annual 20 06 - Tacomacms.cityoftacoma.org/Finance/Financial_Reports/Annuals/PowerAnn06.… · Financial Analysis of Tacoma Power Net assets may serve over time as a useful indicator

2006Tacoma Power

FINANCIAL REPORT

annual

Public Utility Board

DAVID CURRY Chair

ROBERT CASEY Vice-Chair

TOM L. HILYARD Secretary

BlLL LABORDE

LAURA FOX

MARK CRISSON Director of Utilities

BlLL GAINES Power Superintendent

JOSEPH DELANEY Interim Finance Director

DEPARTMENT OF PUBLIC UTILITIES CITY OF TACOMA

CITY OF TACOMA. WASHINGTON DEPARTMENT OF PUBLIC UTII-ITIES

TACOMA POWER

TABLE OF CONTENTS

FINANCIAL DATA

INDEPENDENT AUDITOR'S REPORT ................................................. 3 . MANAGEMENT'S DISCUSSION AND ANALYSIS ................................ 5 14 . BALANCE SHEETS .............................................................................. 16 17

STATEMENTS OF REVENUES. EXPENSES AND CHANGES IN NET ASSETS ...................................................... 19

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

. ............................................... NOTES TO FINANCIAL STATEMENTS 22 36

STATISTICAL DATA (UNAUDITED)

TEN-YEAR FINANCIAL REVIEW ......................................................... 38 . 39

TEN-YEAR POWER SUMMARY .......................................................... 40 . 41 GROSS GENERATION REPORT ........................................................ 42 . 43

DEBT SERVICE REQUIRENIENTS ...................................................... 44

FUNDS AVAILABLE FOR DEBT SERVICE ......................................... 45

ELECTRIC PLANT IN SERVICE . YEAR 2006 .................................... 46 . 47 ........................................................................................ RESOURCES 48

TAXES AND EMPLOYEE WELFARE CONTRIBUTIONS .................... 49 2006 ELECTRIC RATES ...................................................................... 50

. ............................................................................................... GRAPHS 51 55

............................................................... SUPERINTENDENT'S REPORT 57 - 73

FINANCIAL DATA

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INDEPENDENT AUDITOR'S REPORT

Chair and Members of the Public Utility Board City of Tacoma Department of Public Utilities, Light Division Tacoma, Washington

We have audited the accompanying balance sheets of City of Tacoma Department of Public Utilities, Light Division as of December 3 1, 2006 and 2005 and the related statements of revenues, expenses and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Division's 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, evidence 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 evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of City of Tacoma Department of Public Utilities, Light Division as of December 3 1, 2006 and 2005 and the results of its operations and its 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 Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, 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 provided for purposes of additional analysis. We did not audit or perform any other procedures on this information and express no opinion on it

f l o s 5 Adaq.5 L L P Vancouver, Washington July 27,2007

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MANAGEMENT’S DISCUSSION AND ANALYSIS The following discussion and analysis of Tacoma Power’s (the Utility) financial performance provides an overview of the financial activities for the years ended December 31, 2006 and 2005. This discussion and analysis is designed to assist the reader in focusing on the significant financial issues and activities and to identify any changes in the financial position. The information presented here should be read in conjunction with the financial statements and accompanying notes taken as a whole. The management of Tacoma Public Utilities is responsible for preparing the accompanying financial statements and for their integrity. The statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis and include amounts that are based on management's best estimates and judgments. The basic financial statements, presented on a comparative basis for the years ended December 31, 2006 and 2005, include Balance Sheets, Statements of Revenues, Expenses and Changes in Net Assets, and Statements of Cash Flows. The Balance Sheets present information on all of the Utility’s assets and liabilities, with the difference between the two reported as net assets. The Statements of Revenues, Expenses and Changes in Net Assets report all of the revenues and expenses during the time periods indicated. The Statements of Cash Flows provide information on cash receipts and disbursements during the year and report changes in cash resulting from operations, investing and financing activities. The notes to the financial statements provide additional disclosures that are essential to a full understanding of the data provided in the financial statements. They are an integral part of the Utility’s presentation of financial position, results of operations, and changes in cash flows. Financial Highlights

• Tacoma Power reported an increase in net assets of $68.7 million or 14.7% in 2006, compared to $36.2 million or 8.4% in 2005, and $31.3 million or 7.8% in 2004.

• Tacoma Power’s operating revenues increased $53.3 million or 15.5% from 2005. Operating revenues increased $15.8 million or 4.8% in 2005 compared to 2004.

• Utility Plant in Service increased $89.1 million in 2006, and $17.9 million in 2005. • Construction work in progress decreased $17.9 million in 2006, compared to an

increase of $45.9 million in 2005. Overview of Financial Statements For 2006, Tacoma Power is reporting net operating income of $97.1 million compared to $67.9 million in 2005 and $57.4 million in 2004. Operating revenues increased $53.3 million during 2006, and operating expenses increased $24 million. For the prior year, operating revenues increased $15.8 million compared to 2004, and operating expenses increased $5.4 million. Tacoma Power reported a change in net assets of $68.7 million in 2006 compared to $36.2 million in 2005 and $31.3 million in 2004.

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

OPERATING RESULTS (in thousands)

06/05 05/04 Increase Increase Category 2006 2005 2004 (Decrease) (Decrease) Operating Revenues ............ $396,872 $343,610 $327,775 $53,262 $15,835 Operating Expenses ............. 299,731 275,754 270,381 23,977 5,373 Operating Income .................. 97,141 67,856 57,394 29,285 10,462 Net Non-Operating Expenses (11,236) (23,802) (16,986) 12,566 (6,816) Capital Contributions ............. 7,346 13,373 10,897 (6,027) 2,476 Transfers Out ....................... (24,557) (21,277) (20,041) (3,280) (1,236) Change in Net Assets (Net Income) ..................... $ 68,694 $ 36,150 $ 31,264 $32,544 $ 4,886

MEGAWATT-HOURS BILLED (in thousands)

06/05 05/04

Increase Increase Type of Customer 2006 2005 2004 (Decrease) (Decrease) Residential ............................. 1,822 1,760 1,773 62 (13) Commercial/Industrial ............ 2,877 2,967 2,838 (90) 129 Public Street/Primary Power .. 37 35 33 2 2 Bulk Power ............................ 1,953 1,037 1,432 916 (395) Total ……............................... 6,689 5,799 6,076 890(277) Financial Analysis of Tacoma Power Net assets may serve over time as a useful indicator of a company’s financial position. Tacoma Power’s net assets increased from last year by $68.7 million. The following analysis highlights the changes for the last three years.

BALANCE SHEET

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200

250

300

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06 05 04 03 02 01 00 99 98 97

OPERATING REVENUES(in millions)

Residential Comm/Ind Wholesale and Other

(in thousands)

Description 2006 2005 2004 2006/2005 Increase

(Decrease)

2005/2004 Increase

(Decrease)Net Utility Plant and Non-Utility Property............. $ 764,062 $ 726,514 $ 704,792 $37,548 $21,722 Current and Other Assets, Special Funds and Deferred Charges .............. 408,948 390,504 312,281 18,444 78,223 Total Assets ..................... $1,173,010 $1,117,018 $1,017,073 $55,992 $99,945

Net Assets: Invested in Capital Assets, Net of Related Debt .......... $ 337,456 $ 317,231 $ 297,297 $20,225 $19,934 Restricted ........................... 25,999 23,824 35,045 2,175 (11,221) Unrestricted ........................ 173,845 127,551 100,114 46,294 27,437 Total Net Assets ............... 537,300 468,606 _ 432,456 68,694 36,150

,Long-Term Debt.................. 543,900 568,212 508,310 (24,312) 59,902 Other Liabilities .................. 91,810 80,200 _ 76,307 11,610 3,893 Total Liabilities ................. 635,710 648,412 _ 584,617 (12,702) 63,795 Total Net Assets & Liabilities $1,173,010 $1,117,018 $1,017,073 $ 55,992 $ 99,945 Revenues 2006 Compared to 2005 Operating revenues totaled $396.9 million in 2006 compared to $343.6 million in 2005, an increase of $53.3 million. Total revenues from sales of electric energy increased $51.3 million, an increase of 16.4% over 2005, mainly as a result from increased wholesale power revenues of $35.9 million. Revenue from sales to residential customers increased $7.4 million or 6.4%. Revenue from sales to commercial and industrial customers increased $1.7 million or 1.3% over 2005. Residential sales accounted for 34% of total electric sales in 2006, down from 37% in 2005. Commercial and industrial revenues accounted for 38% of total electric sales in 2006, compared to 44% in 2005. Wholesale power revenues represented 26% of total electric sales in 2006, up from 19% in 2005.

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Wholesale power sales in 2006 increased $35.9 million or 59.5% compared to 2005. Total kWh sales increased 916,138,000 or 88.4%. Hydro generation was lower during 2005, resulting in less energy available for sale. Accrued but unbilled revenues were estimated at $25.1 million as of December 31, 2006 compared to the $20.2 million estimate for year-end 2005. This resulted in an increase in revenues earned by December 31, 2006 not yet billed of $4.9 million between 2005 and 2006. Other operating revenues increased $2 million or 6.4% over 2005. Included in this category is revenue from Click! operations, which increased $1.6 million when compared to the prior year. Cable TV revenues increased $736,000 or 6.3% compared to the prior year primarily due to the expansion of new products such as Video on Demand and high-definition cable TV. The increase is also due to continuing growth in ISP Advantage product (high-speed cable modem service through internet service providers) of $519,000 or 16.7%. The high-speed cable modem product grew due to increased speeds of existing levels of service and the addition of new residential and business levels of service. Other miscellaneous Click! revenues, such as equipment rental, increased $244,000 or 38% due to the launching of advanced digital video recording receivers allowing customers to record multiple channels and store programming content. Click! Network wholesale broadband revenues showed an increase of $147,000 or 19.5% due to the addition of Gigabit Ethernet services for large telecommunication providers. Other increases in operating revenues from sources other than electric energy include wheeling revenues up $292,000 or 4.8%, and service fees and other revenues up $129,000 or 2% in 2006. Interest income increased $7.5 million compared to 2005 due to higher interest rates earned on cash balances during the year. 2005 Compared to 2004 Operating revenues totaled $343.6 million in 2005 compared to $327.8 million in 2004, an increase of $15.8 million. Total revenues from sales to customers increased $13.8 million, an increase of 5.8%. Revenue from sales to residential customers increased $4.1 million or 3.7%. Revenue from sales to commercial and industrial customers increased $9.6 million or 7.6% over 2004 as a result of an increase in revenues from other general customers of $8 million followed by increases in industrial customers of $1.3 million and commercial customers of $349,000. Commercial and general industrial revenues accounted for 43% of total electric sales in 2005, compared to 42% in 2004. Residential sales in 2005 remained at 37% of customer sales. Wholesale power sales decreased $2.2 million or 3.5% compared to 2004. Although the average price of power sold increased 39%, total wholesale power kWh sales decreased 27.6%, creating the decrease in revenues. Hydro generation was lower during 2005, resulting in less energy available for sale. Accrued but unbilled revenues were estimated at $20.2 million as of December 31, 2005 compared to the $21.5 million estimate for year-end 2004. This resulted in a decrease in revenues earned by December 31, 2005 not yet billed of $1.3 million between 2005 and 2004.

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Other operating revenues increased $2.1 million or 7.1% over 2004. Included in this category is revenue from Click! operations, which increased $1.9 million from 2004. Cable TV revenues increased $829,000 or 7.7% compared to the prior year. The increase is also due to continuing growth in ISP Advantage product (cable modem service through internet service providers) of $627,000 or 25.3%. Other miscellaneous Click! revenues, such as equipment rental, increased $305,000 or 90.2%. Other increases in operating revenues from sources other than electric energy include wheeling revenues of $362,000 or 6.3%, and rentals and leases from electric property up $115,000 or 5.8% in 2005. Service fees and other revenues decreased $282,000 or 4.2% from 2004. Expenses 2006 Compared to 2005 Total operating expenses increased $24 million or 8.7% from 2005 totaling $299.7 million in 2006. Purchased power expenses increased $12.7 million or 12.2%. Power purchases from Bonneville Power Administration (BPA) increased $5.3 million. Tacoma Power received $4.7 million in 2005 from BPA as a result of a settlement related to overcharges with a portion of our BPA purchases. Contract increases accounted for $600,000. Power purchases from Priest Rapids increased $4.4 million due to contract increases, and payments to Columbia Irrigation District (SCBID) increased $2.7 million because of true-up billings for incentive payments. Administrative and general (A&G) expense increased $4.1 million or 11.8% in 2006 compared to 2005. Uncollectible accounts expense increased $1.1 million in 2006. Tacoma Power experienced an increase of $970,000 in annual fees billed in 2006 from the Federal Energy Regulatory Commission (FERC). Other increases in A&G expense for 2006 compared to 2005 were maintenance of general plant $901,000, A&G salaries $521,000, general government assessments $503,000, computer supplies $167,000, license and maintenance fees $157,000, advertising expense $131,000, and travel and subsistence $126,000. These increases in A&G expense are offset by an increase in costs transferred to capital of $401,000. Distribution operations expense increased $3.6 million or 34.5% in 2006 compared with 2005. Tacoma Power experienced wide-spread damage to its Transmission and Distribution system due to a severe windstorm in December 2006, contributing to the increases in distribution and transmission expenses, for both operations and maintenance expense. Supervision and engineering are up $1.4 million, and meter expenses up $763,000 over 2005. Other increases in distribution operations expense for 2006 compared to 2005 were station expense $596,000, overhead line expense $550,000, and load dispatching $221,000. Fees collected from wiring inspections decreased $359,000 in 2006. Transmission operations expense increased $3.4 million or 24.5% in 2006 due to increased transmission costs from BPA of $1.5 million, Columbia Irrigation costs of $991,000 and other miscellaneous electricity transmission increases of $477,000.

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Generation operations expense increased $1.5 million or 23.2% in 2006 compared with the prior year. This included increased payments to the Washington State Department of Fish and Wildlife of $937,000 and other miscellaneous increased operating expenses at the hydro plants of $514,000. Other operations expenses were up $1.0 million, consisting of conservation and other customer assistance expenses up $717,000, and other production expenses up $331,000. Maintenance expense increased $2.9 million or 13.6% in 2006 compared with the prior year. Generation maintenance expense increased $1.7 million mainly due to Alder turbine generator repairs of $709,000 and work on the Mayfield Lake Park boat dock of $433,000. Distribution maintenance expense increased $1.2 million due to storm damage repairs. Click! Network commercial operations expense, comprised of cable TV, high-speed internet, and data transport services over fiber, increased $1.4 million or 10.9% from 2005. Contract services expense increased $1.4 million or 16.6%, representing new channel additions and increased programming costs. Salaries and wages increased $394,000 or 9.8% from 2005. The lower capitalization of new connections resulted in an increase to expense of $152,000. Partially offsetting these are decreases in general expenses such as operating supplies, office supplies and bad debt of $400,000. The amount of A&G expense capitalized in 2006 was more compared to 2005, resulting in a decrease to expense of $55,000. Depreciation expense decreased $2.5 million or 5.6% from 2005 due to an increase in fully depreciated assets and more retirements. 2005 Compared to 2004 Total operating expenses increased $5.4 million or 2% from 2004 totaling $275.8 million in 2005. Depreciation expense increased $5.2 million or 13.1% from 2004 due to the addition of $81.4 million to plant in service the prior year. Taxes paid to the State of Washington increased $2.6 million, due to the increases in revenue and contributions in aid of construction. Tacoma Power recognized an asset impairment loss of $3.4 million in 2005, related to the write down of the Steam Plant #2 to fair market value. The Solid Waste division of the Department of Public Works, City of Tacoma, had been leasing the plant from Tacoma Power. The Solid Waste division terminated its lease in December 2005. Click! Network commercial operations expense increased $942,000 or 7.7% from 2004. Contract services expense increased $740,000 or 9.6%, representing new channel additions and increased programming costs. Salaries and wages increased $423,000 or 11.7% from 2004. The amount of A&G expense capitalized in 2005 was less compared to 2004, resulting in an increase to expense of $114,000. Partially offsetting these are decreases in general expenses such as operating supplies, office supplies and bad debt of $272,000. The higher capitalization of new connections related to the Gateway project and ISP customers resulted in a decrease to expense of $209,000.

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Several areas of operating expenses experienced decreases in 2005. Purchased power expense decreased $5.7 million or 5.2% from 2004. The majority of the decrease is due to $4.7 million received from Bonneville Power Administration (BPA). In September 2005, Tacoma Power reached a settlement with BPA related to overcharges with a portion of our BPA purchases, the Stepped-up Multiyear (SUMY) Block Product. As part of the settlement, Tacoma Power terminated a complaint against BPA in the Ninth Circuit Court of Appeals that was filed in 2004, and is no longer obligated to pay future costs associated with this purchase. Total maintenance expenses decreased $2.5 million or 10.3% in 2005 compared to 2004, due to a combination of decreased maintenance expense in hydro of $1.5 million, transmission of $515,000, and distribution of $476,000. Operations expenses for distribution also decreased $964,000.

Customer Counts Tacoma Power's overall customer growth during the past 10 years has been at a relatively steady rate averaging between less than 1% and 3% per year. Growth for 2006 was 2.1%, compared to the prior two years which remained steady at 0.2%. The customer count for 2006 is 162,589, compared to 159,180 in 2005 and 158,926 in 2004. The highest growth rate came in 1987, 3.3%; the lowest in the prior year.

Megawatt-hours Billed Megawatt-hours billed to residential customers increased 3.5% in 2006, while commercial/industrial billings decreased 3%. Sales to wholesale/other increased 86%. Wholesale/other has wider swings from year to year because of variances in bulk power sales, which are included in this category. Bulk power sales are affected by precipitation and weather patterns and can vary significantly. Bulk power sales in 2006 were 1,952,758 megawatt-hours compared to 1,036,620 in 2005, an increase of 916,138 megawatt-hours or 88.4%. During 2006, hydro generation increased 911,316 megawatt-hours compared to the previous year. Annual streamflows were above average in 2006, combined with decreased hydro generation during 2005 due primarily to below-normal hydrologic conditions that included periods of unusually warm and dry weather.

0153045607590

105120135150165

06 05 04 03 02 01 00 99 98 97

NUMBER OF CUSTOMERS(in thousands)

Residential Comm/Ind Wholesale/Other

012345678

06 05 04 03 02 01 00 99 98 97

MEGAWATT HOURS BILLED(in millions)

Residential Comm/Ind Wholesale/Other

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

Total Utility Plant and Plant Additions Tacoma Power has $1.2 billion invested in its utility plant assets on a cost basis. The major portion is for the combined distribution and transmission business unit, closely followed by its generation (hydroelectric) business unit. The following graphs show the allocation of plant additions and total investment in plant.

Additions in 2006 of $37.3 million to distribution plant accounted for the largest portion of this year's 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.

Megawatt Hours Generated/Purchased - 2005

Cushman5%

Nisqually7%

Cowlitz21%

BPA57%

Others10%

Megawatt Hours Generated/Purchased - 2006

Others9%

Nisqually8%

BPA50%

Cushman6%

Cow litz27%

2006 TOTAL PLANT

Hydraulic27%

Trans10%

Intangible Plant2%

Work in Progress

4% Telecomm13%

Distrib34%

General10%

2005 TOTAL PLANT

Hydraulic28%

Trans9%

Intangible Plant3%

Work in Progress

6% Telecomm12%

Distrib32%

General10%

2006 PLANT ADDITIONS

Telecomm25%

Distrib38%

General17%

Hydraulic4% Trans

16%

2005 PLANT ADDITIONS

Telecomm5%

Distrib66%

General15%

Hydraulic5%

Trans9%

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Additions in 2005 of $15.7 million to distribution plant accounted for most of this year's plant additions. Other additions were to general plant of $3.7 million, transmission plant of $2.2 million, telecommunications plant of $1.3 million, and hydraulic production plant of $1.1 million. The following table summarizes Tacoma Power’s capital assets, net of accumulated depreciation, for the years ended December 31, 2006 through 2004.

Capital Assets, Net of Accumulated Depreciation (in thousands)

Net Utility Plant

2006

2005

2004

2006/2005 Increase

(Decrease)

2005/2004 Increase

(Decrease) Intangible Plant ........................ $ 28,129 $ 28,595 $ 29,439 $ (466) $ (844)Hydroelectric Plant ................... 206,193 207,379 210,843 (1,186) (3,464)Transmission Facilities ............. 62,269 51,016 51,856 11,253 (840)Distribution Facilities ................ 231,484 205,776 204,048 25,708 1,728 General Plant ........................... 54,942 62,184 65,977 (7,242) (3,793)Telecommunications Plant ....... 125,020 97,608 110,874 27,412 (13,266)Construction Work In Process .. 50,498 68,429 22,528 (17,931) 45,901 Total Net Utility Plant ................ $758,535 $720,987 $695,565 $37,548 $25,422

Debt Administration At December 31, 2006 Tacoma Power had outstanding revenue bonds of $572.2 million, a decrease of $22.4 million from 2005. No new bonds were issued during 2006. At December 31, 2005 Tacoma Power had outstanding revenue bonds of $594.6 million, an increase of $70.1 million from 2004. Tacoma Power issued $93.5 million of Electric System Revenue Bonds and $156.4 million of Electric System Revenue Refunding bonds in October 2005. All bonds are insured and rated Aa3 by Moody’s Investors Service, A+ by Standard & Poor’s, and A+ by Fitch, Inc. Additional information on Tacoma Power’s long-term debt can be found in Note 5 of the financial statements and also in the supplementary Statistical Data. Debt Service Coverage Tacoma Power is required by its bond covenants to maintain a times debt service coverage of 1.25. In 2006, principal and interest were covered 2.88 times, in 2005 they were covered 2.21 times, and in 2004 they were covered 2.03 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 provide additional financial information.

The financial statements have been audited by Moss Adams, LLP. We have made available 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, administrative and accounting processes. These controls provide reasonable assurance that records and reports are complete and reliable, that assets are used appropriately and that business transactions are carried out as authorized.

Mark Crisson Director of Utilities


ASSETS

CITY OF TACOMA, WASHINGTON DEPARTMENT OF PUBLIC UTILITIES

TACOMA POWER

BALANCE SHEETS

DECEMBER 31,

UTILITY PLANT

In Service, at Original Cost . . . . . . Less - Accumulated Depreciation . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . Construction Work in Progress . . . . .

Net Utility Plant . . . . . . . . . . . . . .

NON-UTILITY PROPERTY, NET . . . . . . . a . . .. . . . .. . SPECIAL FUNDS

Construction Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt Service Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Special Bond Reserve Funds . . . . . . . . . . . . . . . . . . . . . . Wynoochee Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . .

Total Special Funds . . . . . . . . . . . . . . . . . . . . . . . . . .

OTHER ASSETS

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

CURRENT ASSETS

Operating Funds Cash and Equity in Pooled Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Net of Allowance for Doubtful Accounts of $1,073,664 in 2006 and $719,798 in 2005)

Accrued Unbilled Revenue . . . . . . . . . . . . . . . . . . . . . . . . Materials and Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from Affiliates . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . .

DEFERRED CHARGES

Unamortized Debt Expense . . . . . i . . . . . . . . . . . . . : . . . . 2,668,780 2 ,720 ,751

Other Deferred Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,188 1 9 , 5 5 1

Total Deferred Charges . . . . . . . . . . . . . . . . . . . . . . . 2,700,968 2 ,740 ,302

TOTAL ASSETS ..................................... $1,173,009,727 $1,117,018,232

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

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DECEMBER 31. NET ASSETS AND LIABILITIES 2006

NET ASSETS Invested in Capital Assets, Net of Related Debt . . $337,455,982 Restricted for:

Wynoochee Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . 2,062,951 Debt Service Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,936,519

Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173.845.041 Total Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 537,300,493

LONG-TERM DEBT, NET OF CURRENT MATURITIES . . . . . . . . . 543,899,543

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

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

DEFERRED CREDITS Deferred Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,354,657

Other Deferred Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . 188,094 Total Deferred Credits . . . . . . . . . . . . . . . . . . . . . . . . 7,542,751

Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 635,709,234

TOTAL NET ASSETS AND LIABILITIES . . . . . . . . . . . . . . . . . . $1,173,009,727 $1,117,018,232


CITY OF TACOMA, WASHINGTON

DEPARTMENT OF PUBLIC UTILITIES TACOMA POWER

STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS

YEAR ENDED DECEMBER 31, 2006 2005

OPERATING REVENUES ............................... $396,872,077 $343,609,849

OPERATING EXPENSES

Operations

Purchased and Interchanged Power . . . . . . . . . . . . . . Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Telecommunications Expense . . . . . . . . . . . . . . . . . . . . . . Administrative and General . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on Asset Impairment . . . . . . . . . . . . . . . . . . . . . . . .

Total Operating Expenses . . . . . . . . . . . . . . . . . . . .

Net Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,141,262 67,856,248

NON-OPERATING REVENUES (EXPENSES)

Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,745,123 2,254,354 Contribution to Family Need . . . . . . . . . . . . . . . . . . . . (450,000) (450,000) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,842,960 672,056

Interest on Long-Term Debt . . . . . . . . . . . . . . . . . . . . . (23,454,964) (21,159,972) Amortization of Debt Premium, Discount, Expense and Loss on Refunding . . . . . . . . . . . . . . . . . . . . . . . . . 80,830 (5,118,421)

Total Non-Operating Revenues (Expenses) . . . . . . (11,236,051) (23,801,983)

Net Income Before Capital Contributions and Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,905,211 44,054,265

Capital Contributions

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,345,821 13,373,338

Transfers City of Tacoma Gross Earnings Tax . . . . . . . . . . . . . . (24,378,937) (21,122,945) Transfers to Other Funds . . . . . . . . . . . . . . . . . . . . . . . (178,031) (154,332)

CHANGE IN NET ASSETS (NET INCOME) ................ 68,694,064 36,150,326

TOTAL NET ASSETS - BEGINNING OF YEAR .......... . . . 468,606,429 432,456,103

TOTAL NET ASSETS - END OF YEAR ................... $537,300,493 $468,606,429

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


TACOMA POWER

I STATEMENTS OF CASH FLOWS

9 1 CASH E'LOWS FROM OPERATING ACTIVITIES Cash from Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash Paid to Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash Paid to Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conservation Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Cash From Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES Transfer Out for Gross Earnings Tax . . . . . . . . . . . . . . . . Transfer to Fleet Services Fund . . . . . . . . . . . . . . . . . . . Transfer to Family Need Fund . . . . . . . . . . . . . . . . . . . . . . Net Cash From Non-Capital Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . .

CASH mows FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from Issuance of Long-Term Debt . . . . . . . . . . Debt Issuance Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal Payments on Long-Term Debt . . . . . . . . . . . . . . Discount and Net Refunding . . . . . . . . . . . . . . . . . . . . . . . . Interest Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contributions in Aid of Construction . . . . . . . . . . . . . . Change in Deferred Credits . . . . . . . . . . . . . . . . . . . . . . . . Net Cash From Capital and Related Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . .

CASH mows FROM INVESTING ACTIVITIES Interest Received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Net Non-Operating Revenues and Expenses . . . . .


. . . . . . . . . . . . . . . . . . . . . . . . Change in Deferred Charges. (12,637) (3,026)

. . . . . . . . . . . 45 1 Net Cash From Investing Activities 12,575,446 4,222,010

Change in Cash and Equity in Pooled Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,851,691 78,214,984

Cash and Equity in Pooled Investments at January 1 . . 324,366,004 246,151,020

Cash and Equity in Pooled Investments at December 31. $333,217,695 $324,366,004

The accompanying no te s are an i n t e g r a l par t o f t hese f i nanc ia l s ta tements .

Reconciliation of Net Operating Income to

Net Cash From Operating Activities:


. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Operating Income $97,141,262 $67,856,248

Adjustments to reconcile net operating income to net cash from operating activities:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation 42,600,065 45,136,001

Loss on Asset Impairment . . . . . . . . . . . . . . . . . . . . . . . - 3,367,594

Cash from changes in operating assets and liabilities: Accounts Receivable and Unbilled Revenue . . . . . . . . Conservation Loans Receivable . . . . . . . . . . . . . . . . . . . Receivables from Affiliates . . . . . . . . . . . . . . . . . . . . . Materials and Supplies and Other . . . . . . . . . . . . . . . . Taxes and Other Payables . . . . . . . . . . . . . . . . . . . . . . . . Purchased Power Payable . . . . . . . . . . . . . . . . . . . . . . . . . Salaries, Wages and Fringe Benefits Payable . . . . . Accrued Compensated Absences . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customers1 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . Payables to Affiliates

Total ~djustments . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Reconciliation of Cash and Equity in Pooled Investments to Balance Sheets: Cash and Equity in Pooled Investments in Special Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $170,861,211 $205,566,596

Cash and Equity in Pooled Investments in Operating Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162,356,484 118,799,408

Cash and Equity in Pooled Investments at December 3 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $333,217,695 $324,366,004


TACOMA POWER

NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31,2006 AND 2005

NOTE I SUMMARY OF SIGNIFICANT ACCOUN'TING POLICIES

Operations of Tacoma Power. The Light Division, doing business as Tacoma Power (Tacoma Power), is a blended component unit of the City of Tacoma, Washington (the City), Department of Public Utilities (the Department). The Department consists of Tacoma Power, Tacoma Water, and Tacoma Rail and is governed by a five-member Public Utility Board (the Board) appointed by the City Council. Certain matters relating to utility operations, such as system expansion, issuance of bonds and fixing of utility rates and charges, are initiated and executed by the Board, but also require formal City Council approval. Tacoma Power owns and operates the City's electrical generation and distribution facilities and telecommunication infrastructure. Tacoma Power serves an average of 163,000 retail customers and has 785 employees. Tacoma Power is organized into five business units: Generation, Power Management, Transmission and Distribution, Click! Network and Energy Services.

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

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

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

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, provides retail cable TV and wholesale high-speed Internet services to residential- and business customers, and data transport services to retail customers.

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

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

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

TACOMA POWER NOTES TO FINANCIAL STATEMENTS

(continued)

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

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

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

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

Depreciation is recorded using the straight-line method based on estimated economic lives of related operating assets placed in service at the beginning of the year. The composite depreciation rates for 2006 and 2005 were 3.89% and 3.80%, respectively. The original cost of property together with removal cost, less salvage, is charged to accumulated depreciation at such time as property is retired and removed from service.

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

Allowance for Funds Used During Construction (AFUDC). AFUDC represents the cost of borrowed funds used for the construction of utility plant, net of interest earned on unspent construction funds. Capitalized AFUDC is shown as part of the cost of utility plant and as a reduction of interest income and expense. Net interest income in 2006 of $1.8 million was capitalized. lnterest expense capitalized in 2005 was $3.7 million, net of related interest income.

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

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

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


(continued)

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

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

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

Tacoma Power's cash in banks held by the City Treasurer at December 31, 2006 and 2005 are entirely covered by federal depository insurance or on deposit with financial institutions recognized as qualified public depositories of the State of Washington under RCW Chapter 39.

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

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

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

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

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


(continued)

Capital Contributions. Tacoma Power adopted Governmental Accounting Standards Board (GASB) Statement No. 33, "Accounting and Financial Reporting for Nonexchange Transactions", which requires capital grants and contributions to be reported as capital contribution revenue. Tacoma Power received capital contributions totaling $7.3 million and $1 3.4 million for the fiscal years ended December 31, 2006 and 2005, respectively.

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

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

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

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

Net Assets. Net assets consist of the followirrg components:

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

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


(continued)

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

Balance December 31,

2005

Balance December 31,

2006 Transfers & Adiustments Additions Retirements

$ Intangible Plant Hydraulic Production Plant

Transmission Plant Distribution Plant General Plant Telecommunications

Plant Total Utility Plant In

Service Less Accumulated Depreciation

Construction Work In Progress

Net Utility Plant

NOTE 3 INVESTMENTS. Tacoma Power's investments are held by the Tacoma City Treasurer (Refer to Note 1). The investments held by the Tacoma City Treasurer outside of the general investment pool at December 31, 2006 and 2005 were as follows:

lnvestments at December 31,2006 Carrying Value Weighted Average

Investment Tvpe (Fair Value) Maturity (in years) Repurchase Agreements $ 8,761,250 3.63 Commercial Paper 10,570,777 0.27 Total Investments $ 19,332,027

Portfolio 45%

lnvestments at December 31,2005 Carrying Value Weighted Average % of

Investment Tvpe /Fair Value) Maturity (in years) . portfolio Repurchase Agreements $ 8,761,250 4.08 45% Commercial Paper 10,572,380 0.27 55% Total Investments $ 19,333,63Q 100%

The "weighted average maturity in years" calculation assumes that all investments are held unt~l maturity.

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


(continued)

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

Cash and Equity in Pooled 2006 2005 lnvestments Construction Funds $104,312,550 $143,455,147 Debt Service Funds 37,941,588 33,672,158 Wynoochee Reserve 2,062,951 1,966,490 Special Bond Reserve 7,212,095 7,139,171

Total 151,529,184 186,232,966 Investments Special Bond Reserve 19,332,027 19,333,630

Total $170,861,211 $205,566,596

NOTE 5 LONG-TERM DEBT. Long-term debt activity for the year ended December 31, 2006 was as follows:

Beginning Ending Due Within Balance Additions Reductions Balance One Year

RevenueBonds $594,635,000 $ $(22,420,000) $572,215,000 $24,180,000 Plus: Unamortized Premium 10,594,074 (1,490,135) 9,103,939

Less: Unamortized Discount (665,029) 59,153 (605,876)

Less: Loss on Refundings /I 3,931,7001 1,298,180 /12,633.520)

Total Long-Term Debt $590.632.345 $ -$568.079.543$24.180.000

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

1997 Refunding Bonds, with interest rates ranging from 5.125% to 6.0%, due in yearly installments of $1,230,000 to $27,750,000 through 2015. $ 84,320,000 $ 85,550,000

1999 Revenue Bonds, with an interest rate of 5.5% due in one payment of $13,500,000 in 2013. 13,500,000 13,500,000

2001A Refunding Bonds, with interest rates ranging from 3.8% to 5.75%, due in yearly ihstallments of $5,190,000 to $8,195,000 through 2015. 59,950,000 65,140,000

2001 B Refunding Bonds, with an interest rate of 5.5%, due in yearly installments of $1 1,280,000 to $1 9,345,000 through 201 2. 90,580,000 101,860,000


(continued)

2004 RevenueBonds, with interest rates ranging from 5.0% to 5.25%, due in yearly installments of $990,000 to $20,690,000 through 2017. 74,160,000 78,680,000

2005A Revenue Bonds, with interest rates ranging from 3.5% to 4.3%, due in yearly installments of $1 00,000 to $30,530,000 through 2021. 93,480,000 93,480,000

2005B Refunding Bonds, with interest rates ranging from 3.0% to 5.0%, due in yearly installments of $200,000 to $30,100,000 through 2021.

Unamortized premium Unamortized discount Unamortized loss on refundings Current portion

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

Principal 2007 $24,180,000 2008 $25,450,000 2009 $26,830,000 2010 $31,115,000 201 1 $32,825,000 2012-2016 $1 93,505,000 201 7-2021 $238,310,000

Interest $27,411,689 $26,136,176 $24,740,911 $23,186,523 $21,470,717 $77,988,572 $25,403,014

The fair value of Tacoma Power's long-term debt is based on quoted market prices. The fair market value of long-term debt at December 31, 2006 and 2005 was $605,122,531 and $61 2,817,020, respectively.

In October 2005, Tacoma Power issued $93,480,000 of Electric System Revenue Bonds, 2005 Series A. The bond proceeds are to finance a portion of the Electric System capital additions and improvements for 2005 through 2006 as well as to pay costs of issuance, bond insurance and underwriter's fees.

In October 2005, Tacoma Power issued $156,425,000 of Electric System' Refunding Bonds, 2005 Series B. The bond proceeds were used to advance refund certain portions of Tacoma Power's 1999 bonds, 2001 Series A bonds as well as pay costs of issuance, bond insurance and underwriter's fees.

The advance refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $1 1 million. This difference is reported in the accompanying financial statements as a loss on refunding. Tacoma Power completed the advance refunding to reduce its total debt service payments over the next 16 years by $8.2 million and to obtain an economic gain (difference between the present values of the old and new debt service payments) of $6.2 million.


(continued)

As of December 31, 2006, the following outstanding bonds were considered defeased:

Issue 1964 Refunding Bonds 1964 Light & Power Bonds 1965 Light & Power Bonds 1967 Light & Power Bonds - Series A & B 1969 Light & Power Bonds 1973 Refunding Bonds 1979 Light & Power Bonds Electric System Refunding Revenue Bonds, 1992A Electric System Refunding Revenue Bonds, 1992B Electric System Refunding Revenue Bonds, 1997 Electric System Refunding Bonds, 1999 Electric System Revenue & Refunding Bonds, 1999 Electric System Revenue Refunding Bonds, 2001

Amount $ 4,170,000

5,520,000 15,095,000 12,490,000 7,740,000 1,665,000

18,100,000 1,490,000 3,785,000 3,650,000

17,545,000 5,000,000

125,270,000 $221 :520!000

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

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

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

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

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

Principal 2007 $1,310,000

\ 2008 $1,380,000 2009 $1,445,000 201 0 $1,505,000 201 1 $1,555,000 2012-2014 $5,120,000

Interest $550,565 $485,065 $416,065 $358,515 $298,315 $495,450


(continued)

NOTE 6 PURCHASED POWER. Tacoma Power purchases electric power and energy from the Bonneville Power Administration (BPA) under a long-term contract expiring in 201 1. The contract consists of a base rate per kwh, and certain cost-recovery adjustment clauses can be invoked under particular circumstances. The power received under this contract averaged approximately 400,450 and 396,092 kilowatts per hour for 2006 and 2005, respectively. Charges for the BPA purchased power are approximately $101 million and $96 million for 2006 and 2005, respectively, and are based on the total amount of energy delivered and the monthly peak power demand.

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

Information for the year ended December 31, 2006 pertaining to these contracts is summarized as follows:

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

Share of Authoritv Rapids Energy Output ................................. 242,198 mWh 375,338 mWh

.......................... Megawatt Capacity 66 mW 63 mW .............................. Operating Costs $ 1,340,506 $7,624,448

......................... Incentive Payments $4,645,623 $ 000,000 ................. Contract Expiration Date 51912024 * * *

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 started on November 1, 2005 pending the issuance of the new permanent license expected in 2007. The terms of the new contracts are for the term of the new FERC license, which is expected to be 30-50 years. Tacoma Power's purchase quantity and costs are uncertain and will diminish with time as Grant County PUD loads increase.

Total expenses for payments made under the above contracts for the years 2006 and 2005 were $5,986,129 and $3,271,768, respectively, for Grand Coulee Project Hydro Authority and $7,624,448 and $3,255,614, respectively, for Grant County PUD - Priest Rapids.

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

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


(continued)

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

For 2006, net interchange was (2,135,324,008) kilowatt-hours while in 2005 it was (1,274,387,268) kilowatt-hours. Tacoma Power's net power purchases or sales and interchanged activities are reflected in the Statements of Revenues, Expenses and Changes in Net Assets.

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

lnterchanqe Summarv 2006 (in kwh)

2005 (in kwh)

Secondary Sales (1,951,924,000) (1,036,508,000) Porffolio Purchases 66,667,000 30,637,000 Miscellaneous Exchanges (232,395,000) (247,848,000) Other (1 7,672,008) (20,668,268) Net Interchange (2,135,324,008) (1,274,387,268)

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

Tacoma Power pays the Fleet Services Fund for its use of the vehicles and equipment to cover fleet operating expenses. Payments made by Tacoma Power in 2006 and 2005 were $6,644,630 and $6,495,294, respectively.

Fleet Services' management makes an annual assessment of the capital replacement reserve balance for appropriate funding levels. It is the Fund's policy to maintain the Fund's maximum balance at a level that will provide adequate purchasing power for a three-year cycle and to return any excess funds to customers based on their scheduled monthly payments. The solvency of the Replacement Fund also allowed Fleet Services to return a portion of interest earned on fund investments for the year to their customers. In 2006 and 2005, Fleet Services returned 75% of the interest earned to Tacoma Power's replacement fund. The amount of the refund was $402,613 and $287,567 for 2006 and 2005, respectively, which was used to offset the corresponding year's fleet expenses.

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


(continued)

Tacoma Power is required to make payments to the Self-Insurance Fund to cover claims incurred by Tacoma Power and administrative expenses of the Fund. Tacoma Power's premium payments totaled $1,460,000 in 2006 and $360,000 in 2005. Liabilities have been accrued in the Self-Insurance Fund for environmental remediation costs expected to be incurred. No provision has been recorded for environmental remediation costs that could result from changes in laws or other circumstances currently not contemplated. Assets in the Self- Insurance Fund total $4.5 million which exceeds accrued and incurred but not reported liabilities. Management believes Tacoma Power's investment in the Self-Insurance Fund is more than adequate to settle all its known or estimated claims. Therefore, no liability has been recorded.

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

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

1. The System is a local single employer defined benefit pension retirement plan covering City of Tacoma employees and administered in accordance with Chapter 41.28, Revised Code of Washington, and Chapter 1.30 of the Tacoma City Code. There are 1,431 retirees and beneficiaries of deceased retirees currently receiving benefits and 308 vested terminated employees entitled to future benefits but not yet receiving them. Currently, 2,968 active members are part of the System.

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

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

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

5. Contribution Rates: Covered employees are required by Chapter 1.30 of the Tacoma City Code to contribute 6.44% of their gross wages to the System, and the employer contributes 7.56% for a total of 14.0% of gross wages contributed. Contributions city-wide in 2006 totaled $24.9 million ($13.2 million employer contributions and $11.7 million employee contributions). The employer contribution rate is determined by the actuarial funding method identified as the "entry age cost method."


(continued)

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

7. Funding Status and Progress: Three-year historical trend information about TERS is presented here as supplementary information. This information is based on the most recent actuarial valuation performed dated January 1, 2005, and is intended to help assess TERS funding status city-wide on a going-concern basis, assess progress made in accumulating assets to pay benefits when due, and make comparisons with other public employee retirement systems.

8. Actuarial Methods and Significant Actuarial Assumptions:

Valuation Date: Actuarial Cost Method: Amortization Method:

Remaining Amortization Period: Asset Valuation Method:

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

January 1,2005 Entry Age Level Percentage of the System's Projected Payroll 19 years Assets are valued at market value, with a four-year smoothing of all market value gains and losses.

SCHEDULE OF FUNDING PROGRESS: ($ in millions)

Actuarial Accrued UAAL as a

Actuarial Actuarial Liability Unfunded Percentage Valuation Value of (AAL) AAL Funded Covered of Covered

Date Assets Entry Age (UAAL) Ratio Payroll Payroll (a) (b) (b-a) (alb) (c) (b-a/c)

1/1/01 $700.7 $605.7 ($95.0) 11 5.7% $1 33.4 (71.2%)

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

($ in millions) Annual Required Contribution (ARC) $1 3.0 Adjustment to ARC - - Annual Pension Cost (APC) 13.0 Contributions made 13.0 Increase (Decrease) in Pension Obligation - - Net Pension Obligation at beginning of year - Net Pension Obligation at end of year - -

$-


(continued)

TREND INFORMATION ($ in millions)

Year Annual Pension % of APC Net Pension Ending Cost (APC) Contributed Obliqation

1213 1 103 $1 1.6 100% $ 0

NOTE 10 COMMITMENTS AND CONTINGENCIES

Capital Improvements. The financial requirement for Tacoma Power's 200512006 biennial Capital lmprovement Program is approximately $144 million and Tacoma Power has substantial contractual commitments relating to the program. At December 31, 2006, the remaining financial requirement was approximately $84 million. The remaining financial requirement for Capital lmprovement Programs relating to prior biennium's is approximately $1 1 million.

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

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

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

Federal Energy Regulatory Commission Refund Proceedings. In July 2001, Tacoma Power, along with Seattle, Eugene, Northern Wasco 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 even assuming that the prices


(continued)

were unjust and unreasonable, relief could not be equitably granted because not all parties were subject to FERC jurisdiction, parties relying on the spot market would be rewarded over those choosing longer term purchases, there were too many transactions to trace, and not all upstream sellers might be identified. This matter was appealed to the U.S. Court of Appeals for the Ninth Circuit. On August 24, 2007, the Ninth Circuit issued a decision in the "Pacific Northwest Refund Proceeding" (Puget, FERC docket No. EL 01-10), granting in part the petitions for review and remanding for FERC to reconsider its 2003 order denying refunds for charges in the Pacific Northwest that allegedly exceeded just and reasonable levels. The Court found FERC failed to consider market manipulation evidence and improperly excluded potential refunds for CERS purchases in the Pacific Northwest for delivery to California. On remand, the Court required the FERC to "examine this ... evidence of market manipulation in detail and account for it in any future orders regarding the award or denial of refunds in the Pacific Northwest proceeding." Further, the Court strongly urged the FERC "to further consider its decision, on remand, in light of the related decisions of this court that followed FERC1s final orders" in Puqet.

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

Tacoma also intervened in three FERC investigative proceedings involving El Paso, Portland General Electric and Avista, pertaining to similar issues. Tacoma's appeal in the Avista matter in the Ninth Circuit Court of Appeals is stayed pending decisions in the California Refund proceeding. Tacoma Power also participates in consolidated "Gamirrg" 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 has settled with a number of parties, these proceedings largely focus on Enron. As did other parties, Tacoma reached a settlement with Enron in June 2006 in which Tacoma received the full amount of its bankruptcy claim against Enron, in the amount of $3,288,520 as an "allowed claim" in the Enron bankruptcy. Tacoma continues to participate in the proceeding in the event the distribution phase yields additional distributions of monies FERC has received through settlements with parties other than Enron in these proceedings.

City of Tacoma v. East Columbia lrrigation Dist. et al. Together with Seattle, Tacoma Power brought suit against the East Columbia Basin, Quincy-Columbia Basin, and South Columbia Basin lrrigation Districts in April 2005, to enforce a dispute resolution clause in the contract with the Districts arising out of the District's calculation of the Cities' costs. Tacoma and Seattle entered into power purchase and sale agreements with the Districts in 1980, which contracts require Tacoma to pay the annual power costs for each of the hydroelectric projects covered by the agreements, plus an amount based on the City's Average Annual Resource Unit Cost (AARUC). The Districts are using an inappropriate AARUC calculation to overcharge the cities. The Contract requires appointment of a project consultant to resolve these types of disputes, which consultant is to be appointed by the Superior Court for Spokane County if the parties cannot agree. The Court appointed a project consultant, who issued a decision in November 2006 that is unfavorable to the cities. Reconsideration was denied in February 2007, and in March 2007, the cities filed two motions with the court to vacate or partially vacate the decision of the project consultant, which were denied. Tacoma and Seattle have filed an appeal with the Court of Appeals, but now are attempting to initiate a mediation. The amount in controversy is approximately $4.2 million.


(continued)

A separate piece of litigation was commenced by Tacoma and Seattle to force the Irrigation Districts to allow an interconnection that the cities wish to construct between the generation projects whose output the cities purchase, and BPA's transmission system. The interconnection project would enable the cities to avoid having to use very expensive transmission over Avista's system. On March 15, 2007 FERC issued a proposed order directing interconnection and notice of intent to reopen licenses, to the extent necessary to accomplish the interconnection. The interconnection also is intended to be part of the mediation.

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

NOTE 11 SUBSEQUENT EVENT

In March of 2007, Tacoma Power issued $81,130,000 of Electric System Revenue Refunding Bonds, Series 2007. The bond proceeds were used to advance refund certain portions of Tacoma Power's 1997 Bonds as well as pay the costs of issuance, bond insurance and underwriter's fees.

STATISTICAL DATA (Unaudited)


DEPARTMENT OF PUBLIC UTILITIES

TACOMA POWER

TEN-YEAR FINANCIAL REVIEW

I BALANCE SHEET

ASSETS

Utility Plant - Net . . . . . . . . . . . Special and Other Assets . . . . . . Current Assets . . . . . . . . . . . . . . . . Deferred Charges . . . . . . . . . . . . . . Total Assets . . . . . . . . . . . . . . . .

NET ASSETS . . . . . . . . . . . . . . . . . . . . . . LIABILITIES AND EQUITY

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

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

STATEMENT OF INCOME

OPERATING REVENUES

Residential . . . . . . . . . . . . . . . . . . . Commercial . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . General Contract Industrial . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . ~ u l k Power . . . . . . . . . . . . . . . . . Sales to WAPA

Unbilled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other

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

OPERATING EXPENSES

. . . . Operation and Maintenance Taxes . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . Depreciation Loss on Asset Impairment . . . . . .

. . . . Total Operating Expenses

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

Other Income and Expense (Net) Interest Earned on Investments

Interest Charges (Net) . . . . . . . Contributions to Project Need . Gain on Sale of Utility Plant .

Net Income (Loss) Before Contributions, Transfers & Extraordinary Items , . . . . . . . . . . .

Total Capital Contributions . . . . . 7,345,821 13,373,338 10,897,261 9,499,253

Transfers Out * * . . . . . . . . . . . . . . . . (24,556,968) (21,277,277) (20,041,377) (21,405,777)

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

. . . . . . . . . . . . . . . I NET INCOME (LOSS) $68,694,064 $36,150,326 $31,264,246 $16,087,810

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

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

2001 * 2002 * (As Restated) 2000 1999 1998 1997



TACOMA POWER

TEN-YEAR POWER SUMMARY

(Unaudited)

2006 2005 2004 2003

MWh Available

Generated

. . . . . . . . . . . . . . . . . . . . . Nisqually 583,204 429,899 515,613 498,865

. . . . . . . . . . . . . . . . . . . . . . . Cushman 421,285 298,306 250,401 402,926

Cowlitz . . . . . . . . . . . . . . . . . . . . . . . 1,914,320 1,289,934 1,551,991 1,617,343

Wynoochee . . . . . . . . . . . . . . . . . . . . . 33,469 22,317 28,151 35,433

Hood Street . . . . . . . . . . . . . . . . . . . 2,354 2,860 2,894 8 5

. . . . . . . . . . . . . I Hydro Generated 2,954,632 2,043,316 2,349,050 2,554,652

Centralia . . . . . . . . . . . . . . . . . . . . . .

l7 I - - -

. . . . . . . . . . . . . Steam Plant No. 2 - - NE Diesel Generation Farm . . . . . - - -

. . . . . . . . . . . . . Total Generated 2,954,632 2,043,316 2,349,050 2,554,652

. . . . . . . . . . . . . . . . . . . . . . . 21 1 Purchased 4,125,464 4,053,389 4,069,277 3,949,659

Interchange - Net . . . . . . . . . . . . . . . (2,135,324) (1,274,387) (1,680,696) (1,814,621)

. . . . . . . . . . . . . . . . . . . . Losses - Net 17,834 16,899 3,484 4,784

Total SysLem Load . . . . . . . . . . . . . . . 4,962,606 4,839,217 4,741,115 4,694,474

MWh Billed

. . . . . . . . . . . . . . . . . . . . . Residential 1,822,438 1,760,110 1,773,275 1,728,305

Commercial/Other . . . . . . . . . . . . . . . . 360,595 353,670 356,140 345,049

Industrial . . . . . . . . . . . . . . . . . . . . . . 2,553,656 2,648,906 2,515,307 2,313,300

Total Firm MWh Billed . . . . . . . 4,736,689 4,762,686 4,644,722 4,386,654

MWh Available Over MWh Billed (Causes: Timing differences, internal use, and losses other than those reflected above.) . . . . . 225,917 76,531 96,393 307,820

35 1 Percent of Power Generated . . . . . . . . 59.54% 42.22% 49.55% 54.42%

I Average Load Factor . . . . . . . . . . . . . . . 58.12% 57.85% 56.83% 66.11% 37 I Average Number of Billings . . . . . . . . 162,589 159,182 158,926 156,464

Maximum Hourly Energy Load MWh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

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

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

CITY OF TACOMA. WASHINGTON DEPARTMENT OF PUBLIC UTILITIES

TACOMA POWER

GROSS GENERATION REPORT . December 31. 2006 and December 31. 2005

DECEMBER 2006

DECEMBER 2005

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

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

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

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

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

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

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

PIERCE COUNTY MUTUAL LOAD . . . . . . . . . . . . . . . . . . . . . . . . 163.312. 000 167.361. 000

KWH BILLED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential Sales

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

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

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

2 0 0 6

OVER

(UNDER)

2 0 0 5

YEAR TO DATE

D e c e m b e r 31, D e c e m b e r 31, 2006 2005

PERCENT

CHANGE



TACOMA POWER

DEBT SERVICE REQUIREMENTS

DECEMBER 31, 2006

PRINCIPAL INTEREST

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

the portion funded in the current year of $24,180,000.

Total Income . . . . . . .

Less: Operating Exp

Income Available for Debt Service . . . . . .

Bond Redemption . . . .

Bond Interest . . . . . .

Debt Service Payable on All Debt . . . . . . .

Times Debt Service Covered . . . . . . . . . . .

Debt Service Payable on Jr Lien Bonds . .



TACOMA POWER

FUNDS AVAILABLE FOR DEBT SERVICE


DEPARTMENT OF PUBLIC UTILITIES TACOMA POWER

ELECTRIC PLANT IN SERVICE - YEAR 2006

PLANT ACCOUNTS

INTANGIBLE PLANT ............................... HYDRAULIC PRODUCTION PLANT ..................... TRANSMISSION PLANT ............................. DISTRIBUTION PLANT ............................. GENERAL PLANT .................................. TELECOMMUNICATIONS PLANT ....................... TOTAL ELECTRIC PLANT IN SERVICE ................ CONSTRUCTION WORK IN PROGRESS ..................

Book Cost Additions

1/1/06 2006

TOTAL ...................................... $1,205,780,244 $96,632,162

DEPRECIATION ACCOUNTS

Depreciation Accumulated Annual

Rate Depreciation Accrual

INTANGIBLE PLANT .................... $2,260,734 $850,024 HYDRAULIC PRODUCTION PLANT .......... 1.6097 138,342,095 4,696,665

TRANSMISSION PLANT .................. 3.4000 59,587,044 3,689,055

DISTRIBUTION PLANT .................. 3.6500 179,415,067 13,984,559

GENERAL PLANT ....................... 5.2700 56,438,874 7,326,977

TELECOMMUNICATIONS PLANT ............ 8.4759 48,749,808 12,052,785

TOTAL PLANT DEPRECIATION ........

1. Total Electric Plant in Service includes non-depreciable land and land

rights of $1,226,434,269.

2. Total Book Cost of Plant Retired ............ ($7,309,691)

Add: Cost of Land and Land Rights Sold:

Transmission Plant .................... -

Amortization of Intangible Plant ............ - Total Retirements ........................... ($7,309,691)

Retirements

2006

Transfers &

Adjustments

Book Cost

Book Cost

of Plant

Retired

Cost of

Removal

Salvage,

Transfers

and

Adjustments

Accumulated

Depreciation

12/31/06


TACOMA POWER

RESOURCES

AS OF DECEMBER 31, 2006

GENERATING FACILITIES

Hydro :

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

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

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

. . . . . . . . . . . . . . . Mossyrock

Wynoochee . . . . . . . . . . . . . . . Hood Street . . . . . . . . . . . . .

. . . . . . . . . . Total Hydro

UNITS

AGGREGATE NAME PLATE mTING (kW)

APPROX. mTED ,

4-YR. AVEmGE

ANNUAL OUTPUT (1,000 kwh)

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

AVERAGE HOURLY ENERGY CUSTOMERS BY CLASS NUMBER BILLINGS (kw)

Residential . . . . . . . . . . . . . . . . . . . . . . . . . . 144,515 1.440

Incidental . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,800 2.498

General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,660 109.833

. . . . . . . . . . Public Streets and Highways 6 14 5.773

Total System . . . . . . . . . . . . . . . . . . . . . 162,589 3.326

Circuit Miles of Overhead Lines

4kV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.50

12.5 and 13.8 kV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,194.80 52.5 kV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.90

115 kV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370.33

230 kV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.57

. . . . . . . . . . . . . Trench Miles of Residential and Commercial Underground 662.60

CITY OF TACOMA. WASHINGTON DEPARTMENT OF PUBLIC UTILITIES

TACOMA POWER

TAXES AND EMPLOYEE WELFARE CONTRIBUTIONS FOR THE YEAR 2006

(Unaudited)

FEDERAL

. . . . . . . . . . . . . . . . . . . . . . . Power Social Security (FICA) $4.919. 633

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.919. 633

STATE OF WASHINGTON

. . . . . . . . . . . . . . . . . . . . . . . . . Retail Sales and Use Taxes 3.937. 102

. . . . . . . . Power Utilities and Business Operations Tax 10.228. 078

. . . . . . . . . . . . . . . . . . . . Power State Employment security 158. 969

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.324. 149

COUNTY

Lewis County . In Lieu of Taxes . . . . . . . . . . . . . . . . . . . . Mason County . In Lieu of Taxes . . . . . . . . . . . . . . . . . . . . Pierce County School Support . Eatonville . . . . . . . . . . White Pass School Support . . . . . . . . . . . . . . . . . . . . . . . . . . Mossyrock School Support . . . . . . . . . . . . . . . . . . . . . . . . . . . Morton School Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . County Fire Patrol . Paid to State . . . . . . . . . . . . . . . . . Mason County Fire Protection District . . . . . . . . . . . . . . Lewis County Fire Protection District . . . . . . . . . . . . . . Pierce County Fire Protection District . . . . . . . . . . . . . Pierce County Drainage District . . . . . . . . . . . . . . . . . . . . Thurston County . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 783

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.571. 503

City of Tacoma Power Gross Earnings Tax . . . . . . . . . . . . 23.070. 058

. . . . Click!Network Gross Earnings ~ax/~ranchise Fees 2.266. 912

City of Fife Power Gross Earnings ~ax/~ranchise Fee 417. 841

City of University Place Power Administrative Fee . . 938. 781

City of Lakewood Power Administrative Fee . . . . . . . . . . 725. 333

City of Fircrest Power Administrative Fee . . . . . . . . . . 155. 335

. . . . . . . . City of Steilacoom Power Administrative Fee - 10. 506

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.584. 766 - TOTAL TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $48.400. 051

Taxes as a % of Total Revenues of $395.383. 300 . . . . . . . 12.24%

EMPLOYEE WELFARE CONTRIBUTIONS

Power Industrial Ins . and M.A. . . . . . . . . . . . . . . . . . . . . . $715. 040

Power City of Tacoma Pension Fund . . . . . . . . . . . . . . . . . . 4.555. 901

Power ~edical/Life Insurance . . . . . . . . . . . . . . . . . . . . . . . 10.362. 791 P

TOTAL EMPLOYEE WELFARE CONTRIBUTIONS . . . . . . . . . . . . . $15.633. 732 P



TACOMA POWER

2006 ELECTRIC RATES

(Based on 2005 rate schedules)

RATE PER MONTH

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

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

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

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

Schedule A-2 - LOW-~nconie/~lderly/~andicapped Residential Service

Seventy-five percent (75%) of the monthly bill as

calculated under Section 12.06.160 of the official

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

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


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

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


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

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

Energy (allenergymeasuredinkilowatt-hours) . . . . . $0.030389perkWh

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

Other schedules also now in effect are:

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

H-1 - Street Lighting and Traffic Signal Service

H-2 - Private Off-Street Lighting Service

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

April 4, 2005.

- 51 -

0

26

52

78

104

130

Dol

lars

(Mill

ions

)

RES COM GEN CP BULK OTHERS

Class of Customer

SALES OF ELECTRIC ENERGYYear to Date - December 2006 & 2005

YTD December 2006 YTD December 2005

0

400

800

1200

1600

2000

2400

KW

H(M

illio

ns)

RES COM GEN CP BULK OTHERS

Class of Customer

TOTAL POWER BILLEDYear to Date - December 2006 & 2005


- 52 -

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

Bulk26%

Commercial6%

General28%

Contract Industrial4%

Residential & Other36%

SALES OF ELECTRIC ENERGYYear to Date - December 2005 ($312,549,100)

Bulk19%

Commercial7%

General32%

Residential & Other37%

Contract Industrial5%

- 53 -

0

400

800

1200

1600

2000

2400

2800

3200

3600

Gen

erat

ion

in K

WH

(mill

ions

)

Nisqually Cushman Cowlitz BPA OthersGenerated By

(*) Interchange excluded

POWER SOURCES (*)Year to Date December 2006 & 2005


- 54 -

POWER SOURCES (*)Year to Date - December 2006

NISQUALLY8%

OTHERS9%BPA

50%

COWLITZ27%

CUSHMAN6%

POWER SOURCES (*)Year to Date - December 2005

COWLITZ21%

OTHERS10%

BPA57%

NISQUALLY7%

CUSHMAN5%

(*) Interchange excluded

-55-

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

Hydraulic Power6%

Other Oper Exp10%

Other Prod Exp1%

Distr & Trans15%

Purchased Power39%

Depreciation14%

Admin & Pension10% Click! Network

5%

TOTAL OPERATING EXPENSES *Year to Date - December 2005 ($275,753,601)

Hydraulic Power5%

Click! Network5%

Other Prod Exp1%

Depreciation16%

Admin & Pension9%

Purchased Power38%

Other Oper Exp12%

Distr & Trans14%

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


SUPERINTENDENT'S REPORT

POWER MANAGEMENT

Hydroelectric Resources 2006 was a year of extremes. The year began with one of the wettest Januarys on record. The summer was one of the driest and sunniest in recent history. There were two heat waves during the summer, the first on June 25 and the second on July 21. November was the wettest month in history in many western Washington locations including Tacoma and Seattle. November finished with a period of cold weather and lowland snow. The year was capped off by the ~ecember , l4 '~ wind storm, the strongest regional wind storm since the Inauguration Day Storm of 1993.

The massive amounts of rainfall received November resulted in widespread and major flooding. Twelve western Washington rivers reached all-time record flood crest levels. After surveying the flood damage, the Governor declared 11 Washington counties as federal disaster areas. The upper Cowlitz and Nisqually rivers experienced major flooding and streamflows that were the second highest on record surpassed only by the February 1 996 flood event. Fortunately, the storage reservoirs were able to impound a majority of the flows entering the Cowlitz and Nisqually Projects and areas downstream of the projects areas experienced little or no flooding. The magnitude of the November flooding was less severe at the Cushman Project with high, but not record setting, streamflows. The Cushman Project provided an exceptional degree of downstream flood reduction by either storing or bypassing essentially all of the flows entering the project. Even with the flood reduction benefits of the Cushman Project the mainstem of the Skokomish rose about 0.7 feet above flood stage.

Annual streamflows into the Cowlitz, Nisqually and Cushman projects were 120 percent, 116 percent and 122 percent of average, respectively. At the beginning of the year Riffe Lake was about 10 feet below the normal operating level while Alder Lake and Lake Cushman were 8 and 9 feet above the normal operating levels, respectively. All of Tacoma Power's storage reservoir reached nearly full levels by early summer. By the end of the year, Riffe Lake was 3 feet below normal, Alder Lake was 16 feet above normal and Lake Cushman was 5 feet above normal.

The combined generation for our hydroelectric projects was 2,952,278 megawatt-hours, about 11 7 percent of average. The Cowlitz River Project generated 1,914,320 megawatt-hours, the Nisqually River Project generated 583,204 megawatt-hours, the Cushman Project generated 421,285 megawatt-hours and the Wynoochee River Project generated 33,469 megawatt-hours.

Bonneville Power Administration Tacoma Power purchased 3,507,942 megawatt-hours of power from the Bonneville Power Administration (BPA) during 2006. The outcome of a new rate case took effect in October 2006, however the net effect was minimal since prior to October the rates the utility paid had included three cost-recovery adjustment clauses (CRACs) tied to BPA's costs and financial condition and each of these CRACs was eliminated with the new rates. All three CRACs established for BPA's preference customers were triggered for only a portion of 20Q6 because of the new rate period which took effect October 1, 2006.

The Load-Based CRAC is intended to offset higher-than-expected costs for acquiring the power necessary to augment BPA's own resources to serve its contractual loads. This rate adjustment is set for six-month rate periods beginning in April and October. The Load-Based CRAC in effect for January through March of 2006 was 24.40 percent above the base rates. The final CRAC period before the new rate case took effect from April through September 2006, the Load-Based CRAC was 28.51 percent above base rates. The associated true-ups reconciling actual numbers with the projected followed each of the CRAC periods.

The Financial-Based CRAC is a temporary annual rate adjustment that occurs if end- of-year accumulated net revenues from generation are forecasted to fall below a threshold level. The Financial-Based CRAC in effect for January through March of 2006 was 4.41 percent above base rates and from April through September it was 0.45 percent above base rates.

The Safety-Net CRAC (SN CRAC) is implemented by the administrator if BPA forecasts a 50 percent or greater chance of missing a payment to the U.S. Treasury Department or other creditor. The SN CRAC triggered on October 1, 2005, and increased BPA rates by an additional 1.75 percent above base levels through September 2006.

In November 2005, BPA's Power Services (PS) business unit began the WP-07 Power Rate Case. Tacoma Power staff continued to participate in the rate case in 2006. Based on information provided in the initial proposal and Power Function Review workshops, Tacoma Power shared in the preparation and submittal of testimony through regional organizations and coalitions. The final Record of Decision was published in July and had a net effect of reducing the rates in the initial proposal by approximately 10 percent and translated into approximate 3 percent reduction to the previous rates. The most significant factor that led to the reduction in rates was the creation and support of the flexible PF program. The program effectively reduces the level of liquidity reserves BPA needs to maintain by giving them authority to request additional payments from customers as needed to maintain reserves, verses setting higher rates initially.

In October 2006, BPA Transmission Services began discussions related to the 2007 Transmission Rate Case. A settlement agreement was offered to customers in December 2006, and it was anticipated that majority of customers would sign this agreement. The agreement outlined that the overall transmission rate to Tacoma Power would not change in the near term but has the ability to increase if additional revenues need to be collected for the generation supplied reactive (GSR) service.

The long-term Regional Dialogue process continued throughout 2006 to address the future terms and conditions by which BPA will serve its customers. In July 2006 BPA published the Long-term Regional Dialogue Policy Proposal that detailed a number of policy decisions in regards to the power contracts that will become effective in October 201 1. In October Tacoma Power submitted comments to BPA in response to the Policy Proposal, addressing issues that were discussed in BPA's proposal as well as important issues that were not addressed. The BPA Record of Decision is projected to be published in the first half of 2007. Discussions regarding the rate methodology and product design started in November and are expected to continue throughout 2007.

PNCA Planning and Operations The Pacific Northwest Coordination Agreement (PNCA) parties continued to plan and operate their resources submitted for coordination under the agreement during 2006. The PNCA optimizes the planning and operation of the resources from a regional perspective and provides benefits to the parties that are downstream of the Columbia River Treaty projects. The purchase of Priest Rapids power is the only Tacoma Power resource in the PNCA.

Planning for the 2006-2007 contract year began in February and concluded by the start of the operating year on August 1. According to the PNCA planning studies for 2006- 2007, firm resource capabilities are based on an eight-month critical period (September 1, 2006, through April 30, 2007) under the worst regional water conditions from 1928 through 1998. This is the 12th contract year in a row that a critical period of less than one year has been determined in the planning studies and adopted for operations. Previously, a 42-month capability had been used to identify the lowest capability for the region, but that capability has been severely altered by the non-power requirements placed on the Columbia River.

In actual operations, no interchange energy, storage energy, in-lieu energy or provisional energy was exchanged between Tacoma Power and any of the other parties. Studies determined that the PNCA reservoirs reached 109 percent of the target on July 31, which is about 3,029 megawatt-months below absolute full reservoirs.

Grand Coulee Project Hydroelectric Authority (GCPHA) Operations of the GCPHA plants were normal during a majority of the 2006 generating season. Mechanical problems were found in two of the smaller plants (P.E.C. 66.0 and R. D. Smith) at the end of the generating season; contracts have been awarded to effect repairs during the off-generation season. A consultant engineer completed a Federal Energy Regulatory Commission Part 12 safety inspection on the Main Canal project and no conditions were identified that would interfere with the safe operation of the plant. In conjunction with the Part 12 inspection, a Potential Failure Mode Analysis exercise was completed and the two findings are being addressed.

In February 2005 under the terms of the five power purchase and sale contracts, Tacoma Power and Seattle City Light (the Cities) called for the appointment of a Project Consultant (PC) to resolve a pricing dispute with GCPHA involving a difference in interpretation of the cities' average annual resource unit (AARUC) costs. This cost is used in another calculation to determine the incentive payments to GCPHA for each kilowatt-hour generated throughout the generating season. The PC was appointed in May 2006 and the Cities sent a packet of information under a cover letter detailing the dispute to the PC on May 30,2006. The PC responded in a November 14, 2006 letter which provided the "Findings of the Project Consultant1'. The PC's findings completely refuted the Cities' positions in the dispute and confirmed GCPHA's positions. On December 1, 2006 the Cities, through their attorney, sent a letter to the PC seeking a modification and clarification of the decision; at year's end a response had not been received.

A long-term power wheeling contract with Avista Corporation expired October 31, 2005. This contract provided for the transmission of power generated at GCPHA's two largest projects, Main Canal and Summer Falls, to the Bonneville Power Administration's (BPA) system. An assessment of options to replace this contract led to examination of a joint operatinglownership arrangement with Seattle City Light and BPA to build a new

transmission line and substation to interconnect with nearby BPA transmission lines. At the end of January 2006 the Cities received confirmation from BPA that the interconnection was feasible and that BPA was prepared to move ahead with the project. During the transmission interconnection construction period, a short-term firm transmission arrangement with Avista will be utilized. At GCPHA's February 2006 board meeting, representatives from the Cities presented the concept of the project which included a proposed draft memorandum of understanding between the Cities and GCPHA to work collaboratively to successfully complete the project in time for the 2008 generating system. At their March 2006 board meeting, GCPHA approved a motion to reject further consideration of the Cities' proposal until a final and binding decision had been rendered in the pending litigation concerning the pricing dispute about AARUC costs (see above). The Cities then filed a request with FERC for an expedited ruling to authorize proceeding with the interconnection project; at year's end, no FERC ruling had been issued.

Priest Rapids In late 2001, Tacoma Power signed three Priest Rapids power contracts containing four distinct products. Operations under these new contracts began on November 1, 2005. Operations under the new contract for the 2006 were normal. Tacoma Power took its share of the Conversion Product and Displacement Product under the Product Sales Contract. The Surplus Product was zero. In addition, Tacoma Power exercised its option to take the full amount of Meaningful Priority Product in both 2006 and similarly exercised its option for 2007.

Tacoma Narrows Tidal Energy Project In June of 2006, Tacoma Power received the final report from the Electric Power Research Institute (EPRI). The phase 1 project definition study identified the Tacoma Narrows as a "good location for siting an in-stream tidal generation power plant." With the issuance of the EPRl report, Tacoma Power completed the work defined by the American Public Power'Association DEED grant.

After a review of the EPRl report, Tacoma Power prepared and issued RFP PG06- 081 OF for competitive bids to conduct phase 2 of the tidal energy project; a feasibility study. In response to the RFP, Tacoma Power received four proposals. The tidal power selection committee reviewed the four proposals and chose to interview two of the respondents. The two firms chosen for interviews were Puget Sound Tidal Power LLC and Hatch Energy. The interviews were scheduled to take place early in January of 2007.

lntegrated Resource Plan During 2006, Tacoma Power completed a Resource Assessment and continued analyses to support and further develop its lntegrated Resource Plan. As part of this effort, new forecasts of customer demand and wholesale power prices were produced, and estimates of firm supply resources were updated. Various combinations of customer demand (load), hydrological conditions (water) and assurr~ptions concerning specific resources were modeled to determine the utility's load resource balance for the duration of the IRP-planning horizon. These analyses were used to draw conclusions about future needs for supply resources including energy, capacity and conservation under a range of hydrological, load and market conditions.

In November 2006 Washington voters passed lnitiative 937 instituting a renewable portfolio standard. Staff conducted extensive studies on the potential impact of this initiative on future resource plan requirements. The lnitiative requires the larger utilities in the state to obtain 15 percent of their electricity from renewable resources by 2020. This lnitiative also requires utilities to undertake all cost-effective energy conservation. As a step toward meeting the 15 percent requirement, utilities must have renewable resources equal to 3 percent of their load by 2012 and 9 percent by 2016. The lnitiative excludes most hydroelectric resources as "renewable" for purposes of compliance. This lnitiative will require Tacoma Power to acquire additional renewable energy resources or equivalent renewable energy credits. The lnitiative includes a cost cap of 4 percent of a utility's annual revenue requirement as a limit for compliance costs for the renewable resource requirement. The lnitiative also imposes a penalty of $50 for each megawatt hour that a utility falls short of meeting the renewable resource requirement.

Also during 2006, the Washington State Legislature passed House Bill 101 0 (Chapter 195, Laws of 2006; RCW 19.280) which requires all Washington electricity utilities with more than 25,000 customers to regularly prepare "integrated resource plans" (IRP). Publicly-owned utilities are required to provide these plans to the state Community Trade and Economic Development office. The utility lRPs are required to be "an analysis describing the mix of generating resources and conservation and efficiency resources that will meet current and projected needs at the lowest reasonable cost to the utility and its ratepayers.'' The resource planning studies completed in 2006 form the foundation for a new IRP that will be completed in 2007 and comply with the requirements of the new law.

Retail Rates Tacoma Power did not adjust retail rates in 2006. A revenue requirements study based on the budget developed in 2006 for'the 2007-2008 biennium indicated that a rate increase tentatively scheduled for April of 2007 would not be necessary. No other rate increases are expected before April 2009.

Credit Management Effective credit management policies and procedures contributed to another year with no losses stemming from defaults by any of Tacoma Power's wholesale trading partners. Tacoma Power has procedures in place to monitor and assess the credit-worthiness of wholesale power marketers as well as other utilities that trade wholesale electricity with Tacoma Power. A Credit Review Committee, composed of staff from Power Management and FinanceIUtilities Accounting, reviews and approves new companies seeking to do wholesale power transactions with Tacoma Power. The committee also evaluates, on an on-going basis, the credit status of existing approved trading partners. No sales or purchases are made with companies that do not meet Tacoma Power's credit-worthiness criteria and that are not on Tacoma Power's list of approved trading partners. There was one small write-off in 2006 stemming from a sale to the California Electric Resource Scheduler (CERS) made during 2001. CERS was subsequently downgraded by credit rating agencies. In response, during 2001 Tacoma Power asked CERS to pay its bill early. CERS deducted $6,393 from its bill as an advance payment discount. Tacoma Power's efforts from 2001 to 2006 to recover this charge from CERS were unsuccessful

GENERATION

During 2006, the hydroelectric generating resources owned by Tacoma Power were available 99.5% excluding maintenance and planned outages. This represents a forced outage rate of .5%.

Cowlitz River Project The Federal Energy Regulatory Commission (FERC) issued a new 35-year license for the Cowlitz River Project on July 18, 2003. FERC issued the license without the biological opinion having been issued by NOAA Fisheries. The biological opinion was issued in March of 2004 and amended into the Cowlitz project license in July 2004. The license challenge by the Cowlitz Indian Tribe, Friends of the Cowlitz and CPR-Fish ended in 2006 with the Supreme Court refusing to hear the case.

Work continued on implementing the requirements of the Cowlitz License. Two more implementation plans for various license articles were submitted to FERC and FERC approved eight implementation plans. The most significant plans approved included Fisheries and Hatchery Management, Hatchery Complex Remodel, Downstream Fish Passage lmprovements at Mayfield Dam, and Water Quality Monitoring.

lmprovements to fisheries facilities included installation of a new fish guidance screen at the Cowlitz Falls Dam intended to improve fish collection. The screen operated during the collection season with moderate success and further improvements are planned for 2007. Significant communication infrastructure was installed at the hatcheries including a .fiber optic cable between the Cowlitz Salmon and Trout hatcheries to improve communications and support automated controls. New instrumentation and controls along with better drawing and process documentation were added at the Trout Hatchery Ozone plant. The instrumentation and controls improved performance of the system including reduced liquid oxygen use and the new documentation facilitated better operational efficiency and system troubleshooting. The Trout Hatchery river pump station emergency generator and transfer switch were replaced to improve reliability and a variable frequency drive motor was installed on one intake pump to irr~prove efficiency.

The Hatchery Complex remodel project commenced with the construction of a new residence at the Cowlitz Salmon Hatchery to replace one that will be displaced by the remodel project and work continued on the redesign of the hatcheries.

The outfall from the fish rearing ponds at the Cowlitz Trout Hatchery was relocated to the Cowlitz River as part of'the hatchery remodel effort. Netting was also installed over three of the fish rearing ponds to prevent predatory birds and animals from accessing the ponds.

The first purchases of riverfront property along the lower Cowlitz River were made from the fish habitat fund. The $3 million fund, required by the license, was established to protect, restore and enhance fisheries habitat. The land purchases are intended to improve habitat by protecting it from development.

A $34 million dollar contract to rebuild the Mossyrock turbines and generators was awarded to General Electric in 2005. Design and modeling work continued with installation scheduled for 2008 and 2009. This rebuild is not being done too soon, as there were three rotor pole connection failures on the Mossyrock generators in 2006.

The Mossyrock units were installed in 1968 and are Tacoma Power's largest units, accounting for approximately 40 percent of Tacoma Power's owned generation.

The design and procurement of a new plant control system for Mayfield was completed in 2006. The new system is scheduled for installation in 2007 and will provide real-time information to dispatchers and plant staff, enable more efficient use of the units through individual unit dispatch instead of plant dispatching, and allow recording of more operational data for trouble-shooting analysis and for efficiency improvements.

Nisqually River Project In 2006 the Nisqually River Project maintained its certification as a low-impact hydropower project, allowing the generation to be marketed as green power. Tacoma Power received recognition from the IVational Hydropower Association for outstanding stewardship for the fifth year in a row.

The kokanee stocking and evaluation program and angler education program continued at Alder Lake, resulting in continued good fishing.

A wetland inventory was completed in 2006 on the 3,350-acre Nisqually wildlife area. Access control was improved in several locations around the wildlife lands and Tacoma Power continued maintenance and monitoring of the elk forage fields, bluebird and wood duck nest boxes, and bat boxes.

The LaGrande Dam river outlet valve was rebuilt to control excessive leakage into the by-pass reach. Extensive work was done on Unit 12 to repair a packing box problem and turbine shaft damage. All repair work was successfully completed.

Cushman Hydroelectric Project The FERC license for Cushman was issued in 1998 and remanded back to FERC by the D.C. Circuit Court of Appeals in 2000. NOAA Fisheries and the Unites States Fish and Wildlife Service issued draft biological opinions for the Cushman license in 2003. Both draft opinions supported the mitigation as written in the stayed license. In June 2004, FERC amended the license to include provisions of the biological opinions. In the same order, FERC partially lifted the license stay, requiring Tacoma Power to release a minimum flow of 240 cubic feet per second as an interim protective measure for listed fish species. Tacoma Power and others filed rehearing requests on this order and, in September 2004, the Skokomish Tribe filed a motion to add new license articles regarding water rights. A license stay was granted by the D.C. Court of Appeals in May 2005. In a decision dated August 22, 2006, the D.C. Court found, among other things, that FERC did not have the authority to omit certain license conditions proposed by several federal agencies. The result of the decision is that the license has been remanded to FERC. Tacoma Power is continuing to work toward an acceptable and economic license, and to pursue a settlement among all affected parties.

We initiated discussions with the Washington Department of Fish and Wildlife (WDFW) to identify suitable alternative wildlife lands to replace some of the original wildlife lands identified in the Cushman license. Changes in land management and ownership necessitate modification of the wildlife lands to be acquired for the license.

We have worked cooperatively with the Skokomish Tribe and the Mason Conservation District to restore the tidelands on the Nalley Ranch. This work is being funded primarily by grants and will provide an enhanced tidal estuary with a boardwalk that will provide access to our transmission structures.

The dismissal of the $5.8 billion dollar past damages claim by the Skokomish Tribe was upheld by the Ninth Circuit Court of Appeals. The tribe submitted this decision for appeal to the United States Supreme Court. In January of 2006 the Supreme Court refused to hear the case, effectively upholding the dismissal. The tribe filed a motion to revive claims at the Federal District Court, which was denied. 'They then appealed to the Ninth Circuit Court of Appeals in May. Both parties agreed to attempt mediation to settle this claim and the license.

The 16-year-old Cushman Unit 21 turbine runner was disassembled to enable major cavitation repair to the turbine blades.

Work at the Cushman project included major upgrades to the Saltwater public boat ramp to allow safe public access to Hood Canal.

Wynoochee River Project Improvements to the Plant Control System were completed which included a manual mode that allows for increased plant reliability and availability by reducing outage time of the plant control system and auxiliary systems. In addition, manual mode control provides improvements for emergency intake gate closure and river restoration capabilities.

Engineering and Dam Safety Ongoing work to inspect, monitor and improve all of Tacoma Power dams to meet current FERC engineering guidelines continued in 2006. The contract to install post- tension anchors in Alder Dam to meet current FERC requirements for sliding stability was completed as was the contract to improve the stability of the left embankment of Mossyrock Dam.

A Potential Failure lblode Analysis (PFMA) of the Cushman dams was completed. This extensive one-time analysis is a new FERC requirement in addition to the normal 5-year independent consultant reports on dam safety. No significant new issues were discovered as a result of the analysis.

Tacoma Power Parks For the second season, Tacoma Power Parks shared a reservation service with Washington State Parks. Customers booked a total of 7,930 reservations for individual campsites in 2006, compared to approximately 4,500 reservations before the joint reservation service.

Recreation improvements at Cowlitz parks included installation of new electric and water systems at Mayfield Lake Park to meet regulatory requirements and allow for the future addition of partial utility hook-ups at campsites.

Work on the expansion of Taidnapam Park as required by the Cowlitz License included the clearing and grubbing of 89 future RV sites and 8 walk-in tent sites and the partial excavation and construction of a new low water boat ramp.

'The first phase of the Peterman Hill Trail system was completed and the Mossyrock Park Wildlife Trail was expanded resulting in over 12-miles of new, non-motorized use trails. These trails are requirements of the Cowlitz license. A portion of the Mossyrock Trail is ADA compliant and 95% of the planned ADA improvements to the project's recreational facilities were completed.

New ADA accessible playground equipment was installed at Alder Park's Stacel Point day-use area in preparation for the 2007 recreation season.

Facilities Progress continued on the Administration Complex Facilities Project, a multi-biennium project to build new facilities and remodel existing facilities. A new men's and women's locker room and the hillside parking lot were completed.

Contracts were awarded and construction begun on the new Administration Building South (ABS) which is a 11 0,000 square foot office space addition to be connected to the existing administration building with a two story sky bridge.

Design was started for the remodel of the remaining spaces in the existing administration building scheduled to start after the ABS is complete in late 2007.

'TRANSMISSION AND DISTRIBUTION

System Reliability T&D exceeded its goals regarding the number, duration, and frequency of customer outages.

Actual 1 12 customers

per outage

67.46 outage minutes per

average customer

StatisticIDescription Goal -- 160 customers or

Outage (ACO) denotes the average number fewer Per outage

of customers out of service per outage.

System Average lnterruption Frequency Index (SAIFI) reflects the average frequency fewer Per average Per average

of sustained interruption per customer, customer

normalized over the whole customer base.

System Average Interruption Duration Index (SAIDI) represents the average time, in minutes, required to restore service, normalized over the whole customer base.

80 outage minutes or less

per average customer

Note: Tacoma Power defines a major storm as an abnormal weather condition or catastrophic event that causes loss of service to 10 percent or more of its customers and requires Tacoma Power to open its Call Center to facilitate restoration. There were three official storms in 2006: February 17-1 8, November 13-1 5, and December 14-1 5, which were not included in Tacoma Power's 2006 annual reliability statistics. Had they been included, the three reliability statistics would have been as follows:

Customer and System Response Connected 4,062 new services. Installed and connected 1,215 temporary services and meters. Handled 320 cases of self cut-inlsuspected meter tampering, resulting in the recovery of $42,025.84 in revenue. Responded to:

= 962 rental light repairs. 18,481 underground locate requests. 1,689 trouble calls. 189 disconnections at the pole. 121 reconnections at the pole. 403 service dropslreconnections for customers (electricians, tree services).

StatisticIDescription Average Number of Customers Per Outage (ACO) System Average Interruption Duration Index (SAIDI) System Average Interruption Frequency Index (SAI FI)

On December 14 Tacoma Power experienced wide-spread damage to its Transmission & Distribution system due to a severe windstorm. Downed wires caused nearly half of the distribution feeders to be out of service as well as causing a 25 percent loss of transmission capacity. In addition, nearly 100 utility poles had been either broken or severely damaged. By the time the storm had passed over 100,000 customers throughout Tacoma Power's service area were without power.

Results including Storms 283 customers per outage

1 1 67 outage rr~inutes per average customer

2.5 interruptions per average customer

Transmission & Distribution line repair crews, tree trimming crews, dispatchers, warehouse crews and call center personnel were quickly mobilized in response to the system-wide outages. By working around the clock the crews had all transmission lines back in service by December 15 and they had restored power to 65,000 customers by December 16. The crews continued without respite until nearly all customers had their power restored by December 18. Preliminary damage repair costs have been estimated at $2.5 million dollars.

Financial Prepared and submitted $17.2 million in bid specifications. Continued to provide power transfer service for BPA under the terms and conditions of Tacoma Power's wholesale transfer tariff.

System Improvements Transmission and Power Plant Substations

lnstalled a second capacitor bank at Pearl Substation. lnstalled three pump protection and one dual-function switchgearlemergency generator relay at Cowlitz Project Salmon Hatchery. Replaced 230 kV potential transformers at Mayfield switchyard. Replaced 11 0 kV circuit breakers with SF6 breakers at Cushman and Fort Lewis Central substations and Cushman No. 2 hydro project. lnstalled the Southwest Substation digital fault recorder. lnstalled new line protection relays on the Cowlitz Substation end of the LaGrande lines. lnstalled new line protection relays on the LaGrande end of the Cowlitz-LaGrande lines. Completed Tacoma Power's Protection System Coordination Study. lnstalled remote communications with the relays at Alder Powerhouse. Completed a NortheastlSto-Beh-Lah relay upgrade. lnstalled new transmission line protection at Fort Lewis South Substation.

Distribution Substations Replaced substation breakers and/or circuit switchers at: . Plaza Substation

Croft Substation Portland Substation . Roosevelt Substation

Completed CedarISto-Beh-Lah relay upgrade. lnstalled new feeder protection relays in Lacamas and Crescent substations. Replaced all dead-end and defective bus support structures in Cedar Substation. lnstalled new data radios to poll the military loop substations to provide operational data to SCADAIEMS. lnstalled GPS clocks to provide accurate event time stamping for substation and hydro RTUIprotection sites.

Underground Projects Completed large residential projects: Salishan 464 lots, Radiance 436 lots, Saddle Creek 395 lots. Replaced 12 mechanical network protector relays with new, microprocessor-based relays. Replaced Hilltop #7 feeder cable (5,000 feet). Completed Wal-Mart development and Bridgeport Way underground feeder conversion. lnstalled primary underground system into 5,200 single-family and multi-family residential lots. lnstalled primary underground system into 100 commercial sites. Participated in the joint trench with Click! and installed 19,640 feet of power conduit.

Overhead Projects Replaced approximately 490 transmission and distribution poles. Completed the upgrade to the Potlatch line in accordance with the Memorandum of Understanding with BPA, which included rebuilding the Narrows Crossing. Completed the Blair Crossing removal and underground installation. Constructed transrr~ission line to Sto-Beh-Lah Substation.

Completed relocation of Tacoma Power facilities to facilitate City grade separation project at East "Dl' Street. Completed relocation of Tacoma Power facilities to facilitate City road improvement of 48th Street, McKinley to Portland avenues. Completed relocation of Tacoma Power facilities to facilitate Pierce County road improvement on Canyon Road from 116th to 128th streets. Entered into an agreement with the Washington State DOT for the relocation of power facilities to facilitate reconstruction of the Nalley Valley Viaduct. Completed construction at nine sites to facilitate Washington State DOT road improvements along 1-5 to facilitate highway improvements. Replaced wood poles with steel structures for crossing 1-5 at 35th Street South.

System Monitoring Completed installation of a radio system which enables the RTU at Southwest Substation to poll mini-RTUs located in each Military Loop substation. Completed installation and testing of GPS receivers at all hydroelectric power plants and electrical substations. Completed the ABB Energy Management System upgrade to the new Network Manager version. Completed SCADA installation at Tideflats, Crandall, Plaza, and Fort Lewis South substations. Installed new microwave link between Mossyrock and Mayfield to support dam safety, security, CCTV and new local plant control. The telemetering was upgraded for the BPA's Pierce County IVlutual utility customers to improve accuracy and responsiveness of interchange energy accounting. Radio coverage was improved in the south service area by completing modifications for a trunked mobile radio repeater using the LaGrande. Hydro radio tower.

Maintenance Trimmed trees on more than 385 line miles of transmission and distribution circuits. Mowed approximately 20 acres of transmission line right-of-way to allow crews maintenance and access.

Safety and Work Practices Safety Committee addressed multiple safety concerns and conducted monthly safety meetings for all Transmission & Distribution employees and provided safety and health training for T&D employees. Distributed updates and 24 new standards to 175 Construction Standards manual owners.

Regulatory Requirements Met the control performance standards set by the North American Electric Reliability Council (NERC). Certified all System Power Dispatchers by NERC and the Western Electricity Coordinating Council (WECC). Completed 2006 winter assessment training for the System Power Dispatchers as a requirement to meet the WECC audit Began preparing for the upcoming WECC audit of Tacoma Power's compliance with new reliability standards under development by NERC and the Federal Energy Regulatory Commission (FERC). Reviewed every requirement in every standard to

identify responsible parties within Tacoma Power, and to outline how Tacoma Power complies with the critical requirements. Working with Generation and Power Management, T&D began preparations to demonstrate compliance with new reliability standards under development by NERC and the Federal Energy Regulatory Commission (FERC). Issued a formal letter that clarifies System Operator Authority for Tacoma Power's electrical system during emergency conditions as required by the WECC audit.

Partnerships Joined and participated in the creation of a new regional transmission group, ColumbiaGrid. Helped develop an agreement to facilitate integrated, regional transmission planning and expansion. Signed agreements to allow third parties to attach wires on poles jointly owned with Qwest (City of Seattle, Elmhurst lblutual Power and Light, OHOP Mutual Light Company, Parkland Light and Water Company, and Lakeview Light and Power).

SAPlTechnology Implemented mobile dispatching for Electrical Inspection. Developed and trained detail process for management and billing for damage to Tacoma Power property. Established rental light and work order packet quality action teams to analyze existing processes, develop recommendations, and identify next steps.

Planning for the Future lnitiated an interconnection study for the Simpson Tacoma Kraft co-generation project located in the Tideflats area. lnitiated the RFP process to hire a consultant to perform the impact and facilities upgrade study to accommodate the Port of Tacoma's expansion in the Tideflats area.

a Completed an informal joint impact study with BPA to consider a longer period of transfer service (through 2024); outcome affects the proposed Canyon Substation and LaGrande line upgrades. Completed the T&D 6-Year Budget Plan along with the 200712008 Biennium budget. Completed the feederlsystem interconnection study between Puget Sound Energy and Tacoma Power to improve parties' system reliability. In support of the Water Division, Communication Engineering . Completed material procurement and design to enhance the coverage for

mobile radios in the watershed and water transrr~issions lines. Construction will be completed in spring of 2007. . Participated in the vendor selection of the Water Automated Meter Reading (AMR) system. The vendor was selected and contracted for a demonstration project, which uses wireless communications and Click! Network transmission.

Employee Development Developed and introduced a set of T&D Core Values to help guide how employees relate to one another in the workplace.

GATEWAY PRO.IECT

The advanced metering pilot program for commercial and residential customers continues to demonstrate that the technology works reliably and well. At year end, more than 7,000 residential meters had been installed and installations are continuing daily. The meters provide one-hour-interval consumption data directly to the SAP billing system for truly automatically billing. This capability can be further leveraged in the future for "time of use billing" and or load shedding if it becomes econorr~ically feasible. Areas of our service footprint with concentrations of older meters and overhead plant are being replaced first. A remote connection and disconnection feature was made operational in July 2006 allowing remote move in and move outs as well as past due account disconnects and results so far are very good. Over 150 commercial &minute interval data meters are connected to the Click! Network telecommunications network. Billing data from these meters is transferred from the STARK RT billing software to the SAP system over the network. The high-tech meters are communicating well over the Click! IVetwork system

A Pay-As-You-Go beta test was performed in 2006 with both employees and regular customers operational, Improvements were made and several "bugs" were worked out. Customers are able to make payments in advance for electrical service through several mechanisms including pay stations, over the phone and the internet as well as regular mail and our lobby customer service counter. The customers account balance is displayed on an in-home device that is updated every hour and customers get a warning light when the balance is below $5. A broader pilot test with more customers is planned for the next year.

CLICK! NETWORK

Click! IVetwork continued to focus on revenue and customer growth, operational efficiencies and customer excellence in 2006. Click! took a more "local" approach and incorporated more community connections in marketing initiatives. Construction activity continued in 2006 and added to the opportunity for additional revenue and customer growth.

Revenue and Customer Growth

Click! Network continued to grow customers in all three commercial product lines: cable television, wholesale data transport and wholesale high-speed Internet service.

Cable TV customers grew to 24,332 and HD premium customers increased to over 1500 customers. Most impressive was the growth of customers with advanced receivers. 1,000 more customers decided to add the advanced receivers with HD and digital video recording (DVR) capabilities in 2006. Video on demand (VOD) movie and event purchases grew in 2006 and provided consistent monthly revenue. The acceptance of VOD by customers will allow Click! to be on track with removing more costly, inefficient pay-per-view services in the future.

Click! was able to avoid a cable TV rate increase in 2006 and yet grew revenues from $16.4 million in 2005 to $18 million in 2006. Competitive pressures continued throughout the year, but with Comcast rate increases hitting near the end of 2006,

customer churn remained flat. Marketing efforts are being revamped in anticipation of a strong year ahead in 2007.

Click! staff further diversified wholesale data transport services circuits and ended the year with 316 wholesale circuits to authorized service providers. Authorized service providers resell these circuits to businesses for a variety of services such as voice, data, lnternet and last mile transport to their end user customers. Many of the end user customers are able to connect within the local marketplace and beyond due to Click! Network wholesale transport capabilities.

Click! Network continued to grow the wholesale high-speed lnternet end user base through the three ISPs; HarborNet, Net-Venture and Advanced Stream. At year-end 16,000 residential and business end users were connected to high-speed lnternet service through the lSPs

Operational Efficiencies

Click! Network's customer care group handled over 126,000 telephone calls in 2006 and answered 93% of all calls within 30 seconds. This exceeded the goal by 3% with a 1% overall improvement from 2005. Customer service continued to deliver excellent service to cable TV customers resulting in numerous customer commendations, Both the service technician and customer service groups received outstanding customer feedback during the 2006 November and December storms. Click! was able to restore customers faster than the competition.

Click! engineers worked throughout the year to create a diverse, routed infrastructure for lSPs to provide deliver a more redundant and reliable network to their end user customers. The second phase of the network redesign was implemented at year end 2006 with an expectation of the full four-phase project to be completed in 2007.

Technical operations and business systems teams assisted in the support of the installation of 3,000 new Gateway meters and supported a total of 7,000 Gateway high- tech meters by year end 2006. Click! continues to support this activity through the regular cable TV and lnternet installation work group.

The network earned a perfect 100 percent rating on the Federal Communication Commission's required Cumulative Leakage Index fly-over test in 2006. The test measures signal leakage from thousands of passive and active components throughout the cable network. Test results are critical in evaluating whether or not errant signals are leaking from the system which could affect the aeronautical communications spectrum and risk interfering with aircraft taking off or landing.

Click! worked on further operational efficiencies by realigning several workgroups. The former Network Operations Center was realigned and employees opted for either dispatch positions or Network Service Assurance (NSA) positions. A customer wholesale sales and service group was created to assist in focusing on our large, wholesale customers. Our goal is to improve our customer service to these large wholesale customers and to respond to them in a more timely manner. This new group was incorporated into the existing business systems workgroup to further allow for efficiencies, cross-training and additional weekend coverage. All of this was accomplished with no new headcount.

Customer service hours expanded to include extra hours on Saturdays and later hours during the week. An after-hours answering service was added from 1 OPM until 6AM. The results have been excellent and through this efficiency, Click! was able to meet the needs of the growing customer base without additional headcount.

Employee Development

The management team focused on internal communication, employee development and growth. 2006 functional goals were tied to employee initiatives and all goals were accomplished by year end. All employees received at least one review and development plan in 2006. All employees received a minimum of eight hours of training in the year. All employee meetings were held throughout 2006 to assist in improving corr~munications and newsletters were distributed on a regular basis to keep employees current on business issues. A communication team was formed and met regularly throughout the year to focus on employee issues and in keeping lines of communication open throughout all workgroups. A revised employee survey from 2005 will be completed early in 2007 to assess the need for further internal improvements.

Due to shifts in workgroups and to employee movement within Click! and Tacoma Power, six employees were promoted in 2006 and all internal positions were posted within Click! prior to be announced outside of Click!

Network Expansion

Click! Network completed construction in Lakewood and is presently serving Tacoma Power customers with cable TV and high-speed Internet. Click! also completed construction in Fife and celebrated the first cable TV and high-speed Internet connection with a ribbon cutting ceremony. Click! completed builds to date in over 50 percent of Tacoma Power's service area, passing approximately 90,000 homes out of Tacoma Power's total base of 165,000 customers.

Cable TV franchise negotiations neared completion with Pierce County and Rainier Communications Communications at the end of 2006. The agreement allows Click! Network to provide cable TV services to households in the northern part of the County in the Tacoma Power service area. Once Tacoma Power completes a business plan for further expansion of Click!, the decision to enter into negotiations for the southern part of Pierce County near Frederickson will be addressed. Click! staff will be involved in the business plan for this area and in determining a customer needs assessment for telecommunications products and services.

Community Relations

Click! staff collaborated with several non-profit, community-based organizations last year, and received valuable advertising and promotional recognition. Associations with lleighborhood Councils, Centro Latino, the Tacoma Rainiers, the Tacoma-Pierce County Humane Society, Tacoma Urban League, Boys & Girls Clubs of South Pierce County, Pierce County AIDS Foundation, Sexual Assault Center, Vadis, YWCA of Pierce County, Asia Pacific Cultural Center, Tacoma Little Theater, various Chambers of Commerce,

Associated Ministries and the Tacoma Art Museum continued to strengthen Click! Network's public image as a good corporate citizen.

Click! hosted tours for several groups interested in what makes Tacoma Power a leader in the telecommunications industry. Policy makers from the Washington Utilities and Transportation Commission, Federal Cornmunications Cornmission, Washington Association of Telecommunications Officers and Administrators, and local business leaders, elected officials and reporters spent time with Click! staff learning about the operational and economic benefits of the multi-application network.

Planning

The Click! management and supervisory team met during the last half of 2006 to develop a tactical and strategic plan for Click! Network to take us into the future. The planning efforts provide a roadmap for the team to focus on 7 key elements:

1. Incorporate the customer in strategic initiatives 2. Grow financial strength 3. Refine operational excellence 4. Leverage technology to create a competitive advantage 5 . Continuously improve internal & external communications 6. Enhance positive reputation in our community 7. Foster employee development

Issues on the federal and local regulatory horizon will make 2007 a year of change for Click! employees. The year will create challenges in managing customer expectations and in ensuring that existing customers needs are being met while making products and services attractive to new customers. With a solid plan and a focus on our goals, the team is poised and ready to take on the challenges ahead in 2007.

William A. Gaines Superintendent, Tacoma Power

Documents

annual 20 06 - Tacomacms.cityoftacoma.org/Finance/Financial_Reports/Annuals/PowerAnn06.… · Financial Analysis of Tacoma Power Net assets may serve over time as a useful indicator