ML20237A948

Forwards Smud 1997 Annual Rept, IAW 10CFR50.71(b),which Includes Certified Financial Statements

ML20237A948
Person / Time
Site:	Rancho Seco
Issue date:	08/03/1998
From:	Delezenski J SACRAMENTO MUNICIPAL UTILITY DISTRICT
To:	Weiss S NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
NQA-98-076, NQA-98-76, NUDOCS 9808170256
Download: ML20237A948 (1)

Text

(

o suus SACRAMENTO MUMCsPAL UTIUTY DISTRICT O P. O. Box 15830, Sacramento CA 95852-1830, (916) 452-3211 AN ELECTRIC SYSTEM SERVING THE HEART OF CALIFORNIA NQA 98-076 8l3l98 U. S. Nuclear Regulatory Commission Attention: Document Control Desk Washington, DC 20555 Docket No. 50-312 Rancho Seco Nuclear Station License No. DPR-54 ANNUAL FINANCIAL REPORT Attention: Seymour Weiss In accordance with 10 CFR 50.71(b), the District provides the enclosed Sacramento Municipal Utility District 1997 Annual Financial Report, which includes the certified financial statements.

Members of your staff requiring additional information or clarification may contact Jerry Delezenski at (916) 452-3211, extension 4914.

Sincerely, ezenski i

i Superintendent j

b

/

Quality Assurance / Licensing / Administration

/

cc w/atch:

E. W. Merschoff, NRC, Arlington, Texas R. Dudley, NRC, Rockville 9806170256 980803 F

PDR ADOCK 05000312 I

PDR m

RANCHO SECO NUCLEAR GENERATING STATION O 14440 Twin Cities Road, Herald, CA 95638-9799; (209) 333-2935 i-

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s A MESSAGE FROM SMUD'S GENERAL MANAGER 1 In 1997, Cahfornia's electric utility industry moved toward a restructured, open market environm N This meant that SMUD,to remain competitive, had to continue to change the way we did business. 7 Just as importantly, though, we stayed focused on our values as a municipal utility, providing the services and suppor' that our customers have come to expect. , y Two historic acts crystallized our efforts to adapt to the emerging marketplace, f irst, we started a f pilot direct-access program that allows other energy providers and marketers to sell electricity to our customers. Secondly, we began testing the waters for providing electricity to customers outside our service area by signing Raley's and the San Juan Water District to senice agreements. Both of these pilot projects helped us get started in identifying the changs we need to make when and if we expand the programs. We also iniGted a reengineering process that drastically cut our order delivery time. In examining our business processes we realized the need to completely altcr the way we responded to customer requests for building substations, new connections, street lights and trouble calls, to name a few of the areas that are affected. The results are exciting - customer order fulfillment within Distribution Services cut costs and turnaround times by as much as 35 percent. While all this change was going on, one important aspect of SMUD remained constant. For the seventh straight year, the SMUD Board of Directors approved no rate increase. We also brought on-line our newest power plant, CoGen Two, at Proctor & Gamble. This is one of three cogeneration plants that we have developed since 1996. Through our econon ic development program we helped to attract or retain 15,000 jobs for greater Sacramento during the past two years. We also offered customers competitive rate options that could better fit their needs. A new renewable energy program called Greenergy* gives customers the opportunity to help us replace polluting fossil f uel power with cleaner resources. More than 2,000 customers signed up in the first six months of the program, helping us make a difference. Our f,aancial results were very bright in 1997, with our hydroelectric facilities on the Upper American River Project saving the District $10 million in power costs compared to buying this power on the open market. We were able to reduce expenditures in other areas as well, and made greater strides than planned in i lowering our stranded investment costs. This means that we are well on our way toward making our rate goals of maintaining steady rates through 2001, and then lowering them. Two maior bond rating agencies also agreed that we are on track by upgrading our senior lien revenue bond ratings to "A." As you look through this annual report, you will see that what we've done in 1997 proves SMUD can change to stay ahead of the industry and remain faithful to our municipal values. With more changes in store,I feel confident that we will continue to meet the many needs of our customer-owners. JAN SCHORI GENERAL MANAGER m lllj SMUD 19 9 7 A N N U A L REPORT

1 1997: AYEAR OF TRANSITION. MEETING THE CHALLENGES. MEETING ~ AYEAR OF SUCCESS. THE DYNAMIC NEEDS OF CUSTOMERS. In 1997, California's electric utility industry As a municipal utility and a premier electric began the transformation into a competitive sen ice provider in Northern California, SMUD ' retail environment. SMUD is ready for the offers residential, commercial, industrial and challenge. SMUD is keeping municipal values governmental customers important advantages 7 l ) (( in balance to maintain a strong position that in myriad ways: e v.1 6* gives the District and its customers the Economic development rates help programs and services necessary to succeed. communities grow, which spreads SMUD's For example, SMUD was the first utihty in fixed costs over more customers, helping California to allow customers to choose their to keep rates down for all. Environmental programs respect and electricity supplier and to market" green power," 4 demonstrating leadership once again as one consene natural resources while helping of America's most progressive electric providers. to clean up the air we breathe. S M U D'S ELECTRIC RATES- -25 Percent ower THANTHOSE OF C A LIF O R NI A S IN V E S TO R.OW N E D U TILITIE S-HAVE BEEN FROZEN THROUGH 2 0 01, W I T H PLANS Heeting the chang.mg needs of today's TO R E D U C E T H E M EV E N F U RT H E R IN 2 0 02, customer - a challes - that SMUD embraces in 1997,a year of A diverse and strong portfolio of power Smce the first full year of operation in rsmarkable change 1947, one thing at SMUD has remained to ensure quality and reliability,induding in the electric utility cons apt ow ra es. n ac,. see c a green power opdon. Industry. A higher percentage of SMUD revenues rates - already 2S percent lower than are invested in renewables research and t ~ ' -.. dj k p% { }_, i,. thme of Cahfornia's development - more than any of the .m = 4, s_ - y L y lyd g investor-owned utilities utilities in California. 4,o

ps

, j r, - have been frozen

1. j Community ownership and partnerships hh; N 'o I

through 2001.Then, enable SMUD to work with other agencies f* i ni 9 l ~ ~ SMUD plans to j and groups for the greater good of ,e l lower rates in 2002. Sacramento. l Full range of customer services from !.y consultation to complete customer y energy solutions. n b $7 F%y [h f 2.) $ MUD 19 9 7 A N N U A L REPORT l l

A STRONG FINANCIAL POSITION A BRIGHT OUTLOOK SMUD is pleased to report that Standard & For the future, SMUD will steer a steady Poor's and Fitch upgraded SMUD's senior lien course of providing safe. dependable services - revenue bond ratings to"A"a particularly and of staying competitive by freezing rates .i-- notable occurrence given the uncertainties of for five years. To maintain leadership in clean. -n , ggg}j [j deregulation. The upgrades reflect the progress energy-efficient energy sources SMUD invests g 5gjU E SMUD has made toward implementing its 28 percent more than the state requires for Competitive Business Strategy adopted in 1997, energy-efficiency programs, renewable Higher revenues from the growing Sacramento technologies, research and development, and 4 s" ia i economy reduced by $39 million the amount limited income programs. To improve internal L 93 9, 95 9e 97 i Total kWh Sales oneh. - =Je %l _f lill L yr $.. ] g f. of funds needed from the rate stabilization operations, SMUD is streamlining decision-

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• y fund in 1997. This will help ensure that SMUD making procedures and reengineering business

.[ teaches the compethive rate goals set for processes. As always, SMUD supports active the year 2001. community partnerships to attract new jobs b n and keep existing ones. And, SMUD continues ee" to enhance delivery of customer services - from answering calls promptly to keeping 93 94 95 96 97 Revenues Totals Y k - lights turned on without interruption. i q ).{ # p e t*W sMUD 199 7 AN N U AL R E P ORT {3

y L THE POWERTO COMPETE. INCREASED CHOICES IN A THE COMMITMENTTO SERVE. COMPETITIVE ENVIRONMENT The District is forging strong partnerships By offering new, exciting choices in 1997, in both the public and private sectors. SMUD expanded its efforts to keep customers' The privately owned Raley's supermarket needs the highest priority. At the same time, f, chain, for example, signed a four year SMUD began California's first direct-access agreement with SMUD for power to their program to give customers the option to choose stores both within and outside the historical an alternate energy provider. Although SMUD SMUD service area."We like the idea of was not mandated to allow competitors into the working with SMUD and keeping electric historical service area, the District began 6 rect service delivery kical," says Ed Estberg, director access in order to stay ahead of the industry. I of facilities for Raley's 115 supermarkets in i In 1997, SMUD customers had the option to l choose a variety of rates that met their needs: j Northern California and Nortnern Nevada. The District will provide competitively priced Greenergy* - cleaner energy sources I"*#' "* '" " E # "'" "E #"#'EI' STEPPING UPTO I f THE PLATE FORTHE CHINET COMPANY The Chinet Company % + e ustomer-at ore ates extendible five-year .-.nt -Ps th.m obtr.in more competitive FOR COMM E RCI AL C U STOM ERS ratss while protecting them against fluctuating P ROYID E T H E O P P O RT U NIT Y To P A RTlC1P AT E IN ' pricss.5 MUD also provided low-cost ',oans and rebates, allowing the plant to install more efl'icient technologies, while sharing any savings of acquiring power

• Time-of-Use Rates-a way to shift electricity during the first year."Another plus is usage to less expensive off peak hours.

the convenience of SMUD's

• Monthly Indexed Rates - a base price for a consolidated billing,"

fixed amount of power with competitive Estberg says, noting that } market prices for new load. I cight electric service

• Real Time Pricing - a base price fo a fixed bills will be whittled amount of power with competitive hourly into one.

market prices for new load. CUSTOMERTAILORED RATES SMUD's competitive agreements indude extended-term contracts, bundled services, hedging options and retention packages. l Customer-tailored rates for commercial l customers provide the opportunity to participate in rate designs : hat meet individual preferences. t SMUD 19 9 7 A N N U A L REPORT

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6 FOR A GREATER SACRAMENTO Internally, staff continually seeks out When it comes to attracting new jobs to better ways to develop and market use of the greater Sacramento, SMUD is an active land and facilities at Rancho Seco, SMUD's supporter of community partnerships. For retired nuclear power plant; diversify SMUD many years now, the District has made a services; and keep the community informed BANK OF AMERICA long-term commitment to promote and of our developing policies and programs. BANKS ON SMUD support economic growth and diversity, job BRINGING IN MORE retention and creation, a healthy business moved its mortsase and SMUD uses a multidisciplinary process that climate and a better quality oflife for SMUD's equity tending processing coordinates the expertise and experience customers - all of which are consistent with center (shown below) ofits staff from a variety of areas to assist prudent planning for future energy needs, elsewhere,but chose to keep major companies in moving to or expanding In partnership with Sacramento County 1,100 jobs in Sacramento, operatnons in metropolitan Sacramento, in fact SMUD's economic and other regional development agencies, From analysis of rate options to a review of retention agreement is one SMUD works to retain local bus,nesses, i m customer operations and SMUD electrical of the key reasons they recruit new ones to the area, and facilitate remain in Sacramento."1 found all ievels of SMUD to be very supportive - from "W E A R E P L E A 5 E D T H AT SHUD PROVIDES US WtTH "I " "' economic development Attractive Incentive Rates, S - - " " ~ ~ ~ - General Manager and the RE$PONStVE DISTRIBUTION S E R V I C E." Board of Directors.1 work I *"d -MIKE 5 t AU DIN, oP E R ATIO N s M A N A G E R, I am very impressed with P O LT C L A D L A M1N AT E s SMUD,says Nancy Oh!,the Bank's vice president of real estate procurement services, local enterprises in establishing, growing and sy stem support capabilities, an integrated expanding their operations. And, by increasing team approach has attracted the customer base, SMUD spreads out its and retained major businesses. .j. fixed costs over a greater number of customers, Over the last two years alone, which helps SMUD keep its prices down. economic development Economic development rates, for example, activities have helped give businesses discounts on their power to secure more than when they locate in the Sacramento area or 15,000 jobs for expar.d their existing operations nere. greater Sacramen:o. SMUD is also an active participant in military base conversion and technology transfer partnerships. t j:' E f m 5 MUD 6 997 ANNU AL REPORT [7]

5 ( 1 RELIABLE POWERTODAY purchases. Total generation at UA (P served AND TOMORROW the equivalent of nearly 247,000 residential 4. t8.. As always, SMUD is committed to generating customers in the Sacramento rommunity. 'w reliable electricity that is economical and J- ~ J. g' WHENTHE HEAT'S ON, A has minimal impact on the environment. SACRAMENTO STAYS COOL t SMUD's diverse resource mix includes .'~ v! In 1997, SMUD had an a /erage outage of hydroelectric power, natural gas cogeneration. only one hour per custo ner per year-half the cost-effective energy efficiency programs, mdustry average of two hours per customer and advanced and renewable technologies per year. In the sweltering August heat SMUD such as w. d and solar power. m responded to a record usage of 2.442 megawatts ~ While nearly half of SMUD's own power (MW), breaking a high of 2,392 MW set the l is generated through efficient, renewable g

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previous August. To assure continuous system

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. Mk,t -: %,..- resources, the District also purchases power r-improvement aad maintenance, SMUD g ' invests comiderable employee and financial on the wholesale market to meet load t..." 1 requirements and to reduce costs throughout . i-resources - r.nd a strong measure of diligence, the year.

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. 4L -Port olio-Power-e TO P R OVID E RE LI ABILITY AN D S U F FICIE N T C& E LE CT RIC AL POWER FOR ALL ITS C U S TO M E R S-SMUD's geothermal. TOOAY A N D T O M O R R O W. wind, solar and hydro power plants (top to bottom) supply clean, HYDRO POWER: ABUNDANT. Stafikeeps trees trimmed away from high-voltage renewable energy to l lines and regularly inspects them, along with the N ATURAL COST-EFFECTIVE. Sacramento. SMUD's hydro facilities at the Upper seven million feet of cable laid during the building American River Project (UAliP) in boom of the late 1960s and early 1970s. Timely Northern California turn snow internal communications help assure that into hydroelectricity - a cost-resources are deployed most effectively during effectivr power source for system outages. .n all SM UD customers. COGENERATION PLANTS SERVE Winter storms in 1997 COMMERCE AND COMMUNITY produced 132 percent of SMUD completed the final two natural gas normal runoff. Thanks to cogeneration plants at Campbell Soup and k;. UAltP hydro generation, Procter & Gamble (see photo, opposite page), SMUD saved approximately M4r allowing the District to replace power it had 2< c $10 million: in power Jf; been buying through the open market. 1

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1 m. 7 i, 4 h ]*' s , PLUG INTO. CLEANER AtR FOR A initiated in 1997, allows homeowners to SMUO'5 ELECTRIC ( CLEANER SACRAMENTO purchase their own PV units and sell any 3 TRANSPORTATION : In 1997, SMUD made it even easier for excess power back to the District. -PROGRAM l customers to increase the use of renewables. DIVERSE ENERGY-SAVING PROGRAMS i-Recognislag that f***8 - SMUD's green-pricing program, called II#I I"E#" *#''"##"#'EY'#*'i"' P g pl-burning vehicles are Greenergy,* gives customers the opportunity f the District's objectives. The Equipment I 'thh leading cause of air ' to help SMUD purchase more electricity from EfII#I'"#Y *P'"*#*#"IP' E'** i"I997 I cleaner, renewable resources. Nearly 2,000 saved SMUD residential customers and the Greenergy customers in 1997 helped SMUD buy Digrict 146 gigawatt hours (GWil) by additional geothermal (underground steam) p - Put non-polluting electric pr viding f nancing for the purchase of energy of fr rb vehicles (EVs) on the rsad eft cient heat pumps, air conditioners, attic f and sclm pn since 1990. Along with the - and wall insulation, shade screens, high-C,ommunity Solar'aallows customers to environmental benefits, o'o taic (PV) synems for 6e performance windows and solar water heaters. p slictric transportation Additionally, the Commercial / Industrial rooftops of community buildinp fly supporting offers SMUD opportunities program saved 15.89 GWil by providing rebates 01 UD mo m klp to crsate new revenue gsnartting sources in an increasingly competitive mtrint.Today,in addition N E A R LY O N E-H ALF 0F S M U D*$ POWER to operating the largest

== """ Renewable 1esources c businesses and government INCLUDING G E OT H E R M A L, H Y D R O E L E C T RIC, WIN D to instaJl public electric vehicle charging stations AND PHOTOVOLTAIC CELLS. throwghout the region. non-profit organizations cut their energy costs and financing for the replacement or retrofit I while encouraging the expansion of of inefficient lighting,ilVAC and process renewable resources. equipment with high-efficiency equipment. SMUD is also creating Through the Sacramento Shade Program, long-term strategies to provide SMUD joined with residential customers commercial and residential to plant 17,200 free shade trees. They are customers with access helping the homeowners cut down on their to PV equipment at air conditioner usage, saving them energy reduced costs. The PV and money. Pioneer 11 pilot program, Mow Down Air Pollution - a rebate program for customers who trade in air-polluting gas j mowers and purchase new electric mowers - Shclion Duruuscau tlem shp> the brought in 860 gas-powered mowers. charger mto hu ric <ral ston m at a cha ymg statwn m front of the Arden I-ast Mall "Ilove st!Itsfun to dnsr and utpd good to be cerursbutmg tenrd smprovmg the enesronment." l wys Durwwau of hu new I V y ( $ MUD 19 9 7 A N N U A L R E P O RT

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ATURN TOWARD THE WILD SIDE Outdoor security lighting provides energy-The Datrict's Rancho Seco Recreational Area efficient security lights at reduced prices. is now home to exotic animah who roam and Advantage Home progr am promotes gra7e freely at the Amanda Blake Memorial new homes exceeding minimum state Wildlife Refuge. More than two dozen oryx energy-efficiency requirements. (an endangered species of antelope) and liome i nergy Audits help customers other animah were rescued by the Performing control their energy usage. l Animal Welfare Society (PAWS) from the l Motor and pump testing, audits, process O m ONTHE illegal underworld of exotic animal trade. evaluation and customized lighting analysis SMUD RANGE Other animals sharing the refuge indude an help bring down customers' operating costs. i "SMUD has provided eland, emus, ostriches and rheas. 1:ncrgy-tratking services give commercial I a secure area for the Visitors can observe the non-native animals customers the ability to manage energy l oryx, beautiful animals I in a near-natural environment. Plans call for costs, forecast energy budgets, verify utihty we rescued from an an intern program for veterinary students bills, analyze load profiles, and produce and field trips for school groups, l reports and graphs. could have ended up l at a hunting ranch, explains Ed Stewart, co-director of PAWS. SMUD B RIN G S MoRETHAN POWERTO GREATER SACRAMENTO- "SMUD's offer presented I SMUD HAS FORMEDA POWERFUL P A RT N E R S HIP FOR educational opportunity ~1]IlG11C5110ruc 0111111li115t! y share the animals w th communky ANDTHE Q U AL1T Y OF L1FE FOR ALL WHO LIVE HERE, while elevating public awareness about the { animals' pilght in Other community sen ices include f Peak Corps program of 115,000 residential Captivity. Plus, the refuge gives us a place customer and Energy Services programs and small commercial customers can help that's ready for other for Sacramento agencies: decrease load in case of a systemwide l animals in danger." Educating customers in planting and electrical emergency. I stewardship of shade trees,in partnership g t. with the Sacramento Tree Foundation. f 2 #' 4 4 1.imited income and multi-family home education provides information on energy- ~~ efficiency measures. j- )h h .i I I i $ MUD 19 9 7 A N N U A L REPC.T p31 $y s 'i e

.p g 0 p -?c g-c r CUSTOMER SERVICE CENTER ENERGY TECHNOLOGY CENTER gj j g SMUD's new 180,000 square-foot The new Energy & Technology Center is a h Customer Service Center houses many of mini-campus of classes and workshops offering the District's customer programs under the latest on electrotechnologies, energy efficiency 'I one roof. The Center is an easily accessible and electrical safety for design professionals, i wg l location for paying bills and obtaining businesses and the general public. V energy-efficiency services. The Center features a variety of interactive Y With the latest in energy-efficient f displays and demonstrations. A favorite attraction d technology, the Customer Service Center j is SMUD's E-Houw, which showcases the latest i 9 i l M keeps. employees and visitors comfortable l in energy-saving techniques and mu-rials, M including residential framing, siding, rooring year-round while cutting heating, cooling -U and lighting expenses. f and insulation. The E-House also includes Like everyone else in today's world, energy-efficient windows, new daylighting SMUD customers are busy people. That's products, a ground-source heat pump, whole-why the Customer Service Center lobby house fan and an interactive video center. h5 l f S M U D'S NEW CUSTOMER SERVICE CENTER p IS JUST ONE OFTHE MANY N E W W AYS THE DISTRICT 45 PROV1 "' "I '"*#8I '#8 TO R ESID E N TI A L. C O M M E R CI A L A N D iN DUSTRI AL in a local grocery stone, trimming trees away from C U S TO M E R S. power lines, checking a homeowner % air conditioner ce hel ing an industrial P incorporates a variety of services, including SERVICE FIRST PROGRAM customer with new an ATM,information on SMUD employment At SMUD, delivering excellent service is a top technologies, SMUD employees are the vital opportunities, postage stamps, Regional priority. To provide the largest customers with link with the commun ty. Transit passes, a PG&E payment a single point of contact for SMUD services, drop, food services and even Key Account Managers serve as liaisons with all ,y

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SMUD departments. Account executives can N $d1 i tailor specialized services and are available 24 L. r hours a day to answer questions or resolve I@ j energy related concerns. g. i To improve services to residential customers y i ) l when they call, SMUD began a multi-year E l program to meet its goal of world-class response t to customer calls, 7 i 4 +.g >l4 EMUD 19 9 7 A N N U A L R E P O R T j b

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FIVE-VE AR SUM M ARY (UNAUDITED) OPERATING STATISTICS (i) 1997 1996 1995 1994 1993 Customers at Year-End. 491,646 486,146 480,303 475,090 467,177 KWil Sales (thousands): Sales to Customers - Residential. 3,823,697 3,851,605 3,567,584 3,680,243 3,635,715 Commercial, Industrial & Other, 5,152,254. 5,037,656 4.891,304 4,778,913 4,812,504 Subtotal. 8,975,951 8,889,261 8,458,888 8,459,156 8,448.219 Sales of Surplus Power /Lnergy Bank Deposits.. 206,679 335,108 151,647 12,678 335,187 Total.. 9,182,630 9.224,369 8,610,535 8,471,834 8,783,40o Revenues (thousands of dollars) Sales to Customers - Residential. $ 319,260 5 319,604 5 290.896 5 299,095 5 294,977 Commercial,Industnal & Other, 370,287 368,257 358,921 355,955 359,238 Subtotal. 689,547 687,861 649,817 655,050 654,215 Sales of Surplus Power, 3,576 1,325 992 31 1,916 Totallii), $ 693.123 5 689J86 5 650,809 5 655,081 5 656,131 Average KWH Sales per Residential Customer, 8,829 8,982 8,412 8.810 8,732 Average Revenue per Residential KWH Sold (cents). 8,35 8.30 8.15 8.13 8.11 Power Supply (Thousands of KWH) Hydroelectric. 2,180,302 2,557,145 3,039,067 738,745 2,162,609 Geothermal. 471,152 464,756 447,024 332,370 506,084 Cogenuation. 1,079,401 322,524 99,900 Windpower, 5,875 10,023 13,088 7,450 -0 Photovoltaic. 2,286 1,622 2,846 2,452 2,673 Gas Turbine Fuel Cells, 5,570 8,089 5,950 3,858 3,086 Purchases. 5,978,408 6,366,520 5,532,892 7,877J80 6,613,205 Net System Peak Demand - I hour (KW), 2,442,000 2,392,000 2,223,000 2,044,000 2,145,000 Employees (Permanent & Other) at Year End. 2,152 2,289 2,340 2,437 2,505 FINANCIAL STAT 15 TICS (thousands o,f dollars) (i) Operating Revenues, $ 714,159 5 670,283 5 613,896 5 644,342 5 017.117 Operating Expenses Purchased and Interchanged Power. 158,272 220,056 230,517 290,843 275,754 Operation and Maintenance.. 236J)71 176,651 198,149 137,683 125,023 Depreciation and Amortization 182,226 123,786 96,773 88339 79,875 Decommissioning. 24,003 22,421 21,649 20,426 20,088 Total Operating Expenses. 600,572 542,914 547,088 537,291 500,740 Operating income.. 113,587 127,369 66,808 107,051 l l6J77 Other Income 45,912 31,027 39,414 52,409 50,815 Income Before Interest Charges. 159,499 158,396 1C0,222 159,460 167,192 Interest Charges, 159,499 148,329 140,711 136,463 140,193 Net income (Loss). $ 5 10.067 5 (34,489) 5 22,997 5 26,999 Funds Available for Resenue Bond Debt Service, 5 314,473 5 300,237 5 264,950 5 269,451 5 267,126 Revenue Bond Debt Service, $ 185,138 5 159,611 5 156,137 5 159,342 $ 152,082 Revenue Bond Debt Service Cowrage Ratio. 1.70 1.88 1.70 1,69 1.76 Total All Bonds Repaid. 5 91,735 5 37J60 5 34,563 5 42,940 5 28,652 Electnc Utihty Plant-Net, $ 1,744,586 ' 5 1,653,975 5 1,511,145 S I,465.534 5 1J20,270 Capitalization Long-term Debt. $ 2,395,729 $ 2,403,410 5 L374,162 5 2,085,773 $ 2,110,555 Customers' Equity. 5 219,652 5 217,235 5 215,720 5 225,54% $ 214.786 i Financialinformation is consolidated (except the debt service informstiont ii Prior to the net deferral / transfer of revenues to/from the Rate Stabilization fund. ,. v {l SMUD 1997 ANNUAL REPORT

FIN ANCIAL STATEMENTS 4 FINANCIAL CONTENTS REPORT OF INDEPENDENT ACCOUNTANTS Repoit of Independent l Public Accountants 17 Italance Sheets 18 To the Board of Directors of Statements of income 20 Statements of in our opinion, the accompanying consolidated balance sheets and the related consolidated Cash Flows 21 statements of income and of cash flows present fairly, in all material respects, the financial Notes to position of Sacramento Municipal Utility I)istrict (the I)istrict) and its component units at Financial Statements 22 December 31,1997 and 1996, and the results of their operation.s and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the 1)istrict's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of thoe statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. A.u.e

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CONSOLIDATED BALANCE SHEETS ASSETS December 31, (th:usands ofdollars) l991 1996 ELECTRIC UTILITY PLANT Plant in service, at original cost. $ 2,226,975 $ 1,810,462 1.ess - accumulated depreciation. (619,488) (542,475) Plant in service - net. 1,607c487 1,267,987 Construction work in progress. 134,722 383,695 Investment in joint powers agencies. 2,377 2.293 lbtal electric utility plant - net. 1,744,586 1,653,975 RESTRICTED, DESIGNATED ANDTRUST FUNDS Revenue bond reserve, debt sersice and construction funds. 306,307 367,174 Nuclear decommissioning trust fund. 125,037 118,497 Designated for rate stabilization fund. 134,487 155,523 Designated for deferred compensation benefits, 47,269 40,359 Designated for CCPA No. I 12,104 12,542 Securities tending collateral. 76,120 1. css - current portion. (215,433) (168,148) lbtal restricted, designated and trust funds. 485,891 525,947 CURRENTASSETS Cash and investments: Unrestricted. 220,909 117,318 Restricted, designated and trust funds, 215,433 168,148 Receivables - net: Customer revenues and other. 99,364 94,118 C<mservatian loans due within one year, 10,347 11,397 Accrued interest. 12,699 6.939 Regulatory costs to be recovered within one year. 140,487 85,177 Materials and supplies, at average cost. 19,904 19,297 Pr. payments. 13,946 16,776 Total current assets. 733,089 519,170 NONCURRENT ASSETS AND DEFERRED CHARGES Regulatory costs for future recovery 627,809 773,161 Advance capacity payments. 88,081 96,170 Unamortized debt issuance costs. 34,440 35,383 Conservation loans - net 71,323 76,721 Preliminary project studies and other. 8,685 11,366 lbtal noncurrent assets and deferred charges. 830,338 992,801 Total assets. $3,793,904 $ 3,691,893 The accompanying notes are an integral part of these financial statemen's. p, !!8l sMUD 19 9 7 A N N U A L REPORT

CONSOLIDATED BALANCE SHEETS t l CAPITALIZATION AND LIABILITIES December 31, (thou< ands ofdollars) l997 l996 CAPITALIZATION Customers' equity: Balance, beginning of year, $ 213,360 $ 203,293 Net income for the year. 10,067 Unrealized holding gins on investments. 6,292 3.875 Total customers' equity. 219,652 217,235 I.ong-term debl. 2,395,729 2,403,410 Total capitalization. 2,615,381 2,620,645 CURRENT LIABILITIES AND DEFERRED CREDITS Commercial paper notes.. 175,300 193,121 Accounts payable. 60,771 44,761 Payable for power purchases. 12,556 18,263 I ong-term debt due within one year. I17,803 64,335 Decommissioning accrual 32,473 30,141 Accrued interest. 50,510 47,825 Customcr deposits. 9,162 8,707 Accrued salaries and compensated absences. 19,570 17,234 Regulatory deferrals to be recognized within one year. 4.531 Securities lending collateral. 76,120 Other. 3,471 3,015 Total current liabilities and deferred credits. 557,736 433,933 NONCURRENT LIABILITIES AND DEFERRED CREDITS Decommissioning accrual 403,638 401,091 Deferred compensation benefits. 47,269 40,359 Enrichment facility decommissioning assessment. 8,169 8,990 Regulatory deferrals for future revenue recognition. 134,487 155,523 Other. 27,224 31,332 Total noncurrent liabilities and deferred credits, 620,787 637,315 Total liabilities. 1,178,523 1,071,248 COMMITMENTS AND CONTINGENCIES (Notes 15 and 16). Total capitalization and liabilities. $ 3,793,904 $ 3,691,893 The accompanying notes are an integral part of these financial statements. SMUD 4 997 ANNU AL REPORT Il9'

' CONSOLIDATED STATEMENTS OF INCOME ' l December 31, (thousands ofdollars) 1997 l996 OPERATING RrVENUES Residential. $ 319,260 $ 319,604 Commercial and industrial. 365,832 360,938 Street lighting and other. 13,662 8,844 Rate stabilization fund transfers. 21,036 (19,103) Test power revenue. (5,631) Total operating revenues. 714,159 670,283 OPERATING EXPENSES Operations. Purchsed power. 158,272 220,056 Production. 52,284 37,257 Transmission and distribution. 31,235 30,020 Administrative, general and customer. 93,145 75,437 Public good. 22,894 Maintenance. 36,513 33,937 Depreciation. 87,000 67,471 Decommissioning. 24,003 22,421 Amortization of regulatory de ferrals-plant and other, 64,523 33,624 Amortization of regulatory deferrals-energy efficiency. 30,703 22,691 Total operating expenses. 600,572 542,914 Operating income, 113,587 127,369 OTHER INCOME Interest income and other. 41,113 16,858 PERS surplus asset recognition. 4,799 14,169 Total other income. 45,912 31,027 Income before interest charges, 159,499 158,396 INTEREST CHARGES Interest on debt. 161,504 151,870 Allowance for borrowed funds used during construction. (2,005) (3,541) Totalinterest charges. 159,499 148,329 NET INCOME 10,067 The accompanying notes are an integral part of these financial statements. I my .20 SMUD 19 9 7 A N N U A L REPORT

CONSOLIDATED STATF.MENTS OF CASH FLOW December 31, (thousands ofdollars) I991 l996 CASH FLOWS FROM OPERATING ACTIVITIES Operating income. $ 113,587 $ 127,369 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation. 87,000 67,471 Amortization of regulatory assets.. I19,229 78.736 Amortization of advance capacity.... 8,089 17,586 Energy bank repayments.. (545) (8,985) Rate stabilization fund. (21,036)- 19,103 Changes in operating assets and liabilities: Accounts receivable. -n202 (827) Accounts payable and other accruals. 13,584 (19,704) Other. (8,229) 12.242 Net cash provided by operating activities 312,881 292.991 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments. (202.993): (232,223) Proceeds from investments. 140,751 155,501 Securities lending collateral received. 76,120 -0 Interest income on investments... 49,365 58,192 Net cash provided by/(used in) investing activities. 63,243 (18.530) CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES Construction expenditures... . (193,614) (229,992) Energy efficiency program expenditures.... (5,704) (29.179) Net proceeds from bond issues.. 369,325 83,584 Repayment and refunding of bonds.... (334,095) (38.763) Interest en long-term debt.... (142,042) (147.011) Interest on commercial paper.. (4,117) (4,333) Other. 2,862 6.931 Net cash used in capital financing act;vities. (307,185) (358.763) CASH FLOWS FROM NONCAPITAL FINANCING ACT!YlTIES Repayments of commercial paper. (19,821).. Interest paid on commercial paper. (2,957) (2,611) Net cash used in noncapital financing activities. (22,778)- (2.611) Net increase /(decrease) in cash and cash equivalents. .46,161 (86,913) Cash and cash equivalents at the beginning of the year. 349,622 436.535 i Cash and cash equivalents at the end of the year. $ 39),783 $ 349.622 I The accompanying notes are an integral part of these financial statements. 4 r, SMUD 19 9 7 A N N U A L R E P ORT *2t

,MTES TO CCN5Q DATED FINANCIAL '5TATEMENTS, U i l Th* a*"'' "* Porting Entity. As required by generally Note 1. Organization accepted accounting principles, these consolidated financial Organization and Exemption from income and statements indude the District and its component units. PropertyTaxes.The Sacram:nto Municipal Utihty District Although the component units are legally separate from the (District) was formed and operates under the State of District, they are blended into and reported as if they were California Municipal Utility District Act (Act).The Act confers part of the District because of the extent of their operational ugun the District the rights and powers to fix rates and charges or financial relationships with the District. All significant for commodities or services furnished, to incur indebtedness inter-component transactions have been climinated and issue bonds or other obligations and, under certain in consolidation. circumstances, to levy and collect ad valorem property taxes. Cornponent Units. The component units include the The District's power to levy property taxes is restricted by ia Central Valley Financing Authority (CVFA), the Sacramento the Californ. Constitution, Article Xll! A,which places Cogeneration Authority (SCA), and the Sacramento Power limits on the taxing power of all Caliform.a public agencies. Authority (SPA). The primary purpose of the component The District is exempt from payment of federal and state units is to finance, construct, own and operate electric utility income taxes and real and personal property taxes. plants that will supply power to the District.The Gstrict's Board of Directors (floard) comprise the commissions that Note 2. Sunnnary of ,ev,,n th,,, spec,iv, component unit.s ope,ations. Sepa,aic Significant Accounting Policies componeni unit financial statements may be obtainea from the District's Accounting Department. Method of Accounting.The accounting records of the District are maintained in accordance with generally accepted Electric Utility Plant. The District generally provides for i accounting principles for proprietary funds as prescribed depreciation on the historical cost of Plant in Service on a by the Governmental Accounting Standards Board (GASB) straight-line, service-life basis, in May 1997, the District I L and, where not in conflict with GASB pronouncements, accelerated depreciation on geothermal, photovoltaic and l accounting principles prescribed by the Financial Accounting certain other generation facilities so that they will be fully I Standards Board. These financial statements were prepared depreciated by December 31,2001. This change in accounting in conformity with generally accepted accounting principles estimate resulted in depreciation expense being $11.8 million and contain management's best estimates when no better more in 1997 then it woukl have been if the prior service information was available. The District's accounting records lives had been used. All depreciation, including depreciation generally follow the Uniform System of Accounts for Public resulting from this change in service lives, will be fully Utilities and Eicensees prescribed by the Federal Energy recovered in rates. The average annual composite depreciation Regulatory Commission (FERC). rates for the years ended December 31,1997 and 1996 a were 4.55 percent and 3.73 percent, respectively. The cost of replacement property units are capitalized. Repair and maintenance costs are charged to expense. When the District retires portions of its Electric Utility lant, retirements are p recorded agaimt 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. 33 sMUD lt9eANNUAL R E P o R'r

MOTES TO CONSOLIDATED FINAMCIAL STATEMENTS Investment in joint Powers Agencies. Imestments in sold. Premiums and discounts on investments are amortized joint powers agencies in which the District does not have a using the effective interest method over the term of the controlling interest are accounted for under the equity respective securities. method of accounting. Prior to plant closure (see Note 9), Securities LendingTransactions. 5 tate statutes and board the District recorded its share of Central California Power of director's policies permit the District to lend its securities Agency No.1 (CCPA No.1) operations and maintenance a broker-dealers and other entities for collateral with a expense, inclusive of amortization, depreciation and decom-simultaneous agreement to return the collateral for the same missioning, as purchased power expense. Subsequent to securities in the future. District policy requires cash collateral plant closure, the District records its share of closure and of 102 percent of the market value of the loaned securities. decommissionmg costs as a reduction to the decommissioning Both the investments purchased with the wilateral received liability.The District records its share of the Transmission and the related liability to repay the collateral are reported Agency of Northern California (TANC) debt service cst' n the balance sheet. and operations and maintenance expense, inclusive of depreciation, as wheeling expenses which are included in Allowance for Doubtful Accounts. The Dis:rict recognizes Transmission and Distribution Operations costs. an estimate of uncollectible accounts for its receivables related to electric service and conses wouo loans based upon its Nuclear DecommissioningTrust Fund. Contributions are historical experience with collections. At December 31,1997 expensed when contributed. Interest earnings on the fund and 1996, the District rewrded an Allowance for Doubtful assets are recorded as interest income and are accumulated in Accounts of 52.8 mi' lion and $2.6 million, respectively, the fund. Expenditures for demmmissioning activities are related to its receivables from its customers for electric and recorded as reductions to the decommissioning liability, mher services. At December 31,1997 and 1996, the District Changes in decommissioning liability estimates, arising from also recorded an Allowance for Doubtful Accounts for its new studies or annual intlation adjustments, are recorded receivables related to energy ef6ciency wnsenation loans directly to the liability with a corresponding adiustment to of 56.1 million and 55.5 million, respectively. the related regulatory deferral. The District expects to review its annual contribution rate in 1998 to ensure it will remain Unbilled Revenues. The District records an estimate for fully funded (with the exccption of site restoration and fuel unbilled revenues earned from the dates the customers were last billed to the end of the month. The accrual at December storage) in 2008, with the commencement of the final decommissioning process. 31,1997 and 1996, for unbilled revenues was $36.8 million and 539.1 million, respectively. Cash and Cash Equivalents. Cash equivalents include all Compensated Absences. The !?istrict accrues vacation debt instruments purchased with an original maturity of. leave and wmpensatory time earned as liabilities when the three months or less and allinvestments in the local Agency a Investment I und (LAll), Vista i und and various monev benefits are earned by the employees. The District does not market mutual funds. rewrd sick leave or other leave as a liability until such time as it is taken by the employee, since there are no cash payments Investments. All of the District's im estments have been for sick leave or other leave made when employees terminate classified as available-for. sale and are reported at fair valuc* or retire. The total estimated liability for vacation and other Unrealized holding gains and losses are reportcJ as a separate mmpensated absences at Dnember 31,1997 and 1996, was part of Customers' l'quity. Reali/cd gains and losses are rec- $16.5 million and $15.2 million, respectively. ognized in the period in which the individual securities are q sMUD 19 9 7 A N N u A L REPORT { 23 -

N3TE'S T5 CON 55LinATE'D FIN'ANCI AL 5'TATEMENTS Regulatory Deferrals. The Board has the authority to insurance Programs. The District and its component units establish the level of rates charged for all District services. record liabilities for unpaid claims at their present value Certain expenses and credits, normally reflected in the when they are probable of occurrence and the amount can Consolidated Statements of Income as incurred, are recog-be rea sonably estimated. The District records a liability for nized when induded in rates and rectwered from,or refunded unpi.d claims associated with general and auto liability, to customers. In May 1997, the District began an accelerated based upon an estimate derived by the District's claims recovery of certain regulatory deferrals so that they will adminisaator, which comprises the present value of the claims be fully amortized by December 31,2001. This change in outstanding, and includes an amount for claims incurred recovery period resulted in the amortization of regulatory but not reported based upon the District's experience,less assets being $34.0 million more than it would have been if the amount of claims and settlements paid. The liability for the prior recmcry period method had been used. workers' compensation is based on the District's historical experience foi outstanding and incurred but not reported Public Good. Public Good expenses are comprised of the w rkers' compensation claims. District's expenditures for energy efficiency programs and investments in renewable energy resources and technologies, Grants. The District receives monies from federally assisted 1 which until May 1997 were capitalized. grant programs for its advanced and renewable technologies and electric vehicle programs. The District also receives Gains / Losses on Bond Refundings. Gains and losses monies from federally assisted grant programs as partial resulting from bond refundings are included in Long-Term reimbursements for costs it has incurred as a result of storm Debt and amortized as a part of Interest Expense, over the shorter of the life of the refunded debt or the new debt using damages. These programs may be subject to financial and c mpliance audits, such as the Single Audit, pursuant to reg-the bonds outstanding method. ulatory requirements. The amount,if any, of expenditures Gains / Losses on Bond Defeasance. Gains and losses which may be disallowed by the granting agencies cannot be resulting from bond defeasance which were not fm' anced determined at this time,ahhough the District expects such with the issuance of new debt are reported as part of amounts to be immaterial. The District records expenditure-Interest income and Other in the statement of income. i driven grants as a reduction in Construction Work In Progress Allowance for Funds Used During Construction.The when the funds are received, pursuant to I ERC guidelines. For District capitalizes, as an additional cost of Construction the years ended December 31,1997 and 1996, the District Work in Progress, an allowance for funds used during con-received expenditure-driven grants of $1.6 million and $2.8 struction (AFUDC), which represents the cost of borrowed million, respectively, and pass-through grants of $0.8 million funds used for such purposes.The amount capitalized is and $0.5 million, respectively. determined by a formula prescribed by FERC.The total Reclassifications. Certain amounts in the 1996 consolidated 1 AFUDC for the years ended December 31,1997 and 1996, financial statements have been reclassified in order to conform was approximately 6.7 percent and 6.8 percent, respectively, th the 1997 presentation. of eligible Construction Work in Progress. sMUD 19 9 7 AN N u AL R E PO RT t:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 Note 3. Deregulation of ""* hs" *' ' 'c"' "' " r '" " r="' "" # """""; expensing public good charges in the period incurred; offering the Utih.t(v Industr/....~.. v customers the ability to support products and programs in September 1996, the Governor tagned Assembly llill 1890 that improve the environment; accelerating the repayment ( All 1890), which provides for a broad-based restructuring of outstanding debt to minimize debt service payments by of California's electric utility industry. In this new market, the end of the transition period; instituting a competitive generation will be competitive, but transmission and distri-transition charge for all customers; reducing discretionary bution will continue to be regulated. All 1890 mandated expenditures, and allowing an early phase-in of direct access, allinvestor owned utilities to allow direct access to their for up to 100 MW of customer load. As of December 31, customers beginning in 1998, with all customers participating 1997,36 MW of customer load had switched to alternative by 2003. The bill also called for the creation of a Power providers for their energy. Exchange, responsible for managing the dispatch of Investor-Proposed Sale of Feieral Power Marketing Owned Utility (IOU) generation, and an Independent System Administrations. The feo ral government is attempting to Operator (ISO) responsible for managing the transmission refbrm some of the federal power marketing administrations, grid in California. Additionally,it authorized the recovery includ;ng the Western Area Power Admini.stration (Western), of certain " transition costs" which would not be recovered to meet the changes of the electricity industry as it moves to through market-based revenues, a public good charge to fund an open, competitive market. The District has a contractual research and development, low-income assistance and energy entitlement to 462 megawatts (MWJ of total long-term, firm ciliciency progiams. Ahhough AB 1890 applies primarily purchased power from Western, which is approximately 20 to IOUs,it strongly encourages customer owned utilities percent of the District's power resource portfolio. Under the to participate in the competitive framework and contains District's contract, as amended, the District is entitled to certain other provisions relating to their participation. receive power at cost-based rates through the year 2014. Customer-owned utilities selling electricity to the retail Although the District has an excellent claim to preserving customers of another utility must permit direct access to existing contractual rights, rates could increase as a result of their retail customers. We pvernment restructuring or selling Western. The District Direct Access. In February 1997, the Board adopted the could incur additional costs of between $15.0 million and "Corapetitive liusiness Strategy", which is designed to balante $20.0 million annually if the District had to replace Western the competing goals of competitive ratet and providing power with new power sources. The possible restructuring municipal services that District customers value. The business of Western will be monitored dosely by the District to ensure strategy was defined by a set of policies that were adopted its concerns are considered and its contract rights are pre-by the Board. The policies indude taking advantage oflow served. The District is unable to predict the final outcome cost market surpluses of electric power; maintaining the and impact on its financial position or results of operations competitiveness of District-owned generation; freering rates from the restructuring of power marketing administrations. at current levels through the transition perimi; funding public m SMUD 19 9 7 A N N U A L REPORT I2$I

! NdTES TO CCESOI.lDATED FINANCIAL. S.TATEMENTS ~ Potent lal E#ects of Restructuring. While the District Enrichment Facility Decommissioning Assessment. is actively participating in the restructuring effort of the The District has established a regulatory asset for the decon-California utility industry to protect its interests,it has tamination and decommissioning of federal nuclear fuel tentatively chosen not to participate in the 150 at this time, enrichment facilities as a result of the Energy Policy Act of The effects of electric utility industry restructuring on the 1992, which is being amortized bawd on cash payments made District and other utilities are uncertain. and collected in rates through the year 2008. TANC Operations Costs. The District defers as a regulatory asset, the difference between its cash payments made to TANC Note 4. Regulatory Items and its share of TANC's costs of operations.This regulatory liased on regulatory actions taken by the 11oard, the District asset will be amortized when the District'. cash payments e has recorded the following regulatory assets which will be made to TANC exceed the District's share of TANC's costs included in the rate-making process and recovered in of operations. future periods. Impairment of Investment in CCPA No. I Project. The Defened Nuclear Plant Costs. The District has established District has established a regulatory asset for the unrecmced a regulatory asset for the unrecovered debt-financed portion debt-financed portion of its investment in CCPA No. I and of abandoned nuclear plant costs (see Note 11) for rate-making the related impairment of CCPA No. I's power plant and steam purposes, which is being amortized and collected in rates field. ~1.he District is amortizing the regulatory asset through through the year 2001. Decomminiorsing. The District has established a regulatory ,g , gg g g; asset fcr the unfunded portion of the decommissioning lia-presented below: bility which is to be collected in rates and through interest ~ earnings on the Decommissioning Trust Fund through the December 31, year 2008. The site restoration and fuel storage liabilities are (thousands ofdollars) 1997-1996 to be collected in rates commencing in the year 2009. Regulatory Costs for I utuie Recovery: Plant and other Energy EWiciency investmer.t. The District deferred erre a car plant costs. $. 24 W 1 5 20.627 as a regulatory aswt certain energy efficiency investment Enrichment facility expenditures incurred before May 1,1997.Through that decommissioning assessment. 11,1% : 11,874 date, these energy efficiency investments wece amortized and D NC operations costs, 7,3s4 6,668 collected in rates over the expected benefit period of impairmenovestment in CCPA No. I pis.. -t. 65,986 79,181 the investment, up to a maximum period of fifteen years. Tota! plant and other. 327,797-391.350 Effective May 1,1997 the maximum amortization period Decommissioning. 296s33 296,694 was reduced to 56 months to coincide with the District's Energy efficiency investment.. 144,146 Po,29J Competitive Business Strategy. Totai regulatory costs. 768,2 %. us 338 Less: regulatory costs to be recovered within one year. (140,487) (85,177) Total regulatory costs for future recovery. $ ~ 627,809 5 773,161 Based on regulatory actions taken by the lioard, the District has recorded the following regulatory liabilities which were deferred as part of the rate-making process,and will be recognized as revenues in future periods. sMUD 19 97 A N N U A L R E PO RY

NOTES'TO ' CONSOLIDATED Fl'N ANCI AL STATEMENTS - Rate Stabilization Fund. The District defers revenues and Note 5. Commercial designates them to the Rate Stabilization Funs v.ich is used to defer the need for future rate increases. The funds in this Paper Notes account are recognized as revenues and the cash unrestricted As of December 31,1997 and 1996, the total principal amount upon direction from the Ibard. In 1997 the District recognized outstanding of the District's commercial paper notes (Notes) $21.0 million in revenues that had been deferred into the Rate was $175.3 million and $195.1 million, respectively. The Stabilization Fund in prior years. In 1996 the lloard deferred effective interest rate for the Notes outstanding during the $19.1 million of revenues to the Rate Stabilization Fund. years ended December 31,1997 and 1996, was approximate. California Public Employees' Retirement System (PERS) ly 3.83 percent and 3.66 percent, respectively, and the aver-Surplus Account Deferral.The District is a member of age term was 67 days and 71 dayz, respectively. PERS, and as such, contributes to the funds based upon a The District's authority to issue Notes is provided under rate calculated by PERS to meet current and future retirement two separate articles of the Act.To date, the District has the obligations on behalf of the District's employees and retirees short-term authority to issue $275.0 million of Notes. At (see Note 12). Due to changes in actuarial assumptions and December 31,1997, $59.6 million of Notes outstanding were higher earnings on PERS assets, the District had a PERS issued under the short term authority and $115.7 million surplus asset account balance as of December 31,1995. In of Notes outstanding were issued under the bond authority, accordance with FERS gmlicy,this surplus was utilized by the The District maintains a letter of credit in the amount of District to offset current employer and employee contributions $179.6 million to support the sale of these outstanding through June 30,1997. For the years ending December 31, Notes. There has not been a term advante under the letter 1997 and 1996, the District offset $4.8 million and $14.2 of credit agreement. million of retirement expenses, respectively* Interest Rate Swap Agreement.The District has entered The District's total regulatory deferrals for future revenue into a variable to fixed rate swap agreement with Smith recognition are presented below: 11arney Capital Services, Inc., to hedge interest risk associated with the issuance of $28.9 million in Notes. The Notes were Decembu 31' issued to refund Series R and S Electric Revenue bonds due (ilmusands efdollars) 1997 1996 in 1999,2000 and 2001. The initial notional amount of the Regulatory Deferrals For Future swap was $30.0.million, and will step down in conjunction Revenue Recognition: with retirement of the commercial paper, to $20.0 million Rate stabilization fund. $ - 134,487 $ 155,523 PERS surplus account deferral. . 4.531 on February 1,1999, to $10.0 million on February 1,2000, Te i regulatory liabilities. 134,487 160,054 and to $0 on February 1,2001. Less: regulatory credits to be (4.531) recognized within one year. Total regulatory deferrals for future revenue recognition. $ ' - 134,487 5 155,523 sMUD 19 9 7 A N N U A L R E P O R T

u-.... L NSTES TO, CONSOLIDATED FINANCIAL STATEMENTS Note 6. Long-Term Debt The District's total long-term debt is presented below: December 31, Ithousands ofdollars) l997 l996 Electric Revenue Bonds. Electric Revenue Bonds. 3.647.6% 1998-2024. $ 2,142,830 I $ 2.091,675 Subordinated Electrit Revenue Bonds. A.0%2010. 24,573 24.575 Total electric revenue bonds. 2,167,405 2.116.250 CVTA Cogeneration Project Revenue ikinds,5.046.2% 1998-2020. 142,700 ' 142,700 CVfA Note Payable, i1% 1998-2025. 4,961 _ 4.988 SCA Cogeneration Project Revenue Bonds,5.4%7.0% 1998-2021. 163,600 163.600 SPA Cogeneration Project Revenue Bonds,6.046.5% 1999-2022. 152,000 152,800 South Sutter Water District,1990 llydroelectric Revenue Bonds,6.546.85% 1998 2002.. . 8,410 9,790 Georgetown Divide Purchase Agreement.3.75% 1998-2000. 270l 354 US Windpower Transmission Corporation Promissory Note,10.0%. 1,100 Grace Industries Promissory Notes,3.9%. 180 Total long-term debt outstanding. 2,640,146 ' 2.591,762 Ikind premiums /(discounts)-net.. -(25,161) (31,148) Gains /(losses) on bond refundinp-net. (101,453) (92,869) Subtotal. -2,513,532: 2.467,745 Less amount due within one year. J (187,803) (64.335) Totallong-term debt-noncurrent portion. $ 2,395,7'9 $ 2,403.410 l The annual debt service payments for 1998 through 2002 proceeds plus an additional 50.5 million contribution by the I are as follows: District and $20.4 million of Electric Revenue Ikind Reserve Fund and debt service monies applicable to the refunded I l (thousands ofdollars) Principal b.terest Total previously issued bonds were used to fund the reserve and l l 1998. $ 117,803 $ 150.921 5 268,724 1999. 78,597 146,309 224,906 million) and to purchase United States (U.S.) government 2000..... 49,501 140.869 240,370 2001..., 104,128 136,174 240,302 securities ($245.3 million). The securities and cash were

2002, 89,429 129,289 218dl8 deposited in an irrevocable trust with an escrow agent to Totals.

$ 489.458 $ 703.562 s t.193.02t, nrovide im." mnaining future debt service payments on the refunded bonds. As a result,'.. refunded bonds have The principal portion oflong-term debt outranding been legally defeased, and the liability for these bonds has thereafter,is $2.1 billion' been removed from inng-Term Debt.This refunding resulted 1997 Electric Revenue Bonds. On July 2,19 '7, the in the recognition of a deferred accounting loss of $22.5 District issued $131.0 million of Electric Rever ac lionds, million, which is being amortized over the life of the refunding 1997 - Series K. issue. The refunding reduced future aggregate debt service On July 22,1997, the District also issued $243.5 million of payments by $39.7 million and resulted in an economic pain Electric Revenue Refunding Ilonds,1997 - Series L to refund of $12.2 million, the difference between the present values $231.6 million of previoudy issued Revenue ik>nds.The net of the old and new debt service payments. SMUD ' 9 9 7 A N N U A L. R F P O R T

NOTES TO CONSOLIDATED FIN ANCI AL STATEMEMTS Defeasance of Debt. In October 1997, the Di3trict defcased the prise that the Distric would pay would be the par value a portion ofits 1992 Series C Electric Revenue ikmds having of the bonds and the swap is terminated with no cost to l a principal amount of $30.0 million with an interest rate the District. The total fees received by the District fmm the of 5.75 percent by depositing U.S. Treasury securities in an interest rate swap and the sale of the put will be equal to the irrevocable trust with an escrow agent to provide for all coupon payments on Series K, plus 8 basis points (.08 percent). remaining future debt service payments on the defeased The combination of these financial transactions brings the bonds. Securities for the trust were purchased at a cost of District's net cost of borrowing to the PSA index less 8 basis $29.8 million with unrestricted cash. As a result, the bonds points. The term of both the swap and the put is equal to have been legally defcased, and the liability for those bonds the maturity of the Series K bonds. has been removed from Long-Term Debt.The defeasance South SutterWater District Hydroelectric Revenue resulted in an accounting gain under generally accepted Bonds. The District is obligated to purchase power from accounting principles of 50.1 million for the year ended the South Sutter Water District project under a contract that December 31,1997.The defcasance reduced the District's has the effect of transferring subs' entially all of the economic aggregate debt. service payments by 549.0 million over the benefits of the project to the District and making the District next 11 years

• liable for all debt service on bonds issued by the South Sutter Interest Rate Swap Agreement. In July 1997, the District Water District to finance the construction cost of the project.

entered into a fixed to variable interest rate swap agreement The District is obligated for annual debt service pavments with Goldman Sachs Capital Markets, LP. for a total noto nal of approximately $2.0 million without regard to the level of amount of $131.0 million, which is equivalent to the principal operation of the project. Payments for debt service under amount of the 1997 Series K bonds. Under this swap, the this agreement are reported as purchased power expense. l)istrict will pay a variable rate eq dvalent to the pSA Municipal Compor.ent Unit Bonds. The component units of the Index (PSA Index), published weeldy by the Public Securitics District have cach issued bonds to finance the development, Association. The District will receive a series of payments engineering and construction of the respective cogeneration for each of the Series K maturities. In connection with the projects. These bonds are non-recourse to the District. swap, the District sold a put option to Goldman, Sachs & Principal and interest associated with these bonds are paid Co. (Goldman), also in the amount of $131.0 million. This solely from the cornponent units' resenues and receipts put option gives Goldman the right to sell to the District the derived in connection with the operation of the cogeneration Series K bonds,or a portfolio of"AAA" rated Municipal proiccts. The ability of the component units to servicc the debt bonds sufficient to defcase the series K bonds, at some point is dependent upon the successful mmpletion and operation in the future. In the event that Goldman exercises the right of the respective cogeneration projects (see Note 10). to sell the Series K for other equivalent) boads to the District, y3 sMUD 19 9 7 A N N U A L REPORT 29

NOTES TQ CON 5':;LINATE3 FINANCIAL. STATEMENTS Note 7. Cash, Investments and Securities Lending A summary of the District's cash, investments and securities lending is presented below: December 31, (thousands ofdollars) 1997 l996 Cash and Cash Equivalents: Cash... $ 51,921 5 3;.347 Vista fund. ~ 22,442 21,508 Iocal agency investment fund. 100,615 103,156 Repurchase Agreements... 76,120.. U.S. Government Securities.. 6,867... 16,887 - 33,472 Commercial paper. Certificates of deposit. 26,500. lianker's Acceptance. 9,999. Money market mutual funds.. 47,269 40,582 Guaranteed investment contracts. 37,163 116,557 Total cash and cash equivalents. 395,783 349.622 Investments - Category 1 (Held by the District's agent in the District's name.): U.S. government securities. 248,517 354,135 Corporate securities.. 59,990 34,984 Commercial paper. 26,972 24,398 Certificates of deposit. I16,959 38,500 llankers' acceptances. 9,774 Total Category 1 investments. 452,438 461.791 Investments - Not categorized Investments held by broker-dealers / agents under securities loans with cash collateral: U.S. government securities. 74,012 Total noncategorized investments. 74,012 Total investments. 526,450 461,791 Total cash, cash equivalents and investments.. $ 922.233 $ 811,413 Total Cash, Cash Equivalents and Investments: Revenue bond reserve, debt service and construction funds: Revenue bond reserve fund. $ 122,859 ' $ 123,628 Debt service fund.. 62,310 52,797 CVFA bond reserve aad construction funds. 27,805 31,825 SCA bond reserve and construction funds. 48,169 55,944 SPA bond reserve and construction funds. 45,164 100,056 Other. 2,924 Total revenue bond reserve, debt service and construction funds. 306,307 367,174 Nuclear decommissioning trust fund.. 125,037 118,497 Designated for rate stabilization fund. 134,487 155,523 Designated for deferred compensation benefits. 47,269 40,359 Securities lending collateral. . 76,120 Designated for CCPA No. l. 12,104 12,542 Unrestricted funds. 220,909 117,318 Total cash cash equivaler i and investments. $ 922.233 $ 811,413 i $ MUD 19 9 7 A N N U A L R E P O R T i

NOTES TO CONSOLIDATED FIN ANCI AL STATEMENTS Cash and investments. Cash deposits are held in institutions These products which are in the form of struttured notes insured by the Federal Deposit Insun,nce Corporation and, as and asset-backed securities, deri e their value from one or required by the District's hond resolutions,in a bank, sanngs more ind;ces or are dependent upon cash flows from receivable and loan association or trust company of the U.S. or national payments. IAIF's (and the District's) exposure to risk (credit, banking association having capital stock, surphu and undivided market or legal) is not currently available. Investments in I AIF earnings segregated of at least $10.0 million. Deposits to the and Vista funds are not insured or collaterals 7ed. Howeser, extent possib;e are invested. In accordance with state laws due to the stringent imestment policies of these funds, man-and the Distrkt's bond resolutions, the District is authorized agement considers the risk ofloss of principal to be remote. to invest in the following types of instruments: obligations Securities Lending Transactions. The District may enter which are unconditionally guaranteed by the U.S. or its into securities lending agreements.up to $75 million, only agencies or instrumentalities; direct and general obligations with counterparties that have senior debt credit rating of the State of California or any kical distri t within the in the "A" category or better by either Standard & Poors State; bankers' acceptances; certificates of deposit; repurchase Corporation or Moody's investors Services, at the time of agreements; reverse repurchase agreements; interest rate swap the agreement. All securities lending transactions during agreements; securities lending agreements, and corporate 1997 were collaterals 7ed in the form of cash at 102 percent r indebtedness, including commercial paper and medium term of the loaned securities value. securities on loan at year-end no'es with a maximum term of five years. Investments in are presented as unclassified in the preceding schedule. At corporate indebtedness must be rated "A 1"or its equivalent December 31,1997, the District had no credit risk exposure for commercial paper, and "A"or equivalent for medium to borrowers because the amounts the District owes the I term notes by a nationally recognized rating agency. The borrowers exceeds the amounts the borrowers owe the component units'lxmd indentures allow investing in various District. The contract with the District's custodial bank other suorities in addition to the ones mentioned earlier. I requires it to indemnify the District if the borrowers fail T he District's custodial agent maintains records showing the to return the securities (and the collateral is inadequate to securities are solely owned by the District, or by one of its replace the securities lent) or fail to pay the Distritt for componcat units, where applicable. The District and its income distributions by the securities' issuer the component units' deposits and investments are imured or securities were on loan. All securities loans un be tcomnated collateralized with securities held by the District or by its on demand by either the District or the borrower, although agent,in the District's name or in the name of one ofits the average term of the loans is one day. Cash collateral is component units, v.here applicable. invested in accordance with District investment policies and I.AIF is a component of the Pooled Money Investment reported in the preceding schedule. Account Portfolio managed by the Treasurer for the State Repurchase Ag eements. The District occasionally enters of California. The District and its component units' total into repurchase agreements. Only one transatiion was entered investment in LAIF at December 31,1997 was $100.6 million. into during 1997 wherem bond proceeds were invested in an The Pooled Money Investment Account Portfolio includes overnight repurchase agreement collateralized at 102 percent approximately 3.9 percent in certain derivative-type products. with U.S. Treasury bills. b d' wuoim auuuac m on

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS '"""""'*'""'"c""h'""""'"""'""~ Note 8. Fair Value of ments and related unrealized holding gains and losses are Financialinstriunents pre,c,wd ua,. The following methods and assumptions were used to December 31,1997 estimate the fair value of each class of financial instruments Unrealized for which it is practicable to estimate the value: Holding Amortved Gains / Investments. The fair values ofinvestments are based upon almuumds of dollars) Cost fair Value (losses) quoted market prices. Investments: US. government ecurit es 5 316.063 5 322,529 5 6,464 Long Term Debt. The fair value of Iong 'lerm Debt (!kmds), Corporate wcurities. 59.908 59.990 82 which includes the short-term portion, was calculated by Certificates of depmit. 116,978 116,959 (19) determining the net present value of ft ture debt service Commercial paper. 27.207 26,972 (235) payments discounted at the liond fluyers' 25-year Revenue Total investments. 5 520,158 5 526.450 5 6.292 Ilond index, which was 5.40 percent at December 31,1997 long-term debt. 5(2,513.532) 512,780,009) and 5.96 percent at Decemhrt 31,1996. A similar fair value interest rate swap I"'"E"" calculation was performed for the component units'11onds except that an amount ranging from 0.33 percent to 0.50 percent was added to the liond lluyers' 25-year Revenue llond December 31,1996 Index to account for the spread at the date of bond issuance in Unrealiicd comparison to the index and the fact that the lionds are non-H"IS"8 Amortized Gains / recourse bonds to the District and have a rating of *l11111." olmusma <>fdellars) Cost Iair Value c lossesi Swap Agreement. The Series K swap and put agreements Imestments: are linked to the underlying Series K bonds, and effectively US+nern ent saurities 5 349,624 5 354.135 5 43H Corporate securities. 35,026 34.984 (42) convert Series K bonds from a fixed to a floatmg mterest Certificates of deposit. 38.5(0 38,500 (3) rate.The fair market values of the swap and put together are 9 y,y equal to the difference between the fair market value and Commercial paper. ?4,847 24.w8 (449) the carrying cost of the Series K bonds. Total investments. 5 457,916 5 461.791 5 3.875 l ong-term debt. S t 2.467,745) 5(2.585,699) e e y-w y !32, sMUD 19 9 7 A N N U A L REPORT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. Investment in Joint '^* C '""' ""'" "s * "' r"'""""""' '" c" h' " sc for ownership of 339 MW of TANC's 1,269 MW transfer 13oWCTS AgenC/CS capability. Additionally, the District has a 46 MW share Central California Power Agency No.1. The District of TANC's 300 MW of firm. bidirectional transmission owns a 50 percent undivided interest in CCPA No.1, a joint over Pacific Gas and Electric Company's (PG&E's) system powers agency, formed for the purpose of participating in between PG&E's Tesla and Midway substations. For years the exploration, development and production of electricity ended December 31,1997 and 1996, the District recorded from geothermal resources. In June 1996, CCPA No. I ceased wheeling costs related to TANC of $9.5 million and $11.5 operations and placed it's power plant and steam field in a million, respectively. lay-up condition pending a possible sale or dismantlement. Summary financial information for TANC as of December Summary financialinformation for CCPA No. I as of 31.1997 and 1996,is presented below: December 31,1997 and 1996,is presented below: December 31, December 3l, (Ilwaumds of Jollars t l997 l996 (tlwuwids ofdollarsJ 1997 1896 Total assets $ 482,797 5 494.158 Total assets. 25,392 5 25.918 listalliabilities. $ 482.301 5 493,742 Totalliabilities. 16,322 5 16,848 Total members' equitv. 496 416 'lotal members' equiry. 9,070 9.070 Tiital liabihties and members' equity $ 482,797 $ 494.158 'liital liabilities and members' equity. $ 25J92 5 25.918 Net income for the year. 17 5 31 Net incomenloss) for the year. $ 5 (964 Transmission Agency of Northern California, The District and fourteen other California municipal utilities are members of the TANC, a joint powers agency. TANC along with nearly all California utilities own and operate the California-Oregon Transmission Project (COTP), a 500 kilovolt transmission line between central California and southern Oregon. The District is obligated to pay approximately 27.1 percent of ) P" 6'l sMUD 19 9 7 A N N U A L REPORT )33 '

'l NdTES TO CCNSOd.lDATED) FINANCI AL S'TATEMENTS Note 10. Cominent Units Note 11. Rancho Seco CVFA Carson ice-Gen Project. L. FA was formed by Nuclear Power Plant a joint powers agreement between the District and the History. Rancho Seco, a 913 MW nuclear power plant, was Sacramento Regional County Sanitation District. CVFA in service in 1974. In lune 1989, voters rejected a constructed the Carson ice-Gen project, a 99 MW natural referendum permitting continued operation of Rancho Seco gas-fired cogeneration facility, which became commercially by the District, and as a result, the Di. strict began the process operable in October 1995 and was financed primarily by of shutting down Rancho Seco and abandoned the plant as CVFA non-recourse revenue bonds.

g SCA Procter & Gamble Project.The Sacramento Decommissioning. The District obtained Nuclear Regulatory Munitipal Utility District Financing Authority (SMUDFA)

Commission (NRC) approval of its decommissioning plan was formed by a joint powers agreement between the District in 1995 and will be subject to continuing regulation by the and the Modesto irrigation District. SCA was formed by the NRC until the decommissioning of Rancho Seco is complete. execution of two separate joint powers agreements between Under the approved decommissioning plan, the District will the District and SMUDFA. SCA constructed the Procter & proceed with the decommissioning of Rancho Seco in two Gamble project,a 117 MW natural gas fired cogeneration phases - a storage phase followed by a decontamination phase. facility,which became commercially operable in March 1997 During the storage phase, the plant will be maintained to and was financed primarily through SCA non-recourse the extent necessary to protect the fuel and other radioactive revenue bonds. materials. At the end of the storage phase in 2008, the plant will SPA Campbell Soup Project. SPA was formed by the exe-be decontaminated by removing all radioactive materials and cution of two separate joint powers agreements between the radioactive plant components to otT-site locations yet to be District and SM UDFA. SPA constructed the Campbell Soup determined by federal and state authorities. Decontamination project, a 159 MW natural gas-fired cogeneration facility, of the plant and its site will be completed when the remaining which became commercially operable in December 1997 detectable radioactivity has been reduced below the pre-and was financed primarily through SPA non-recourse approved release criteria, at which time the Rancho Seco revenue bonds. plant will be released from regulation by the NRC. The nuclear fucl will be stored in dry canisters at a new on-ste independent spent fuels storage facility (ISFSI) untilit is removed by the U.S. Department of Energy (DOE) at a date yet to be determined by DOE. The ISFSI will remain under the regulation of NRC until such time as the nuclear fuel is removed by the DOE and the ISFSI is decommissioned. sMUD 19 9 7 A N N U A L R E PO RT

3

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Rancho Seco is one of the first large commercial nuclear Financial Effects in November 1989, the lloard approved power plants to be removed from service. Due to the sub-the recovery of $661.9 million of abandoned Rancho Seco stantial technical, regulatory and legal issues being faced in costs through future rates to be charged to customers over a connection with the decommissioning, the District cannot period of seventeen years. The lloard's rate action addressed predict with certainty how long various decommissioning $499.2 million of Rancho Seco asuts that had been written-off actions will take r,or the eventual cost of decommissioning. and $162.7 million of unfunded decommissioning liability. These financial statements reflect the District's current esti-Several studies and updates of the cost of decommissioning mate of its obligation for the cost of decommissioning. The have been conducted since 1989, which hase resulted in District undertook a reevaluation of the decommissioning adjustments to the decommissioning liability in addition to approach for Rancho Seco and determined that cost savings adjustments for inflation. The 1997 study included the effects j could be realized by accelerating the schedule and are currently of the dry fuel storage. As a esult, the District increased the I commencing some decommissioning tasks instead of in decommissioning liability and the related regulatory asset by 2008 as originally planned. The lloard approved this incre- $23.6 million which relates primarily to recognition of fuel mental decommissioning project in January 1997. The storage decommissioning cost to be incurred after completion District will pursue incremental decommissioning as long of primary decommissioning activities. At December 31, as it is economical to do so. 1997, the decommiss;oning liability totaled $422.0 million, In 1996, the District became aware of problems with a vendor's which included $443 million for minimum site restoration efforts to license its dry fuel storage system with the NRC. and $21.4 million for fuel storage. The L)istrict has been The problems resulted in the vendor terminating fabrication funding the decommissioning liability at a rate of $16.5 million activities on the dry fuel storage system in January 1997 and per year. This amount will be increased to $17.5 million per 1 filing for bankruptcy protection. In October 1997, the vendor year in 1998. I sold its nuclear fuel business to TransNuclear. Negotiations for a contract with the new owner are expected to begin in the first quarter of 1998; meanwhile, the new owner is l l actively pursuing resolution of the licensing problems and I other NRC issues. Until a new timetable for the dry fuel storage system is developed, the impact on Ransho Seco's decommissioning schedule cannot be accurately estimated. 110 wever, staff believes spent fuel will be in dry storage by the end of 1999. prv;g SMUD 19 9 7 A N N U A L R E P O R T l35' L -_-_---_

N",TES TO CONSOLID'ATED Fl'NANCIAL STATEMENTS 1

l Note 12. Pension Plans The pension benefit obligation was computed as part of an actuarial valuation performed as of June 30,1996 (the most Defined Benefit Pension Plan.The District contributes t recent actuarial valuation). The total pension benefit obligation PERS,an agent multiple-employer public retirement system plicable to the District is presented below: that arts as a common investment and administrative agent for participating public entities within the State of California. _ June 30,1996 The District's payroll for employees covered by PERS for the (thousands ofdollas) years ended December 31,1997 and 1996 was $124.2 million Pension benefit obligation: and $125.7 million, respectively. The District's total payroll Retirees and beneficiaries currently receiving benefits and terminated employees not yet receiving benefits, 5 213,357 for the same period was $t32.0 million and $132.2 million, Current employees: respectively-Accumulated employee contributions induding allocated investment earnings. 124,865 All permanent District employees working more than twenty Employer financed vested. 188,281 hours per week are eligible to participate in PERS. Ilenefits Employer financed.non-vested. 3.148 vest after five years of service. Upon retirement, participants Total pension benefit obligation. 529.651 are entitled to an annual retirement benefit, payable monthly 1.ess Net assets available for benefits - at cost (market value = $6973 mimon). M9,33D for life,in an amount equal to a benefit factor times their P#" highest average monthly salary over any 36 consecutive months of employment. The applicable benefit factor is based on PERS uses the Entry Age Normal Actuarial Cost M?thod age at retirement and years of credited service, and ranges which is a projected benefit cost method.That is,it takes from 1.1 percent per year of credited service for retirement into account those benefits that are expected to be ea ned in at age 50, to 2.4 percent per year of credited service for the future as well as those already accrued. According to this retirernent at or after age 63. PERS also provides death and cost method. the normal cost for an employee is the level disability benefits to covered employees. lienefit provisions amount which would fund the projected benefit ifit were and all other requirements are established and governed by paid annually from date of employment until re rement. Caliform.a statute. PERS uses a modification of the Entry Age Normal Actuarial The " pension benefit obligation"is a standardized disclosure Cost Method in which the employer's total normal cost is measure of the present value of pension benefits, adjusted expressed as a level percentage of payroll. PERS also uses the for the effects of projected salary increases and step-rate level percentage of payroll method to amortize any unfunded benefits, estimated to be paya.ble in the future as a result of actuarial liabilities. The si nificant actuarial assumptions F employee service to date. The measure is intended to help used to compute the actuarially determined contribution readers of the financial statements assess, on a going-concern requirement are the same as those used to compute the pen-basis, the funding status of PERS, the progress made in sion benefit oblignion as described above. The actuarially accumulating sufficient assets to pay benefits when due, and assumed annual investment return was 8.5 percent. The make comparisons among employers. The measure is the salary scale used assumed salary increases varied by length of actuarial present value of credited projected benefits and service, and the total increase in any future year included an is independent of the funding method used to determine assumed inflation rate of 4.5 percent. There were no changes contributions to PERS. n the actuarial assumptions used in the valuation performed as of June 30,1996. Consequently, there were no additional costs resulting from changes in the actuarial assumptions. M;Mj sMUD 19 9 7 A N N U A L R E P O RT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The contribution to PERS for the plan year ended June 30, of some ofits employees pursuant to a memorandum of 1997, of $93 million was made in accordance with actuarially understanding with one of its collective bargaining units. determined requirements computed through the actuarial District employees participating in the 401(k) Plan are valuation performed as of June 30,1994.The contribution considered vested once enrolled and are responsible for consisted of(a) $17.0 million normal cost (13.5 percent of determining how their funds are to be invested. The District current covered payroll) and (b) a credit of $7.3 million is responsible for ensuring compliance with Internal Revenue amortization of the over funded actuarial liability (-5.8 percent Code requirements concerning the 401(k) Plan and not for o of current covered payroll).The District contributed $1.0 market variations in the 401(k) Plan asset values. Currently, million (0.8 percent of current covertd payroll) and employees the District does not match cny contributions. Ilowever, D contributed $8.7 million (6.9 percent of current covered commencing in 1999 pursuant to a co!!ective bargaining payroll), of which $8.6 million was paid by the District on agreement, the District will match employee contributions behalf ofits employees. on a dollar for dollar basis up to a speci6ed dollar limit Trend information provides an indication of the progress made f r the eniployees awered under the particular collective in accumulating sutricient assets to pay benents when due. bargaining agreement who are participating in the 401(k) Trend information for the past ten years related to the pension Plan. All ongoing fees related to the 401(k) Plan are paid by the District employees participating in the 401(k) Plan.The plan is presented below: 401(k) Plan is a gmernmental plan and is currently not Underfunded/ subject to discrimination testing or the requirements of the (Overfundedi Net Assets as a Pension Benefit Employer Percentage of Obligation as a Contribution District employees participating in the 401(k) Plan are allowed Years Ended Pension Benefits Percentage of as a Pewentage of lune 30, Obligation (evered Payrol! Lovered Payroll to contribute up to 20 percent of their gross income not to 1987 85.1 37.0 20.8 Revenue Code. 1988 91.9 21.7 15.2 1989 99.4 1.8 12.7 The District also offers its employees a de6ned contribution 1990 100.3 ( 1.2 ) 11.4 plan created in accordance with Internal Revenue Code 1991 104.1 ( 14.1 ) 93 Section 457 (457 Plan). The 457 Plan is a contributory plan 1992 103.4 ( 13.0) 10.2 n which the funds are primarily contributed by the District's 1993 106.5 (26.2) 8.2 pl yees and, by the end of the first quarter of 1998,will 1994 126.3 (109.5) 8.8 e 1993 124.4 (113.1) 8.1 be held by a trustee in trust for the employees upon retirement 1996 122.6 (119.7) 8.1 from District service. Subsequently, these funds will not be subject to the general claims of the District's creditors. The D. fined Contribution Plans. The District prosides a cash District has the duty of reasonable care in the selection of deferred compensation plan pursuant to Internal Revenue investment alternatives, but neither the District nor its directors Code Section 401(k) (401(k) Plan} in which all of its eligible or of6cers have any liability for losses under the 457 Plan. full-time or permanent part. time employees may participate. The District does not match employee contributions nor make The 401(L) Plan is a contributory plan in which the funds contributions on behalf of its employees to the 457 Plan. are primarily contributed by the District's employees and are held by a Trustee in trust for the employees upon retirement from District service and sub3cquently are not subject to the general claims of the District's creditors. The District makes annual contributions to the District's 401(L) Plan on behalf w, $ MUD 19 9 7 A N N U A L R E P O R T 137'

.g:~-, mr, n, H s NOTES TO CON 53LIDATED FINANCIAL STATEMENTS ' ' Note 13 Other Post-Note 14. Insurance Programs Employment Benefits The District and its component units are exposed to various risks ofloss related to torts, theft of and destruction to assets. in addition to the employee pension benefits described in err rs and omissions, and natural disasters. In addition, the Note 12, the District provides post-employ ment health care District is exposed to risks of loss due to injuries to, and benefits in accordance with District policy and negotiated illnesses f,its employees. The District and its component agreements with employee representation groups to all units purchase commercial insurance coverage to cover any employees who retire from the District on or after attaining claim in excess f specific dollar thresholds, which range age 50 with at least 5 years of service. The District also fr m $0.2 million to $1.0 million per claim, with additional 8-I provides post-employment heahh care benefits to covered excess insurance c verage f r claims ver $20 million for the employees who are digible for disability retirement. Currently, c mp nent units and $100 million for the District. As a 1,513 participants,induding retirees, spouses of retirees and result, the maximum risk that the District and its component surviving spouses participate in the District's health care units would be exposed to is limited to.,0.2 million to $1.0 benefits program.The District contributes the full cost of mill n per claim.There have been no significant reductions coverage for employees hired before January 1,1991, and a in insurance c verages as c mpared to December 31,1996; l portion of the cost based on credited years of service for and for the years ended December 31,1997 and 1996, the employees hired after January 1,1991.The District contributes - insurance p licies in effect have adequately covered all settle-a portion of the cost for dependent coverage as well.The ments f the claims against the District and its component District records post-employment health care benefit expenses units. The daims liability is recorded in Other Noncurrent on a pay-as-you-go basis. During the years ended December Liabilities and Deferred Credits. 31,1997 and 1996, post-employment health care benefit expenditures were $2.8 million and $2.4 million, respectively. The claims liability at December 31,1997 and 1996 is The District estimates that the net present value ofits post. presented below: employment benefit obligation was approximately 580.9 million and $75.8 million at December 31,1997 and 1996, Workers' compensation daims.. 5,467 _ $ 6,803 respectively. General and auto daims. 2,125 2,000 Short-and long-tena disability daims - 640 700 Claims liabilt, end of year. 8,232 ~ $ 9,503 4 Changes in the daims liabihty balance during 1997 and 1996 were as fnikws: (thouunds ofdollars) l997 l996 Claims liability, beginning of year. 9,503 l $ 8,048 Add: Provisions for daims incurred in current and previous years. - 6,590 I 6,498 Less: Payments on claims attributable to current and previcus years. (7,861) (5,043) Claims liabihty, end of year. 8.232 9,503 I &[Mi $ MUD 19 9 7 A N N U A L R E P O R T p*

- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15. Commitments energyaubjuu rate changes.W District has the right to reduce its energy obligation with six months advance notice Southern California Edison (Edison) Power Sale and to reduce its capacity obligation with eighteen months Agreement. The District's Power Sale Agreement with dvance notice. Edison provides for year round capacity of 200 h1W and additional capacity of 200 h1W in certain months through Calpine Corporation (Calpine) Stam Sales Agreement. December 1999. llased on the minimum amount of capacity 1he District has entered into a steam sales agreement with the District is required to purchase under the Edison Power Calpine to purchase steam for the District's geothermal Sale Agreement, the District will pay Edison $53.6 million for unit, SN1UDGEO#1.The District's minimum obligation is capacity over the remaining life of the agreement. Additionally, for the purchase of the amount of steam necessary to run the District will pay for any energy neceived at rates specified Sh1UDGEO*1 at 39 h1W.The District has the right to terminate the contract upon 180 days notice, should Calpine m the contract. fail to meet its steam delivery obligations which are necessary l Pacificorp (PAC) Power Sale Agreement. The District to operate ShlUDGEO*l at 39 htW. Based on the terms has entered into a series of agreements with PAC providing of this contract, the District's minimum obligation is for the purchase by the District of 100 A1W of firm power approximately $13.3 million. through 2015. The District has a minimum annual take-or-pay commitment for this energy of approximately $3.6 million Alberta Natural Gas and Pacific GasTransport Capacity Agreement. The District has entered into a contrac with through the term of the agreement. Alberta Natural Gas and Pacific Gas Transport to reserve Public Utility District No. I of Snohomish County capacity of 12,101 million Dekatherms (Dths) per day, over (Snohomish) Power Sale Agreement. The District has a 30-year period, on a new interstate natural gas pipeline agreed to purchase up to 36 MW from a wood-fired cogen-from the Canadian border to the California /Oregoi. border, eration plant built by Snohomish and Scott Paper Company. The District is obligated to make capacity payments of The District provides Snohomish energy during the winter approximately $1.8 million per year through 2023.These months when Snohomish needs the energy, and in return (aPacity payments are reduced by sales of available capacity the District can schedule up to 42 htW in the summer to other agencies under this agreement. months when the District needs the energy to meet its load The District's total purchased power, steam and gas purchases requirements. Pr. ices for capacity and energy are fixed, and 1 and transportation commitments for the years 1998 through I the minimum annual capacity factor is 60 percent. The i l y-2002 are $95.0 million, $46.3 million, $18.8 million, $19.0 i District will pay Snohomish a minimum of approximately million and $19.1 million, respectively. $105.0 million through September 2007. ~ Western Area Power Administration Power Sale ditures (exc:uding AFUDC) for 1998 total $100.8 million. Agreement. The District has a long-term contract with Approximately $19.7 million is for power supply projects, Western that allows the District to purchase 361 MW of $33.1 million is for transmission anu distribution projects I capacity and associated energy from the Central Valley I and the remaining $48.0 million is for other construction. Project (CVP). In addition to the long-term capacity, the Iludgeted capital expenditures for component units for 1998 District also has access to an additional 100 htW o.uring June, total 50.9 million. July, and August.The total minimum obligation under this contract is approximately $40.2 million for capacity and I sMUD 4 997 ANNU AL R E PORT

,$NGUES TO CONSOLIDATED NN ANCIAL, STATEMENTS l l 'c'"~r "' * " """' "" d *i" "* *i"" c ""is""" l Note 16. Contingencies oppose any action by the Bureau to recover its purported l l Environmental Matters. The District is one of many billing deficit from the District. Further, management believes potentially responsible parties that has been named in a the ultimate outcome of the matter will not result in a material i number of actions relating to environmental claims and/or settlement or liability due to the Bureau and accordingly, no complaints. Due to the nature of these claims, legal actions liability has been recorded. l or complaints, the District is unable to predict the range of Other Matters. In the normal operation of business, the costs for resolution of these actions and intends to do all District is party to various claims, legal actions and complaints. things necessary to defend its posit. ion.The D.istrict does not Management and the District's kgal counsel are of the opinion r believe that the outcome of any of these environmental that there are no other material loss contingencies that would l actions will have a material adveise impact on the District's have a material adverse impact on the financial position of financial position or results of operations. the District, except as disclosed within the footnotes to these U.S. Bureau of Reclamation Water Service Contract financial statements. Billing Dispute. The District entered into a 40-year water service contract with the U.S. Bureau of Reclamation (Bureau),wb,ich expires in 2012 for the delivery of up to ) 75,000 acre-feet of water per year to meet the District's needs at Rancho Seco. This amount includes 60,000 acre-feet of municipal and industrial (M&l) water from CVP. Over time, Bureau revenues have been insufficient to cover actual CVP operations and mair#enance (O&M) costs; contractor payments have been insufficient to cover amortization of their respective shares of CVP capital costs and,in the case of M&1 contractors, have been insufficient to cover interest on unpaid capital. Although the District's contract contains a specific rate methodology, the Bureaa now maintains that the District and other M&l contractors are running substantial O&M deficits which, by the Bureau's definition, includes as O&M costs, both unpaid interest on capital and interest on ( ] the O&M deficit. The Bureau claims interest charges on these l unpaid capital interest and O&M deficits. As a result, the Bureau's 1997 Rate Ik>ok (the most recent information published at this writing) lists a deficit of approximately l $9.5 million for the District. Since this figure is based on i financial data from fiscal year 1995, the actual deficit claimed by the Bureau will be somewhat larger. Management believes the District complied fully with the terms and conditions i of its contract, which contains specific rate methodology for b ? o k rm 1 {40 sMUD 19 9 7 A N N U A L R E Po RT

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