Text

& Independent Spent Fuel Installation - Annual Financial Report
	ML11166A208
Person / Time
Site:	Rancho Seco, 07200011
Issue date:	06/06/2011
From:	Ronningen E; Sacramento Municipal Utility District (SMUD)
To:	John Hickman, Staab C; Document Control Desk, Office of Nuclear Reactor Regulation
References
	DPG 11-316
	Download: ML11166A208 (89)
	v • d • e

SMUD Jý,Pr SACRAMENTO MUNICIPAL UTILITY DISTRICT The Power To Do More.'

PO. Box 15830, Sacramento, CA 95852-1830; 1-888-742-SMUD (7683)

DPG 11-316 June 6, 2011 U.S. Nuclear Regulatory Commission Document Control Desk Washington, DC 20555 Docket No. 50-312 Rancho Seco Nuclear Generating Station License No. DPR-54 Docket No. 72-11 Rancho Seco Independent Spent Fuel Storage Installation License No. SNM-2510 ANNUAL FINANCIAL REPORT Attention: John Hickman and Christopher Staab In accordance with 10 CFR 50.71(b) and 10 CFR 72.80(b), we are submitting the 2011 Annual Financial Report for the Sacramento Municipal Utility District. If you or members of your staff have questions requiring additional information or clarification, please contact me at (916) 732-4817.

Sincerely, Einar T. Ronningen Superintendent, Rancho Seco Assets Cc: NRC, Region VI RANCHO SECO NUCLEAR PLANT

14440 Twin Cities Road, Herald,CA 95638-9799; (209) 333-2935

SMUI SACRAMENTO MUNICIPAL UTILITY DISTRICT 2010 ANNUAL REPORT

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SMUD overview 2010 Service Area Population Total Authorized Budget Credit Rating 1.45 million $1.8 billion A+ Standard & Poor's Record Peak Demand Number of Customers (year end) Al Moody's 3,299 megawatts 597,097 A Fitch on July 24, 2006 Employees (year end) 2,064 SMUD Service Area and Board Member Wards Executive Management SMUD generates, transmits and distributes electric power to a 9oo-square-mile John DiStasio territory that includes California's capital city, Sacramento County and a small General Managerk Chief Executive Officer portion of Placer County. As a municipal utility, SMUD is governed by a seven-member Board of Directors selected by the voters to staggered four-year terms.

Arlen Orchard The SMUD Board of Directors determines policy for the District and appoints General Counsel the general manager, who is responsible for the District's operations.

James A. Tracy ChiefFinancialOfficer J Board of Directors James R. Shetler Assistant General Manager,Energy Supply Ward i Paul Lau I Renee Taylor President 2o11 Assistant General Manager, I Nancy Bui-Thompson Ward 2 Customer, DistributionoZTechnology Gary King Vice President2011 Chief Workforce Officer I Howard Posner Elisabeth Brinton Ward3 ChiefBusiness k Public Affairs Officer Genevieve Shiroma I

Michael Gianunzio Ward 4 ChiefLegislative eZRegulatory Affairs Officer President2010 Noreen Roche-Carter Treasurer I WardKerth Rob 5 Cary M. Nethaway I Larry Carr Controller Ward 6 N

GENERAL MA" fAR/CFO'S LFTTER In SMUD's 65 years of providing public power to the Sacramento region, we've developed a national reputation as an innovator. We take pride in delivering affordable electricity in the most environmentally responsible manner possible.

JOHN DISTASIO Reputation, however, goes only so far when it General Manager/CEO comes to navigating what has been probably the worst economic climate in our existence. Despite sales that were lower than cautious projections, SMUD remained on solid financial footing and finished the year with net income that exceeded budget by about $23 million.

SMUD benefitted from strong spring runoff into our Upper American River Project storage reservoirs, fueling our hydroelectric system with low-cost power during the peak summer months. But the recession didn't arrive by surprise in 2010, and we were prepared, across the entire organization, to do more with less. Through attrition, position reductions and retirements, our staffing levels are the lowest since 2ooo. By conducting a thorough review of our business practices, we are keeping our costs aligned with our revenues. Innovation and creativity are valuable attributes in tough times, too.

In 2010, SMUD began receiving stimulus funds from the $127.5 million smart grid infrastructure grant we were awarded in late 2oo9 by the U.S.

Department of Energy. About 8o,ooo of our customers had received smart By conducting a thorough review of our business practices, we are keeping our costs aligned with our revenues. Innovation m and creativity are valuable attributes in tough times, too.ea'enad meters by the deployment of these new meters is proceeding extremely well. We will continue to provide the same level of customer support as we install most of the remaining 535,000 meters in 2011, laying the groundwork for a smart grid that will improve reliability, help us respond to outages and give our customers more energy information and choices. contintued next page

GENERAL MANAGER/CEO'S LETTER conibied Another highlight came when SMUD reached the 20-percent mark in renewable resources in 2010, putting us on track to have 33 percent of our power supply come from green sources by 202o. The Board of Directors approved an expansion of our Solano Wind Project by 128 megawatts. We're ready to break ground in 2011 on a new corporate yard to support our field services, a construction project that will provide a welcome lift to the local economy in addition to improving SMUD's overall efficiency.

While we don't anticipate the need for a general rate increase through 2012, the SMUD Board is looking at a possible restructuring that will better align our prices with our costs and create greater opportunities for customers to employ beneficial energy efficiency, load shifting and self-generation.

The energy industry is changing rapidly with the advent of smart meters and cutting-edge technologies. The convergence of these new technologies provide both business risk and opportunities for SMUD. Third parties are interested in capitalizing on these new capabilities. Legislative mandates will force us to be even more innovative in balancing environmental concerns with our region's need for affordable, reliably delivered electricity.

In conclusion, the coming years will present SMUD with challenges, but changing times present opportunities to continue serving our community's best interests in new ways. I hope you take a few minutes to read about some of the ways in which SMUD's tradition of stewardship and innovation will serve as a reliable road map as we move forward.

JOHN DISTAsiO General Manager/CEO SMUD

IN RE IE S U SU( CESSFULJ Y STE1RS -OLi( P{EOI*

EC EdSSI THE YEAR N REVIEW" With the economic downturn continuing to batter Sacramento in 2010, SMUD strategically adjusted to lower revenues while continuing to provide reliable electricity at some of the lowest rates in the state.

Electricity sales were even lower than SMUD anticipated at the beginning of 2olO as high unemployment, governmental budget woes and sluggish business conditions exacted a harsh toll on the A Sacramento region. With no expectation of a quick recovery, SMUD adjusted to the new economic climate with a variety of measures.

The second phase of a three-part rate increase - spread out over 16 months to minimize the impact on residential and commercial customers - took effect on March I, 2010 (5.5 percent). The third and final phase of the increase, which was approved by the SMUD Board of Directors in 2009, was implemented on Jan. i, 2011 (2.25 percent).

After cutting costs across the board in 2oo8 and 2009, SMUD management adopted a more surgical approach in 2010 to capture savings and increase value. These efforts contributed to net income that was $22.9 million above budget.

As a result, SMUD is well positioned to move forward in 2011 on two major construction projects - the East Campus-Operations Center and a 128-megawatt expansion of the Solano Wind Project.

With no expectation of a quick economic recovery, SMUD SMUD's 688-megawatt adjusted to lower revenues while continuing to provide its hydroelectric system, customers with some of the lowest electric rates in California. the Upper American River Project, continues to reap dividends for SMUD customers 50 years after it was built. An unseasonably wet spring wound up providing normal levels of precipitation in 2010, eliminating the likelihood of a fourth straight drier-than-average water year. In dry years, SMUD is forced to replace hydroelectric power with more expensive wholesale power during the summer months of peak usage.

continued next page

Another highlight of 2010 was the successful installation of about 8o,ooo of the 615,000 smart meters that will move the capital region toward a more efficient smart grid (see pages io-ii). The digital meters and the communication network performed very well during testing, providing both the utility and its customers with confidence as most of the meters are scheduled to be installed in 2011.

The "SmartSacramento" project began to benefit from the

$127.5 million in federal stimulus dollars that SMUD was awarded in late 2009. SmartSacramento will maximize the reach of the smart grid by providing customers with more choices and information about their energy use, an ability to better integrate renewable resources in the electric grid, and the expected influx of plug-in electric vehicles.

SMUD also surpassed a significant "green" milestone in 2010, obtaining 20 percent of its energy from renewable resources such as wind, biogas and solar. If participation in SMUD's voluntary Greenergy program is factored in, SMUD's renewable number is closer to 24 percent.

The SMUD Board also voted in 2010 to increase the capacity of the Solano Wind Project by 128 megawatts. Construction on the third and largest phase of the Solano wind project will more than double the facility's current production capacity of 102 megawatts.

Reducing SMUD's reliance on carbon-based fuels will improve the environment and quality of life of Sacramento's residents far into the future. Through innovative planning and the commitment of the Board of Directors to environmental stewardship, SMUD is well positioned to reach its renewable goal of 33 percent by 2020.

SMUD's national reputation for innovation is a prime mover behind the Sacramento region's effort to position itself as a national center of clean technology and green jobs.

SMUD continued to receive some of the highest The Green Capital Alliance satisfaction scores of any electric utility in the nation.

reported in late 2010 that Sacramento has led the state in clean-tech job growth during the last 13 years and now employs more than 13,000 workers.

The challenging economic climate didn't stop SMUD's customers from giving their electric utility some of the highest customer satisfaction scores in the nation. For the ninth straight year, SMUD topped all California utilities in the J.D. Power and Associates survey of residential customer satisfaction.

SMUD was the fifth-ranked utility nationwide. And in the J.D. Power survey of business customers, SMUD was ranked first in California and second in the nation among all utilities.

SMUD's electric rates remain among the lowest in the state.

A comparison with other California utilities:

SMUD $ 91.07 LADWP* $ 100.68 + 9.5%

Roseville $ 106.43 + 14.4%

PG&E $ 121.14 + 24.8%

Modesto $ 127.40 + 28.5%

SCE** $ 129.07 + 29.4%

SDG&E*** $ 132.57 + 31.3%

'Los Angeles Department of Water& Power ' Southern California Edison ýSan Diego Gas & Electric

SMUD an innovative tradition SACRAENTOVOTES FOM TH

{inception} As a wave of enthusiasm for community-owned power companies swept the nation, Sacramento residents voted in 1923 to create their The Federal Power Commission FINAL own Sacramento issued a license to SMUD for Municipal Utility District. [hydr etr ty construction of ydroelecriciy the Upper American River Project, a series of hydroelectric facilities that supply customers with low-cost, non-carbon power.

I C0-After the last PG&E appeal was denied by the California

{beginnings} Supreme Court, SMUD began supplying electricity to Sacramento-area residents at 6 p.m. on Dec. 31, 1946.

loo,

SMU BULD NUCEA To meet the region's surging demand for power, the SMUD Board approved construction of the Rancho Seco nuclear plant.

When Rancho Seco opened, it was the {nuclear}

More than a half-million trees largest nuclear power plant west planted throughout the region are ofthe Mississippi River. SMUD the fruit of a free shade {shadel closed Ranch Seco in 1989 tree program that SMUD following a voter referendum. initiated in 199o in conjunction with the Sacramento Tree Foundation.

I II I F___.... -

A worldwide energy crisis prompted PLN AT RACO 0 PHTOOLAI SMUD to make

{enrye~cec energy efficiency}1 energy efficiency a central part of its mission, putting the {photo voltaic) SMUD's reputation as an innovative utility grew with utility on the the dedication of the -

road to national world's first commercial leadership central-station in helping photovoltaic power customers use plant at Rancho Seco.

less electricity.

SM U D an innovative tradition INOAIEPORM RN SOA OE O IE AG OFSM CUTOER 0U JU P 0EID H HE SMUD continued its solar leadership by SMUD led the initial drive toward

{solarl creating a pair of groundbreaking telectric carsl electric transportation in programs, the early 199os, building SolarSmart homes the first solar-powered and SolarShares.

charging station in the ....

western United States.

I 3I -

11M0 SMUD's new Customer Service Center incorporated the newest technologies Igreen leaderl in energy efficiency. The building's innovative features received platinum certification from the U.S.

Green Building Council.

ON WIN PROJEC WEI BRING MORETHA 200 MEAWTT OFCLA POE TO SARMET Delta breezes will {clean energy) fuel SMUD's Solano Wind Project with SMUD is on track to receive {biogas}

33 percent of its energy from an additional 128 renewable sources megawatts of clean, such as wind, solar renewable power.

Sand biogas.

I I

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CAM PU-PRTOSCNE In addition to giving SMUD's field crews more room to operate I and providing the 0 S ~~m'

region with an The U.S. Department of Energy {operaions}boost,

{ operations} the economic awarded SMUD a $127.5 million smart grid infrastructure grant, East Campus-

{smart grid} the largerset Operations Center is being designed to presentedity generate as much energy as it consumes.

to any California utility.

With automated metering, customers accustomed to receiving a monthly bill chronicling their energy use will be receiving daily and hourly information.

Customers will be able to see what their energy use is costing and make personal decisions accordingly.

VIJ mg-In Hybd&

powwwwor METERS SMART METER PROJECT F EET N CUSTOMER APPROVAL SMUD's thorough approach to its smart meter project was validated when three months of acceptance testing in late 2010 confirmed that the digital meters and communications network Testing showed accurate daily reads operate as smoothly as advertised.

in the neighborhood of 99.5 percent.

Results of the extensive acceptance test gave SMUD's project team the go-ahead to move forward with full deployment of the smart meters in 2011. SMUD plans to have more than 6oo,ooo smart meters installed by the end of 20H.

With their two-way communication capabilities opening up a host of possibilities, smart meters are the foundation for a smart grid that will capitalize on automation to improve efficiencies in all aspects of the power ! ý 0 delivery system. The smart meters will be the customers' link to new tools and programs that will give them more information and more choices - -,

for managing their energy use.

SMUD tested approximately ii5 tasks and functions with the first 8o,ooo smart meters. Those digital meters were installed in downtown Sacramento and in eastern Sacramento County. The test area was chosen carefully to include a variety of challenging situations for data communications between the meters and SMUD.

Testing showed accurate reads in the neighborhood of 99.5 percent.

SMUD's strategy with smart meter installations has been to proceed cautiously.

While smart meters are automatically transmitting energy-use data to SMUD Smart meters use advanced, four times a day, SMUD has continued with manual meter reading to verify digital technology to enable the accuracy of the smart-meter system during the test phase. The transition two-way communication to automated billing began in February 2011.

between customers and their utility. The new meters automatically and securely send energy-use data to SMUD on a daily basis.

MOTHER NATURE GIVES SMUD A BIG BOOST If the economic climate wasn't the best in 2010, Mother Nature thankfully stepped in to pick up some of the slack.

At Fresh Pond, the location east of Placerville that SMUD uses for its precipitation measurements, total rainfall for the full water year (Oct. i In a plentiful water year such as 201o, nearly 50 percent through Sept. 30) came to 57.38 inches, le th a quarer-of SMUD's power comesfrom non-carbon resources. less than a quarter-inch shy of the historical median. Runoff into the Upper American River Project (UARP) storage reservoirs came in just a shade above average.

In March 2010, SMUD was confronted with the high probability of a fourth consecutive drier-than-average water year, which would have reduced hydroelectric generation and forced SMUD to replace it with more expensive wholesale power.

Fortunately, cold and potent storms rolled over Northern California in April and May to pad the Sierra snowpack. Fresh Pond received the equivalent of 17.5 inches of rain in those two months, with much of it falling as snow. Historically, Fresh Pond gets just 6.75 inches in April and May combined.

The 688-megawatt UARP is SMUD's most economical energy The Upper American source. If the power generated in the Sierra Nevada River Project is a is added to the renewable energy SMUD receives series of hydroelectric from sources such as wind and facilities in the Sierra solar, nearly 50 percent of the Nevada that supplies SMUD with at least utility's power comes from 15 percent of its power non-carbon resources.

in a typical water year.

Through careful planning with the U.S. Forest Service, SMUD built a variety of recreational facilities around its Upper American River Project reservoirs. Spanning 85,000 acres of pine and fir forests and traversed by lakes, reservoirs and streams, the Crystal Basin Recreation Area provides the public with a range of outdoor activities such as hiking, boating, camping and fishing.

4 GEARING UP FOR ELECTRIC VEHICLES If plug-in electric vehicles become an increasingly common sight on U.S. roadways, as the auto industry seems to believe they will, SMUD has laid the groundwork to help customers make the transition to this cleaner mode of daily transportation.

In 2010, SMUD made an organization-wide push to develop an integrated process I14 to support the expected influx of plug-in electric vehicles (PEVs) in the next few years. SMUD will receive Chevy Volts in 2011 for testing and evaluation through a

$2.5 million grant from the U.S. Department of Energy and the California Energy Commission.

Major automakers IThe plug-in electric models are expected to hit the road in the next few years. SMUD supports a network of public charging stations Volt and the Nissan Leaf are already on the market, and more throughout the Sacramento area and continues to work closely with electric vehicle drivers, business owners and community agencies to establish are investing in plug-in charging stations for the public. Many existing charging stations will be electric vehicles, upgraded to meet new standards, and more stations are planned to power a technology that's the coming wave of electric vehicles.

expected to become more popular as Customers are encouraged to either call SMUD at 1-888-742-7683 or visit gas prices rise.

www.smud.org to learn more about what they need to do to get their homes ready to charge their new vehicles. The new electric cars can be charged by normal 120-volt outlets. A 240-volt charger is necessary for quicker charging times.

SMUD has reesearched and supported Recognizing the potential that es continuously since 1989. electric vehicles have to improve electric vehicl local air quality, SMUD has researched and supported electric vehicles continuously since 1989. Plug-in electric vehicles cut carbon emissions and help improve local air quality while reducing energy costs. While customers switching to PEVs will see an increase in their monthly electric bills, the high price of gasoline means the switch will result in considerably lower fuel costs overall.

Land Park resident Owen Thunes drives an all-electric Nissan Leaf and figures his fuel costs are one-fourth what they would be if he drove a gasoline-powered car.

7E NNL Wind has propelled sailboats and ships for more than 5,000 years. Windmills were used in the Middle East for irrigation and for milling grain in the seventh century AD.

For electric utilities, wind is now one of the most productive and economical forms of renewable energy. In 2010, the SMUD Board approved a 128-megawatt expansion of the Solano Wind Project For electric utilitiees, wind is one of near Rio Vista.

the most productiive and economical forms of renewabhe energy. This is the third and largest phase of the Solano Wind Project's development.

The construction of up to 75 wind turbine generators will more than double the project's current production capacity of 102 megawatts. The Solano Wind Project is a crucial component in SMUD's strategy to have one-third of its energy come from renewable sources by 2020.

The State of California's Renewable Portfolio Standard, or RPS, places an obligation on utilities to produce a specified percentage of their electricity from renewable energy sources. In 2010, SMUD's RPS reached 20 percent. SMUD is on track to meet the RPS of 33 percent by 2020.

Wind power currently accounts for about one-fifth of SMUD's RPS.

~ The figure is expected to climb to 26 percent by 2015.

To reach the ambitious targets The environmental impact report for Phase 3 of the Solano Wind Project of Senate Bill i, the "Million included 42 mitigation measures. A major point of focus in the environmental Homes Solar Initiative," SMUD impact report is avian mortality - an issue for virtually all wind energy projects.

provides a range of incentives that encourage customers to Records SMUD has collected since 2005 show the first two phases of make the switch to solar power. development at the Solano site resulted in lower bird mortality rates than neighboring wind developments in the Montezuma Hills. SMUD will buy approximately ioo acres of land in Solano County to compensate for the loss of raptor habitat. The acquired land will be suitable breeding and foraging habitat, and SMUD will fund habitat management at the property.

D SAVINGS BY DESIGN HELPS LOCAL BUSINESSES SAVE ENERGY, MONEY Energy savings happen not by happenstance but by design. That's the philosophy of the Savings by Design program.

SMUD and four other California utilities encourage high-performance building design and construction for non-residential customers. SMUD managed its own program before joining the statewide effort.

Nearly all major architectural firms and developers that do business in the Sacramento region have participated in Savings by Design. Incentives are paid to building owners for projects that significantly exceed the SCalifornia building energy code, better known as Title 24 standards.

The program features an integrated approach that brings all the disciplines that are needed to construct a building - architects, civil engineers, lighting designers, HVAC specialists and so on. These experts look for low-cost opportunities to optimize the building's energy efficiency. Many projects also pursue certification under the U.S. Green Building Council's Leadership in Energy & Environmental Design (LEED) program that encourages energy efficiency and other environmentally friendly building practices.

Bank of the West Micron California ISO Nestle Waters North America CSUS Wellness Center Raging Wire City of Citrus Heights Sacramento City Unified School District City of Sacramento Sacramento County Regional Sanitation District Elk Grove Unified School District Sacramento Food Bank Evergreen Company Sacramento News & Review Franklin Templeton Resources San Juan Unified School District Jackson Labs Sports Authority Jackson Properties State of California Department of General Services Joe 0. Alexander Construction, Inc. Target Kohls Verizon Wireless Mel Rapton Honda Wong Family Trust

Steve Lebastchi of D&S Development (below) worked with SMUD's Savings by Design and Zero Energy Buildings groups on the renovation of the historic Maydestone apartment building in downtown Sacramento. With similar assistance from SMUD, Hot Italian owners Andrea Lepore and Fabrizio Cercatore (left) received LEED certification for their downtown restaurant.

// A

2010 FINANCIAL STATEMENTS Sacramento Municipal Utility District 12010 Annual Report 5 YEAR

SUMMARY

(Unaudited)

Operating Statistics (i) 2010 2009 2008 2007 2006 Customers at year-end ................... 597,097 595,076 592,490 589,599 585,221 KWH Sales (thousands)

Sales to customers -

Residential ...................... ........ 4,486,241 4,707,104 4,696,912 4,608,170 4,760,391 Commercial, industrial & other .............. 5,798,569 5,984,803 6,219,838 6,209,689 6,038,839 Subtotal ..................... 10,284,810 10,691,907 10,916,750 10,817,859 10,799,230 Sales of surplus power ..................... 1,836,957 2,133,049 2,460,487 2,427,964 3,964,326 To tal . . . . . . . . . . . . . . . . . . . . . . .. . . . . 12,121,767 12,824,956 13,377,237 13,245,823 14,763,556 Revenues (thousands of dollars)

Sales to Customers -

Resid en tial ................................ S 526,860 $ 514,320 $ 540,546 $ 493,910 $ 515,025 Commercial, industrial & other .......... 669,489 631,251 627,571 589,922 566,851 Sub to tal .................................. 1,196,349 1,145,571 1,168,117 1,083,832 1,081,876 Sales of surplus power .............. 59,493 58,626 170,640 134,002 191,931 Sales of surplus gas .......... .. ....... 59,998 61,331 139,275 78,292 112,719 Total (ii) ... ........ ....... $1,315,840 $ 1,265,528 $ 1,478,032 $ 1,296,126 $ 1,386,526 Average kWh sales per residential customer ...... 8,497 8,955 8,982 8,841 9,202 Average revenue per residential kWh sold (cents)... 11.91 11.07 11.11 10.49 10.60 Power supply (thousands of kWh)

Hydroelectric ........... 1,926,783 1,442,015 886,728 1,056,893 2,804,704 Cogeneration ............................ 5,468,825 5,166,669 5,995,248 5,886,579 4,775,933 Windpow er ...... ...................... 236,352 173,775 261,338 117,197 73,887 Photovoltaic ............................. 1,952 2,236 2,655 2,235 2,323 G as turbine ............................. 181 7,918 Purchases ........... ................... 5,013,814 6,534,376 6,756,059 6,724,160 7,679,518 Net system peak demand - 1 hour1.157407e-5 days <br />2.777778e-4 hours <br />1.653439e-6 weeks <br />3.805e-7 months <br /> (kW) ....... 2,990,000 2,848,001 3,086,000 3,099,000 3,280,000 Equivalent Full Time Employees at year-end .... 2,064 2,113 2,197 2,226 2,213 Financial Statistics (thousands of dollars)

O perating revenues ......................... $1,323,288 $ 1,293,337 $ 1,486,679 $ 1,312,083 $ 1,354,427 Operating expenses -

Purchased and interchanged power ........... 255,523 339,310 446,302 385,021 388,714 Operation and maintenance ................. 733,377 687,558 752,554 666,661 620,002 Depreciation and amortization ............... 162,708 150,811 145,196 133,603 125,937 Decommissioning .............. 4,704 421 4,700 31,620 30,894 Total operating expenses ........... 1,156,312 1,178,100 1,348,752 1,216,905 1,165,547 Operating income ............ 166,976 115,237 137,927 95,178 188,880 O ther incom e.......................... 3,843 (16,428) 38,365 47,340 47,421 Income before interest charges ............. 170,819 98,809 176,292 142,518 236,301 Interest charges ...................... 140,069 110,594 164,322 147,101 128,895 Net increase (decrease) in net assets before extraordinary income ................ $ 30,750 $ (11,785) $ 11,970 $ (4,583) $ 107,406 Extraordinary Income .............. $ 3 $ 17,170 $ 10,168 $

Net increase (decrease) in net assets ......... $ 30,753 $ 5,385 $ 22,138 $ (4,583) $ 107,406 Funds available for revenue bond debt service... $ 339,649 $ 256,453 $ 264,100 $ 245,604 $ 345,293 Revenue bond debt service ................... $ 172,787 $ 164,355 $ 174,846 $ 181,706 $ 174,121 Revenue bond debt service coverage ratio ...... 1.97 1.56 1.51 1.35 1.98 Electric utility plant - net . .................. $3,004,216 $ 2,978,623 $ 2,926,746 $ 2,882,321 $ 2,734,776 Capitalization Long-term debt ............. $3,156,447 $ 3,007,908 $ 3,205,101 $ 3,173,216 $ 2,518,309 Customers' equity ........... $ 546,687 $ 515,934 $ 510,549 $ 488,411 $ 492,994 i Financial information is consolidated (except the debt service information).

ii Prior to the net deferral/transfer of revenues to/from the Rate Stabilization Fund and deferral of Public Good revenue.

Sacramento Municipal Utility District I 2010 Annual Report TABLE OF CONTENTS Report of Independent Auditors .......................................... 23 Management's Discussion and Analysis funaudited) ................................... 24 Financial Statements ................................................... 34 Notes to Financial Statements Noat 1. O rganization ................................................. 39 Note 2. Summary of Significant Accounting Policies ........................... 39 Note. Accounting Change ............................................ 49 N - 4. Utility Plant .................................................. 50 Not S. Investment in Joint Powers Agency .................................. 51 Noft 6. Component Units .............................................. 52 Not* 7. Cash, Cash Equivalents, and Investments ............................ 53 NoteS. Regulatory Deferrals ............................................ 56 Not9. Derivative Financial Instruments ................................... 59 Note 10, Long-term Debt. .............................................. 65 Note 11. Commercial Paper Notes ........................................ 69 Not 12. Fair Value of Financial Instruments................................. 70 Note 13. Rancho Seco Decommissioning Liability ............................. 72 Note 14. Pension Plans ................................................ 73 Note 15. Other Postemployment Benefits ................................... 75 z

0 Noft 16. Insurance Programs and Claims................................... 77 0

z Note 17. Com m itments ................................................ 78 Note 18. Claims and Contingencies ....................................... 79 0

Required Supplementary Information (unaudited) ............... 84

Sacramento Municipal Utility District I 2010 Annual Report INDEPENDENT AUDITORS' REPORT BAK ER TILLY To the Board of Directors of Sacramento Municipal Utility District, Sacramento, California We have audited the accompanying consolidated balance sheets of Sacramento Municipal Utility District and its blended component units as of December 31, 2010 and 2009, and the related consolidated statements of revenues, expenses, and changes in net assets and cash flows for the years then ended. These consolidated financial statements are the responsibility of Sacramento Municipal Utility District's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards,issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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 consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sacramento Municipal Utility District and its blended component units at December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

In accordance with GovernmentAuditing Standards,we will issue a report on our consideration of Sacramento Municipal Utility District's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance.

That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit.

As discussed in Note 3 to the financial statements, effective with the financial statements for 2010 the Sacramento Municipal Utility District adopted the provisions of Governmental Accounting Standards Board (GASB)

Statement No. 53, Accounting and FinancialReporting for Derivative Instruments.

The management's discussion and analysis on pages 2 through 15 and the Schedules of Funding Progress are not a required part of the consolidated 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.

Madison, Wisconsin February 18, 2011

Sacramento Municipal Utility District 12010 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS (unaudited)

The following discussion and analysis of the Sacramento Municipal Utility District and its component units (SMUD) financial performance provides an overview of SMUD's financial activities for the years ended December 31, 2010 and 2009. This discussion and analysis should be read in conjunction with SMUD's financial statements and accompanying notes, which follow this section.

BACKGROUND SMUD was formed by a vote of the electors in 1923, under provisions of the State of California Municipal Utility District Act, and began electric operations in 1947. SMUD is governed by an elected Board of Directors (Board) and has the rights and powers to fix rates and charges for commodities or services furnished, and to incur indebtedness and issue bonds or other obligations. SMUD is responsible for the acquisition, generation, transmission, and distribution of electric power to its service area, which includes most of Sacramento County and small adjoining portions of Placer County and Yolo County.

Setting of Rates The Board has autonomous authority to establish the rates charged for all SMUD services. Changes in such rates require formal action, after public hearing, by the Board.

In June 2009, the Board approved an average system rate increase of approximately 5.5 percent that was effective in rates beginning September 1, 2009; 5.5 percent effective in rates beginning March 1, 2010; and 2.25 percent effective in rates January 1, 2011. In April 2009, $11 million from the Hydro Rate Stabilization Fund (HRSF) was recognized as revenue to cover the budget impact of lower hydro generation resulting from lower precipitation for the period April 1, 2008 through March 31, 2009. In April 2010, the remaining $4.1 million in the HRSF was recognized as revenue to cover the budget impact of lower hydro generation for the period April 1, 2009 through March 31, 2010 as a result of lower precipitation. In December 2010, $2.1 million of the Rate Stabilization Fund was recognized as revenue, $1.1 million of which was to offset the higher cost of purchased power due to lower Western Area Power Administration energy deliveries for the year.

Financial Reporting 2 SMUD's accounting records are maintained in accordance with Generally Accepted Accounting Principles (GAAP) for proprietary funds as prescribed by the Governmental Accounting Standards Board (GASB) and, where not in 0

©z conflict with GASB pronouncements, accounting principles prescribed by the Financial Accounting Standards Board (FASB). Over the years, the FASB and other designated GAAP-setting bodies, have issued standards in the form of FASB Statements, Interpretations, etc. The FASB recognized the complexity of its standard-setting process and 0 embarked on a revised process in 2004 that culminated in the release on July 1, 2009, of the FASB Accounting Standards Codification-, sometimes referred to the Codification or ASC. The Codification does not change how SMUD accounts for its transactions or the nature of related disclosures made. However, when referring to guidance issued by the FASB, SMUD refers to topics in the ASC rather than Statement 143, etc. The above change was made effective by the FASB for periods ending on or after September 15, 2009. References to GAAP in this Annual Report have been updated to reflect the guidance in the Codification. SMUD's accounting records generally follow the Uniform System of Accounts for Public Licensees prescribed by the Federal Energy Regulatory Commission, except as it relates to the accounting for contributions of utility property in aid of construction.

Sacramento Municipal Utility District I 2010 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS (unaudited)

In accordance with Financial Accounting Standards Board ASC 980, formerly known as Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" the Board has taken various regulatory actions for ratemaking purposes that result in the deferral of expense or revenue recognition. With the implementation of the Statement of Government Accounting Standard No. 53 "Accountingand FinancialReporting for Derivative Instruments," 2009 deferrals related to effective energy and gas related derivatives have been reclassified as Deferred outflow resources for future recovery. The implementation also resulted in additional reclassifications of 2009 amounts, and as a result, certain categories are no longer comparable for 2009 and 2008. As of December 31, 2010, SMUD had total Regulatory Costs for Future Recovery of $258 million, which is a net increase of $24 million from 2009. The increase is primarily due to an increase in the valuation of derivative financial instruments and an increase in the deferred costs for Rancho Seco decommissioning, partially offset by a reduction in the deferred TANC operation costs. SMUD also had Regulatory Credits of $294 million as of December 31, 2010, which is a net increase of $9 million from 2009. The increase is primarily due to the deferral of Grant revenues related to capital assets. This was partially offset by the recognition of $4 million of revenue from the Hydro Rate Stabilization Fund to offset lower hydro generation as a result of lower precipitation, and the recognition of revenues from the Rate Stabilization Fund to offset lower Western Area Power Administration (Western) energy deliveries. Additionally, revenues were recognized related to Contributions In Aid of Construction. The Regulatory Costs and Regulatory Credits will be recognized in the Consolidated Statement of Revenues, Expenses and Changes in Net Assets in future periods as determined by the Board for ratemaking purposes.

Using This Financial Report This financial annual report consists of management's discussion and analysis and the consolidated financial statements, including notes to the consolidated financial statements. The financial annual report reflects the activities of SMUD primarily funded through the sale of energy, transmission, and distribution services to its customer-owners.

Consolidated Balance Sheets, Statements of Revenues, Expenses and Changes in Net Assets, and Statements of Cash Flows The consolidated financial statements provide both short-term and long-term information about SMUD's financial status. The Consolidated Balance Sheets include all of SMUD's assets and liabilities, using the accrual method of accounting, as well as an indication about which assets can be utilized for general purposes, and which assets are restricted as a result of bond covenants, Board action and other commitments. The Consolidated Balance Sheets provide information about the nature and amount of resources and obligations at a specific point in time.

The Consolidated Statements of Revenues, Expenses and Changes in Net Assets report all of SMUD's revenues and expenses during the periods indicated. The Consolidated Statements of Cash Flows report the cash provided and used by operating activities, as well as other cash sources such as investment income, debt financing, and other cash uses such as payments for bond principal and capital additions and betterments.

Sacramento Municipal Utility District I 2010 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS (unaudited)

FINANCIAL HIGHLIGHTS December 31, Condensed Consolidated Balance Sheets 2010 2009 2008 (millions of dollars)

Assets Electric Utility Plant-net ................................. $ 3,004 $ 2,979 $ 2,927 Restricted and Designated Assets .............................. 205 202 274 Current Assets ...................... ..................... 989 786 739 Noncurrent Assets and Deferred Charges ........................ 896 857 1,159

$ 5,094 $ 4,824 $ 5,099 Liabilities and Net Assets Long-Term Debt-net. .................................. $ 3,156 $ 3,008 $ 3,205 Current Liabilities and Deferred Credits ... ........ . ... 718 690 740 Noncurrent Liabilities and Deferred Credits .... 673 611 643 Net Assets:

Invested in capital, net of related debt ......................... 97 222 274 Restricted .......................... 101 86 122 Unrestricted ...... .......... .......... 349 207 115

$ 5,094 $ 4,824 $ 5,099 ASSETS Utility Plant - net 2010 Compared to 2009 SMUD has invested approximately $3,004 million in utility plant assets and Construction Work in Progress net of accumulated depreciation at December 31, 2010. Net utility plant makes up about 59 percent of SMUD's assets, approximately 3 percent less than the previous year. During 2010, SMUD capitalized approximately

$198 million of additions to utility plant, including additions to Construction Work in Progress in SMUD's Consolidated Balance Sheets. This was a result of the Smart Grid project, land acquisition and preliminary costs for the East Campus project, and routine capital additions for generation, transmission, distribution, and general plant.

2009 Compared to 2008 SMUD has invested approximately $2,979 million in utility plant assets and Construction Work in Progress net of accumulated depreciation at December 31, 2009. Net utility plant makes up about 62 percent of SMUD's assets, approximately 5 percent more than the previous year. During 2009, SMUD capitalized approxi-mately $217 million of additions to utility plant, including additions to Construction Work in Progress in SMUD's Consolidated Balance Sheets. This was a result of routine capital additions for generation, transmission, distribution, and general plant.

Sacramento Municipal Utility District 1 2010 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS (unaudited)

The following charts show the breakdown of net utility plant by major plant category -

Generation (Gen), Transmission (Trans), Distribution (Distr), and Other:

December 31, 2010 December 31, 2009 December 31, 2008 EGen

( Trans El Distr E39% 389% L Other 6%5% 5%

Restricted and Designated Assets 2010 Compared to 2009 SMUD's Restricted and Designated Assets increased by $3 million during 2010.

Revenue Bond, Debt Service, and Construction Reserves increased by $31 million mainly due to higher component unit funds. This was partially offset by lower Nuclear decommissioning trust funds due to reimbursement for decommissioning activities, lower Rate stabilization funds after recognition of revenues to offset the budget impact of lower hydro generation resulting from lower precipitation in the previous water year, and for lower energy deliveries from Western. There was no Securities lending collateral held at year-end and a higher current portion of Restricted and Designated Assets.

2009 Compared to 2008 SMUD's Restricted and Designated Assets decreased by $72 million during 2009. There was a significant decrease in Revenue Bond, Debt Service, and Construction Reserves mainly due to component unit refundings that resulted in a reduction in the requirement for various restricted funds. The Rate Stabilization Funds decreased due to the recognition of revenue to offset the budget impact of lower hydro generation resulting from lower precipitation in the previous water year and for lower energy deliveries from Western. There was a significant decrease in funds held for Securities Lending Collateral.

Current Assets 2010 Compared to 2009 Current Assets increased by $203 million in 2010 due to increases in Unrestricted Cash and Cash Equivalents, Receivables from customers, and Energy Efficiency Loans due Within One Year, Interest Receivable, Grant Receivable and Other, Regulatory costs and Deferred Outflow Resources to be Recovered Within One Year, and Credit Support Collateral Deposits. These increases were partially offset by a lower current portion of Restricted and Designated Assets, lower Derivative Investment and Hedging Derivative Instruments Maturing within One Year, lower Materials and Supplies, and lower Prepayments.

2009 Compared to 2008 Current Assets increased by $47 million in 2009 due to increases in Unrestricted Cash and Cash Equivalents, Receivables for retail customers, Derivative Financial Instruments maturing within one year, and Prepayments. These increases were partially offset by a lower current portion of Restricted and Designated Assets, lower wholesale receivables, and lower Materials and Supplies.

Sacramento Municipal Utility District I 2010 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS (unaudited)

Noncurrent Assets and Deferred Charges 2010 Compared to 2009 Total Noncurrent Assets and Deferred Charges increased by $39 million mainly due to an increase in the Deferred Outflow Resources for Future Recovery, an increase in Regulatory Costs for Future Recovery, and an increase in Credit Support Collateral Deposits. These were partially offset by decreases in Pre-paid gas, the long-term portion of Advance Capacity Payments, Investment and Hedging Derivative Instruments Maturing within One Year, Unamortized Debt Issuance Costs, and Energy Efficiency Loans - net.

2009 Compared to 2008 Total Noncurrent Assets and Deferred Charges decreased by $299 million mainly due to a $272 million reduction in the long-term portion of the Prepaid Gas asset. Twice during 2009, Morgan Stanley Capital Group (MSCG) extinguished component unit debt and made cash payments in exchange for a reduction in their obligation for daily natural gas deliveries. Additionally, there were decreases in the long-term portion of Advance Capacity Payments, Derivative Financial Instruments, Unamortized Debt Issuance Costs, and Preliminary Project Studies and Other.

LIABILITIES Long-Term Debt 2010 Compared to 2009 In July 2010, SMUD issued $250 million of fixed-rate 2010 Series W Electric Revenue Bonds. These bonds qualify under the federal program as "Build America Bonds" and SMUD expects to receive a cash subsidy from the United States Treasury equal to 35 percent of the interest payable. The interest payments on these bonds are fully taxable.

2009 Compared to 2008 In January 2009, SMUD extinguished $250 million of 2007 Northern California Gas Authority #1 (NCGA) Series B Gas Project Revenue Bonds, a component unit of SMUD. In August 2009, SMUD extinguished an additional $10 million of 2007 NCGA Series B Gas Project Revenue Bonds. For both extinguishments, MSCG funded the bond extinguishment plus made cash payments to NCGA in exchange for lowering their obligation for daily natural gas deliveries.

In May 2009, SMUD issued $200 million of fixed-rate 2009 Series V Electric Revenue Bonds. These bonds qualify under the federal program as "Build America Bonds" and SMUD expects to receive a cash subsidy from the United States Treasury equal to 35 percent of the interest payable. The interest payments on these bonds are fully taxable.

In August 2009, SMUD issued $58 million of fixed-rate 2009 Series Sacramento Cogeneration Authority (SCA)

Cogeneration Project Revenue Refunding Bonds, a component unit of SMUD. Bond proceeds plus $7 million of available funds were used to refund $68 million of outstanding 1998 Series SCA Cogeneration Project Revenue Bonds.

In August 2009, SMUD issued $49 million of fixed-rate 2009 Series Central Valley Financing Authority (CVFA)

Cogeneration Project Revenue Refunding Bonds, a component unit of SMUD. Bond proceeds plus $5 million of avail-able funds were used to refund $55 million of outstanding 1998 Series CVFA Cogeneration Project Revenue Bonds.

Sacramento Municipal Utility District I 2010 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS (unaudited)

The following table shows SMUD's future debt service requirements through 2015 as of December 31, 2010:

Debt Service Requirements 0

F- Interest 0 Principal 2011 2012 2013 2014 2015 As of December 31, 2010, SMUD had an underlying rating of "A+" from Standard & Poor's, "A"from Fitch, and "Al" from Moody's. Most of SMUD's bonds are insured and are rated by the rating agencies at the higher of the insurer's rating or SMUD's underlying rating.

Current Liabilities and Deferred Credits 2010 Compared to 2009 Current Liabilities and Deferred Credits increased by approximately $28 million during 2010. Investment and Hedging Derivative Instruments Maturing within One Year increased by $53 million and Customer deposits and other increased by $6 million and higher Accrued Salaries and Compensated Balances.

These increases were partially offset by lower Purchased Power Payable, lower Long-term Debt due within One Year, lower Accrued Decommissioning, and no Securities Lending Collateral Obligation at year-end.

2009 Compared to 2008 Current Liabilities and Deferred Credits decreased by approximately $50 million during 2009. The most significant decrease was a reduction in SMUD's obligation for Securities Lending Collateral reflecting lower securities lending activity in 2009. SMUD's obligation for Credit Support Collateral also decreased during the year as a result of lower energy and gas prices. Other decreases were attributable to Accounts Payable, Interest Payable, and Regulatory Credits to be recognized within one year. These decreases were partially offset by an increase in Long-Term Debt due within one year and Derivative Financial Instruments maturing within one year.

Sacramento Municipal Utility District I 2010 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS (unaudited)

Noncurrent Liabilities and Deferred Credits 2010 Compared to 2009 Noncurrent Liabilities and Deferred Credits increased by $62 million during 2010.

Accrued Decommissioning increased by $7 million reflecting a higher estimate for the cost of completing decommis-sioning at the Rancho Seco nuclear plant site. Also, the value of the liability for Investment and Hedging Derivative Instruments increased by approximately $46 million due to price changes in the power and gas markets. Regulatory Credits also increased by $10 million reflecting the deferral of grant revenues related to capital projects.

2009 Compared to 2008 Noncurrent Liabilities and Deferred Credits decreased by $32 million during 2009.

Accrued Decommissioning decreased by $12 million reflecting a lower estimate for the cost of completing decommis-sioning at the Rancho Seco nuclear plant site. Also, the value of the liability for Derivative Financial Instruments decreased by approximately $21 million due to price changes in the power and gas markets. Regulatory Credits also decreased by $17 million reflecting the recognition in 2009 of previously deferred revenue. These decreases were partially offset by increase for amounts Due to Affiliated Entity and for Self-Insurance, Deferred Credits and Other.

Condensed Statement of Consolidated Revenues, Expenses and Changes in Net Assets December 31, 2010 2009 2008 (millions of dollars)

Operating revenues .............. ........................... $ 1,323 $ 1,293 $ 1,487 Operating expenses ........................................... (1,156) 1,178) (1,349)

O perating incom e ............ ....... ....... ............. 167 115 138 O ther revenues ............................. ............. 4 (16) 38 Interest charges .............................................. (140) (111) (164 )

Net increase/(decrease) in net assets before extraordinary incom e ........................................ 31 (12) 12 Extraordinary incom e ......................................... 0 17 10 Increase/(decrease) in net assets ..... ......................... 31 5 22 Net assets - beginning of year................................... 516 511 488 Net assets - end of year .............................. $ 547 $ 516 $ 510 z

0 0

z z

0 0*

Sacramento Municipal Utility District I 2010 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS (unaudited)

CHANGES IN NET ASSETS Operating Revenues 2010 Compared to 2009 Operating Revenues were $1,323 million in 2010, an increase of $30 million from 2009.

Sales to retail customers were $1,184 million in 2010, an increase of $50 million as compared to 2009 sales. SMUD sold about 3.8 percent less energy to its retail customers, which grew from 595,076 customers in 2009 to 597,097 customers at the end of 2010, at an average revenue per kilowatt hour that increased by 8.5 percent. SMUD transferred

$2 million from the Rate Stabilization Fund in 2010 as compared to a transfer from the Rate Stabilization Fund of

$16 million in 2009. SMUD also transferred $4 million from the Hydro Rate Stabilization Fund during 2010 as compared to a transfer of $11 million in 2009. Additionally, SMUD recognized approximately $1 million of previously deferred Senate Bill 1 revenues to match them against expenditures in the current year.

Wholesale revenues are comprised of both surplus energy and gas sales. In 2010, surplus gas sales were $60 million as compared to $61 million in 2009. The amount of surplus gas sold was 16 percent lower, but at higher average prices.

Surplus energy sales in 2010 were $1 million higher than in 2009. The increase is due to significantly higher average prices (20 percent), although a lower volume was sold (15 percent) as compared to 2009.

2009 Compared to 2008 Operating Revenues were $1,293 million in 2009, a decrease of $194 million from 2008.

Sales to retail customers were $1,134 million in 2009, a decrease of $17 million as compared to 2008 sales. SMUD sold about 2.1 percent less energy to its retail customers, which grew from 592,490 customers in 2008 to 595,076 customers at the end of 2009, at an average revenue per kilowatt hour that increased by 0.3 percent. SMUD transferred $16 million from the Rate Stabilization Fund in 2009 as compared to a transfer from the Rate Stabilization Fund of $16 million in 2008. SMUD also transferred $11 million from the Hydro Rate Stabilization Fund during 2009. Additionally, SMUD recognized approximately $1 million of previously deferred Senate Bill 1 revenues to match them against expenditures in the current period.

Wholesale revenues are comprised of both surplus energy and gas sales. In 2009, surplus gas sales were $61 million as compared to $139 million in 2008. The amount of surplus gas sold was lower, but at higher average prices. Surplus energy sales in 2009 were $112 million lower than in 2008. The decrease is due to lower volume (12 percent) at significantly lower average prices (61 percent) than in 2008.

The following charts show the percentage of megawatt hour (MWh) sales and sales revenue in 2010, 2009, and 2008 by surplus energy sales (Surplus), commercial and industrial (C&I), and residential (Res) customers:

MWh Sales Sales Revenues 100% 100%

90% 90%

80% 80%

70% 70%

60% 60%

50% 50%

40% 40%

30% 30%

20% El Surplus 20% El Surplus 10% [] C&l 10% F] C&I UN Res nUV I _ Res 2010 2009 2008

Sacramento Municipal Utility District I 2010 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS (unaudited)

Operating Expenses 2010 Compared to 2009 Operating Expenses were $1,156 million in 2010, approximately $22 million lower than in 2009. Purchased Power expense was $84 million lower in 2010 mainly due to less energy purchased and slightly lower average prices as compared to 2009. Approximately 24 percent less energy was purchased in 2010 at average prices that were one percent lower than in 2009. Purchased Power expense increased by $4 million for precipitation hedges and insurance. In 2010, net fuel costs for generation, a component of Production Costs, were approximately

$295 million (inclusive of ineffective hedges reported as Investment Expense), or $24 million higher than 2009.

More fuel was used in 2010 (1.2 million decatherms), primarily due to higher production at the component unit generation plants (6 percent). Average net fuel prices were higher by 6 percent in 2010 as compared to 2009.

Administrative, General and Customer expenses were $3 million lower in 2010 than in 2009 reflecting lower Cosumnes Power Plant litigation costs and efforts to reduce expenses.

Depreciation expense increased by $12 million due to a change in the remaining service life for meters as SMUD transitions to advanced metering technology and due to normal capital plant additions.

In 2010, power supply costs made up approximately 59 percent of total Operating Expenses as compared to 61 percent for 2009.

2009 Compared to 2008 Operating Expenses were $1.2 billion in 2009, approximately $139 million lower than in 2008. Purchased Power expense was $107 million lower in 2009 mainly due to lower average prices and less energy purchased as compared to 2008. Approximately three percent less energy was purchased in 2009 at average prices that were 22 percent lower than in 2008. Purchased Power expense increased by $4 million for precipitation hedges and insurance. In 2009, net fuel costs for generation, a component of Production Costs, were approximately

$271 million, or $34 million higher than 2008. Less fuel was used in 2009 (5.4 million decatherms), primarily due to lower production at all of the component unit cogeneration plants (14 percent). Average net fuel prices were 30 percent higher in 2009 as compared to 2008.

These reductions were partially offset by higher Administrative, General and Customer expenses, which were

$6 million higher in 2009 than in 2008.

Depreciation expense increased by $7 million due to a change in the remaining service life for meters as SMUD z transitions to advanced metering technology and due to normal capital plant additions.

In 2009, power supply costs made up approximately 61 percent of total Operating Expenses as compared to zz 66 percent for 2008.

0 The following charts compare the relative cost of Purchased Power, Production expenses, and depletion of the 0 Rosa gas field (power supply costs) to all other Operating Expenses in 2010, 2009, and 2008:

I 2010 2009 2008 a;UV Operating Expenses Operating Expenses a>

Operating Expenses EOther

.PowerSupply

Sacramento Municipal Utility District 1 2010 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS (unaudited)

Other Revenues (Expenses) 2010 Compared to 2009 Other Revenues were $20 million higher in 2010 as compared to 2009. Interest Income was $2 million lower due to significantly lower interest rates. Other Income - net was $7 million higher due to higher Build America Bond interest subsidies. Investment Expense related to ineffective hedges was lower by $14 million.

2009 Compared to 2008 Other Revenues were $10 million lower in 2009 as compared to 2008. Interest Income was $18 million lower due to significantly lower interest rates and lower securities lending income.

Interest Charges 2010 Compared to 2009 Interest Charges in 2010 were $30 million higher than in 2009, due mainly to a 2009 gain on the extinguishments of a portion of the NCGA long-term debt.

2009 Compared to 2008 Interest Charges in 2009 were $41 million lower than in 2008, due mainly to a gain on the extinguishments of a portion of the NCGA long-term debt. This also resulted in lower Interest on Debt for 2009.

Extraordinary Income SMUD recognized Extraordinary Income of $17 million in 2009 for natural gas and power settlements.

Sacramento Municipal Utility District I 2010 Annual Report CONSOLIDATED BALANCE SHEETS December 31, Assets 2010 2009 (thousands of dollars)

Electric Utility Plant Plant in service ........ ....... ........ ................................... $4,505,686 $4,342,758 Less accumulated depreciation and depletion ....................... (1,755,534) (1,608,459)

Plant in service - net ..... ......... ............... ...................... 2,750,152 2,734,299 Construction work in progress .................. 254,064 244,324 Total electric utility plant - net .............................. ........ 3,004,216 2,978,623 Restricted and Designated Assets Revenue bond, debt service and construction reserves .......................... 239,533 208,663 Nuclear decommissioning trust fund .............. ............... .... 30,335 38,849 Rate stabilization fund ............................... 41,471 47,688 Securities lending collateral ................... .............. ........ 5,247 O ther funds ........... .............. ................. ....... ...... 750 805 Less current portion .......... ........................................... (107,649) (98,757)

Total restricted and designated assets ....................................... 204,440 202,495 Current Assets Unrestricted cash and cash equivalents .......................... 371,090 257,648 Restricted and designated cash and cash equivalents ............................. 39,056 49,981 Restricted and designated investments ..................................... 68,593 48,776 Receivables - net:

Retail custom ers .. ....... ................................. ....... 154,489 150,811 Wholesale .................................... 47,594 40,743 Energy efficiency loans due within one year, interest receivable, grants receivable and other ......... ..................... 33,524 25,008 Regulatory costs to be recovered within one year. ....... 52,626 37,736 Deferred outflow resources to be recovered within one year ....................... 104,556 61,062 Investment derivative instruments maturing within one year ........................... .. 905 1,792 Hedging derivative instruments maturing within one year ............. ....... 13,232 17,064 Materials and supplies ............................... 44,518 47,526 Prepaid gas to be delivered within one year .............. ........................ 21,309 22,114 Credit support collateral deposits .............................. . 22,761 8,872 Prepaym ents ................................................ . 14,676 17,001

Total Tota current c r e t a s assets.s .. .. ................ ................................

988,929 786,134 9 8 9 9 8 , 3 Noncurrent Assets and Deferred Charges Regulatory costs for future recovery ....................... 205,052 195,798 Deferred outflow resources for future recovery ........................ 113,064 67,063 Prepaid G as .............................................. 406,046 427,355 Advance capacity payments ............. . . . . . . ......... 16,795 21,713 Investm ent derivative instrum ents ............................................. 294 Hedging derivative instruments ................ ...... . ........... 27,654 38,467 Unamortized debt issuance costs ................................ 31,459 32,368 Energy effi ciency loans - net ................ ............................. 57,959 60,497 Credit support collateral deposits ........ .......... ........ ............ 27,139 2,128 Preliminary project studies and other .................... 11,081 11,507 Total noncurrent assets and deferred charges ............................ 896,249 857,190 Total Assets ... ............... ....... ............ $ 5,093,834 $ 4,824,442 The accompanying notes are an integral part of these consolidated financial statements.

Sacramento Municipal Utility District i 2010 Annual Report CONSOLIDATED BALANCE SHEETS December 31, Liabilities 2010 2009 (thousands of dollars)

Long-Term Debt - net. $ 3,156,447 $ 3,007,908 Current Liabilities and Deferred Credits Com m ercial paper notes .. . .... .... ....................................... 200,000 200,000 Accounts payable ...... ........................................ .......... 77,422 77,105 Purchased power payable ..................... ................ 52,104 70,491 Credit support collateral obligation .......... ............ ........... 6,050 6,050 Long-term debt due within one year . 99,935 106,775 Accrued decom m issioning .................................................... 1,893 6,913 Interest payable.. . 47,119 46,299 Accrued salaries and compensated absences ................................. . 37,747 33,943 Investment derivative instruments maturing within one year ....................... 29,076 15,345 Hedging derivative instruments maturing within one year ......................... I117,787 78,126 Regulatory credits to be recognized within one year ... ....... .............. 11,941 13,549 Securities lending collateral obligation .................. --...... 5,247 Custom er deposits and other............ ................................. 36,207 30,066 Total current liabilities and deferred credits ...... 717,281 689,909 Noncurrent Liabilities and Deferred Credits Accrued decom m issioning .................................... ....... . 165,603 158,436 Investm ent derivative instrum ents ............................................. 43,703 32,418 Hedging derivative instrum ents ........................................... .. 140,717 105,530 Regulatory credits ................... .......................... ............ 281,740 271,482 Due to affiliated entity .... ....... ....... ................. ................ . 9,448 13,041 Due to U.S. Bureau of Reclam ation .......................................... 6,300 6,400 Self insurance, deferred credits and other ......................... . 23,908 23,384 Total noncurrent liabilities and deferred credits .............................. 673,419 610,691 Total Liabilities ..................................................... 4,547,147 4,308,508 Net Assets Invested in capital assets, net of related debt ... 96,871 221,988 Restricted ................................................. ............... 100,889 86,321 Unrestricted ........................................ 348,927 207,625 Total N et Assets ................................................... .546,687 515,934 Commitments and Contingencies (Notes 17 and 18)

Total Liabilities and Net Assets . ................ 5....................$ 4,824,442 5,093,834 The accompanying notes are an integral part of these consolidated financial statements.

Sacramento Municipal Utility District I 2010 Annual Report CONSOLIDATED STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS Year Ended December 31, 2010 2009 (thousands of dollars)

Operating Revenues Resid en tial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . $ 526,860 $ 514,320 Com m ercial and industrial .................................... ............ 640,727 604,907 Street lighting and other ...................... 28,762 26,344 W h o lesale . ... .. .. .. .. .. .. .. .. ... . .. .. .. .. .. .. ... . .. .. . . . .. .. . . . . . . . . . 119,490 119,956 Senate Bill - 1 revenue ............. ...................... 1,232 722 Rate stabilization fund transfers ....................................... 6,217 27,088 Total operating revenues ..... 1,323,288 1,293,337 Operating Expenses Operations:

Purchased power ............ ....... .............................. 255,523 339,310 Production ............. .... ..................... ................ 404,845 360,022 Transm ission and distribution ............................................. 49,879 50,175 Adm inistrative, general and custom er .......................................... 140,025 142,860 Public good ................................................................ 53,236 47,607 Maintenance ........................................ 74,498 74,706 Depreciation ............. .............. 162,708 150,811 D ep letio n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,894 12,188 D ecomm issioning ............................................ ......... 4,704 421 Total operating expenses ................................................. 1,156,312 1,178,100 Operating Income ....................................................... 166,976 115,237 Non-Operating Revenues and Expenses Other revenues Interest income .......... ................ 10,123 12,326 Investment expense ........... ......... ............ ........ (30,175) (44,302)

Revenue - G rants ............................... 6,354 4,925 Pass through expenditures - Grants ................ ............ ......... (365) (177) z Other income - net........................ 17,906

--- 10,800 0

Total other revenues and (expenses) ........... 3,843 (16,428) 0 z Interest charges z

Interest on debt ............................ ......................... 145,148 143,111 Gain on debt extinguishment and refundings ...... (28,320)

Z Allowance for funds used during construction ....... ............ (5,079) (4,197)

Total interest charges ...................... .......... .......... 140,069 110,594 I

Increase (decrease) in Net Assets before Extraordinary Income ..................... 30,750 (11,785)

Extraordinary Income Natural gas and power settlement proceeds............................... 3 17,170 Increase in Net Assets ....... ............................. 30,753 5,385 Net Assets - Beginning of Year ................................................ 515,934 510,549 Net A ssets - End of Year ......... .............. ............................. $ 546,687 $ 515,934 The accompanying notes are an integral part of these consolidated financial statements.

Sacramento Municipal Utility District 12010 Annual Report CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2010 2009 (thousands of dollars)

Cash Flows From Operating Activities Receipts from retail custom ers ............................. $ 1,184,802 $ 1,127,952 Receipts from surplus power sales .................................. 56,696 59,225 Receipts from surplus gas sales ......................... ...... 55,745 63,646 Receipts from steam sales .................... ...... 8,565 8,013 Natural gas and power settlement proceeds ...................................... 3 702 O th er receip ts . . .. . . . . . . .. . .. . . .. . . . . . . .... . . .. . .. .. .. .. .. .. .. . . . . .. .. 11,753 7,921 Paym ents for credit support collateral, net ...................................... (38,900) (8,450)

Issuance/repayment of energy efficiency loans, net .............. ........ (778) (5,313)

Payments to employees - payroll and other ...... (226,522) (223,857)

Paym ents for wholesale power .................. .................. ......... (261,617) (326,611)

Paym ents for gas purchases .......................... .................... (313,559) (281,195)

Paym ents to vendors/others ................................................... (149,455) (154,701)

Paym ents for weather hedge/insurance ......................................... (3,462) (4,218)

Payments for decommissioning . ............................. .......... (4,801) (3,859)

Net cash provided by operating activities ...................... 318,470 259,255 Cash Flows From Noncapital Financing Activities R epaym ent of d ebt ....................... ............................... (23,465) (24,085)

Proceeds from extinguishment of long-term debt .............................. 20,529 Receipts from federal and state grants .......................................... 20,432 7,007 Other receipts ............. 528 Interest on debt ........................ (19,335) (23,542)

Net cash used in noncapital financing activities .............................. (22,368) (19,563)

Cash Flows From Capital Financing Activities Construction expenditures ............................. ............... ...... (194,207) (211,234)

Contributions in aid of construction ....................... ....... 6,566 18,813 Net proceeds from bond issues. 247,777 310,276 Repaym ents and refundings of debt ............................................ (83,310) (218,322)

In terest o n d eb t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (123,440) (120,813)

Net cash used in capital financing activities .............................. (146,614) (221,280)

Cash Flows From Investing Activities Sales and m aturities of securities ................... ....... ............. 116,368 239,480 Purchases of securities ........ ..................... ............. (173,586) (142,055)

Interest and dividends received ..................... .................. 10,306 12,749 Investm ent revenue/expenses, net ................... .................. (30,176) (44,302)

Securities lending collateral - net .............................................. _..(5,247) (26,153)

Net cash provided by (used in) investing activities ............................ (82,335) 39,719 Net increase in cash and cash equivalents ...................................... 67,153 58,131 Cash and cash equivalents at the beginning of the year ........................ 4701,839 412,708 Cash and cash equivalents at the end of the year ............................... $ 537,992 $ 470,839 Cash and cash equivalents included in:

Unrestricted cash and cash equivalents ............ $ 371,090 $ 257,648 Restricted and designated cash and cash equivalents .............................. 39,056 49,981 Revenue bond, debt service and construction reserves (a component of the total of $239,533 and $208,663 at December 31, 2010 and 2009, respectively) ........... 127,846 163,210 Cash and cash equivalents at the end of the year ............................... S 537,992 $ 470,839 The accompanying notes are an integral part of these consolidated financial statements.

Sacramento Municipal Utility District 1 2010 Annual Report SUPPLEMENTAL CASH FLOW INFORMATION A reconciliation of the consolidated statements of cash flows operating activities to operating income is as follows:

Year Ended December 31, 2010 2009 (thousands of dollars)

O perating incom e ........................ ............................ $ 166,976 $ 115,237 Adjustments to reconcile operating income to net cash provided by operating activities:

D ep reciatio n ... ... ........................................... ........ 162,708 150,811 D ep letio n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,894 12,188 D ecom m issioning ...................... ............................... 4,704 421 Amortization of advance capacity & other .................................. 5,464 5,431 Amortization of prepaid gas supply .............. ................... 22,113 21,350 Revenue (recognized from) deferred to regulatory credits, net ................. (7,466) (28,447)

Natural gas and power settlement proceeds ........................... 3 702 Payments for credit support collateral, net .................................. (38,900) (8,450)

Other receipts/payments ........................................ 5,525 7,632 Changes in operating assets and liabilities:

Custom er and wholesale receivables ...................................... (10,727) (2,749)

Energy efficiency loans ................ ................................ (778) (5,313)

Other assets ......... ....................................... 6,808 4,016 Payables and accruals ...................... ..................... (4,053) (9,715)

Decommissioning .............. ......................... ....... (4,801) (3,859)

Net cash provided by operating activities ......................... $ 318,470 $ 259,255 The supplemental disclosure of noncash financing and investing activities is as follows:

Year Ended December 31, 2010 2009 (thousands of dollars)

Gain or (Loss) on debt extinguishment and refundings ....................... 7,791 Amortization of debt related costs .................................... (1,546) (2,355)

Unrealized holding gain or (loss) ....................... ...... ............... (92) (301) z Change in valuation of derivative financial instruments ....................... (115,690) 5,043 0 Amortization of revenue for assets contributed in aid of construction ............. 9,133 8,689 Allowance for funds used during construction ................................... 5,079 4,197 O

Construction costs included in accounts payable ................. ......... 30,576 32,443 0

Extinguishm ent of long-term debt .............. .............................. 259,840 Partial termination of prepaid gas supply .................................. (250,988) 0 The accompanying notes are an integral part of these consolidated financial statements.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION The Sacramento Municipal Utility District (SMUD) was formed and operates under the State of California Municipal Utility District Act (Act). The Act confers upon SMUD the rights and powers to fix rates and charges for commodities or services furnished, and to incur indebtedness and issue bonds or other obligations. As a public utility, SMUD is not subject to regulation or oversight by the California PublicUtilities Commission. SMUD is responsible for the acquisition, generation, transmission, and distribution of electric power to its service area, which includes most of Sacramento County and small adjoining portions of Placer County and Yolo County. The Board of Directors (Board) determines SMUD's rates. SMUD is exempt from payment of federal and state income taxes and, under most circumstances, real and personal property taxes. SMUD is not exempt from real and personal property taxes on assets it holds outside of California. In addition, SMUD is responsible for the payment of a portion of the property taxes associated with its real property located in California but outside of its service area.

NOTE 2.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES Method of Accounting. SMUD's accounting records are maintained in accordance with Generally Accepted Accounting Principles (GAAP) for proprietary funds as prescribed by the Governmental Accounting Standards Board (GASB) and, where not in conflict with GASB pronouncements, accounting principles prescribed by the Financial Accounting Standards Board (FASB). References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards CodificationT' sometimes referred to as the Codification or ASC. The FASB finalized the Codification for periods ending on or after September 15, 2009. Prior FASB standards like FASB No. 157, "Fair Value Measurements"' are no longer being issued by the FASB. For further discussion of the Codification see "FASB Codification Discussion" in Management's Discussion and Analysis elsewhere in this report. SMUD's accounting records generally follow the Uniform System of Accounts for Public Utilities and Licensees prescribed by the Federal Energy Regulatory Commission (FERC), except as it relates to the accounting for contributions of utility property in aid of construction. SMUD's consolidated financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. Electric revenues and costs that are directly related to the acquisition, generation, transmission, and distribution of electricity are reported as operating revenues and expenses. All other revenues and expenses are reported as non-operating revenues and expenses.

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

The Financial Reporting Entity. These consolidated financial statements include SMUD and its component units.

Although the component units are legally separate from SMUD, they are blended into and reported as part of SMUD because of the extent of their operational and financial relationships with SMUD. All significant inter-component transactions have been eliminated in consolidation.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Component Units. The component units include the Central Valley Financing Authority (CVFA), the Sacramento Cogeneration Authority (SCA), the Sacramento Power Authority (SPA), the Sacramento Municipal Utility District Financing Authority (SFA), and the Northern California Gas Authority No. I (NCGA). The primary purpose of CVFA, SCA, SPA and SFA is to own and operate electric utility plants that supply power to SMUD. The primary purpose of NCGA is to prepay for natural gas and to sell the natural gas to SMUD. SMUD's Board comprises the Commissions that govern these entities.

Plant in Service. The cost of additions to Plant in Service and replacement property units is capitalized. Repair and maintenance costs are charged to expense when incurred. When SMUD retires portions of its Electric Utility Plant, retirements are recorded against Accumulated Depreciation and the retired portion of Electric Utility Plant is removed from Plant in Service. The costs of removal and the related salvage value, if any, are charged or credited as appropriate to Accumulated Depreciation. SMUD generally computes depreciation on Plant in Service on a straight-line, service-life basis. The consolidated average annual composite depreciation rates for 2010 and 2009 were 3.88 and 3.72 percent, respectively. Depreciation is calculated using the following estimated lives:

Generation ............................ 5 to 90 years Transmission and Distribution .......... 5 to 50 years G eneral ............................... 2 to 50 years G as Pipeline ........................... 5 to 90 years Investments in Joint Power Agency (JPA). SMUD's investment in the Transmission Agency of Northern California (TANC) is accounted for under the equity method of accounting and is reported as a component of Plant in Service.

SMUD's share of the TANC debt service costs and operations and maintenance expense, inclusive of depreciation, is included in Transmission and Distribution expense in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets.

Investments in Gas Properties. SMUD has an approximate 23 percent non-operating ownership interest in the Rosa Unit gas properties in New Mexico of which, SMUD's portion of the extracted gas is transported for use in its component unit natural gas-fired power plants (see Note 6). SMUD uses the successful efforts method of accounting for its investment in gas producing properties. Costs to acquire mineral interests in gas properties, to drill and equip z exploratory wells that find proved reserves, and to drill and equip development wells are capitalized as a component of Plant in Service on the Consolidated Balance Sheets. Costs to drill exploratory wells that do not find proved

> reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.

Z SMUD has purchased proven reserves and has not participated in exploratory drilling. Capitalized costs of producing o gas properties, after considering estimated residual salvage values, are depleted by the unit-of-production method based on the estimated future production of the proved developed producing wells. SMUD's investment in gas 0

properties is reported as a component of Plant in Service.

2:

Restricted and Designated Assets. Cash, cash equivalents, and investments, which are restricted under terms of certain agreements for payments to third parties or Board actions limiting the use of such funds, are included as restricted assets. When SMUD restricts funds for a specific purpose, and both restricted and unrestricted resources are available for use, it is SMUD's policy to use restricted resources first, then unrestricted resources as they are needed.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO' CONSOLIDATED FINANCIAL STATEMENTS Restricted Bond Funds. SMUD's Indenture Agreements (Indenture) and Bond Resolutions require the maintenance of minimum levels of reserves for debt service and certain construction costs intended by the related debt offerings.

Nuclear Decommissioning Trust Fund. SMUD made annual contributions to its Nuclear Decommissioning Trust Fund (Trust Fund) through 2008 to cover the cost of its primary decommissioning activities associated with the Rancho Seco facility. Primary decommissioning excludes activities associated with the spent fuel storage facility after 2008 and most non-radiological decommissioning tasks. SMUD determined early in 2008 that there were enough funds in the trust to complete the radiological decommissioning of the Rancho Seco nuclear plant site, and stopped contributing to the Trust Fund (see Note 13).

Interest earnings on the Trust Fund assets are recorded as Interest Income and are accumulated in the Trust Fund.

Annual Decommissioning expense comprises the interest earnings on Trust Fund assets during the year and spent fuel storage facility and non-radiological decommissioning expenses that cannot be taken from the Trust account.

Accrued Decommissioning. SMUD accrues decommissioning costs related to Utility Plant when an obligation to decommission facilities is legally required. Adjustments are made to such liabilities based on estimates by SMUD staff in accordance with FASB ASC 410, Asset Retirement and Environmental Obligations (FASB ASC 410), (formerly known as Statement of Financial Accounting Standards (SFAS) No. 143, "Accountingfor Asset Retirement Obligations" (ARO)). For active plants, such costs are included in the Utility Plant's cost and included as a component of Operating Expense over the Utility Plant's life. Expenditures for decommissioning activities are recorded as reductions to Accrued Decommissioning liability. Changes in the Rancho Seco decommissioning liability estimates arising from inflation, annual accretion, and other changes to the cost assumptions are recorded directly to Accrued Decommissioning with a corresponding adjustment to the related regulatory deferral. The current portion of the Accrued Decommissioning liability represents SMUD's estimate of actual expenditures in the next year, as set forth in the annual budget.

SMUD has identified potential retirement obligations related to certain generation, distribution and transmission facilities. SMUD's non-perpetual leased land rights generally are renewed continuously because SMUD intends to utilize these facilities indefinitely. Since the timing and extent of any potential asset retirements are unknown, the fair value of any obligations associated with these facilities cannot be reasonably estimated. Accordingly, a liability has not been recorded.

At December 31, 2010 and 2009, SMUD's Accrued Decommissioning balance in the Consolidated Balance Sheets relating to Rancho Seco was $160.5 million and $158.8 million, respectively (see Note 13). The Accrued Decommissioning balance in the Consolidated Balance Sheets relating to other electricity generation and gas production facilities totaled $7.0 million and $6.5 million as of December 31, 2010 and 2009, respectively.

Securities Lending Transactions. SMUD lends its securities to broker-dealers and other entities secured by collateral with a simultaneous agreement to return the collateral for the same securities in the future. SMUD policy requires cash collateral of 102 percent of the market value of the loaned securities. Both the investments purchased, with the collateral received, and the related liability to repay the collateral are included in the Consolidated Balance Sheets.

At December 31, 2010 SMUD had no securities lending transactions.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cash and Cash Equivalents. Cash and cash equivalents include all debt instruments purchased with an original maturity of 90 days or less, all investments in the Local Agency Investment Fund (LAIF), and money market mutual funds. LAIF has an equity interest in the State of California (State) Pooled Money Investment Account (PMIA).

PMIA funds are on deposit with the State's Centralized Treasury System and are managed in compliance with the California Government Code according to a statement of investment policy which sets forth permitted investment vehicles, liquidity parameters, and maximum maturity of investments. SMUD's deposits with LAIF comprise cash representing demand deposits up to $50.0 million maximum, and cash equivalents representing amounts above

$50.0 million which may be withdrawn once per month after a thirty-day period. The debt instruments and money market mutual funds are reported at amortized cost which approximates fair value, and the LAIF is reported at the value of its pool shares.

Investments. SMUD's investments are reported at fair value. Realized and unrealized gains and losses are included in Interest and Other Income in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets. Premiums and discounts on zero coupon bonds are amortized using the effective interest method. Premiums and discounts on other securities are amortized using the straight-line method, which approximates the effective interest method.

Electric Operating Revenues. Electric revenues are billed on the basis of monthly cycle bills and are recorded as revenue when the electricity is delivered. SMUD records an estimate for unbilled revenues earned from the dates its retail customers were last billed to the end of the month. At December 31, 2010 and 2009, unbilled revenues were

$67.6 million and $64.3 million, respectively.

Purchased Power Expenses. A portion of SMUD's power needs are provided through power purchase agreements.

Expenses from such agreements, along with associated transmission costs paid to other utilities, are charged to Purchased Power expense on the Consolidated Statements of Revenues, Expenses and Changes in Net Assets in the period the power is received. The costs, or credits, associated with energy swap agreements (gas and electricity) or other arrangements that affect the net cost of Purchased Power are recognized in the period in which the underlying power delivery occurs. Contract termination payments and adjustments to prior billings are included in Purchased Power expense once the payments or adjustments can be reasonably estimated.

Advanced Capacity Payments. Some long-term agreements to purchase energy or capacity from other providers call z for up-front payment. Such costs are generally recorded as an asset and amortized over the length of the contract.

o Credit and Market Risk. SMUD enters into forward purchase and sales commitments for physical delivery of gas Z

and electricity with utilities and power marketers. SMUD is exposed to credit risk related to nonperformance by its

~o wholesale counterparties under the terms of these contractual agreements. In order to limit the risk of counterparty default, SMUD has a wholesale counterparty risk policy which includes using the credit agency ratings of SMUD's 0

counterparties, credit enhancements for counterparties that do not meet an acceptable risk level, and the use of standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty. SMUD is also subject to similar requirements for many of its gas and electricity purchase agreements.

At both December 31, 2010 and 2009, SMUD held $6.1 million on deposit by counterparties. The amount is recorded as unrestricted cash with an associated short-term and long-term liability. At December 31, 2010, SMUD had

$49.9 million in collateral on deposit with counterparties. SMUD has a $50 million letter of credit facility to support collateral requirements under SMUD's various energy and natural gas purchase, sale and swap agreements.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accounts Receivable and Allowance for Doubtful Accounts. Accounts Receivable is recorded at the invoiced amount

and does not bear interest, except for accounts related to energy efficiency loans. SMUD recognizes an estimate of uncollectible accounts for its receivables related to electric service, wholesale activities, and energy efficiency loans based upon its historical experience with collections and current energy market conditions. For large wholesale receivable balances, SMUD determines its bad debt reserves based on the specific credit issues for each account.

SMUD records bad debts for its estimated uncollectible accounts related to electric service and wholesale activities as a reduction to the related operating revenues in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets. SMUD records bad debts for its estimated uncollectible accounts related to energy efficiency loans in Administrative, General and Customer expense in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets.

The summarized activity of the changes in the allowance for doubtful accounts during 2010 and 2009 is presented.

below (thousand of dollars):

Balance at Write-offs Balance beginning of and at end of Year Additions Recoveries Year California ISO and PX:

December 31, 2010 ......................... $ 23,848 $ 222 $ 63 $ 24,007 December 31, 2009 ........................ $ 24,582 $ 237 $ 971 $ 23,848 Wholesale Power and Other:

December 31, 2010 ......................... $ 1,518 $ 659 $ 958 $ 1,219 December 31, 2009 ........................ $ 1,681 $ 400 $ 563 $ 1,518 Retail Customers:

December 31, 2010 ......................... $ 3,548 $ 7,432 $ 7,034 $ 3,946 December 31, 2009 ........................ $ 2,882 $ 6,617 $ 5,951 $ 3,548 Energy Efficiency Loans:

December 31, 2010 ........................ $ 2,978 $ 2,312 $ 2,007 $ 3,283 December 31, 2009 ........................ $ 2,349 $ 2,351 $ 1,722 $ 2,978 Regulatory Deferrals. The Board has the authority to establish the level of rates charged for all SMUD services.

As a regulated entity, SMUD's financial statements are prepared in accordance with FASB ASC 980, Regulated Operations,formerly known as SFAS 71, "Accountingfor the Effects of Certain Types of Regulation,"which requires that the effects of the rate-making process be recorded in the financial statements. Accordingly, certain expenses and credits, normally reflected in Net Increase (Decrease) in Net Assets as incurred, are recognized when included in rates and recovered from, or refunded to, customers. SMUD records various regulatory assets and credits to reflect rate-making actions of the Board.

Materials and Supplies. Materials and supplies are stated at average cost, which approximates the first-in, first-out method.

Unamortized Debt Issuance Costs. The costs incurred in connection with the issuance of debt obligations, principally underwriters fees and legal costs, are recorded as Unamortized Debt Issuance Costs in the Consolidated Balance Sheets and are amortized over the terms of the related obligations using the effective interest method.

Compensated Absences. SMUD accrues vacation leave and compensatory time when employees earn the rights to the benefits. SMUD does not record sick leave or other leave as a liability until it is taken by the employee, since there are no cash payments for sick leave or other leave made when employees terminate or retire. At both December 31, 2010 and 2009, the total estimated liability for vacation and other compensated absences was $24.4 million.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Public Good. Public Good expenses consist of non-capital expenditures for energy efficiency programs, low income subsidies, renewable energy resources and technologies research and development.

Gains/Losses on Bond Refundings. Gains and losses resulting from bond refundings are included as a component of Long-Term Debt on the Consolidated Balance Sheets and amortized as a component of Interest on Debt in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets over the shorter of the life of the refunded debt or the new debt using the effective interest method.

Gains/Losses on Bond Defeasances or Extinguishments. Gains and losses resulting from bond defeasances or extinguish-ments that were not financed with the issuance of new debt are included as a component of Interest on Debt in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets.

Allowance for Funds Used During Construction (AFUDC). SMUD capitalizes, as an additional cost of Construction Work In Progress (CWIP), AFUDC, which represents the cost of borrowed funds used for such purposes. The amount capitalized is determined by a formula prescribed by FERC. The AFUDC rates for 2010 and 2009 were 3.9 percent and 3.5 percent, respectively, of eligible CWIP.

Derivative Financial Instruments. SMUD records derivative financial instruments (interest rate swap and gas price swap agreements, certain wholesale sales agreements, certain electricity purchase agreements and option agreements) at fair value on its Consolidated Balance Sheets. SMUD generally does not enter into agreements for trading purposes.

Fair market value is estimated by comparing contract prices to forward market prices quoted by third party market participants and/or provided in relevant industry publications. SMUD is exposed to risk of nonperformance if the counterparties default or if the swap agreements are terminated. SMUD reports derivative financial instruments with remaining maturities of one year or less and the portion of long-term contracts with scheduled transactions over the next twelve months as current on the Consolidated Balance Sheets. See Notes 3 and 9.

Interest Rate Swap Agreements. SMUD enters into interest rate swap agreements to modify the effective interest rates on outstanding debt. See Notes 3 and 9.

Gas and Electricity Price Swap and Option Agreements. SMUD uses forward contracts to hedge the impact of market z volatility on gas commodity prices for its gas-fueled power plants and for energy prices on purchased power for SMUD's retail load. See Notes 3 and 9.

0 z

Z_ Precipitation Hedge Agreements. SMUD enters into non-exchange traded precipitation hedge agreements to hedge o the increased cost of power caused by low precipitation years (Precipitation Agreements). SMUD records the intrinsic value of the Precipitation Agreements on the Consolidated Balance Sheets. Settlement of the Precipitation 0

Agreements is not performed until the end of the period covered (water year ended September 30). The intrinsic value of a Precipitation Agreement is the difference between the expected results from a monthly allocation of the cumulative rainfall amounts, in an average rainfall year, and the actual rainfall during the same period.

Insurance Programs. SMUD records liabilities for unpaid claims at their present value when they are probable in occurrence and the amount can be reasonably estimated. SMUD records a liability for unpaid claims associated with general, auto, workers' compensation, and short-term and long-term disability based upon estimates derived by SMUD's claims administrator or SMUD staff. The liability comprises the present value of the claims outstanding, and includes an amount for claim events incurred but not reported based upon SMUD's experience.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net Assets. SMUD classifies its net assets into three components as follows:

Invested in capital assets, net of related debt - This component of net assets consists of capital assets, net of Accumulated Depreciation reduced by the outstanding debt balances, net of unamortized debt expenses.

Restricted - This component consists of net assets with constraints placed on their use, either externally or internally. Constraints include those imposed by debt indentures (excluding amounts considered in net capital, above), grants or laws and regulations of other governments, or by law through constitutional provisions or enabling legislation or by the Board.

Unrestricted - This component of net assets consists of net assets that do not meet the definition of "Invested in Capital Assets, Net of Related Debt" or "Restricted."

Contributions in Aid of Construction (CIAC). SMUD records CIAC from customer contributions, primarily relating to expansions to SMUD's distribution facilities, as Non-Operating Revenues in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets. Contributions of capital are valued at estimated market cost.

For rate-making purposes, the Board does not recognize such revenues when received; rather, CIAC is included in revenues as such costs are amortized over the estimated useful lives of the related distribution facilities.

Revenues and Expenses. SMUD distinguishes operating revenues and expenses from nonoperating items.

Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with SMUD's principal ongoing operations. The principal operating revenues of SMUD are charges to customers for sales and services. Operating expenses include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses.

Grants. SMUD receives grant proceeds from federal and state assisted programs for its advanced and renewable technologies, electric vehicle, and energy efficiency programs. SMUD also periodically receives grant proceeds from federal or state assistance programs as partial reimbursements for costs it has incurred as a result of storm damages. Additionally, SMUD received several large American Recovery and Reinvestment Act (ARRA) grants in 2009. When applicable, these programs may be subject to financial and compliance audits pursuant to regulatory requirements. SMUD considers the possibility of any material disallowances to be remote. During 2010, SMUD recorded $26.5 million of grant proceeds and recognized $6.4 million as a component of Interest and Other Income, in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets, $19.5 million as a Regulatory Deferral (Note 8), and $0.6 million as deferred revenues as a component of Self Insurance, Deferred Credits and Other on the Consolidated Balance Sheets. During 2009, SMUD recognized grant proceeds of $4.9 million, as a component of Interest and Other Income, in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets. In 2010 and 2009, SMUD issued taxable Build America Bonds. SMUD will receive an interest subsidy from the federal government equal to 35 percent of the interest paid (Note 10). In 2010 and 2009, SMUD recog-nized $6.7 and $2.8 million in revenues for its Build America Bonds, as a component of Interest Income, in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Extraordinary Income. During 2008 and 2009, SMUD received several settlements that were considered extraordinary income. SMUD was involved in a natural gas antitrust litigation settlement, and received $16.5 million in December 2008. The Board opted to defer $16.5 million to be recognized as revenue in 2009 for rate-making purposes. The deferred amount was recognized equally in January through March of 2009, and an additional $0.4 million was received in 2009 related to the litigation. SMUD also received $0.3 million in 2009 related to a bankruptcy claim related to sales into the California market that were related to gaming activities. This amount was for purchased power, and was not passed through to the component units. In 2010, SMUD received and recognized an additional

$3 thousand of extraordinary income for purchased power and it was not passed through to the component units.

Customer Sales and Excise Taxes. SMUD is required by various governmental authorities, including states and municipalities, to collect and remit taxes on certain customer sales. Such taxes are presented on a net basis and excluded from revenues and expenses in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets.

Termination Benefits. Termination benefits are benefits provided to employees as an incentive to hasten the termina-tion of services, as a result of a voluntary early termination, or as a consequence of involuntary early termination.

SMUD has identified a termination benefit liability related to certain employees related to the Rancho Seco site.

There are voluntary separation programs and retention agreements for certain employees. Benefits provided include up to six months of paid Consolidated Omnibus Reconciliation Act of 1985 (COBRA) medical benefits, outplacement services, and severance, based on length of service and type of termination agreement. Employees with sufficient length of service are eligible for Other Post Employment Benefits (OPEB) after termination. As of December 31, 2010, 3 employees had retention agreements totaling $0.1 million, recorded as a component of Customer Deposits and Other on the Consolidated Balance Sheets.

In October 2009, SMUD announced that the installation of "Smart Meters" would affect certain job classifications.

A separation package and talent retention program was outlined with employees. Benefits provided include up to 12 weeks of paid leave, plus pay in lieu of benefits for up to 12 weeks. Because some of the affected employees must work through January 2012, the amount of the termination liability is being recognized ratably on a monthly basis through January 2012. There is also a termination liability for another separation package for employees that will work through September 2011. As of December 31, 2010, there were approximately 52 positions affected, and SMUD had a termination liability of $0.7 million, recorded as a component of Customer Deposits and Other on the 2 Consolidated Balance Sheets.

0 o

Z Reclassifications. Certain amounts in the 2009 consolidated financial statements have been reclassified in order to conform to the 2010 presentation.

o Recent Accounting Pronouncements. In September 2006, the FASB issued FASB ASC 820, "FairValue Measurements and Disclosures"(FASB ASC 820), formerly known as SFAS No. 157, "FairValue Measurements." FASB ASC 820 provides guidance for using fair value to measure assets and liabilities. The statement clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability. The statement also establishes a fair value hierarchy that prioritizes the information used to develop these assumptions.

This statement was effective for SMUD beginning in 2008. See Note 3.

Effective in 2009, SMUD adopted an amendment to FASB ASC 820, formerly known as FASB Staff Position FAS 157-2 "Effective Date of FASB Statement No. 157," which requires calculation of the fair market value of AROs that are measured on a nonrecurring basis. See Note 12.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In May 2009, the FASB issued FASB ASC 855, "Subsequent Events" (FASB ASC 855). FASB ASC 855 establishes standards of accounting and disclosure for events that occur after the balance sheet date but before financial state-ments are issued or are available to be issued. This statement introduces the concept of financial statements being "available to be issued", and requires that an entity disclose the date that through which it has evaluated subsequent events. This statement was effective for SMUD in 2009. Subsequent events for SMUD have been evaluated through February 18, 2011, which is the date that the financial statements were available to be issued.

In June 2009, the FASB issued FASB ASC 105, "GenerallyAccepted Accounting Principles"(FASB ASC 105), which establishes the FASB Accounting Standards Codification (ASC or Codification) as the sole source of authoritative GAAP. Pursuant to the provisions of FASB ASC 105, SMUD has updated references to GAAP in its financial state-ments issued for the period ended December 31, 2009. The adoption of FASB ASC 105 did not impact SMUD's financial position or results of operations.

In August 2009, the FASB Issued Accounting Standards Update No. 2009-05, "FairValue Measurements and Disclosures relating to FASB ASC 820." This update requires that the fair value of liabilities be measured under the assumption that the liability is transferred to a market participant, and provides guidance on how to estimate the fair value of a liability. This update was effective for SMUD in 2009.

In January 2010, FASB issued Accounting Standards Update No. 2010-06 "FairValue Measurements and Disclosures (Topic 820): Improving Disclosuresabout Fair Value Measurements" (ASU 2010-06). ASU 2010-06 seeks to improve disclosure relating to fair values. The update requires the separate disclosure of and explanation of significant transfers in and out of fair values based on Level 1 and Level 2 inputs. The update also requires the presentation of separate information about purchases, sales, issuances, and settlements activity for fair values based on Level 3 inputs. For 2010, this specifically refers to SMUD's disclosure relating to its Rancho Seco Asset Retirement Obligation.

The portion of this update related to the Rancho Seco ARO is effective for SMUD for 2011. SMUD is currently assess-ing the financial statement impact of adopting the statement, but does not believe that its impact will be material.

In April 2010, FASB issued Accounting Standards Update No. 2010-17 "Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition - a consensus of the FASB Emerging Issues Task Force" (ASU 2010-17). ASU 2010-17 establishes authoritative guidance for revenue recognition relating to milestone contracts.

This update provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition. This update is effective for SMUD for 2011. SMUD is currently assessing the financial statement impact of adopting the update, but does not believe that its impact will be material.

In November 2006, GASB issued Statement of Government Accounting Standards (SGAS) No. 49, "Accountingand FinancialReportingforPollution Remediation Obligations"(GASB No. 49). GASB No. 49 requires local governments to provide the public with better information about the financial impact of environmental cleanups. A government would have to estimate its expected outlays for pollution remediation if it knows a site is polluted and if certain events have occurred. This statement was effective for SMUD beginning in 2008. In December 2009, SMUD identified a pollution remediation obligation at its North City Substation. This substation was built on a former landfill, and the site requires remediation. As part of the 2010 Budget Resolution, the Board authorized SMUD to defer the expense for rate-making purposes, and SMUD recorded a pollution remediation liability of $12.0 million and a corresponding regulatory asset for the remediation project. See Note 8.

Sacramento Municipal Utility District 1 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In June 2007, GASB issued SGAS No. 51, 'Accounting and FinancialReportingfor Intangible Assets" (GASB No. 51).

GASB No. 51 provides guidance regarding how to identify, account for and report intangible assets. Intangible assets are defined as assets that lack physical substance, are non-financial in nature, and have an initial useful life extending beyond a single reporting period. The statement provides that intangible assets be classified as capital assets, except for items explicitly excluded from the scope of the standard. This statement is effective for SMUD beginning in 2010.

SMUD has assessed the financial statement impact of adopting the new statement, and its impact is not material.

In June 2007, GASB issued SGAS No. 53, 'Accounting and FinancialReportingfor Derivative Instruments" (GASB No. 53). GASB No. 53 provides a comprehensive framework for the measurement, recognition and disclosure of derivative financial instrument transactions entered into by state and local governments. The statement requires that all derivative financial instruments be measured at fair value which will be reported on the Consolidated Balance Sheets, and that all derivative financial instruments are tested for effectiveness. The change in valuation of ineffective hedges should be reported as Investment Revenue on the Consolidated Statements of Revenues, Expenses and Changes in Net Assets. This statement is effective for SMUD beginning in 2010. See Note 3.

In March 2009, GASB issued SGAS No. 55, "The Hierarchyof GenerallyAccepted Accounting Principlesfor State and Local Governments" (GASB No. 55). GASB No. 55 incorporates the hierarchy of GAAP for state and local governments into the GASB's authoritative literature. Prior to this standard, the GAAP hierarchy was included in an American Institute of Certified Public Accountants (AICPA) Statements on Auditing Standards, rather than in the GASB's literature. This statement was effective for SMUD upon issuance and does not have a material impact on SMUD's financial statements.

In March 2009, GASB issued SGAS No. 56, "Codification of Accounting and FinancialReporting Guidance Contained in the AICPA Statements on Auditing Standards"(GASB No. 56). GASB No. 56 incorporates certain accounting and financial reporting guidance presented in the AICPA's Statements on Auditing Standards into the GASB's authoritative literature. This statement was effective for SMUD upon issuance and does not have a material impact on SMUD's financial statements.

In December 2009, GASB issued SGAS No. 57, "OPEB Measurements by Agent Employers and Agent Multiple -

Employer Plans" (GASB No. 57). GASB No. 57 addresses issues related to the use of the alternative measurement z method and the frequency and timing of measurements by employers that participate in agent multiple-employer OPEB plans. The statement amends previous GASB statements on OPEB plans, and will improve the consistency of 0 reporting for OPEB plans. This statement is effective for SMUD for 2012. SMUD is currently assessing the financial Z statement impact of adopting this portion of the statement, but does not believe that its impact will be material.

0 In June 2010, GASB issued SGAS No. 59, "FinancialInstruments Omnibus" (GASB No. 59). GASB No. 59 addresses 0

topics relating to the reporting and disclosure of certain financial instruments and external investment pools, and H includes some clarifications to GASB No. 53. This statement is effective for SMUD for 2011. SMUD is currently assessing the financial statement impact of adopting the statement, but does not believe that its impact will be material.

In November 2010, GASB issued SGAS No. 61, "The FinancialReporting Entity - Omnibus - An Amendment of GASB Statements No. 14 and No. 34" (GASB No. 61). GASB No. 61 modifies requirements for inclusion of component units and amends criteria for reporting of component units. The statement also clarifies the reporting of equity interests in legally separate organizations. This statement is effective for SMUD for 2013. SMUD is currently assessing the financial statement impact of adopting the statement, but does not believe that its impact will be material.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In December 2010, GASB issued SGAS No. 62, "Codification of Accounting and FinancialReporting Guidance Contained in the Pre-November 30, 1989 FASB and AICPA Pronouncements"(GASB No. 62). GASB No. 62 incorporates into GASB's authoritative literature certain accounting and financial reporting guidance issued on or before November 30, 1989 included in: FASB Statements and Interpretations, Accounting Principles Board Opinions, and Accounting Research Bulletins of the AICPA Committee on Accounting Procedure that do not conflict with or contradict GASB pronouncements. The statement also supersedes SGAS No. 20, 'Accounting and FinancialReportingfor ProprietaryFunds and Other Governmental Entities That Use ProprietaryFund Accounting" which eliminates the election for business-type activities to apply post-November 30, 1989 FASB Statements and Interpretations that do not conflict with or contradict GASB pronouncements. This statement is effective for SMUD for 2012. SMUD is currently assessing the financial statement impact of adopting the statement, but does not believe that its impact will be material.

NOTE 3. ACCOUNTING CHANGE Effective with the Financial Statements for 2010, SMUD implemented GASB No. 53. The statement requires that all derivative financial instruments be measured at fair value which will be reported on the Consolidated Balance Sheets, and that all derivative financial instruments are tested for effectiveness.

The fair values of SMUD's derivative instruments (gas, electric and interest rate swap agreements), as defined by GASB No. 53, are reported in current and noncurrent assets and liabilities on the Consolidated Balance Sheets.

Effective hedges are recognized as Hedging Derivative Instruments. Changes in the fair value of Hedging Derivative Instruments are reported as Deferred Outflow of Resources on the Consolidated Balance Sheets.

Ineffective hedges are recognized as Investment Derivative Instruments. Changes in the fair value of Investment Derivative Instruments are expensed and then deferred to regulatory accounts per the Board Resolution (see Note 8).

All settlement payments or receipts for Hedging Derivative Instruments are recorded as either Production Expense for natural gas related derivative instruments, Purchased Power for energy related derivative instruments or Interest Expense for interest rate derivative instruments on the Consolidated Statements of Revenues, Expenses and Changes in Net Assets in the period incurred. All settlement payments or receipts for Investment Derivative Instruments are recorded as Investment Expense in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets in the period incurred.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 UTILITY PLANT The summarized activity of SMUD's utility plant during 2010 is presented below (thousands of dollars):

Balance Transfers Balance December 31, and December 31, 2009 Additions Deletions 2010 Nondepreciable Utility Plant:

Land ..................................... $ 101,258 $ 13,943 $ (4) $ 115,197 CW IP .................................... 244,324 190,602 (180,862) 254,064 Total nondepreciable utility plant ............... 345,582 204,545 (180,866) 369,261 Depreciable Utility Plant:

Generation ............................... 1,423,331 12,451 (1,483) 1,434,299 Transmission .............................. 221,223 17,224 (1,539) 236,908 Distribution .............................. 1,587,736 88,700 (5,659) 1,670,777 Investment in gas properties ................. 186,824 5,788 192,612 Investment in JPAs ......................... . 10,391 1,410 11,801 Intangibles ............................... 175,098 8,096 (3,589) 179,605 General .................................. 636,897 40,500 (12,910) 664,487 4,241,500 174,169 (25,180) 4,390,489 Less: accumulated depreciation and depletion .... (1,604,624) (173,363) 26,601 (1,751,386)

Less: accumulated amortization on JPAs ......... (3,835) (313) (4,148)

(1,608,459) (173,676) 26,601 (1,755,534)

Total depreciable plant ........................ 2,633,041 493 1,421 2,634,955 Total Utility Plant-net ...................... $ 2,978,623 $ 205,038 $ (179,445) $ 3,004,216 The summarized activity of SMUD's utility plant during 2009 is presented below (thousands of dollars):

Balance Transfers Balance December 31, and December 31, 2008 Additions Deletions 2009 Nondepreciable Utility Plant:

Land ..................................... $ 96,859 $ 5,869 $ (1,470) $ 101,258 z

o CW IP .................................... 237,149 213,358 (206,183) 244,324 Total nondepreciable utility plant .............. 334,008 219,227 (207,653) 345,582 0z Z Depreciable Utility Plant:

Generation .............................. 1,386,758 41,081 (4,508) 1,423,331 Transmission .............................. 204,739 21,801 (5,317) 221,223 0 Distribution .............................. 1,501,004 93,278 (6,546) 1,587,736 Investment in gas properties ................. 180,561 6,263 186,824 Investment in JPAs ......................... 11,836 (1,445) 10,391 Intangibles ............. ..... .......... 161,653 15,087 (1,642) 175,098 General .................................. 643,025 27,570 (33,698) 636,897 4,089,576 205,080 (53,156) 4,241,500 Less: accumulated depreciation and depletion .... (1,493,316) (162,578) 51,270 (1,604,624)

Less: accumulated amortization on JPAs ......... (3,522) (313) (3,835)

(1,496,838) (162,891) 51,270 (1,608,459)

Total depreciable plant ........................ 2,592,738 42,189 (1,886) 2,633,041 Total Utility Plant-net ...................... $ 2,926,746 $ 261,416 $ (209,539) $ 2,978,623

Sacramento Municipal Utility District 1 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. INVESTMENT IN JOINT POWERS AGENCY TANC. SMUD and fourteen other California municipal utilities are members of TANC, a JPA. TANC, along with the other California municipal utilities, own and operate the California-Oregon Transmission Project (COTP), a 500-kilovolt transmission line between central California and southern Oregon. SMUD is obligated to pay approxi-mately 30.0 percent of TANC's COTP debt service and operations costs in exchange for entitlement to approximately 419 megawatts (MW) of TANC's 1,390 MW transfer capability. Additionally, SMUD has a 48 MW share of TANC's 300 MW firm, bi-directional transmission over Pacific Gas and Electric's (PG&E) system between PG&E's Tesla and Midway substations (SOT).

In October 2007, TANC entered into a sales and purchase agreement with the City of Vernon (Vernon) whereby TANC purchased entitlement, rights, title and interest in Vernon's COTP transmission assets (approximately 121 MW North-to-South). The assignment and transfer of Vernon's COTP entitlement occurred in April 2008. SMUD received an additional entitlement to 36 MW of the COTP and 2 MW of SOT, both of which are included in the 419 MW COTP and 48 MW SOT totals, respectively. In December 2009, SMUD entered into a long-term reallocation agreement with TANC and the City of Santa Clara. Effective January 2010 through 2013, SMUD has an additional 30 MW, which makes SMUD's entitlement a 78 MW share of the SOT.

The long-term debt of TANC, which totals $421.4 million (unaudited) at December 31, 2010, is collateralized by a pledge and assignment of net revenues of TANC supported by take-or-pay commitments of SMUD and other members. Should other members default on their obligations to TANC, SMUD would be required to make additional payments to cover a portion of such defaulted payments, up to 25 percent of its current obligation.

Copies of the TANC annual financial reports may be obtained from SMUD at 6201 S Street, P.O. Box 15830, Sacramento, California 95852.

SMUD recorded transmission expenses related to TANC of $18.5 million and $18.0 million in 2010 and 2009, respectively.

Summary financial information for TANC is presented below:

December 31, 2010 2009 (unaudited) (unaudited)

(thousands of dollars)

Total assets ................................................................. $ 488,664 $ 491,624 Total liabilities .............................................................. $ 479,982 $ 488,030 Total net assets .............................................................. 8,682 3,594 Total liabilities and net assets ................................................ $ 488,664 $ 491,624 Changes in net assets for the six months ended December 31 ...................... .$ 2,199) $ (82)

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Balancing Authority of Northern California (BANC). SMUD and three other California municipal utilities formed BANC, a JPA, in 2009. BANC was formed to perform North American Electric Reliability Corporation (NERC) functions that would otherwise be performed by the BANC members or on their behalf.

Summary financial information for BANC is presented below:

December 31, 2010 2009 (unaudited) (audited)

(thousands of dollars)

To tal assets ................................................................ $ 37,20 1 $ 172 Total liab ilities .............................................................. $ 37,20 1 $ 172 To tal n et assets .............................................................. Total liabilities and net assets ................................................ $ 37,201 $ 172 Changes in net assets for the twelve and five months ended December 31 ............ $ $ SMUD recorded expenses related to BANC of $0.15 million in both 2010 and 2009.

NOTE 6. COMPONENT UNITS CVFA Carson Cogeneration Project. CVFA is a JPA formed by SMUD and the Sacramento Regional County Sanitation District. CVFA operates the Carson Project, a 57 MW (net) natural gas-fired cogeneration facility and a 43 MW (net) natural gas-fired simple cycle peaking plant. In 2010, the turbine for the combined cycle cogeneration facility was upgraded, which increased plant capacity by 8 MW. The revenue stream to pay the CVFA bonds' debt service is provided by a take or pay purchase power agreement between SMUD and CVFA.

SCA Procter & Gamble Cogeneration Project. SCA is a JPA formed by SMUD and the SFA. SCA operates the Procter

& Gamble Project, a 136 MW (net) natural gas-fired cogeneration facility and a 44 MW (net) natural gas-fired simple cycle peaking plant. In 2010, the turbine for the peaking plant was upgraded, which increased plant capacity by 6 MW. The revenue stream to pay the SCA bonds' debt service is provided by a take or pay purchase power agree-z 2 ment between SMUD and SCA.

0 zz SFA Cosumnes Power Plant Project. SFA is a JPA formed by SMUD and the Modesto Irrigation District. SFA operates the Cosumnes Power Plant Project, a 501 MW (net) natural gas-fired, combined cycle facility. The revenue stream to pay the SFA bonds' debt service is provided by a take and pay power purchase agreement between SMUD and SFA.

0 H_ SPA Campbell Soup Cogeneration Project. SPA is a JPA formed by SMUD and the SFA. SPA operates the Campbell Soup Project, a 160 MW (net) natural gas-fired cogeneration facility, and the McClellan Project, a 72 MW (net) natural gas-fired simple cycle peaking plant. The revenue stream to pay the SPA bonds' debt service is provided by a take and pay power purchase agreement between SMUD and SPA.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NCGA. NCGA is a JPA formed by SMUD and the SFA. NCGA has a twenty-year prepaid gas contract with Morgan Stanley Capital Group (MSCG), which is financed primarily by NCGA revenue bonds. SMUD has contracted with NCGA to purchase all of the gas delivered to NCGA pursuant to the gas contract with MSCG. NCGA is obligated to pay the principal and interest on the bonds. SMUD is obligated to purchase and pay for gas tendered for delivery by NCGA at market prices and is not obligated to make payments in respect to debt service on the bonds. In January and August 2009, some NCGA bonds were extinguished.

As described in Note 2, all of the activities and balances of the component units are blended into and reported as part of SMUD because of the extent of their operational and financial relationships with SMUD. Copies of CVFA's, SCA's, SPA's, SFA's and NCGA's annual financial reports may be obtained from their Executive Office at 6201 S Street, P.O. Box 15830, Sacramento, California 95852.

NOTE 7.CASH, CASH EQUIVALENTS, AND INVESTMENTS Cash Equivalents and Investments. SMUD's investment policies are governed by the California State and Municipal Codes and its Indenture, which restricts SMUD's investment securities to obligations which are unconditionally guaranteed by the United States (U.S.) Government or its agencies or instrumentalities; direct and general obligations of the State or any local agency within the State; bankers' acceptances; certificates of deposit; repurchase agreements; and taxable government and tax-exempt money market portfolios. SMUD's investment policy includes restrictions for investments relating to maximum amounts invested as a percentage of total portfolio and with a single issuer, maximum maturities, and minimum credit ratings.

Credit Risk. To mitigate the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment, SMUD limits investments to those rated, at a minimum, "A-I" or equivalent for commercial paper and "A" or equivalent for medium-term corporate notes by a nationally recognized rating agency.

Custodial Credit Risk. This is the risk that, in the event of the failure of a depository financial institution or counter-party to a transaction, SMUD's deposits may not be returned or SMUD will not be able to recover the value of its deposits, investments or collateral securities that are in the possession of another party. SMUD does not have a deposit policy for custodial credit risk. At December 31, 2010, SMUD did not have any securities lending transactions.

At December 31, 2009, $5.2 million in money market funds were held by a counterparty that was acting as SMUD's agent in securities lending transactions.

On November 9, 2010, the Federal Deposit Insurance Corporation (FDIC) issued a Final Rule implementing section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which will provide unlimited insurance coverage for non-interest bearing transaction deposit accounts at FDIC-insured institutions. This unlimited insurance coverage is temporary and will remain in effect until December 31, 2012.

On October 14, 2008, the FDIC announced a temporary Transaction Account Guarantee Program, which provided full coverage for non-interest bearing transaction deposit accounts at FDIC-insured institutions which agreed to participate in the program. This unlimited insurance coverage remained in effect for participating institutions until December 31, 2009.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Due to these temporary programs, all of SMUD's commercial cash deposits were fully insured at December 31, 2010 and 2009. The bank balance is also, per a depository pledge agreement between SMUD and SMUD's bank, collateralized at 755 percent and 649 percent of the collected funds on deposit (increased by the amount of accrued but uncredited interest, reduced by deposits covered by FDIC) at December 31, 2010 and 2009, respectively. At December 31, 2010, SMUD has a Money Market Deposit Account of $30.0 million which is uninsured. SMUD's investments are held in SMUD's name.

Concentration of Credit Risk. This is the risk of loss attributed to the magnitude of an entity's investment in a single issuer. SMUD places no limit on the amounts invested in any one issuer for repurchase agreements and federal agency securities. The following are the concentrations of risk greater than five percent in either year:

December 31, 2010 2009 Investment Type:

Federal National Mortgage Association (Fannie Mae) ........................... 7% 5%

Federal H ome Loan Banks ................................................. 0% 5%

M unicipal Bonds - State of California ....................................... 11% 0%

Interest Rate Risk. This is the risk of loss due to the fair value of an investment falling due to interest rates rising.

Though SMUD has restrictions as to the maturities of some of the investments, it does not have a formal policy that limits investment maturities as means of managing its exposure to fair value losses arising from increasing interest rates.

Securities Lending Transactions. SMUD is authorized by its investment policy and by California Government Code to enter into securities lending agreements for up to 20 percent of its investment portfolio, not to exceed $75.0 million, only with counterparties that are primary dealers of the Federal Reserve Bank of New York. There have been no violations of the provisions of the authorization during 2010 or 2009. The maturities of the investments made match the maturities of the securities loaned, which are U.S. Treasuries and Agencies. At December 31, 2010 SMUD had no security lending transactions. At December 31, 2009, SMUD had no credit risk exposure to borrowers because the amount SMUD owed the borrowers exceeded the amounts the borrowers owed SMUD. The contract with SMUD's custodial bank requires it to indemnify SMUD if the borrowers fail to return the securities (and the collateral is o2 inadequate to replace the securities lent), or fail to pay SMUD for income distributions by the securities' issuers while the securities were on loan. SMUD cannot pledge or sell collateral securities without borrower default. SMUD 0

z receives cash collateral and invests in certain securities allowed for in the securities lending agreement.

0 0

O

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following schedules indicate the credit and interest rate risk at December 31, 2010 and 2009. The credit ratings listed are from S&P. (N/A is defined as not applicable to the rating disclosure requirements).

At December 31, 2010, SMUD's cash, cash equivalents, and investments consist of the following:

Remaining Maturities (in years)

Credit Less More Total Fair Description Rating Than 1 1-5 than 5 Value (thousands ofd.11.rs)

Cash and Cash Equivalents:

Cash D eposits ....................... N/A $ 4,418 $ $ $ 4,418 LA IF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Rated 352,185 352,185 Money Market Mutual Funds .......... AAAm/N/A 85,669 85,669 Money Market Deposit Account ........ A-1+ 30,000 30,000 Comm ercial Paper ................... A-I+/A-1 65,720 65,720 Total cash and cash equivalents ....... 537,992 537,992 Investments:

Fannie M ae ......................... AAA 29,985 20,107 50,092 Federal Home Loan Banks ............. AAA 4,501 4,501 Federal Home Loan Mortgage Corp .... AAA 2,086 2,086 M unicipal Bonds ..................... SP- I 75,579 75,579 Corporate N ote ...................... AAA/AA+ 12,929 12,929 Total investments .................. 120,579 24,608 145,187 Total cash, cash equivalents, and investments ............... $ 658,571 $ 24,608 $ $ 683,179 At December 31, 2009, SMUD's cash, cash equivalents and investments consist of the following:

Remaining Maturities (in years)

Credit Less More Total Fair Description Rating Than 1 1-5 than 5 Value (thousands of dollars)

Cash and Cash Equivalents:

Cash Deposits ....................... N/A $ 10,544 $ $ $ 10,544 LA IF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not Rated 255,056 255,056 Money Market Mutual Funds ............ AAAm 141,959 141,959 Fannie M ae ......................... AAAm 17,999 17,999 Bankers Acceptance .................. A-i+ 4,100 4,100 Commercial Paper ............... A-1 35,934 35,934 Money Market Funds ................ AAA 5,247 5,247 Total cash and cash equivalents ...... 470,839 470,839 Investments:

Fannie M ae ......................... AAA 9,972 9,972 Federal Home Loan Banks ......... AAA 20,007 10,028 30,035 Federal Home Loan Mortgage Corp..... AAA 2,164 2,164 Bankers Acceptance .................. A-i+ 9,998 9,998 United States Treasuries .............. N/A 20,667 20,667 Corporate Note ..................... AAA/AA+ 15,225 15,225 Total investm ents .................. 30,005 58,056 88,061 Total cash, cash equivalents and investments ............... $ 500,844 $ 58,056 $ $ 558,900

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SMUD's cash, cash equivalents, and investments are classified in the Consolidated Balance Sheets as follows:

December 31, 2010 2009 (thousands of dollars)

Total Cash, Cash Equivalents, and Investments:

Revenue bond reserve, debt service and construction funds:

Revenue bond reserve fund ............................................... $ 53,271 $ 56,740 D ebt service fund ....................................................... 47,691 48,026 Component unit bond reserve and construction funds ........................ 138,571 103,897 Total revenue bond reserve, debt service and construction funds .............. 239,533 208,663 Nuclear decomm issioning trust fund ......................................... 30,335 38,849 Rate stabilization fund ..................................................... 41,471 47,688 Securities lending collateral ................................................. 5,247 O ther restricted funds ..................................................... 750 805 U nrestricted funds ........................................................ 371,090 257,648 Total cash, cash equivalents and investments .............................. $ 683,179 $ 558,900 NOTE 8. REGULATORY DEFERRALS The Board has taken various regulatory actions that result in differences between the recognition of revenues and expenses for rate-making purposes and their treatment under generally accepted accounting principles for non-regulated entities. These actions result in regulatory assets and liabilities, which are summarized in the tables below. Changes to these balances, and their inclusion in rates, occur only at the direction of the Board.

Regulatory Assets (Costs)

Decommissioning. SMUD's regulatory asset relating to the unfunded portion of its decommissioning liability is being collected through interest earnings on the Trust Fund. Nuclear fuel storage costs and non-radiological decommissioning costs have been collected in rates since 2009.

Wholesale Power Receivables. SMUD's regulatory asset relating to its wholesale receivables that were fully reserved z

as uncollectible in 2001. These wholesale receivable reserves relate to amounts due from the California Power Exchange 2 totaling $24.0 million and $23.8 million at December 31, 2010 and 2009, respectively. The ultimate recovery of

> these amounts is dependent on numerous factors and cannot be determined at this time. This regulatory asset will Z be reversed concurrent with the reasonable certainty of collections, or by inclusion in rates in future periods.

0 TANC Operations Costs. SMUD's regulatory asset relating to deferred TANC costs comprises the difference between 0

its cash payments made to TANC and its share of TANC's accrual-based costs of operations. This regulatory asset is being collected in rates over the life of TANC's assets during the period that cash payments to TANC exceed TANC's

] accrual-based costs.

U.S. Bureau of Reclamation. In December 2004, SMUD established a regulatory asset to defer recognizing the expense related to the settlement with the U.S. Bureau of Reclamation (Bureau) on a billing dispute. SMUD will make increased payments in future rates to settle the dispute. This regulatory asset will be collected in rates for future water service over the twenty-five year period SMUD is committed to making the increased rate payments to the Bureau.

Sacramento Municipal Utility District 12010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Derivative Financial Instruments. SMUD's regulatory costs and/or credits relating to Investment Derivative Instruments are intended to defer the net difference between the fair value of derivative instruments and their cost basis, if any. Investment Derivative Instruments are reflected in rates at contract cost and as such, the balance is charged or credited into rates as the related asset or liability is utilized. See Note 9.

Pollution Remediation. With the adoption of the 2010 Budget Resolution, SMUD established a regulatory asset to defer recognition of the expense related to the investigation, design and remediation necessary for the North City Substation site. SMUD has recorded a liability for the full $12,0 million estimated for the project under GASB No. 49.

This regulatory asset will be collected in rates in 2012 and 2013.

SMUD's total regulatory costs for future recovery are presented below:

December 31, 2010 2009 (thousands of dollars)

Regulatory Costs for Future Recovery:

D ecom m issioning ......................................................... $ 134,050 $ 132,567 Wholesale power receivables ................................................ 24,007 23,849 TA N C operations costs ..................................................... 9,447 13,041 U .S. Bureau of Reclam ation ................................................. 6,300 6,400 Derivative financial instrum ents ............................................. 71,874 45,677 Pollution rem ediation ...................................................... 12,000 12,000 Total regulatory costs .................................................... 257,678 233,534 Less: regulatory costs to be recovered within one year ............................ (52,626) (37,736)

Total regulatory costs for future recovery - net ............................. $ 205,052 $ 195,798 Regulatory Liabilities (Credits)

CIAC. In 2010 and 2009 SMUD capitalized CIAC totaling $6.6 million and $18.8 million, respectively, in Plant in Service in the Consolidated Balance Sheets and recorded $9.1 million and $8.7 million, respectively, of Depreciation Expense in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets. SMUD's regulatory credit relating to CIAC is intended to offset the revenue and expense associated with this accounting treatment. Thus, this regulatory credit is being amortized into rates over the depreciable lives of the related contributed distribution plant assets in order to offset the earnings effect of these nonexchange transactions.

Rate Stabilization. SMUD's regulatory credit relating to Rate Stabilization is intended to defer the need for future rate increases when costs exceed existing rates. At the direction of the Board, amounts may be either transferred into this fund (which reduces revenues), or amounts are transferred out of this fund (which increases revenues). The Board authorizes Rate Stabilization Fund transfers on an event driven basis.

Hydro Rate Stabilization. In May 2008, the Board approved a Hydro Generation Adjustment (HGA) mechanism effective July 1, 2008. The HGA will automatically adjust rates in April each year based on the precipitation results from the previous April 1 through March 31. The increase or decrease in rates will be limited to a maximum rate change of four percent. The HGA also established a Hydro Rate Stabilization Fund (HRSF) with the transfer of

$30.0 million from the Rate Stabilization Fund. In 2010, $4.1 million from the HRSF was recognized as revenue to cover the budget impact of low precipitation.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Grant Revenues. In 2009, SMUD was awarded several large grants under the ARRA, which provided large amounts of reimbursements for capital expenditures. In 2010, the Board authorized the deferral of grant income for capital expenditures as regulatory liabilities. Thus, this regulatory credit will be deferred to match the depreciable lives of the related capital assets in order to offset the earnings effect of these nonexchange transactions.

Public Good. SMUD's regulatory credit relating to Public Good comprises the amounts collected in rates for specifically identified Public Good programs that have not been fully expended. These regulatory deferrals are credited to revenue in the period when the expenditures on identified projects occur.

Precipitation Hedges. Settlements of Precipitation Agreements are included in rates in the year settled and accordingly, the intrinsic value of open precipitation hedges is deferred as regulatory assets or liabilities.

Senate Bill 1. During 2007, SMUD implemented a per kilowatt hour solar surcharge, effective January 1, 2008.

The surcharge was implemented in order to fund investments in solar required by Senate Bill 1 (SB-1). The difference between the surcharge revenues received and the funds spent on solar initiatives will be deferred into future years.

In 2010, SMUD spent less than it collected in SB-I revenues, and has recorded a regulatory credit.

SMUD's total regulatory credits for future revenue recognition are presented below:

December 31, 2010 2009 (thousands of dollars)

Regulatory Credits for Future Revenue Recognition:

CIA C .................................................................... $ 227,127 $ 229,694 R ate stabilization ......................................................... 4 1,471 43,605 H ydro rate stabilization .................................................... 4,083 G rant R evenues ........................................................... 19,042 Pub lic goo d .............................................................. 273 290 Precipitation H edge ....................................................... 359 SB- I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ,7 6 8 7,0 00 Total regulatory credits for future revenue recognition ...................... 293,681 285,031 Less: regulatory credits to be recognized within one year ........................ (11,941) (13,549)

Total regulatory credits - net .......................................... $ 281,740 $ 271,482 z

0 0

z Z

0 0

Sacramento Municipal Utility District 12010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS To help provide stable electric rates and to meet the forecasted power needs of its retail customers reliably, SMUD enters into various physical and financial fixed price purchase contracts for electricity and natural gas.

These fixed price contracts and swap agreements are intended to hedge the exposure due to highly volatile and fluctuating commodity prices. SMUD also enters into interest rate swap agreements to reduce interest rate risk, or to enhance the relationship between the risk and return regarding SMUD's assets or debt obligations. SMUD utilizes these derivative financial instruments to mitigate its exposure to certain market risks associated with our ongoing operations. It should be noted that SMUD does not use derivative financial instruments for trading or speculative purposes. These contracts are evaluated pursuant to GASB No. 53 to determine whether they meet the definition of derivative instruments, and if so, whether they effectively hedge the expected cash flows associated with interest rate and commodity price risk exposures.

SMUD applies hedge accounting for derivatives that are deemed effective hedges. Under hedge accounting, the increase (decrease) in the fair value of a hedge is reported as a deferred inflow or deferred outflow on the Consolidated Balance Sheets. Derivatives that don't meet the effectiveness tests, that would be recorded on the Consolidated Statements of Revenues, Expenses and Changes in Net Assets, are deferred for rate-making purposes as regulatory assets or liabilities on the Consolidated Balance Sheets (Note 8).

SMUD implemented GASB No. 53 in 2010. The statement requires governments to retroactively apply the provisions of the statement by restating prior periods presented in the financial statements if practical. SMUD has restated its 2009 results to comply with GASB No. 53.

During 2010 and 2009, SMUD executed numerous new gas and power related purchase agreements, some of which are recorded as hedging or investment derivatives and are therefore included in the table below. All hedging or investment derivatives are recorded at fair value on our Consolidated Balance Sheets.

For electricity and gas derivatives, fair values are estimated by comparing contract prices to forward market prices quoted by an independent external pricing service. When external quoted market prices are not available for derivative contracts, SMUD uses an internally developed valuationmodel utilizing short term observable inputs.

For interest rate derivatives, SMUD subscribes to a financial information service that it uses to verify fair value estimates obtained from its counterparties.

Sacramento Municipal Utility District 1 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of the fair values, changes in fair value and notional amounts of derivative instruments, grouped by trading strategy, outstanding at December 31, 2010 (amounts in thousands; gains shown as positive amounts, losses as negative):

Fair Value at 2010 Changes in Fair Value December 31, 2010 Current Non Current Current Non Current Notional Cash Flow Hedges: Amount Amount Amount Amount (in thousands)

Investment Derivative Instruments: (thousands of dollars)

Asset: Investment Derivative Instruments Change in valuation to:

G as - Basis ........................... $ (1,096) (282) 695 10,045 Dth Gas - Com modity ..................... (12) G as - Storage ......................... 210 210 450 Dth Total Investment Derivative Instruments.. (886) (294) 905 Hedging Derivative Instruments:

Asset: Hedging Derivative Instruments:

G as - Basis ........................... (5,210) (12,649) 9,068 17,035 Dth Gas - Com modity ..................... (221) G as - Storage ......................... 1,060 (13) 1,952 1,093 Dth Interest R ate .......................... 317 2,070 2,212 27,654 $131,030 Total Hedging Derivative Instruments .... (3,833) (10,813) 13,232 27,654 Investment Derivative Instruments:

Liability: Investment Derivative Instruments:

Gas - Basis ........................... 123 Gas - Com modity ..................... (12,949) (6,079) 24,821 11,834 43,048 Dth G as - Storage ......................... (77) 77 341 Dth Interest R ate .......................... (828) (5,206) 4,178 31,869 $380,995 Total Investment Derivative Instruments.. (13,731) (11,285) 29,076 43,703 Hedging Derivative Instruments:

Liability: Hedging Derivative Instruments:

G as - Basis ........................... 26 z Gas - Commodity ................. (36,805) (35,943) 114,818 140,718 90,753 Dth 0 G as - Storage ......................... (50) 39 137 737 Dth 0 Electric - Commodity ................. (2,832) 717 2,832 166 MWh z

z-- Total Hedging Derivative Instruments .... (39,661) (35,187) 117,787 140,718 I

0 H

U

Sacramento Municipal Utility District 12010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of the fair values, changes in fair value and notional amounts of derivative instruments outstanding at December 31, 2009 (amounts in thousands; gains shown as positive amounts, losses as negative):

Fair Value at 2009 Changes in Fair Value December 31, 2009 Current Non Current Current Non Current Notional Cash Flow Hedges: Amount Amount Amount Amount (in thousands)

Investment Derivative Instruments: (thousands of dollars)

Asset: Investment Derivative Instruments Change in valuation to:

G as - Basis ........................... $ 1,701 121 1,792 282 15,903 Dth Gas - Comm odity ..................... 12 12 305 Dth Gas - Storage ......................... (62) Total Investment Derivative Instruments.. 1,639 133 1,792 294 Hedging Derivative Instruments:

Asset: Hedging Derivative Instruments:

Gas - Basis ........................... 12,836 12,677 14,278 12,649 68,148 Dth Gas - Com modity ..................... (17,601) 221 6,093 Dth Gas - Storage ......................... (4,309) 13 891 13 1,375 Dth Electric - Commodity .................. (1,037) 166 MWh Interest Rate ...................... (496) (9,081) 1,895 25,584 $131,030 Total Hedging Derivative Instruments .... 6,994 (13,992) 17,064 38,467 Investment Derivative Instruments:

Liability: Investment Derivative Instruments:

Gas - Basis ....................... 1,038 66 123 1,033 Dth Gas - Comm odity ..................... 321 209 11,872 5,755 32,280 Dth Gas - Exchange ....................... 486 Gas - Storage ......................... 55 In terest R ate .......................... 1,714 23,158 3,350 26,663 $380,995 Total Investment Derivative Instruments.. 3,614 23,433 15,345 32,418 Hedging Derivative Instruments:

Liability: Hedging Derivative Instruments: ....

Gas - Basis ........................... 32,096 168 26 388 Dth Gas - Com modity ..................... (60,410) (2,039) 78,013 104,775 130,588 Dth Gas - Exchange ....................... 4,775 Gas - Storage ......................... (87) (39) 87 39 390 Dth Electric - Commodity ................. 9,475 (717) 716 166 MWh Total Hedging Derivative Instruments .... (14,151) (2,627) 78,126 105,530

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Objective and terms of hedging derivative instruments. The objectives and terms of SMUD's hedging derivative instruments that were outstanding at December 31, 2010 are summarized in the table below. The table is aggregated by the trading strategy. Credit ratings of SMUD's counterparties can be found in the table under Credit Risk.

Details of SMUD's interest rate derivative instruments can be found in Note 10.

Notional Beginning Ending Minimum Maximum Amount Date Date Price Price Gas - Basis ............................... 27,080 12/1/10 12/31/11 $ (0.27) $ (1.15)

Gas - Commodity ......................... 133,800 01/1/08 12/31/22 6.00 10.80 Gas - Storage ............................. 2,621 01/1/11 03/31/11 0.01 7.30 Electric .................................. 166 07/1/11 09/30/11 77.72 77.72 The objectives and terms of SMUD's hedging derivative instruments that were outstanding at December 31, 2009 are summarized in the table below. The table is aggregated by the trading strategy. Credit ratings of SMUD's counterparties can be found in the table under Credit Risk. Details of SMUD's interest rate derivative instruments can be found in Note 10.

Notional Beginning Ending Minimum Maximum Amount Date Date Price Price Gas- Basis .............................. 85,470 04/1/08 12/31/11 $ (1.23) $ 0.11 Gas - Commodity ......................... 169,265 01/1/08 12/31/13 6.44 12.41 Gas - Storage ............................. 1,675 01/1/10 01/01/11 5.22 7.74 Electric .................................. 166 07/1/11 09/30/11 77.72 77.72 SMUD hedges its interest costs. The interest rate swaps are designed to synthetically fix the cash flows associated with variable rate bonds. See Note 10.

SMUD hedges its power and natural gas costs so that it can offer predictable rates to its retail electric customers and support its credit rating. SMUD maintains a risk management program to control the price, credit, and operational risks arising from its power and natural gas market activities. Under the program, authorized SMUD employees assemble a portfolio of swaps, futures, and forward contracts over time with the goal of making SMUD's purchased power and fuel budget more predictable.

These hedged risks include those related to interest rate and commodity price fluctuations associated with certain z forecasted transactions, including interest rate risk on our long-term debt, and forward purchases of gas and electricity to meet our load.

0 zZ z Derivatives not designated as hedging instruments.

Gas Contracts. SMUD utilizes certain gas swap agreements under FASB ASC 815 not designated as hedging derivative 0

instruments to mitigate exposure to changes in the market price of natural gas. The fair value of each agreement,

- excluding the actual settlements to be paid or received as of the end of the period, is recorded in either Current or NonCurrent Assets, Investment Derivative Instruments on the Consolidated Balance Sheets if in an asset position or Current or NonCurrent Liabilities, Investment Derivative Instruments on the Consolidated Balance Sheets if in a liability position. An offsetting amount is included in Current or Noncurrent Regulatory Costs or Regulatory Credits for future recovery in the Consolidated Balance Sheets. The actual settlement payable is recorded in Accounts Payable on the Consolidated Balance Sheets, and the actual settlement receivable is recorded in Energy Efficiency loans due within one year, accrued interest and other on the Consolidated Balance Sheets. The payments and receipts of the actual settlement are recorded as Investment Expense in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Electric Contracts. SMUD utilizes certain electric swap agreements under FASB ASC 815 not designated as hedging derivative instruments to mitigate exposure to changes in the market price of electricity. The fair value of each agree-ment, excluding the actual settlements to be paid or received as of the end of the period, is recorded in either Current or NonCurrent Assets, Investment Derivative Instruments on the Consolidated Balance Sheets if in an asset position or Current or NonCurrent Liabilities, Investment Derivative Instruments on the Consolidated Balance Sheets if in a liability position. An offsetting amount is included in Current or Noncurrent Regulatory Costs or Regulatory Credits for future recovery in the Consolidated Balance Sheets. The actual settlement payable is recorded in Accounts Payable on the Consolidated Balance Sheets, and the actual settlement receivable is recorded in Energy Efficiency Loans due within one year, Accrued Interest and Other on the Consolidated Balance Sheets. The payments or receipts of the actual settlement are recorded as Investment Expense in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets.

Interest Rate Contracts. SMUD utilizes certain interest rate swap agreements not designated as hedging derivative instruments under FASB ASC 815 to mitigate exposure to changes in the fair value of variable rate debt resulting from fluctuations in interest rates. The fair value of each agreement, excluding the balance of interest to be paid or received as of the end of the period, is recorded in either Current or NonCurrent Assets, Investment Derivative Instruments on the Consolidated Balance Sheets if in an asset position or Current or NonCurrent Liabilities, Investment Derivative Instruments on the Consolidated Balance Sheets if in a liability position. An offsetting amount is included in Current or Noncurrent Regulatory Costs or Regulatory Credits for future recovery in the Consolidated Balance Sheets. The interest receivable is recorded in Energy Efficiency Loans due within one year, Accrued Interest and Other on the Consolidated Balance Sheets, and the interest payable is recorded Accrued interest on the Consolidated Balance Sheets. The payments or receipts of the actual settlement are recorded as Investment Expense in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets.

The Board has deferred recognition of the effects of reporting the fair value of Investment Derivative Instruments for rate-making purposes, and maintains regulatory accounts to defer the accounting impact of these accounting adjustments (see Note 8). Market values may have changed significantly since December 31, 2010.

Interest rate risk. Interest rate risk is the risk that changes in interest rates will adversely affect the fair values of SMUD's interest rate swaps. SMUD is exposed to interest rate risk on its interest rate swaps, as LIBOR or the Securities Industry and Financial Markets Association swap index decreases, SMUD's net payment on the swap increases.

Basis risk. Basis risk is the risk that arises when a hedged item and a derivative that is attempting to hedge that item are based on different indices. SMUD is exposed to basis risk when it hedges its natural gas purchases, which are priced at various locations, with NYMEX futures contracts, which settle based on the price in Henry Hub, Louisiana.

SMUD enters into Basis Swaps to hedge against this risk.

Termination risk. Termination risk is the risk that a derivative will terminate prior to its scheduled maturity due to a contractual event. Contractual events include bankruptcy, illegality, default, credit events upon merger, and other events. One aspect of termination risk is that SMUD would lose the hedging benefit of a derivative that becomes subject to a termination event. Another aspect of termination risk is that, if at the time of termination the mark to market value of the derivative was a liability to SMUD, SMUD could be required to pay that amount to the counterparty. Termination risk is associated with all of SMUD's derivatives up to the fair value amounts.

Sacramento Municipal Utility District 1 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Credit Risk. Credit risk is the risk of loss resulting when the counterparty is unable or unwilling to fulfill its present and future financial obligations. SMUD is exposed to counterparty credit risk on all of its Investment Derivative Instruments. SMUD seeks to minimize credit risk by transacting with creditworthy counterparties. SMUD has established and maintained strict counterparty credit guidelines and enters into contracts only with institutions that are investment grade or better. SMUD continuously monitors counterparty credit risk, and utilizes numerous counterparties to minimize exposure to potential defaults. Under certain conditions as outlined in SMUD's credit risk management policy, SMUD may require collateral under these agreements.

Some of SMUD's derivative master agreements contain credit contingent provisions that enable SMUD to maintain unsecured credit as a result of positive investment quality credit ratings from each of the major credit rating agencies.

If SMUD's debt were to go down below investment grade, it would trigger some of these provisions, and the counter-parties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The counterparty's current credit rating at December 31, 2010 is shown in the table below:

Counterparty Cournterparty Credit Rating I. Aron & Company (gas & electric) ........................... A Barclays Bank PLC ......................................... AA-Citigroup Energy ........................ .......... ..... . A Credit Suisse Energy LLC ..............................

Deutsche Bank AG Energy Trading LLC ...................... AA-BNP Paribas Energy Trading Canada Corp ...................... BBB J.P. M organ Ventures Energy Corp ............................. A+

M acquarie Bank Lim ited .................................... A M erril Lynch Com modities, Inc .............................. A M organ Stanley Capital Group, Inc ........................... A Powerex Co rp .............................................. AA-Shell Energy North America (US), L.P ......................... A-U BS AG . .. .. .. ... .. .. .. ... .. .. ... .. .. .. .. ... .. .. .. .. . A+

Goldman Sachs Capital Markets, L.P. (treasury) ................. A Goldman Sachs Mitui Marine Derivative Products L.P. (treasury).. AAA Morgan Stanley Capital Services, Inc. (treasury) ................. A z

0 0

z Z

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Sacramento Municipal Utility District 1 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. LONG-TERM DEBT SMUD's total long-term debt is presented below:

December 31, 2010 2009 (thousands of dollars)

Electric Revenue Bonds:

Electric revenue bonds, 2.5% -6.5%, 2011-2033 ................................ $ 2,143,690 $ 1,948,645 Subordinated electric revenue bonds, 0.2%-8.0%, 2011-2028 .................... 197,850 207,850 Total electric revenue bonds .............................................. 2,341,540 2,156,495 Component unit project revenue bonds, 2.25%-5.50%, 2011-2030 ................. 470,310 488,665 Gas supply prepayment bonds 3.385%-5.0%, 2011-2027 .......................... 431,000 454,465 Total long-term debt outstanding .......................................... 3,242,850 3,099,625 Bond prem ium s - net ......................................................... 76,386 86,951 Deferred losses on bond refundings - net ....................................... (62,854) (71,893)

Total long-term debt ..................................................... 3,256,382 3,114,683 Less: am ounts due within one year ............................................. (99,935) (106,775)

Total long-term debt - net .............................................. $ 3,156,447 $ 3,007,908 The summarized activity of SMUD's long-term debt during 2010 is presented below (thousands of dollars):

Amounts December 31, Payments or December 31, Due Within 2009 Additions Amortization 2010 One Year Electric revenue bonds ............... $ 1,948,645 $ 250,000 $ (54,955) $ 2,143,690 $ 54,775 Subordinate electric revenue bonds .... 207,850 (10,000) 197,850 Component unit project revenue bonds .................... 488,665 (18,355) 470,310 22,790 Gas supply prepayment bonds ........ 454,465 (23,465) 431,000 22,370 Total .......................... 3,099,625 250,000 (106,775) 3,242,850 $ 99,935 Unamortized premiums - net ......... 86,951 (10,565) 76,386 Deferred losses on bond refundings - net .................. (71,893) 9,039 (62,854)

Total long-term debt ................. $ 3,114,683 $ 250,000 $ (108,301) $ 3,256,382 The summarized activity of SMUD's long-term debt during 2009 is presented below (thousands of dollars):

Amounts December 31, Payments or December 31, Due Within 2008 Additions Amortization 2009 One Year Electric revenue bonds ............... $ 1,814,480 $ 200,000 $ (65,835) $ 1,948,645 $ 54,955 Subordinate electric revenue bonds ..... 222,425 (14,575) 207,850 10,000 Component unit project revenue bonds .................... 519,205 106,450 (136,990) 488,665 18,355 Gas supply prepayment bonds ......... 738,390 (283,925) 454,465 23,465 Total .......................... 3,294,500 306,450 (501,325) 3,099,625 $ 106,775 Unamortized premiums - net ......... 93,303 7,385 (13,737) 86,951 Deferred losses on bond refundings - net ................... (78,857) (7,575) 14,539 (71,893)

Total long-term debt ................. $ 3,308,946 $ 306,260 $ 500,523) $ 3,114,683

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2010 scheduled annual principal maturities and interest are as follows (thousands of dollars):

Principal Interest Total 2011 ....................................................... $ 99,935 $ 153,351 $ 253,286 2012 ........ ........... .......... . . ................. 105,925 148,335 254,260 2013 ...... ............................................. 123,380 143,425 266,805 2014 .... .... ............................................. 132,685 137,727 270,412 2015 ...................... ................................ 146,395 131,928 278,323 2016 - 2020 (com bined) ..... ................................ 831,505 551,631 1,383,136 2021 - 2025 (combined) ...................................... 786,215 367,777 1,153,992 2026 - 2030 (combined) ...................................... 563,265 205,648 768,913 2031 - 2035 (combined) ...................................... 369,775 86,025 455,800 2036 ....................................................... 83,770 2,59 1 86,36 1 Total Requirem ents .......................................... $ 3,242,850 $ 1,928,438 $ 5,171,288 Interest in the preceding table includes interest requirements for fixed rate debt at their stated rates, variable rate debt covered by interest rate swaps at their fixed rate, and variable rate debt not covered by interest rate swaps using the debt interest rate of 0.30 and 0.34 percent in effect at December 31, 2010 for the issue.

2010 Bond Issuances - In July 2010, SMUD issued $250.0 million of 2010 Series W Electric Revenue Bonds at par.

These bonds were issued as taxable Build America Bonds under the provisions of the American Recovery and Reinvestment Act of 2009. SMUD expects to receive a cash subsidy payment from the U.S. Treasury equal to 35 percent of the interest payable on the bonds which will be recorded as a component of Interest and Other Income, in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets.

2009 Revenue Bonds Refunding and Extinguishments. In January 2009, NCGA extinguished $250.0 million of 2007 NCGA Series B Gas Project Revenue Bonds (NCGA Bonds). This bond extinguishment resulted in a current accounting gain of $26.9 million, which is included in Gain or Loss on Debt Extinguishment and Refundings in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets. Redeeming the bonds reduced the aggregate future debt service payments by $417.3 million.

In May 2009, SMUD redeemed $14.6 million of SMUD 1985 Subordinated Series ER Bonds. This bond redemption resulted in a current accounting gain of $0.5 million, which is included in Gain or Loss on Debt Extinguishment 2_ and Refundings in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets. Redeeming the

>* bonds reduced the aggregate future debt service payments by $16.3 million.

0

_Z In August 2009, NCGA extinguished $9.8 million of NCGA Bonds. This bond extinguishment resulted in a current accounting gain of $1.1 million, which is included in Gain or Loss on Debt Extinguishment and Refundings in the 00 Consolidated Statements of Revenues, Expenses and Changes in Net Assets. Redeeming the bonds reduced the aggregate future debt service payments by $16.2 million.

In August 2009, SCA issued $57.5 million of 2009 Series SCA Cogeneration Project Revenue Refunding Bonds.

Proceeds from the 2009 bonds and $7.1 million of available funds were used to refund $67.8 million of the out-standing 1998 SCA 1998 revenue bonds and accordingly, the liability for the extinguished bonds has been removed from Long-Term Debt in the Consolidated Balance Sheets. The refunding resulted in the recognition of a deferred accounting loss of $4.0 million, which is being amortized over the life of the refunding issue, and a current period loss of $0.2 million which is included in Gain or Loss on Debt Extinguishment and Refundings in the Consolidated Statement of Revenues, Expenses, and Changes in Net Assets. The 2009 refunding reduced future aggregate debt service payments by $15.1 million and resulted in a total economic gain of $4.9 million, which is the difference between the present value of the old and new debt service payments.

Sacramento Municipal Utility District 12010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In August 2009, CVFA issued $48.9 million of 2009 Series CVFA Cogeneration Project Revenue Refunding Bonds.

Proceeds from the 2009 CVFA bonds and $5.0 million of available funds were used to refund $55.2 million of the outstanding CVFA 1998 revenue bonds and accordingly, the liability for the extinguished bonds has been removed from Long-Term Debt in the Consolidated Balance Sheets. The refunding resulted in the recognition of a deferred accounting loss of $3.6 million, which is being amortized over the life of the refunding issue, and a current period loss of $0.07 million which is included in Gain or Loss on Debt Extinguishment and Refundings in the Consolidated Statement of Revenues, Expenses, and Changes in Net Assets. The 2009 refunding reduced future aggregate debt service payments by $10.8 million and resulted in a total economic gain of $4.0 million, which is the difference between the present value of the old and new debt service payments.

2009 Bond Issuances - In May 2009, SMUD issued $200 million of 2009 Series V Electric Revenue Bonds at par.

These bonds were issued as taxable Build America Bonds under the provisions of the American Recovery and Reinvestment Act of 2009. SMUD expects to receive a cash subsidy payment from the U.S. Treasury equal to 35 percent of the interest payable on the bonds which will be recorded as a component of Interest and Other Income, in the Consolidated Statements of Revenues, Expenses and Changes in Net Assets.

Interest Rate Swap Agreements. A summary of SMUD's three swap agreements are as follows:

Initial Notional Counterparty Amount SMUD Fixed Floating Termination Credit (thousands) Pays Rate Rate Date Rating (S&P)

$ 131,030 Variable 5.154% SIFMA 07/01/24 A 269,095 Fixed 4.345% 70% of LIBOR 08/15/18 AAA 111,900 Fixed 2.894% 63% of LIBOR 08/15/28 A SMUD has a fixed-to-variable interest rate swap agreement with an initial notional amount of $131.0 million, which is equivalent to the principal amount of SMUD's 1997 Series K Electric Revenue Bonds. Under this swap agreement, SMUD pays a variable rate equivalent to the Securities Industry and Financial Markets Association (SIFMA) Index (0.34 percent at December 31, 2010) and receives fixed rate payments of 5.154 percent. In connection with the swap agreement, SMUD has a put option agreement, also with an initial notional amount of $131.0 million, which gives the counterparty the right to sell to SMUD, at par, either the 1997 Series K Bonds, or a portfolio of securities sufficient to defease the 1997 Series K Bonds. The exercise of the option terminates the swap at no cost to SMUD. The term of both the swap and the put is equal to the maturity of the 1997 Series K Bonds.

Additionally, SMUD has two variable-to-fixed interest rate swap agreements with a combined initial notional amount of $381.0 million originally entered into for the purpose of fixing the effective interest rate associated with certain of its subordinated bonds that were refunded during 2008. The notional values of the two swaps are amortized over the life of the respective swap agreements. SMUD can terminate all swap agreements at any time, with payment or receipt of the fair market value of the swaps as of the date of termination. The obligations of SMUD under the swap agreements are not secured by a pledge of revenues of SMUD's electric system or any other property of SMUD.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Component Unit Interest Rate Swap Agreements. NCGA has four swap agreements, which are summarized as follows:

Initial Notional Credit Support Amount Agency Fixed Floating Termination Provider Credit (thousands) Pays Rate Rate Date Rating (S&P)

$ 43,770 Fixed 3.851% 67% of LIBOR +.45% 07/01/13 A 100,385 Fixed 4.062% 67% of LIBOR +.60% 07/01/17 A 65,865 Fixed 4.144% 67% of LIBOR +.63% 07/01/19 A 458,450 Fixed 4.304% 67% of LIBOR +.72% 07/01/27 A NCGA has four variable-to-fixed interest rate swap agreements with a counterparty for the purpose of fixing the effective interest rate associated with the 2007 Series B Bonds. NCGA pays the counterparty a fixed rate on the notional amount and receives a floating rate equal to 67 percent of the three month LIBOR (0.30 percent at December 31, 2010) plus an interest rate spread, as specified in each swap agreement. The total notional amount of the four swaps at December 31, 2010 was $408.6 million and was equivalent to the outstanding principal balance on the NCGA Bonds. The swaps are amortized over the life of their respective swap agreements in a manner corresponding to the principal repayment schedule of the NCGA Bonds. Early termination of the swaps would occur upon termination of the prepaid agreement for any reason. Upon early termination, the swaps would have no value to either party.

Subordinated Electric Revenue Bonds. Payment of and interest on the Subordinated Electric Revenue Bonds is subordinate to the payment of the principal and interest on SMUD's Electric Revenue Bonds.

Variable Rate Bonds. SMUD's Variable Rate Bonds bear interest at weekly rates, ranging from 0.30 percent to 0.34 percent at December 31, 2010. SMUD can elect to change the interest rate period or fix the interest rate, with certain limitations. SMUD's Variable Rate Bonds can be put to SMUD's Trustee by the bondholders; however, SMUD has in place a reimbursement agreement with Bank of America to enable SMUD to pay off the bonds over five years if the bonds are put. Accordingly, SMUD has recorded such bonds as Long-Term Debt, less amounts scheduled for redemption within one year.

Component Unit Bonds. The component units of SMUD have each issued bonds to finance their respective projects.

The revenue stream to pay the SPA, NCGA and SFA bonds' debt service is provided by a take, and pay purchase Z agreement. Principal and interest associated with these bonds are paid solely from the component units' revenues

<* and receipts collected in connection with the operation of the projects. Most operating revenues earned by the component units are collected from SMUD in connection with the sale of gas or electricity to SMUD. The ability to service debt for SPA and SFA is dependent upon the successful availability of operations, and for NCGA is dependent 0

on various parties (particularly Morgan Stanley Capital Group Inc., as gas supplier) meeting their contractual o obligations. The ability of SCA and CVFA to service their debt is no longer dependent upon the successful operation of the project, as SMUD is now required, under a "take-or-pay" contract to make payments sufficient to pay principal and interest and all other payments required to be made under CVFA and SCAs indenture of trust, regardless of the continued successful operation of the Project.

Callable Bonds. SMUD has $647.9 million of Electric System Revenue Bonds that are currently callable, $450.0 million of which are fixed rate Build America Bonds debt and $197.9 million of subordinate Variable Rate Demand Notes (VRDN's). SMUD also has $1,172.7 million of bonds that become callable from 2011 through 2018, and these bonds can be called until maturity.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Collateral. The principal and interest on SMUD's bonds are payable exclusively from, and are collateralized by a pledge of, the net revenues of SMUD's electric system. Neither the credit nor the taxing power of SMUD is pledged to the payment of the bonds and the general fund of SMUD is not liable for the payment thereof.

Covenants. SMUD's bond resolutions contain various covenants that include requirements to maintain minimum debt service coverage ratios, certain other financial ratios, stipulated minimum funding of revenue bond reserves, and various other requirements including a rate covenant to raise rates to maintain minimum debt service coverage.

SMUD has pledged future net electric revenues, component unit net project revenues, and net gas supply prepayment revenues to repay $3,242.9 million and $3,099.6 million at December 31, 2010 and 2009, respectively, in electric revenue, component unit project revenue, and gas supply prepayment revenue bonds issued from 1993 through 2010. Proceeds from the bonds provided financing for various capital improvement projects, component unit capital projects, and the prepayment of a twenty-year supply of natural gas. The bonds are payable solely from the net revenues generated by SMUD's electrical sales, component unit project revenues, and gas supply prepayment revenues and are payable through 2036 at December 31, 2010, and through 2035 at December 31, 2009. Annual principal and interest payments on the bonds are expected to require approximately 30 and 38 percent of net revenues for the years ending December 31, 2010 and 2009, respectively. The total principal and interest remaining to be paid on the bonds is $5,171.3 million and $4,817.4 million at December 31, 2010 and 2009, respectively. Principal and interest paid was $249.6 million for 2010, and $275.9 million for 2009. Total net revenues were $827.8 million for 2010 and

$720.7 million for 2009.

NOTE 11. COMMERCIAL PAPER NOTES SMUD issues Commercial Paper Notes (Notes) to finance or reimburse capital expenditures. At December 31, 2010 and 2009 Notes outstanding totaled $200.0 million. The effective interest rate for the Notes outstanding at December 31, 2010 was 0.3 percent and the average term was 94 days. SMUD has a $204.9 million letter of credit agreement, and there have not been any term advances under it.

The summarized activity of SMUD's Notes during 2010 and 2009 is presented below (thousands of dollars):

Balance at Balance beginning of at end of Year Additions Reductions Year December 31, 2010 ........................... $ 200,000 $ $ $ 200,000 December 31, 2009 ........................... $ 200,000 $ $ $ 200,000

Sacramento Municipal Utility District 12010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value:

Investments. The fair values of investments, including cash equivalents, are based upon quoted market prices.

Long-Term Debt. The fair value of Long-Term Debt, which includes the short-term portion, was calculated by determining the value of each individual series using a standard bond pricing formula and market yields from representative yield curves. For debt with a stepped interest rate, the fair market value of debt was calculated by discounting future interest and principal payments using a market yield from a representative yield curve. For 2010 and 2009, due to the weakened financial condition of bond insurers, the yield curve for insured municipal bonds was not used for SMUD's debt. SMUD's electric revenue bonds, SCA bonds, and CVFA bonds were instead valued at the yield curve for "A"rated municipal power bonds. For the same reasons, the yield curve for "BBB" rated municipal power bonds was used for insured component unit bonds of SPA and SFA instead of the "A"ratings used in past years.

The yield curve for "A" rated finance bonds was used for NCGA debt, reflecting the downgrade of Morgan Stanley in 2008. All yield curves were obtained from Bloomberg, L.P.

Interest Rate Swap and Put Agreements. The fair values of interest rate swap and put agreements are based on values provided by counterparties.

Gas and Electricity Related Derivatives. The fair values of gas and electricity price swap agreements and electricity option agreements are based on forward prices from established indexes for the applicable regions. The fair values of gas and electricity purchase agreements are based on forward prices from established indexes from applicable regions and discounted using established interest rate indexes.

Asset Retirement Obligation. SMUD values its ARO for Rancho Seco based on significant unobservable inputs (Level 3). During 2010, the ARO was updated to reflect new information and revise the estimated costs. The infor-mation used to develop the inputs was a combination of actual historical costs and published data with contingencies to account for uncertainties in future costs. There was no change in the methodology used from the prior estimate.

z 0

0 z

z 0

F-

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimated fair values of SMUD's financial instruments are presented below. Market values may have changed significantly since December 31, 2010.

December 31, 2010 Recorded Value Fair Value (thousands of dollars)

Investments, including cash and cash equivalents ................................. $ 683,179 $ 683,179 L o n g-term d eb t .. .. .. .. .. .. .. .. .. . ... .. .. .. .. .. ... . .. ... .. .. .. .. .. .. .. .. .. . (3,256,382) (3,216,440)

Interest rate swap and put agreem ents - net .................................... (6,181) (6,181)

Gas and electricity related derivatives - net ..................................... (283,311) (283,311)

Asset Retirem ent O bligation .................................................. (160,492) (160,492)

December 31, 2009 Recorded Value Fair Value (thousands of dollars)

Investments, including cash and cash equivalents ................................. $ 558,900 $ 558,900 L on g-term d eb t .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ... .. .. . ... .. .. .. .. ... .. . .. .. . (3,117,342) (3,149,721)

Interest rate swap and put agreem ents - net .................................... (2,534) (2,534)

Gas and electricity related derivatives - net ..................................... (171,269) (171,269)

A sset Retirem ent O bligation .................................................. (158,817) (158,817)

Fair Value Measurements. FASB ASC 820, as discussed in Note 2, requires enhanced disclosures about assets and liabilities carried at fair value. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). SMUD uses FASB ASC 820 for its Asset Retirement Obligation.

FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy defined by FASB ASC 820 are as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date. An active market is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 - Pricing inputs that are other than quoted prices included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.

Level 3 - Pricing inputs that are unobservable for the asset or liability for which there is little, if any, market activity as of the reporting date. These inputs may be used with internally developed methodologies that result in SMUD's best estimate of fair value. Level 3 fair values for asset retirement obligations are calculated by estimating future costs U on the basis of published and historical data and including contingencies for uncertainty in future costs.

Sacramento Municipal Utility District 1 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth by level within the fair value hierarchy SMUD's asset retirement obligation that was accounted for at fair value on a recurring basis as of December 31, 2010 and 2009. As required by FASB ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. SMUD's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value assets of and liabilities and their placement within the fair value hierarchy levels.

At fair value as of December 31, 2010 Recurring Fair Value Measures Level 1 Level 2 Level 3 Total (thousands of dollars)

Asset Retirement Obligation Liability:

Rancho Seco .............................. 160,492 160,492 At fair value as of December 31, 2009 Level 1 Level 2 Level 3 Total (thousands of dollars)

Asset Retirement Obligation Liability:

Rancho'Seco .............................. 158,817 158,817 NOTE 13. RANCHO SECO DECOMMISSIONING LIABILITY Background. The Rancho Seco decommissioning liability relates to the nuclear decommissioning of the former 913 MW nuclear power plant, which terminated commercial operations in 1989. Nuclear decommissioning is the process of safely removing nuclear facilities from service and reducing residual radioactivity to a level that permits termination of the Nuclear Regulatory Commission (NRC) license, and release of the property for unrestricted use.

The NRC has approved SMUD's decommissioning plan, which delineates a phased process, and the first phase of physical work was completed in 2008.

In 2009, the NRC released all of the land under the Part 50 license for unrestricted use with the exception of the 1 acre fenced area around the Interim Onsite Storage Building (IOB) that houses the stored class B and C waste.

This waste will be stored for an unspecified period pending availability of appropriate disposal sites. The facility z2 operating license will be terminated after the waste is removed.

<* The Department of Energy (DOE), under the Nuclear Waste Policy Act of 1982, is responsible for permanent disposal z of spent nuclear fuel and high-level radioactive waste. SMUD has a contract with the DOE for the removal and z

disposal of spent nuclear fuel and high-level (greater than class "C": GTCC) radioactive waste. However, the date when fuel and GTCC waste removal will be complete is uncertain. In 2010, the DOE formally withdrew the application for 0 licensing of Yucca Mountain as a high-level waste repository, essentially removing Yucca Mountain as an option for disposal of SMUD's used nuclear fuel. The DOE also announced in January 2010 the creation of a Blue Ribbon Commission to study alternatives for developing a repository for the nation's used nuclear fuel. The Commission is tasked with providing a final report on alternatives in two years or January 2012. At this time, there is no credible information available to determine when the DOE would remove the used nuclear fuel from the Rancho Seco facility.

SMUD maintains a separately licensed on-site independent spent fuel storage facility (Storage Facility) which stores all of SMUD's spent fuel and GTCC waste in sealed canisters. The Storage Facility will remain under the regulation of the NRC until such time as it is decommissioned after the DOE removes the nuclear fuel and GTCC radioactive waste.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Asset Retirement Obligations. These financial statements reflect SMUD's current estimate of its obligation for the cost of decommissioning (including the cost of managing the Storage Facility until it can be decommissioned) under the requirements of FASB ASC 410, based on studies completed each year. Each year, SMUD evaluates the estimate of costs of decommissioning and there was a slight increase in cost in the 2010 study. The ARO estimate assumes all spent nuclear fuel will be removed from the site by 2028.

Rancho Seco's ARO is presented below:

December 31, 2010 2009 (thousands of dollars)

A ctive decom m issioning ..................................................... $ 25,940 $ 26,309 Spent fuel managem ent ..... ...... .......................................... 134,552 132,508 To ta l A R O . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 160,492 $ 158,817 Less: cu rren t p o rtio n ........................................................ (1,893) (6,913)

Total Non-current portion of ARO ....................................... $ 158,599 $ 151,904 The summarized activity of the Rancho Seco ARO during 2010 and 2009 are presented below. The annual adjustments include a savings computed as the difference between the fair value of the obligation as if the decommissioning activities were performed by a third party and the amount actually incurred by SMUD performing the decommissioning activities.

December 31, 2010 2009 (thousands of dollars)

ARO at beginning of year ..................................................... $ 158,817 $ 171,392 A c c re tio n .. ... .. .. .. .. ... .. ... .. .. .. .. ... .. .. ... .. ... .. .. .. .. ... .. ..:.. .. 7,879 7,416 E xp e nd itures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,512) (2,070)

Ch an ge in Stu d y ............................................................ 140 13,605 An nual adjustmen ts ......................................................... (1,832) (31,526)

Total A R O . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 160,492 $ 158,817 SMUD made no contributions to the Trust Fund in 2010 and 2009.

NOTE 14. PENSION PLANS Defined Benefit Pension Plan. SMUD participates in the California Public Employees' Retirement System (PERS),

an agent multiple-employer public employee defined benefit pension plan. PERS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. PERS acts as a common investment and administrative agent for participating public entities within the State. Benefit provisions and all other requirements are established by State statute and SMUD policies. The pension plan provides retirement benefits, survivor benefits, and death and disability benefits based upon employees years of credited service, age, and final compensation. Copies of PERS' annual financial report may be obtained from their Executive Office at 400 Q Street, Sacramento, California 95814.

E Funding Policy. Participants are required to contribute approximately 7 percent of their annual covered salary.

SMUD makes either the full or partial contributions required of SMUD employees on their behalf and for their account. SMUD is currently required to contribute 8.1 percent of payroll to the plan. The contribution requirements of plan members and SMUD are established and may be amended by PERS.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Annual Pension Cost. PERS payments made by SMUD in 2010 were $28.1 million. The Annual Pension Cost for 2010 was $28.6 million, and $0.5 million was paid by employees for purchase of additional service credits. Overall, SMUD paid $27.6 million, and employees paid $0.5 million. PERS payments made by SMUD in 2009 were $28.0 million. The Annual Pension Cost for 2009 was $27.4 million, and $0.6 million was paid by employees for purchase of additional service credits. Overall, SMUD paid $27.1 million, and employees paid $0.9 million. Contributions are determined by actuarial valuations, which are performed based on the entry age normal actuarial cost method.

The contribution for the first half of 2010 was determined by PERS as part of the annual actuarial valuation as of June 30, 2008; the contribution for the second half of 2010 was determined by PERS as part of the annual actuarial valuation.as of June 30, 2009. The actuarial assumptions included: (a) a 7.75 percent investment rate of return (net of administrative expenses), (b) projected annual salary increases that vary by duration of service, and (c) 3.0 percent per year cost-of-living adjustments. Both (a) and (b) also included an inflation component of 3.0 percent. The actuarial value of PERS' assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a fifteen-year period (smoothed market value).

Three-year trend information for PERS is presented below (thousands of dollars):

Annual Pension Percentage of Fiscal Year Cost (APC) APC Contribution 6/30/10 $ 28,617 100%

6/30/09 $ 27,372 100%

6/30/08 $ 27,405 100%

Funded Status and Funding Progress. As of June 30, 2009, the most recent actuarial valuation date, the plan was 92.7 percent funded. The actuarial accrued liability for benefits was $1,532 million, and the actuarial value of assets was $1,420 million, resulting in an unfunded actuarial accrued liability (UAAL) of $112 million. The covered payroll (annual payroll of active employees covered by the plan) was $185.5 million, and the ratio of the UAAL to the covered payroll was 60.3 percent. The schedule of funding progress, presented as Required Supplementary Information (RSI) following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits.

Other Plans. SMUD provides its employees with two cash deferred compensation plans: one pursuant to Internal z Revenue Code (IRC) Section 401(k) [401(k) Plan] and one pursuant to IRC Section 457 (457 Plan) (collectively, the 0

Plans). The Plans are contributory plans in which SMUD's employees contribute the funds. Each of SMUD's eligible 0o full-time or permanent part-time employees may participate in either or both Plans, and amounts contributed are z

z vested immediately. Such funds are held by a Trustee in trust for the employees upon retirement from SMUD service 0

and, accordingly, are not subject to the general claims of SMUD's creditors. SMUD is responsible for ensuring 0 compliance with IRC requirements concerning the Plans and has the duty of reasonable care in the selection of investment alternatives, but neither SMUD, nor its Board or officers have any liability for market variations in the F- Plans' asset values. SMUD employees are responsible for determining how their funds are to be invested and pay U all ongoing fees related to the Plans. The Plans are currently not subject to discrimination testing, nor the require-ments of the Employee Retirement Income Security Act of 1974. SMUD employees participating in the Plans are allowed to contribute a portion of their gross income not to exceed the annual dollar limits prescribed by the IRC.

SMUD makes annual contributions to the 40 1(k) Plan on behalf of certain employees pursuant to a memorandum of understanding with both of its collective bargaining units. SMUD does not match employee contributions, nor make contributions on behalf of its employees to the 457 Plan. Participating employees and SMUD made contributions into the Plans totaling $15.2 million and $1.2 million in 2010, respectively, and $15.5 million and $1.6 million in 2009, respectively.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. OTHER POSTEMPLOYMENT BENEFITS SMUD provides postemployment healthcare benefits, in accordance with SMUD policy and negotiated agreements with employee representation groups in a single employer defined benefit plan, to all employees who retire from SMUD, and their dependents. SMUD also provides postemployment healthcare benefits to covered employees who are eligible for disability retirement. SMUD contributes the full cost of coverage for retirees hired before January 1, 1991, and a portion of the cost based on credited years of service for retirees hired after January 1, 1991. SMUD also contributes a portion of the costs of coverage for these retirees' dependents. Retirees are required to contribute the portion that is not paid by SMUD. The benefits, benefit levels, retiree contributions and employer contributions are governed by SMUD and can be amended by SMUD through its personnel manual and union contracts. At December 31, 2010, 2,782 postemployment participants, including retirees, spouses of retirees, surviving spouses, and eligible dependents, participated in SMUD's healthcare benefits program.

OPEB arises from an exchange of salaries and benefits for employee services rendered, and refers to postemployment benefits other than pension benefits such as post employment healthcare benefits. SMUD considers the following benefits to be OPEB: Medical, Dental and Long-Term Disability.

Plan Description. SMUD is a member of the California Employers Retiree Benefit Trust (CERBT) for prefunding of OPEB obligations. The CERBT Fund is an IRC Section 115 Trust set up for the purpose of receiving employer contributions to prefund health and other postemployment benefits for retirees and their beneficiaries. The plan is an agent multiple employer plan administered by PERS, which provides medical, dental and long-term disability benefits for retirees and their beneficiaries. Any changes to these benefits would be approved by SMUD's Board and union contracts. To obtain a CERBT report, please contact PERS at 888-CALPERS.

The funding of a plan occurs when the following events take place: the employer makes payments of benefits directly to or on behalf of a retiree or beneficiary; the employer makes premium payments to an insurer; or the employer irrevocably transfers assets to a trust or other third party acting in the role of trustee, where the plan assets are dedicated to the sole purpose of the payments of the plan benefits, and creditors of the government do not have access to those assets.

Funding Policy. SMUD has elected to net fund to PERS, so the contributions are the Annual Required Contribution (ARC) less the estimated cash flow for retiree benefit costs for each year. In 2010 and 2009, the net ARC contribution to the CERBT was $5.9 and $6.6 million, respectively. During 2010 and 2009, SMUD made the following healthcare benefit contributions by paying actual medical costs of $17.3 and $13.6 million, respectively.

Funding Status and Funding Progress. At December 31, 2010 and 2009, SMUD estimates that the actuarially determined accumulated postemployment benefit obligation was approximately $311.0 million and $286.9 million, respectively.

The plan was 9.9 percent and 5.8 percent funded in 2010 and 2009, respectively. The covered payroll (annual payroll of active employees covered by the plan) is $195.4 million for 2010. The ratio of the UAAL to covered payroll is 143.4 percent for 2010.

Annual OPEB Cost. The annual OPEB cost (expense) is calculated based on the ARC of the employer, an amount actuarially determined in accordance with the parameters of GASB No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 30 years. For 2010, SMUD's annual OPEB Cost (expense) of $21.4 million was equal to the ARC.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table shows the components of SMUD's annual OPEB cost for the year, the amount actually paid in premiums, and changes in the net OPEB obligation:

Year Ended December 31, 2010 2009 (thousands of dollars)

Annual required contribution .................. .............................. $ 21,441 $ 19,582 Interest on net O PEB obligation . ............................................. Annual O PEB cost (expense) ................................................. 21,441 19,582 C ontributions made ... . ................................................... (23,133) (20,110)

Increase (decrease) in net OPEB obligation ..................................... (1,692) (528)

Net OPEB obligation, beginning of year ........................................ (528) Net OPEB obligation (asset), end of year ....................................... $ 2,220) $ (528)

SMUD's annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for 2010 and the two preceding years is as follows (thousands of dollars):

Percentage of Annual Net OPEB Year Ending Annual OPEB Cost OPEB Cost Contributed Obligation (Asset)

December 31, 2010 $ 21,441 108% (2,220)

December 31, 2009 $ 19,582 103% (528)

December 31, 2008 $ 19,589 176% Actuarial Methods and Assumptions. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing the benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations.

The entry age normal was used in the December 31, 2010 and 2009 actuarial valuation. Actuarial assumptions used a 7.75 percent investment rate of return (net of administrative expenses), and a 3.25 percent inflation assumption.

For 2010, the actuarial assumptions for an annual healthcare cost trend growth of 9.5 percent for the current year, Z

2 8.5 percent for 2011, 8.0 percent for 2012, and declining 0.5 percent per year until 5 percent is reached. The 5 percent

> growth is used on a go-forward basis. The UAAL will be amortized as a percentage of payroll over an open 30-year 0

Z period. The actuarial value of assets was $30.8 million and $16.6 million in 2010 and 2009, respectively.

0 Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about o the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the ARC of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as RSI following the notes to the financial statements, presents multiyear trend information that shows whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. INSURANCE PROGRAMS AND CLAIMS SMUD is exposed to various risks of loss related to torts, theft of and destruction to assets, errors and omissions, and natural disasters. In addition, SMUD is exposed to risks of loss due to injuries to, and illnesses of, its employees.

SMUD carries commercial insurance coverage to cover most claims in excess of specific dollar thresholds, which range from $5 thousand to $2.5 million per claim with total excess liability insurance coverage for most claims of

$125.0 million. SMUD property insurance coverage is based on the replacement value of the asset. There have been no significant reductions in insurance coverage, and in some cases, certain coverages increased in 2010. In 2010, 2009 and 2008, the insurance policies in effect have adequately covered all settlements of the claims against SMUD.

No claims have exceeded the limits of property or liability insurance in any of the past three years.

The claims liability is included as a component of Self Insurance, Deferred Credits and Other in the Consolidated Balance Sheets.

SMUD's total claims liability, comprising claims received and claims incurred but not reported, at December 31, 2010, 2009, and 2008 is presented below:

2010 2009 2008 (thousands of dollars)

Workers' compensation claims ................................. $ 11,338 $ 9,605 $ 7,066 General and auto claim s....................................... 1,260 1,221 761 Short- and long-term disability claims ........................... 87 73 79 Claim s liability ............................................. $ 12,685 $ 10,899 $ 7,906 Changes in SMUD's total claims liability during 2010, 2009 and 2008 is presented below:

2010 2009 2008 (thousands of dollars)

Claim s liability, beginning of year ............................... $ 10,899 $ 7,906 $ 9,465 Add: provision for claims, current year .......................... 3,025 2,512 3,111 Increase/(Decrease) in provision for claims in prior years ........... 2,923 3,763 (470)

Less: payments on claims attributable to current & prior years ...... (4,162) (3,282) (4,200)

Claim s liability, end of year .................................. $ 12,685 $ 10,899 $ 7,906

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. COMMITMENTS Electric Power and Gas Supply Purchase Agreements. SMUD has numerous power purchase agreements with other power producers to purchase capacity, transmission, and associated energy to supply a portion of its load require-ments. SMUD has minimum take-or-pay commitments for energy on some contracts. Certain contracts allow SMUD to exchange energy, received primarily in the summer months, when SMUD most needs the energy and to return energy during the winter months, or other subsequent periods. SMUD has numerous long-term natural gas supply, gas transportation and gas storage agreements with Canadian and U.S. companies to supply a portion of the consumption needs of SMUD's natural gas-fired power plants, which expire through 2040.

At December 31, 2010, the approximate minimum obligations for the take or pay contracts over the next five years are as follows:

Electric Gas (thousands of dollars) 20 1 1 .. .. .. .. .. .. .. .. . .. .. .. .. .. .. ... .. .. . .. .. .. ... .. . .. ... .. .. . ... .. .. .. .. $ 7 7,52 1 $ 17 ,363 20 12 . . . . . . . . . . . . .. .. .. ... .. .. ... .. .. .. .. ... .. ... .. .. .. .. ... .. .. ... .. ... . .. 4 7,736 12 ,529 2 0 13 . . . . . . . . . . . . .. ... .. .. .. . ... .. .. ... .. .. .. ... .. .. ... . ... .. .. ... .. ... .. . 4 3, 10 3 11,3 4 3 20 14 . . . . . . . . . . . . .. ... .. .. .. .. ... .. .. ... .. .. .. ... .. .. ... .. .. .. .. ... .. ... .. . 3 6,5 12 11,3 43 20 15 . . . . . . . . . . . . .. ... .. .. ... .. .. .. .. ... .. ... .. .. .. .. ... .. .. ... .. .. .. ... .. . 3 1,7 13 11,3 43 At December 31, 2010, the approximate minimum obligations for the remaining contracts, assuming the energy or gas is delivered over the next five years, are as follows:

Electric Gas (thousands of dollars) 20 11 .. .. .. .. .. .. .. .. .. ..... .. .. .. ... .. . .. .. .. .. .. . ... .. .. .. .. .. .. .. ... .. . .. $ 1 18 ,6 20 $ 14 6 ,756 20 12 .. .. ... . .. ... .. . .. .. ... . ... .. .. .. .. .. .. . ... .. .. .. . ... .. .. .. .. .. .. ... . . 12 1,4 84 154 ,259 20 13 . .. . .. .. ... .. . .. ... .. .. . ... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ... .. .. .. .. 1 15 ,9 66 16 2 ,20 2 20 14 . .. ... .. . .. ... . .. .. .. .. .. .. .. .. ... .. . .. .. ... .. . .. ... .. .. .. .. .. .. ... . .. 1 10 ,8 68 16 2 ,4 2 8 20 15 . .. .. .. .. .. .. .. .. . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ... .. .. .. .. .. .. .. .. .. . 69 ,9 16 14 5,5 76 Contractual Commitments beyond 2015 - Electricity. Several of SMUD's purchase power and transmission contracts extend beyond the five-year summary presented above. These contracts expire between 2016 and 2033 and z

o provide for power under various terms and conditions. SMUD estimates its annual minimum commitments under the take or pay contracts ranges between $27.2 million in 2016 and $4.4 million in 2033. SMUD estimates its 0

zz annual minimum commitments under the remaining contracts, assuming the energy is delivered, ranges between

$59.1 million in 2016 and $0.2 million in 2033. SMUD's largest purchase power source is the Western Area Power Administration (Western) Base Resource contract, whereby SMUD receives 31.25 percent of the amount of energy made available by Western, after meeting Central Valley Project use requirements, in any given year at a 31.25 percent share of their revenue requirement. On January 1, 2015, SMUD's percentage share changes to approximately 25 percent. The Western contract expires on December 31, 2024.

Contractual Commitments beyond 2015 - Gas. Several of SMUD's gas transport and gas storage contracts extend beyond the five-year summary presented above. These contracts expire between 2016 and 2040 and provide for transportation and storage under various terms and conditions. SMUD estimates its annual minimum commit-ments under the take or pay contracts ranges between $11.3 million in 2016 and $0.7 million in 2040. SMUD estimates its annual minimum commitments under the remaining contracts, assuming the gas is delivered, ranges between $139.2 million in 2016 and $32.6 million in 2040.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additional Contracts. SMUD has entered into two additional power contracts that have been excluded from the table above due to unknown start dates. Both contracts are based on generation that has not been built and is expected online between 2011 and 2013. Because of the uncertainty of the start dates, they have been excluded from the table above.

Electric Power Price Swap Agreements. SMUD has entered into one variable to fixed rate swap with a notional amount totaling 92,400 megawatt hours (MWh) for the purpose of fixing the rate on SMUD's electric power purchases. This electric power price swap agreement results in SMUD paying fixed rates of $77.72 per MWh.

The swap agreement expires in September 2011.

Gas Price Swap Agreements. SMUD has entered into numerous variable to fixed rate swaps with notional amounts totaling 164,448,500 million British Thermal Units (mmbtu) for the purpose of fixing the rate on SMUD's natural gas purchases for its gas-fueled power plants and gas indexed electric contracts. These gas price swap agreements result in SMUD paying fixed rates ranging from $4.11 to $10.80 per mmbtu. The swap agreements expire periodically from January 2011 through December 2022.

Gas Transport Capacity Agreements. SMUD has numerous long-term natural gas transport capacity agreements with Canadian and U.S. companies to transport natural gas to SMUD's natural gas-fired power plants from the supply basins in Alberta to the California-Oregon border and from supply basins in the southwest and Rocky Mountains to the Southern California border. These gas transport capacity agreements provide for the delivery of gas into SMUD-owned pipeline capacity within California. The gas transport capacity agreements provide SMUD with 64,000 dekatherms (Dth) per day (Dth/d) of natural gas pipeline capacity from the North, including the Canadian Basins through 2023 and 66,000 Dth/d from the Southwest or Rocky Mountain Basins through at least 2018.

Gas Storage Agreements. SMUD also has an agreement for the storage of up to 2.33 million Dth of natural gas at a regional facility. The gas storage agreement was renewed in 2009 and expires in 2011.

NOTE 18. CLAIMS AND CONTINGENCIES Replacement Reserves Dispute. In August 2003, Pacific Gas and Electric (PG&E) issued invoices totaling $2.2 million for replacement reserve charges purportedly incurred by PG&E for energy scheduled through the Rancho Seco intertie point from July 2000 through June 2002. In September 2003, SMUD provided PG&E notice of dispute of the invoices arguing that the billing was inconsistent with the Restated Interim Agreement, the primary agreement between the parties governing such transactions; and therefore, no Replacement Reserve charges are due. PG&E functioned as the Scheduling Coordinator on SMUD's behalf for transactions with the California Independent System Operator (ISO) at this intertie point until June 2002, when SMUD became its own balancing authority. These Replacement Reserve charges purportedly relate to power purchased by the ISO to cover deviations between actual load and forecasted load.

SMUD believes that, even if the charges were appropriate, PG&E's delay in billing within a reasonable timeframe compromised SMUD's ability to modify its operations or scheduling procedures to eliminate or mitigate the charges.

In October 2003 SMUD and PG&E entered into a tolling agreement, which among other things, tolls any applicable statute of limitations and may be terminated by either party upon thirty days written notice. SMUD estimates its maximum liability for this matter at $2.2 million; however, SMUD management believes that it is not likely that it will be found liable for any charges in this matter; and therefore, no liability has been recorded.

Sacramento Municipal Utility District 1 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Claims for 2000 and 2001 Power Sales. On December 6, 2005, PG&E, Southern California Edison Company, San Diego Gas & Electric Company and the Electricity Oversight Board (collectively, the California Parties) filed a claim for damages pursuant to California Government Code § 910.4 (Tort Claims Act) and in March 2006 filed complaints against SMUD and other governmental entities (Governmental Entities) for damages and/or restitution and declaratory relief in Federal District Court in the Eastern District of California, Sacramento Division (Federal Court). The California Parties claim arises from SMUD's power sales from May 1, 2000 through June 20, 2001 (Refund Period) in the wholesale electricity markets operated by the ISO and the California Power Exchange (PX) under Tariffs filed with the FERC.

In a related matter, the State of California and the California Department of Water Resources (DWR) (collectively, the State Entities) filed a complaint in 2006, as amended in 2007, seeking damages similar to those sought by the California Parties. The complaint further claimed damages arising of SMUD's voluntary power sales to the DWR and the ISO, for which the DWR paid, during the Refund Period. On February 23, 2007, SMUD entered into a tolling agreement with the State Entities, under which the State Entities agreed to dismiss without prejudice its claim against SMUD on or before March 1, 2007. The State Entities' complaint was dismissed without prejudice.

The tolling agreement serves to put a temporary hold on all future action in the State's prosecution of its claims, and in any claims which SMUD may bring against the State Entities, until the Parties have a better understanding of the progress of other related proceedings.

In proceedings before the FERC (California Refund Proceedings), the California Parties contended that SMUD and other municipals should be subject to the mitigated market clearing price for any sales made into the ISO and PX markets. However, the Supreme Court ruled that municipal entities like SMUD were not subject to the FERC refund liability under the Federal Power Act. The California Parties now allege that SMUD is contractually obligated under the PX Participation Agreement to reimburse the California Parties for any amounts that the FERC might find were unjust under the California Refund Proceedings but for the FERC's lack of jurisdiction. In March 2007, the Federal Court dismissed the complaints for lack of subject matter jurisdiction. The California Parties appealed the judge's decision in the U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit).

In April 2007, the California Parties filed a breach of contract claim in Los Angeles Superior Court (LA Superior Court) against the Governmental Entities on the same grounds and seeking the same relief as in the Federal Court action described above. In 2009, the LA Superior Court bifurcated the issues of liability and damages. A liability trial was set for November 2010.

The California Parties, State Entities (collectively, the Parties), and SMUD entered into a Binding Term Sheet, dated October 19, 2010, that requires the Parties negotiate in good faith to complete a definitive settlement agreement (Settlement Agreement) that (i) embodies the terms set forth in the Binding Term Sheet, and (ii) to the extent not otherwise addressed therein, includes terms that are consistent with the terms of the California Parties' settlements with other governmental utilities. The Settlement Agreement would resolve all disputes between the Parties with respect to the transactions in the Western Energy Markets during the Refund Period. It would also require the Parties to waive any potential claim that they may have against SMUD for any bilateral or market sales made during the Refund Period. The Binding Term Sheet, among other things, provides that, upon the FERC approval of the Settlement Agreement, the PX and the ISO shall pay to SMUD $31 million from its receivables and accrued interest at the PX and the ISO. The Parties are currently negotiating the Settlement Agreement.

On October 26, 2010, the LA Superior Court issued an order approving a stay of the litigation pending the execution of the definitive settlement agreement and receipt of all required regulatory approvals. SMUD expects the FERC to approve the final settlement in 2011.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NERC Compliance Investigation. On April 20, 2009, SMUD received notice from the North American Electric Reliability Corporation (NERC) that it initiated a NERC Compliance Violation Investigation in response to possible compliance violations as a result of a system disturbance that occurred on December 26, 2008. A preliminary investigation revealed that the disturbance was caused by a failing battery charger at the Orangevale Substation.

On October 29, 2010, NERC issued a Notice of Preliminary Findings and Analysis (Notice) identifying possible violations of seven requirements of five separate reliability standards. SMUD responded to the Notice on November 30, 2010. In its response, SMUD objected to many of NERC's findings, provided NERC with additional information, and requested that settlement discussions commence. Because the investigation is ongoing and no Notice of Alleged Violation has been issued, it is impossible to state with any degree of certainty the amount of any proposed penalty, if any. SMUD expects that the penalty levied by NERC will be less than $1 million. Accordingly, management believes that the outcome of this matter will not have a material adverse impact on SMUD's financial position or results of operations.

Fru-Con Construction Corporation Construction Matters. In August 2003, SMUD entered into a contract with Fru-Con Construction Corporation (Fru-Con) to construct SMUD's 500 MW Cosumnes Power Plant (CPP Project). St. Paul Travelers Casualty Company (Travelers) is obligated, under a Performance Bond, to guarantee Fru-Con's perfor-mance under the contract. The original construction schedule for the CPP Project called for commercial operation in September 2005. The CPP Project became operational on February 24, 2006.

Though Fru-Con had previously made claims for comparably smaller amounts that had been resolved through negotiation, in October 2004, Fru-Con asserted additional claims totaling $26.0 million. Beginning in October 2004 and continuing until early February 2005, SMUD and Fru-Con participated in negotiations to resolve disputes over both cost and delays in the CPP Project schedule. SMUD also notified Travelers in January 2005 about Fru-Con's defaults. The parties were unable to resolve the disputes to the satisfaction of SMUD and in February 2005, SMUD terminated its contract with Fru-Con on the basis of breach of contract by Fru-Con, and took steps to complete the CPP Project. In February 2005, SMUD filed suit in the Sacramento County Superior Court against Fru-Con and one of its sub-contractors alleging breach of contract and violation of the California False Claims Act (State Court Action).

In March 2005, Fru-Con filed a complaint against SMUD in federal court, alleging breach of contract (Federal Court Action) and attempted to remove the State Court Action to federal court. In May 2005, the federal court granted SMUD's motion to remand, and transferred the State Court Action back to the Sacramento County Superior Court.

SMUD also pursued a claim against Travelers under the performance bond. In September 2005, Travelers denied SMUD's claim and filed a declaratory relief action in the same federal court as the Fru-Con Federal Court Action.

SMUD filed a counterclaim in response to Travelers' lawsuit. In general, SMUD is seeking to recover from Travelers all of the damages it claims against Fru-Con, including attorneys' fees. Fru-Con's federal case has been consolidated with the Travelers lawsuit for purposes of discovery.

In June 2007, the Sacramento County Superior Court issued a summary adjudication order upholding SMUD's right to terminate the contract, leaving for trial only the issue of the amount of damages owing by Fru-Con to SMUD.

Fru-Con appealed the Superior Court order to the Court of Appeals. In September 2007, the California Supreme Court denied Fru-Con's Petition for Review seeking to overturn the Court of Appeals decision, which had denied their petition to reverse the Superior Court order.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Superior Court trial commenced in January 2009. SMUD presented evidence at trial to support an award of $47.1 million net in damages, excluding interest and attorney's fees, comprised of SMUD's cost to complete Fru-Con's scope of work ($38.8 million), contract liquidated damages ($8.2 million) and statutory damages for false claims ($153 thousand). This net total included offsets for Fru-Con's legitimate change order requests for out-of-scope work that Fru-Con actually performed prior to termination and the $7.8 million in retained funds held by SMUD.

In contrast, Fru-Con presented evidence at trial that SMUD should not be awarded any damages, and instead that Fru-Con should be awarded roughly $45 million, inclusive of claims for extra work for change orders, delays and inefficiencies allegedly caused by SMUD, and attorneys' fees.

In June 2009, the jury rendered a verdict awarding SMUD $42.2 million in damages, excluding interest and attorneys' fees ($35.6 million cost to complete, $6.6 million in liquidated damages, and $10,000 for False Claims), and awarding Fru-Con $1.5 million for change orders.

In December 2009, following a hearing on motions for pre-judgment interest and attorneys fees, the Final Judgment on Verdict was issued. In addition to the $42.2 million in damages to SMUD, SMUD was awarded $13 million in prejudgment interest through the date of Judgment, and reduced Fru-Con's net award to $1.2 million, which offsets against SMUD's award, resulting in a net total of approximately $54 million, plus costs to be submitted. SMUD's request for attorney's fees was denied.

In December 2009, Fru-Con filed motions for a mistrial and a judgment in Fru-Con's favor notwithstanding the verdict. In February, 2010, the Judge issued his final ruling denying both motions, and Fru-Con filed a Notice of Appeal of the final judgment, including prejudgment orders and the order denying both post-judgment motions with the State Court of Appeals for the Third Appellate District. On January 3, 2011, Fru-Con filed its opening brief with the Third Appellate District. SMUD will file its response during the first quarter of 2011.

Meanwhile in September 2009, Federal District Court handed SMUD a further procedural victory by issuing a Stay Order. This Stay Order puts a hold on the federal trial pending the final resolution of the state court proceedings.

Effectively, the state judgment would then be binding on the federal court. In September 2009, Fru-Con filed an appeal of the Stay Order to the Ninth Circuit, followed by a similar appeal by Travelers. Fru-Con and Travelers also filed motions to expedite appeal and to consolidate. In October 2009, the Ninth Circuit ordered the appeals consoli-dated, but denied Fru-Con's and Travelers' motions to expedite the appeal, retaining the regular briefing schedule.

On August 19, 2010, the Ninth Circuit panel denied Fru-Con and Travelers appeal and upheld the Judge's Stay Order.

z 2 Consequently, there will be no additional Federal District Court activity in this case until the State court proceedings

> are resolved.

0 z

SMUD management continues to believe that over the course of the state and federal appellate review proceedings and any follow-up trial court proceedings, SMUD is reasonably likely to be successful in refuting, at a minimum, a 0* majority of Fru-Con's claims and to prevail in a majority of its claims against Fru-Con, as well as the surety Travelers.

SMUD management also believes that the outcome of this matter will not have a material adverse impact on SMUD's financial position or results of operations. No liability or receivable has been recorded by SMUD in connection with these disputes.

Sacramento Municipal Utility District I 2010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS North City Environmental Remediation. In 1950, SMUD purchased property from the City of Sacramento and the Western Railroad Company (the "Site"). Portions of the Site prior to the sale had been operated as a municipal landfill by the City of Sacramento. SMUD currently operates a bulk substation on the Site. SMUD intends to assure compliance with the State standards at closed landfill sites and is in the process of determining the appropriate remediation of the Site. SMUD believes that there are potentially responsible parties legally obligated to contribute to the remediation costs at the Site and intends to pursue recovery from those parties. In 2010, SMUD established a regulatory asset to defer recognition of the expense related to the investigation, design and remediation necessary for the Site, and has recorded a liability for the full $12 million estimated for the project under GASB No. 49. This regulatory asset will be collected in rates in 2012 and 2013 (see Note 8).

Other Construction Matters. SMUD contracts with various other firms to design and construct facilities for SMUD.

Currently, SMUD is party to various claims, legal actions and complaints on some of these construction projects. SMUD management believes that it will be successful in refuting these allegations, and estimates that the ultimate resolution of these matters will not have a material adverse effect on SMUD's financial position or results of operations.

Environmental Matters. SMUD is one of many potentially responsible parties that have been named in a number of actions relating to environmental claims and/or complaints. Due to the nature of these claims, legal actions or complaints, SMUD is unable to predict the range of costs for resolution of these actions and intends to take all actions necessary to defend its position. Some of these matters name SMUD along with other electric utilities as potentially responsible parties. SMUD has estimated its exposure to such costs based on its proportionate share of the potential claim and recorded its share as a liability; in most instances this is a relatively small percentage. However, should other named responsible parties become insolvent and unable to pay their share of the claims, SMUD's share of these contingent liabilities would increase and could be material. SMUD management does not believe this will occur, and accordingly, management believes that the outcome of these environmental claims will not have a material adverse impact on SMUD's financial position or results of operations.

Other Matters. In the normal operation of business, SMUD is party to various claims, legal actions and complaints.

Management and SMUD's legal counsel believe that there are no other material loss contingencies that would have a material adverse impact on SMUD's financial position or results of operations.

Sacramento Municipal Utility District 12010 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REQUIRED SUPPLEMENTARY INFORMATION (unaudited)

Schedules of Funding Progress PERS Pension. The schedule of funding progress for PERS is presented below for the three most recent years for which SMUD has available data (thousands of dollars):

UAAL Unfunded (Excess of Actuarial AAL Assets over Accrued (UAAL) AAL) as a Actuarial Liability (Excess of Percentage Actuarial Value of (AAL) - Assets over Funded Covered of Covered Valuation Assets Entry Age AAL) Ratio Payroll Payroll Date (a) (b) (b-a) (a/b) (c) ((b-a)/c) 6/30/09 $ 1,419,866 $ 1,531,728 $ 111,862 92.7% $ 185,474 60.3%

6/30/08 $ 1,373,974 $ 1,393,705 $ 19,731 98.6% $ 180,362 10.9%

6/30/07 $ 1,300,814 $ 1,315,424 $ 14,611 98.9% $ 171,285 8.5%

OPEB. The schedule of funding progress for the other post-employment benefit healthcare plan is presented below for the three recent years for which SMUD has available data (thousands of dollars):

Actuarial UAAL as a Actuarial Accrued Unfunded Percentage Actuarial Value of Liability AAL Funded Covered of Covered Valuation Assets (AAL) (UAAL) Ratio Payroll Payroll Date (a) (b) (b-a) (a/b) (c) ((b-a)/c) 1/1/2010 $ 30,781 $ 310,993 $ 280,212 9.9% $ 195,413 143%

1/1/2009 $ 16,570 $ 286,874 $ 270,304 5.8% $ 197,772 137%

1/1/2008 $ 22,923 $ 263,982 $ 241,059 8.7% $ 199,369 121%

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SMUD SACRAMENTO MUNICIPAL UTILITY DISTRICT The Power To Do More.m www.SMUD.org Printed on recycled paper.

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