NEVADA COGENERATION ASSOCIATES #1

FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996 
TOGETHER WITH AUDITORS' REPORT




REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Management Committee of
  Nevada Cogeneration Associates #1:

We  have  audited  the  accompanying   balance  sheets  of  NEVADA  COGENERATION
ASSOCIATES #1 (a Utah general partnership) as of December 31, 1997 and 1996, and
the related  statements  of income and  partners'  equity and cash flows for the
years then ended.  These  financial  statements  are the  responsibility  of the
Partnership's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence 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 Nevada Cogeneration  Associates
#1 as of December 31, 1997 and 1996,  and the results of its  operations and its
cash  flows for the years  then  ended in  conformity  with  generally  accepted
accounting principles.


ARTHUR ANDERSEN & COMPANY
Los Angeles, California
February 27, 1998

<PAGE>

                       NEVADA COGENERATION ASSOCIATES #1

                  BALANCE SHEETS - DECEMBER 31, 1997 AND 1996


                                                  1997          1996


ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                 $  5,416,442    $  5,821,900
  Receivables:
  Nevada Power Company                         3,632,944       3,414,709
  Other (amounts include $153,417 and
  $48,348 receivable from related parties 
  in 1997 and 1996, respectively)                171,100         141,808
  Inventories                                  1,018,796       1,084,093
  Prepaid expenses                               376,900          78,000
  Current portion of restricted cash             798,000         927,404
                                             -------------    ------------

 Total current assets                         11,414,182      11,467,914
                                             -------------    ------------

OPERATING FACILITY AND EQUIPMENT,
 at cost, net of accumulated
 depreciation of $18,560,822 and 
 $15,290,009 in 1997 and 1996, 
 respectively                                 82,652,388       86,053,302
                                             -------------    ------------

OTHER ASSETS:
 Deferred financing costs, net of
 accumulated amortization of $421,795
 and $335,388 in 1997 and 1996,
 respectively                                  1,603,434        1,689,841
 Restricted cash,
 net of current portion                        8,483,222        8,119,520
                                            -------------    -------------
 Total other assets                           10,086,656        9,809,361
                                            -------------    -------------
                                            $104,153,226     $107,330,577
                                            =============    =============

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

<PAGE>


                       NEVADA COGENERATION ASSOCIATES #1


                  BALANCE SHEETS - DECEMBER 31, 1997 AND 1996

                        LIABILITIES AND PARTNERS' EQUITY


                                                1997           1996
CURRENT LIABILITIES:
Project financing loan payable             $  4,495,786     $  3,578,280
Current portion of major maintenance
accrual                                         798,000          843,051
Payables:
Texaco Inc. and subsidiaries                  1,231,534        1,135,747
Trade and other (amounts include
$282,431 and $311,483 payable to
related parties in 1997 and 1996,
respectively)                                 1,680,586        1,568,667
Accrued liabilities                             409,531          387,491
                                            ------------     ------------
Total current liabilities                     8,615,437        7,513,236
                                            ------------     ------------
PROJECT FINANCING LOAN PAYABLE, net
  of current portion                         46,367,601       50,863,386

BONDS PAYABLE                                27,400,000       27,400,000

COMMITMENTS AND CONTINGENCIES (Note 7)

MAJOR MAINTENANCE ACCRUAL, net of current
  portion                                     2,338,333        3,225,659
                                             -----------    -------------
Total liabilities                            84,721,371       89,002,281
                                            ------------    -------------
PARTNERS' EQUITY:
Texaco Clark County Cogeneration
Company                                      12,627,350       11,909,571
Bonneville Nevada Corporation                 6,804,505        6,418,725
                                           -------------    ------------
Total partners' equity                       19,431,855       18,328,296
                                           -------------    ------------
                                           $104,153,226     $107,330,577
                                           =============    ============

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


<PAGE>


                       NEVADA COGENERATION ASSOCIATES #1

                   STATEMENTS OF INCOME AND PARTNERS' EQUITY

                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996



                                                  1997         1996

REVENUES:
 Sales of energy to Nevada Power 
 Company                                      $44,018,349   $43,283,499
 Sales of heat to Georgia-Pacific
 Corporation                                      839,273       596,194
 Interest and other income                        826,534     1,713,702
                                              ------------  ------------

 Total revenues                                45,684,156    45,593,395
                                              ------------  ------------

COSTS AND EXPENSES:
Plant and other operating expenses             26,193,641    26,356,012
  Depreciation and amortization                 3,482,077     3,600,671
  General and administrative expenses           1,677,147     2,176,360
  Interest expense                              6,187,432     6,702,212
  Asset impairment expense                        340,300            -      
                                              ------------- ------------
Total costs and expenses                       37,880,597    38,835,255
                                              ------------  ------------
NET INCOME                                    $ 7,803,559   $ 6,758,140
                                              ------------  ------------

PARTNERS' EQUITY AT BEGINNING OF YEAR         $18,328,296   $21,890,156


NET INCOME                                      7,803,559     6,758,140

DISTRIBUTION TO PARTNERS                       (6,700,000)  (10,320,000)
                                              ------------  ------------
PARTNERS' EQUITY AT END OF YEAR               $19,431,855   $18,328,296
                                              ------------  ------------

The accompanying notes are an integral part of these financial statements

<PAGE>

                       NEVADA COGENERATION ASSOCIATES #1

                            STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996


                                               1997            1996

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income                                  $ 7,803,559    $ 6,758,140
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization                 3,482,077      3,600,671
Asset impairment expense                        340,300              -   
Changes in operating assets and liabilities:
(Increase) decrease in receivables             (247,527)       289,840
(Increase) decrease in prepaids                (298,900)        83,790
Decrease in inventories                          65,297         12,996
(Decrease) increase in major 
maintenance accrual                            (932,375)       627,966
Increase (decrease) in payables                 207,706        (76,697)
Increase (decrease) in accrued liabilities       22,040       (348,718)
                                            -------------   -------------
Net cash provided by operating activity      10,442,177     10,947,988
                                            -------------   -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Capital expenditures                          (454,181)       (55,011)
Proceeds from refund of sales tax
relating to operating facility 
and equipment                                   119,124            -   
                                            -------------   -------------
Net cash used in investing activities          (335,057)       (55,011)
                                            -------------   -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Distributions to partners                  (6,700,000)    (10,320,000)
  Proceeds from restricted cash accounts      1,745,606       6,282,698
  Deposits into restricted cash accounts     (1,979,905)     (2,466,186)
  Payments for deferred sales tax payable          -           (474,561)
  Payments on project financing              (3,578,279)     (3,027,775)
                                            -------------   -------------
 Net cash used in financing activities      (10,512,578)    (10,005,824)
                                            -------------   -------------
NET (DECREASE) INCREASE IN CASH 
  AND CASH EQUIVALENTS                         (405,458)        887,153

CASH AND CASH EQUIVALENTS, 
at beginning of year                          5,821,900       4,934,747
                                            -------------   -------------
CASH AND CASH EQUIVALENTS, 
at end of year                             $  5,416,442      $5,821,900
                                            =============   =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for 
interest                                   $  6,228,487      $6,720,590
                                            =============   =============


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


<PAGE>

                       NEVADA COGENERATION ASSOCIATES #1

                         NOTES TO FINANCIAL STATEMENTS

                               DECEMBER 31, 1997


1.      General

Nevada  Cogeneration  Associates #1 (the  Partnership) is a general  partnership
between  Texaco  Clark  County  Cogeneration  Company  (TCCCC),  a  wholly-owned
subsidiary of Texaco Inc.  (Texaco),  and Bonneville Nevada Corporation (BNC), a
wholly-owned subsidiary of Bonneville Pacific Corporation (BPC). The Partnership
was organized  under Utah law on October 8, 1990. The  Partnership was organized
to design,  construct,  own and operate a  cogeneration  facility (the Facility)
located in Clark County,  Nevada for the purpose of selling  electric  energy to
Nevada  Power  Company  (NPC) for resale to its  customers  and selling  thermal
energy  to  Georgia-Pacific  Corporation  (Georgia-  Pacific)  for  use  in  its
wallboard facility.

The partners share equally in the  allocations  of income  (loss),  depreciation
expenses  and  other  tax  benefits  from  operations  of  the  Partnership.  In
accordance with the general partnership agreement,  BNC initially received a 66-
2/3  percent  and  TCCCC a  33-1/3  percent  disproportionate  share of net cash
distributions  until such time as net cash distributions  equaled  approximately
$18,876,000 (September,  1997) at which time BNC's and TCCCC's share of net cash
distributions  changed to 50 percent.  The Partnership  shall terminate,  unless
terminated at an earlier date pursuant to the general partnership agreement,  on
the  latter  of April  30,  2023,  or the date the  Partnership  elects to cease
operations.

The Facility consists of three combustion  turbine generators which exhaust heat
into three heat recovery steam generators,  producing electricity,  process heat
and steam sequentially using one fuel source. Additionally,  in a combined cycle
facility, electricity is produced by a condensing steam turbine. The Facility is
designed to support the name plate production of 85 megawatts of electric energy
and 275,000 pounds per hour of process heat.  Commercial operations commenced on
June 18, 1992.

2.      Summary of Significant Accounting Policies

        a.      Operating Facility and Equipment

        All costs  (including  interest and field  overhead  expenses)  incurred
during  the  construction  and the  precommission  phase  of the  Facility  were
capitalized  as part of the cost of the  Facility.  Revenue  earned  during  the
precommission  phase was offset against the costs of the Facility.  The Facility
and related  equipment are being  depreciated on a  straight-line  basis over 30
years,  the  estimated  useful  life of the  Facility  and the life of the Power
Purchase Agreement with Nevada Power Company.

<PAGE>


        b.      Deferred Financing Costs

        All legal and financing fees associated with the Construction Loan, Term
Loan and  Reimbursement  Agreement  (the  Agreement)  (see Note 3) and the Bonds
Payable (see Note 4) were deferred and are being  amortized  over the respective
term of the financing.

        c.      Major Maintenance Accrual

Each of the Facility's gas turbines will require a hot section replacement and a
major  overhaul   approximately   every  25,000  and  50,000   operating  hours,
respectively. Expenses for these events are accrued for on a straight-line basis
over the expected  operating-hour  interval between each like maintenance event.
Expenditures for minor maintenance,  repairs and renewals are charged to expense
as incurred. Expenditures for additions and improvements are capitalized.

The accruals for major repair and  maintenance  events are based on management's
estimates  of what these events will cost at the time the events  occur.  Due to
fluctuations  in the extent of repairs,  prices and changes in the timing of the
scheduled  events,  the  estimated  costs of these events can differ from actual
costs incurred.

        d.      Statements of Cash Flows

        For  purposes  of  reporting  cash  flows,  the  Partnership   considers
short-term  investments with an original maturity of three months or less, to be
cash equivalents.

        e.      Fair Value of Financial Instruments

        The carrying  amount of the  short-term  investments  approximates  fair
value due to the short  maturity of those  instruments.  Based on the  borrowing
rates  currently  available to the  Partnership  for long-term debt with similar
terms and  maturities as the project  financing  loan payable and bonds payable,
the carrying  amounts of the project  financing  loan payable and bonds  payable
approximate fair value.  Taking into consideration the prevailing interest rates
at December 31, 1997 and the Partnership's  credit  worthiness,  the Partnership
would have had to pay approximately  $3,970,940 to buy-out the remaining portion
of the interest rate swap agreements (See Note 3).

     f.      Pervasiveness of Estimates
     
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the  reported  amounts  of assets  and  liabilities,  the  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

<PAGE>

The Partnership's  results of operations for any particular year may be impacted
by fluctuations in the price of natural gas.

        g.      Restricted Cash Accounts

The  Partnership is required by the Agreement to maintain a debt service reserve
account.  The funds in this  restricted  account are maintained  until such time
that  the  Agreement  is  fully  satisfied.  These  funds  may  be  used  by the
administrative  agent  of the  Agreement  to pay  fees,  costs,  principal,  and
interest  associated  with  the  Agreement.  The  balance  in this  account  was
$5,347,409 and $4,990,090 as of December 31, 1997 and 1996, respectively.

Due to amendments  adopted during 1996, the Partnership is no longer required to
maintain a balance in the thermal host restricted reserve account.  This account
could become active again under certain  circumstances in which the Thermal Host
(Georgia-Pacific)  does  not  purchase  sufficient  thermal  energy,  and  other
situations,  as  defined.  The account  balance was $0 on December  31, 1997 and
1996, respectively.

Another of the  restricted  cash  accounts is designated  for major  maintenance
events (see c.  above).  This  account is funded in order to reserve  sufficient
cash to allow  payment of the cost of the major  maintenance  events,  when they
occur.  Funds for this account are  deposited  on a systematic  basis for events
occurring  within the next 36 months  and are used to  service  the cost of each
event.  This account will be maintained for the duration of the  Agreement.  The
balance in this  account  at  December  31,  1997 and 1996 was,  $2,235,811  and
$2,448,193, respectively.

The  Partnership  also maintains a Selective  Catalytic  Reduction (SCR) reserve
account with  balances of  $1,698,002  and  $1,608,641  at December 31, 1997 and
1996, respectively.

All restricted  cash accounts are required by the Agreement and earn interest at
the  current  market  rate.  Upon  authorization  from  certain  parties  to the
Agreement, funds from any of the above accounts may be used for items other than
their restricted purpose.

3.      Project Financing

     On April 28, 1993 the Partnership converted their construction financing to
term financing.  The financing obtained consisted of term loans of approximately
$64,350,000 and letters of credit issued in support of $27,400,000 of tax exempt
bonds. Amounts outstanding under the Agreement are reduced by quarterly payments
in February, May, August and November, with the final payment due November 2007.
The term loan balance at December 31, 1997 was $50,863,387. The Agreement places
certain  restrictions  on cash  accounts,  capital  distributions  and permitted
investments.  The Agreement is secured by substantially all of the assets of the
Partnership.

<PAGE>

The  Partnership  has  entered  into six  interest  rate  swap  agreements  with
commercial  banks.  Three  swaps  (amortizing  swaps) had an  aggregate  initial
notional  principal  amount of $45 million  ($31,770,000  at December  31, 1997)
which  decreases  over the ten-year  term of the  agreements.  These  agreements
essentially  change the  Partnership's  interest  rate  exposure on the notional
amount to a fixed 8.85  percent per annum plus the  lenders'  margin.  The other
three interest rate swap  agreements  (bullet swaps) have an aggregate  notional
principal amount of $15 million which remains constant over their ten-year term.
These  swap  agreements  essentially  change  the  Partnership's  interest  rate
exposure  on the  notional  amount to a fixed  7.71  percent  per annum plus the
lenders' margin.

If the variable rate  applicable to the notional  amount  exceeds the fixed rate
established by the swap agreements, the Partnership could be exposed to the risk
of higher  interest  costs in the  event of  non-performance  by the  commercial
banks.  The Partnership does not,  however,  anticipate  non-performance  by the
commercial banks.

Amounts outstanding (other than those noted above) bear interest at LIBOR plus a
margin of .875 percent and are paid monthly. The weighted average interest rate,
inclusive of the effect of the swap agreements,  on the outstanding loan balance
at December 31, 1997 and 1996 was 7.74 percent and 7.58 percent, respectively.

The future minimum  payments on the debt  outstanding  and the letters of credit
supporting the tax-exempt bonds at December 31, 1997, are as follows:


                      1998         4,495,786
                      1999         5,138,041
                      2000         5,688,546
                      2001         6,239,050 
                      2002         6,881,304
                      Thereafter  22,420,660
                                -------------
                                 $50,863,387    
                                =============


4.      Bonds Payable

The Partnership  initially  obtained  tax-exempt bond financing in the amount of
$19,400,000  from Clark  County,  Nevada in the form of  Industrial  Development
Revenue Bonds. These Variable Rate Demand Industrial  Development  Revenue Bonds
are due and payable on November 1, 2020.  Interest is currently  payable monthly
and the  interest  rate was 6.26 and 6.16 percent at December 31, 1997 and 1996,
respectively.

<PAGE>

The  Partnership  obtained  additional  project bond  financing of $8,000,000 on
February  11,  1992,  from Clark  County  Nevada.  These  Variable  Rate  Demand
Industrial  Development  Revenue  Bonds are due and payable on November 1, 2021.
Interest is currently payable monthly and the interest rate was 6.26 percent and
6.16 percent at December 31, 1997 and 1996.

5.      Related-Party Transactions

        a.      Gas Sales and Purchase Agreements

        The  Partnership  has long-term  agreements for the purchase of fuel gas
(in addition to those described in Note 7) with Texaco Natural Gas Inc.  (TNGI),
a wholly owned  subsidiary of Texaco and Texaco  Exploration  & Production  Inc.
(TEPI), a wholly owned subsidiary of Texaco.

        The maximum daily  contract  quantities of gas available  under the TNGI
and TEPI  agreements  are  6,250  and 5,250  MMBtu  per day,  respectively.  The
agreements  require the  Partnership to take delivery of and/or pay for a volume
of gas up to 90 percent of the TNGI  agreement  quantities and 75 percent of the
TEPI agreement quantities.  The Partnership has two and one-half years under the
TNGI  agreement and five years under the TEPI  agreement to take delivery of any
gas not  taken  but  paid  for in any  one  contract  year,  as  defined  in the
agreements.

        The initial  weighted  average price under the TNGI  agreement was $2.29
per MMBtu and $2.13 per MMBtu under the TEPI  agreement  commencing  May 1, 1993
until May 1, 2007. The price paid under these agreements is adjusted annually by
the change in the Consumer  Price Index (CPI) each May 1. The TNGI agreement has
additional  increases,  as defined in the  agreement,  starting May 1, 2007. The
weighted average price as of December 31, 1997 was $2.63 per MMBtu and $2.45 per
MMBtu for TNGI and TEPI, respectively.

        The TNGI  agreement  remains in effect  until the latter of December 31,
2011, or twenty years from the commencement  date (June 18, 1992), as defined in
the agreement.  Under the TNGI agreement,  an additional 8,250 MMBtu per day was
replaced with other suppliers' long-term gas contracts (Replacement  Contracts).
TNGI will provide up to 8,250 MMBtu per day to the  Partnership  in the event of
default under the  Replacement  Contracts.  The amounts  incurred under the TNGI
agreement were $6,180,013 and $6,290,456 in 1997 and 1996, respectively.

        The TEPI  agreement  remains in effect  until the latter of December 31,
2007 or fifteen years from the commencement  date (June 18, 1992), as defined in
the agreement. The amounts incurred under the TEPI agreement were $3,162,641 and
$3,340,878 in 1997 and 1996, respectively.

<PAGE>

     b.      Fuels Management Agreement

The Partnership is party to an agreement with TNGI,  whereby TNGI is to procure,
at prices  based upon the spot  market,  and manage all  fuel-gas  supplies  and
transportation for the Partnership (except those fuel- gas supplies procured and
delivered under tariff-gas contracts,  those fuel-gas supplied under an excepted
contract and other fuel-gas  supplies excluded from this agreement by the mutual
consent of TNGI and TEPI until termination of the agreement.

        The  agreement  will remain in effect  until the latter of December  31,
2011, or twenty years from the commercial  operations date (June 18, 1992). TNGI
receives a fixed  service fee of $0.04 per MMBtu on  short-term  contracts  (one
year or less). TNGI also receives a fixed service fee of $0.04 per MMBtu,  which
is adjusted annually by the change in the CPI, each May 1, for the volume of gas
delivered  under the  Replacement  Contracts.  TNGI received  fixed service fees
under short-term and Replacement  Contracts of $191,241 and $216,142 in 1997 and
1996, respectively.

        c.      Operation and Maintenance Agreement

        The Partnership has an agreement with Bonneville Pacific Services,  Inc.
(BPSI),  a wholly-owned  subsidiary of BPC,  whereby BPSI performs all operation
and maintenance activities necessary for the production of electrical energy and
process heat. The agreement  became effective August 1, 1991, and will remain in
effect for 30 years from the commercial operations date (June 18, 1992), subject
to earlier  termination  after 10 years from the commercial  operations  date as
defined in the agreement.

        BPSI is paid for all costs  incurred in  connection  with  operating and
maintaining the Facility and is paid an annual operating fee of $260,000,  which
is adjusted  annually by the change in the CPI. BPSI may earn an incentive bonus
which is based upon BPSI achieving  certain  operating  goals, as defined in the
agreement.   The  costs  incurred  under  this  agreement  were  $1,729,752  and
$1,731,625  in 1997  and  1996,  respectively.  Incentive  bonuses  earned  were
$333,065 and $412,352 in 1997 and 1996, respectively.

        d.      Engineering and Administrative and Other Costs

        The  Partnership,  under  agreements,  pays for certain  engineering and
administrative  expenses and other costs to Texaco and its subsidiaries.  Texaco
may also  earn a  performance  bonus  based  upon the  plant  achieving  certain
operational  goals,  as defined in the agreement.  The fees incurred under these
agreements  totaled  $525,159  and  $567,128  in 1997  and  1996,  respectively.
Performance  incentives  earned  were  $333,065  and  $412,352 in 1997 and 1996,
respectively.

<PAGE>

6.      Income Taxes

Income  taxes are not recorded by the  Partnership  since the net income or loss
allocated to the partners is included in their respective income tax returns.

7.      Commitments and Contingencies

        a.      Power Purchase Agreement

        The Partnership has an agreement for long-term power purchases of energy
and capacity by NPC which  terminates on April 30, 2023. The Partnership is paid
for  energy  delivered  based  upon fixed  rates,  as defined in the  agreement,
adjusted  annually  at 120  percent of the change in the CPI.  NPC also pays the
Partnership  for firm  capacity  based  upon  fixed  rates,  as  defined  in the
agreement, increased annually by two percent.

        During 1997 the  Partnership  negotiated  an amendment to the  agreement
severely limiting NPC's  curtailment  rights in exchange for a price discount of
$.25 per  megawatt  hour.  The  amendment  was  signed on October 3, 1997 and is
awaiting Nevada Public Utility Commission approval.

        Pursuant  to the amended  agreement,  the  Partnership  has the right to
release NPC from its purchase obligation for an agreed upon payment per released
megawatt.  In 1997, the Partnership  received $1,101,320 for released megawatts.
In conjunction  with the above the  Partnership was able to manage its fuel cost
through non-acceptance or sell to others.

        b.      Heat Purchase Agreement

        The  Partnership has an agreement for the long-term sale of process heat
to  Georgia-Pacific.  The agreement became effective  January 29, 1991, and will
terminate  on April 30,  2023,  or  earlier,  as defined in the  agreement.  The
Partnership  is paid for process heat delivered at an amount equal to 65 percent
of the energy  cost of  operating  Georgia-Pacific's  kiln and gypsum  calcining
mills on the lowest  alternative  energy.  Process heat sold under this contract
has been sufficient for the Partnership to meet its annual  qualifying  facility
status and is expected to be sufficient  for the  Partnership to meet its annual
qualifying facility requirements in the future.

        c.      Gas Sales and Purchase Agreements

The Partnership has two long-term agreements for the purchase of fuel gas (other
than  those  described  in Note 5) with  unrelated  parties.  The first of these
agreements  remains in effect  until the  earlier  of March 1, 2008,  or fifteen
years from the commercial operations date (June 18, 1992).

<PAGE>

The second agreement remains in effect until the latter of December 31, 2007, or
fifteen years from the commercial operations date (June 18, 1992).

The maximum daily contract  quantities  available under these  agreements  total
7,000 MMBtu per day. The agreements  require the Partnership to take delivery of
and/or  pay for a volume of gas up to 75 percent of the  average  maximum  daily
contract  quantities  available under these agreements.  The Partnership has two
years (under the 2,000 MMBtu per day  contract)  and five years (under the 5,000
MMBtu per day  contract)  to take  delivery of any gas not taken but paid for in
any one contract year, as defined in the agreements.

The Partnership  initially paid a fixed price ($2.00 to $2.20 per MMBtu) for the
quantities of fuel gas delivered  under these  contracts.  The price paid on the
5,000 MMBtu per day contract is adjusted  annually by the change in the CPI. The
price on the 2,000 MMBtu per day contract  will be adjusted by 90 percent of the
change in the CPI,  twenty-five  months after the start of gas deliveries  (June
18,  1992),  and  annually  each May 1  thereafter.  The price paid under  these
contracts was $2.30 to $2.37 during 1997.

d.      Equipment Lease

The  Partnership and Nevada  Cogeneration  Associates #2 jointly entered into an
equipment lease  agreement,  with an unrelated  party, on December 31, 1992. The
agreement  requires monthly payments of $48,747 plus sales tax over the ten year
term. The Partnership's share is one-half of the monthly payments.

e.      Environmental Matters

        As a result of issues  brought  forth  during 1996  regarding  SCR,  the
Partnership has negotiated  with the EPA for the  installation of two SCR units.
The schedule calls for the installation to take place by March 1999.

        Funds for the  installations  will come  from the SCR  reserve  account,
current reserves are considered adequate to cover the cost of the installations.

f.      Electric Utility Deregulation

     In 1997, The Nevada  Legislature  passed  legislation  to  restructure  the
Nevada electric utility industry.  The legislation (AB366) calls for competition
to commence by January 1, 2000.  The eventual  outcome of these  activities  and
their potential impact, if any, upon the Partnership is not known.

<PAGE>

                       NEVADA COGENERATION ASSOCIATES #1

                              FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 1998 AND 1997
                         TOGETHER WITH AUDITORS' REPORT


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Management Committee of
  Nevada Cogeneration Associates #1:

We  have  audited  the  accompanying   balance  sheets  of  NEVADA  COGENERATION
ASSOCIATES #1 (a Utah general partnership) as of December 31, 1998 and 1997, and
the related  statements  of income and  partners'  equity and cash flows for the
years then ended.  These  financial  statements  are the  responsibility  of the
Partnership's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence 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 Nevada Cogeneration  Associates
#1 as of December 31, 1998 and 1997,  and the results of its  operations and its
cash  flows for the years  then  ended in  conformity  with  generally  accepted
accounting principles.


Arthur Andersen & Company
Los Angeles, California
February 12, 199

<PAGE>



                       NEVADA COGENERATION ASSOCIATES #1
                  BALANCE SHEETS - DECEMBER 31, 1998 AND 1997


                                                      1998            1997

                                      
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................       $ 5,300,921       $ 5,416,442
  Receivables:
  Nevada Power Company .....................         3,708,360         3,632,944
    Other
    (amounts include $71,275 and
    $153,417 receivable from
    related parties in 1998 and
    1997, respectively) ....................           161,330           171,100
  Inventories ..............................           899,758         1,018,796
  Prepaid expenses .........................              --             376,900
  Current portion of
  restricted cash ..........................         3,503,948           798,000
                                                   -----------       -----------
Total current assets .......................        13,574,317        11,414,182
                                                   -----------       -----------

OPERATING FACILITY AND EQUIPMENT,
  at cost, net of accumulated
  depreciation of $21,996,892 and 
  $18,560,822 in 1998 and 1997, 
  respectively ...............................       79,379,670       82,652,388
                                                   ------------     ------------

OTHER ASSETS:
  Deferred financing costs, net of
  accumulated amortization of $508,201
  and $421,795 in 1998 and 1997,
  respectively ...............................        1,517,028        1,603,434
  Restricted cash, net of
  current portion ............................        6,543,469        8,483,222
                                                   ------------     ------------
 Total other assets ..........................        8,060,497       10,086,656
                                                   ------------     ------------
                                                   $101,014,484     $104,153,226
                                                   ============     ============


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

<PAGE>

                       NEVADA COGENERATION ASSOCIATES #1


                  BALANCE SHEETS - DECEMBER 31, 1998 AND 1997



LIABILITIES AND PARTNERS' EQUITY


                                                           1998            1997
CURRENT LIABILITIES:
 Project financing loan payable                      $5,138,041     $  4,495,786
 Current portion of major
 maintenance accrual .........................        1,852,814          798,000
  Payables:
  Texaco Inc. and subsidiaries ...............        1,218,316        1,231,534
  Trade and other (amounts include
  $256,066 and $282,431 payable to
  related parties in 1998 and 1997,
  respectively) ..............................        1,391,250        1,680,586
  Accrued liabilities ........................          447,373          409,531
                                                   ------------     ------------
  Total current liabilities ..................       10,047,794        8,615,437
                                                   ------------     ------------

PROJECT FINANCING LOAN PAYABLE, net
of current portion ...........................       41,229,559       46,367,601

BONDS PAYABLE ................................       27,400,000       27,400,000

COMMITMENTS AND CONTINGENCIES (Note 8)

MAJOR MAINTENANCE ACCRUAL, net of current
  portion ....................................        1,345,894        2,338,333
                                                   ------------     ------------
Total liabilities ............................       80,023,247       84,721,371
                                                   ------------     ------------
PARTNERS' EQUITY:
Texaco Clark County Cogeneration
Company ......................................       13,407,042       12,627,350
Bonneville Nevada Corporation ................        7,584,195        6,804,505
                                                   ------------     ------------
Total partners' equity .......................       20,991,237       19,431,855
                                                   ------------     ------------
                                                   $101,014,484     $104,153,226
                                                   ============     ============

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

<PAGE>

                       NEVADA COGENERATION ASSOCIATES #1


                   STATEMENTS OF INCOME AND PARTNERS' EQUITY

                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997


    
                                                         1998              1997

REVENUES:
Sales of energy to Nevada Power
Company ....................................     $ 45,733,059      $ 44,018,349
Sales of heat to Georgia-Pacific
Corporation ................................          716,084           839,273
Interest and other income ..................          889,688           826,534
                                                 ------------      ------------

Total revenues .............................       47,338,831        45,684,156
                                                 ------------      ------------

COSTS AND EXPENSES:
  Plant and other operating expenses .......       25,933,891        26,193,641
  Depreciation and amortization ............        3,532,448         3,482,077
  General and administrative expenses ......        1,646,608         1,677,147
  Interest expense .........................        5,773,559         6,187,432
  Asset impairment expense .................          192,943           340,300
                                                 ------------      ------------
Total costs and expenses ...................       37,079,449        37,880,597
                                                 ------------      ------------
NET INCOME .................................     $ 10,259,382      $  7,803,559
                                                 ============      ============

PARTNERS' EQUITY AT
BEGINNING OF YEAR ..........................     $ 19,431,855      $ 18,328,296

NET INCOME .................................       10,259,382         7,803,559

DISTRIBUTION TO PARTNERS ...................       (8,700,000)       (6,700,000)
                                                 ------------      ------------
PARTNERS' EQUITY AT END
OF YEAR ....................................     $ 20,991,237      $ 19,431,855
                                                 ============      ============


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

<PAGE>

                       NEVADA COGENERATION ASSOCIATES #1

                            STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

                   
                                                           1998            1997 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .....................................   $ 10,259,382    $  7,803,559
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization ..................      3,532,448       3,482,077
Asset impairment expense .......................        192,943         340,300
Changes in operating assets and liabilities:
(Increase) in receivables ......................        (65,646)       (247,527)
Decrease (increase) in prepaids ................        376,900        (298,900)
Decrease in inventories ........................        119,038          65,297
Increase (decrease) in major
maintenance accrual ............................         62,375        (932,375)
(Decrease) increase in payables ................       (302,554)        207,706
Increase in accrued liabilities ................         37,842          22,040
                                                   ------------    ------------
Net cash provided by operating
activities .....................................     14,212,728      10,442,177
                                                   ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................         (366,267)         (454,181)
Proceeds from refund of sales tax
relating to operating facility
and equipment ..............................             --             119,124
                                                 ------------      ------------
Net cash used in investing
activities .................................         (366,267)         (335,057)
                                                 ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Distributions to partners ................       (8,700,000)       (6,700,000)
  Proceeds from restricted
  cash accounts ............................          877,697         1,745,606
  Deposits into restricted
  cash accounts ............................       (1,643,892)       (1,979,905)
  Payments on project financing ............       (4,495,787)       (3,578,279)
                                                 ------------      ------------
Net cash used in financing
activities .................................      (13,961,982)      (10,512,578)
                                                 ------------      ------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS ...........................         (115,521)         (405,458)

CASH AND CASH EQUIVALENTS,
at beginning of year .......................        5,416,442         5,821,900
                                                 ------------      ------------
CASH AND CASH EQUIVALENTS,
at end of year .............................     $  5,300,921      $  5,416,442
                                                 ============      ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 Cash paid during the year
 for interest ..................................   $5,736,092      $  6,228,487
                                                 ============      ============

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

<PAGE>

NEVADA COGENERATION ASSOCIATES #1

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1998


1.      General

Nevada  Cogeneration  Associates #1 (the  Partnership) is a general  partnership
between  Texaco  Clark  County  Cogeneration  Company  (TCCCC),  a  wholly-owned
subsidiary of Texaco Inc.  (Texaco),  and Bonneville Nevada Corporation (BNC), a
wholly-owned subsidiary of Bonneville Pacific Corporation (BPC). The Partnership
was organized  under Utah law on October 8, 1990. The  Partnership was organized
to design,  construct,  own and operate a  cogeneration  facility (the Facility)
located in Clark County,  Nevada for the purpose of selling  electric  energy to
Nevada  Power  Company  (NPC) for resale to its  customers  and selling  thermal
energy to Georgia-Pacific Corporation (Georgia-Pacific) for use in its wallboard
facility.

The partners share equally in the  allocations  of income  (loss),  depreciation
expenses  and  other  tax  benefits  from  operations  of  the  Partnership.  In
accordance  with the general  partnership  agreement,  BNC initially  received a
66-2/3  percent and TCCCC a 33-1/3  percent  disproportionate  share of net cash
distributions  until such time as net cash distributions  equaled  approximately
$18,876,000 (September,  1997) at which time BNC's and TCCCC's share of net cash
distributions  changed to 50 percent.  The Partnership  shall terminate,  unless
terminated at an earlier date pursuant to the general partnership agreement,  on
the  latter  of April  30,  2023,  or the date the  Partnership  elects to cease
operations.

The Facility consists of three combustion  turbine generators which exhaust heat
into three heat recovery steam generators,  producing electricity,  process heat
and steam sequentially using one fuel source. Additionally,  in a combined cycle
facility, electricity is produced by a condensing steam turbine. The Facility is
designed to support the name plate production of 85 megawatts of electric energy
and 275,000 pounds per hour of process heat.  Commercial operations commenced on
June 18, 1992.

2.      Summary of Significant Accounting Policies

        a.      Operating Facility and Equipment

        All costs  (including  interest and field  overhead  expenses)  incurred
during  the  construction  and the  precommission  phase  of the  Facility  were
capitalized  as part of the cost of the  Facility.  Revenue  earned  during  the
precommission  phase was offset against the costs of the Facility.  The Facility
and related  equipment are being  depreciated on a  straight-line  basis over 30
years,  the  estimated  useful  life of the  Facility  and the life of the Power
Purchase Agreement with Nevada Power Company.


        b.      Inventories

Inventories  consist  primarily  of spare parts and are stated at average  cost,
which did not exceed market.

        c.      Deferred Financing Costs

        All legal and financing fees associated with the Construction Loan, Term
Loan and  Reimbursement  Agreement  (the  Agreement)  (see Note 3) and the Bonds
Payable (see Note 4) were deferred and are being  amortized  over the respective
term of the financing.

        d.      Major Maintenance Accrual

Each of the Facility's gas turbines will require a hot section replacement and a
major  overhaul   approximately   every  25,000  and  50,000   operating  hours,
respectively. Expenses for these events are accrued for on a straight-line basis
over the expected  operating-hour  interval between each like maintenance event.
Expenditures for minor maintenance,  repairs and renewals are charged to expense
as incurred. Expenditures for additions and improvements are capitalized.

The accruals for major repair and  maintenance  events are based on management's
estimates  of what these events will cost at the time the events  occur.  Due to
fluctuations  in the extent of repairs,  prices and changes in the timing of the
scheduled  events,  the  estimated  costs of these events can differ from actual
costs incurred.

        e.      Statements of Cash Flows

        For  purposes  of  reporting  cash  flows,  the  Partnership   considers
short-term  investments with an original maturity of three months or less, to be
cash equivalents.

        f.      Fair Value of Financial Instruments

        The carrying  amount of the  short-term  investments  approximates  fair
value due to the short  maturity of those  instruments.  Based on the  borrowing
rates  currently  available to the  Partnership  for long-term debt with similar
terms and  maturities as the project  financing  loan payable and bonds payable,
the carrying  amounts of the project  financing  loan payable and bonds  payable
approximate fair value.  Taking into consideration the prevailing interest rates
at December 31, 1998 and the Partnership's  credit  worthiness,  the Partnership
would have had to pay approximately  $3,848,420 to buy-out the remaining portion
of the interest rate swap agreements (See Note 3).


     g. Pervasiveness of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the reported  amounts of assets and  liabilities  and the  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

The Partnership's  results of operations for any particular year may be impacted
by fluctuations in the price of natural gas.

     h. Restricted Cash Accounts

The  Partnership is required by the Agreement to maintain a debt service reserve
account.  The funds in this  restricted  account are maintained  until such time
that  the  Agreement  is  fully  satisfied.  These  funds  may  be  used  by the
administrative  agent  of the  Agreement  to pay  fees,  costs,  principal,  and
interest  associated  with  the  Agreement.  The  balance  in this  account  was
$5,383,604 and $5,347,409 as of December 31, 1998 and 1997, respectively.

Due to amendments  adopted during 1997, the Partnership is no longer required to
maintain a balance in the thermal host restricted reserve account.  This account
could become active again under certain  circumstances in which the Thermal Host
(Georgia-Pacific)  does  not  purchase  sufficient  thermal  energy,  and  other
situations,  as  defined.  The account  balance was $0 on December  31, 1998 and
1997, respectively.

Another of the  restricted  cash  accounts is designated  for major  maintenance
events (see d.  above).  This  account is funded in order to reserve  sufficient
cash to allow  payment of the cost of the major  maintenance  events,  when they
occur.  Funds for this account are  deposited  on a systematic  basis for events
occurring  within the next 36 months  and are used to  service  the cost of each
event.  This account will be maintained for the duration of the  Agreement.  The
balance in this  account  at  December  31,  1998 and 1997 was,  $3,012,679  and
$2,235,811, respectively.

The  Partnership  also maintains a Selective  Catalytic  Reduction (SCR) reserve
account with  balances of  $1,651,134  and  $1,698,002  at December 31, 1998 and
1997, respectively. (See Note 8e).

All restricted  cash accounts are required by the Agreement and earn interest at
the  current  market  rate.  Upon  authorization  from  certain  parties  to the
Agreement, funds from any of the above accounts may be used for items other than
their restricted purpose.


     i. New Statement of Position

On April 3, 1998, the American  Institute of Certified Public Accountants issued
Statement of Position 98-5  Reporting on the Costs of Start-Up  Activities  (the
Statement).  The  Statement  provides  guidance on the  financial  reporting  of
start-up costs and organization  costs. It requires costs of start-up activities
and organization  costs to be expensed as incurred.  The Partnership is required
to adopt the Statement on January 1, 1999.  Management  believes adoption of the
Statement  will  not  have a  material  impact  on the  Partnership's  financial
position or results of operations.

3.      Project Financing

On April 28, 1993 the Partnership converted their construction financing to term
financing.  The  financing  obtained  consisted  of term loans of  approximately
$64,350,000 and letters of credit issued in support of $27,400,000 of tax exempt
bonds. Amounts outstanding under the Agreement are reduced by quarterly payments
in February, May, August and November, with the final payment due November 2007.
The term loan balance at December 31, 1998 was $46,367,600. The Agreement places
certain  restrictions  on cash  accounts,  capital  distributions  and permitted
investments.  The Agreement is secured by substantially all of the assets of the
Partnership.

The  Partnership  has  entered  into six  interest  rate  swap  agreements  with
commercial  banks.  Three  swaps  (amortizing  swaps) had an  aggregate  initial
notional  principal  amount of $45 million  ($27,360,000  at December  31, 1998)
which  decreases  over the ten-year  term of the  agreements.  These  agreements
essentially  change the  Partnership's  interest  rate  exposure on the notional
amount to a fixed 8.85  percent per annum plus the  lenders'  margin.  The other
three interest rate swap  agreements  (bullet swaps) have an aggregate  notional
principal amount of $15 million which remains constant over their ten-year term.
These  swap  agreements  essentially  change  the  Partnership's  interest  rate
exposure  on the  notional  amount to a fixed  7.71  percent  per annum plus the
lenders' margin.

If the variable rate  applicable to the notional  amount  exceeds the fixed rate
established by the swap agreements, the Partnership could be exposed to the risk
of higher  interest  costs in the  event of  non-performance  by the  commercial
banks.  The Partnership does not,  however,  anticipate  non-performance  by the
commercial banks.

Amounts outstanding (other than those noted above) bear interest at LIBOR plus a
margin of .875 percent and are paid monthly. The weighted average interest rate,
inclusive of the effect of the swap agreements,  on the outstanding loan balance
at December 31, 1998 and 1997 was 7.20 percent and 7.74 percent, respectively.


The future minimum  payments on the debt  outstanding  and the letters of credit
supporting the tax-exempt bonds at December 31, 1998, are as follows:



                
                1999     $  5,138,041
                2000        5,688,546 
                2003        6,239,050
                2004        6,881,304
                2005        7,798,813
                Thereafter 14,621,846
                           -----------
                          $46,367,600          
                           ===========


4.      Bonds Payable

The Partnership  initially  obtained  tax-exempt bond financing in the amount of
$19,400,000  from Clark  County,  Nevada in the form of  Industrial  Development
Revenue Bonds. These Variable Rate Demand Industrial  Development  Revenue Bonds
are due and payable on November 1, 2020.  Interest is currently  payable monthly
and the  interest  rate was 6.31 and 6.26 percent at December 31, 1998 and 1997,
respectively.

The  Partnership  obtained  additional  project bond  financing of $8,000,000 on
February  11,  1992,  from Clark  County,  Nevada.  These  Variable  Rate Demand
Industrial  Development  Revenue  Bonds are due and payable on November 1, 2021.
Interest is currently payable monthly and the interest rate was 6.31 percent and
6.26 percent at December 31, 1998 and 1997.

5.      Related-Party Transactions

        a.      Gas Sales and Purchase Agreements

 The Partnership has long-term agreements for the  purchase of fuel gas 
(in addition to those described in Note 8) with Texaco Natural Gas Inc. (TNGI),
and Texaco Exploration & Production Inc. (TEPI), both wholly owned 
subsidiaries of Texaco.

        The maximum daily  contract  quantities of gas available  under the TNGI
and TEPI  agreements  are  6,250  and 5,250  MMBtu  per day,  respectively.  The
agreements  require the  Partnership to take delivery of and/or pay for a volume
of gas up to 90 percent of the TNGI  agreement  quantities and 75 percent of the
TEPI agreement quantities.  The Partnership has two and one-half years under the
TNGI  agreement and five years under the TEPI  agreement to take delivery of any
gas not  taken  but  paid  for in any  one  contract  year,  as  defined  in the
agreements.  As of December 31, 1998, the  Partnership had satisfied the minimum
volumetric contract obligations.

        The initial  weighted  average price under the TNGI  agreement was $2.29
per MMBtu and $2.13 per MMBtu under the TEPI  agreement  commencing  May 1, 1993
until May 1, 2007. The price paid under these agreements is adjusted annually by
the change in the Consumer  Price Index (CPI) each May 1. The TNGI agreement has
additional  increases,  as defined in the  agreement,  starting May 1, 2007. The
weighted average price as of December 31, 1998 was $2.68 per MMBtu and $2.49 per
MMBtu for TNGI and TEPI, respectively.

        The TNGI  agreement  remains in effect  until the latter of December 31,
2011, or twenty years from the commencement  date (June 18, 1992), as defined in
the agreement.  Under the TNGI agreement,  an additional 8,250 MMBtu per day was
replaced with other suppliers' long-term gas contracts (Replacement  Contracts).
TNGI will provide up to 8,250 MMBtu per day to the  Partnership  in the event of
default under the  Replacement  Contracts.  The amounts  incurred under the TNGI
agreement were $6,992,359 and $6,180,013 in 1998 and 1997, respectively.

        The TEPI  agreement  remains in effect  until the latter of December 31,
2007 or fifteen years from the commencement  date (June 18, 1992), as defined in
the agreement. The amounts incurred under the TEPI agreement were $3,529,193 and
$3,162,641 in 1998 and 1997, respectively.

        b.      Fuels Management Agreement

The Partnership is party to an agreement with TNGI,  whereby TNGI is to procure,
at prices  based upon the spot  market,  and manage all  fuel-gas  supplies  and
transportation for the Partnership (except those fuel- gas supplies procured and
delivered under tariff-gas contracts,  those fuel-gas supplied under an excepted
contract and other fuel-gas  supplies excluded from this agreement by the mutual
consent of TNGI and TEPI until termination of the agreement).

        The  agreement  will remain in effect  until the latter of December  31,
2011, or twenty years from the commercial  operations date (June 18, 1992). TNGI
receives a fixed  service fee of $0.04 per MMBtu on  short-term  contracts  (one
year or less). TNGI also receives a fixed service fee of $0.04 per MMBtu for the
volume of gas delivered  under the  Replacement  Contracts.  TNGI received fixed
service fees under short-term and Replacement Contracts of $229,452 and $191,241
in 1998 and 1997, respectively.

        c.      Operation and Maintenance Agreement

        The Partnership has an agreement with Bonneville Pacific Services,  Inc.
(BPSI),  a wholly-owned  subsidiary of BPC,  whereby BPSI performs all operation
and maintenance activities necessary for the production of electrical energy and
process heat. The agreement  became effective August 1, 1991, and will remain in
effect for 30 years from the commercial operations date (June 18, 1992), subject
to earlier  termination  after 10 years from the commercial  operations  date as
defined in the agreement.

        BPSI is paid for all costs  incurred in  connection  with  operating and
maintaining the Facility and is paid an annual operating fee of $260,000,  which
is adjusted  annually by the change in the CPI. BPSI may earn an incentive bonus
which is based upon BPSI achieving  certain  operating  goals, as defined in the
agreement.   The  costs  incurred  under  this  agreement  were  $1,637,953  and
$1,729,752  in 1998  and  1997,  respectively.  Incentive  bonuses  earned  were
$321,010 and $333,065 in 1998 and 1997, respectively.

        d.      Engineering and Administrative and Other Costs

        The  Partnership,  under  agreements,  pays for certain  engineering and
administrative  expenses and other costs to Texaco and its subsidiaries.  Texaco
may also  earn a  performance  bonus  based  upon the  plant  achieving  certain
operational  goals,  as defined in the agreement.  The fees incurred under these
agreements  totaled  $474,377  and  $525,159  in 1998  and  1997,  respectively.
Performance  incentives  earned  were  $321,010  and  $333,065 in 1998 and 1997,
respectively.

6. Asset Impairment Expense

During 1997, the  Partnership  replaced an outdated  reverse osmosis system with
newer technology.  As a result, an impairment expense of $340,000 was recognized
for the year ending  December  31, 1997 on the old reverse  osmosis  system.  At
December  31,  1997,  the  Partnership's  estimate  of fair value of the reverse
osmosis system based on market quotes was $200,000.

At  December  31,  1998  the  reverse  osmosis  system  was  deemed  unsaleable;
accordingly, the Partnership wrote down the remaining value of the system to $0.

7.      Income Taxes

Income  taxes are not recorded by the  Partnership  since the net income or loss
allocated to the partners is included in their respective income tax returns.

8.      Commitments and Contingencies

        a.      Power Purchase Agreement

        The Partnership has an agreement for long-term power purchases of energy
and capacity by NPC which  terminates on April 30, 2023. The Partnership is paid
for  energy  delivered  based  upon fixed  rates,  as defined in the  agreement,
adjusted  annually  at 120  percent of the change in the CPI.  NPC also pays the
Partnership  for firm  capacity  based  upon  fixed  rates,  as  defined  in the
agreement, increased annually by two percent.

        During 1997 the  Partnership  negotiated  an amendment to the  agreement
severely limiting NPC's  curtailment  rights in exchange for a price discount of
$0.25 per  megawatt  hour.  The  amendment  was  signed on  October  3, 1997 and
received Nevada Public Utility Commission's approval on April 3,1998.

        Pursuant  to the amended  agreement,  the  Partnership  has the right to
release NPC from its purchase obligation for an agreed upon payment per released
megawatt.  For the year  ended  December  31,  1998 and  1997,  the  Partnership
received  $1,549,480 and $1,101,320,  respectively  for released  megawatts.  In
conjunction  with the above  the  Partnership  was able to manage  its fuel cost
through non-acceptance or resale to others.

        b.      Heat Purchase Agreement

        The  Partnership has an agreement for the long-term sale of process heat
to  Georgia-Pacific.  The agreement became effective  January 29, 1991, and will
terminate  on April 30,  2023,  or  earlier,  as defined in the  agreement.  The
Partnership  is paid for process heat delivered at an amount equal to 65 percent
of the energy  cost of  operating  Georgia-Pacific's  kiln and gypsum  calcining
mills on the lowest  alternative  energy.  Process heat sold under this contract
has been sufficient for the Partnership to meet its annual  qualifying  facility
status and is expected to be sufficient  for the  Partnership to meet its annual
qualifying facility requirements in the future.

        c.      Gas Sales and Purchase Agreements

The Partnership has two long-term agreements for the purchase of fuel gas (other
than  those  described  in Note 5) with  unrelated  parties.  The first of these
agreements  remains in effect  until the  earlier  of March 1, 2008,  or fifteen
years from the commercial operations date (June 18, 1992).

        The second agreement  remains in effect until the latter of December 31,
2007, or fifteen years from the commercial  operations date (June 18, 1992). The
maximum daily contract  quantities  available under these agreements total 7,000
MMBtu per day. The agreements require the Partnership to take delivery of and/or
pay for a volume of gas up to 75 percent of the average  maximum daily  contract
quantities  available  under these  agreements.  The  Partnership  has two years
(under the 2,000 MMBtu per day  contract)  and five years (under the 5,000 MMBtu
per day  contract) to take delivery of any gas not taken but paid for in any one
contract  year,  as defined in the  agreements.  As of December  31,  1998,  the
Partnership had satisfied the minimum volumetric contract obligations.

The Partnership  initially paid a fixed price ($2.00 to $2.20 per MMBtu) for the
quantities of fuel gas delivered  under these  contracts.  The price paid on the
5,000 MMBtu per day contract is adjusted  annually by the change in the CPI. The
price on the 2,000 MMBtu per day contract  will be adjusted by 90 percent of the
change in the CPI,  twenty-five  months after the start of gas deliveries  (June
18,  1992),  and  annually  each May 1  thereafter.  The price paid under  these
contracts was $2.41 during 1998.

     d. Equipment Lease

The  Partnership and Nevada  Cogeneration  Associates #2 jointly entered into an
equipment lease  agreement,  with an unrelated  party, on December 31, 1992. The
agreement  requires monthly payments of $48,747 plus sales tax over the ten year
term. The Partnership's share is one-half of the monthly payments.

     e. Environmental Matters

        As a result of issues  brought  forth  during 1997  regarding  SCR,  the
Partnership  has negotiated  with the  Environmental  Protection  Agency for the
installation of two SCR units.  The schedule calls for the  installation to take
place by March 1999.

        Funds for the  installations  will come  from the SCR  reserve  account,
current reserves are considered adequate to cover the cost of the installations.

     f. Electric Utility Deregulation

In 1998, The Nevada  Legislature  passed  legislation to restructure  the Nevada
electric  utility  industry.  The  legislation  (AB366) calls for competition to
commence by January 1, 2000. The eventual  outcome of these activities and their
potential impact, if any, upon the Partnership is not known.