilot program, which allows customers to pre-pay for power. The program reduced the debt owed to the utility by $53,000. Tacoma Power s Click! Network quickly responded to the transition from broadcast teleision signals to digital signals by creating a digital simulcast of all analog signals. It began a series of customer education classes to help cable TV customers understand how the federal legislation, which will go into effect in 2009, impacts them. Deeloping a long-term strategic plan dominated Tacoma Power s priority list in Utility leaders gathered weekly to analyze existing operations, set business priorities and start mapping out a plan for the future. The plan will be completed in early Utility leaders also put their long-term strategic thinking skills to work as they began the process of negotiating new contracts with the Bonneille Power Administration. The existing contracts expire in Tacoma Power will work toward securing new contracts that proide enough resources to meet the demand oer the next 20 years while limiting the financial impact on ratepayers. Washington state oters sent a strong message to utilities in 2006 by passing an initiatie that mandates conseration and renewable energy targets. Tacoma Power responded by participating in the policy deelopment that will shape how and when it will achiee the initiatie s goals. Although the utility will not need to meet its first goals until 2010, employees hae begun deeloping a strategy for doing so. The utility continued its effort to proide green power to its commercial and residential customers by promoting the Eergreen Options program. Tacoma Power employees worked with the Port of Tacoma to explain the benefits of green power, and the port 1 4 Ta c o m a P u b l i c U T I L I T I E S Tacoma Power s leaders responded to staggering retirement projections and a shortage of skilled workers by taking a proactie approach to recruiting and retention. The utility aggressiely recruited electrical engineers from colleges around the nation, while strengthening its one-of-a-kind training program for line, wire and meter electricians. Tacoma Power leadership played a key role in negotiating residential exchange refunds from the Bonneille Power Administration. The utility will receie nearly $13 million in Tacoma Power anticipates that recruiting and retaining line electricians will be a significant challenge in the next few years, so it has started a tailored recruitment program. Utilities are experiencing worker shortages in the trade fields industry wide. Many people will look back at 2007 as a good year for the utility. Tacoma Power generated more electricity than required for its own consumption and was able to sell that power on the wholesale market. This resulted in increased cash reseres that will help the utility keep rates low for the next seeral years. A Tacoma Power eteran of 40 years, Fisheries Technician Gary Gilhuly shows off a salmon that traeled upstream to the Cowlitz Salmon Hatchery, which will go through a complete remodel in 2008 and became the utility s second-largest purchaser. Two Tacoma Power plug-in hybrid electric ehicles hit the roads this year. The highly isible ehicles promote the benefits of plug-in hybrid technology while reducing the utility s carbon footprint. 1 5 Ta c o m a P u b l i c U T I L I T I E S

10 Tacoma Power 2007 Financial Highlights 1 6 Ta c o m a P u b l i c U T I L I T I E S A record of reliability A safe work enironment, competitie pay and good business decisions keep Tacoma Power s employees smiling. Audits by the North American Electric Reliability Corporation (NERC) reealed few flaws in Tacoma Power s system. Power Management worked on its Integrated Resource Plan, which spells out how the utility will meet its resource needs for the next 20 years. Deelopment of the plan included inolement from key stakeholders, such as industrial and residential customers, as well as agency and special interest groups. Click! Network began the final expansion of its telecommunications system in Tacoma Power s north serice area, which helps ensure reliability of the electrical system while bringing in new reenue from cable teleision customers. TACOMA Federal Way Fircrest Uniersity Place Lakewood Tacoma Power Serice Area Fife Innoation abounds The decision to rebuild the two generators at Mossyrock Dam, proided Tacoma Power a unique opportunity to call on new technology to improe efficiency enough to power another 4,500 homes each year. The tidal power technology spotlight shined on Tacoma this year when the Bonneille Power Administration awarded the utility nearly $170,000 in grant funding to study the feasibility of tidal power in the Tacoma Narrows waterway. With the help of Puget Sound Tidal Power LLC, Tacoma Power conducted an in-depth inestigation of tidal currents, tidal turbine technology, permitting and enironmental issues and the economics of tidal power in the Tacoma Narrows. The study reealed that tidal power would not be economically or technologically feasible for a minimum of eight to 10 years. Tacoma Power seres 162,000 customers in the cities of Tacoma, Fircrest, Uniersity Place, portions of Fife, Lakewood, Federal Way, Steilacoom, Fort Lewis, McChord Air Force Base and other parts of Pierce County. Financial Highlights In millions, for the years ended December 31, Total Income $414.2 $407.6 $345.6 $331.2 $327.7 $292.8 $325.2 $329.5 Operating Expenses Income Aailable for Debt Serice $161.2 $150.5 $118.3 $100.8 $80.9 $54.8 $34.2 $64.7 Debt Serice $51.7 $52.2 $53.5 $49.7 $43.7 $43.2 $25.8 $30.8 Debt Serice Coerage 3.12x 2.88x 2.21x 2.03x 1.85x 1.27x 1.33x 2.10x Plant Additions $79.8 $96.6 $69.9 $58.1 $62.8 $40.4 $54.3 $48.2 Number of Customers 165, , , , , , , ,843 Aerage Rates (per kwh) Residential $0.068 $0.068 $0.066 $0.063 $0.061 $0.059 $0.060 $0.045 Commercial $0.069 $0.069 $0.068 $0.066 $0.064 $0.063 $0.064 $0.046 General/Industrial $0.046 $0.045 $0.043 $0.042 $0.043 $0.044 $0.056 $0.040 Sales of Electric Energy (dollars in millions) Residential Commercial General Contract Bulk Others Total Consumption (mwh in millions) Residential Commercial General Contract Others Power Sources (mwh in millions) Nisqually Cushman Cowlitz BPA Others Operating Expenses 007 Hydraulic Power 15,771,265 5% Purchased Power 114,772,828 38% Other Production Expenses 2,864,361 1% Distribution & Transmission 43,603,494 15% Other Operating Expenses 31,515,326 11% Depreciation 43,705,705 15% Administration & Pension 27,688,318 9% Click! Network 16,725,438 6% 1 7 Ta c o m a P u b l i c U T I L I T I E S

11 Tacoma Water Achieing balance in 2007 meant respecting and improing business practices from the past while mapping out the business plan that will lead to success in the future. LWorking through its business plan in 2007 meant analyzing Tacoma Water s operations and planning changes to its asset management and other systems. The utility will pursue the business plan audit recommendations in Realigning leadership roles, preparing for the worst Water quality focus means better serice Business planning now builds stability for future Making history, taking enironmental responsibility When Tacoma Water Superintendent John Kirner separated the utility s Distribution section between engineering and operations, he anticipated that it would lead to more field-staff participation in the diision-wide strategic and business planning, while improing communications through a more manageable span of control. He was right. The new structure has improed Tacoma Water s existing business practices and will help deelop better plans for the future. The utility s leadership receied confirmation of its solid business practices when it receied the Association of Metropolitan Water Association s highest honor: The Platinum Award for Sustained Competitieness Achieement. Tacoma Water receied the award for its long-standing excellence in utility operations and management. Any organization that proides basic life necessities Treating the utility s water supply has become more complex because of changes to the treatment process and increased state and federal requirements. In response, Tacoma Water moed to 24-hour operations at its treatment facility. The change has improed system monitoring and decreased the time it takes to respond to problems. In late summer, Tacoma Water faced a serious issue: yellow water. After an in-depth look at the cause, the water quality team determined that the dissoled minerals iron and manganese became isible after being treated. While this was an aesthetic problem, it was not a health issue. To help assure customers that their water was safe to drink, the utility sent them letters explaining the problem and cause. Planned improements at the Howard Hanson Dam should reduce or eliminate yellow-water problems in future years. Tacoma Water focused heaily on analyzing and updating its business plan this year. The plan integrates the utility s resource and facility needs with the funding and rates necessary to meet those needs. An independent reiew of the business plan reealed a number of areas for possible improement: enhanced performance measurements for the utility, improement of the communication tools in the financial model, better documentation of capital project ealuation and formalization and documentation of Tacoma Water s asset management program. Tacoma Water s management will pursue all recommendations in the coming year. For the first time in nearly a century, Tacoma Water released salmon into the upper Green Rier watershed a milestone in the re-colonization of Pacific salmon in the rier. Salmon hae not had access to the 100 miles of rier and streams in the upper Green Rier since Tacoma Water built its system in The reintroduction of salmon showed Tacoma Water s commitment to its customers and the natural enironment. must prepare itself for potential disaster. In 2007, Tacoma Water conducted two emergency drills to 1 8 Ta c o m a P u b l i c U T I L I T I E S understand the challenges it would face in a crisis. The exercises helped employees and managers identify the utility s strengths and potential weaknesses in an emergency. Seenty eight employees and managers took 200 National Incident Management System training courses from the Federal Emergency Management Agency this year. Proiding high-quality water has been, and will continue to be, Tacoma Water s top priority. Tacoma Water s reputation for great customer serice can be credited to its friendly, approachable employees. Crews work on replacing water main pipes a 20-year project that will ensure reliable serice for many years. 1 9 Ta c o m a P u b l i c U T I L I T I E S

12 Tacoma Water 2007 Financial Highlights A new well, combined with additional storage at Howard Hanson Dam, will help ensure Tacoma Water s ability to meet customer needs for many years to come. Financial Highlights In millions, for the years ended December 31, Total Income $68.1 $66.6 $49.4 $45.4 $50.4 $38.6 $33.0 $37.2 Operating Expenses Income Aailable for Debt Serice $34.1 $34.0 $19.9 $17.4 $24.5 $15.9 $10.4 $16.2 Debt Serice $10.4 $10.4 $8.2 $8.1 $8.3 $4.4 $3.0 $2.8 Debt Serice Coerage 3.27x 3.26x 2.45x 2.16x 4.40x 3.62x 3.44x 5.69x Plant Additions $41.5 $38.0 $73.1 $65.6 $70.2 $49.7 $25.0 $17.7 Number of Customers 96,278 95,103 94,033 93,906 92,740 91,376 89,550 85,273 Resources customers can rely on New ideas tested, innoation implemented Aerage Rates (per 100 cubic feet) Residential $2.861 $2.571 $2.432 $2.131 $1.914 $1.784 $1.645 $1.452 For the first time, Tacoma Water was able to store 20,000 acre-feet of additional water at the Howard Hansen Dam. Not only is summer water storage aluable now, it could be critical if predicted global climate changes result in significantly reduced snow packs in the Green Rier Watershed. Tacoma Water and three other regional utilities commissioned a study this year to understand how global warming could affect future water supply. The results showed that the existing resources will sere customer needs for about 40 years. The utility secured een more water supply when it drilled a new well near the Water Operations Center. The well will sere the summer needs of approximately 5,000 customers. To help ensure more accurate meter reading and better customer serice, Tacoma Water launched an automated meter reading pilot project this year. The meters use Click! Network s fiber optic system to relay real-time water usage information for 450 customers. The pilot project will run through 2008, and will help determine the cost-effectieness of automated meter reading for the entire serice area. Treating water with ozone is a proen treatment world-wide that has now taken a foothold in the United States. Tacoma Water began treating the Green Rier water supply with ozone oer the summer. Ozone makes the water more aesthetically pleasing and improes disinfection of the water supply. Water Sales (dollars in millions) Residential Commercial Special Other Water Consumption (gallons in billions) Residential Commercial Special Other Operating Expenses 007 Administration 6,838,704 15% Distribution 11,989,611 26% Power & Transmission 2,975,534 7% Depreciation 11,363,970 25% 2 0 Ta c o m a P u b l i c U T I L I T I E S Tacoma Water seres 97,000 customers in the cities of Tacoma, Uniersity Place, Fircrest, Federal Way, Puyallup and other parts of Pierce County. TACOMA Uniersity Place Federal Way Fife Puyallup Bonney Lake Tacoma Water Serice Area Wholesale Serice Areas Second Supply Project Partners Palmer Green Rier Watershed Pipelines Production 6,189,263 14% Taxes 2,924,930 6% Other Operating Expenses 3,083,403 7% Contract Resource Obligation 2 1 Ta c o m a P u b l i c U T I L I T I E S

13 Independent Auditor s Report Tacoma Power Management s Discussion and Analysis Chair and Members of the Public Utility Board City of Tacoma Department of Public Utilities, Light and Water Diisions Tacoma, Washington The following discussion and analysis of Tacoma Power s (the Utility) financial performance proides an oeriew of the financial actiities for the years ended December 31, 2007 and This discussion and analysis is designed to assist the reader in focusing on the significant financial issues and actiities 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. 2 2 Ta c o m a P u b l i c U T I L I T I E S We hae audited the accompanying balance sheets of City of Tacoma Department of Public Utilities, Light and Water Diisions as of December 31, 2007 and 2006 and the related statements of reenues, expenses and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Diisions management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, eidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as ealuating the oerall financial statement presentation. We beliee that our audits proide a reasonable basis for our opinion. In our opinion, the financial statements referred to aboe present fairly, in all material respects, the financial position of City of Tacoma Department of Public Utilities, Light and Water Diisions as of December 31, 2007 and 2006 and the results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The management s discussion and analysis preceding the financial statements is not a required part of the basic financial statements but is supplementary information required by the Goernmental Accounting Standards Board. We hae applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. Howeer, we did not audit the information and express no opinion on it. The statistical data and additional supplemental information following the financial statements and notes to the financial statements are also not a required part of the basic financial statements but are supplementary information proided for purposes of additional analysis. We did not audit or perform any other procedures on this information and express no opinion on it Portland, Oregon May 8, 2008 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 comparatie basis for the years ended December 31, 2007 and 2006, include Balance Sheets, Statements of Reenues, 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 Reenues, Expenses and Changes in Net Assets report all of the reenues and expenses during the time periods indicated. The Statements of Cash Flows proide information on cash receipts and disbursements during the year and report changes in cash resulting from operations, inesting and financing actiities. The notes to the financial statements proide additional disclosures that are essential to a full understanding of the data proided 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 Tacoma Power s operating reenues increased $3.3 million or 0.8% from Operating reenues increased $53.3 million or 15.5% in 2006 compared to Utility Plant in Serice increased $40.6 million in 2007 and $89.1 million in Construction work in progress increased $35.2 million in 2007 compared to a decrease of $17.9 million in Oeriew 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 Operating reenues increased $3.3 million during 2007 and operating expenses decreased $3.1 million. For the prior year, operating reenues 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 The following tables highlight Tacoma Power s past three years operating results and megawatt-hours billed. This actiity represents the annual surplus of reenues oer expenses (the change in net assets). Operating Results (in thousands) 07/06 06/05 increase increase Category (Decrease) (Decrease) Operating Reenues $ 400,159 $ 396,872 $ 343,610 $ 3,287 $ 53,262 Operating Expenses 296, , ,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, Ta c o m a P u b l i c U T I L I T I E S

14 Megawatt-Hours Billed (in thousands) 07/06 06/05 increase increase Type of Customer (Decrease) (Decrease) Residential 1,885 1,822 1, Commercial/Industrial 2,890 2,877 2, Public Street/Primary Power Bulk Power 1,982 1,953 1, Total 6,794 6,689 5, Financial Analysis of Tacoma Power Net assets may sere oer 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. Balance Sheet (in thousands) 07/06 06/05 increase increase Description (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, , ,504 23,098 18,444 Total Assets 1,226,912 1,173,010 1,117,018 53,902 55,992 Net Assets: Inested in Capital Assets, Net of Related Debt 389, , ,231 41,027 31,123 Restricted 27,469 25,999 23,824 1,470 2,175 Unrestricted 204, , ,551 42,021 35,396 Total Net Assets 621, , ,606 84,518 68,694 Long-Term Debt 517, , ,212 (26,066) (24,312) Other Liabilities 87,260 91,810 80,200 (4,550) 11,610 Total Liabilities 605, , ,412 (30,616) (12,702) Total Net Assets & Liabilities $ 1,226,912 $ 1,173,010 $1,117,018 $ 53,902 $ 55,992 Operating Reenue (in millions) $ Reenues 2007 Compared to Commercial / Industrial Wholesale / Other Residential Operating reenues totaled $400.2 million in 2007 compared to $396.9 million in 2006, an increase of $3.3 million or 0.8% oer Reenue from sales to residential customers increased $4.1 million or 3.4%. Reenue from sales to commercial and industrial customers increased $1.2 million or 1.1% oer Telecommunications reenue increased $2.1 million oer Residential sales accounted for 34% of total electric sales in Commercial and industrial reenues accounted for 38% of total electric sales in Wholesale power reenues represented 26% of total electric sales in All customer classes experienced relatiely flat sales when compared to 2006 due to the mild weather conditions of Wholesale power sales in 2007 increased $2.1 million or 2.0% compared to The related Kwh increased 29,787,000 or 1.5%. Accrued but unbilled reenues were estimated at $25.2 million as of December 31, 2007 compared to the $25.1 million estimate for yearend This resulted in a ery small increase in reenues earned by December 31, 2007 not yet billed of $0.05 million between 2006 and Other operating reenues increased $0.7 million or 2.1% oer Included in this category is reenue from Click! operations, which increased $2.1 million when compared to the prior year. Cable TV reenues 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 Adantage product (high-speed cable modem serice through internet serice proiders) of $690,495 or 19%. The high-speed cable modem product grew due to increased speeds of existing leels of serice and the addition of new residential and business leels of serice. Other decreases in operating reenues from sources other than electric energy include wheeling reenues down $245,223 or 3.8%, and serice fees and other reenues down $1,151,352 or 17.5% in Ta c o m a P u b l i c U T I L I T I E S 2006 Compared to 2005 Operating reenues totaled $396.9 million in 2006 compared to $343.6 million in 2005, an increase of $53.3 million. Total reenues from sales of electric energy increased $51.3 million, an increase of 16.4% oer 2005, mainly as a result from increased wholesale power reenues of $35.9 million. Reenue from sales to residential customers increased $7.4 million or 6.4%. Reenue from sales to commercial and industrial customers increased $1.7 million or 1.3% oer Residential sales accounted for 34% of total electric sales in 2006, down from 37% in Commercial and industrial reenues accounted for 38% of total electric sales in 2006, compared to 44% in Wholesale power reenues represented 26% of total electric sales in 2006, up from 19% in Wholesale power sales in 2006 increased $35.9 million or 59.5% compared to Total Kwh sales increased 916,138,000 or 88.4%. Hydro generation was lower during 2005, resulting in less energy aailable for sale. Accrued but unbilled reenues were estimated at $25.1 million as of December 31, 2006 compared to the $20.2 million estimate for year-end This resulted in an increase in reenues earned by December 31, 2006 not yet billed of $4.9 million between 2005 and Other operating reenues increased $2 million or 6.4% oer Included in this category is reenue from Click! operations, which 2 5 Ta c o m a P u b l i c U T I L I T I E S

15 increased $1.6 million when compared to the prior year. Cable TV reenues 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 Adantage product (high-speed cable modem serice through internet serice proiders) of $519,000 or 16.7%. The high-speed cable modem product grew due to increased speeds of existing leels of serice and the addition of new residential and business leels of serice. Other miscellaneous Click! reenues, such as equipment rental, increased $244,000 or 38% due to the launching of adanced digital ideo recording receiers allowing customers to record multiple channels and store programming content. Click! Network wholesale broadband reenues showed an increase of $147,000 or 19.5% due to the addition of Gigabit Ethernet serices for large telecommunication proiders. Other increases in operating reenues from sources other than electric energy include wheeling reenues up $292,000 or 4.8%, and serice fees and other reenues up $129,000 or 2% in 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 goernment assessments for $503,000, computer supplies for $167,000, license and maintenance fees for $157,000, adertising expense for $131,000, and trael 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 Tacoma Power experienced widespread damage to its Transmission and Distribution system due to a seere windstorm in December 2006, contributing to the increases in distribution and transmission expenses, for both operations and maintenance expense. Superision and engineering were up $1.4 million, and meter expenses up $763,000 oer Other increases in distribution operations expense for 2006 compared to 2005 were station expense for $596,000, oerhead line expense for $550,000, and load dispatching for $221,000. Fees collected from wiring inspections decreased $359,000 in Ta c o m a P u b l i c U T I L I T I E S 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 Purchased power expenses decreased $2.0 million or 1.7%. Power purchases from Bonneille 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. Administratie and general (A&G) expense decreased $674,975 or 1.7% in 2007 compared to 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 serice diision of $823,374. One additional major change impacting the administratie and general expenses was due to third party claims which impacted insurance expense decreasing it by $0.8 million in Distribution operations expense decreased $2.1 million or 15% in 2007 compared with Tacoma Power did not experience any major storm damage during 2007 which helped keep operation expenses relatiely flat. Superision and engineering are down $1.4 million, and meter expenses are down $766,829 from Other decreases in distribution operations expense for 2007 compared to 2006 were oerhead line expense of $645,329. Transmission operations expense remained constant when compared to 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 oerall reduction in labor and supplies as more effort was spent on maintenance during 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 Click! Network commercial operations expense, comprised of cable TV, high-speed internet, and data transport serices oer fiber, increased $2.2 million or 14.8% from Contract serices expense increased $1.0 million or 10.3%, representing new channel additions, increased programming costs and increased adertising expense. Salaries and wages increased $217,000 or 4.9% from 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%. Depreciation expense increased $1.1 million or 2.6% from 2006 due to the increase in plant in serice actiity in Compared to 2005 Total operating expenses increased $24 million or 8.7% from 2005 totaling $299.7 million in Purchased power expenses increased $12.7 million or 12.2%. Power purchases from Bonneille Power Administration (BPA) increased $5.3 million. Tacoma Power receied $4.7 million in 2005 from BPA as a result of a settlement related to oercharges 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 incentie payments. Administratie and general (A&G) expense increased $4.1 million or 11.8% in 2006 compared to Uncollectible accounts expense increased $1.1 million in Tacoma Power experienced an increase of $970,000 in annual fees billed in 2006 from the Federal 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 conseration 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. Click! Network commercial operations expense, comprised of cable TV, high-speed internet, and data transport serices oer fiber, increased $1.4 million or 10.9% from Contract serices 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 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 oerall customer growth during the past 10 years has been at a relatiely steady rate aeraging between less than 1% and 3% per year. Growth for 2007 was 1.6% when compared to The customer count for 2007 is 165,113 compared to 162,589 in 2006, and compared to 159,180 in Number of Customers (in thousands) Residential Commercial / Industrial Wholesale / Other 2 7 Ta c o m a P u b l i c U T I L I T I E S

16 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 ariances in bulk power sales, which are included in this category. Bulk power sales are affected by precipitation and weather patterns and can ary 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 preious year. Annual streamflows into Tacoma Power s projects were slightly below aerage in 2007 (92% of aerage) compared to well aboe aerage in 2006 (120% of aerage). Megawatt Hours Billed (in millions) 8 7 Commercial / Industrial Total Utility Plant and Plant Additions Tacoma Power has $1.3 billion inested 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 inestment in plant Total Plant 2007 Plant Additions Hydraulic 26% Telecomm 13% Transmission 9% Distribution 34% Work in Progress 6% General 10% Intangible Plant 2% Hydraulic 9% Telecomm 22% Transmission 4% Distribution 46% General 19% Intangible Plant 0% Sources of Power Residential Wholesale / Other Tacoma Power s total resources for power supply to sere its retail and wholesale customers for the last two years are shown in the following graphs. Megawatt Hours Generated/Purchased 2007 Megawatt Hours Generated/Purchased 2006 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 Total Plant 2006 Plant Additions Hydraulic 27% Telecomm 13% Transmission 10% Distribution 34% Work in Progress 4% General 10% Intangible Plant 2% Hydraulic 4% Telecomm 25% Transmission 16% Distribution 39% General 16% Intangible Plant 0% 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. 2 8 Ta c o m a P u b l i c U T I L I T I E S BPA 54% Cowlitz 23% Cushman 6% Nisqually 7% Others 10% BPA 50% Cowlitz 27% Cushman 6% Nisqually 8% Others 9% The following table summarizes Tacoma Power s capital assets, net of accumulated depreciation, for the years ended December 31, 2007 through Capital Assets, Net of Accumulated Depreciation (in thousands) Net Utility Plant increase increase (Decrease) (Decrease) Intangible Plant $ 27,346 $ 28,129 $ 28,595 $ (783) $ (466) Hydroelectric Plant 205, , ,379 (782) (1,186) Transmission Facilities 61,457 62,269 51,016 (812) 11,253 Distribution Facilities 236, , ,776 4,938 25,708 General Plant 76,671 54,942 62,184 21,729 (7,242) Telecommunications Plant 101, ,020 97,608 (23,357) 27,412 Construction 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, Ta c o m a P u b l i c U T I L I T I E S

17 Tacoma Water Management s Discussion and Analysis Debt Administration At December 31, 2007 Tacoma Power had outstanding reenue bonds of $544.8 million, a decrease of $27.4 million from Tacoma Power issued $81.1 million of Electric System Refunding bonds in March At December 31, 2006 Tacoma Power had outstanding reenue bonds of $572.2 million, a decrease of $22.4 million from No new bonds were issued during All bonds are insured and rated Aa 3 by Moody s Inestors Serice, 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 Serice Coerage Tacoma Power is required by its bond coenants to maintain a times debt serice coerage of In 2007, principal and interest were coered 3.12 times, in 2006 they were coered 2.88 times, and in 2005 they were coered 2.21 times. Summary The management of Tacoma Public Utilities is responsible for preparing the information in this annual report. 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 proide additional financial information. The financial statements hae been audited by Moss Adams, LLP. We hae made aailable to them all pertinent information necessary to complete the audit. Management considers and takes appropriate action on audit recommendations. Management has established and maintains a system of controls which includes organizational, administratie and accounting processes. These controls proide reasonable assurance that records and reports are complete and reliable, that assets are used appropriately and that business transactions are carried out as authorized. As financial management of Tacoma Water (the Utility), we offer readers of these financial statements this narratie oeriew and analysis of the financial actiities of Tacoma Water for the years ended December 31, 2007 and This discussion and analysis is designed to assist the reader in focusing on the significant financial issues, proide an oeriew of the Utility s financial actiities, and identify changes in the Utility s financial position. We encourage readers to consider the information presented here in conjunction with the financial statements and 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 comparatie basis for the years ended December 31, 2007 and 2006 include Balance Sheets, Statements of Reenues, 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 Reenues, Expenses and Changes in Net Assets report all of the reenues and expenses during the time periods indicated. The Statements of Cash Flows proide information on cash receipts and disbursements during the year and report changes in cash resulting from operating, inesting and financing actiities. The notes to the financial statements proide additional disclosures that are essential to a full understanding of the data proided 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 The assets of Tacoma Water exceeded its liabilities at the close of 2007 by $391.8 million and 2006 by $374.9 million. Of these amounts, $9.3 million in 2007 and $7.7 million in 2006 may be used to meet Tacoma Water s ongoing obligation to citizens and creditors. Tacoma Water s total net assets increased $16.9 million in 2007 and $29.3 million in The 2007 increase is attributed to resources from tap fees and donated assets by contractors. Priate contractors donated $3.5 million in 2007 and $4.0 million in Tacoma Water s operating reenues equaled $52.7 million, an increase of $1.9 million or 3.6% in 2007 compared to 2006 operating reenues of $50.9 million. In 2007, Tacoma Water s net utility plant of $568.5 million increased by $25.7 million or 4.7% oer 2006 s $542.8 million balance. Tacoma Water s total Long Term Debt decreased by $3.8 million during the current fiscal year and decreased $3.7 million during The key factor in the current fiscal year decrease was the payment to Muckleshoot Indian Tribe per agreement for $6.0 million. William A. Gaines Director of Utilities Chief Executie Officer Robert K. Biles Finance Director Oeriew of the Financial Statements This discussion and analysis is intended to sere as an introduction to Tacoma Water s basic financial statements. Tacoma Water s basic financial statements are comprised of two components: 1) financial statements, 2) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themseles. 3 0 Ta c o m a P u b l i c U T I L I T I E S For 2007, Tacoma Water is reporting operating income of $7.4 million compared to $6.7 million in 2006 and $4.2 million in Tacoma Water s 2007 operating reenue increased 3.6% ersus 2.8% increase in operating expenses. Net income for 2007 is $16.9 million compared to $29.3 million in 2006 and $26.7 million in Of the net income, capital contributions for 2007 were $12.8 million compared to $30.5 million in 2006 and $24.5 million in Included in capital contributions are donated fixed assets; donated fixed assets were $3.5 million in 2007, $4.5 million in 2006 and $6.6 million in This declining trend in capital contributions is due to a decline in new connections for water serices. There were 942 new meter serices for 2007 compared to 1,552 new meter serices in 2006 and 1,177 new meter serices for Ta c o m a P u b l i c U T I L I T I E S

18 The following table highlights Tacoma Water s operating results for the years The analysis below highlights the changes in Tacoma Water s net assets for the years 2007, 2006 and Operating Results (in thousands) /06 06/05 increase increase (Decrease) (Decrease) Operating Reenues $ 52,726 $ 50,873 $ 43,051 $ 1,853 $ 7,822 Operating Expenses 45,365 44,129 38,831 1,236 5,298 Operating Income 7,361 6,744 4, ,524 Tacoma Water s Net Assets (in thousands) Description /06 06/05 increase increase (Decrease) (Decrease) Net Utility Plant $ 568,493 $ 542,838 $ 515,241 $ 25,655 $ 27,597 Non-Utility Property, Net Current and Other Assets 123, , ,155 (10,428) (8,939) Total Assets 692, , ,944 15,227 18,658 Net Non-Operating Income 1,278 (3,602) 1,975 4,880 (5,577) Capital Contributions 12,801 30,462 24,454 (17,661) 6,008 Transfers Out (4,563) (4,302) (3,952) (261) (350) Change in Net Assets ( Net Income) $ 16,877 $ 29,302 $ 26,697 $ (12,425) $ 2,605 Net Assets Net assets may sere oer time as a useful indicator of Tacoma Water s financial position. Assets exceeded liabilities by $391.8 million for 2007, $374.9 million for 2006 and $345.6 million for These changes in net assets representing net income resulted in an increase of $16.9 million or 4.5% for the 2007/2006 change and $29.3 million or 8.5% for the 2006/2005 change. Changes in all years are largely due to capital contributions. Capital contributions for 2007 were $9.3 million for system deelopment charges and $3.5 million for donated fixed assets entirely from priate contracts. In the year 2006, capital contributions were $25.9 million for system deelopment charges and $4.5 million for donated fixed assets from which $4.0 million were priate contracts. In the year 2005, capital contributions were $17.9 million in cash contributions from customers and system deelopment charges and $6.6 million for donated fixed assets from which $6.3 million were priate contracts. The inestment in capital assets net of related debt or Tacoma Water s equity inestment in capital assets for 2007 is $360.0 million, an increase of $17.0 million or 5.0% oer Inestment in capital assets for 2006 was $343.0 million, an increase of $18.6 million or 5.8% oer 2005 s $324.4 million. Net Assets: Inested in Capital Assets, Net of Related Debt 360, , ,418 17,016 18,602 Restricted 21,246 24,189 15,580 (2,943) 8,609 Unrestricted 10,481 7,677 5,586 2,804 2,091 Total Net Assets 391, , ,584 16,877 29,302 Long-Term Liabilities 227, , ,760 (3,750) 6,306 Current and Other Liabilities 73,750 71,650 88,600 2,100 (16,950) Total Liabilities 301, , ,360 (1,650) (10,644) Total Net Assets & Liabilities $ 692,829 $ 677,602 $ 658,944 $ 15,227 $ 18,658 Reenues Water sales increased by $1.5 million, or 3.2% in 2007 to $48.4 million from $46.9 million in Water sales increased by $5.2 million or 12.6% in 2006 from 2005 s $41.6 million. $1.4 million of the increase was from residential and domestic customers and is due to an aerage 7.5% water rate increase oer 2006 rates approed by the Public Utility Board and City Council that took effect January 1, Another notable increase was the 21.6% increase in the Simpson Tacoma Kraft Company. Restricted net assets for 2007 were $21.2 million, a decrease of $2.9 million or 12.2% from Restricted net assets for 2006 were $24.2 million, reflecting an increase of $8.6 million or 55.3% from the 2005 restricted net asset amount of $15.6 million. This large increase between 2006 and 2005 was due to an increase in system deelopment charges. Total operating reenues increased by $1.9 million in 2007 to $52.7 million from 2006 and of the total increase, 81.7% was due to the sale of water. There was an increase of $7.8 million or 18.2% to $50.9 million in 2006 from $43.1 million in Ta c o m a P u b l i c U T I L I T I E S In 2007, unrestricted net assets were $10.5 million an increase of $2.8 million or 36.5% oer Unrestricted net assets for 2006 were $7.7 million, representing an increase of $2.1 million or 37.4% from 2005 s $5.6 million amount. The following table highlights Tacoma Water s water sales by type of customer for 2007, 2006 and Water Sales (in thousands) Type of Customer /06 06/05 increase increase (Decrease) (Decrease) Residential and Domestic $ 32,646 $ 31,218 $ 27,611 $ 1,428 $ 3,607 Commercial and Industrial 8,298 7,751 7, Special Rate Simpson Tacoma 3,918 3,222 3, (289) Municipal Other Public Buildings and Grounds 1,644 1,596 1, Sale to Other Utilities 1,434 1,641 1,600 (207) 41 Unbilled Reenue 37 1,067 - (1,030) 1,067 Total $ 48,373 $ 46,858 $ 41,623 $ 1,515 $ 5, Ta c o m a P u b l i c U T I L I T I E S

19 The largest portion of Tacoma Water s reenues was from sales to residential customers. Approximately 67.5% of the water sales were from residential customers in 2007, 66.6% for 2006 and 66.3% in Residential sales are followed by commercial and industrial sales at 17.2% for 2007, 16.5% for 2006 and 17.2% for Special rate sales to Simpson Tacoma Kraft represent 8.1% of total sales for 2007, 6.9% in 2006 and 8.4% in Customers Oer the last fie years, the oerall number of customers has remained steady, growing at a rate of approximately 1.0% a year. In 2007, of it s 96,278 customers, 93.6% or 90,092 of Tacoma Water s customers were residential, 5.7% or 5,494 were commercial and industrial, and 0.7% or 692 were other rate classes combined. Below is a graphical representation of the number of customers by customer type for the last 5 years. Number of Customers Expenses 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, Residential Commercial / Industrial Other Operating expenses in 2007 increased $1.2 million or 2.8% compared to Operating expenses in 2006 increased $5.3 million or 13.6% compared to In 2007, the largest increase was administration and general with $1.1 million. The following table highlights Tacoma Water s operating expenses for Operating Expenses (in thousands) Category /06 06/05 increase increase (Decrease) (Decrease) Source of Supply $ 3,396 $ 3,300 $ 2,672 $ 96 $ 628 Water Treatment 2,793 2,558 1, Total Production Expense 6,189 5,858 4, ,332 Power Pumping Expense Transmission and Storage Expense 2,615 2,704 2,414 (89) 290 Distribution Expense 11,990 11,720 10, ,428 Customer Accounting and Serice 3,083 2,853 2, (34) Taxes 2,925 3,407 2,995 (482) 412 Depreciation 11,364 11,557 9,386 (193) 2,171 Administratie and General 6,838 5,777 5,896 1,065 (119) Total Operating Expenses $ 45,365 $ 44,129 $ 38,630 $ 1,240 $ 5,499 The following is a graphical representation of Tacoma Water s operating expenses for Production 14% Power Pumping 1% Transmission & Storage 6% Distribution 26% Consumer Serices 7% Taxes 6% Depreciation 25% Administration & General 15% The other 2007 significant increases were in production expense by $0.3 million or 5.7% and distribution expense for $0.3 million or 2.3%. In 2006, production expense increased by $1.1 million or 24.0% and distribution expense increased by $1.4 million or 13.9%. The increases are in line with the growth that Pierce County is experiencing in the eastern portion of the Tacoma Water Serice area, coupled with the Regional Water Second Supply and Green Rier Treatment Plant both becoming operational during There was a decrease in depreciation expense of $0.2 million in This decrease is largely due to fully depreciated assets such as Telemetry & Instrumentation and Water Distribution Center. In 2006, depreciation increased by $2.2 million or 23.1%. 3 4 Ta c o m a P u b l i c U T I L I T I E S 3 5 Ta c o m a P u b l i c U T I L I T I E S

20 Water Users Tacoma Water generates the majority of its reenues from its residential customer base. Residential customers used 11.4 million CCF (100 cubic feet) or approximately 46.1% of the 24.7 million CCF of water consumed by the Utility s customers in 2007; Simpson Tacoma Kraft Company used approximately 29.5% or 7.3 million CCF; commercial and industrial customers used 16.3% or 4.0 million CCF. The remaining 8.1% or 2.0 million CCF was consumed by other customers. Annual Water Usage (in millions of CCF) Residential The following graph proides a isual presentation of the allocation of Tacoma Water s capital inestment at December 31, Total Net Plant Intangible 6% Source of Supply 8% Pumping 1% Treatment 3% Transmission 27% Distribution 43% General 1% Work in Progress 11% Simpson Commercial / Industrial Other Debt Administration At the year-end of 2007, Tacoma Water had outstanding reenue bond obligations of $198.5 million (net of unamortized bond premiums and deferred loss on refunding), a decrease of $5.9 million or 2.9% from 2006 amounts. At the year-end of 2006, Tacoma Water had outstanding reenue bond obligations of $204.5 million (net of unamortized bond discounts, premiums, and deferred loss on refunding), a decrease of $5.5 million or 2.6% from 2005 amounts. New Reenue Bonds of $46.6 million were issued during Tacoma Water did not issue new bonds in 2006 or All outstanding bonds are insured and rated Aaa by Moody s Inestors Serice and AAA by Standard & Poor s. In 2005, Moody s Inestors Serice and Standard & Poor s assigned their underlying ratings of Aa3 and AA-, respectiely. Tacoma Water is required by its bond coenants to maintain a times debt serice coerage of In 2007, principal and interest were coered 3.27 times, in 2006, were coered 3.26 times, and in 2005, were coered 2.45 times. Capital Assets Utility Plant Tacoma Water has inested in a broad range of utility assets. At the end of 2007, Tacoma Water had $568.5 million in net capital assets, an increase of $25.7 million or 4.7% from At the end of 2006, Tacoma Water had $542.8 million in net capital assets, an increase of $27.6 million or 5.4% from In the current year, the ozone treatment system came on line and work on the Howard Hanson Dam additional storage project was substantially completed. During 2007, $4.5 million in additional Washington State Public Works Board Loans were issued. Of the $4.5 million, $3.5 million was for the Green Rier Water Treatment Plant Ozonation Facility. At the end of 2007, Tacoma Water had outstanding state loan balances of $26.7 million, an increase of $3.1 million from the 2006 balance of $23.6 million. Additional information on Tacoma Water s long-term debt can be found in Note 4 of the financial statements and in the supplementary Statistical Data. 3 6 Ta c o m a P u b l i c U T I L I T I E S From year to year, the majority of Tacoma Water s capital is inested in distribution facilities, which make up 43.3% or $245.6 million for 2007; $234.4 million or 43.2% for 2006; and $224.7 million or 43.6% for In addition, Tacoma Water added 10.5 miles of main and replaced miles in The following table summarizes Tacoma Water s capital assets, net of accumulated depreciation, for the years ended December 31, 2007, 2006 and Capital Assets, Net of Accumulated Depreciation (in thousands) Net Utility Plant /06 06/05 increase increase (Decrease) (Decrease) Intangible Asset $ 34,795 $ 34,803 $ 33,047 $ (8) $ 1,756 Source of Supply Plant 42,996 44,146 44,880 (1,150) (734) Pumping Plant 5,267 5,390 3,389 (123) 2,001 Water Treatment Plant 15,415 15,995 15,282 (580) 713 Transmission Plant 153, , ,516 (2,148) 2,471 Distribution Plant 245, , ,743 11,250 9,655 General Plant 5,313 6,260 6,734 (947) (474) Construction Work In Progress 65,220 45,859 33,650 19,361 12,209 Total $ 568,493 $ 542,838 $ 515,241 $ 25,655 $ 27,597 Summary The management of Tacoma Public Utilities is responsible for preparing the information in this annual report. We prepared the financial statements according to generally accepted accounting principles and they fairly portray Tacoma Water s financial position and operational results. The financial statements hae been audited by Moss Adams, LLP. We hae made aailable to them all pertinent information necessary to complete the audit. Management considers and takes appropriate action on audit recommendations. Management has established and maintains a system of internal controls, which includes organizational, administratie and accounting processes. These controls proide reasonable assurance that records and reports are complete and reliable, that assets are used appropriately and that business transactions are carried out as authorized. William A. Gaines Director of Utilities Chief Executie Officer Robert K. Biles Finance Director 3 7 Ta c o m a P u b l i c U T I L I T I E S

21 Tacoma Power and Tacoma Water 2007 Financial Reports Balance Sheets for the years ended December 31, 2007 Power 006 Power 2007 Water 006 Water Assets Utility Plant In Serice, at Original Cost $ 1,267,075,248 $ 1,226,434,269 $ 619,239,712 $ 604,236,187 Less - Accumulated Depreciation (558,104,768) (518,396,746) (115,966,258) (107,257,290) Total 708,970, ,037, ,273, ,978,897 Construction Work in Progress 85,712,913 50,497,498 65,219,561 45,858,722 Net Utility Plant 794,683, ,535, ,493, ,837,619 Non-Utility Property, Net 182,370 5,527, , ,159 Special Funds Construction Funds 88,405, ,312,550 20,251,838 38,628,149 Debt Serice Funds 38,410,963 37,941,588 1,928,744 1,953,944 Special Bond Resere Funds 26,592,231 26,544,122 5,851,669 5,827,637 Wynoochee Resere Funds 2,182,840 2,062,951 Other - Inestments 64,373,190 57,778,820 Notes & Contracts Receiables - SDC & Other 6,109,432 7,148,079 Total Special Funds 155,591, ,861,211 98,514, ,336,629 Other Assets Conseration Loans Receiable 2,738,736 3,321,600 Current Assets Operating Funds Cash and Equity in Pooled Inestments 201,724, ,356,484 11,229,062 7,217,131 Accounts Receiable 32,345,233 34,904,990 5,073,383 7,100,819 (Net of Allowance for Doubtful Accounts of $1,273,461 in 2007 and $1,073,664 in 2006 for Power and $300,964 in 2007 and $100,644 in 2006 for Water) Accrued Unbilled Reenue 25,178,338 25,128,962 3,174,427 3,137,314 Materials and Supplies 6,913,078 6,909,430 2,349,055 2,327,643 Receiables from Affiliates 1,459,771 1,125,808 95, ,132 Other 3,738,333 1,637,903 1,229, ,720 Total Current Assets 271,358, ,063,577 23,150,235 20,256,759 Net Assets and Liabilities for the years ended December 31, 2007 Power 006 Power 2007 Water 006 Water Net Assets Inested in Capital Assets, Net of Related Debt $ 389,381,457 $ 348,353,812 $ 360,036,128 $ 343,020,451 Restricted for: Regional Water Supply System Construction Fund 683,368 2,338,798 Water Assurance & System Deelopment Charges 19,519,178 20,776,056 Wynoochee Resere Funds 2,182,840 2,062,951 Debt Serice Funds 25,286,044 23,936,519 1,044,075 1,073,926 Unrestricted 204,967, ,947,211 10,480,568 7,676,585 Total Net Assets 621,817, ,300, ,763, ,885,816 Long-Term Debt, Net of Current Maturities Reenue Bonds 517,834, ,899, ,487, ,766,112 Public Works Trust Fund Loans 22,913,176 20,052,520 Drinking Water State Reoling Fund Loan 2,093,684 2,254,737 Muckleshoot Agreements 9,821,357 9,993,033 Total Long-Term Debt 517,834, ,899, ,315, ,066,402 Current Liabilitiies Current Portion of Long-Term Debt 25,275,000 24,180,000 7,995,814 13,031,226 Taxes and Other Payables 15,814,275 19,702,671 2,897,401 5,043,065 Purchased Power Payable 14,244,959 14,115,888 Salaries, Wages and Fringe Benefits Payable 1,553,477 1,202, , ,802 Interest Payable 13,124,919 14,005, , ,018 Accrued Compensated Absences 7,638,402 7,609,119 2,039,218 1,926,357 Customers Deposits 3,141,238 2,992, , ,080 Payables to Affiliates 654, , ,145 Total Current Liabilities 81,446,692 84,266,940 15,169,687 21,418,548 Deferred Credits Deferred Reenue 3,872,160 7,354,657 Deferred Reenue - SDC & Other 49,858,546 41,974,619 Customer Adances for Construction 6,471,205 6,039,233 Other Deferred Credits 1,940, ,094 2,250,458 2,217,279 Total Deferred Credits 5,812,899 7,542,751 58,580,209 50,231,131 Total Liabilities 605,093, ,709, ,065, ,716,081 Total Net Assets and Liabilities $ 1,226,911,856 $ 1,173,009,727 $ 692,829,003 $ 677,601, Ta c o m a P u b l i c U T I L I T I E S Deferred Charges Unamortized Debt Expense 2,355,638 2,668,780 2,036,570 2,216,069 Other Deferred Charges 1,204 32,188 86, ,662 Total Deferred Charges 2,356,842 2,700,968 2,123,339 2,622,731 Total Assets $ 1,226,911,856 $ 1,173,009,727 $ 692,829,003 $ 677,601,897 The accompanying notes are an integral part of these financial statements. 3 9 Ta c o m a P u b l i c U T I L I T I E S

22 Statements of Reenues, Expenses and Changes in Net Assets Net Assets and Liabilities for the years ended December 31, 2007 Power 006 Power 2007 Water 006 Water Statements of Cash Flows for the years ended December 31, 2007 Power 006 Power 2007 Water 006 Water Operating Reenues $ 400,158,895 $ 396,872,077 $ 52,726,210 $ 50,873,034 Operating Expenses Operations: Purchased and Interchanged Power 114,772, ,727,975 Generation 6,688,760 7,717,463 Transmission 17,163,734 17,234,402 Distribution 12,144,805 14,239,756 Other 8,097,483 7,981,258 14,965,145 14,677,766 Maintenance 23,377,460 24,336,641 6,189,263 5,857,813 Telecommunications Expense 16,725,438 14,572,399 Administratie and General 38,412,511 39,087,486 9,922,107 8,629,589 Depreciation 43,705,705 42,600,065 11,363,970 11,556,821 Other Taxes 15,558,011 15,233,370 2,924,930 3,407,187 Total Operating Expenses 296,646, ,730,815 45,365,415 44,129,176 Cash Flows from Operating Actiities Cash from Customers $ 402,669,276 $ 387,077,336 $ 54,716,533 $ 47,273,683 Cash Paid to Suppliers (169,465,060) (161,403,115) (15,175,318) (11,755,386) Cash Paid to Employees (73,132,721) (73,124,455) (17,563,426) (15,927,222) Taxes Paid (15,816,388) (15,577,146) (3,352,669) (3,297,911) Conseration Loans 582, ,434 Net Cash From Operating Actiities 144,837, ,636,054 18,625,120 16,293,164 Cash Flows from Non-Capital Financing Actiities Transfer Out for Gross Earnings Tax (25,034,239) (24,378,937) (4,359,041) (4,182,061) Transfer to Fleet Serices Fund (224,710) (178,031) Transfer to Family Need Fund (450,000) (450,000) Transfer to Other Funds (203,616) (120,213) Net Cash From Non-Capital Financing Actiities (25,708,949) (25,006,968) (4,562,657) (4,302,274) 4 0 Ta c o m a P u b l i c U T I L I T I E S Net Operating Income 103,512,160 97,141,262 7,360,795 6,743,858 Non-Operating Reenues (Expenses) Interest Income 14,127,012 9,745,123 5,255,881 4,603,137 Contribution to Family Need (450,000) (450,000) Gain from Disposition of Property 4,200,000 Other 1,754,339 2,842, , ,154 Interest on Long-Term Debt (22,955,214) (23,454,964) (8,523,445) (8,419,692) Amortization of Debt Premium, Discount, Expense and Loss on Refunding 274,567 80,830 39,040 16,244 Gain on Sale of Utility Plant 1,467,378 Total Non-Operating Reenues (Expenses) (5,781,918) (11,236,051) 1,278,156 (3,602,157) Net Income Before Capital Contributions and Transfers 97,730,242 85,905,211 8,638,951 3,141,701 Capital Contributions Cash 12,046,164 7,345,821 9,308,102 25,943,727 Donated Fixed Assets 3,493,105 4,519,061 Transfers City of Tacoma Gross Earnings Tax (25,034,239) (24,378,937) (4,359,041) (4,182,061) Transfers to Other Funds (224,710) (178,031) (203,616) (120,213) Change in Net Assets (Net Income) 84,517,457 68,694,064 16,877,501 29,302,215 Total Net Assets - Beginning of Year 537,300, ,606, ,885, ,583,601 Total Net Assets - End of Year $ 621,817,950 $ 537,300,493 $ 391,763,317 $ 374,885,816 The accompanying notes are an integral part of these financial statements. Cash Flows from Capital and Related Financing Actiities Capital Expenditures (77,135,026) (75,593,291) (32,065,004) (32,471,881) Proceeds from Sale of Plant 7,350,497 Proceeds from PWTF Pre-Construction Loan 4,500,000 3,400,000 Proceeds from Issuance of Long-Term Debt 81,130,000 Debt Issuance Costs (547,587) Principal Payments on Long-Term Debt (24,180,000) (22,420,000) (13,067,485) (6,627,337) Payments for Early Extinguishment of Debt (84,320,000) Premium, Discount and Net Refunding 3,535,068 Interest Paid (27,092,554) (25,819,630) (9,979,433) (10,134,156) System Deelopment Charges, CIAC and Other 12,046,164 7,345,821 18,695,827 50,924,240 Grants Receied Sale of Property 4,200,000 Change in Deferred Credits (1,729,852) 134,259 Net Cash From Capital and Related Financing Actiities (110,943,290) (116,352,841) (27,716,095) 5,090,866 Cash Flows from Inesting Actiities Interest Receied 14,127,012 9,745,123 5,255,881 4,603,137 Other Net Non-Operating Reenues and Expenses 1,754,339 2,842, , ,154 Change in Deferred Charges 30,984 (12,637) 319, ,064 Net Cash From Inesting Actiities 15,912,335 12,575,446 5,882,454 4,925,355 Change in Cash & Equity in Pooled Inestments 24,098,067 8,851,691 (7,771,178) 22,007,111 Cash and Equity in Pooled Inestments at January 1 333,217, ,366, ,405,681 89,398,570 Cash and Equity in Pooled Inestments at December 31 $ 357,315,762 $ 333,217,695 $ 103,634,503 $ 111,405, Ta c o m a P u b l i c U T I L I T I E S

23 Statements of Cash Flows (continued) for the years ended December 31, 2007 Power 006 Power 2007 Water 006 Water Tacoma Power and Tacoma Water Notes to Financial Statements for the years ended December 31, 2007 and 2006 Reconciliation of Net Operating Income to Net Cash from Operating Actiities Net Operating Income $ 103,512,160 $ 97,141,262 $ 7,360,795 $ 6,743,858 Note 1 Summary of Significant Accounting Policies Adjustments to reconcile net operating income to net cash from operating actiities: Depreciation 43,705,705 42,600,065 11,363,970 11,556,821 Cash from changes in operating assets and liabilities: Accounts Receiable and Unbilled Reenue 2,510,381 (9,794,741) 1,990,323 (3,599,351) Conseration Loans Receiable 582, ,434 Receiables from Affiliates (333,963) 552, ,109 (436,429) Materials and Supplies and Other (2,104,078) (1,052,226) (21,412) (298,088) Other Current Assets (1,016,565) 5,224 Taxes and Other Payables (3,888,396) 5,391,781 (427,739) 109,276 Purchased Power Payable 129,071 2,456,683 Salaries, Wages and Fringe Benefits Payable 350,773 (36,199) 67,919 21,668 Accrued Compensated Absences 29, , ,861 86,605 Customers Deposits 148, ,010 11,639 19,905 Accrued Expenses and Contracts Payable (1,717,925) 2,419,456 Payables to Affiliates 195,742 (600,661) 735,145 (335,781) Total Adjustments 41,325,811 40,494,792 11,264,325 9,549,306 Net Cash From Operating Actiities $ 144,837,971 $ 137,636,054 $ 18,625,120 $ 16,293,164 Reconciliation of Cash and Equity in Pooled Inestments to Balance Sheet: Cash and Equity in Pooled Inestments in Special Funds $ 155,591,635 $ 170,861,211 $ 92,405,441 $ 104,188,550 Cash and Equity in Pooled Inestments in Operating Funds 201,724, ,356,484 11,229,062 7,217,131 Cash and Equity in Pooled Inestments at December 31 $ 357,315,762 $ 333,217,695 $ 103,634,503 $ 111,405,681 The accompanying notes are an integral part of these financial statements. Operations of Tacoma Power and Tacoma Water. The Light and Water Diisions, doing business as Tacoma Power and Tacoma Water (Tacoma Power and Tacoma Water), are blended component units 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 goerned by a fie-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 approal. Tacoma Power owns and operates the City s electrical generation and distribution facilities and telecommunication infrastructure. Tacoma Power seres an aerage of 165,000 retail customers and has 798 employees. Tacoma Power is organized into fie business units: Generation, Power Management, Transmission and Distribution, Click! Network and Energy Serices. 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 serices, schedules and dispatches Diision-owned generation and contract power supplies, and performs power trading and risk management actiities. Reenues and the cost of electric power purchases ary from year to year depending on the electric wholesale power market, which is affected by seeral factors including the aailability 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, reenue metering facilities and all oerhead transmission and distribution systems. Electricity use by retail customers aries from year to year primarily because of weather conditions, customer growth, the economy in Tacoma Power s serice area, conseration efforts, appliance efficiency and other technology. Click! 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, proides retail cable TV and wholesale high-speed Internet serices to residential and business customers, and data transport serices to retail customers. Energy Serices plans and deliers energy serices, including conseration, technical assistance and payment options for customers and ensures safe electrical installations. Energy Serices ensures accurate communications between Tacoma Power and its retail customers. Tacoma Water owns and operates the City s Water System which includes a surface water supply source (the Watershed); seeral extensie well fields; a water transmission system consisting of seeral pipelines, water treatment and quality facilities; arious reseroirs, standpipes and pump stations; and an extensie distribution system. Tacoma Water supplies water to approximately 96,278 customers and has approximately 268 employees. Tacoma Water s serice area includes the City of Tacoma and urbanized areas of Pierce and South King Counties. Water serice outside the City limits is proided under franchises granted by both Pierce and King Counties. Tacoma Water is organized functionally as Water Supply, Water Quality, Water Distribution, Second Supply Project and Water Resource Planning. Water Supply designs, constructs, maintains and operates the water supply structures, wells, pumping stations, reseroirs, standpipes, transmission mains and associated property. Water use by retail customers aries from year to year primarily because of weather conditions, customer growth, economic conditions in Tacoma Water s serice area and conseration efforts. 4 2 Ta c o m a P u b l i c U T I L I T I E S Water Quality operates and maintains the Green Rier Watershed and Headworks, operates and maintains water treatment equipment, and monitors water quality. Water Distribution engineers, designs, constructs, operates and maintains all distribution system facilities including mains, hydrants, ales, serice connections and metering. Water Resource Planning proides planning for cost-effectie resources to meet future needs, including water supply projects and conseration actiities. Resource Planning manages watershed lands to proide for fisheries and wildlife populations, manages real estate property acquisitions and dispositions, and acquires and grants right-of-way easements. 4 3 Ta c o m a P u b l i c U T I L I T I E S

24 Second Supply Project was deeloped to meet Tacoma Water s own future water supply requirements as well as to increase regional supply. The Second Supply Project Pipeline is approximately 34 miles long. Its route follows a more northerly route than Tacoma Water s existing Pipeline No. 1, traersing south King County and thereby making water aailable to the urbanized areas north and east of the City. Tacoma Water owns and operates the Second Supply Project. (See Note 5, Second Supply Project Agreement.) Shared Serices. Tacoma Power and Tacoma Water receie certain serices from other departments and agencies of the City, including those normally considered to be general and administratie. Tacoma Power and Tacoma Water are charged for serices receied 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 and Tacoma Water 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 Goernmental Accounting Standards Board (GASB) applicable to goernmental entities that use proprietary fund accounting and the Financial Accounting Standards Board (FASB) that do not conflict with rules issued by the GASB. Reenues are recognized when earned, and costs and expenses are recognized when incurred. The general inestment pool operates like a demand deposit account in that all City departments, including Tacoma Power and Tacoma Water, 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 equialents. The City of Tacoma Inestment Policy permits inestments in certificates of deposit, obligations of the U.S. Treasury, agencies and instrumentalities, bankers acceptances and repurchase and reerse repurchase agreements. Repurchase agreements are settled deliered ersus payment. The market alue of collateralized securities must exceed the dollar amount of the repurchase agreement by 2% oer the term of the agreement. Currently, the City participates only in oernight agreements. The underlying collateral must be an inestment instrument that the City is authorized to purchase. Tacoma Power s and Tacoma Water s cash in banks held by the City Treasurer at December 31, 2007 and 2006 are entirely coered by federal depository insurance or on deposit with financial institutions recognized as qualified public depositories of the State of Washington under RCW Chapter Ta c o m a P u b l i c U T I L I T I E S Tacoma Power follows the proisions 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 recoering or expects to recoer 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 Diision of Audits of the State Auditor s Office. Tacoma Water generally follows the uniform system of accounts prescribed by the National Association of Regulatory Utility Commissioners and the Diision of Audits of the State Auditor s Office. Tacoma Power and Tacoma Water are 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 lies of related operating assets placed in serice at the beginning of the year. The composite depreciation rates for Tacoma Power for 2007 and 2006 were 3.93% and 3.89%, respectiely. The composite depreciation rates for Tacoma Water for 2007 and 2006 were both 2.20%. The original cost of property together with remoal cost, less salage, is charged to accumulated depreciation at such time as property is retired and remoed from serice. Management has ealuated 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. For Tacoma Power, net interest income in 2007 and 2006 of $2.2 million and $1.8 million, respectiely, was capitalized. Interest capitalized for Tacoma Water in 2007 and 2006 was $1,460,639 and $2,161,196, respectiely. Asset Valuation. Tacoma Power and Tacoma Water periodically reiew the carrying amount of their long-lied assets for impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the eent the carrying amount of such asset is not deemed recoerable, the asset is adjusted to its estimated fair alue. Fair alue is generally determined based on discounted future cash flow. Special Funds. In accordance with bond resolutions, agreements and laws, separate restricted funds hae been established. These funds, which consist of cash and inestments, are restricted for specific uses, including capital additions, debt serice and extraordinary operations and maintenance costs. Cash and Equity in Pooled Inestments and Inestments. Tacoma Power s and Tacoma Water s cash and inestments are deposited with the City Treasurer in the City s general inestment pool for the purpose of maximizing interest earnings through pooled inestment actiities. Cash and equity in pooled inestments in the City s general inestment pool are reported at fair alue and changes in unrealized gains and losses are recorded in the Statements of Reenues, Expenses and Changes in Net Assets. Interest earned on such pooled inestments is allocated to the participating funds based on each fund s aerage daily cash balance during the allocation period. Materials and Supplies. Materials and supplies consist primarily of items for construction and maintenance of utility plant and are alued at the lower of aerage cost or market. Accounts Receiable. Accounts receiable are recorded when inoices 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 and Tacoma Water s historical losses, reiew of specific problem accounts, the existing economic conditions and the financial stability of its customers. Generally, Tacoma Power and Tacoma Water consider accounts receiable 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 oer 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 acation 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 leae 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 acation and sick leae. Employees who worked for the City prior to the change could choose to stay with the original policy or opt to conert to the new policy. The amount of PTO earned is based on years of serice. 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 leae at the rate of one day per month with no maximum accumulation specified. In the case of termination, the employee receies 25% of the alue at retirement or death or 10% upon termination for any other reason. The accrued liability is computed at 10%, which is considered the amount ested. Sick leae pay is recorded as an expense in the year earned. Capital Contributions. Tacoma Power and Tacoma Water adopted Goernmental Accounting Standards Board (GASB) Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, which requires capital grants and contributions to be reported as capital contribution reenue. Tacoma Power receied capital contributions totaling $12.0 million and $7.3 million for the fiscal years ended December 31, 2007 and 2006, respectiely. Tacoma Water recognized capital contributions totaling $12,801,207 and $30,462,788 for the fiscal years ended December 31, 2007 and 2006, respectiely. Of the total capital contributions, donated capital contributions were $3,493,105 for 2007 and $4,519,061 for Capital contributions include new serice connections and system deelopment charges. System deelopment charges are collected on all new serices prior to installation to ensure required new source, transmission and storage facilities needed to meet new demands are funded. The charge was deeloped using a cost-of-serice approach and includes a share of historical plant inestment and projected future outlays that will increase system capacity. Because the funds collected for this charge can only be used for system expansion projects, the balance is reflected as restricted in Tacoma Water s net assets. System deelopment charges on uncompleted projects are recorded in deferred credits. Reenues. Serice rates are authorized by the Tacoma City Council. Reenues are recognized as earned and include an estimate of reenue earned but not billed to customers as of year-end. Tacoma Power reenues are deried primarily from the sale and transmission of electricity. Reenue from power sales and power transmission is recognized when power is deliered to and receied by the customer. 4 5 Ta c o m a P u b l i c U T I L I T I E S

25 Tacoma Water reenues are deried primarily from the sale and transmission of water. Reenue from water sales is recognized when the water is deliered to and receied by the customer. Tacoma Water receies contract resource obligation reenue and debt serice payments from our partners in the Second Supply Project Agreement which are recorded as operating reenue. Such reenues amounted to $3.1 million and $2.9 million for 2007 and 2006, respectiely. Note 5 describes the terms of the agreement. Family Need. In 2003, a new program called Family Need was instituted to assist households when aailable federal energy assistance funds hae 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 receied from customers, employees, and Tacoma Power. The Family Need program is administered by the Metropolitan Deelopment Council and Pierce County Community Serices 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 and Tacoma Water used estimates in determining reported unbilled reenues, 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 and Tacoma Water are subject to certain business risks that could hae a material impact on future operations and financial performance. These risks include water conditions, weather and natural disaster-related disruptions, collectie bargaining labor disputes, fish and other endangered species act issues, Enironmental Protection Agency regulations, federal goernment regulations or orders concerning the operation, maintenance, and/or licensing of hydroelectric facilities and the deregulation of the electrical utility industry. A summary of the balances and changes in utility plant for Tacoma Water follows: Balance additions Retirements Transfers & Balance Dec 31, 2006 A adjustments Dec 31, 2007 Intangible Plant $ 34,840,646 $ 5,992,131 $ (6,000,000) $ - $ 34,832,777 Source of Supply Plant 52,757,593 11, ,769,381 Pumping Plant 7,340,138 61, ,401,229 Water Treatment Plant 19,588, , ,705,303 Transmission Facilities 180,719, , ,512,933 Distribution Facilities 287,713,768 14,890,294 (886,714) - 301,717,348 General Plant 21,276, ,841 - (203,615) 21,300,741 Total Water Plant In Serice 604,236,187 22,093,854 (6,886,714) (203,615) 619,239,712 Less Accumulated Depreciation 107,257,290 11,363,970 (884,091) (1,770,911) 115,966, ,978,897 10,729,884 (6,002,623) 1,567, ,273,454 Construction Work In Progress 45,858,722 19,360, ,219,561 Net Utility Plant $ 542,837,619 $ 30,090,723 $ (6,002,623) $ 1,567,296 $ 568,493,015 Note 3 Inestments. Tacoma Power s inestments are held by the Tacoma City Treasurer (Refer to Note 1). The inestments held by the Tacoma City Treasurer outside of the general inestment pool at December 31, 2007 and 2006 were as follows: Inestments at December 31, 2007 Net Assets. Net assets consist of the following components: Inested 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 improement 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 aailable for use. Inestment Type carrying Value Weighted Aerage % of (Fair Value) maturity (in years) Portfolio Repurchase Agreements $ 8,761, % Commercial Paper 10,570, % Total Inestments $ 19,331, % Inestments at December 31, Ta c o m a P u b l i c U T I L I T I E S Reclassifications. Changes hae been made to prior year account classifications as needed to conform to the current year presentation format. Note 2 Utility Plant. A summary of the balances and changes in utility plant for Tacoma Power follows: balance additions Retirements Transfers & Balance Dec 31, 2006 A adjustments Dec 31, 2007 Intangible Plant $ 31,239,755 $ 77,984 $ (776) $ 1 $ 31,316,964 Hydraulic Production Plant 347,209,490 3,903, ,112,539 Transmission Plant 125,600,402 1,898,990 (1,563,066) - 125,936,326 Distribution Plant 421,234,507 19,946,781 (1,335,695) - 439,845,593 Regional Transmission - 1,073, ,073,221 General Plant 131,662,114 8,279,068 (778,497) (224,767) 138,937,918 Telecommunications Plant 169,488,001 9,421,980 (57,294) - 178,852,687 Total Utility Plant In Serice 1,226,434,269 44,601,073 (3,735,328) (224,766) 1,267,075,248 Less Accumulated Depreciation 518,396,746 43,705,705 (4,836,029) 838, ,104, ,037, ,368 1,100,701 (1,063,112) 708,970,480 Construction Work In Progress 50,497,498 35,215, ,712,913 Net Utility Plant $ 758,535,021 $ 36,110,783 $ 1,100,701 $ (1,063,112) $ 794,683,393 Inestment Type carrying Value Weighted Aerage % of (Fair Value) maturity (in years) Portfolio Repurchase Agreements $ 8,761, % Commercial Paper 10,570, % Total Inestments $ 19,332, % The weighted aerage maturity in years calculation assumes that all inestments are held until maturity. Interest rate risk is the risk that changes in market interest rates will adersely affect the fair alue of an inestment. Generally, longer term inestments hae greater exposure to changes in market interest rates. These inestments are held in accordance with the Bond Indenture of Trust for the purpose of bond reseres. The repurchase agreements are fixed oer the life of the contract. 4 7 Ta c o m a P u b l i c U T I L I T I E S

26 Note 4 Special Funds. Cash and equity in pooled inestments and inestments included in Tacoma Power s and Tacoma Water s Special Funds consist of: Tacoma Power Cash and Equity in Pooled Inestments Construction Funds $ 88,405,601 $ 104,312,550 Debt Serice Funds 38,410,963 37,941,588 Wynoochee Resere 2,182,840 2,062,951 Special Bond Resere 7,260,409 7,212,095 Total 136,259, ,529,184 Inestments Special Bond Resere 19,331,822 19,332,027 Total $ 155,591,635 $ 170,861,211 Tacoma Water Cash and Equity in Pooled Inestments Construction Funds $ 20,251,838 $ 38,628,149 Other 72,153,603 65,560,401 Total $ 92,405,441 $ 104,188,550 Tacoma Power s long-term debt at December 31 consists of the following payable from reenues of Tacoma Power: 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 $ - $ 84,320, Reenue Bonds, with an interest rate of 5.5% due in one payment of $13,500,000 in ,500,000 13,500, A 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 ,560,000 59,950, B Refunding Bonds, with an interest rate of 5.5%, due in yearly installments of $11,780,000 to $19,345,000 through ,800,000 90,580, Reenue Bonds, with interest rates ranging from 5.0% to 5.25%, due in yearly installments of $990,000 to $20,690,000 through ,005,000 74,160, A Reenue Bonds, with interest rates ranging from 3.5% to 4.3%, due in yearly installments of $100,000 to $30,530,000 through ,480,000 93,480, B Refunding Bonds, with interest rates ranging from 3.0% to 5.0%, due in yearly installments of $855,000 to $30,100,000 through ,370, ,225,000 Note 5 Long-Term Debt. Tacoma Power s long-term debt actiity for the year ended December 31, 2007 was as follows: 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 ,130,000 - beginning additions Reductions Ending Due Within balance B balance one Year Reenue Bonds $ 572,215,000 $ 81,130,000 $ (108,500,000) $ 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 (12,633,520) (2,358,417) 1,592,982 (13,398,955) - Total Long-Term Debt $ 568,079,543 $ 84,133,684 $ (109,103,912) $ 543,109,315 $ 25,275, ,845, ,215,000 Unamortized premium 12,097,245 9,103,939 Unamortized discount (433,975) (605,876) Unamortized loss on refundings (13,398,955) (12,633,520) Current portion (25,275,000) (24,180,000) $ 517,834,315 $ 543,899,543 Scheduled principal maturities on the bonds and interest payments are as follows: Principal Interest 2008 $ 25,275,000 $ 25,585, $ 26,590,000 $ 24,229, $ 30,820,000 $ 22,726, $ 32,475,000 $ 21,066, $ 34,235,000 $ 19,308, $ 202,305,000 $ 67,017, $ 193,145,000 $ 16,181, Ta c o m a P u b l i c U T I L I T I E S The fair alue of Tacoma Power s long-term debt is based on quoted market prices. The fair market alue of long-term debt at December 31, 2007 and 2006 was $581,297,330 and $650,122,531, respectiely. In March 2007, Tacoma Power issued $81,130,000 of Electric System Reenue Refunding Bonds, 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 adance 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 adance refunding 4 9 Ta c o m a P u b l i c U T I L I T I E S

27 to reduce its annual debt serice requirements by approximately $750,000 and to obtain an economic gain (difference between the present alues of the old and new debt serice payments) of $5.2 million. As of December 31, 2007, the following outstanding bonds were considered defeased: Issue amount 1964 Refunding Bonds $ 2,995, Light & Power Bonds 4,875, Light & Power Bonds 13,315, Light & Power Bonds - Series A & B 11,045, Light & Power Bonds 6,945, Light & Power Bonds 16,350,000 Electric System Refunding Reenue Bonds, 1992A 1,135,000 Electric System Refunding Reenue Bonds, 1992B 1,905,000 Electric System Refunding Reenue Bonds, ,920,000 Electric System Refunding Bonds, ,545,000 Electric System Reenue & Refunding Bonds, ,000,000 Electric System Reenue Refunding Bonds, ,270,000 $ 208,300,000 Tacoma Water s long-term liability actiity for the year ended December 31, 2007 was as follows: beginning additions Reductions Ending Due Within balance B balance one Year Reenue Bonds $ 202,020,000 $ - $ (5,710,000) $ 196,310,000 $ 6,060,000 Plus: Unamortized Premium 4,038,308 - (392,360) 3,645,948 - Less: Unamortized Discount (301) Less: Unamortized Loss on Refundings (1,581,895) - 173,520 (1,408,375) - Net Reenue Bonds 204,476,112 - (5,928,539) 198,547,573 6,060,000 Washington State Public Works Board Loans 21,212,695 4,500,000 (1,224,757) 24,487,938 1,574,762 Drinking Water State Reoling Fund Loan 2,415,788 - (161,052) 2,254, ,052 Total Long-Term Debt $ 228,104,595 $ 4,500,000 $ (7,314,348) $ 225,290,247 $ 7,795,814 Muckleshoot Liability (See Note 11) 15,993,033 28,324 (6,000,000) 10,021, ,000 Total Long-Term Liabilities $ 244,097,628 $ 4,528,324 $ (13,314,348) $ 235,311,604 $ 7,995,814 Tacoma Water s long-term debt at December 31 consists of the following payable from reenues of Tacoma Water: Senior Lien Bonds These refunded bonds constitute a contingent liability of Tacoma Power only to the extent that cash and inestments presently in the control of the refunding trustees are not sufficient to meet debt serice requirements, and are therefore excluded from the financial statements because the likelihood of additional funding requirements is considered remote. Tacoma Power s reenue bonds are secured by the net reenue of Tacoma Power and all cash and inestments held in the bond and construction funds. The bonds are also subject to certain financial and non-financial coenants Water System Reenue Bonds, with an interest rate of 4.75%, due in one payment in $ - $ 525, Water System Reenue Bonds, with interest rates ranging from 4.0% to 5.25%, due in yearly installments ranging from $380,000 to $4,795,000 through ,840,000 31,210,000 Conseration Project Reenue Bonds. On February 23, 1994, Tacoma Power and the Bonneille Power Administration (BPA) entered into a Conseration Project Agreement. The Conseration Project was created to deelop cost-effectie conseration resources within the serice area of Tacoma Power. In the agreement, BPA is to acquire the conseration energy saings generated by the Conseration Project in return for paying all annual project costs. Regional Water Supply System Reenue Bonds, 2002, with interest rates ranging from 3.5% to 5.50%, due in yearly installments ranging from $800,000 to $1,150,000 and term bonds due in installments ranging from $1,125,000 to $7,400,000 through ,300,000 81,300,000 In December 1994 to finance the Project, Tacoma Power and BPA joined in the sale of $22.2 million of Conseration Project Reenue Bonds for which BPA is obligated to pay debt serice. 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 Conseration Project Agreement conseration reenues that do not include any reenue deried from the electric system of Tacoma Power Water System Reenue and Refunding Bonds, with interest rates ranging from 3.00% to 5.25%, due in yearly installments ranging from $1,725,000 to $3,505,000 through ,695,000 43,455,000 The 2003 Bonds are special limited obligations of Tacoma Power payable from the reenues deried from the Conseration Project and were issued to proide 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 serice. Scheduled principal maturities on the bonds and interest payments are as follows: 2005 Water System Reenue and Refunding Bonds, with interest rates ranging from 3.5% to 5.0%, serial bonds due in yearly installments ranging from $1,665,000 to $4,760,000 through ,475,000 45,530, ,310, ,020, Ta c o m a P u b l i c U T I L I T I E S Principal interest 2008 $ 1,380,000 $ 485, $ 1,445,000 $ 416, $ 1,505,000 $ 358, $ 1,555,000 $ 298, $ 1,625,000 $ 247, $ 3,495,000 $ 248,450 Unamortized premium 3,645,948 4,038,308 Unamortized discount - (301) Unamortized loss on refunding (1,408,375) (1,581,895) Less Current Portion of Reenue Bond Debt (6,060,000) (5,710,000) Long-term Portion of Reenue Bond Debt $ 192,487,573 $ 198,766, Ta c o m a P u b l i c U T I L I T I E S

28 Scheduled principal maturities on the bonds and interest payments are as follows: Scheduled principal maturities of junior lien debt and interest payments are as follows: Year Principal interest 2008 $ 6,060,000 $ 9,483, $ 5,880,000 $ 9,261, $ 6,075,000 $ 9,038, $ 6,280,000 $ 8,804, $ 6,550,000 $ 8,526, $ 38,190,000 $ 37,624, $ 53,020,000 $ 26,947, $ 39,505,000 $ 13,898, $ 34,750,000 $ 5,340,000 Year Principal interest 2008 $ 1,735,814 $ 168, $ 1,735,814 $ 166, $ 1,735,814 $ 155, $ 1,735,814 $ 143, $ 1,735,814 $ 131, $ 8,679,048 $ 477, $ 7,877,854 $ 180, $ 1,506,702 $ 18, Ta c o m a P u b l i c U T I L I T I E S The fair alue of Tacoma Water s long-term debt is based on quoted market prices. The fair market alue of the Water System Reenue Bonds at December 31, 2007 and 2006 was $122,489,133 and $126,982,014, respectiely. The fair market alue of the Regional Water Supply System Reenue Bonds at December 31, 2007 and 2006 was $83,407,035 and $85,086,795, respectiely. The carrying amounts of the Washington State Public Works Board Loans and Drinking Water State Reoling Fund Loan approximate the fair alue since such loans are exclusie and hae no market. Tacoma Water s reenue bonds are secured by the net reenue of Tacoma Water and all cash and inestments held in the bond funds and construction funds. The bonds are also subject to certain financial and non-financial coenants. Junior Lien Debt Washington State Public Works Board Loans Public Works Trust Fund construction loan, with interest of ½% per annum, due in yearly installments of $533,333 through $ 7,466,667 $ 7,500, Public Works Trust Fund pre-construction loan, with interest of ½% per annum, due in yearly installments of $52,632 through , , Public Works Trust Fund construction loan, with interest of ½% per annum, due in yearly installments of $531,250 through ,968,750 8,000, Public Works Trust Fund pre-construction loan, with interest of ½% per annum, due in yearly installments of $54,180 through , , Public Works Trust Fund pre-construction loan, with interest of ½% per annum, due in yearly installments of $53,363 through , , Public Works Trust Fund pre-construction loan, with interest of ½% per annum, due in yearly installments of $350,000 from 2008 through ,650,000 3,150,00 Drinking Water State Reoling Fund Loan 2002 construction loan, with interest of 2½% per annum, due in yearly installments of $161,053 through ,254,736 2,415,788 Subtotal Junior Lien Debt 26,742,674 23,628,483 Less current portion of debt (1,735,814) (1,321,226) Long-Term portion of Junior Lien Debt $ 25,006,860 $ 22,307,257 Note 6 Purchased Power. Tacoma Power purchases electric power and energy from the Bonneille Power Administration (BPA) under a long-term contract expiring in The contract consists of a base rate per kwh, and certain cost-recoery adjustment clauses can be inoked under particular circumstances. The power receied under this contract aeraged approximately 428,399 and 400,450 kilowatts per hour for 2007 and 2006, respectiely. Charges for the BPA purchased power are approximately $99 million and $101 million for 2007 and 2006, respectiely, and are based on the total amount of energy deliered 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 inestment in such facilities, these contracts proide that Tacoma Power pay certain minimum amounts (which are based at least in part on the debt serice 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 Reenues, Expenses and Changes in Net Assets. Information for the year ended December 31, 2007 pertaining to these contracts is summarized as follows: Tacoma Power s Grand Coulee Project Grant County Current Share of Hydro Authority PUD - Priest Rapids Energy Output 255,303 mwh 393,036 mwh Megawatt Capacity 66 mw 63 mw Operating Costs $ 1,237,627 $ 11,791,871 Incentie 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 Noember 1, 2005 pending the issuance of the new permanent license expected in mid The terms of the new contracts are for the term of the new FERC license, which is expected to be years. Tacoma Power s purchase quantity and costs are uncertain and will diminish with time as Grant County PUD loads increase. Total expenses for payments made under the aboe contracts for the years 2007 and 2006 were $3,536,158 and $5,986,129, respectiely, for Grand Coulee Project Hydro Authority and $11,791,871 and $7,624,448, respectiely, for Grant County PUD - Priest Rapids. In addition, Tacoma Power will be required to pay its proportionate share of the ariable 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 ariations. Fluctuations in annual precipitation leels 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 ary 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 actiities are limited to purchasing power to meet natie loads, optimizing the alue of Tacoma Power s power supply portfolio and selling energy during times of surplus. 5 3 Ta c o m a P u b l i c U T I L I T I E S

29 In October 2002, the Emerging Issues Task Force (EITF) reached a final consensus in EITF Issue Accounting for Contracts in Energy Trading and Risk Management Actiities (EITF 02-03) eliminating mark to market accounting on non-deriatie energy contracts, including transportation contracts. The energy contracts are fixed-price contracts. Tacoma Power records applicable energy contracts using accrual accounting and recognizes the reenue or expense at the time of contract performance, settlement or termination. Tacoma Power does not engage in deriaties trading, deriaties market making or other speculatie actiities. 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 actiities are reflected in the Statements of Reenues, Expenses and Changes in Net Assets. the interest earned on the capital replacement resere to Tacoma Water s replacement fund. The amounts refunded in 2007 and 2006 were $160,813 and $116,658, respectiely, which was used to offset the corresponding year s fleet expenses. Note 10 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, Tacoma Water and other diisions within the Department for certain losses arising from personal and property damage claims by third parties. The major risks to Tacoma Power and Tacoma Water 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 alues, rates may be impacted. A breakdown of the net interchange in kilowatt-hours is as follows: Interchange Summary 007 (in kwh) 006 (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 (17,672,008) Net Interchange (1,918,581,381) (2,135,324,008) Note 7 Second Supply Project Agreement. Four Washington municipalities are the Participants in the Second Supply Project under the terms of the Second Supply Project Agreement, which defines their rights and obligations with regard to the Second Supply Project. Tacoma Water has a 15/36 Participant Share and each of the City of Kent, Coington Water District and Lakehaen Utility District has a 7/36 Participant Share in the Second Supply Project. Each Participant has contractual rights under the Second Supply Project Agreement (i) to use an undiided share of the Project equal to its project capacity share and to use aailable excess project capacity; (ii) to schedule for deliery and receie its Participant Share of Second Diersion Water at its points of deliery; (iii) to schedule for deliery and receie additional water at its points of deliery; and (i) to its Participant Share of storage. Each Participant has a contractual obligation (i) to receie Second Diersion Water and additional water scheduled for deliery and deliered to it and (ii) to pay its Participant Share of Project Costs, including but not limited to Fixed and Variable O & M Costs, Initial Project Construction Costs and Capital Expenditures. Kent and Coington, in the Repayment Agreement, pledge to pay Tacoma Water a defined share of the principal and interest debt serice on the Regional Water Supply System Bonds. The term of the Second Supply Project Agreement extends through the operating life of the Second Supply Project including all renewals and replacements thereof and additions thereto. The Second Supply Project Agreement proides that all obligations incurred during its term will surie its termination or expiration and will surie until satisfied. Tacoma Power and Tacoma Water are required to make payments to the Self-Insurance Fund to coer claims incurred by Tacoma Power and Tacoma Water and administratie expenses of the Fund. Tacoma Power s premium payments totaled $480,000 in 2007 and $1,460,000 in Tacoma Water s premium payments totaled $120,000 in both 2007 and Liabilities hae been accrued in the Self-Insurance Fund for enironmental remediation costs expected to be incurred. No proision has been recorded for enironmental remediation costs that could result from changes in laws or other circumstances currently not contemplated. Assets in the Self-Insurance 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 diisions in accordance with GASB 10. Management beliees Tacoma Power s and Tacoma Water s inestments in the Self-Insurance Fund are more than adequate to settle all its known or estimated claims. Performance and fidelity bonds coering all employees are proided in amounts up to $1 million (subject to a $50,000 deductible per occurrence). The insurance policies presently in effect include coerage on the Department s buildings and fleet ehicles as well as general liability and public official s liability. The current insurance policies hae deductibles or self insured retentions of $100,000 for buildings and ehicles and $1,000,000 for general comprehensie liability. The public officials policy has a $200,000 deductible for employee practices liability and $100,000 deductible for all other issues. The general comprehensie liability policies proide $20 million of coerage. The City has a policy to coer extraordinary worker s compensation claims with a limit of $25 million ($1 million deductible). Note 11 Tacoma Employes Retirement System Fund (TERS). Employees of Tacoma Power and Tacoma Water are coered by the Tacoma Employes Retirement System (the System), an actuarially funded system operated by the City. The following information is proided on a city-wide basis. 1. The System is a local single employer defined benefit pension retirement plan coering City of Tacoma employees and administered in accordance with Chapter 41.28, Reised Code of Washington, and Chapter 1.30 of the Tacoma City Code. There are 1,792 retirees and beneficiaries of deceased retirees currently receiing benefits and 317 ested terminated employees entitled to future benefits but not yet receiing them. Currently, 3,000 actie members are part of the System. 5 4 Ta c o m a P u b l i c U T I L I T I E S Note 8 Significant Customer. Contracted sales to Simpson Tacoma Kraft Company (Simpson) accounted for 8.1% and 6.9% of Tacoma Water s total water sales in 2007 and 2006, respectiely. Tacoma Water has contracted with Simpson to supply certain quantities of water under a take-or-pay arrangement at a specified rate through the year Note 9 Fleet Serices Fund. The Department of Public Utilities has established a Fleet Serices Fund to perform scheduled maintenance, repair and replacement of Department ehicles and related equipment. Transfers of ehicles and equipment from Tacoma Power and Tacoma Water to the Fleet Serices Fund are accounted for as transfers. Tacoma Power and Tacoma Water pay the Fleet Serices Fund for its use of the ehicles and equipment to coer fleet operating expenses. Payments made by Tacoma Power in 2007 and 2006 were $7,163,762 and $6,644,630, respectiely. Payments made by Tacoma Water in 2007 and 2006 were $3,121,601 and $2,724,258, respectiely. Fleet Serices management makes an annual assessment of the capital replacement resere balance for appropriate funding leels. It is the Fund s policy to maintain the Fund s maximum balance at a leel that will proide adequate purchasing power for a three-year cycle and to return any excess funds to customers based on their scheduled monthly payments. The solency of the Replacement Fund also allowed Fleet Serices to return a portion of interest earned on fund inestments for the year to their customers. In 2007 and 2006, Fleet Serices 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, respectiely, which was used to offset the corresponding year s fleet expenses. In 2007 and 2006, Fleet Serices returned 75% of 2. Basis of Accounting: The financial statements are prepared using the accrual basis of accounting. Employee and employer contributions are recognized as reenues in the period in which employee serices are performed, and expenses are recorded when the corresponding liabilities are incurred, regardless of when payment is made. 3. Inestments: Equity securities, fixed income securities, real estate, and short-term inestments are all reported at fair market alue. Fair market alue was determined by our custodian bank using standard industry practices and was erified by our performance consultant. No inestment in any one corporation or organization exceeded 5% of net assets aailable 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: Coered 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. 6. Pursuant to GASB Statement No. 27, the note disclosures aboe emphasize the City of Tacoma disclosures and detailed information presented in an independent Comprehensie 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 Ta c o m a P u b l i c U T I L I T I E S

30 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 aluation 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: January 1, 2007 Actuarial Cost Method: Amortization Method: Remaining Amortization Period: Asset Valuation Method: Actuarial Assumptions: Entry Age Inestment Rate of Return 7.75% Projected Salary Increases 4.0% Includes Inflation at 3.25% Leel Percentage of the System s Projected Payroll 30 years; open Post-Retirement Benefit Increases 2.125% Schedule of Funding Progress: ($ in millions) Assets are alued at market alue, with a four-year smoothing of all market alue gains and losses. uaal as a Actuarial Actuarial Actuarial Accrued Unfunded Percentage Valuation Value liability (AAL) AAL Funded Coered of Coered Date of Assets (a) Entry Age (b) (UAAL)(b-a) Ratio (a/b) Payroll (c) Payroll (b-a/c) 1/1/03 $740.1 $686.8 ($53.3) 107.8% $154.2 (34.6%) 1/1/05 $807.3 $754.3 ($53.0) 107.0% $172.5 (30.7%) 1/1/07 $1,021.3 $895.8 ($125.5) 114.0% $175.0 (71.7%) Annual Pension Cost and Net Pension Obligation ($ in millions) The City s annual pension costs and net pension obligation to the Retirement System for 2006 were as follows: 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 $ - Trend Information ($ in millions) Year annual Pension % of APc Net Pension Ending cost (APC) contributed obligation 12/31/04 $ % ($ 0.4) 12/31/05 $ % ($ 0.4) 12/31/06 $ % ($ 0.4) Note 12 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 acties and retirees. Since health claims costs generally increase with age, retiree health premiums would be significantly higher if they were determined without regard to actie 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 alue of projected benefits discounted at the aluation interest rate. The aluation 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 proided benefit attributable to employee serice in the current year. The Actuarial Accrued Liability (AAL) is the portion of the present alue of benefits attributed to past serice 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 leel of funding that, if paid on an ongoing basis, is projected to coer Normal Cost each year and amortize any unfunded actuarial liabilities (or funding excess) oer 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 aluation results as of January 1, Total Membership: Actie employees 3,674 Terminated ested employees 247 Retired employees 729 Dependents 184 Total 4,834 Annual Benefit Payments $ 8,527,863 Discount rate 4.00% Present Value of Benefits (PVB) $ 236,595,810 Actuarial Accrued Liability (AAL) $ 178,137,499 Normal Cost $ 4,949,734 Annual Required Contribution (ARC) $ 14,159, Ta c o m a P u b l i c U T I L I T I E S 5 7 Ta c o m a P u b l i c U T I L I T I E S

31 The following table shows the City s Net OPEB Obligation broken down by the total alue of the benefits proided, 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) Actie employees $ 233,919,911 $ 128,671,261 $ 105,248,650 Inactie employees 151,028,255 19,681, ,347,160 Total $ 384,948,166 $ 148,352,356 $ 236,595,810 Funded Status and Funding Progress. The City uses pay as you go funding. For Tacoma Power, the following table shows the annual OPEB costs and net OPEB obligation for three years. Annual OPEB Cost contributed Net OPEB Obligation Year Ended City Tacoma Power City Tacoma Power City Tacoma Power 12/31/2005 N/A N/A N/A N/A N/A N/A 12/31/2006 N/A N/A N/A N/A N/A N/A 12/31/2007 $14,159,338 $1,243,763 $8,527,863 $475,063 $5,631,475 $768,700 Actuarial Accrued Liability (AAL) Actie employees $ 94,449,644 $ 47,659,305 $ 46,790,339 Inactie employees 151,028,255 19,681, ,347,160 Total $ 245,477,899 $ 67,340,400 $ 178,137,499 Normal Cost $ 11,155,450 $ 6,205,715 $ 4,949,734 Annual Benefit Payments $ 11,074,373 $ 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 For Tacoma Water, the following table shows the annual OPEB costs and net OPEB obligation for three years. Annual OPEB Cost contributed Net OPEB Obligation Year Ended City Tacoma Water City Tacoma Water City Tacoma Water 12/31/2005 N/A N/A N/A N/A N/A N/A 12/31/2006 N/A N/A N/A N/A N/A N/A 12/31/2007 $14,159,338 $378,274 $8,527,863 $115,133 $5,631,475 $263, Ta c o m a P u b l i c U T I L I T I E S Determination of Annual Required Contribution city Tacoma Power Normal Cost at Year-end $ 4,949,734 $ 926,491 Amortization of UAAL 9,209, ,272 Annual Required Contribution (ARC) $ 14,159,338 $ 1,243,763 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, ,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 The following table shows the calculation of the Annual Required Contribution and Net OPEB Obligation for the City and for Tacoma Water. Determination of Annual Required Contribution city Tacoma Water Normal Cost at Year-end $ 4,949,734 $ 282,895 Amortization of UAAL 9,209,604 95,379 Annual Required Contribution (ARC) $ 14,159,338 $ 378,274 Determination of Net OPEB Obligation Annual Required Contribution (ARC) $ 14,159,338 $ 378,274 Interest on prior year Net OPEB Obligation - - Adjustments to ARC - - Annual OPEB Cost $ 14,159,338 $ 378,274 Actual benefits paid 8,527, ,133 Increase in Net OPEB Obligation $ 5,631,475 $ 263,141 Net OPEB Obligation beginning of year - - Net OPEB Obligation end of year $ 5,631,475 $ 263,141 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 alue of the projected benefits of each indiidual included in the aluation is allocated as a leel 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 alue allocated to a aluation year is called the normal cost. The portion of this actuarial present alue not proided for at a aluation date by the sum of (a) the actuarial alue of the assets, and (b) the actuarial present alue of future normal costs is called the Unfunded Actuarial Accrued Liability (UAAL). In determining the Annual Required Contribution, the UAAL is amortized as a leel percentage of expected payrolls oer 30 years for non-leoff (Law Enforcement Officers Fire Fighters) 1 groups: for LEOFF 1, the UAAL is amortized as a leel dollar amount oer 30 years. Actuarial Methods and Significant Actuarial Assumptions: Valuation Date: January 1, 2007 Census Date: July 31, 2006 Actuarial Cost Method Entry Age Amortization Method: Combination of leel percentage and Remaining Amortization Period: Demographic Assumptions leel dollar amount, see note aboe 30 years, open Demographic assumption regarding retirement, disability and turnoer are based upon pension aluations for the arious pension plans. Actuarial Assumptions: Discount Rate 4.0% Health Cost Trend 10.0% in the first year ( ), 9% in Projected Payroll Increases 4.0% the second year and graded down 1% per year to 5% per year in the sixth and beyond. 5 9 Ta c o m a P u b l i c U T I L I T I E S

32 Eligibility: TERS members are eligible for retiree medical benefits after becoming eligible for serice retirement pension benefits (either reduced or full pension benefits): Age 55 with 10 years of serice 20 years of serice 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 reiew and remanding for FERC to reconsider its 2003 order denying refunds for charges in the Pacific Northwest that allegedly exceeded just and reasonable leels. The Court found FERC failed to consider market manipulation eidence and improperly excluded potential refunds for CERS purchases in the Pacific Northwest for deliery to California. On remand, the Court required the FERC to examine this...eidence 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. Valuation of Retiree Premium: The City uses the same premiums for retirees under age 65 as for actie employees. Therefore, the retiree premium rates are being subsidized by the inclusion of acties in setting non-medicare retiree rates. For TERS retirees, Regence deeloped monthly premium leels for 2007 and a projected claims cost per retiree under age Monthly Projected Claim Value of Premium Leels Cost per Retiree Retiree Premium PPO $ $1, $ Selections $ $1, $ Note 13 Commitments and Contingencies Capital Improements. The financial requirement for Tacoma Power s 2007/2008 biennial Capital Improement 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 Improement 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 Rier 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 seeral salmonid species, including Fall Chinook, Summer Chum and Bull Trout, were listed as threatened under the ESA in FERC issued a license order in June 2004 that incorporated conditions from ESA biological opinions issued by USFWS and NOAA Fisheries in March At the same time, FERC lifted a stay of interim conditions, thus requiring Tacoma Power to install a ale 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 reiew 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 hae appealed, therefore the case will proceed before FERC. The parties are, howeer, exploring a mediated settlement option. Because the D.C. Circuit s license opinion also resoled issues raised in a separate appeal Tacoma Power filed challenging the biological opinions, Tacoma Power has oluntarily dismissed that appeal. Tacoma Power continues to operate the Cushman Project pursuant to the 1998 FERC license which is subject to a partial stay. 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 coering the major issues in the proceeding. The first of these opinions, in 2005, held that FERC did not hae refund jurisdiction oer 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 inoled in the California Refund proceeding, including Tacoma. Tacoma receied a claim in the amount of $1.7 million on January 12, Tacoma has denied this claim, and it was not included in the suit filed by California against other municipalities. Tacoma also interened in three FERC inestigatie proceedings inoling El Paso, Portland General Electric and Aista, pertaining to similar issues. Tacoma s appeal in the Aista 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 receied 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 eent the distribution phase yields additional distributions of monies FERC has receied through settlements with parties other than Enron in these proceedings. Tacoma expects to participate in a settlement of this distribution phase in April City of Tacoma. East Columbia Irrigation Dist. et al. Together with Seattle, Tacoma Power brought suit against the East Columbia Basin, Quincy-Columbia Basin, and South Columbia Basin Irrigation 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 coered by the agreements, plus an amount based on the City s Aerage Annual Resource Unit Cost (AARUC). The Districts are using an inappropriate AARUC calculation to oercharge the cities. The Contract requires appointment of a project consultant to resole 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 Noember 2006 that is unfaorable to the cities. Reconsideration was denied in February 2007, and in March 2007, the cities filed two motions with the court to acate or partially acate the decision of the project consultant, which were denied. Tacoma and Seattle hae filed an appeal with the Court of Appeals, but now are attempting to initiate a mediation. BPA Letter of Credit In 2006, Bonneille 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 proide potential reductions in the rates and payments by reducing the need for BPA to retain additional cash reseres, and therefore, reducing the cost of BPA power to Tacoma Power s system. BPA requires each participant to proide 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 alue. 6 0 Ta c o m a P u b l i c U T I L I T I E S Federal Energy Regulatory Commission Refund Proceedings. In July 2001, Tacoma Power, along with Seattle, Eugene, Northern Wasco PUD, Snohomish PUD 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 een 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 oer 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 People of the State of California A $1.7 million claim was filed in January 2006 seeking damages for oerpayments for wholesale power sold by Tacoma Power during the 2001 Energy Crisis. The claim explicitly stated that the sought amount was exclusie 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 inoled in the California Refund case. After the Ninth Circuit ruled that refunds were not aailable against municipalities in the California Refund case (on the grounds that FERC did not hae jurisdiction oer said entities), California filed this claim to presere 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, een though it did initiate suit against many of the municipalities in federal district court in Northern California. 6 1 Ta c o m a P u b l i c U T I L I T I E S

33 Shaw EDS There is a dispute oer $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. Muckleshoot Indian Tribe Settlement. A mutually beneficial settlement agreement was reached with the Muckleshoot Indian Tribe in The settlement package has a cost of approximately $30 million and includes fie basic elements: 1) building a fish restoration facility and annual operation and maintenance of that facility, or in the alternatie, proiding $12 million (indexed at 1995 dollars) into a fish restoration fund; 2) proiding for enhanced flows in the Green Rier; 3) transferring certain lands; 4) establishing a trust fund payable oer 40 years which is intended to proide for the general welfare, educational and other needs of the Tribe; and 5) limited access into the Green Rier Watershed. The settlement will resole past damage claims by the Tribe for Tacoma Water s historical operations on the rier, gain the Tribe s support for the Second Supply Project and proide the basis for a long-term, cooperatie working relationship on the Green Rier. Tacoma Water has been implementing this agreement. In 2005, Tacoma Water concluded the alternatie payment under item 1, and the transfer of certain lands under item 3. The Muckleshoot Indian Tribe has until 2015 to decide to deelop the fish restoration facility. Tacoma Water and the Muckleshoot Indian Tribe are scheduled to meet in September 2010 to reiew the status of this facility. The estimated cost to Tacoma Water for the facility is $2.675 million and the funding obligation decreases by one third for each year after Current funding obligation is $0.892 million. Robison Construction Inc. On Tacoma Water s Second Supply Pipeline construction project, the contractor has deeloped two potential additional work construction claims arising out of work done by its subcontractor Northwest Boring, in boring tunnels for the I-5 and Green Rier crossings. The potential claims together are $4,884,055. The contractor is not currently pressing these claims. Debt Serice Requirements December 31, 2007 Tacoma Power Year Principal interest Total 2008 $ 26,590,000 $ 24,921,764 $ 51,511, ,820,000 23,537,089 54,357, ,475,000 21,915,839 54,390, ,235,000 20,217,901 54,452, ,110,000 18,398,926 54,508, ,045,000 16,476,176 54,521, ,050,000 14,522,226 54,572, ,935,000 12,464,714 55,399, ,165,000 10,268,364 55,433, ,830,000 8,173,820 56,003, ,885,000 6,182,525 56,067, ,055,000 4,062,413 56,117, ,375,000 1,850,075 45,225,075 $ 519,570,000 $ 182,991,832 $ 702,561,832 The amounts aboe reflect debt serice requirements, and do not include the portion funded in the current year of $25,275,000. December 31, 2007 Tacoma Water 6 2 Ta c o m a P u b l i c U T I L I T I E S Year Principal interest Total 2008 $ 6,060,000 $ 9,483,520 $ 15,543, ,880,000 9,261,445 15,141, ,075,000 9,038,895 15,113, ,280,000 8,804,870 15,084, ,550,000 8,526,483 15,076, ,880,000 8,211,683 15,091, ,230,000 7,879,989 15,109, ,625,000 7,545,636 15,170, ,010,000 7,189,106 15,199, ,445,000 6,798,013 15,243, ,900,000 6,372,438 15,272, ,230,000 5,932,269 16,162, ,745,000 5,425,694 16,170, ,290,000 4,888,038 16,178, ,855,000 4,328,863 16,183, ,480,000 3,724,125 16,204, ,420,000 3,088,750 10,508, ,805,000 2,717,750 10,522, ,750,000 2,327,500 8,077, ,050,000 2,040,000 8,090, ,350,000 1,737,500 8,087, ,700,000 1,420,000 8,119, ,025,000 1,085,000 8,110, ,400, ,750 8,133, ,275, ,750 7,638,751 $ 196,310,000 $ 128,925,065 $ 325,235,065 The amounts aboe reflect debt serice requirements, and do not include the portion funded in the current year of $505, Ta c o m a P u b l i c U T I L I T I E S

34 Tacoma Public Utilities Management Team William Gaines, Director of Utilities/Chief Executie Officer Gary Armfield, Tacoma Power Superintendent George Whitener, Deputy Superintendent Dae Ward, Transmission & Distribution Manager Randy Karr, Gateway Project Manager Patrick McCarty, Generation Manager Ted Coates, Power Manager Cyndi Wikstrom, Telecommunications Manager John Kirner, Tacoma Water Superintendent Linda McCrea, Deputy Superintendent Jane Eancho, Resource Planning Manager Chris McMeen, Water Quality Manager Heather Pennington, Distribution Engineering Manager Daid Sherman, Water Supply Manager Ray West, Distribution Operations Manager Alan Hardy, Interim Tacoma Rail Superintendent Daniel McCabe, Finance and Technology Manager Michael Klass, Marketing Manager Lori Daniels, Human Resources & Support Serices Manager Steen Hatcher, Customer Serices Manager Robert Mack, Deputy Director/Public Affairs Chris Gleason, Community & Media Serices Manager Barbara Ostrander, Management Serices Manager Robert Biles, Director, City of Tacoma Finance Department Joy St. Germain, Director, City of Tacoma Human Resources Department Bill Fosbre, Interim Chief Assistant City Attorney 6 4 Ta c o m a P u b l i c U T I L I T I E S Photography: Design: Keith Wood Coer, page 6,8,10,11 (top and bottom right) chris Tumbusch page 2,5 Tacoma Public Utilities page 6,7,8,11 (bottom left) Shutterstock page 4 Gehl Design Inc. Printed on 100% recycled post-consumer fiber, processed chlorine-free, FSC certified. Ta c o m a P u b l i c U T I L I T I E S 6 5

35 Tacoma Public Utilities 3628 South 35th Street Tacoma Washington