ML20246P443

Forwards Financial Statements as of 881231 & Auditors Rept

ML20246P443
Person / Time
Site:	Rancho Seco
Issue date:	12/31/1988
From:	Gaebler W SACRAMENTO MUNICIPAL UTILITY DISTRICT
To:
References
AGMF-89-33, NUDOCS 8903280221
Download: ML20246P443 (19)

Text

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'e .f SACRAMENTO MUNICIPAL UTILITY DISTRICT O P. o. Box 15830, Sacramento CA 95852-1830,(916) 452-3211 AN ELECTRIC SYSTEM SERVING THE HEART OF CALIFORNIA AGMF 89-33 March 22, 1989 Director of Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Washington, DC 20555 Docket No. 50-312 Rancho Seco Nuclear Generating Station License No. DPR-54 PRICE ANDERSON ACT RETROSPECTIVE PREMIUM SYSTEM LETTER OF GUARANTEE To follow up on our letter of guarantee (GM 89-120) dated.

February 24, 1989, please find enclosed our audited financial report entitled " Financial Statements as of December 31, 1988 and Auditors' Report".

Members of your staff with questions regarding this document may contact Mr. Richard Vorpe at (936) 732-5259. .._

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Walter Gaebler II Chief Financial Officer Enclosure cc w/ encl: J. B. Martin, NRC, Walnut Creek A. D'Angelo, NRC, Rancho Seco 8903280221 12 PDR ADOCK % 2 PNV I I I I DISTRICT HEADQUARTERS O 6201 S Street, Sacramento CA 95817-1899

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FINANCIAL STATEMENTS AS OF l DECEMBER 31,1988 AND y AUDITORS' REPORT L

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$SMUD SACRAMENTO MUNICIPAL UTIUTY DISTRICT

4 9 AnTnun ANDERSEN & CO.

SACHAMENTO, CAMPORNIA 1

Report of Independent Public Accountants 1

To the Board of Directors of Sacramento Municipal Utility District:

We have audited the accompanying balance sheets of SACRAMENTO MUNICIPAL UTILITY DISTRICT (a political subdivision of the State of California) as of December 31, 1988 and 1987, and the related statements of ' income and cash flows for each of the three years in the period ended December 31, 1988. These financial state-ments are the responsibility of the District's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally M.epted auditing

- standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes k assessing the accounting principles used and significant estimates made by management, as'well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sacramento Municipal Utility District as of December 31, 1988 and 1987, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1988, in conformity with generally accepted accounting principles. 1 l

l As more fully discussed in Note 6, the status of future operations of the l District's nuclear power plant (Rancho Seco) is subject to the significant uncertainty presented by the Measure C Referendum and the related proposition on the June'1989 ballot. The Measure C Referendum requires the District to use all due diligence to divest itself of Rancho Seco, close Rancho Seco if certain per-formance levels are not achieved, and have the proposition of continued operation of Rancho Seco be re-ratified by a majority of the voters. The District has placed the proposition required by the Measure C Referendum on the June 1989 regular election ballot. If significant portions of the investment in Rancho j Seco are not recovered through successful operation of the plant, or the rate- '

making process, the adverse impact upon the District's customers' equity and 1 future statements of income would be substantial.

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Sacramento, California

>krch 7, 1989 l

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SACRAMENTO MUNICIPAL UTILITY DISTRICT BALANCE SHEETS -

ASSETS -

December 31.

.19$$. 1961

~ (thousands of dollars)

ELECTRIC UTILITY PLANT Plant in service, at original cost . . . . . . . . . . . . . . . . . . . . . . 51,981,372 $1,692,292 Less - accumulated depreciation . . . . . .................. 471.049 415.510 ,

Plant in service - net .. ........................ 1,510,323 1,276,782 Construction work in progress . . . . . . . . . . . . . . . . . . . . . . . . . 195,892 272,152 Investment in joint power agencies (Note 3) . . . . . . . . . . . . . . 52,463 133,155 Nuclear fuel, at ainortize'd cost (Note 1) . . . ............. 207.006 214.720 Total electric utility plant - net .................. 1.965.684 1.896.809 i

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- RESTRICTED FUNDS Revenue bond reserve funds .......................... 115,450 109,423 Nuclear decommissioning f und (Note 1) . . . . . . . . . . . . . . . . . 54,190 - 42,054 Funds for jointly owned projects under construction (Note 3) 24.683 Total restricted f unds . . . . . . . . . . . . . . . . . . . . . . . . . . 169.640 '176.160 CURRENT ASSETS Cash and investments Un r es t ric te d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258,154 157,506 Restricted for payment of debt service . . . . . . . . ..... 39,057 36,809 Designated for deferred compensation benefits (Note 1) . 14,989 12,935

- Accounts receivable, net

- Billed customer reven ues . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,993 37,735 Unbilled customer revenues (Note 1) . . . . . ........... 31.,311 Sale of surplus power (Note 7) . . . . . . . . . . . . . . . ...... 12,114 Other ........................................... 8,205 6,424 Deferred power supply costs to be recovered within one year (Note 1) . . . . . . . . . . . . ................ ....... 54,999 37,111 Materials and supplies, at average cost .................. 38,358 32,014 A cc ru e d i n t e r es t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,540 6,477 Prepayments........................................ 10.677 5.005 Total current assets . . . . . . . ......... .......... 502.283 344.130

,1 NONCURRENT ASSETS AND DEFERRED CHARGES j Advance capacity payments (Notes 7 and 8) . . . . . . ....... 186,271 Unamortized loss on refunding (Note 4) . . . ............. 54,472 41,308 Unamortized debt expense . . . . . . . . . . . . . . . . . . . .... . .. 24,438 23,931 Noncurrent deferred power supply costs (Note 1) . ..... 30,559 Other . ....................... . ....... ........ 9.732 8.798 Total noncurrent assets and deferred charges . . . .. 274.o13 104.596 Total assets . . . . . .. ... .. ... ... 52.912.520 $2.521.695 The accompanying notes are an integral part of these financial statements.

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SACRAMENTO MUNICIPAL UTILITY DISTRICT:

- BALANCE SHEETS

. CAPITALIZATION AND LIABILITIES I- December 31.

l-ll M M (thousands of dollars) '

CAPITALIZATION Customers' equity employed in the business

< Balance, beginning of year . . . ...................... S 665,749 $ 655,206

< Net income for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.501- 10.543 Total customers' equity ........................ 671,250 , 665,749

. Long-term debt (Note 4) .............................. 1.531.999 1.365.931 Total ca vitalization . . .. . . . . . . . . . . . . . . . . . . . . . . . . . 2.203.249 2.031.680' E

g CURRENT LIABILITIES' Commercial paper notes (Note 5) ~ . . . . . . . . . . . . . . . . . . . . . . . 195,086 121,800 A ccou n ts pa ya ble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,313 84,615 Payable for power purchases (Note 7) . . . . . . . . . . . . . . . . . . . 6,701 16,341' Long term debt due within one year (Note 4) . . . . . . . . . . . . 13,211 12,918-A ccrued i n te rest . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 32,464 23,294 C usto mer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,792 10,745 Accrued salaries and vacation .......... .............. 13,583 12,554 Energy and capacity exchange account (Note 1) . . . . . . . . . . . 21,803 32,015 Advance capacity obligations (Note 7) . . . . . . . ........... 13.300 _

ju _ Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 375.253. 314.282 f

NONCURRENT LIABILITIES AND DEFERRED CREDITS I Advance capacity. obligations (Notes 7 and 8) . . . . . . . . . . . . . 147,044 ' Unamortized gain on refunding (Notes 1 and 4) . . . . . . . . . . . 101,522 106,073 54,190 42,054

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Decommissioning accruan (Note 1) . . . . . . . . . . . . . . . . . . . . . .

' Energy exchan ge account (Note 1) . . . . . . . . . . . . . . . . . . . . . . 7,479 5,126 Deferred compensation benefits (Note 1) ............. .. 14,989 12,935

'Other'..................... ........................ 8.794 9.545 Total noncurrent liabilities and deferred credits . . . . 334.018 175.733 q-COMMITMENTS AND CONTINGENCIES (Notes 6,7 and 8)

> S2.521.695 Total capitalization and liabilities . . ......... 52.912.520

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l SACRAMENTO MUNICIPAL' UTILITY DISTRICT STATEMENTS OF INCOME:

s Year Ended December 31.

.1911. .12.62 . jf.86i l.

- (thousands of dollars)

OPERATING REVENNES

' R es i d e n tia l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $285,363 ;S234,438- . $ 185,888 ,

Commercial and industrial . . . . . . . . . . . .. . . . . . . . . . . . . . . :282,916 '234,655 177,335 i E Sales of surplus power (Notes 1 and 7) . . . . . . . . . . . . . . . . . . 7,991. -26,475 34,697

Other. ............................................ 6.860 17.667 15.015 Total operating revenues . . . . . . . . . . . . . . . . . . . . . . . 583.130 513.235 '412.935 OPERATING' EXPENSES

' Operation =

l; ~ Purchased and interchanged power (Note 1) . . . . . . . . . . 153,814- 208,309' 155,431

' Power supply costs - over/(under) recovery inet

-(Note 1)....................................... 4 12,671 (42,670)_ (25,000). <

Nuclear fuel used for generation' . . . . . . . . . . . . . . . . . . . 21,692 100-

- P r od u ct i o n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,303 89,787 72,895 Administrative and general and other . . . . . . . . . . . . . . . 71,066 66,844 59,677 '

Ma i n t e n a n c e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,650. 70,223 53,173 l .- .

Depreciation (Note 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -59,545 50,567 46,166 Decommissioning (Note 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . !2.255 3.705 5.061 Total operating expenses ....................... 497.996 446.765 367.503 a

' Opera tin g i ncome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,134 66,470' 45,432 OTHER INCOME -

Interest income and other (Note 1) . . . . . . . . . . . . . . . . . . . . 25,682 27,710 19,350 Allowance for equity funds used during construction (Note 1).......................................... 7.893 8.116 11.185 Income before interest charges . . . . . . . . . . . . . . . . . . 118.709 102.296 75.967 INTEREST CHARGES In teres t o n d e bt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,689 105,665 88,025 Allowance for borrowed funds used during construction

( N o t e .1 ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . (11.481) (13.912) (8.395)

Net interest charges . .. . . . . . . . . . . . . . . . . . . . . . . . . . I13.208 91.753 79.630-N ET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S 5.501 $ 10.543 ],ggg) i h

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

SACRAMENTO MUNICIPAL UTILITY DISTRICT STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents Year Ended December 31.

12M 12E M (thousands of dollars)

CASII FLOWS FROM OPERATING ACTIVITIES Net income ............................ ..... .. . S 5,501 5 10,543 $ (3,663)

Adjustments to reconcile net income to net cash provided by operating activities:

De p r e ci a t io n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,545 50,567 46,166 Decommissioning and amortization of n u c l ea r f u e l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,044 3,705 5,061 Energy bank drawdowns (repayments) .............. (7,859) 4,848 5,826 PSCR recovery (deferral) . ....................... 12,671 (42,670) (25,000)

Allowance for equity funds used during construction . . (7,893) (8,116) (11,185)

Other, net .................. ........... ....... 3,760 4,790 5,840 l

1 Purchase of advance capacity . . . . . . . . . . . . . . . ...... (25,925) Change in operating assets and liabilities:

Accou nts receiva ble . . . . . . . . . . . . . . . . . . . . . . . . . (23,236) (25,654) 3,688 Accounts payable . . . .................... .. (23,518) (6,153) 23,827 Other working capital . . . . . .... ..... . ..... (727) (553) (3.642)

Net cash provided by operations . . . . . . . . . . . . . 23.363. (8.693) 46.918 CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures . . . . . . . . . . . . . . . . . . . ..... . (144,720) (263,575) (193,567)

Cost of nuclear fuel . . . . . . . . . . . . . . . . .. .. .. . .. (11,075) (3,694) (13,502)

Purchases of long-term investments . . . . . . . . . . . . . . . (552,432) (607,860) (453,346)

Procceds of long-term investments .... .......... .. 529,843 567,737 501,643 O t h e r, n e t . . . . . . . . . . . . . . . . . . . . ....... ............ 6,219 7,743 4,448 l

) Non-cash adjustments to investing activities:

Accounts payable and other accruals . . . . ........... (3,530) 17,694 9,998 Allowance for equity funds used during construction . . 7.893 8.116 11.185 Net cash used in investing activities . . . . . . . . . (167.802) (273.839) _(DL14.1)

CASII FLOWS FROM FINANCING ACTIVITIES Proceeds f rom bond issues . . . . . . . . . . . . . . . . . . . . . . . . . . 324,984 546,207 146,850 Repayment and refunding of bonds . . . . . . . . . . . . . ..... (176,313) (238,632) (5,905)

Proceeds (repayment) of commercial paper . . . . . . . . . . . . . 73,286 (3,200) 25,000 Other, net..... .......... ....... .............. (1.676) (1.188) (1.211)

Net cash provided by financing activities . .. 220.281 303.187 164.734 Net increase /(decrease) in cash and cash equivalents . . . . . ..... .. . . ....... .... .. 75,842 20,655 78,511 Cash and cash equivalents at the beginning of the year .. .. . .... .. ... ... ... 136.188 115.533 37.022 Cash and cash equivalents at the end of the year . . . . ... .. .. .. ....... . .. 5 212.030 5 136.188 5 115,533 The accompanying notes are an integral part of these financial statements.

SACRAMENTO MUNICIPAL UTILITY DISTRICT NOTES TO FINANCI AL STATEMENTS i

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NOTE 1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES Organization and Exemption from income and Property Taxes. The Sacramento Municipal Utility District (District) was formed and operates under the State of California Municipal Utility District Act (Act). The Act confers upon the District the rights and powers to fix rates and charges for commodities or services furnished, to incur indebtedness and issue bonds or other obligations and, under certain circumstances, to levy and collect ad valorem property taxes. The District's power to levy property taxes is restricted by the California Constitution, Article XIII A, which places limits on the taxing power of all California public agencies. The District is exempt from payment of federal and state income taxes and real and personal property taxes.

Method of Acounting. The accounting records of the District are maintained in accordance with generally accepted accounting principles for rate regulated enterprises, as prescribed by the Financial Accounting Standards Board (FASB) and, where applicable, the Governmental Accounting Standards Board (GASB), and generally follow the Uniform System of Accounts for Public Utilities and Licensees prescribed by the Federal Energy Regulatory Commission (FERC). The District's accounting records are maintained on a comparable basis with investor-owned electric utilities operating in California.

Cash and Investments. The investments in restricted and unrestricted funds are valued at cost which approximates market.

The District invests its funds in accordance with the Municipal Utility District Act and other California statutes. All securitics are held by the District's agent in its name. A summary of the District's investments at December 31,1988 and 1987 is shown below.

l December 31.

12.61 19$1 (thousands of dollars)

U.S. Government Securities . . . ....... . ........ .. 5138,113 5 47,022 Commercial Paper . . . . . . . .................... . .... 45,554 4,977 f Ba n kers' Accepta nces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234,337 278.075 Local Agency Investment Fund . . . . . ...... ....... . 54.814 54.000 5472,8I8 5384.074 Total investments are composed of the following:

Unrestricted funds . . ..... . . . .... . .. .. 5258,154 5157,506 Funds restricted for payment of debt service . . . . . 39,057 36,809

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Revenue bond reserve funds . . . ............ ..... 115,450 109,423 Nuclear decommissioning fund . . . . . .... ... ... ..... 54,190 42,054 Funds for jointly owned projects under construction . . . 24,683 Checks issued but unpaid ........ . . . .. .. ... 6,186 13,934 1 Less cash on hand . . . .. .... . ......... . .. . (219) (335)

$472,818 5384.074 Cash and Cash Equivalents. For purposes of the statements of cash flows, cash equivalents include all debt instruments purchased with a maturity of three months or less and all investments in the Local Agency Investment Fund. For the years ended December 31,1988,1987 and 1986 the investments considered cash equivalents were S203.0 million, 5136.9 million and $132.3 million, t

respectively.

Rate Making Balancing Accounts. The District's Board of Directors has authority to establish the I

level of rates charged for all District services. During 1986, the Board of Directors established a rate-making balancing account to remove the effect on the results of operations of fluctuations in net j power supply costs (purchased and interchanged power, nuclear fuel and steam supply costs, offset I by surplus power sales).

Fluctuations from budgeted levels utilized in the rate-setting process are recorded in the Power Supply Cost Rate (PSCR) balancing account and will be reflected in future rates. The unrecovered deferred power supply costs to be reflected in future rates at December 31,1988 were $55.0 million.

The Board of Directors has also established a rate making account for deferral of material losses, arising from adverse resolutions or settlements of claims and litigation, not previously considered in District rates (See Note 7).

Surplus Power Transactions. Prior to 1988, under the terms of the Integration Contract with Pacific Gas and Electric Company (PG&E) that expires December 31,1989, any capacity and energy which was not required to serve District load was sold to PG&E. The contract also established an energy exchange account from which the District could withdraw energy, within certain limits, when needed to meet District load. Energy which was withdrawn from the energy exchange account was recorded as purchased power and energy deposited in the bank was recorded as surplus power sales.

Since 1986, the District has exceeded the limits placed on the energy exchange account and has paid for all energy received from PGAE.

As of January 1988, under the terms of the 1988 Amendment and the Dispute Settlement Agreement with PG&E (see Note 7), the District may no longer withdraw energy from the energy exchange account and must pay for all energy and certain capacity in cash. District surplus energy will be applied against the balance of the energy exchange account, which was an obligation to PG&E of 1,627 GWh as of December 31,1988 valued at approximately $29.3 million. P.epayment of this obligation is recorded as surplus power sales. During 1989, all surplus power must be used to reduce the energy bank obligation or sold to PG&E. Af ter 1989, the District may sell surplus energy to PG&E and other utilities whether or not the balance has been repaid. If the District has not returned the

! energy within ten years of the termination of the Integration Contract with PG&E, then the Dist At must pay for any remaining balance at rates specified in the Dispute Settlement Agreement. Energy exchange account liabilities are. valued at the production cost of the future generation which is planned to return the obligation.

Depreciation. The District provides for depreciation on the historical cost of electric properties on a straight line, service-life basis at rates determined by engineering studies. The average annual l composite depreciation rates for the years ended December 31,1988,1987 and 1986 were 3.64 percent, 3.34 percent and 3.35 percent, respectively.

The costs of replacement property units are capitalized. Repair and maintenance costs are charged to expense, including such costs associated with refueling the Rancho Seco nucicar plant.

Plant modifications that do not meet the criteria for capitalization are also charged to expense.

Decommissioning. The District maintains a fund restricted by the Board of Directors to provide for eventual payment of decommissioning costs. Fund management is currently under District control.

The District's policy is to make levelized contributions to the fund in amounts which, along with interest earned by investing fund assets, will be sufficient to provide for payment of decommissioning costs as incurred.

The District conducted a study, performed by an independent specialist, to estimate the cost of decommissioning the Rancho Seco Nuclear Power Plant (Rancho Seco). This study resulted in an estimated cost of $218 million in 1988 dollars and is the basis for the current provision for

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decommissioning. The study assumes that decommissioning will occur after the expiration of the plant's operating license in 2008 and that the dismantling / removal method will be used.

In June 1988, the Nuc! car Regulatory Commission (NRC) issued Final Rules governing certain aspects of decommissioning funding plans. As a result of these Final Rules, the District will be I

required to piece its funds with an outside trustee within two years and will be required to adopt certain other changes regarding escalation and earnings assumptions.  ;

Nuclear Fuel. The District amortizes the cost of nuclear fuel to nuclear fuel expense on a unit- l of-production basis. Under the Nuclear Waste Policy Act of 1982, the Federal government assumed i responsibility for the permanent disposal of spent nuclear fuel. The District is charged a fee for the disposal of spent nuclear fuel in the amount of one mill per kWh on electricity generated by the nuclear power reactor after April 7,1983. The District records this charge as a current period expense.

Allowarce for Funds Used During Construction. The District capitalizes, as an additional cost of construction work in progress, nuclear fuel, and its participation in jointly owned projects under 4 construction, an allowance for funds used during construction (AFUDC) which represents the cost f of borrowed funds used for such purposes and a return on equity funds when so used. AFUDC is a non cash item and is capitalized and depreciated along 'vith the related fixed assets and reflected in rates for future recovery. In the majority of applications, the amount capitalized is determined by a formula prescribed by FERC. The total allowance for funds used during construction for the years ended 1988,1987 and 1986 amounted to approximately 7.7 percent, 7.3 percent and 7.5 percent, j respectively, of eligible plant under construction, nuclear fuel, and participation in jointly owned projects under construction. AFUDC capitalized during 1988,1987 and 1986 relating to Rancho Seco was approximately 511.3 million, $12.7 million and $13.2 million, respectively.

Deferred Compensation Plan. The District offers its employees a deferred compensation plan created in accordance with Internal Revenue Code Section 457. Until paid or made available to the employee or other beneficiary, all amounts of deferred compensation, all property and rights purchased with those amounts, and all income attributable to those amounts, property or rights are subject to the claims of the District's bondholders and general creditors. Participants' rights under the plan are equal to those of general creditors. T.o. District has the duty of reasonable care in the selection of investment alternatives but neither the District nor its directors or officers have any liability for losses under the plan.

Unbilled Revenues. In accordance with a 1988 rate resolution, the District began recording an estimate for unbilled revenues earned from the dates the customers were last billed. The accrual at December 31,1988 for unbilled revenues was $31.3 million. The change is concurrent with the change in the revenue recognition method for rate-making purposes, the tfore, the in, crease in revenues had no material effect on net income.

Accounting Gains / Losses on Bond Refundings. The gains or losses from bond refundings have been deferred pursuant to Board of Directors' resolutions for rate making and accounting purposes,

! and are recognized through amortization over the life of the applicable bonds issued for purposes of the refundings.

NOTE 2. DEFINED BENEFIT PENSION PLAN The District contributes to the Public Employees Retirement System of the State of California (PERS), an agent multiple-employer retirement system that acts as a common investment and administrative agent for participating state and local governmental entities in California. The District's payroll for employees covered by PERS for the year ended December 31,1988 was $99.4 million, the District's total payroll for the same period was $113.4 million.

All permanent District employees working more than twenty hours per week are eligible to participate in PERS. Benefits vest after five years of service. Upon retirement, participants are

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entitled to an annual retirement benefit, payable monthly for life, in an amount equal to a benefit factor times their highest average monthly salary over any 36 consecutive months of employment.

The applicable benefit factor is based on age at retirement and years of credited service, and ranges from 1.1 percent per year of credited service for retirement at age 50 to 2.4 percent per year of credited service for retirement at or after age 63. PERS also provides death and disability benefits

to covered employees. Benefit provisions and all other requirements are established and governed by state statute.

The " pension benefit obligation" is a standardized disclosure measure of the present value of pension benefits, adjusted for the effects of projected salary increases and step-rate benefits, I estimated to be payable in the future as a result of employee service to date. The measure is intended to help users assess, on a going-concern basis, the funding status of PERS, assess progress made in accumulating sufficient assets to pay benefits when due, and make comparisons among employers.

The measure is the actuarial present value of credited projected benefits and is independent of the funding method used to determine contributions to PERS.

The pension benefit obligation was computed as part of an actuarial valuation performed as of June 30,1987 (the most recent actuarial valuation). Significant actuarial assumptions used in the valuation include (a) a rate of return on the investment of present and future assets of 8.5 percent compounded annually, (b) projected salary increases of 5 percent per year compounded annually attributable to inflation,(c) additional salary increases of 2 percent per year compounded annually attributable to merit and general salary increases, and (d) post-retirement benefits increases of up to 5 percent per year compounded annually.

l The total unfunded pension benefit obligation applicable to the District's employees was $37.1 million at June 30,1987 as follows (in millions):

Pension benefit obligation:

Retirees and beneficiaries currently receiving l

benefits and terminated employees not yet re ce iv i n g be n efi ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5102.1 Current employees:

Accumulated employee contributions including allocated investment earnings . . ........... ......... 50.3 Employer financed vested . . . . . .............. .. .. . 92.5 Employer financed non vested . ..... . ............ ._42 Total pension benefit obligation . .. . .... ..... ..... 249.1 Net assets available for benefits - at cost .. ...... ....

(market value - 5265.4 million) . ........... .... ... 212.0 Unfunded pension benefit obligation . . .......... S 37.1 I PERS uses the Entry Age Normal Actuarial Cost Method which is a projected benefit cost method. That is,it takes into account those benefits that are expected to be earned in the future as well as those already accrued.

According to this cost method, the normal cost for an employee is the level amount which would fund the projected benefit if it were paid annually from date of employment until retirement. PERS uses a modification of the Entry Age Cost Method in which the employer's total normal cost is expressed as a level percentage of payroll. PERS also uses the level percentage of payroll method to amortize any unfunded actuarial liabilities. The amortization period of the unfunded actuarial liability ends on June 30,2000.

The significant actuarial assumptions used to compute the actuarially determined contribution requirement are the same as those used to compute the Pension Benefit Obligation as described above.

( The contribution to PERS for the plan year ended June 30,1988 of $18.1 million was made in accordance with actuarially determined requirements computed through the actuarial valuation performed as of June 30,1987. The contrit,ution consisted of (a) 58.2 million normal cost (8.4 percent of current covered payroll) and (b) 56.6 million amortization of the unfunded actuarial liability (6.8 percent of current covered payroll). The District contributed 514.8 million (15.2 percent of current l

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covered payroll) and employees contributed $3.3 million (3.3 percent of current covered payroll).

Trend information gives an indication of the progress made in accumulating sufficient assets to pay benefits when due. Systemwide ten year trend information may be found in the California Public Employees' Retirement System Annual Reports. For the year ended June 30,1987, available I assets were sufficient to fund 85.1 percent of the pension benefit obligation. Unfunded pension benefit obligation represents I8.1 percent of the annual payroll for employees covered by the PERS -

for the plan year ended June 30,1988.

NOTE 3. PARTICIPATION IN JOINTLY OWNED PROJECTS Central California Power Agency No.1. In 1982, the District and two other northern California public agencies (City of Santa Clara and Modesto Irrigation District) formed a joint powers agency entitled Central California Power Agency No.1 (CCPA No.1), for the purpose of participating in the ,

exploration, development and production of electricity from geothermal resources.. Since its I formation, CCPA No. I has entered into a series of agreements for the development of a geothermal steam project with certain entities having leasehold interests in the California Geysers geothermal area. Under this series of agreem:nts, CCPA No. I advanced $26 million towards the acquisition of rights to purchase steam, provided additional funds toward steam field exploration and development costs for approved acreage, and committed to construct two 65 MW geothermal steam electric generating units. In exchange,CCPA No. I acquired rights to a production payment (a royalty based on the revenue from steam sales) and the exclusive right to purchase steam under a contract. The steam contract terms require CCPA No. I to take a minimum of, or otherwise make payment for,50 percent of the annual steam requirement. The District's investment under the series of agreements for steam field exploration and development, including AFUDC,is $52.3 million.

CCPA No. I has constructed and is responsible for operating a two-unit generating plant, Coldwater Creek Geothermal Power Plant (CCGPP). The District has been designated project manager for the construction and operation of both units. Unit No. I was declared commercially operable on Junc .1,1988 and Unit No. 2 was declared commercially operable on July 18, 1988. The District's ownership interest in the jointly owned facilities as of December 31,1988 is as follows:

CCGPP Units No.1&2 (thousands of dollars)

Plant in service (District share) 593,730 Less - accumulated depreciation 1.514

$92.216 1988 Operating Expenses (District share) 55,921 Plant Capacity - MW 130 District's Share 50 %

It is the intent of the District and the other members of CCPA No. I to enter into power sales contracts with CCPA No. I to take or pay for all of the power from the plant. The meinbers of CCPA No. I have agreed to run both units at rated output for the first year of operations to test the limits for equipment warranties and to test the steam deliverability of the geothermal reservoir.

Transmission Agency of Northern California. In 1984 the District and fourteen other California j municipal utilities formed a joint powers agency entitled the Transmission Agency of Northern California (TANC). TANC has joined with nearly all California utilities to share in the construction and ownership of a R0 KV transmission line between central California and southern Oregon which will facilitate power exchanges with the Pacific Northwest.

TANC has agreed to pay 45.11 percent of the estimated $425 million cost of the project for

i' approximately 42.29 percent of the transmission capacity estimated to be 1,600 MW. The District has a 30.6 percent interest in TANC and will be entitled to approximately 200 MW of transmission

. capacity at an estimated cost of $60 million. The District anticipates that TANC will finance its share of the California /Orcgon Transmission Project, although the District will have ultimate f responsibility for the cost.

NOTE 4. LONG-TERM DEBT Long term debt outstanding at December 31,1988 and 1987 was as follows:

.1938. .L921 (thousands of dollars)

Revenue Bonds Electric Revenue Bonds, 4 3/4 %-8 5/8 %, 1989-2018 ........... 51,063,725 5 743,270 Taxable Electric Revenue Bonds, 10 9/10 4 11 3/8%, 1993 1997 . 150,000 Subordinated Electric Revenue Bonds, 7 1/2 %-9 %, 1993-2010 ... 491.495 491.495 Total Revenue Bonds . . . . . . . . . . ................ 1,555,220 1,384,765 l

General Obligation Bonds, 2%-4 3/4%,1989-1992 . . . . . . . . . . . .. 3,007 3,960 South Sutter Water District, Hydroelectric Revenue Bonds, 10 9/10%- 11 3/4%,1989-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,310 15,765 Purchase Agreement, 3 3/4%,1989-2000 . . . . . . . . . . . . . . . ...... 924 984 Total long term debt outstanding . . . . . . . . . . . . . . . . . . 1,574,461 1,405,474 Less - Amount due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . 13,211 12,918 Bond Discount Electric Revenue Bonds ................. ........... 22,413 19,363 Subordinated Electric Revenue Bonds . . . . . . . . . . . . . . . . . . 6.838 7.262 Total lon g te rm d e b t . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.531.999 $1.365 0),J, Annual debt maturities for 1989 through 1993 are S13.2 million,516.3 million, S19.1 million, S19.8 million and S22.8 million, respectively.

South Sutter Water District, Hydroelectric Revenue Bonds. The District is obligated to purchase power from the South Sutter Water District project under a contract that has the effect of transferring substantially all the economic benefits of the project to the District and making the l District liable for all debt service on $16.9 million of bonds issued at an effective cost of 11.48 percent by the South Sutter Water District in August 1982. Accordingly, the obligation and project have been capitalized, effective in February 1985 when the project became operational. The bonds mature serially through 2002. The District is obligated for annual debt service payments of approximately $2.3 million without regard for the level of operation of the project. Amounts expended under this agreement have been reported as purchased power expense.

1988 Refunding Bonds. On November 2,1988, the Di'rict issued $161.9 million of its Electric Revenue Bonds, Series V, with an average interest rate of 7.75 percent, to refund $150 million of outstanding taxable Electric Revenue Bonds, Series T and U, with average interest rates of 10.9 percent and 11.38 percent, respectively. The net proceeds of $157.7 million (af ter payment of 52.2 ,

million in underwriting fees and other issuance costs, and after deducting the 52.0 million original t

issue discount), plus an additional 59.3 million of Electric Revenue Bond Reserve Fund and Sinking Fund monies applicable to Series T and U bonds, were used to repurchase Series T and U bonds l

($152.4 million) and U.S. government securities (514.6 million). The securities were deposited in an irrevocable trust with an escrow agent to provide for all remaining future debt service payments on and redemption of (at the earliest call date) the Series T and U bonds. As a result, the Series T and U bonds have been legally defcased, under the terms of the bonds, and the liability for these bonds l

have been removed from the Balance Sheet.

Although the refunding resulted in the recognition of an accounting loss under generally accepted accounting principles of $15.8 million for the year ended December 31,1988, and the District increased its aggregate debt service payments by $152.6 million over the next 30 years,it obtained an economic gain (difference between the present values of the old and new debt service payments) of

$10.9 million. In accordance with District policy, the loss of $15.8 million has been deferred.

Rural Electrification Administration Borrowings. At December 31,1988, the District had the following principal amount of general obligation bonds outstanding, due to the United States of America and issued through the Rural Electrification Administration (REA):

Fif th 2% Series, due May 5,1989 $154,000 Sixth 2% Series, due November 15,1989 to 1990 513.000 i Total outstanding $667.000 During the year ended December 31,1988, the Fourth 2% Series matured. The District remitted  ;

$443,000 of principal payments and recorded approximately S19,480 of interest expense associated i with the Fourth through the Sixth 2% Series bonds during the year ended December 31,1988. Annual i REA bond maturities for 1989 and 1990 are $424,000 and $243,000, respectively.

NOTE 5. COMMERCIAL PAPER NOTES As of December 31,1988, S195.1 million principal amount of the District's commercial paper f notes were outstanding. The approximate effective interest rate for the commercial paper notes sold during the 12 months ended December 31,1988, was 6.28 percent, the average commercial paper notes outstanding was $170.7 million and the average term was 38 days. The District's authority to issue  !

commercial paper notes, for other than the purchase of electricity, is limited by state law to approximately $386 millien, based upon a percentage of outstanding long-term debt. The District I currently has $122 million outstanding under this provision (with an additional $38 million j authorized but unissued). The Municipal Utility District Act provides an additional $75 million of short-term borrowing authority which is limited to the purchase of electricity. As of December 31, 1988, the District has utilized $73 million of this borrowing authority.

Two letters of credit are maintained to support the sale of commercial paper notes. The District compensates the banks for the letters of credit by fee payments. There has not been a term advance under either of the letter of credit agreements.

NOTE 6. RANCHO SECO NUCLEAR POWER PLANT Rancho Seco is a 913 MW generating plant with the nuclear steam supply system designed by Babcock and Wilcox (B&W). Prior to 1985, Rancho Seco provided approximately 55 percent of the District's generating capacity and energy production and had operated at an average capacity factor of 50 percent as compared to an industry average of approximately 60 percent.

On December 26,1985, a loss of power to the plant's integrated control system (ICS) resulted in a plant trip and subsequent rapid cooldown of the reactor coolant system and the reactor vessel. An NRC fact finding team concluded the fundamental cause of this incident was design weaknesses in j the !CS and the equipment it controlled and that, while known to the District and the NRC, had not been adequately compensated for by corrective action.

Restart. The District decided not to attempt a restart of Rancho Seco until a comprehensive program (which looked beyond the specific causes of the December 1985 outage) of identifying and correcting the reasons for the deterioration in the performance of Rancho Seco and its staff was completed. The District developed a restart plan (the Restart Plan) which provided for a comprehensive review and upgrading of Rancho Seco's systems and equipment, its management

systems and programs, and its management and operating personnel.

On March 30,1988, Rancho Seco was restarted. Since that date, the plant has been operated and tested at a series of planned power output plateaus making up the District's Power Ascension Program.

Rancho Seco was declared commercially operable at the 80 percent power plateau in August 1988.

Since then, the plant has reached the 92 percent power plateau and the testing requirements through I this power level have been successfully completed. Rancho Seco, however,like all nuclear plants,is subject to periodic unscheduled outages and periods of reduced power production which will affect the plant's overall output level. The plant has experienced three suen outages since restart. The actual capacity factor from April 1,1988 to February 28,1989 was 44.8 percent.

The most recent outage occurred on January 31,1989, due to the failure of a governor in the l auxiliary feedwater system. On February 1,1989, the District received a Confirmatory Action letter from the NRC. This letter requires that the District not restart Rancho Seco prior to receiving NRC concurrence. The District has substantially completed all required and necessary investigatory and corrective action items related to this unscheduled outage. The District also requested an assistance visit by the Institute of Nuclear Power Operations (INPO) to assist with determining the causes of the unscheduled outage. The INPO report cited numerous problems in plant operation, engineering practices and management as the causes which led to this outage. The District has met with the NRC and INPO to address the causes of the outage and the corrective action items that have been implemented. The restart of Rancho Seco is dependent on the successful completion of corrective action items, testing, reviews and NRC concurrence. The District believes that the items will be completed and NRC concurrence will be obtained in March 1989, which will allow Rancho Seco to restart and operate in 1989 as planned.

The future of Rancho Seco is subject to the significant uncertainty presented by the Measure C Referendum discussed below. In addition, the continued successful operation of Rancho Seco is also subject to uncertainties outside of the control of the District, including but not limited to the following: unanticipated operational problems; equipment or systems failures at the plant; possible future shortages of operators and other personnel; the possible effects of incidents at other nuclear plants; or the failure of the District to satisfy the criteria of NRC, INPO and other independent appraisal teams in future inspections or evaluations of plant, operator or management performance.

The District believes that Rancho Seco should be operable in the future, as planned, unless it is required to be removed from service by the Measure C Referendum discussed below.

June 1989 Proposition. In the statewide primary election held in June 1988, two measures relating to Rancho Seco were presented to the voters of the District (the Measure B Initiative and the Measure C Referendum). The Measure B Initiative would have,if enacted, required the permanent shut-down of Rancho Seco as a rauclear generating station. In response to the Measure B Initiative, the District adopted and placed on the June 7,1988 ballot the Measure C Referendum. The Measure C Referendum provided that Rancho Seco would be operated by the District for the duration of the current refueling cycle, a period of approximately eighteen months. If performance fell below a minimum monthly capacity factor of 50 percent for four successive months after December 31,1988, then the plant would be permanently closed. To restart the plant thereaf ter, or to close the plant for other than not meeting minimum performance levels,would require a four fif ths vote of the District's Board. In addition, the Referencum called for the District to use all due diligence to divest itself of Rancho Seco in the eighteen month period following the election.

At the June 1988 election, the Measure B Initiative was narrowly defeated and the Measure C Referendum was narrowly passed by the voters. The Measure C Referendum requires that the continued operation of Rancho Seco be re-ratified by the majority of the voters. The District will l place this proposition on the June 1989 regular election ballot. If the voters choose to close Rancho Seco, a power descension process will begin immediately.

FinancialImpact of Rancho Seco. Rancho Seco represents a significant portion of the District's assets and generating capacity. At December 31, 1988, the net book value of Rancho Seco was approximately 5919.2 million, including $207.0 million of nuclear fuel. Plant costs including l

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I . .

decommissioning are being amortized over 30 years. The most recent estimate of the total decommissioning cost of the plant is $218 million in 1988 dollars of which $54.2 million has been funded as of December 31,1988.

The continued opesation of Rancho Seco is subject to the uncertainty of the requirements of the Measure C Referendum (including the June 1989 proposition), and other uncertainties, which are

. outside the control of the District and, accordingly, the District is unable to provide assurance as to whether Rancho Seco will continue in operation. Realization of the District's investment in Rancho Seco and associated nuclear fuel and the adequacy of the provision for estimated future decommissioning costs are dependent upon future events. If significant portions of the investment in Rancho Seco are not recovered through successful operation of the plant, or the rate-making process, the adverse impact upon the District's customers' equity and future statements of income would be substantial.

NOTE 7. DISPUTED SURPLUS POWER SALES Background. In February 1986, citing the prolonged Rancho Seco outage as a basis for its action, PG&E requested modifications to the Integration contract. PG&E proposed to pay for capacity only on an as delivered basis until commercial reliability was established and to require the District to pay cash currently for interest on negative capacity and energy exchange account balances. PG&E stated it would withhold payment for undelivered capacity and withheld payments aggregating $5.8 million for December 1985 and S29 million for the 12 months ended December 31,1986. The District believed that the position PG&E took was not in accord with the contract and on March 11,1986, initiated a proceeding before FERC to obtain a ruling that PG&E's action was improper. FERC ruled on December 30,1986 it had jurisdiction over the dispute. The FERC hearing before an administrative law judge commenced on September 29,1987 and concluded on October 30,1987. In January 1988, before a decision was rendered, the administrative law judge resigned and a new judge was assigned to the case.

On April 4,1986, PG&E filed with the District a formal claim against the Distria for $34.8 million plus interest. PG&E claimed that the District wrongfully collected $27.5 million of capacity payments for the period January 1985 through November 1985, "because SMUD (the District) has failed over an extended time period, including 1985, to operate and maintain its Rancho Seco Nuclear Power Plant in a manner intended to reasonably ensure Rancho Seco's reliability and usability". The remaining $7.3 million represents amounts the District had offset PG&E billings to that date as discussed above. The District formally rejected the PG&E claim. On April 23,1986, PG&E filed in the Superior Court a " complaint for declaratory relief on written contract" naming the District as defendant. PG&E sought a judgment on matters relating to the operation of Rancho Seco and its impact on the surplus power sales contract. The Court stayed the action pending the outcome of the FERC proceedings.

Surplus power sales for 1986,1987 and 1988 include billings to PG&E subject to the dispute described above of $30 million, $10.3 million and $0, respectively. The District recovered payments withheld by PG&E for 1986 of $29 million by offsetting payments due to PG&E for power purchased by the District under the contract.

The District and PG&E entered into an agreement deted July 6,1987 which provides that, effective January 1,1987 and until December 31,1987, the District would pay PG&E in full for all energy provided without offsets of any kind, and PG&E would deposit in an escrow account all amounts billed by the District for excess capacity under the terms of the contract.

PCdE Dispute Settlement. Based on a March 1988 Memorandum of Understanding, the District and PG&E adopted a Dispute Settlement Agreement on July 27, 1988 which was effective as of January 1,1988. The Dispute Settlement provides for settlement of all existing PG&E claims against the District related to Rancho Seco. In return for PG&E's abandonment of those claims and for other benefits that the District will receive under the agreements, among them PG&E's commitment

to sell capacity to the District at favorable rates from 1990 through 1994, the District has released 58.6 million held in escrow for PG&E capacity purchases, will pay $66.5 million in five equal installments over four years, beginning August 1988,and forego $4.1 million in receivables for surplus capacity and energy sales.

L The total cost of the settlement to the District is approximately 579.1 million. In recognition of

! future reduced capacity charges from a new power purchase agreeme nt with PG&E, that resulted from the settlement, the Board of Directors has established.that this cost will be recovered through rates over the life of the new power purchase agreement. Thus, the District has deferred the cost of the settlement in the Balance Sheet pending future rate recovery.

1988 Amendment. The District also adopted a 1988 Amendment to the existing PG&E Contract.

t The Amendment provides that the District is not required to return to PG&E any capacity which was borrowed as of January 1,1988. The Amendment further provides that the provisions of the energy exchange account are no longer applicable except for the return of energy borrowed, plus in kind interest, over the term of the 1988 Amendment and the Power Sale Agreement. Future energy and capacity purchases by the District, after January !,1988, must be paid for in cash.

Transmission Agreement / Transmission Rate Schedule. The agreements between the District and PG&E required PG&E to file a unilateral Transmission Rate Schedule by November 1,1988 if the parties were unable to negotiate a Transmission Agreement by that date. Having failed to negotiate that agreement PG&E has filed a Transmission Rate Schedule and the District is asking FERC for a modification of that schedule. The District has also filed a motion requesting an expedited hearing and a FERC decision by July 31,1989.

Potential Effect on the District. The Dispute Settlement Agreement provides that if it, the 1988 l Contract Amendment, a Transmission Agreement, an Interconnection Agreement, and a new PG&E Power Sale Agreement are not approved by FERC before July 16,1991, then the District and PG&E would be restored to their respective positions as of January 1,1988 as if the Dispute Settlement ,

Agreement had never been executed. If the Dispute Settlement Agreement is treated as never having.

been executed, the disputes between PG&E and the District would, presumably, again become active.

In February 1989, FERC approved the 1988 Contract Amendment, the Dispute Settlement Agreement and the new PG&E Power Sale Agreement.

The District's Board of Directors, which has authority to establish the IcVel of rates charged for ,

all District services, has established a rate making balancing account for deferring material losses arising from adverse resolutions or settlements of claims and litigation that have not been previously considered in District rates. Under this balancing account mechanism, recognition of any loss resulting from the PG&E dispute would be deferred for rate making purposes and recovered over a future period of time and, therefore, the ultimate outcome of the disputed surplus power sales will not have a material adverse impact on the District's customers' equity and future statements of income.

NOTE 8. COMMITMENTS AND CONTINGENCIES Commitments. The District's capital expenditures (excluding allowance for funds used during construction) for 1989 through 1991 are estimated to be $497.6 million. Approximately 5151.6 million is for transmission and distribution projects, $209.4 million for nuclear plant modifications and repairs, and $136.6 million for nuclear fuel and other construction.

The District's first geothermal unit became commercially operationalin December 1983. Under its steam supply agreement, the District is obligated to pay a minimum of $6.6 million annually during the operating life of the plant subject to price level adjustments and, under a transmission service agreement, the District is also obligated to pay a minimum of 51.1 million annually until 1990 for transmission of the energy to the District.

On June 10,1987 the District entered into a Power Entitlement Assignment Agreement with Pacific Power and Light which will make available 100 MW of firm capacity and associated energy

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from 1990 through 2014. In exchange for the firm capacity entitlement, the District was obligated to pay approxim'ately 598 million on January 1,1988. The District had the option to defer this payment until December 31,1989 or, under certain conditions, to pay it in monthly installments over the term of the agreement. The District elected to defer payment and interest began accruing from January 1,1988 at the lesser of the prime interest rate or 9.5 percent. Energy received under the agreement will be paid for as delivered and cannot exceed 657,000 megawatt hours per year. The District has a minimum annual take or pay commitment for this energy of approximately $4 million beginning in 1990 through the term of the agreement.

In August 1988, based on the March 1988 Memorandum of Understanding, the District and Southern California Edison (Edison) entered into a power sale agreement effective January 1,1990 through December 31,1999 allowing the District to purchase up to 700 MW of capacity and associated energy and providing for Edison to purchase from the District a portion of its surplus energy. The District is committed to purchase a minimum of 300 MW,250 MW of which the District may elect to purchase only during the summer months, and has an option, which expires July 31,1989, to purchase up to an additional 400 MW of capacity. If the District elects to purchase 250 MW of the 300 MW minimum obligation as summer capacity, then the District has the option to reduce the commitment to 50 MW at ter 1994. The District is responsible for arranging for transmission of all capacity and l energy and if the District does not notify Edison of such arrangements by July 31,1989, then the Edison Power Sale Agreement is terminated. The Edison Power Sale Agreement is expected to be filed and approved by FERC by March 1989. The minimum contract obligation is estimated to be 5180 million over the life of the contract.

In July 1988, the District and PG&E entered into a power sale agreement providing for the l purchase by the District from PG&E,during the period January 1,1990 through December 31,1999, )

of a minimum of 600 MW and the option, which expires on July 1,1989, to increase the commitment up to 1,000 MW. Additionally, the District has the option to reduce the commitment to 400 MW from January 1,1990 through December 31,1994 and to 0 MW thereafter. The minimum contract obligation is estimated to be 5148 million over the life of the contract.

Litigation. A $1 billion class action suit was filed against the District alleging the District allowed excessive amounts of radioactivity in the liquid effluent discharges from the District's nuclear power plant, Rancho Seco, injuring the claimants and their land, crops, livestock and business.

The Courts denied certification of the class. Unless the ruling is reversed, the plaintiffs can proceed only as a group of individuals with individual claims. A second class action claim in the amount of 5500 million was filed alleging intentional misconduct and deceit in connection with such releases.

An amended complaint combining the $500 million claim with the Si billion suit was filed on February 10,1987.

Tests conducted by nationally recognized experts show that rnaximum exporure to any one individualin the Rancho Seco area is well below the rate allowed by the United States Environmental Protection Agency. The District believes that any liability on account of such discharges is limited to an amount covered by liability insurance and a federal government indemnity agreement and will not have a material adverse impact on the District's financial position and results of operations.

The District has been notified that scrapped distribution transformers which were sold by the District and disposed of by a dealer are suspected of containing polychlorinated biphenyls (PCB's) and responsible for contaminating the dealer's site. In April 1986, the California State Department of Health Services (Department) issued a Determination of Imminent or Substantial Endangerment and Remedial Action / Director's Order (Order)against the District and the dealer. The Order requires that a remedial measure be developed and implemented at the site to contain contaminants during the rainy season. The Order further requires that the District and the dealer prepare, submit and implement a remedial investigation (testing) plan for soils and groundwater to the Department.

Testing has been completed and shows no groundwater contamination, however, soil testing results show that the extent and depth of contamination is greater than originally anticipated. The District has implemented an interim remedial measure and removed portions of the contaminated soil as well

as a large quantity of transformers from the site.

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The District recently completed a feasibility study which evaluated 13 possible soil remedies at i the site, from passive containment to off-site incineration, with cost estimates ranging from $900,000 to $22.7 million. Once the feasibility study has been approved a remedial action plan will be submitted for approval. Until the remedial action plan is approved, the cost of remediation at the site remains uncertain. Based on estimates prepared by a consultant, the District believes that the total cost of compliance will be approximately $3 million which has been accrued as of December 31, 1988. The District believes that compliance with the Order and final clean-up costs will not have a material adverse impact on the District's customers' equity and future statements of income.

Nuclear Liability Insurance. The District's potential public liability for claims resulting from nuclear or radioactive incidents is limited to approximately $7.3 billion as of January 1,1989, under provisions of the Price-Anderson Act. The District has insurance coverage of $160 million, through private insurance pools. The remaining $7.1 billion in financial protection would be provided by  ;

assessments against utilities owning nuclear reactors. The District is subject to a retrospective assessment of up to S63 million per nuclear incident, payable in annualinstallments of no more than

$10 million.

l The District insures against losses for nuclear property damage and decontamination liability using several layers of coverage. The first layer of coverage, through American Nuclear Insurers (ANI), provides the first $500 million in coverage limits. Excess layers from ANI and Nuclear Electric Insurance Limited, Pool II (NEIL II), provide $731.6 million in additional coverage. Total protection is 51.3 billion, which exceeds the NRC requirement of $1.1 billion. The District is subject to a maximum retrospective premium assessment of 57.7 million per year in the event of a loss by any NEIL 11 member.

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