ML21195A326

Independent Spent Fuel Storage Installation - 2020 Annual Financial Report

ML21195A326
Person / Time
Site:	07200011
Issue date:	06/30/2021
From:	Gacke B Sacramento Municipal Utility District (SMUD)
To:	Document Control Desk, Office of Nuclear Material Safety and Safeguards, Division of Fuel Management
References
DPG 21-100
Download: ML21195A326 (77)

Text

June 30, 2021 DPG 21-100 Attn: Document Control Desk Director, Division of Fuel Management Office of Nuclear Material Safety and Safeguards U.S. Nuclear Regulatory Commission Washington, DC 20555-0001 Docket No. 72-11 Rancho Seco Independent Spent Fuel Storage Installation Renewed License No. SNM-2510 2020 ANNUAL FINANCIAL REPORT Attention: Chris Allen In accordance with 10 CFR 72.80(b), I am submitting the Certified Financial Statements

- Report of Independent Auditors for the period ending December 31, 2020 and 2019 for the Sacramento Municipal Utility District (SMUD). <

• If you or members of your staff have questions requiring additional information or clarification, please contact me at (916) 732-4812.

f}ol> I Brad Gacke Manager, Rancho Seco Assets j\lrJ/ 5 s 2/p Enclosure t,Jlv/:5-5 cc: RIC: 1F.099 Rancho Seco Nuclear Generating Station I 14440 Twin Cities Road I Herald, CA 95638-9799 I 916.452.3211 I smud.org

Financial Statements Report of Independent Auditors December 31, 202_0 and 2019 0091-21

SACRAMENTO MUNICIPAL UTILITY DISTRICT TABLE OF CONTENTS As of and for the Years Ended December 31, 2020 and 2019 Report oflndependent Auditors Required Supplementary Information - Unaudited Management's Discussion and Analysis 3 Financial Statements 15 Notes to Financial Statements Note 1. Organization 20 Note 2. Summary of Significant Accounting Policies 20 j

Note 3. Accounting Change.* 28 Note 4. Electric Utility Plant 29 Note 5. Investment in Joint Powers Authority 30 Note 6. Component Units 32 Note 7. Cash, Cash Equivalents, and Investments 36 Note 8. Regulatory Deferrals 38

. I Note 9. Derivative Financial Instruments 41 Note 10. Long-term Debt 46 Note 11. Commercial Paper Notes 51 Note 12. Fair Value Measurement 52 Note 13. Accrued Decommissioning Liability 54 Note 14. Pension Plans ' 56 v

Note 15. Other Postemployment Benefits 61 Note 16. Insurance Programs and Claims 66 Note 17. Commitments 67 Note 18. Claims and Contingencies 68 Note 19. Subsequent Events 69

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SACRAMENTO MUNICIPAL UTILITY DISTRICT TABLE OF CONTENTS - CONTINUED As of and for the Years Ended December 31, 2020 and 2019 Required Supplementary Information - Unaudited Schedule of Changes in Net Pension Liability and Related Ratios 71 During the Measurement Period - PERS Plan Schedule of Changes in Net Pension Liability and Related Ratios 72 During the Measurement Period - SHY Schedule of Plan Contributions for Pension - PERS Plan 73 Schedule of Changes in Net OPEB Asset or Liability and Related Ratios 74 During the Measurement Period Schedule of Plan Contributions for OPEB 75

Sacramento Municipal Utility District Management's Discussion and Analysis - Unaudited For the Years Ended December 31, 2020 and 2019 Using this Financial Report This annual financial report for Sacramento Municipal Utility District (SMUD) consists of management's discussion and

• analysis and the financial statements, including notes to financial statements. The Financial Statements consist ofthe Statements of Net Position, the Statements of Revenue, Expenses and Changes in Net Position and the Statements of Cash Flows.

SMUD maintains its accounting records in accordance with Generally AcceptedAccountingPrinciples forproprietacy funds as prescribed by the Governmental Accounting Standards Board (GASB). SMUD's accounting records generally follow the Uniform System of Accounts for Public Utilities and Licensees prescribed by the FederalEnergy Regulatory Commission (FERC), except as it relates to accounting for contributions ofutility property in aid ofconstruction.

Overview of the Financial Statements The following discussion and analysis of the financial performance of SMUD provides an overview of the financial activities for the years ended December 31, 2020and2019. This discussion and analysis should be read in conjunction with.

the financial statements and accompanying notes, which follow this section.

The Stat~entsofNet Position provide information aboutthe nature and amountofresources and obligations ata specific point in time.

The Statements ofRevenues, Expenses and Changes in Net Position report ail SMUD's rerenues and expenses for the periods shown.

The Statements of Cash Flows report the cash provided and used by operating activities, as well as other cash sources, such as investment income and debt financing, and other cash uses such as payments for debt service.and capital additions.

The Notes to Financial Statements provide additional detailed information to support the financial statements.

\._

Nature of Operations Underprovisions ofCalifornia's Municipal Utility District Act, the citizens of Sacramento voted in 1923 to form their own electric utility- SMUD. The independently run community-owned ~tility began operations on December 31, 1946 an dis not subjecttoregulationoroversight by the California Public Utilities Commission. It is now the sixth largestcommunity-owned electric utility in the natio~.

Governed by an elected board of directors (Board), SMUD has the rights and powers to fix rates and charges for commodities and services it furnishes, incur indebtedness, and issue bonds or other obligations. SMUD is responsible for the acquisition, generation, transmission, and distribution ofelectric power to its service area with a population of approximately I .5 million - most of Sacramento County and small adjoining portions ofPlacer and Yo lo Counties. Its purpose is to enhance th equality of life forits customers andcommunitythrough creative energy solutions. The Board has independentauthorityto set SMUD'srates and charges. Changes in rates require a publichearingandfonnalaction bythe Board.

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In 2018, SMUDbeganrollingoutthetransitionto Time-of-Day(TOD)ratesto better align with the cost ofproviding electricity, send more accurate price signals to customers, and give customers the opportunity to bettermanagetheir electricity bills by shifting usage to lower-cost time periods. In 2020, after the first fullyearofTOD, SMUD showed a lower energy consumption and a 13 0 MW reduction in peak load, surpassing our environmental, peak load reduction and financial goals set forTOD. In June 2019, the Board approved a3.75percentrate increase effective January 2020, 3.0 percent rate increase effective October 1,2020, a2.50percentrateincreaseeffective January 1,2021 and a 2.0percentrate increase effective October 1,2021, forallcustomerclasses. Additionally, the Board approved a restructuring of the commercial rates and increases in the fixed bill components, such as the System Infrastructure Fixed Charge and demand

. charges along with a decrease in energy charges. Due to COVID-19, the Board delayed the implementation of the Commercial Rate Restructure for one year to be effective not la terthan May 31, 2022. Even with these increases, SMUD's rates continue to remain amongstthelowest in the state. In 2020, the average system rate was 35.0percentbelowthe average rate cifthe nearestinvestor-ownedutility.

SMUD's vision is to be the trusted partner with its customers and the community, providing innovative solutions to ensure energy affordability andreliability, improve the environment, reduce the region's carbon footprint, and enhance the vitality of the community. SMUD's business strategy focuses on serving its customers in a progressive, forward looking manner, addressing current regulatory and legisla tiveissues and potential competitive forces. This includes ensuring financial stability by establishing rates thatprovide acceptable cash coverage of all fixed charges, taking into consideration the impact of capital expenditures and other factors on cash flow.

COVID-19 Global Pandemic In response to national, state, and local mandates, in mid-March SMUDordered its non-essential employees to work remotely and reduced critical workforce onsite. SMUD continues to support its customers during the COVID-19 pandemic. SMUDprovided its electric customers with suspension ofdisconnections and stopped collections, late fee, and security de~osit processes for all customers to support them during this difficult time through April 2021. SMUD is workingproactively with electric customers to create payment arrangements for those who need them. The effects of the pandemic have resulted in an in crease in the numberofpast due customeraccounts. As a result, SMUD increased its uncollectablereserve for account write-offs to $45.0million as ofDecember31,2020. Other financial and operational impacts to SMUDassociated with COVID-19arenoted throughout this report.

Financial& Operational Highlights In July 2020, the Board adopted a Climate Emergency Declaration to work toward an ambitious goal of delivering carbon neutral electricity by 2030 and indicating a strongcommitmentto finding additional opportunities to accelerate decarbonization in ou*renergy supply. Building on the Board's Climate Emergency Declaration, our2030 Clean Energy Vision calls forabsolute zero carbon emission in our power supply by 2030. It's anaggressiveand nation-leadinggoaland a dedicated team is now developingour2030 Zero Carbon Plan, which will be presented to the Board in March 2021. To achieve zero carbon by 2030, we must address our reliability needs, and we see much promise in technologies such as long duration energy storage, flexible load, and renewable power-to-gas technologies.

Due to ourstrongcreditratingand financial strength, SMUDwas one of the first utilities able to issue debt after the debt markets froze due to COVID-19. This shows the importance ofmaintainingourstrongcreditratingof AA by two of the three majorratingagencies and continuing to monitorourfinancialmetrics by exceeding the Board's policy fora minimum fixed charge coverageratio ofl .50times of annual budgets. Oursuccessfulissuance of$400.0million of new debt in May was used to reimburse SMUDfor2018 and2019capitalprojectsandpaid off all the outstandingcommercialpapernotes.

This included the issuance of $25 .2 million of Green Bonds, which reimbursed SMUD for ca pita! expenditures tied to South Fork Powerhouse, Jones Powerhouse, and the Rancho Seco II Solar interconnection. This was SMUD's second green bond 4

issuance. Paying offour commercial pa pernotes frees up additional capacity for future capital expenditures, provides reserves for any unforeseen circumstances and creates flexibility in choosing when to issue new debt. SMUD ended the year strong with more than 150days cash on hand and over$168.0million in the rate stabilization funds.

In 2020, SMUDwasrecognized by its residential and commercial customers as the top California utility by J.D. Power, receiving its highest scores ever. SMUD also receivedrecognitionfor its efforts in innovations and environmental stewardship. SMUD developed and released the Sustainable Communities Resource Priorities Map to drive community supporttounderresourcedneighborhoods. The map has Jogged over3,500uniquehits since launch and has gained adoption by over 10 local jurisdictions. In addition, approximately 24.0 percent of contract dollars were a warded to small, local businesses.

SMUD has continued to grow its Greenergy program and is now one of the largest ofits kind in the nation. The program was redesigned in 2020 to now focus oncarbonsa vings in addition to renewable energy to provide consistency and alignmentwithour2040CarbonPlan. InFebruary2020,theCalifomiaEnergyCommissionapprovedSM UDtoofferthe Neighborhood SolarSharesprogram as an alternative to the 2019 solar mandate fornew low-rise, residential homes.

In 2014, FERCissued a fifty-year license for the Upper American River Project (UARP)which consists ofthreerelatively large storage reservoirs and eight powerhouses containing eleven turbines. The UARP is one of SMUD's lowest cost power

- sources. In addition to providing clean hydroelectric power and operational flexibility, it provides habitat for fish and wildlife and a variety ofrecreational opportunities, including camping, fishing, boating, hiking, horseback riding, mountain biking, and cross-country skiing. The combined capacity of the UARP is a pproximately673 MW and represents a bout 15 .0 percentofSMUD'saverage annualretailenergy requirements. SMUD's otherpowergenerationfacilities include a 3 MW ofsolarphotovoltaic installations, 230MWSolano WindProject(Phase 1-3), and five local gas-fired power plants with total capacity of approximately 1,103 MW. In addition, SMUD has entered into several power purchase agreements to help meet its remainingpowerrequirements.

As part of the hydro relicensing process, SMUD entered into long-term contracts to provide certain services to four different government agencies- U.S. Department oflnterior Bureau of Land Management, U.S. Department ofAgriculture Forest Service, El Dorado County, and the California Department of Parks and Recreation. At December 31, 2020, the liability for these contractpayments was $64.8 million.

As ofDecember2020, SMUD'stotalreservoirstorage in the UARPwas about 51.0 percent ofcapacity, approximately 8.0 percent below the historical average forth is date. SMUD manages its reservoirs tom axim izewa ter storage going into the summer season and thereby preserving generating capacity during SMUD's high load months. Although reservoir levels in the UARP are only slightly below historical averages, there remains the potential for wide swings in precipitation from year to year and dry conditions could return again in any year. In years with below average rainfall, SMUD may have to generate or purchase replacement energy at additional cost. A Hydro Rate Stabilization Fund (HRSF) was established to help absorb higher energy costs when hydroelectric production is down and to serve as a bufferagainstunexpectedfinancial developments. In April2020, $7.7million was transferred from the HRSF duetobelowaverage precipitation. The balance in the HRSFatDecember31,2020was $74.7 million.

• SMUD also has a long-term agreement with the Western Area Power Administration (WAPA)to purchase power generated by the Central Valley Project, a series offederalhydroelectric facilities operated by the U.S. Bureau of Reclamation. SMUD uses a Rate Stabilization Fund (RSF) to offset any excess or deficits in WAPA energy deliveries.

Due to excess deliveries by WAPA, $1.6 million was transferred to theRSFin 2020. SMUDalso participates in carbon allowance auctions under California Assembly Bill32 (AB-32), the Global Warming Solutions Act. Proceeds from these auctions are recognized with related expenses. When proceeds from these auctions exceed related expenses the difference is deferrl:)d into future years. SMUD participates in the Low Carbon Fuel Standards (LCFS) pro gram under AB-3 2, which is designed to reduce greenhouse gas emissions associated with the lifecycle of transportation fuels used in California.

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.SMUD receives credit from this program which are then sold. Revenue from these sales are recognized with related expenses. When proceeds from these sales exceed related expenses the difference is deferred into future years. In 2020, amounts transferred from the RSFto revenueforrelatedexpenses for AB-32andLCFS sales amounted to $4.1 million.

In 2020, the Board authorized SMUDto transfer$35.0million from revenue to the RSFto offset future one-time specific expenses which may have a significant financial impact on SMUD. This will provide reserves to cover large contingencies while limitmg or leveling out the impact of cost increases to ratepayers. At December 31, 2020, the balance of the RSFwas $94.0million.

Decommissioning SMUD has made significant progress toward completing the Decommissioning Plan for its Rancho Seco nuclear facility, which was shutdown in 1989. The plan consists of two phases that allowSMUDto terminate its posses~ion-only license.

Phase I of the decommissioning was completed atthe,endof2008. Phase II consists ofa storage periodfortheClassB and Class C radioactive waste overseen by theexistingfacility staff, followed by shipmentofthewaste for disposal, and then complete termination ofthe possession-only license. SMUD also established and funded an external decommissioning trust fund as part of its assurance to the Nuclear Regulatory Commission (NRC)to pay for the cost of decommissioning.

Shipment of the previously stored Class Band Class C radioactive waste was completed in November2014 to a low-level radioactive waste facility located in Andrews, Texas. The remaining Phase II decommissioning activities required for termination ofthe possession-only license commenced in 2015. In September2017, SMUD formally requested the termination ofthe possession-only license and termination of the possession-only license was completed in 2018.

As part of the Decommissioning Plan, the nuclear fuel and Greater Than Class C (GTCC)radioactive waste is being stored in a dry storage facility constructed by SMUD and licensed separately by the NRC. The U.S. Department ofEnergy (DOE),

under the Nuclear Waste Policy Act of 1982, was responsible forpermanentdisposalofusednuclearfueland GTCC radioactive waste and SMUD contracted with the DOE forremovalanddisposalofthat waste. The DOE has yetto fulfill its contractual obligation to provide a permanent waste disposal site. SMUD has filed a series of successfulla wsuits agtinstthe federalgovemmentforrecoveryofthepastspent fuel costs, with recoveries to date in excess of$104.0 million, SMUDwill continue to pursue cost recovery claims until the DOE fulfills its obligation.

The total Accrued Decommissioning balance in the Statements of Net Position, including Rancho Seco and other AR O's, amounted to $99.5 million as ofDecember3 l,2020, Employee Relations and Benefits SMUD has a four-year memorandum ofunderstanding (MOU) with both ofits collective bargaining units, the International Brotherhood of Electrical Workers Local Union 1245, and the Organization of SMUD Employees that is effective through 2021. Both contracts contain a no-strike/no-lockout clause effective during the life of the agreements. In October2019 SMUDbegan operatingunderanMOU forthePublic Safety Officers' Association that is effective through 2021. This contractalso contains a no-strike/no-lockoutclause effectiveduringthe life of the agreement.

SMUD participates in the California Public Employees' Retirement System (PERS), an agent m ultiple-employerpublic employee defmed benefit pension plan. SMUD reports the Net Pension Liability (NPL), which is the difference between the actuarial present value of projected pension benefit payments attributable to employees' past service and the pension plan's fiduciary net position, in its Statements ofNet Position. At December 31, 2020, the NPL was $469.8million. SMUD elected to follow accountingforregulatedoperations underGASB SGAS No. 62, "Codiftcation ofAccounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB andAICPA Pronouncements," (GASB No.

62)and asofDecember31,2020, the balance of the regulatory asset for pension amounted to $374.6 million. Amortization of the regulatory asset begtn in 2018 over a period of25 years. In 2020, as part ofa ten-year fun ding strategy forthe unfunded liability, SMUDmade an additional$99.0million in supplemental contributions to theplanas part ofthis strategy.

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SMUD provides otherpostemployment benefits (OPEB)to allemployees who retire from SMUDand their dependents, in accordance with SMUDpolicy andMOUs. These benefits are funded through the PERS California Employer's Retiree Benefit Trust, an agent multiple-employer plan. In 2018, SMUD implemented SGAS No. 7 5 "Accounting and Financial ReportingforPostemploymentBenefUsOtherthanPensions"(GASB No. 75). TheprimaryobjectiveofGASB No. 75 is to improve accounting and financial reporting by state and local governments forpostemployment benefits other than pensions. SMUD is required to reportthe Net OPEB Liability (NOL) or Net OPEB Asset (NOA), which is the difference between the actuarial present value ofprojected OPEB benefit payments attributable to employees' past service and the OPEB plan's fiduciary netposition, in its Statements ofNetPosition. AtDecember31,2020, the NOA was $1.0 million.

SMUD elected to follow accountingforregulated operations underGASB No. 62 and recorded a regulatory.isset and as of Dec em ber3 l, 2020, the balance of the regulatory asset for OPEB amounted to $306.6 million. Amortization ofthe regulatory asset began.in 2020 over a period of25 years.

Developments in the Energy Market New developments in the energy marketatboththefederalandstatelevelkeptSMUDon high alert as it continued to monitorand address the potential impacts on the organization. Legislation at the federal level include policies on cyber security, regulations related to transmission access, the North American Electric Reliability Corporationrelia bility standards, anti-marketmanipulationrules, advance refunding orrefinancingm unicipal bonds and GHG emissions.

Legislation at the state level includes bills that provide for GH G standards and greater investment in energy efficiency, mandate rooftop solar, renewable portfolio standards, wildfire mitigation and ongoing regulatory proceedings related to Sacramento- San Joaquin River Bay- Delta processes.

SignificaritAccountingPolicies*

In accordance with GASB No. 62, the Board has takenregulatory actions forratemakingthat result in the deferral of expense and revenue recognition. These actions result in regulatory assets and liabilities. SMUD has regulatory assets that cover costs related to decommissioning, derivative financial instruments, debt issuance costs, pension costs, and OPEB costs. As ofDecember31, 2020, total regulatory assets were $742.6 million. SMUD also has regulatory credits that cover costs related to contributions in aid of construction, theRSF andHRSF, EAPR reserves, SB~ 1, grant revenues, and Transmission Agency of Northern California operations costs. As ofDecem ber 3 1, 2020, total regulatory credits were

$516.2 million.

Requests for Information Forni ore information about SMUD, visit our website at www.smud.org or contact us at customerservices@smud.org 7

FINANCIAL POSITION CONDENSEDSTATEMENTSO FNETPOSITION Decem her 3 1, 2020 2019 2018 (restated)*

(millions of do liars)

Assets Electric Utility Plant - net $ 3,747 $ 3,626 $ 3,517 Restricted and Designated Assets 187 173 120 Current Assets 1,239 933 960 Noncurrent Assets 1 516 1 606 1,620 Tota 1Assets 6,689 6,338 6,217 Deferred Outflows of Resources 271 238 229 Total Assets and Deferred Outflows ofResources $ 6960 $ 6 576 $ 6 446 Liabilities Long-Term* Debt - net $ 3,259 $ 2,944 $ 2,639 Current Liabilities 437 491 766 Noncurrent Liabilities 694 731 730 Total Liabilities 4,390 4,166 4,135 Deferred Inflows of Resomces 613 606 586 Net Position 1 957 1 804 1 725 Total Liabilities, Deferred Inflows of Resources, and Net Position $ 6 960 $ 6 576 $ 6 446

• See Note 3 of the financial statements for discussion ontherestatementoftheDecemb er3 l,2018 Statement ofNet Position.

ASSETS AND DEFERRED OUTFLOWS OF RESOURCES 2020 Compared to 2019

• As ofDecember3 l,2020, SMUDhas invested approximately $3,747.0million in electric utility plant assets and construction work in progress (CWIP) net of accumulated depreciation. Electric Utility Plant-net makes up about 54 percent ofSMUD's Total Assets and Deferred Outflows of Resources, which is similarto 2019. In 2020, SMUD capitalized approximately $201.0 million of additions to electric utility plant in the Statements ofNet Position. The additions were primarily due to the completion of Slab Creek, distnbution line work, purchases related to the replacementofbulk substations. These additions wern offset by the retirementofdistribution assets, fleet equipment and communication equipment.

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The following charts showthebreakdown ofElectric Utility Plant-net by majorplant category:

December 31, 2020 Other 28% liilGeneration I.al Transmission Transmission li:il Distribution 10%

ii Other

• SMUD's restricted and designated assets are comprised ofdebt service reserves, nuclear decommissioning trust funds, rate stabilization fund, andotherthird-party agreements or Board actions, less the currentportion. These assets increased$14.l million during2020. The increasewasdueto transfers of$25.0million to the RSF(includingthe HRSF), as a result of $3 5.0 million deferral of2020 operating revenues forrecognition in future years to offset one-time expenditures not identified in the annual budget, offset by HRSF transfer to revenue for below average precipitation, and funds used for low carbon and electric vehicle programs. In addition, there was a decrease ofthird-party agreements of$6.7 million and decrease of$4.3 million in revenue bond, debtservice and construction reserves and the current portion ..

• Tota 1current assets increased $305 .6 million in 2020. Unrestricted cash and cash equivalents and umestricted investments increased$263.4 million primarily as a result of the issuance of$400.0million ofnewdebt, receivables from retail customers- net increased $23.5 million due to suspension ofdisconnections and collection activities amidst COVID-19 in March 2020, and inventory increased by $12.3 million.

• Totalnoncurrent assets decreased$89.7 million primarily due to decreases in unrestricted investments, regulatory costs for future recovery and prepaid gas.

• Tota I deferred outflows of resources increased by $32. 7 million primarily due to an increase in deferred pension and OPEB outflows of$70.0 million offset bya decrease in accumulated decrease in fair value ofhedgingderivatives of 33.6million.

2019 compared to 2018

• As ofDecember31,2019, SMUDhas invested approximately $3,625.9million in electric utilityplantassets and construction work in progress (CWIP)net of accumulated depreciation. Electric Utility Plant-net makes up about 55 percent o fSMUD' s Total Assets and Deferred Outflows of Resources, which is unchanged compared to 2 0 18. In 2019, SMUD capitalized approximately $420.4 million of additions to electric utility plant in the Statements of Net Position.

The additions were primarily due to the renovation ofthe Headquarters building, distribution line work, purchases related to the replacement ofbulkstibstations, investments in software and hardware andmajoroverhauls in the Joint 9

Power Authorities (JPAs). These additions were offset by the divestment ofthe Rosa gas reserves, retirement of distribution assets, fleet equipment and communication equipment

• SMUD's restricted and designated assets increased$53.0 million during2019. The increase was due to transfers of

$4 7 .0 million to the RSF (including the HRSF), as a result ofa bove average precipitation, higher energy deliveries from WAPA and excessAB-32auctionandLCFS credit sales. In addition, there was an increase ofthird-partyagreements of $16.4 million, offset by a decrease of $10.6 million in revenue bond, debt service and constructionreserves and the current portion.

• Total current assets increased $55.9 million in 2019. Unrestricted cash and cash equivalents increased$44.3 million, regulatory costs to be recovered within one year increased by $12.8 million, unrestricted investments increased by 11.5 million, and prepayments and other increased by $7 .7 million. These increases were offset by a decrease in prepaid gas of$22.2 million.

• Totalnoncurrent assets decreased $97.9 million primarily due to decreases in unrestricted investments, regulatory costs for future recovery and prepaid gas.

• Total deferred outflows ofresources increased by $9.4 million due to an increase in deferred pension andOPEB outflows of$14.2 million offset by a decrease in unamortized bond lossesof$4.2million.

LIABILITIES AND DEFERRED INFLOWS OF RESOURCES 2020 compared to 2019

• In May 2020, SMUD issued$400.0 million of2020 Series H Revenue Bonds. Proceeds from the 2020 Series H Bonds were used to payoffallthe outstandingcommercialpapernotes andreimburseSMUDfor2018 and 2019 capital projects. The2020 SeriesH Bonds have a fixed coupon rate of4.0 percent to 5.0percentandamortizefrom2029 to 2050.

The following table shows SMUD's future debt servicerequirements through 2025 as ofDecember3 l, 2020:

Debt Service Requirements 300 250 iii 200 C

~

=

~

150 IJ Interest C r.il Principal

~ 100 so 0

2021 2022 2023 2024 2025 10

As ofDecember3 l,2020, SMUD's bonds hadanunderlyingratingof"AA" from Standard &Poor's, "AA" from Fitch, and "Aa3" from Moody's. Some ofSMUD's bonds are insuredandarerated by the rating agencies atthe higher of the insurer's rating or SMUD's underlyingra ting.

• Totalcurrent liabilities decreased $54.7 million during 2020. The decrease was primarily due to pay offof commercial papernotes of$50.0million and decrease in hedging derivative instruments maturing within one yearof$19.1 million.

This decrease was offset by an increase in purchased power payable, interest payable and long-term debt due within one yearof$18.5 million.

• Total noncurrent liabilities decreased $36 .8 million during 2020. The decrease was mainly due to a $3 2.2 million decrease in the net OPEB liability and hedging derivative in vestments of $14 .5 million, offset by an increase in net pension liability andaccrueddecommissioningof$8.8million.

• Total deferred inflows ofresources increased$6.6million. The increasewas primarily due to regulatory credits increased by $26.7 million and OPEB inflows increased by $16.0 million, offset by a decrease in deferred pension inflows of$31.8million.

2019 compared to 2018

• In July 2019, SMUDissued$191.9 million of2019 SeriesG Revenue Bonds, $100.0million of2019 Series A Subordinate Revenue Bonds, and $100.0million of2019 Series B Subordinate Revenue Bonds. The 2019 Series G Bonds have a fixed coupon rate of2.375 percentto 5.0percentandamortizefrom2029 to 2041. The 2019 Series Ahas a fixed interestcouponrateof5.0percent, amortized from2041 to 2049, with a mandatory remarketingpurchase in April 2023. The2019 Series B has a fixedcouponinterestrate of5.0 percent, amortized from 2041 Jo 2049, with a .

mandatory remarketingpurchase in April2025. Proceeds from 2019 Series G Bonds, the 2019 Series A Bonds and the 2019 Series B Bonds were used to refund outstanding commercial paper.

In September 2019, CVFAdefeased $5.4 million of2009 Series Bonds maturing in July 2020, alongwith the accrued interestusingCVFA'savailable funds. The corresponding amount was placed in an irrevocable trust which has a balanceof$5.6 million at December 31, 2019'. In addition, SCA defeased $12.9million of2009 Series Bonds maturing July 2020 andJuly 2021, alongwith the accruedinterestusingSCA's available funds and$7.9million from SMUD.

The corresponding amount was placed in an irrevocable trust which has a balance of$13.7 million.as ofDecember3 l, 2019. The defeasancesresultedin a currentaccountinglossof$0.8million which is included in Intereston Debtin the Statements of Revenues, Expenses, and Changes in Net Position.

• Total current liabilities decreased$274.4 million during 2019. The decrease was mainly dueto decreases in commercial paper, accounts payables, and long-term debt due within one yearof$308.3 million, offset by increases in interest payable, and hedging derivative instruments maturing within one yearof$26.3 million.

• Totalnoncurrent liabilities increased$ 1.0 million during 2020. The increase was mainly due to a $13 .6million increase in the net pension liability and a $10.1 million increase in the net OPEB liability, offset bya decrease in investment and hedgingderivativeirivestments of$19 .4million and a decrease in accrueddecommissioningof$4.5 million.

• Total deferred inflows ofresources increased$ l 9.6 million. Regulatory credits increased by $46.8 million. This increase was offset by a decrease in deferred pension inflows of$ l 6.8 million andOPEB inflows of$ l 2.2 million.

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RE SULTS OF OPERATIO NS CONDENSED STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION December 31, 2020 2019 2018 (restated)*

(millions of dollars)

Operating revenues $ 1,588 $ 1,559 $ 1,595 Operating expenses. (1,389) (1,363) (1,353)

Operating income 199 196 242 Other revenues/(expenses) 63 (19) 57 Interest charges (109) (98) (90)

Change in net position 153 79 209 Net position - beginning of year 1 804 1,725 1 516 Net position - end of year $ 1 251 $ 1 8Q4 $ 1125

• See Note 3 of the financial statements for discussion on the restatement oftheDecember3 l,2018 Statement of Revenue, Expenses and Changes in Net Position.

2020 compared to 2019 OPERATING REVENUES Totaloperatingrevenues were$ l,588million for 2020, anincreaseof$28.7million or 1.8 percentover2019operating revenues. In 2020, the impacts of COVID-19 led to residential MWh sales increase of 9 .2 percent and sales revenues increase of 11.9 percent compared to 2019, primarily due to increased remote work from home and the unseasonably hot summer. The commercial & industrial MWh sales decreased 2 .9 percent and sales revenues increased O.6 percent compared to 2019, primarily due to the California mandated shut down and limited re-openings of commercial businesses formajority of year.

The following charts showthemegawatt hour(MWh) sales, and sales revenue for the past three years by surplus energy sales (Surplus), commercial, industriai and other(C&D and residential (Res) customers:

MWhSales Sales Revenues

$800,000 7,000

$700,000 6,000

$600,000 5,000

-;;;- $500,000 "C

C

~

4,000 li,IIRes ."'

"C"'

C

s $400,000 iiil Res 0

iiJC&I 0  !:J C&I E 3,000 E

.c $300,000 id Surplus sa ~Surplus 2,000 $200,000 1,000 $100,000 0 $0 2020 2019 2018 2020 2019 2018 12

The net rate stabilization transfers (including the HRSF) increased by $21.9 million. In 2020, SMUDtransferred $48.2 million to the RSFprimarily due to a $35.0million deferralof2020 operating revenues forrecognition in future years to offset one-time expenditures not identified in the annual budget and $9 .8 million LCFS sales. SMUD also transferred $15 .4 million from the RSF to be used for low carbon and electric vehicle programs and $7. 7 million from the HRSF as a result of a below average precipitation.

Wholesale revenues are comprised of both surplus gas and energy sa Jes which are part of the operational strategy in managing fuel and energy costs. 'In 2020, energy sales were higher by $22.3 million as compared to 2019 due to higher energy prices and energy sales. Surplus gas sales were lowerthan2019by $32.7million due to lower gas prices and volume ofgas sold.

OPERATING EXPENSES Total operating expenses were $1,389million for2020, anincreaseof$25.6 million or 1.9 percentover2019.

• Purchased power increased by $44.5million or 14.6 percent due to higherenergypurchasesoffsetby lowerprices.

• Production expense decreased by $18.4 million or 6 .2 percent due to reduction of hydro gene~tion and fuelcosts.

• General, administrative and customer decreased by $15.9 million or 6.2 percent due to reduction in administrative and labor costs related to employees working remotely and reduction in customer pro grams during COVID.

• Maintenance expense increased by $3 .3 million or2.4 percentprimarily due to $19.3 million increase in outside service costsrelatedto wild-fire tree trimming offset by $10.3 million decrease in thermalplantmaintenance compared to 2019.

• Other expenses increased by $15 .0 million or 5 .3 percent primarily due to increase of depreciation expense of$17:0 million as a result of$402.4million of additions to electric utility plant in 2019.

The following chart show the breakdown of operating expenses for 2020:

2020 Operating Expenses Purchase Power 25.1%

liiil Purchase Power f.:l Production iiT&D Maintenance lriil G&A and Customer 10.0%

'iiii Maintenance i.ii!Other Production G&A and Customer 20.0%

17.4%

6.0%

13

OTHERREVENUES -

Total other revenues (net)were $63.0millipn for 2020, anincreaseof$82.7million over2019. In 2020, SMUDreceived

$10.9 million related to an early temiinationofagasprepaycontra ctand$5.5 million insuranceproce~s onthe2017winter stonn claim. The remaining increase is primarily due to a $52.1 million loss on the divestment of SMUD' s interest in the Rosa gas properties in 2019.

2019 compared to 2018

• RESULTSOFOPERATIONS (

• Total operating revenues decreased $36 .2 million in 20 19. Rate stabilization transfers decreased by $ 50 .2 million. In 2019, SMUDtransferred$28.6million to theRSF as a resultofhigherenergy deliveries from WAPAandexcess proceeds from AB-3 2 auctions andLCFS sales. SMUD also transferred $18.4 million to the HRSF as a resuh ofa hove average precipitation.

• In 2019, energy sales were lower by $15.l million as comparedto2018duetoloweren ergy prices offset by higher energy sales. Smplusgas saleswerehigherthan2018 by$8.2million due to higher gas prices and an increase in the volumeofgassold. \.

• Residentiai commerciai and industrial revenues increased by $26.2 million compared to2018 due to the rate increase thattookplace in 2019.

• Total operating expenses increased$ I 0.0 million compared to 2018. Administrative, general and customer and maintenance expenses increased by $3 2.6 million. These expenses were offset by decreases of purchased power,*

production and transmission and distribution expenses of $24.1 million mainly due to lower fuel cost~.

• Totalotherrevenues were $77.0 million lower in 2019. The decrease in otherrevenue as compared to2018 is due to the divestmentofSMUD's interestin the Rosagaspropertiesresultingin a lossof$52.l million. Additionally, in 2018 other revenue included again of$46.7 ~illion from the repurchase of the Solano Wind Phase 3 plant These decreases in otherrevenuewere offset by lower arbitration payments of$ l 7.0 million.

14

SACRAMENTO MUNICIPAL UTILITY DISTRICT STATEMENTS OF NET POSITION December 31, 2020 2019 (thousands of,dollars)

ASSETS ELECTRIC UTILITY PLANT Plant in service $ 6,425,366 $ 6,227,374 Less accumulated depreciation and depletion (3,139,526) (2,955,316)

Plant in service - net 3,285,840 3,272,058 Construction work in progress 461,319 353,802 Total electric utility plant - net 3,747,159 3,625,860 RESTRICTED AND DESIGNATED ASSETS Revenue bond and debt service reserves 121,845 116,527 Nuclear decommissioning trust fund 8,873 8,798 Rate stabilization fund 168,726 143,669 Other funds 23,246 29,953 Less current portion (135,550) (125,870)

Total restricted and designated assets 187,140 173,077 CURRENT ASSETS Unrestricted cash and cash eqµivalents 680,618 255,578 Unrestricted investments 33,798 195,435 Restricted and designated cash and cash equivalents 44,014 41,717 Restricted and designated investments 91,536 84,153 Receivables - net:

Retail customers 175,777 152,264 Wholesale and other 38,863 44,271 Regulatory costs to be recovered within one year 38,162 37,622 Investment derivative instruments maturing within one year 488 Hedging derivative instruments maturing within one year 4,913 8,732 Inventories 84,037 71,719 Prepaid gas to be dt;livered within one year 23,261 20,866, Prepayments and other 23,915 20,453

, Total current assets 1,238,894 933,298 NONCURRENT ASSETS Unrestricted investments 43,962 Regulatory costs for future recovery 742,588 766,808 Prepaid gas 692,511 715,772 Prepaid power and capacity 588 795 Investment derivative instruments 33 Hedging derivative instruments 8,606 7,986 Energy efficiency loans - net 18,503 23,262 Credit support collateral deposits 5,650 4,400 Due from affiliated entity 28,370 28,858 Prepayments and other 19,038 13,703 Total noncurrent assets 1,515,887 1,605,546 TOTAL ASSETS 6,689,080 6,337,781 DEFERRED OUTFLOWS OF RESOURCES Accumulated decrease in fair value of hedging derivative instruments 51,580 85,194 Deferred pension outflows 176,340 105,868 Deferred other postemployment benefits outflows 26,136 26,658 Deferred asset retirement obligations outflows *I,734 1,956 Unamortized bond losses 15,216 18,802 TOTAL DEFERRED OUTFLOWS OF RESOURCES 271,006 238,478 TOTAL ASSETS AND DEFERRED OUTFLOWS OF RESOURCES $ 6,960,086 $ 6,576,259 The accompanying notes are an integral part of these financial statements.

15

SACRAMENTO MUNICIPAL UTILITY DISTRICT STATEMENTS OF NET POSITION December 31, 2020 2019 (thousands of dollars)

LIABILITIES LONG-TERM DEBT- net $ 3,259,312 $ 2,943,795 CURRENT LIABILITIES Commercial paper notes 50,000 Accounts payable 101,396 103,829 Purchased power payable 33,335 26,997 Credit support collateral obligation 4,413 3,235 Long-term debt due within one year 127,390 118,305 Accrued decommissioning 6,751 5,649 Interest payable 52,940 49,832 Accrued salaries and compensated absences 44,703 45,403 Investment derivative instruments maturing within one year 1,401 2,235 Hedging derivative instruments maturing within one year 22,284 41,374 Customer deposits and other 41,887 44,379 Total current liabilities 436,500 491,238 NONCURRENT LIABILITIES Net pension liability 469,820 467,647 Net other postemployment benefits liability 32,211 Accrued decommissioning 92,723 86,054 Investment derivative instruments 7,903 8,769 Hedging derivative instruments 29,296 43,820 Self insurance and other 94,238 92,304 Total noncurrent liabilities 693,980 730,805 TOTAL LIABILITIES 4,389,792 4,165,838 DEFERRED INFLOWS OF RESOURCES Accumulated i.ncrease in fair value of hedging derivative instruments 13,519 16,718 Regulatory credits 516,209 489,486 Deferred pension inflows 14,212 45,996 Deferred other postemployment benefits inflows 58,854 42,859 Unamortized bond gains 6,504 7,516 Unearned revenue 3,484 3,569 TOTAL DEFERRED INFLOWS OF RESOURCES 612,782 .606,144 NET POSITION Net investment in capital assets 1,112,982 1,284,694 Restricted:

Revenue bond and debt service 63,351 60,744 Other funds 18,833 26,828 Unrestricted 762,346 432,01 I TOTAL NET POSITION 1,957,512 1,804,277 COMMITMENTS, CLAIMS AND CONTINGENCIES (Notes 17 a'!d 18)

TOTAL LIABILITIES, DEFERRED INFLOWS OF RESOURCES, AND NET POSITION $ 6,960,086 $ 6,576,259 The accompanying notes are an integral part of these financial statements.

16

SACRAMENTO MUNICIPAL UTILITY DISTRICT STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION Year Ended December 31, 2020 2019 (thousands of dollars)

OPERATING REVENUES Residential $ 710,912 $ 666,477 Commercial and industrial 712,495 714,001 Street lighting and other 38,493 43,321 Wholesale 135,522. 145,915 Senate Bill - I revenue deferral 2,276 2,765 AB-32 revenue 26,936 LCFS revenue 9,762 3,825 Public good deferral 3,501 2,959 Rate stabilization fund transfers (25,056) (46,975)

Total operating revenues 1,587,905 1,559,224 OPERATING EXPENSES Operations:

Purchased power 348,040 303,566 Production 278,236 296,612 Transmission and distribution 83,236 86,230 Administrative, general and customer 241,581 257,464 Public good 57,198 63,572 Maintenance 138,734 135,420

• Depreciation 206,452 189,469 Depletion 4,103 Regulatory amounts collected in rates 34,915 26,389 Total operating expenses 1,388,392 1,362,825 OPERATING INCOME 199,513 196,399 NON-OPERATING REVE!'iUES AND EXPENSES Other revenues and (expenses):

Interest income 14,291 16,639 Investment expense (3,455) (3,700)

Other income (expense) - net 52,186 (32,573)

Total other revenues and (expenses) 63,022 (19,634)

Interest chm:ges:

Interest on debt 109,300 104,960 Allowance for funds used during construction (7,110)

Total interest charges 109,300 97,850 Total non-operating revenues and (expenses) (46,278) (117,484)

CHANGE IN NET POSITION 153,235 78,915 NET POSITION - BEGINNING OF YEAR 1,804,277 1,725,362 NET POSITION - END OF YEAR $ 1,957,512 $ 1,804,277 The accompanying notes are an integral part of these financial statements.

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SACRAMENTO MUNICIPAL UTILITY DISTRICT STATEMENTS OF CASH FLOWS Year Ended December 31, 2020 2019 (thousands of dollars)

CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers $- 1,426,267 $ 1,423,897 Receipts from surplus power and gas sales 134,080 153,216 Other receipts 23,660 32,305 Payments to employees - payroll and other (406,810) (366,815)

Payments for wholesale power and gas purchases (491,480) (476,205)

Payments to vendors/others (315,982) (350,465}

Net cash provided b):'. operating activities 369,735 415,933 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Repayment of debt (16,675) (34,560)

Receipts from federal and state grants 10,214 10,333 Proceeds from insurance settlements 5,500 Interest on debt (30,122) (21,223}

Net cash used in noncapital financing activities (31,083) (45,450)

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Construction expenditures (357,897) (330,412)

Proceeds from land sales 479 878 Payments for gas fields divestment (232) (8,521)

Contributions in aid of construction 19,551 15,959 Net proceeds from bond issues 483,456 475,623 Repayments and refundings of debt (101,630) (128,685)

Issuance of commercial paper 161,250 Repayments of commercial paper (50,000) (400,000)

Interest on debt (113,8642 C99,8222 Net cash used in capital and related financing activities (120,137) (313,730}

CASH FLOWS FROM INVESTING ACTIVITIES Sales and maturities of securities 386,898 686,547 Purchases of securities (197,811) (703,118)

Proceeds from termination of prepaid gas contracts 10,915 Interest and dividends received 15,406 16,105 Investment revenue/exeenses - net (3,420) (3,682)

Net cash provided by (used in) investing activities 2-11,988 (4,148)

Net increase in cash and cash equivalents 430,503 52,605 Cash and cash eguivalents at the beginning oftlie year 308,108 255,503 Cash and cash equivalents at the end of the year $ 738,611 $ 308,108 Cash and cash equivalents included in:

Unrestricted cash and cash equivalents $ 680,618 $ 255,578 Restricted and designated cash and cash equivalents 44,014 41,717 Restricted and designated assets (a component of the total of$187,140 and $173,077 at December 31, 2020 and 2019, respectively) 13,979 10,813 Cash and cash eguivalents at the end of the year $ 738,611 $ 308,108 The accompanying notes are an integral part of these financial statements.

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SACRAMENTO MUNICIPAL UTILITY DISTRICT SUPPLEMENTAL CASH FLOW INFORMATION A reconciliation of the statements of cash flows operating activities to operating income as follows:

Year Ended December 31, 2020 2019 (thousands of dollars)

Operating income $ 199,513 $ 196,399 Adjustments to reconcile operating income to net cash provided by operating activities:

Depreciation 206,452 189,469 Depletion 4,103 Regulatory amortization 34,915 26,389 Other Amortizations 24,307 31,110 Revenue deferred to (recognized from) regulatory credits - net 19,279 41,251 Other (receipts) payments - net (3,549) (6,729)

Changes in operating assets, deferred outflows, liabilities and deferred inflows:

Receivables - retail customers, wholesale and other (16,631) 14,211 Inventories, prepayments and other (14,190) (7,852)

Credit support collateral deposits (1,250) 1,500 Deferred pension outflows (70,472) (2,837)

Deferred other postemployment benefits outflows 522 (I 1,328)

Payables and accruals 40,322 (51,429)

Credit support collateral obligation 1,178 747 Decommissioning (4,814) (5,179)

Net pension liability 2,173

• J3,603 Net other postemployment benefits liability (32,21 I) 10,145 Deferred pension inflows (31,784) (16,770)

Deferred other postemployment benefits inflows 15,995 (12,165)

Deferred unearned revenue (20) 1,295 Net cash provided by operating activities $ 369,735 $ 415,933 The supplemental disclosure ofnoncash financing and investing activities is as follows:

Year Ended December 31, 2020 2019 (thousands of dollars)

Amortization of debt related (expenses) and premiums - net $ 37,939 $ 30,797 (Loss) Gain on debt extinguishment and refundings (731)

Unrealized holding gain (loss) 1,768 4,165 Change in valuation of derivative financial instruments 31,66 I 8,824 Amortization of revenue for assets contributed in aid of construction 14,250 16,904 Allowance for funds used during construction 7,110 Construction expenditures included in accounts payable 39,196 81,902 Losses on sale and asset retirements (287) (845)

Loss on gas fields divestment (43,609)

Write-off capital projects and preliminary surveys (1,329) (13,614)

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

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Sacramento Municipal Utility District Notes to Financial Statements As of and for the Years Ended December 31, 2020 and 2019 NOTE 1. ORGANIZATION The Sacramento Municipal Utility District (SMUD) was formed and operates under the State of California Municipal Utility District Act (Act). The Act gives SMUD the rights and powers to fix rates and charges for commodities or services it furnishes, and to incur indebtedness and issue bonds or other obligations. As a community-owned utility, SMUD is not subject to regulation or oversight by the California Public Utilities Commission.

SMUD is responsible for the acquisition, generation, transmission, and distribution of electric power to its service area, which includes most of Sacramento County and small adjoining portions of Placer and Yolo Counties. The Board of Directors (Board) determines SMUD's rates.

SMUD is exempt from payment of federal and state income taxes and, under most circumstances, real and personal property taxes. SMUD is not exempt from real and personal property taxes on assets it holds outside of its service territory. In addition, SMUD is responsible for the payment ofa portion of the property taxes associated with its real property in California

-that lies outside of its service area.

NOTE 2.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES Method of Accounting. SMUD's accounting records are maintained in accordance with Generally Accepted Accounting Principles for proprietary funds as prescribed by the Governmental Accounting Standards Board (GASB). SMUD's accounting records generally follow the Uniform System of Accounts for Public Utilities and Licensees prescribed by the Federal Energy Regulatory Commission (FERC), except as it relates to the accounting for contributions of utility property in aid of construction. SMUD's Financial Statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. Electric revenues and costs that are directly related to the acquisition, generation, transmission, and distribution of electricity are reported as operating revenues and expenses. All other revenues and expenses are reported as non-operating revenues and expenses.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S.) requires management to make estimates and assumptions that affect the reported amounts of assets, deferred outflows of resources, liabilities, and deferred inflows of resources and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts ofrevenues and expenses during'the reporting period.

Actual results could differ from those estimates.

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

Component Units. The component units include the Central Valley Financing Authority (CVFA), the Sacramento Cogeneration Authority (SCA), the Sacramento Municipal Utility District Financing Authority (SF A), the Sacramento Power Authority (SPA), the Northern California Gas Authority No. I (NCGA), and the Northern California Energy Authority (NCEA). The primary purpose of CVF A, SCA, SF A and SPA is to own and operate electric utility plants that supply power to SMUD. The primary purpose ofNCGA is to prepay for natural gas to sell to SMUD. The primary purpose ofNCEA is to 20

prepay for commodities in the form of natural gas and electricity to sell to SMUD. SMUD's Board comprises the Commissions that govern these entities (see Note 6).

Plant in Service. Capital assets are generally defined by SMUD as tangible assets with an initial, individual cost of more than five thousand dollars and an estimated useful life in excess of two years. The cost of additions to Plant in Service and replacement property units is capitalized. Repair and maintenance costs are charged to expense when incurred. When SMUD retires portions of its Electric Utility Plant, retirements are recorded against Accumulated Depreciation and the retired portion of Electric Utility Plant is removed from Plant in Service. The costs of removal and the related salvage value, if any, are charged or credited as appropriate to Accumulated Depreciation. SMUD generally computes depreciation on Plant in Service on a straight-line, service-life basis. The average annual composite depreciation rates for 2020 and 2019 were 3.3 percent and 3.1 percent, respectively. Depreciation is calculated using the following estimated lives:

Generation 8 to 80 years Transmission and Distribution 7 to 50 years Gas Pipeline 10 to 90 years General 5 to 90 years Investment in Joint Powers Authority (JPA). SMUD's investment in the Transmission Agency of Northern California (TANC) is accounted for under the equity method of accounting and is reported as a component of Plant in Service. SMUD's share of the TANC debt service costs and operations and maintenance expense, inclusive of depreciation, is included in Transmission and Distribution expense in the Statements of Revenues, Expenses and Changes in Net Position (see Note 5).

SMUD's investment in the Balancing Authority of Northern California (BANC) is accounted for under the equity method of accounting. SMUD's share of the BANC operations and maintenance expense is included in Transmission and Distribution expense in the Statements of Revenues, Expenses and Changes in Net Position (see Note 5).

Investment in Gas Properties. In 2019, SMUD sold its approximate 21 percent non-operating ownership interest in the Rosa Unit gas properties in New Mexico, of which SMUD's portion of the extracted gas was transported to use in ,its component unit natural gas fired power plants. The loss on sale was $52.1 million and included as Other income (expense) - net in the Statements of Revenues, Expenses and Changes in Net Position.

Restricted and Designated Assets. Cash, cash equivalents, and investments, which are restricted by regulation or under

• terms of certain agreements for payments to third parties are included as restricted assets. Restricted assets include Revenue bond and debt service reserves, Nuclear decommissioning trust fund, and $22.6 million and $29.3 million of Other funds as of December 31, 2020 and 2019, respectively. Board actions limiting the use of such funds are included as designated assets.

Designated assets include the Rate stabilization fund and $0.6 million of Other funds as of December 31, 2020 and 2019.

When SMUD restricts or designates funds for a specific purpose, and restricted and designated and unrestricted resources are available for use, it is SMUD's policy to use restricted and designated resources first, then unrestricted resources as they are needed.

Restricted Bond Funds. SMUD's Indenture Agreements (Indenture) requires the maintenance of minimum levels ofreserves for debt service on the 1997 Series K Bonds.

Nuclear Decommissioning Trust Fund. SMUD made annual contributions to its Nuclear Decommissioning Trust Fund (Trust Fund) through 2008 to cover the cost of its primary decommissioning activities associated with the Rancho Seco facility. Primary decommissioning excludes activities associated with the spent fuel storage facility after 2008 and most non-radiological decommissioning tasks. Interest earnings on the Trust Fund assets are recorded as Interest Income and are accumulated in the Trust Fund.

21

Asset Retirement Obligations (ARO). SMUD implemented Statement of Governmental Accounting Standards (SGAS) No.

83, "Certain Asset Retirement Obligations" in 2019. SMUD records asset retirement obligations (ARO) for tangible capital assets when an obligation to decommission facilities is legally required. SMUD recognizes AROs for its Rancho Seco nuclear power plant and for the CVFA power plant facility (see Note 13). The Rancho Seco ARO is recorded as Accrued Decommissioning and the unfunded portion of the ARO is recorded as current and noncurrent Regulatory Costs for Future Recovery (see Note 8) in the Statements ofNet Position. Other AROs are recorded as Accrued Decommissioning and a corresp.onding Deferred Asset Retirement Obligation Outflows in the Statements ofNet Position.

SMUD has identified potential retirement obligations related to certain generation, distribution and transmission facilities.

SMUD's non-perpetual leased land rights generally are renewed continuously because SMUD intends to utilize these facilities indefinitely. GASB No, 83 requires the measurement of the ARO to be based on the probability weighting of potential outcomes. Due to the low probability that these leases will be terminated, a liability has not been recorded.

Cash and Cash Equivalents. Cash and cash equivalents include all debt instruments purchased with an original maturity of 90 days or less, deposits held at financial institutions, all investments in the Local Agency Investment Fund (LAIF), and money market funds. LAIF has an equity inter\!St in the State of California (State) Pooled Money Investment Account (PMIA). PMIA funds are on deposit with the State's Centralized Treasury System and are managed in compliance with the California Government Code according to a statement of investment policy which sets forth permitted investment vehicles, liquidity parameters, and maximum maturity of investments.

Investments. SMUD's investments are reported at fair value in accordance with SGAS No. 72, "Fair Value Measurement and Application" (see Note 12). Realized and unrealized gains and losses are included in Other income (expense) - net in the Statements of Revenues, Expenses and Changes in Net Position. Premiums and discounts on zero coupon bonds are amortized using the effective interest method. Premiums and discounts on other securities are amortized using the straight-line method, which approximates the effective interest method.

Electric Operating Revenues. Electric revenues are billed on the basis of monthly cycle bills and are recorded as revenue when the electricity is delivered. SMUD records an estimate for unbilled revenues earned from the dates its retail customers were last billed to the end of the month. At December 31, 2020 and 2019, unbilled revenues were $68.8 and $69.4 million, respectively.

Purchased Power Expenses. A portion ofSMUD's power needs are provided through power purchase agreements (PPA).

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

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

Production expense on the Statements of Revenues, Expenses and Changes in Net Position.

Credit and Market Risk. SMUD enters into forward purchase and sales commitments for physical delivery of gas and electricity with utilities and power marketers. SMUD is exposed to credit risk related to nonperformance by its wholesale counterparties under the terms of these contractual agreements. In order to limit the risk of counterparty default, SMUD has a wholesale counterparty risk policy which includes using the credit agency ratings ofSMUD's counterparties and other credit services, credit enhancements for counterparties that do not meet an acceptable risk level, and the use of standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty. SMUD is also 22

subject to similar requirements for many of its gas and power. purchase agreements. SMUD uses a combination of cash and securities to satisfy its collateral requirements to counterparties.

SMUD's component units, NCGA and NCEA, entered into guaranteed investment contracts and are exposed to credit risk related to nonperformance by its investment provider. For NCGA, the investment provider provides collateral if their credit ratings fall below agreed upon levels. SMUD holds deposits by counterparties and an investment provider and records the amounts as Credit Support Collateral Obligation in the Statements of Net Position.

Collateral deposits that SMUD has with counterparties are recorded as Credit Support Collateral Deposits in the Statements of Net Position.

Accounts Receivable and Allowance for Doubtful Accounts. Accounts Receivable is recorded at the invoiced amount and does not bear interest, except for accounts related to energy efficiency loans. SMUD recognizes an estimate ofuncollectible accounts for its receivables related to electric service, energy efficiency loans, and other non-electric billings, based upon its historical experience with collections and current energy market conditions. For large wholesale receivable balances, SMUD determines its bad debt reserves based on the specific credit issues for each account. Due to COVID-19, SMUD suspended disconnections for non-payment beginning in March 2020 through April 2021. At December 31, 2020, SMUD estimated its uncollectible retail customer accounts at $45.0 million based on non-payment behaviors by aging category. SMUD records bad debts for its estimated uncollectible accounts related to electric service as a reduction to the related operating revenues in the Statements of Revenues, Expenses and Changes in Net Position. SMUD records bad debts for its estimated uncollectible accounts related to energy efficiency loans and other non-electric billings in Administrative, General and Customer expense in the Statements of Revenues, Expenses and Changes in Net Position.

The summarized activity of the changes in the allowance for doubtful accounts during2020 and 2019 is presented below:

Balance at (Write-offs) Balance at beginning of and end of Year Additions Recoveries Year (thousands of dollars)

Other Non-Electric:

December 31, 2020 $ 2,790 $ 802 $ 37 $ 3,629 December 31, 2019 $ 1,509 $ 2,188 $ (907) $ 2,790 Retail Customers:

December 31, 2020 $ 3,044 $ 43,966 $ (2,010) $ 45,000 December 31, 2019 $ 6,005 $ 3,137 $ (6,098) $ 3,044 Energy Efficiency Loans:

December 31, 2020 $ 680 $ (194) $ 183 $ 669 December 31, 2019 $ 637 $ (483) $ 526 $ 680 Regulatory Deferrals. The Board has the authority to establish the level of rates charged for all SMUD services. As a regulated entity, SMUD's financial statements are prepa~ed in accordance with SGAS Statement No. 62, "Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 Financial Accounting Standards Board (FASB) and American Institute of Certified Public Accountants Pronouncements," which requires that the effects of the ratemaking process be recorded in the financial statements. Accordingly, certain expenses and credits, normally reflected in Change in Net Position as incurred, are recognized when included in rates and recovered from or refunded to customers.

SMUD records various regulatory assets and credits to reflect ratemaking actions of the Board (see Note 8).

/

23

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

Compensated Absences. SMUD accrues vacation leave and compensatory time when employees earn the rights to the benefits. SMUD does not record sick leave as a liability until it is taken by the employee, since there are no cash payments made for sick leave when employees terminate or retire. Compensated absences are recorded as Accrued Salaries and Compensated Absences in the Statements of Net Position. At December 31, 2020 and 2019, the total estimated liability for vacation and other compensated absences was $37.7 million and $31.3 million, respectively.

Public Good. Public Good expenses consist of non-capital expenditures for energy efficiency programs, low income subsidies, renewable energy resources and technologies, and research and development.

Gains/Losses on Bond Refundings. Gains and losses resulting from bond refundings are included as a component of Deferred Inflows of Resources or Deferred Outflows of Resources in the Statements ofNet Position and amortized as a component oflnterest on Debt in the Statements of Revenues, Expenses and Changes in Net Position over the shorter of the life of the refunded debt or the n~w debt using the effective interest method.

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

Allowance for Funds Used During Construction (AFUDC). SMUD capitalizes, as an additional cost of Construction Work In Progress (CWIP), AFUDC, which represents the cost of borrowed funds used for such purposes. The amount capitalized is determined by a formula prescribed by FERC. The AFUDC rate for 2019 was 2.4 percent of eligible CWIP. In 2020, SMUD implemented GASB 89 "Accounting for Interest Cost Incurred before the End of a Construction Period" and has discontinued including the cost of borrowed funds as an additional cost ofCWIP (see Note 3).

Derivative Financial Instruments. SMUD records derivative financial instruments (interest rate swap and gas price swap agreements, certain wholesale sales agreements, certain power purchase agreements and option agreements) at fair value in its Statements of Net Position. SMUD does not enter into agreements for speculative purposes. Fair value is estimated by comparing contract prices to forward market prices quoted by third party market participants and/or provided in relevant industry publications. SMUD is exposed to risk of nonperformance if the counterparties default or if the swap agreements are terminated. SMUD reports derivative financial instruments with remaining maturities of one year or less and the portion of long-term contracts with scheduled transactions over the next twelve months as current in the Statements of Net Position (see Note 9).

Interest Rate Swap Agreements. SMUD enters into interest rate swap agreements to modify the effective interest rates on outstanding debt (see Notes 9 and 10).

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

Precipitation Hedge Agreements. SMUD enters into non-exchange traded precipitation hedge agreements to hedge the cost ofreplacement power caused by low precipitation years (Precipitation Agreements). SMUD records the intrinsic value of the Precipitation Agreements as Prepayments and Other under Current Assets in the Statements of Net Position. Settlement of the Precipitati9n Agreements is not performed until the end of the period covered (water year ended September 30). The intrinsic value of a Precipitation Agreement is the difference between the expected results from a monthly allocation of the cumulative rainfall amounts, in an average rainfall year, and the actual rainfall during the same period.

• 24

Insurance Programs. SMUD records liabilities for unpaid claims at their present value when they are probable in occurrence and the amount can be reasonably estimated. SMUD records a liability for unpaid claims associated with general, auto, workers' compensation, and short-term and long-term disability based upon estimates derived by SMUD's claims administrator or SMUD staff. The liability comprises the present value of the claims outstanding and includes an amount for claim events incurred but not reported based upon SMUD's experience (see Note 16).

Pollution Remediation. SGAS No. 49, "Accounting and Financial Reporting for Pollution Remediation Obligations,"

(GASB No. 49) requires that a liability be recognized for expected outlays for remediating existing pollution when certain triggering events occur. SMUD recorded a pollution remediation obligation for its North City substation, which was built on a former landfill, for the former Community Linen Rental Services Property, and obligations for several land sites; including one where, it will be building a substation (see Note 18). At December 31, 2020 and 2019, the total pollution remediation liability was $19 .3 million and $17 .8 million, respectively, and recorded as either Current Liabilities, Customer Deposits and Other or Noncurrent Liabilities, Self Insurance and Other in the Statements of Net Position.* Costs were. estimated using the expected cash flow technique prescribed under GASB No. 49, including only amounts that are reasonably estimable.

Hydro License. SMUD owns and operates the Upper American River Hydroelectric Project (UARP). The original license to construct and operate the UARP was issued in 1957 by FERC. Effective July 1, 2014, SMUD received a 50-year hydro license. As part of the hydro licensing process, SMUD entered into four contracts with government agencies whereby SMUD makes annual payments to them for various services for the term of the license. At December 31, 2020 and 2019, the liability for these contract payments was $64.8 million and $63 .4 million, respectively, and recorded as either Current Liabilities, Customer Deposits and Other or Noncurrent Liabilities, Self Insurance and Other in the Statements of Net Position (see Note 17)~ r Assembly Bill 32. California Assembly Bill (AB) 32 was an effort by the State of California to set a greenhouse gas (GHG) emissions reduction goal into law, and initially was set through 2020. In 2015, the state established a 2030 goal for GHG emissions at 40 percent below 1990 levels, and in July of2017 AB-398 was approvt,d by the Governor. Central to these initiatives is the Cap and Trade program, which covers major sources ofGHG emissions in the State including power plants.

AB-398 extended Cap and Trade through 2030. The Cap and Trade program includes an enforceable emissions cap that will decline over time. The State distributes allowances, which are tradable permits, equal to the emissions allowed under the cap. Sources under the cap are required to surrender allowances and offsets equal to their emissions at the end of each compliance period. SMUD is subject to AB-32 and has participated in California Air Resources Board (CARB) administered quarterly auctions in the past. In.a normal water year, SMUD expects _its free allocation of allowances from the CARB to cover its compliance costs associated with electricity delivered to its retail customers. SMUD expects to recover compliance costs associated with wholesale power sales costs through its wholesale power sales revenues. SMUD continues to monitor new legislation and proposed programs that could impact AB-32 and its subsequent extensions.

In addition, Low Carbon Fuel Standards (LCFS) was enacted through AB-32. The CARB is responsible for the adoption and implementation ofLCFS and has established a program for LCFS credits. The LCFS progrl;lm is designed to reduce greenhouse gas emissions associated with the lifecycle of transportation fuels used in California. SMUD participates in the program and receives LCFS credits from CARB. The LCFS credits are sold to parties that have a compliance obligation.

CARB requires that LCFS credit sales proceeds be spent in a way to benefit current or future Electric Vehicle drivers in California, for both commercial and residential vehicles.

Net Pension Liability (NPL). The NPL is the difference between the actuarial pr~sent value of projected pension benefit payments attributable to employees' past service and the pension plan's fiduciary net position (see Note 14).

25

Net Other Postemployment Benefit (OPEB) Asset (NOA) or Liability (NOL). SMUD implemented SGAS No. 75, "Accounting and Financial Reporting/or Postemployment Benefits Other Than Pensions," (GASB No. 75) in 2018. The NOA or NOL is the difference between the actuarial present value of projected OPEB benefit payments attributable to employee's past service and the OPEB plan's fiduciary net position. At December 31, 2020, SMUD's NOA is $0.8 million and is recorded in Prepayments and other under Noncurrent Assets on the Statements of Net Position. At December 31, 2019, SMUD's NOL is $32.2 million and is recorded under Noncurrent Liabilities on the Statements of Net Position (see Note 15).

Net Position. SMUD classifies its net position into three components as follows:

• Net investment in capital assets - This component of net position consists of capital assets, net of accumulated depreciation, reduced by the outstanding debt balances, net of unamortized debt expenses. Deferred inflows and outflows ofresources that are attributable to the acquisition, construction or improvement of those assets or related debt are also included.

• . Restricted - This component of net position consists of assets with constraints placed on their use, either externally or internally. Constraints include those imposed by debt indentures (excluding amounts considered in Net investment in capital assets, above), grants or laws and regulations of other governments, or by Jaw through constitutional provisions or enabling legislation or by the Board. These restricted assets are reduced by liabilities and deferred inflows of resources related to those assets. *

• Unrestricted-This component of net position consists of net amount of the assets, deferred outflows ofresources, liabilities, and deferred inflows of resources that do not meet the definition of "Net investment in capital assets" or "Restricted."

Contributions in Aid of Construction (CIAC). SMUD records CIAC from customer contributions, primarily relating to expansions to SMUD's distribution facilities,.as Other income (expense) - net in the Statements of Revenues, Expenses and Changes in Net Position. Contributions of capital are valued at acquisition value. For ratemaking purposes, the Board does not recognize such revenues when received; rather, CIAC is included in revenues as such costs are amortized over the estimated useful Jives of the related distribution facilities.

Revenues and Expenses. SMUD distinguishes operating revenues and expenses from non-operating 'items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with SMUD's principal ongoing operations. The principal operating revenues ofSMUD are charges to customers for sales and services. Operating expenses include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition, are reported as Nori-Operating Revenues and Expenses in the Statements of Revenues, Expenses and Changes in Net Position.

Grants. SMUD receives grant proceeds from federal and state assisted programs for its projects which include, but are not limited to, advanced and renewable technologies, electric transportation, and energy efficiency. SMUD also periodically receives grant proceeds from federal or state assistance programs as partial reimbursements for costs it has incurred as a result of natural disasters, such as storm or fire damages. When applicable, these programs may be subject to financial and compliance audits pursuant to regulatory requirements. SMUD considers the possibility of any material disallowances to be remote. SMUD records grant proceeds related to capital projects as a Regulatory Credit (see Note 8).

SMUD has taxable *Build America Bonds in which it receives an interest subsidy from the federal government equal to 35 percent of the interest paid (see Note 10). SMUD received reduced subsidy payments in 2020 and 2019 due to budget sequestration by the federal government. SMUD recognized $9.3 million and $9.2 million in revenues in 2020 and 2019, respectively for its Build America Bonds, as a component of Other income (expense) - net, in the Statements of Revenues, Expenses and Changes in Net Position.

26

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

Subsequent Events. Subsequent events for SMUD have been evaluated through February 19, 2021, which is the date that the financial statements were available to be issued.

Reclassifications. Certain amounts in the 2019 Financial Statements have been reclassified in order to conform to the 2020 presentation.

Recent Accounting Pronouncements, adopted. In January 2020, GASB issued SGAS No. 92, "Omnibus 2020" (GASB No.

92). This statement addresses a variety of topics and includes specific provisions to clarify issues related to leases, intra-entity transfers, pension and postemployment benefits, asset retirement obligations, risk pools, fair value measurements, and derivative instruments. This statement is effective for SMUD in 2020 or 2022 depending on the topic. SMUD has assessed the note disclosure impact of adopting the derivative instruments topic of this statement and has updated the terminology used to refer to derivative or derivatives to derivative instrument or derivative instruments, respectively (see Note 9). No other topics in this°'

statement apply to SMUD.

In May 2020, GASB issued SGAS No. 95, "Postponement of the Effective Dates of Certain Authoritative Guidance" (GASB No. 95). The primary objective of this statement is to provide temporary relief to governments and other stakeholders as a rei;ult of the COVID-19 pandemic. GASB No. 95 postpones the effective dates of certain provisions in statements and implementation guides that first became effective or are scheduled to become effective for periods beginning after June 15, 2018, and later. This statement is effective for SMUD in 2020. SMUD has postponed the implementation ofGASB No. 87, "Leases" and GASB No.

93, "Replacement of Interbank Offered Rates."

Recent Accounting Pronouncements, not yet adopted. In June 2017, GASB issued SGAS No. 87, "Leases" (GASB No. 87).

The objective of this statement is to better meet the information needs of financial statement users by improving accounting and financial reporting for leases by governments. The statement requires recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows ofresources based on the payment provisions of the contract. GASB No. 87 establishes.a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. Under GASB No. 87, a lessee is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable arid a deferred inflow ofresources. This statement is effective for SMUD in 20~2. SMUD is currently assessing the financial statement impact of adopting this statement.

In March 2020, GASB issued SGAS No. 93, "Replacement of Interbank Offered Rates" (GASB No. 93). The objective of this statement is to address accounting and financial reporting implications that result from the replacement of an interbank offered rate (IBOR), most notably, the London Interbank Offered Rate (LIBOR), which is expected to cease to* exist in its current form at the end of 2021. This statement provides exceptions for certain hedging derivative instruments to the hedge accounting termination provisions when an IBOR is replaced as the reference rate of the hedging derivative instrument's variable payment.

By removing LIBOR as an appropriate benchmark interest rate for the qualitative evaluation of the effectiveness of an interest rate swap, GASB No. 93 identifies the Secured Overnight Financing Rate and the Effective Federal Funds Rate as appropriate benchmark interest rates to replace LIBOR. This statement is effective for SMUD in 2022. SMUD is currently assessing the financial statement impact of adopting this statement but does not expect it to be material.

In March 2020, GASB issued SGAS No. 94, "Public-Private and Public-Public Partnerships and Availability Payment Arrangements" (GASB No. 94). The primary objective of this Statement is to provide guidance for accounting and financial reporting related to public-private and public-public partnership arrangements (PPPs) and availability payment arrangements (AP As). A PPP is an arrangement in which a government (the transferor) contracts with an operator (a governmental or 27

nongovernmental entity) to provide public services by conveying control of the right to operate or use a nonfinancial asset, such as infrastructure or other capital asset (the underlying PPP asset), for a period of time in an exchange or exchange-like transaction. An AP A is an arrangement in which a government compensates an operator for services that may include designing, constructing, financing, maintaining, or operating an underlying nonfinancial asset for a period of time in an exchange or exchange-like transaction. This statement is effective for SMUD in 2023. SMUD is currently assessing the financial impact of adopting this statement but does not expect it to be material.

In May 2020, GASB issued SGAS No. 96, "Subscription-Based Information Technology Arrangements" (GASB No. 96).

This statement provides guidance on the accounting and financial reporting for subscription-based information technology arrangements (SBITAs) for governments. The statement (1) defines a SBITA as a contract that conveys control of the right to use another party's information technology software, alone or in combination with tangible capital assets, as specified in the contract for a period of time in an exchange or exchange-like transaction; (2) establishes that a SBITA results in a right-to-use subscription asset and a corresponding subscription liability; (3) provides the capitalization criteria for outlays other than subscription payments, including implementation costs of a SBIT A; and (4) requires note disclosures regarding a SBIT A. To the extent relevant, the standards for SBIT As are based on the standards established in GASB No. 87, Leases, as amended. This statement is effective for SMUD in 2023. SMUD is currently assessing the financial statement impact of adopting this statement.

In June 2020; GASB issued SGAS No. 97, "Certain Component Unit Criteria, and Accounting and Financial Reportingfor

• Internal Revenue Code Section 457 Deferred Compensation Plans" (GASB No. 97). The primary objectives of this statement are to (1) increase consistency and comparability related to the reporting of fiduciary component units in circumstances in which a potential component unit does not have a governing board and the primary government performs the duties that a governing board typically would perform; (2) mitigate costs associated with the reporting of certain defined contribution pension plans, defined contribution other postemployment benefit (OPEB) plans, and employee benefit plans other than pension plans or OPEB plans as fiduciary component units in fiduciary fund financial statements; and (3) enhance the relevance, consistency, and comparability of the accounting and financial reporting for Internal Revenue Code Section 457 deferred compensation plans that meet the definition of a pension plan and for benefits provided through those plans. This statement is effective for SMUD in 2022. SMUD is currently assessing the financial statement impact of adopting this statement but does not expect it to be material.

NOTE 3. ACCOUNTING CHANGE In June 2018, GASB issued SGAS No. 89, "Accounting for Interest Cost Incurred before the End of a Construction Period" (GASB No. 89). The objectives of this statement are (1) to enhance the relevance and comparability of information about capital assets and the cost of borrowing for a reporting period and (2) to simplify accounting for interest cost incurred before the end of a construction period. GASB No. 89 requires that interest cost incurred before the end of a construction period be recognized as an expense in the period in which the cost is incurred for financial statements. As a result, interest cost incurred before the end of a construction period will not be included in the historical cost of a capital asset reported in a business-type activity. SMUD has assessed the financial statement impact of adopting the new statement and its impact is not material. Although GASB No. 95 postponed this statement for one year to 2021, SMUD had already implemented this statement before GASB No. 95 was issued.

Beginning January 1, 2020, SMUD recognizes interest costs incurred before the end of a construction period as an expense in the period in which the costs are incurred and no longer includes these interest costs as part of the historical cost of a capital asset.

This standard is to be applied prospectively, so the interest costs already included in construction work in progress (CWIP) on December 31, 2019 will still be included as part of the historical cost of the capital asset.

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NOTE 4. ELECTRIC UTILITY PLANT The summarized activity ofSMUD's Electric Utility Plant during 2020 is presented below:

Balance Transfers Balance January 1, and December 31, 2020 Additions Dis12osals 2020 (thousands of dollars)

Nondepreciable Electric Utility Plant:

Land and land rights $ 142,291 $ 17,471 $ (247) $ 159,5\5 CWIP 353,802 318 354 (210,837) 461 319 Total nondepreciable electric utility plant 496 093 335,825 (211,084) 620,834 Depreciable Electric Utility Plant:

Generation

• 1,670,224 43,017 (2,821) 1,710,420 Transmission 390,296 21,255 (984) 410,567 Distribution 2,427,408 76,335 (5,217) 2,498,526 Investment in JP As 22,844 7,168 30,012 Intangibles 495,651 21,764 517,415 General 1,078,660 31463 (11,212) 1098911 6,085,083 201,002 (20,234) 6,265,851 Less: accumulated depreciation and depletion (2,948,350) (204,088) 20,191 (3, 13 2,24 7)

Less: accumulated amortization on JPAs (6,966) (313) (7,279)

(2,955,316) (204,401) 20,191 (3,139,526)

Total depreciable plant 3,129,767 (3,399) (43) 3,126,325 Total Electric Utility Plant - net $ 3,625,860 $ 332,426 $ (211,127) $ 3,747,159

• 29

The summarized activity ofSMUD's Electric Utility Plant during 2019 is presented below:

Balance Transfers Balance January I, and December 31, 2019 Additions Dis11osals 2019 (thousands of dollars)

Nondepreciable Electric Utility Plant:

Land and land rights $ 139,625 $ 3,418 $ (752) $ 142,291 CWIP 428,249 342 545 (416,992) 353,802 Total nondepreciable electric utility plant 567 874 345 963 (417,744) 496 093 Depreciable Electric Utility Plant:

Generation 1,632,081 38,956 (813) 1,670,224 Transmission 336,407 54,637 (748) 390,296 Distribution 2,337,484 96,264 (6,340) 2,427,408 Investment in gas properties 206,624 36 (206,660) Investment in JP As 19,012 3,832 22,844 Intangibles 426,267 69,836 (452) 495,651 General 929 701 156 812 (7,853) 1,078,660 5,887,576 420,373 (222,866) 6,085,083 Less: accumulated depreciation and depletion (2,932,724) (192,524) 176,898 (2,948,350)

Less: accumulated amortization on JP As (6,653) (313) (6,966)

(2,939,377) (192,837) 176,898 (2,955,316)

Total depreciable plant 2,948,199 227,536 (45,968) 3,129,767 Total Electric Utility Plant - net $ 3,516,073 $ 573,499 $ (463,712) $ 3,625.860 NOTE 5. INVESTMENT IN JOINT POWERS AUTHORITY

_TANC. SMUD and fourteen other California municipal utilities are members ofTANC, a JPA. TANC, along with the other California municipal utilities, own and operate the California-Oregon Transmission Project (COTP), a 500-kilovolt transmission line between central California and southern Oregon. SMUD is obligated to pay approximately 39 percent of

• TANC's COTP debt service and operations cost~ in exchange for entitlement to approximately 536 megawatts (MW) of TANC's 1,390 MW transfer capability. Additionally, SMUD has a 48 MW share ofTANC's 300 MW firm, bi-directional transmission over Pacific Gas and Electric Company's (PG&E) system between PG&E's Tesla and Midway substations (SOT). The total entitlement shares for the COTP and SOT described above include the long-term agreements listed below.

In 2009, SMUD entered into a 15-year long-term layoff agreement with TANC and certain members, expiring January 31, 2024. This agreement provides for the assignment of all rights and obligations of the City of Palo Alto and the City of Roseville related to their COTP and SOT entitlements. This agreement increased SMUD's COTP entitlement by 36 MW and SOT entitlement by 2 MW. On July 1, 2014, an amendment returned to the City of Roseville all rights and obligations related to the COTP entitlements, which decreased SMUD's COTP entitlement by 13 MW.

Effective July 1, 2014, SMUD entered into a 25-year long-term layoff agreement with T ANC and certain members that provides for the assignment of all rights and obligations of Northern California Power Agency and partial rights and 30

obligations of the City of Santa Clara related to their COTP entitlements. This agreement increased SMUD' s COTP entitlements by 130 MW.

The long-term debt ofTANC, which totals $172.0 million (unaudited) at December 31, 2020, is collateralized by a pledge and assignment of net revenues ofTANC supported by take or pay commitments of SMUD and other members. Should other members default on their obligations to T ANC, SMUD would be required to make additional payments to cover a portion of such defaulted payments, up to 25 percent of its current obligation. SMUD recorded transmission expenses related to TANC of$17.5 million and $17.9 million in 2020 and 2019, respectively.

Summary financial information for T ANC is presented below:

December 31 2020 2019 (Unaudited} (Unaudited}

(thousands of dollars)

Total Assets $ 356,807 $ 345,739 Total Deferred Outflows of Resources 731 1240 Total Assets and Deferred.Outflows of Resources $ 357.538 $ 346.979 Total Liabilities $ 305,096 $ 312,470 Total Net Position 52 442 34 509 Total Liabilities and Net Position $ 357,538 $ 346.979 Changes in Net Position for the Six Months Ended December 31 $ (564) $ (413)

Copies of the TANC annual financial reports may be obtained from SMUD at P.O. Box 15830, Sacramento, California 95852 or online at www.tanc.us.

BANC. SMUD, City of Redding, City of Roseville, Modesto Irrigation District (MID), City of Shasta Lake, and Trinity Public Utilities District are members of BANC, a JPA formed in 2009 .. In 2011, operational control of Balancing Authority Area (BAA) operations was transferred from SMUD to BANC. BANC performs FERC approved BAA reliability functions that are managed by North American Electric Reliability Corporation (NERC), nationally, and by Western Electricity Coordinating Council functions in the west. SMUD recorded expenses related to BANC of$1.7 million in 2020 and $2.1 million in 2019.

Summary financial information for BANC is presented below:

December 31 2020 2019 (Audited} (Audited}

(thousands of dollars)

Total Assets $ 8.125 $ 6.184 Total Liabilities $ 8,125 $ 6,184 Total Net Position Total Liabilities and Net Position $ 8.125 $ 6.184 Changes in Net Position for the Year Ended December 31 $ $ Copies of the BANC annual financial reports may be obtained from SMUD at P.O. Box 15830, Sacramento, California 95852.

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NOTE 6. COMPONENT UNITS CVF A Carson Cogeneration Project. CVF A is a JP A formed by SMUD and the Sacr~ento Regional County Sanitation District. CVFA operates the Carson Project, a 65 MW (net) natural gas-fired cogeneration facility and a 42 MW (net) natural gas-fired simple cycle peaking plant. .

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

Gamble Project, a 136 MW (net) natural gas-fired cogeneration facility and a 50 MW (net) natural gas-fired simple cycle peaking plant.

SFA Cosumnes Power Plant Project. SF A is a JPA formed by SMUD and MID. SF A operates the Cosumnes Power Plant Project, a 602 MW (net) natural gas-fired, combined cycle facility. The revenue stream to pay the SPA bonds' debt service is provided by a "take-or-pay" power purchase agreement between SMUD and SF A.

SPA Campbell Soup Cogeneration Project. SPA is a JPA formed by SMUD and the SPA. SPA operates the Campbell Soup Project, a 160 MW (net) natural gas-fired cogeneration facility, and the McClellan Project, a 72 MW (net) natural gas-fired simple cycle peaking plant.

. NCGA. NCGA is a JPA formed by SMUD and the SPA. NCGA has a prepaid gas contract with Morgan Stanley Capital

Group (MSCG) expiring in 2027, which is financed primarily by NCGA revenue bonds. SMUD has contracted with NCGA to purchase all the gas delivered by MSCG to NCGA, based on market prices. NCGA is obligated to pay the principal and interest on the bonds. Neither SMUD nor SPA is obligated to make debt service payments on the bonds. NCGA can terminate the prepaid gas contract under certain circumstances, including a failure by MSCG to meet its gas delivery obligation to NCGA or a drop in MSCG's credit rating below a specified level. If this occurs, MSCG will be required to make a termination payment to NCGA based on the unamortized prepayment proceeds received by MSCG.

NCEA. NCEA is a JPA formed by SMUD and the SPA. NCEA has a prepaid natural gas and electricity (commodity) contract with J. Aron & Company LLC (J. Ar9n) expiring in 2049, which is financed primarily by NCEA revenue bonds.

SMUD has contracted with NCEA to purchase all the commodity delivered by J. Aron to NCEA, based on market prices.

NCEA is obligated to pay the principal and interest on the bonds. Neither SMUD nor SF A is obligated to make debt service payments on the bonds. NCEA can terminate the prepaid commodity contract under certain circumstances, including a failure by J. Aron to meet its commodity delivery obligation to NCEA. If this occurs, J. Aron will be required to make a termination payment to NCEA based on the unamortized prepayment proceeds received by J. Aron.

32

The summarized activity ofSMUD's component units for 2020 is presented below:

CONDENSED STATEMENTS OF NET POSITION December 31, 2020 (thousands of dollars)

CVFA SCA SFA SPA NCGA NCEA Assets Electric Utility Plant - net $ 31,264 $ 48,502 $ 207,058 $ 48,351 $ $ Restricted Assets 90 Current Assets 12,373 31,823 60,107 21,285 37,271 27,857 Noncurrent Assets 2* 1 892 1 160,648 532,525 Total Assets 43,639 80,326 268,057 69,637 197,919 560,472 Deferred Outflows of Resources 1 733 1,829 -Os Total Assets and Deferred Outflows of Resources $ 45.372 $ 80 326 $ 269.886 $ 69.637 $ 197,919 $ 560.472 Liabilities Long-Term Debt - net $ $ $ 113,152 $ $ 163,485 $ 556,794 Current Liabilities 3,441 5,515 36,819 5,190 24,288 10,876 Noncurrent Liabilities 8,633 121 Total Liabilities 12,074 5,515 149,971 5,190 187,773 567,791 Net Po~ition 33,298 74 811 119 915 64447 10,146 (7,319)

Total Liabilities and Net Position $ 45,372 $ 80,326 $ 269.886 $ 69,637 $ 197,919 $ 560.472 CONDENSED STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION December 31, 2020 (thousands of dollars)

CVFA SCA SFA SPA NCGA NCEA Operating Revenues $ 16,599 $ 35,932 $ 141,874 $ 26,818 $ 25,935 $ 20,053 Operating Expenses 22,073 39,624 J137,415 32,545 17,810 3 366 Operating Income (Loss) (5,474) (3,692) 4,459 (5,727) 8,125 ,6,687 Non-Operating Revenues and Expenses Other Revenues 48 205 179 113 533 Interest Charges and Other (3,670} (8,205) (16,197)

Change in Net Position Before Distributions and Contributions (5,426) * (3,487) 968 (5,614) 453 490 Distribution to Member (507) (1,090)

Member Contributions and Adjustments 86 127 Change in Net Position (5,426) (3,487) 968 (5,614) 32 (473)

Net Position - Beginning of Year 38,724 78,298 118 947 70 061 10,114 (6,846}

Net Position - End of Year $ 33,298 $ 74,811 $ 119,915 $ 64,447 $ 10,146 $ (7,319) 33

CONDENSED STATEMENTS OF CASH FLOWS December 31, 2020 (thousands of dollars)

CVFA SCA SFA SPA NCGA NCEA Net Cash Provided by Operating Activities $ 1,232 $ 4,462 $ 19,673 $ 1,929 $ 26,597 $ 20,053 Net Cash Used in Noncapital Financing Activities -07 (25,550) (21,753)

Net Cash Used in Capital Financing Activities (500) (54) (16,683) (748) Net Cash Provided by Investing Activities 46 242 226 138 450 2 714

• Net Increase in Cash and Cash Equivalents 778 4,650 3,216 1,319 1,497 1,014 Cash and Cash Equivalents at the Beginning of the Year 4 311 16,003 20,650 9 586 13,315 10,953 Cash and Cash Equivalents at the End of the Year $ 5,089 $ 20,653 $ 23,866 $ 10,905 $ 14,812 $ 11,967

• The summarized activity ofSMUD's component units for 2019 is presented below:

CONDENSED STATEMENTS OF NET POSITION December 31, 2019 (thousands of dollars)

CVFA SCA SFA SPA NCGA NCEA Assets Electric Utility Plant - net $ 37,248 $ 56,309 $ 220,676 $ 55,074 $ $ Restricted Assets 2,840 Current* Assets 11,418 26,939 54,906 20,487 33,422 27,096 Noncurrent Assets 2 2 998 2 180,564 535,991 Total Assets 48,668 83,250 276,580 75,563 213,986 565,927 Deferred Outflows of Resources 1 955 2,195 Total Assets and Deferred Outflows of Resources $ 50.623 $ 83.250 $ 278.775 $ 75.563 $ 213.986 $ 565.927 Liabilities Long-Term Debt - net $ $ $ 126,571 $ $ 181,935 $ 561,820 Current Liabilities 3,370 4,952 33,257 5,502 21,937 10,876 Noncurrent Liabilities 8,529 77 Total Liabilities 11,899 4,952 159,828 5,502 203,872 572,773 Net Position 38 724 78,298 118,947 70 061 10,114 (6,846)

Total Liabilities and Net Position $ 50.623 $ 83,250 $ 278.775 $ 75,563 $ 213,986 $ 565.927 34

CONDENSED STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION December 31, 2019 (thousands of dollars)

CVFA SCA SFA SPA NCGA NCEA Operating Revenues $ 23,858 $ 36,208 $ 157,200 $ 27,732 $ 33,472 $ 16,438 Operating Expenses 26,046 33 947 120,562 31,106 25,133 2,682 Operating Income (Loss) . (2,188) 2,261 36,638 (3,374) 8,339 . 13,756 Non-Operating Revenues and Expenses Other Revenues 114 363 376 142 850 Interest Charges and Other (534) (1,211) (3,962) _ _ _-~0- (9,280) (16,091)

Change in Net Position Before Distributions and Contributions (2,608) 1,413 33,052 (3,232) (91) (2,335)

Distribution to Member (953) Member Contributions and Adjustments _ _ _-~0- -~7~9~0_2 _ _ _-~0- _ _ _-~0- --~8~0 88 Change in Net Position * (2,608) 9,315 33,052 (3,232) (964) (2,247)

Net Position - Beginning of Year 41,332 68,983 85,895 73,293 11,078 (4,599)

Net Position - End of Year $ 38.724 $ 78,298 $ 118.947 $ 70,061 $ 10,114 $ (6,846)

CONDENSED STATEMENTS OF CASH FLOWS December 31, 2019 (thousands of dollars)

CVFA SCA SFA SPA NCGA NCEA Net Cash Provided by Operating Activities $ 6,382 $ 10,855 $ 42,686 $ 3,295 $ 35,948 $ 13,135 Net Cash Provided by (Used in)

Noncapital Financing Activities

• 7,902 (45,135) (11,601)

Net Cash Used in Capital Financing Activities (11,345) (20,698) (46,462) (2,774) Net Cash Provided by Investing Activities 135 351 389 134 787 8,656 Net Increase (Decrease) in Cash and Cash Equivalents (4,828) (1,590) (3,387) 655 (8,400) 10,190 Cash and Cash Equivalents at the Beginning of the Year 9139 17,593 24,037 8 931 21,715 763 Cash and Cash Equivalents at the End of the Year $ 4,311 . $ 16.003 $ 20.650 "=$--2-=58"""6 $ 13.315 $ 10.953 As described in Note 2, all of the activities and balances of the component units are blended into and reported as part of SMUD because of the extent of their operational and financial retationships with SMUD. Copies ofCVFA's, SCA's, SF A's, SPA's, NCGA's and NCEA's annual financial reports m~y be obtained from their Executive Office at P.O. Box 15830, Sacramento, California 95852 or online at www.smud.org.

35

f NOTE 7. CASH, CASH EQUIVALENTS, AND INVESTMENTS Cash Equivalents and Investments. SMUD's investment policy is governed by the California State and Municipal Codes and its Indenture, which allow SMUD's investments to include: obligations which are unc,onditionaUy guaranteed by the U.S.

Government or its agencies or instrumentalities; direct and general obligations of the State or any local agency within the State; bankers' acceptances; commercial paper; certificates of deposit; repurchase and reverse repurchase agreements; medium*

term corporate notes; LAIF; and money market funds. SMUD's investment policy includes restrictions for investments relating to maximum amounts invested as a percentage of total portfolio and with a single issuer, maximum maturities, and minimum credit ratings.

Credit Risk. This is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. To mitigate this risk, SMUD limits investments to those rated, at a minimum, "A-1" or equivalent for short-term investments'----and "A" or equivalent for medium-term corporate notes by a nationally recognized rating agency, with the exception of the Guaranteed InvestmentContracts (GICs) held by NCEA. NCEA GICs are rated at the credit rating of the commodity supplier, or, if not rated, the guarantor of the commodity supplier which is currently Goldman Sachs rated as "BBB+".

Custodial Credit Risk. This is the risk that, in the event of the failure of a depository financial institution or counterparty to a transaction, SMUD's deposits and investments may not be returned or SMUD will not be able to recover the value of its deposits, investments or coy_ateral securities that are in the possession of another party. SMUD does not have a deposit or investment p9licy for custodial credit risk.

I As of December 31, 2020 and 2019, $12.2 million and $5.5 million in deposits were uninsured, respectively. The bank balance is also, per a depository pledge agreement between SMUD and SMUD's bank, collateralized at 134 percent and 131

\ percent of the collective funds on deposit (increased by the amount of accrued but uncredited interest, reduced by deposits covered by Fede~alDeposit Insurance Corporation) at December 31, 2020 and 2019, respectively. SMUD had m.oney market funds of $128.4 million and $103.4 million which were uninsured at December 31, 2020 and 2019, respectively. SMUD's

'* investments and money market funds are held in SMUD's name.

Concentration of Credit Risk. This is the risk ofloss attributed to the magnitude of an entity's investment in a single issuer.

SMUD places no limit on the amounts invested in any one issuer for repurchase agreements and federal agency securities.

The following are the concentrations of risk greater than five percent in either year:

December 31 2020 2019 Investment Type:

Federal Home Loan Banks 17% 27%

Freddie Mac 7% 12%

Commercial Paper - Toyota Motor Credit Corp NIA 10%

Municipal Bond- CA Department of Water Resources 10% 6%

Municipal Bond- State of Florida 9% NIA Municipal Bond - State of California 4% 6%

Corporate Note-Tennessee Valley Authority 7% 5%

Corporate Note - Wells Fargo Bank 7% 5%

Corporate Note - Microsoft Corporation 9% 3%

Corporate Note - Apple Inc 11% 9%

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

Though SMUD has restrictions as to the maturities of some of the investments, it does not have a formal policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. SMUD is exposed to interest rate risk on its interest rate swaps (see Note 9).

The following schedules indicate the credit and interest rate risk at December 31, 2020 and 2019. The credit ratings listed are from Standard & Poor's (S&P) or Moody's. (NIA is defined as not applicable to the rating disclosure requirements.)

At December 31, 2020, SMUD's cash, cash equivalents, and investments consist of the following:

Remaining Maturities (in years).

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

Cash and Cash Equivalents:

Cash NIA $ 8,607 $ $ $ 8,607 LAIF Not Rated 512,682 512,682 Money Market Funds AAAm 128,406 128,406 Deposit at Notice NIA 80;062 , 80,062 I

Commercial Paper A-l+IA-1 8 854 8 854 Total cash and cash equivalents 738,611 738,611 Investments:

Federal Farm Credit Bank AA+ 15,188 15,188 Federal Home Loan Bank AA+ 49,986 49,986 Freddie Mac AA+ 20,462 20,462 U.S. Treasury Obligations AAA 20,248 20,248 Corporate Notes AAA/AA+IA+IA-IA 113,980 4,035 118,015 Municipal Bonds AAAIAA+IAA- 63,647 63,647 Guaranteed Investment Contracts BBB+ 10 859 90 10 949 Total investments 210,261 88,234 298,495 Total cash, cash equivalents, and investments $ 948,872 $ 88,234 $ $ 1,037,106 37

At December 31, 2019, SMUD's cash, cash equivalents, and investments consist of the following:

Remaining Maturities (in years)

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

Cash and Cash Equivalents:

Cash NIA $ 1,093 $ $ $ 1,093 LAIF Not Rated 104,742 104,742 Money Market Funds AAAm 103,367 103,367 Deposit at Notice NIA 51,432 51,432 Commercial Paper A-1+/A-l 47 474 47 474 Total cash and cash equivalents 308,108 308,108 Investments:

Fannie Mae AA+ 3,030 3,030 Federal Farm Credit Bank AA+ 15,001 15,001 Federal Home Loan Bank AA+ 111,844 111,844 Freddie Mac AA+ 27,984 20,308 48,292

• U.S. Treasury Obligations AAA 105,116 20,167 125,283 Corporate Notes AAA/AA+/AA-/A+/A 6,302 114,897 121,199 Municipal Bonds AA/AA- 15,063 33,013 48,076 Guaranteed Investment Contracts BBB+ 10 249 2 840 13 089 Total investments 279,588 206,226 485,814 Total cash, cash equivalents, and investments $ 587,696 $ 206,226 $ $ 793.922 SMUD's cash, cash equivalents, and investments are classified in the Statements of Net Position as follows:

December 31 2020 2019 (thousands of dollars)

Cash, Cash Equivalents, and Investments:

Revenue bond reserve and debt service funds:

Revenue bond reserve fund $ 3,813 $ 4,748 Debt service fund 80,022 73,250 Component unit bond reserve and debt service funds 38 010 38 529 Total revenue bond reserve and debt service/ funds 121,845 116,527 Nuclear decommissioning trust fund 8,873 8,798 Rate stabilization fund 168,726 143,669 Component unit other restricted funds 7,413 8,707 Escrow fund 15,179 20,592 Other restricted funds 654 654 Unrestricted funds 714 416 494 975 Total cash, cash equivalents, and investments $ 1,037.106 $ 793,922 NOTE 8. REGULATORY DEFERRALS The Board has taken various regulatory actions that result in differences between the recognition ofrevenues and expenses for ratemaking purposes and their treatment under generally accepted accounting principles for non-regulated entities (see Note 38

2). These actions result in regulatory assets and deferred inflow ofresources, which are summarized in the tables below.

Changes to these balances, and their inclusion in rates, occur only at the direction of the Board.

Regulatory Assets (Costs)

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

Derivative Financial Instruments. SMUD's regulatory costs and/or credits relating to investment derivative instruments are intended to defer the net difference between the fair value of derivative instruments and their cost basis, if any. *Investment derivative instruments are reflected in rates at contract cost and as such, the balance is charged or credited into rates as the related asset or deferred inflow ofresource is utilized (see Note 9).

Debt Issuance Costs. SMUD established a regulatory asset for costs incurred in connection with the issuance of debt obligations, principally underwriter fees and legal costs. The regulatory asset is amortized through 2020 for the portion related to SMUD's debt issuance costs and over the life of the bonds for the portion related to the component units' debt issuance costs. Debt issuance costs after December 31, 2013 are expensed.

Pension. SMUD established a regulatory asset for pension costs related to the implementation ofGASB No. 68 which requires SMUD to record a net pensionliability. The regulatory asset is being amortized over a period of25 years starting in

.2018.

OPEB. SMUD established a regulatory asset for OPEB costs related to the implementation of GASB No. 75 which requires SMUD to record a net OPEB liability. The regulatory asset will be amortized over a period of25 years starting in 2020.

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

December 31 2020 2019 (thousands of dollars)

Regulatory* Costs:

Decommissioning $ 88,652 $ 81,076 Derivative financial instruments 9,270 10,517 Debt issuance costs 1,673 1,882 Pension 374,599 391,626 OPEB 306 556 319 329 Total regulatory costs 780,750 804,430 Less: regulatory costs to be recovered within one year {38,162) {37,622)

Total regulatory costs for future recovery - net $ 742.58 8 ""$====="7"""66,,.,,=80"""8 Regulatory Credits CIAC. In 2020 and 2019, SMUD added CIAC totaling $25.1 million and $18.8 million, respectively, to Regulatory Credits in the Statements of Net Position and recorded $13.3 million and $12.8 million of amortization, respectively, to Other income (expense) - net in the Statements of Revenues, Expenses and Changes in Net Position. SMUD's regulatory credit relating to CIAC is intended to offset the revenue and expense associated with this accounting treatment. Thus, this regulatory credit is being amortized into rates over the depreciable lives of the related assets in order to offset the earnings effect of these non-exchange transactions.

Rate Stabilization. SMUD's regulatory credit relating to Rate Stabilization is intended to defer the need for future rate increases when costs exceed existing rates. At the direction of the Board, amounts may be either transferred into this fund 39

(which reduces revenues), or amounts are transferred out of this fund (which increases revenues). The Board authorizes Rate Stabilization Fund (RSF) transfers on an event driven basis.

In 2020 and 2019, $1.6 million and $10.7 million, respectively, was transferred from revenue to the RSF as a result of higher than budgeted energy deliveries from the Western Area Power Administration.

SMUD participates in the carbon allowance auctions under AB-32, the Global Warming Solutions Act (see Note 2). The Board authorized deferral of AB-32 auction proceeds to match the revenue recognition with the related expenses. The difference between the auction proceeds received and the funds spent on AB-32 programs are deferred into future years. In 2020, the Board authorized transferring the difference out of the RSF and $4.1 million was transferred from the RSF to revenue. In 2019, the Board authorized transferring the difference into the RSF and $15.6 million was transferred from revenue to the RSF.

SMUD sells LCFS credits under AB-32, the Global Warming Solutions Act (see Note 2). In 2019, the Board authorized deferral ofLCFS credit sales to match the revenue recognition with the related expenses. The difference between the LCFS credit sales and the funds spent on LCFS programs are deferred into future years. In 2020 and 2019, the Board authorized transferring the difference into the RSF and $0.3 million and $2.3 million, respectively, was transferred from revenue to the RSF.

In 2020, the Board authorized SMUD to transfer $35.0 million from revenue to the RSF to offset future one-time specific expenses which may have a significant financial impact on SMUD. This will provide reserves to cover large contingencies while limiting or leveling out the impact of cost increases to ratepayers.

Hydro Rate Stabilization. The Hydro Rate Stabilization Fund (HRSF) was established through the Hydro Generation Adjustment (HGA) mechanism, which helps manage volatility in energy costs. The HGA mechanism applies a formula based on precipitation and wholesale electricity prices to calculate needed withdrawals from or deposits to the HRSF. The maximum balance of the HRSF is 6 percent of the budgeted retail revenue and the maximum annual transfer in or out of the HRSF is 4 percent of budgeted retail revenue. If the HRSF is depleted, SMUD will apply a hydro rate surcharge to customers' bills up to 4 percent. When the HRSF reaches the 6 percent cap, the Board may authorize a hydro rebate to customers or direct the funds for another purpose. In 2020, $7.7 million was transferred from the HRSF to revenue as a result oflow precipitation. In 2019,

$18.4 million was transferred from revenue to the HRSF as a result of high precipitation.

Energy Assistance Program Rate (EAPR). In 2016, the Board authorized SMUD to transfer $10.0 million ofrevenue to a regulatory credit related to EAPR. This regulatory credit is intended to offset future expenditures for energy efficiency programs for EAPR customers from the period 2018-2020. In 2020 and 2019, $3.5 million and $3.0 million was spent on energy efficiency programs for EAPR customers, respectively.

Senate Bill 1. SMUD implemented a per kilowatt hour solar surcharge, effective January I, 2008 in order to fund investments in solar required by Senate Bill I (SB- I). The difference between the surcharge revenues received and the funds spent on solar _initiatives will be recognized or deferred into future years. SMUD has spent less than it collected in SB-1 revenues and has recorded a regulatory credit. Collection of the solar surcharge ended in December 2,017 when total collections reached

$130.0 million. In 2020 and 2019, $2.3 million and $2.8 million was spent for SB-I programs, respectively.

Grant Revenues. In 2009, SMUD was awarded several large grants under the American Recovery and Reinvestment Act, which provided significant reimbursements for capital expenditures. In 2010, the Board authorized the deferral of grant income for capital expenditures as regulatory liabilities. Thus, this regulatory credit was deferred to match the depreciable lives of the related capital assets in order to offset the earnings effect of these non-exchange transactions.

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TANC Operations Costs. SMUD's cash payments to TANC exceeded TANC's accrual-based costs and SMUD has recorded a regulatory credit.

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

December 31 2020 2019 (thousands of dollars)

Regulatory Credits:

CIAC $278,791 $ 267,041 Rate stabilization 94,006 61,231 Hydro rate stabilization 74;720 82,438 EAPR 3,501 Senate Bill 1 4,254 6,529 Grant revenues 36,068 39,888 TANC operations costs 28 370 28 858 Total regulatory credits $ 516,209 $ 489,486 NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS To help provide stable electric rates and to meet the forecasted power needs of its retail customers reliably, SMUD enters into various physical and financial fixed price purchase contracts for electricity and natural gas. These fixed price contracts and swap agreements are intended to hedge the exposure due to highly volatile commodity prices. SMUD also enters into interest rate swap agreements to reduce interest rate risk. SMUD utilizes these derivative financial instruments to mitigate its exposure to certain market risks associated with ongoing operations. SMUD has established policies set by an executive committee for the use of derivative financial instruments for trading purposes. These contracts are evaluated pursuant to SGAS No. 53, "Accounting and Financial Reporting for Derivative Instruments," (GASB No. 53) to determine whether they meet the definition of derivative instruments, and if so, whether they effectively hedge the expected cash flows associated with interest rate and commodity price risk exposures.

SMUD applies hedge accounting for derivative instruments that are deemed effective hedges. Under hedge accounting, the increase or (decrease) in the fair value of a hedge is reported as a Deferred Inflow or Deferred Outflow in the Statements of Net Position. Accumulated gains and losses from derivative instruments that do not meet the effectiveness tests are deferred for ratemaking purposes as regulatory assets on the Statements of Net Position (see Note 8).

During 2020 and 2019, SMUD executed numerous new gas and power related purchase agreements, some of which are recorded as hedging or investment derivative instruments and are therefore included in the following table. All hedging or investment derivative instruments are recorded at fair value in the Statements of Net Position. -

For electricity and gas derivative instruments, fair values are estimated by comparing contract prices to forward market prices quoted by an independent external pricing service. When external quoted market prices are not available for derivative instrument contracts, SMUD uses an internally developed valuation model utilizing short term observable inputs. For interest rate derivative instruments, SMUD calculates the fair value by discounting the expected cash flows at their correspondin*g zero coupon rate.

41

The following is a summary of the fair value, changes in fair value and notional amounts of derivative instruments, grouped by trading strategy, outstanding at December 31, 2020 (amounts in thousands; gains shown as positive amounts, losses as negative):

2020 Changes in Fair Value at Fair Value December 31, 2020 Current Non current Current Noncurrent Amount Amount Amount Amount Notional Cash Flow Hedges:

(thousands of dollars)

(thousands ofDekatherms (Dth))

Asset: Investment Derivative Instruments Gas - Commodity $ (69) $ 33 $ $ 33 305 Dth Gas - Storage (141) Gas - Transportation (278) Total Investment Derivative Instruments $ (488) $ 33 $ $ 33 Asset: Hedging Derivative Instruments Gas - Commodity $ (189) $ 2,311 $ 1,329 $ 2,325 39,730 Dth Gas _:_ Storage (90) 301 900 Dth Gas - Transportation (3,836) 1,490 11,958 Dth Interest Rate 295 (1,692) I 793 6 281 $280,320 Total Hedging Derivative Instruments $ (3,820) $ 619 $ 4,913 $ 8,606 Liability: Investment Derivative Instruments Gas - Commodity $ 1,164 $ ~,402 $ 9 $ 263 1,675 Dth Gas - Storage 191 Gas - Transportation . 93 -0:

Interest Rate (614) (536) I 392 7 640 $80,100 Total Investment Derivative Instruments $ 834 $ 866 $ 1,401 $ 7,903 Liability: Hedging Derivative Instruments Gas - Commodity $ 20,193 $ 23,002 $ 20,666 $ 18,698 47,778 Dth Gas - Storage (583) 1,097 l,2IO*Dth Gas - Transportation Interest Rate (521) (8,478) 521 10 598 $284,815 Total Hedging Derivative Instruments $ 19,089 $ 14,524 $ 22,284 $ 29,296 42

The following is a summary of the fair value, changes in fair value and notional amounts of derivative instruments, grouped by trading strategy, outstanding at December 31, 2019 (amounts in thousands; gains shown as positive amounts, losses as negative):

2019 Changes in Fair Value at Fair Value December 31, 2019 Current Noncurrent Current Non current Amount Amount Amount Amount Notional Cash Flow Hedges:

(thousands of dollars)

(thousands ofDekatherms (Dth))

Asset: Investment Derivative Instruments Gas - Commodity $ 49 $ $ 69 $ 150 Dth Gas - Storage 141 141 295 Dth Gas - Transportation 278 278 310 Dth Total Investment Derivative Instruments $ 468 $ $ 488 $ Asset: Hedging Derivative Instruments Gas - Commodity $ 1,055 $ 13 $ 1,517 $ 13 2,835 Dth Gas - Storage 154 391 687 Dth Gas - Transportation 2,729 5,326 14,320 Dth Interest Rate 270 (2,507) 1498 7 973 $215,500 Total Hedging Derivative Instruments $ 4,208 $ (2,494) $ 8,732 *$ 7,986 Liability: Investment Derivative Instruments Gas - Commodity $ 195 $ 6,938 $ 1,173 $ 1,665 2,433 Dth Gas - Storage. (191) 191 295 Dth Gas - Transportation (93) 93 310 Dth Interest Rate (403) (379) 778 7 104 $85,625 Total Investment Derivative Instruments $ (492) $ 6,559 $ 2,235 $ 8,769 Liability: Hedging Derivative Instruments Gas-Basis $ 3,651 $ $ $ Gas - Commodity (15,857) 14,984 40,859 41,700 61,957Dth Gas - Storage (124) 515 688 Dth Gas - Transportation 41 Interest Rate (2,120) 2 120 $157,785 Total Hedging Derivative Instruments $ (12,289) $ 12,864 $ 41,374 $ 43,820 I

I I

i 43

Objectives and Terms of Hedging Derivative Instruments. The objectives and terms of SMUD's hedging derivative instruments that were outstanding at December 31, 2020 are summarized in the table below. The table is aggregated by the trading strategy. Credit ratings of SMUD's counterparties can be found in the table under Credit Risk. Details of SMUD's interest rate derivative instruments can be found in Note 10.

Notional Beginning Ending Minimum Maximum AmountDth Date Date Price/Dth Price/Dth Gas - Commodity 89,565 01/01/08 12/31/24 $ .89 $ 7.17 Gas - Storage 2,110 01/01/21 03/31/21 .26 3.13 Gas - Transportation 11,958 01/01/21 12/31/21 (0.82) .43 The objectives and terms of SMUD' s hedging derivative instruments that were outstanding at December 31, 2019 are .

summarized in the table below. The table is aggregated by the trading strategy.

Notional Beginning Ending Minimum Maximum AmountDth Date Date Price/Dth Price/Dth Gas - Commodity 67,375 01/01/08 12/31/22 $ .43 $ 7.17 Gas - Storage 1,965 01/01/20 10/31/20 .24 3.02 Gas - Transportation 14,940 01/01/20 12/31/20 (1.51)* .69 SMUD hedges its interest rate exposure with swaps. One swap is used to convert some of the interest expense associated with fixed rate bonds to a variable rate interest expense. SMUD has four forward starting swaps that are designed to synthetically fix the interest expense associated with refunding bonds that are expected to be issued to refund the 2011 Series X, 2012 Series Y, 2013 Series A and 2013 Series B bonds in 2021, 2022 and 2023, respectively (see Note 10). SMUD also has a swap that is designed to fix the interest expense associated with commercial paper (see Note 11).

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

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

Derivative Instruments Not Designated as Hedging Derivative Instruments Gas and Electric Contracts. SMUD utilizes certain gas swap and electric swap agreements under GASB No. 53 not designated as hedging derivative instruments to mitigate exposure to changes in the market price of natural gas- and electricity.

The fair value of each agreement, excluding the actual settlements to be paid or received as of the end of the period, is recorded in the Statements of Net Ppsition in either Current or Noncurrent Assets, Investment Derivative Instruments if in an asset position or Current or Non current Liabilities, Investment Derivative Instruments if in a liability position. An offsetting amount is included in Current or Noncurrent Regulatory Costs or Regulatory Credits for future recovery in the Statements of Net Position. The actual settlement payable is recorded in Accounts Payable in the Statements of Net Position, and the actual settlement receivable is recorded in Receivables - net: Wholesale and Other in the Statements of Net Position. The payments and receipts of the actual settlement are recorded as Investment Expense in the Statements of Revenues, Expenses and Changes in Net Position.

Interest Rate Contracts. SMUD utilizes certain interest rate swap agreements not designated as hedging derivative instruments under GASB No. 53 to mitigate exposure to fluctuations in interest rates. The fair value of each agreement, excluding the balance of interest to be paid or received as of the end of the period, is recorded in the Statements of Net 44

Position in either Current or Noncurrent Assets, Investment Derivative Instruments if in an asset position or Current or Noncurrent Liabilities, Investment Derivative Instruments if in a liability position. An offsetting amount is included in Current or Noncurrent Regulatory Costs or Deferred *outflows or Inflows ofResource_s in the Statements ofNet Position. The interest receivable is recorded in Receivables - net: Wholesale and Other in the Statements of Net Position and the accrued interest is recorded in Interest Payable in the Statements ofNet Position. The payments or receipts of the actual settlement are recorded as Investment Expense in the Statements of Revenues, Expenses and Changes in Net Position.

The Board has deferred recognition of the effects ofreporting the fair value oflnvestment Derivative Instruments for ratemaking purposes, and maintains regulatory accounts to defer the accounting impact of these accounting adjustments (see Note 8). Fair values may have changed significantly since December 31, 2020.

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

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

. risk is associated with all of SMUD's derivative instruments up to the fair value amounts.

Counterparty Credit Risk. This is the risk of loss resulting when the counterparty is unable or unwilling to fulfill its present and future financial obligations. SMUD can be exposed to significant counterparty credit risk on all derivative instruments.

SMUD seeks to minimize credit risk by transacting with creditworthy counterparties. SMUD has established and maintained strict counterparty credit guidelines. SMUD continuously monitors counterparty credit risk and utilizes numerous counterparties to diversify the exposure to potential defaults. Under certain conditions as outlined in SMUD's credit risk management policy, SMUD may require additional credit support under its trading agreements.

Some ofSMUD's derivative instrument master agreements contain credit contingent provisions that enable SMUD to maintain unsecured credit as a result of positive investment quality credit ratings from each of the major credit rating agencies. If SMUD's credit rating was to be downgraded, there could be a step-down in SMUD's unsecured credit thresholds, and SMUD's counterparties would require additional collateral. IfSMUD's credit rating was to decrease below investment grade, SMUD's unsecured credit thresholds would be reduced to zero, and counterparties to the derivative instruments would demand ongoing full collateralization on derivative instruments in net out of the money positions (see Note 2).

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The counterparties' credit ratings at December 31, 2020 and 2019 are shown in the table below. The credit ratings listed are from S&P or Moody's.

December 31 2020 2019 Counterparty Gas Contracts:

Bank of Montreal A+ A+

Barclays Bank PLC A A Citigroup Inc. BBB+ BBB+

EDF Trading Group Baa2 Baa2 J.P. Morgan Ventures Energy Corp. A- A-Merrill Lynch A2 A3 Mitsui Bussan A NIA Morgan Stanley Capital Group, Inc. A+ BBB+

Nextera A- NIA Royal Bank of Canada AA- NIA Shell Trading Market Risk A+ A Interest Rate Contracts:

Barclays Bank PLC A A Goldman Sachs Capital Markets, L.P. (J. Aron) BBB+ BBB+ I Morgan Stanley Capital Services, Inc. A+ A+

NOTE 10. LONG-TERM DEBT SMUD's total long-term debt is presented below:

December 31 2020 2019 (thousands of dollars)

Electric revenue bonds, 2.0%-6.32%, 2021-2050 $ 2,085,120 $ 1,778,040 Subordinated electric revenue bonds, 5.0%, 2021-2049 200,000 200,000 Total electric revenue bonds 2,285,120 1,978,040 Component unit project revenue bonds, 5.0%, 2021-2030 112,085 120,795 Gas and Commodity supply revenue bonds, index rates. and 4.0%-5.0%, 2021-2049 721 550 738,225 Total long-term debt outstanding 3,118,755 2,837,060 Bond premiums - net 267 947 225 040 Total long-term debt 3,386,702 3,062,100 Less: amounts due within one year (127,390) (118,305)

Total long-term debt- net $ 3,259,312 $ 2,943,795 46 I

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The summarized activity ofSMUD's long-term debt during 2020 is presented below:

Defeasance Amounts January 1, Payments or December 31, Due Within 2020 Additions Amortization 2020 One Year (thousands of dollars)

Electric revenue bonds $ 1,778,040 $ 400,000 $ (92,920) $ 2,085,120 $ 98,040 .

Subordinate electric revenue bonds 200,000 200,000 Component unit project revenue bonds 120,795 (8,710) 112,085 10,900 Gas and Commodity supply revenue bonds 738 225 (16,675) 721 550 18 450 Total 2,837,060 400,000 (118,305) 3,118,755 $ 127,390 Unamortized premiums - net 225 040 83,457 (40,550) 267 947 Total long-term debt $ 3,062 100 $ 483 457 $ (158,855) $ 3,386.702 The summarized activity ofSMUD's long-term debt during 2019 is presented below:

Defeasance Amounts January 1, Payments or December 31, Due Within 2019 Additions Amortization 2019 One Year (thousands of dollars)

Electric revenue bonds $ 1,673,590 $ 191,875 $ (87,425) $ 1,778,040 $ 92,920 Subordinate electric revenue bonds 200,000 200,000 Component unit project revenue bonds 162,055 (41,260) 120,795 8,710 Gas and Commodity supply revenue bonds 772 785 (34,560) 738,225 16 675 Total 2,608,430 391,875 (163,245) 2,837,060 $ 118.305 Unamortized premiums - net 175 187 83,748 (33,895) 225 040 Total long-term debt $ 2,783,617 $ 475,623 $ (197,140) $ 3,062,IOQ At December 31, 2020 scheduled annual principal maturities and interest are as follows:

Princi12al Interest Total (thousands of dollars) 2021 $ 127,390 $ 152,881 $ 280,271 2022 135,115 146,723 281,838 2023 143,515 140,929 284,444 2024 143,310 130,519 273,829 2025 155,900 124,813 280,713 2026 - 2030 (combined) 677,550 498,136 1,175,686 2031 - 2035 (combined) 559,375 342,033 901,408 2036 - 2040 (combined) 466,645 198,044 664,689 2041 - 2045 (combined) 379,530 107,541 487,071 2046- 2050 (combined) 330 425 36 830 367,255 Total requirements $ 3,118.755 $ 1,878,449 $ 4,997.204 Interest in the preceding table includes interest requirements for fixed rate debt at their stated rates, variable rate debt covered by interest rate swaps at their fixed rate, and variable rate debt not covered by interest rate swaps using the debt interest rate of 70.0 percent of 1 month London Interbank Offered Rate (LIBOR) plus a fixed fee. The LIBOR rate is based on the rate in effect at December 31, 2020 for the issues. The 2019 Series A and 2019 Series B Put Bonds assume a 3.0 percent fixed rate coupon after mandatory remarketing. The 2018 NCEA Put Bonds assume a 4.0 percent fixed rate coupon after mandatory remarketing. Principal in the preceding table includes known principal payments and the amortization schedule for mandatory remarketing bonds.

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I I

I The following bonds have been issued and are outstanding at December 31, 2020:

Final Interest Original Outstanding Date Issue Maturity Rate Amount Amount (thousands of dollars)

Electric Revenue Bonds 06/15/1997 1997 Series K Bonds 07/01/2024 5.25%- 5.9% $ 131,030 $ 72,620 05/15/2009

• 2009 Series V Bonds 05/15/2036 6.322% 200,000 200,000 07/29/2010 2010 Series W Bonds 05/15/2036 6.156% 250,000 250,000 10/04/2011 2011 Series X Bonds 08/15/2028 1.5%- 5.0% 325,550 156,770 05/31/2012 2012 Series Y Bonds 08/15/2033 3.0%- 5.0% 196,945 169,530 05/21/2013 2013 Series A Bonds 08/15/2041 3.75%- 5.0% 132,020 132,020 05/21/2013 2013 Series B Bonds 08/15/2033 3.0%- 5.0% 118,615 84,905 07/14/2016 2016 Series D Bonds 08/15/2028 2.0%- 5.0% 149,890 133,360 12/14/2017 2017 Series E Bonds 08/15/2028 5.0% 202,500 152,560 07/12/2018 2018 Series F Bonds 08/15/2028 5:0% 165,515 141,480

• 07/25/2019 2019 Series G Bonds 08/15/2041 2.375% - 5.0% 191,875 191,875 05/07/2020 2020 Series H Bonds 08/15/2050 4.0%'- 5.0% 400,000 400,000 Subordinated Electric Revenue Bonds 07/25/2019 2019 Series A Bonds 08/15/2049 5.0% 100,000 100,000 07/25/2019 2019 Series B Bonds 08/15/2049 5.0% 100,000 100,000 JPA Revenue Bonds 06/03/2015 2015 SFA Bonds 07/01/2030 2.0%- 5.0% 193,335 112,085 05/31/2007 2007B NCGA#l Bonds 07/01/2027 Index Rate 668,470 181,935 12/19/2018 2018 NCEA Bonds 07/01/2049 4.0%-5.0% 539,615 539,615 2020 Bond Issuances. In May 2020, SMUD issued $400.0 million of2020 Series H Revenue Bonds. The 2020 Series H Bonds have a fixed coupon rate of 4.0 percent to 5 .0 percent and amortize from 2029 to 2050. Proceeds from the 2020 Series H Bonds were used to refund all outstanding commercial paper and reimburse SMUD for capital projects in 2018, 2019 and through February 2020.

2019 Bond Issuances. In July 2019, SMUD issued $191.9 million of2019 Series G Revenue Bonds, $100.0 million of2019 Series A Subordinated Revenue Bonds, and $100.0 million of2019 Series B Subordinated Revenue Bonds. The 2019 Series G Bonds have a fixed coupon rate of2.375 percent to 5.0 percent and amortize from 2029 to 2041. The 2019 Series A Bonds have a fixed interest coupon rate of5.0 percent, amortized from 2041 to 2049, with a mandatory remarketing purchase in April 2023.

The 2019 Series B Bonds have a fixed coupon interest rate of 5.0 percent, amortized from 2041 to 2049, with a mandatory remarketing purchase in April 2025. Proceeds from 2019 Series G Bonds, the 2019 Series A Bonds and the 2019 Series B Bonds were used to refund outstanding commercial paper.

Component Unit Bond Defeasances. In September 2019, CVFA defeased $5.4 million of2009 Series Bonds maturing on July 2020, along with the accrued interest using CVFA's available funds. The corresponding amount was placed in an irrevocable trust which had a balance of$5.6"million at December 31, 2019. In addition, SCA defeased $12.9 million of2009 Series Bonds maturing July 2020 and July 2021, along with the accrued interest using SCA's available funds and $7.9 million from SMUD.

The corresponding amount was placed in a11 irrevocable trust which has a remaining balance of $6.9 million and $13.7 million as of December 31, 2020 and 2019, respectively. The defeasances resulted in an accounting loss of$0.8 million which is included in Interest on Debt in the Statements of Revenues, Expenses and Changes in Net Position.

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Terms of Debt Indentures. Debt indentures contain a provision that in an event of default, the holders of the majority of the debt outstanding are entitled to declare the outstanding amounts due immediately.

Interest Rate Swap Agreements. A summary ofSMUD's six interest rate swap agreements as of December 31, 2020 are as follows. The credit ratings listed are from S&P.

Notional Counterparty Amount SMUD Fixed Floating Termination Credit (thousands) Pays Rate Rate Date Rating

$ 72,620 Variable 5.166% SIFMA 07/01/24 BBB+

80,100 Fixed 2.894% 63% of IM LIBOR 08/15/28 A+

127,030 Fixed 1.099% 67% of IM LIBOR 08/15/28 BBB+

157,785 Fixed 1.607% SIFMA 08/15/33 A+

132,020 Fixed 0.7179% 70% of IM LIBOR 08/15/41 A 75,680 Fixed 0.5543% 70% of IM LIBOR 08/15/33 A A summary of SMUD's four interest rate swap agreements as of December 31, 2019 are as follows:

Notional Counterparty Amount SMUD Fixed Floating Termination Credit (thousands) Pays Rate Rate Date Rating

$ 88,470 Variable 5.166% SIFMA 07/01/24 BBB+

85,625 Fixed 2.894% 63% of IM LIBOR 08/15/28 A+

127,030 Fixed 1.099% 67% of IM LIBOR 08/15/28 BBB+

157,785 Fixed 1.607% SIFMA 08/15/33 A+

At December 31, 2020 and 2019, SMUD had a fixed-to-variable interest rate swap agreement with a notional amount of$72.6 million and $88.5 million, respectively, which is equivalent to the principal amount of SMUD's 1997 Series K Electric Revenue Bonds. Under this swap agreement, SMUD pays a variable rate equivalent to the Securities Industry and Financial Markets Association (SIFMA) Index (.09 percent and 1.61 percent at December 31, 2020 and 2019, respectively) and receives fixed rate payments of5.166 percent as of December 31, 2020 and 2019: In connection with the swap agreement, SMUD has a put option agreement, also with a notional amount of $72.6 million and $88.5 million as of December 31, 2020 and 2019, respectively, which gives the counterparty the right to sell to SMUD, at par, either the 1997 Series K Bonds, or a portfolio of securities sufficient to defease the 1997 Series K Bonds. SMUD receives fixed rate payments of0.01 percent and 0.162 percent as of December 31, 2020 and 2019, respectively, in connection with the put option agreement. The exercise of the option terminates the swap at no cost to SMUD. The term of both the swap and the put is equal to the maturity of the 1997 Series K Bonds.

At December 31, 2020 and 2019, SMUD had one variable-to-fixed interest rate swap agreement with a notional amount of

$80.1 million and $85.6 million, respectively. This swap was originally entered into for the purpose of fixing the effective interest rate associated with certain of its subordinated bonds that were refunded during 2008. The notional value of the swap is amortized over the life of the swap agreement. SMUD can terminate th~ swap agreement at any time, with payment or receipt of the fair market value of the swap as of the date of termination. The obligations ofSMUD under the swap agreement are not secured by a pledge ofrevenues of SMUD's electric system or any other property of SMUD.

Additionally, in June 2020, SMUD executed a variable-to-fixed interest rate swap agreement with Barclays Bank PLC with a notional amount of$132.0 million for the purpose of fixing the effective interest rate associated with the potential refunding of the 2013 Series A Bonds. The Barclays 2013 Series A swap becomes effective in July 2023. Also, in June 2020, SMUD 49

executed a variable-to-fixed interest rate swap agreement with Barclays Bank PLC with a notional amount of$75.7 million for the purpose of fixing the effective interest rate associated with the potential refunding of the 2013 Series B Bonds. The Barclays 2013 Series B swap becomes effective in July 2023. The notional values of the two swaps are amortized over the life of their respective swap agreements. SMUD can terminate both swap agreements at any time, with payment or receipt of the fair market value of the swaps as of the date of termination. The obligations of SMUD under the swap agreements are not secured by a pledge ofrevenues ofSMUD's electric system or any other property ofSMUD.

In December 2019, SMUD executed a variable-to-fixed interest rate swap agreement with J. Aron with a notional amount of

$127.0 million for the purpose of fixing the effective interest rate assocjated with the potential refunding of the 2011 Series X Bonds. The J. Aron swap becomes effective in July 202_1. Also, in December 2019, SMUD executed a variable-to-fixed interest rate swap agreement with Morgan Stanley Capital Services with a notional amount of$157.8 million for the purpose of fixing the effective interest rate associated with the potential refunding of the 2012 Series Y Bonds. The Morgan Stanley Capital Services swap becomes effective in July 2022. The notional values of the two swaps are amortized over the life of their respective swap agreements. SMUD can terminate both swap agreements at any time, with payment or receipt of the fair market value of the swaps as of the date of termination. Additionaily, on August 15, 2026 and for the remaining life of the Morgan Stanley Capital Services swap associated with 2012 Series Y Bonds, the swap can be terminated at no cost to SMUD.

The obligations of SMUD under the swap agreements are not secured by a pledge ofrevenues of SMUD's electric system or any other property of SMUD.

Component Unit Interest Rate Swap Agreements. NCGA had one interest rate swap agreement as of December 31, 2020, which is summarized as follows. The credit ratings listed are from S&P.

Credit Support Notional Provider Amount NCGA Fixed Floating Termination Credit (thousands) Pays Rate Rate Date Rating

$ 181,935 Fixed 4.304% 67% ofLIBOR + .72% 07/01/27 A+

NCGA had one interest rate swap agreement as of December 31, 2019, which are summarized as follows:

Credit Support Notional Provider Amount NCGA Fixed Floating Termination Credit (thousands) Pays Rate Rate Date Rating

$ 198,610 Fixed 4.304% 67% ofLIBOR + .72% 07/01/27 A+

At December 31, 2020 and 2019, NCGA had a variable-to-fixed interest rate swap agreement with a counterparty for the purpose of fixing the effective interest rate associated with the 2007 Series B Bonds. NCGA pays the counterparty a fixed rate on the notional amount and receives a floating rate equal to 67 percent of the three month LIBOR (0.23 percent and 1.91 percent at December 31, 2020 and 2019, respectively) plus an interest rate spread, as specified in the swap agreement. The total notional amount of the swap at December 31, 2020 and 2019 was $181.9 million and $198.6 million, respectively, and was equivalent to the outstanding principal balance on the NCGA Bonds. The swap is amortized over the life of the swap agreement in a manner corresponding to the principal repayment schedule of the NCGA Bonds. Early termination of the swap would occur upon termination of the prepaid agreement for any reason. Upon early termination, the swap would have no value to either party.

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

Component Unit Bonds. The component units of SMUD have each issued bonds to finance their respective projects. The revenue stream to pay SPA bonds' debt service is provided by a "take-or-pay" power purchase agreement, and is therefore not dependent on the successful operation of the project. SMUD guarantees to make payments sufficient to pay principal and 50

interest and all other payments _required to be made under SF A's indenture of trust. SFA is not required to repay SMUD for any amounts paid under this guarantee. The revenue stream to pay NCGA and NCEA bonds' debt service is provided by "take-and-pay" purchase agreements. Therefore, principal and interest associated_ with these bonds are paid solely from the revenues and receipts collected in connection with the operation of the project. Most operating revenues earned by NCGA and NCEA are collected from SMUD in connection with the sale of gas or electricity to SMUD. The ability for NCGA and NCEA to service debt is dependent on various parties (particularly MSCG, as gas supplier forNCGA and J. Aron, as commodity supplier for NCEA) meeting their contractual obligations.

Callable Bonds. SMUD has $488.8 miUion of Electric Revenue Bonds that are currently callable, all of which are fixed rate Build America Bonds debt. SMUD also has $492.5 million of bonds that become callable from 2021 through 2026, and these bonds can be called until maturity. SMUD also has a four month call period on the 2019 Series A and 2019 Series B Bonds in advance of their mandatory remarketing purchase date in 2023 and 2025, respectively.

Collateral The principal and in~erest on SMUD's bonds are payable exclusively from, and are collateralized by a pledge of, the net revenues of SMUD's electric system. Neither the credit nor the taxing power of SMUD is pledged to the payment of the bonds and the general fund of SMUD is not liable for the payment thereof.

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

SMUD has pledged future net electric revenues, component unit net project revenues, and net gas supply prepaymenfrevenues to repay, in electric revenue, component unit project revenue, and gas supply prepayment revenue bonds issued from 1997 through 2020. Proceeds from the bonds provided financing for various capital improvement projects, component unit capital projects, and the prepayments of a twenty-year supply of natural gas and a thirty-year supply of commodity. The bonds are payable solely from the net revenues generated by SMUD's electrical sales, component unit project revenues, and gas supply prepayment revenues and are payable through 2050 at December 31, 2020.

GASB Statement No. 48, "Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues," disclosures for pledged revenues are as follows:

December 31 2020 2019 (thousands of dollars) \

Pledged future revenues $ 3,118,755 $ 2,837,060 Principal and interest payments for the year ended $ 262,291 $ 265,930 Total net revenues for the year ended $ 632,572 $ 586,514 Total remaining principal and interest to be paid $ 4,297,204 $ 4,469,821 Annual principal and interest payments as a percent of net revenues for the year ended 41% 45%

NOTE 11. COMMERCIAL PAPER NOTES SMUD issues Commercial Paper Notes (Notes) to finance or reimburse capital expenditures. In February 2019, SMUD expanded its commercial paper program from $288.8 million to $400.0 million. At December 31, 2020, there were no Notes outstanding. At December 31, 2019, Notes outstanding totaled $50.0 million. The average interest rate for the Notes outstanding at December 31, 2019 was 1.02 percent and the average term was 90 days. SMUD 's commercial paper program is backed by $409.9 million in letter of credit agreements (LOCs) with three separate banks. The LOCs are calculated as the sum of the maximum principal amount of the Notes plus interest thereon at a maximum rate often percent per annum for a period of 90 days calculated on the basis of a year of 365 days and the actual number of days elapsed. There have not been any term 51

advances under the LOCs. The LOCs contain a provision that in an event of default, the outstanding amounts may become immediately due.

The summarized activity ofSMUD's Notes during 2020 and 2019 is presented below:

Balance at Balance at Beginning of End of Year Additions Reductions Year (thousands of dollars)

December 31, 2020 $ 50,000 $ $ (50,000) $ December 31, 2019 $ 288,750 $ 161,250 $ (400,000) $ 50,000 NOTE 12. FAIR VALUE MEASUREMENT GASB No. 72 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). SMUD utilizes ~arket data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.

GASB No. 72 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the_

highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy defined by GASB No. 72 are as follows:

• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

• Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for an asset or liability, either directly or indirectly.

• Level 3 inputs are unobservable inputs that reflect SMUD's own assumptions about factors that market participants would use in pricing the asset or liability.

The valuation methods of the fair value measurements are as follows:

• LAIF - uses the fair value of the pool's share price multiplied by the number of shares held. This pool can include a variety of investments such as U.S. government securities, federal agency securities, negotiable certificates of deposit, bankers' acceptances, commercial paper, corporate bonds, bank notes, and other investments. The fair values of the securities are generally based on quoted and/or observable market prices.

• U.S. Government Agency Obligations - uses a market based approach which considers yield, price of comparable securities, coupon rate, maturity, credit quality and dealer-provided prices.

• U.S. Treasury Obligations - uses a market approach based on institutional bond quotes. Evaluations are based on various market and industry inputs.

• Corporate Notes - uses a market based approach. Evaluations are based on various market and industry inputs.

• Municipal Bonds - uses a market approach based on institutional bond quotes. Evaluations are based on various market and industry inputs.

• Investment Derivative Instruments:

o Interest rate swap agreements - uses the present value technique. The fair value of the interest rate swap agreements _are calculated by discounting the expected cash flows. The cash flows and discount rates are estimated based on a I-month LIBOR forward curve from Bloomberg, and assuming SIFMA is equal to 70.0 percent of I-month LIBOR.

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o Gas related agreements - uses the market approach based on monthly quoted prices from an independent external pricing service. The fair values for natural gas and electricity derivative financial instruments are calculated based on prevailing market quotes in active markets (i.e. Henry Hub and So Cal) where identical contracts are available.

The following tables identify the level within the fair value hierarchy that SMUD's financial assets and liabilities were accounted for on a recurring basis as of December 31, 2020 and 2019, respectively. As required by GASB No. 72, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value 111easurement.

SMUD's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of liabilities and their placement within the fair value hierarchy levels.

Recurring Fair Value Measures At fair value as of December 31, 2020 Level 1 Level 2 Total (thousands of dollars)

Investments, including cash and cash equivalents:

LAIF $ $ 512,682 $ 512,682 U.S. Government Agency Obligations 85,636 85,636 U.S. Treasury Obligations 20,248 20,248 Corporate Notes 118,015 118,015 Municipal Bonds 63 647 63 647 Total Investments, including cash and cash equivalents $ 20.248 $ 779.980 $ 800.228

-Investment Derivative Instrument Assets:

Gas related agreements $ 33 $ $ 33 Total Investment Derivative Instrument Assets $ 33 $ $ 33 Hedging Derivative Instrument Assets:

Gas related agreements $ 5,445 $ $ 5,445 Interest rate swap agreements 8 074 8 074 Total Hedging Derivative Instrument Assets $ 5.445 $ 8.074 $ 13 519 Investment Derivative Instrument Liabilities:

Gas related agreements $ 272 $ $ 272 Interest rate swap agreements 9 032 9 032 Total Investment Derivative Instrument Liabilities $ 272 $ 9,032 $ 9,304 Hedging Derivative Instrument Liabilities:

Gas related agreements $ 40,461 $ $ 40,461 Interest rate swap agreements 11119 11119 Total Hedging Derivative Instrument Liabilities $ 40,461 $ 11,112 $ 51.580 53

Recurring Fair Value Measures At fair value as of December 31, 2019 Level 1 Level2 Total (thousands of dollars)

Investments, including cash and cash equivalents:

LAIF $ $ 104,742 $ 104,742 U.S. Government Agency Obligations 178,167 178,167 u:s. Treasury Obligations 125,283 125,283 Corporate Notes 121,199 121,199 Municipal Bonds 48 076 48 076 Total Investments, including cash and cash equivalents $

• 125.283 $ 452,184 $ 577.467 Investment Derivative Instrument Assets:

Gas related agreements $ 488 $ $ 488 Total Investment Derivative Instrument Assets $ 488 $ $ 488 Hedging Derivative Instrument Assets:

Gas.related agreements $ 7,247 $ $ 7,247 Interest rate swap agreements 9 471 9 471 Total Hedging Derivative Instrument Assets $ 7.247 $ 9.471 $ 16,718 Investment Derivative Instrument Liabilities:

Gas related agreements $ 3,122 $ $ 3,122 Interest rate swap agreements 7 882 7 882 Total Investment Derivative Instrument Liabilities $ 3,122 $ 7.882 $ 11.004 Hedging Derivative Instrument Liabilities:

Gas related agreements $ 83,074 $ $ 83,074 Interest rate swap agreements 2 120 2 120 Total Hedging Derivative Instrument Liabilities $ 83,074 $ 2,120 $ 85.194 NOTE 13. ACCRUED DECOMMISSIONING LIABILITY Asset Retirement Obligations (ARO). SMUD implemented GASB No. 83 in 2019. SMUD recognizes AROs for its Rancho Seco nuclear power plant facility and the CVF A power plant facility. This statement requires measurement of the ARO be on the best estimate of the current value of outlays expected to be incurred. The best estimate should be determined using all available evidence and requires probability weighting of potential outcomes when sufficient evidence is available. This statement also requires the current value be adjusted for the effects of the general inflation or deflation and an evaluation of relevant factors that may significantly change the estimated asset retirement outlays at least annually.

Rancho Seco Nuclear Power Plant. With the completion of nuclear decommissioning of the former 913 MW nuclear power plant, and the subsequent termination of the 10 Code of Federal Regulations (CFR) 50 license by the Nuclear Regulatory Commission (NRC) effective August 31, 2018, all remaining Rancho Seco decommissioning liability relates to the Independent Spent Fuel Storage Installation (ISFSI) licensed under 10 CFR Part 72. Nuclear decommissioning is the process of safely removing nuclear facilities from service and reducing residual radioactivity to a level that permits termination of the NRC licenses and release of the property for unrestricted use. Final decommissioning of the ISFSI will occur after the spent nuclear fuel (SNF) and Greater Than Class C (GTCC) radioactive waste are removed from the site and SMUD demonstrates that the site is suitable for release in accordance with release criteria specified in 10 CFR 20, Subpart E and an approved License Termination Plan.

The Department of Energy (DOE), under the Nuclear Waste Policy Act (NWPA) of 1982 as amended, is responsible for permanent disposal of spent nuclear fuel and GTCC radioactive waste, which are currently stored in the Part 72 licensed ISFSI. SMUD has a contract with the DOE for the removal and disposal of SNF and GTCC waste. All SMUD's SNF and GTCC waste are currently stored in sealed canisters in the ISFSI. However, the date when DOE will remove the fuel and GTCC waste is uncertain. In 2010, the DOE formally withdrew the application for licensing of Yucca Mountain as a high-54

level waste repository. While the court- ordered reinstatement ofNRC license review activities of Yucca Mountain have yielded generally positive results, Yucca Mountain remains speculative as a disposal option for SMUD's used nuclear fuel. The DOE also announced in January 2010 the creation ofa Blui::-Ribbon Commission to study alternatives for developing a repository for the nation's used nuclear fuel. The Commission provided a final report on alternatives in January 2012. The DOE evaluated the recommendations and published the report "Strategy for the Management and Disposal of Used Nuclear Fuel and High-Level Radioactive Waste" in January 2013.

The next phase of the process will be for Congress and the President of the United States to consider the recommendations and enact legislation to implement the recommendations. At this time, two license applications have been submitted to the NRC for the construction and operation of Consolidated Interim Storage Facility(s) that would store SNF and GTCC waste on an interim basis. These applications are currently under review by the NRC. Should the NRC license one or both facilities, Congress will have to modify the NWPA to allow for its use. In May 2018, the U.S. House of Representatives passed H.R.

3053 - the Nuclear Waste Policy Amendments Act, which was co-sponsored by Representative Doris Matsui and 109 other members of Congress. This bill includes a provision to allow a Consolidated Interim Storage Facility to store fuel from permanently shut down sites like Rancho Seco. The U.S. Senate did not act on the bill. Until legislation is passed which includes a significant step towards removal of the used nuclear fuel at the Rancho Seco facility, SMUD is committed to the safe and secure storage of its SNF and GTCC waste under its Part 72 license until DOE fulfills its obligation to dispose of this material in accordance with NWPA. In support of this commitment, SMUD submitted its ISFSI license renewal application to the NRC in March of 2018. The NRC issued Renewed Licensee No. SNM-2510 on March 9, 2020. This renewed license authorizes the continued storage ofSMUD's SNF and GTCC until June 30, 2060.

The Rancho Seco decommissioning liability is based on an internal study of the remaining decommissioning costs, which consist of: 1) annual spent fuel management costs, 2) transportation of the canisters in the ISFSI and 3) termination of the Part 72 license. The largest part of the decommissioning estimate is the annual spent fuel management costs; next year's annual budget is used for the estimate. The other costs were estimated based on prior experience and studies and prepared by management representatives of the nuclear power plant. The costs in the estimate were in 2019 dollars. An employment cost index was used to adjust the other costs portion of the obligation for inflation in 2020. Probability weighting was assigned for two scenarios: 1) spent nuclear fuel will be removed from the site by 2028 and 2) spent nuclear fuel will be removed from the site by 2035. SMUD uses its Trust Fund (see Note 2) to demonstrate financial assurance to the NRC that there are enough funds to complete the termination of the Part 72 license; the balance of the Trust Fund at December 31, 2020 is $8.9 million.

CVFA Power Plant. CVF A's ground lease agreement with the Sacramento Regional County Sanitation District requires CVF A to restore the premises to its original condition upon termination of the contract. A new study to determine the current value of the asset retirement obligation was conducted by an external contractor who specializes in decommissioning studies. The expected costs and scope of work were based on the most recent cost estimate and assumes a contractor will be responsible for the work and that decommissioning would take place between 2025 and 2027. The estimated costs were in 2018 dollars. The result of this study was used to determine the new balance of the ARO and the deferred outflows at January 1, 2018, in order to account for the 2018 activity. CVFA used the annual All Urban Consumer Price Index to adjust this obligation for inflation in 2020. The remaining useful life of the Agency's assets is five years at December 31, 2020.

The current portion of the Accrued Decommissioning liability represents SMUD's estimate of actual expenditures for Rancho Seco in the next year, as set forth in the annual budget.

At December 31, 2020 and 2019, SMUD's Accrued Decommissioning balance in the Statements of Net Position was $99.5 million and $91.7 million, respectively.

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NOTE 14. PENSION PLANS Summary of Significant Accounting Policies. For purposes of measuring net pension liability, deferred outflows ofresources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the pension plans and additions to/deductions from the fiduciary net position have been determined on the same basis as they are reported by the California Public Employees' Retirement System (PERS) Financial Office. For this purpose, benefit payments (including refunds of employee contributions) are recognized when currently due and payable in accordance with the benefit terms. Investments are reported at fair value.

Plan Description and Benefits Provided. SMUD participates in PERS, an agent multiple-employer public employee defined benefit pension plan (PERS Plan). PERS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. PERS acts as a common investment and administrative agent for participating public entities within the State. Benefit provisions and all other requirements are established by State statute and SMUD policies. The pension plan provides retirement benefits, survivor benefits, and death and disability benefits based upon employee's years of credited service, age, and final compensation. A full description of the pension plan regarding number of employees covered, benefit provision, assumptions (for funding, but not accounting purposes), and membership information are included in the annual actuarial valuation reports as of June 30, 2019 and June 30, 2018.

During 2019, SMUD also provided a supplemental benefit in lieu of PERS' Single Highest Year (SHY) for certain represented employees hired before January 1, 2013. For these employees, if the present value of pension allowance under the PERS Plan with the employer paid member contributions (EPMC) benefit enhancement program is less than the present value of what the employee would have received under the PERS Plan benefit with SHY earnings but no EPMC, SMUD pays a lump sum equivalent to the-difference. There are no assets accumulated in a trust for SHY. At December 31, 2020 SMUD no longer had an obligation to provide the supplemental benefit in lieu of PERS' SHY.

GASB No, 68 and GASB No. 73 require that the reported results must pertain to liability and asset information within certain defined timeframes. The following timeframes are used for the year ended:

PERS Plan December 31 2020 2019 Valuation date June 30, 2019 June 30, 2018 Measurement date June 30, 2020 June 30,2019 SHY December 31 2020 2019 Valuation date and Measurement date NIA June 30, 2019 Employees Covered by Benefit Terms. The following employees were covered by the benefit terms for the year ended:

PERS Plan December 31 2020 2019 Inactive employees or beneficiaries currently receiving benefit payments 3,003 2,936 Inactive employees entitled to but not yet receiving benefit payments 979 946 Active employees 2 265 2 260 Total employees covered by benefit terms 6 247 6 142 56

SHY December 31 2020 2019 Inactive employees or beneficiaries currently receiving benefit payments Inactive employees entitled to but not yet receiving benefit payments Active employees ------~0- 215 Total employees covered by benefit terms =====-==0- 215 Contributions. Section 20814(c) of the California Public Employees' Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice ofa change in the rate. The total plan contributions are determined through PERS' annual actuarial valuation process.

The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The employer is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. For the PERS fiscal years ended June 30, 2020 and 2019, the average active employee contribution rate is 6.6 percent and 6.7 percent of annual pay, respectively.

For the PERS fiscal year ended June 30, 2020, the employer's contribution rate is 8.7 percent of annual payroll plus $3 I.I million for the unfunded accrued liability contribution. For the PERS fiscal-year ended June 30, 2019, the employer's contribution rate is 8.2 percent of annual payroll plus $29.4 million for the unfunded accrued liability contribution. Employer contribution rates may change if plan contracts are amended. For the fiscal years ended June 30, 2020 and 2019, SMUD made contributions recognized by the PERS Plan in the amount of$98.3 million and $69.1 million, respectively.

Net Pension Liability (NPL). SMUD's NPL at December 31, 2020 and 2019 was measured at June 30, 2020 and 2019, respectively. The total pension liability used to calculate the NPL was determined by actuarial valuations as of June 30, 2019 and 2018 rolled forward using generally accepted actuarial procedures to the June 30, 2020 and 2019 measurement dates for the PERS Plan and actuarial valuations as of June 30, 2019 for SHY.

Actuarial Methods and Assumptions. The actuarial methods and assumptions used for the December 31, 2020 and December 31, 2019 total pension liabilities are as follows for the PERS Plan:

Actuarial Cost Method Entry age normal Discount Rate 7.15%

Inflation 2.5%

Salary Increases Varies by entry age and service Mortality Rate Table The mortality table used was developed based on PERS' specific data. The probabilities of mortality are based on the 2017 PERS' Experience Study for the period from 1997 to 2015. Pre-retirement and Post-retirement mortality rates include 15 years of projected mortality improvement using the Society of Actuaries Scale 90% of scale MP-2016.

Post Retirement Benefit Increase For 2020 and 2019, the lesser of contract COLA or 2.5% until Purchasing Power Protection Allowance floor on purchasing power applies, 2.5% thereafter The actuarial methods and assumptions used for the December 31, 2019 total pension liabilities are as follows for SHY:

Actuarial Cost Method Entry age normal Discount Rate Bond Buyer 20 Index - 3.50% (2019)

Inflation 2.5% (2019)

Salary Increases Aggregate-2.75% (2019); merit- PERS 1997-2015 Experience Study Mortality, Retirement, Disability, Termination PERS 1997-2015 Experience Study Mortality Improvement Mortality projected 15 years with 90% of Scale MP-2016 57

Discount Rates. For the PERS Plan, the discount rate used to measure the total pension liability for the years ended December 31, 2020 and 2019 was 7.15 percent for both years. For the year ended December 31, 2020, the projection of cash flows used to determine the discount rate assumed that contributions from plan members will be made at the current member contribution rates and that contributions from rmployers will be made at statutorily required rates, actuarially determined.

Based on those assumptions, the PERS Plan was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate ofreturn on plan investments was applied to all periods of projected benefit payments to determine the total pension liability.

The long-term expected rate ofreturn on pension plan investments was determined using a building-block method in which expected future real rates ofreturn (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. Using historical returns of all the funds' asset classes, expected compound (geometric) returns were ,

calculated over the short-term (first 10 years) and the long-term (11-60 years) using a building-block approach.

The expected real rates ofreturn by asset class used for December 31, 2020 are as follows:

Current Target Real Return Real Return Asset Class Allocation Years 1-10 Years 11+

Global Equity 50.0% 4.80% 5.98%

Global Fixed Income 28.0% 1.00% 2.62%

Inflation Assets 0% 0.77% 1.81%

Private Equity 8.0% 6.30% 7.23%

Real Estate 13.0% 3.75% 4.93%

Liquidity 1.0% 0% (0.92%)

The expected real rates ofreturn by asset class used for December 31, 2019 are as follows:

Current Target Real Return Real Return Asset Class Allocation Years 1-10 Years 11+

Global Equity 50:0% 4.80% 5.98%

Global .Fixed Income 28.0% 1.00% 2.62%

Inflation Assets 0% 0.77% 1.81%

Private Equity 8.0% 6.30% 7.23%

Real Estate 13.0% 3.75% 4.93%

Liquidity 1.0% 0% (0.92%)

58

Changes in the NPL. The following table shows the changes in NPL recognized over the year ended December 31, 2020:

Increase (Decrease) Net Pension Total Pension Plan Fiduciary Net Liability Liabili:tx (a) Position (b) (a) - (b)

(thousands of dollars)

Balances at January 1, 2020 $ 2,332,097 $ 1864450 $ 467,647 Changes recognized for the measurement period:

Service cost _38,901 38,901 Interest 164,044 164,044 Changes in assumptions Differences between expected and actual experience 9,981 9,981 Contributions - employer 98,344 (98,344)

Contributions - employee 18,095 (18,095)

Net investment income 92,534 (92,534)

Benefit payments (125,581) (125,581) Administrative expense (2,628) 2,628 Other - GASB 73 pension liability write off (4,408) (4,408)

Net changes 82 937 80 764 2 173 Balances at December 31, 2020 $ 2,415.034 $ 1,945.214 $ 469 820 The following table shows the changes in NPL recognized over the year ended December 31, 2019:

Increase (Decrease) Net Pension Total Pension Plan Fiduciary Net Liability Liabili:tx (a) Position (b) (a)- (b)

(thousands of dollars)

Balances at January 1, 2019 $ 2,234,911 $ 1,780,867 $ 454,044 Changes recognized for the measurement period:

Service cost 38,264 38,264 Interest 158,160 158,160 Changes in assumptions . (194) y (194)

Differences between expected and actual experience 18,561 18,561 Contributions - employer 69,119 (69,119)

Contributions - employee 17,411 (17,411)

Net investment income 115,867 (115,867)

Benefit payments (117,605) (117,548) (57)

Administrative expense (1,270) 1,270 Other 4 (4)

Net changes 97 186 83 583 13 603 Balances at December 31, 2019 $ 2,332.097 $ 1,864.450 $ 467,647 59

Sensitivity of the NPL to Changes in the Discount Rate. The following presents the NPL of the Plan as of the measurement date, calculated using the current discount rate, as well as what the net pension liability would be if it were calculated using a discount rate that is I percentage-point lower or I percentage~point higher than the current discount rate:

!%Decrease Current Discount 1% Increase PERS Plan (6.15%} Rate (7.15%} (8.15%}

(thousands of dollars)

Plan's NPL, December 31, 2020 $ 777,072 $ 469,820 $ 214,331 Plan's NPL, December 31, 2019 761,785 463,239 215,186 1% Decrease Current Discount 1% Increase SHY (2.50%} Rate (3.50%} (4.50%}

(thousands of dollars)

Plan's NPL, December 31, 2019 $ 5,375 $ 4,408 $ 3,642 Pension Plan Fiduciary Net Positi~n. Detailed information about the PERS Plan's fiduciary net position is available in the separately issued PERS Plan financial statements. This report, the audited financial statements, ~nd other reports can be obtained at the PERS' website at www.calpers.ca.gov.

Pension Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions. For the years ended December 31, 2020 and 2019, SMUD recognized pension expense of $79.7 million and $91.8 million, respectively.

At December 31, 2020 and 2019, SMUD reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources:

December 31 2020 2019 (thousands of dollars)

Deferred outflows ofresources:

Changes of assumptions $ $ 23,961 Differences between expected and actual experience 17,222 14,788 Differences between projected and actual earnings on pension plan investments 16,985 Employer's contributions to the Plan subsequent to the measurement of total pension liability 142 133 67 119 Total deferred outflows of resources $ 176.340 $ 105,868 Deferred inflows of resources:

Changes of assumptions $ 14,212 $ 30,825 Differences between expected and actual experience 7,239 Differences between projected and actual earnings on pension plan investments 7 932 Total deferred inflows of resources $ 14,212 $ 45.996 60

Amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows:

Year ended December 31:

2021 $ (13,622) 2022 13,040 2023 12,545 2024 8,032 2025 Thereafter Other Plans. SMUD provides its employees with two cash deferred compensation plans: one pursuant to Internal Revenue Code (IRC) Section 40l(k) (40l(k) Plan) and one pursuant to IRC Section 457 (457 Plan) (collectively, the Plans). The Plans are contributory plans in which SMUD's employees contribute the funds. Each of SMUD'1, eligible full-time or permanent part-time employees may participate in either or both Plans, and amounts contributed are vested immediately.* Such funds are held by a Trustee in trust for the employees upon retirement from SMUD service and, accordingly, are not subject to the general claims of SMUD' s creditors. SMUD is responsible for ensuring compliance with IRC requirements concerning the Plans and has the fiduciary duty ofreasonable care in the selection_ofinvestment alternatives, but neither SMUD, nor its Board or officers have any liability for market variations in the Plans' asset values. SMUD employees are responsible for determining how their funds are to be invested and pay all ongoing fees related to the Plans. The Plans are currently not subject to discrimination testing, nor the requirements of the Employee Retirement Income Security Act of 1974. SMUD employees participating in the Plans are allowed to contribute a portion of their gross income not to exceed the annual dollar limits prescribed by the IRC.

SMUD makes annual contributions to the 401 (k) Plan on behalf of certain employees pursuant to a memorandum of understanding with both of its collective bargaining units. SMUD also matches non-represented employee contributions to the 40l(k) Plan up to a set amount. SMUD made contributions into the 40l(k) Plan of$5.8 million in 2020 and $5.4 million in 2019. SMUD does not match employee contributions, nor make contributions on behalf of its employees to the 457 Plan.

Participating employees made contributions into both Plans totaling $28.8 million in 2020 and $24.8 million in 2019.

NOTE 15. OTHER POSTEMPLOYMENT BENEFITS Summary of Significant 'Accounting Policies. For purposes of measuring the net OPEB asset or liability, deferred outflows of resources and deferred inflows ofresources related to OPEB, and OPEB expense, information about the fiduciary net position of the OPEB plan and additions to/deductions from the OPEB plan's fiduciary net position have been determined on the same basis as they are reported by the California Employers' Retiree Benefit Trust (CERBT). For this purpose, SMUD recognizes benefit payments when due and payable in accordance with the benefit terms. Investments are reported at fair value.

Plan Description and Benefits Provided. SMUD is a member of CERBT. The CERBT Fund is an IRC Section 115 Trust set up for the purpose of receiving employer contributions to prefund OPEB for retirees and their beneficiaries. CERBT is an agent multiple-employer defined benefit OPEB plan (OPEB Plan) administered by PERS. The OPEB Plan provides medical, dental and long-term disability benefits for retirees and their beneficiaries, in accordance with SMUD policy and negotiated agreements with employee representation groups. The benefit, benefit levels, retiree contributions and employer contributions are governed by SMUD and can be amended by SMUD through its personnel manual and union contracts. Any changes to these benefits would be approved by SMUD's Board and unions.

61

Employees Covered by Benefit Terms. The following employees were covered by the benefit terms:

December 31 2020 2019 Inactive employees or beneficiaries currently receiving benefit payments 2,286 2,244 Inactive employees entitled to but not yet receiving benefit payments 46 44 Active employees 2 136 2 186 Total employees covered by benefit terms 4 468 4474 Contributions. OPEB contributions are elective and not required. In December 2018, SMUD split its CERBT assets across two asset strategies to better align trust assets with liabilities (Strategy 1 for active employees and retirements after June 30, 2018 and Strategy 3 for retirements before July 1, 2018). SMUD contributes the normal cost to the CERBT, but annually receives reimbursement for cash benefit payments from the CERBT. SMUD may also elect to put additional contributions into the OPEB Plan. For the OPEB Plan's fiscal years ended June 30, 2020 and 2019, SMUD made contributions recognized by the OPEB Plan in the amounts of$13.3 million and $14.0 million, respectively.

Net OPEB Asset (NOA) or Liability (NOL). SMUD's NOA at December 31, 2020 and NOL at December 31, 2019 was measured as of June 30, 2020 and 2019, respectively, and the total OPEB liability used to calculate the NOA and NOL was determined by actuarial valuations as of those dates.

Actuarial Methods and Assumptions. The actuarial methods and assumptions used for the December 31, 2020 and December 31, 2019 total OPEB liabilities are as follows:

Discount Rate 6.37% (2020). Blended discount rate based on projected benefit streams expected to be paid from each Strategy. 6.40% (2019)

Inflation 2.75%

Salary Increases Aggregate - 3.0%; merit - PERS 1997-2015 Experience Study Mortality, Retirement, Disability, Termination PERS 1997-2015 Experience Study Mortality Improvement Mortality projected fully generational with Scale MP-19 (2020), MP-18 (2019)

Healthcare Cost Trend Rates Non-medicare: 7.0% for 2022, decreasing to an ultimate rate of 4.0% in 2076 (2020);

7.25% for 2021, decreasing to an ultimate rate of 4.0% in 2076 (2019)

Kaiser Medicare: 5.0% for 2022, decreasing to an ultimate rate of 4.0% in 2076 (2020)

Medicare: 6.1 % for 2022, decreasing to an ultimate rate of 4.0% in 2076 (2020);

6.3% for 2021, decreasing to an ultimate rate of 4.0% in 2076 (2019)

Discount Rates. For the OPEB Plan, the discount rate used to measure the total OPEB liability was 6.37 percent and 6.40 percent for the years ended December 31, 2020 and 2019, respectively. This rate is a blended discount rate based on projected benefit streams expected to be paid from Strategies 1 and 3. The projection of cash flows used to determine the discount rate assumed that SMUD contributes the full normal cost to the trust and only takes reimbursement from the trust of the cash benefit paymen,ts. Because the implied subsidy benefit payments have a larger present value than the payments toward the unfunded accrued liability, there should be sufficient plan assets to pay all benefits from the trust. Based on those assumptions, the OPEB Plan's fiduciary net position was projected to be available to make all projected OPEB payments for current active and inactive employees. The long-term expected rate ofreturn of6.75 percent for Strategy 1 and 5.50 percent for Strategy 3 was applied to all periods of projected benefit payments to determine the total OPEB liability for the years

\

ended December 31, 2020 and 2019.

62

The expected real rates of return by asset class used and presented as geometric means for December 31, 2020 are as follows:

Target Allocation Expected Real Asset Class CERBT Strategy I Rate of Return Global Equity 59% 4.82%

Fixed Income 25% 1.47%

TIPS 5% 1.29%

Commodities 3% 0.84%

REITS 8% 3.76%

Target Allocation Expected Real Asset Class CERBT Strategy 3 Rate of Return Global Equity 22% 4.82%

Fixed Income . 49% 1.47%

TIPS 16% 1.29%

Commodities 5% 0.84%

REITS 8% *o 3.76%

The expected real rates ofreturn by asset class used and presented as geometric means for December 31, 2019 are as follows:

Target Allocation Expected Real Asset Class CERBT Strategy I Rate of Return Global Equity 59% 4.82%

Fixed Income 25% 1.47%

TIPS 5% 1.29%

Commodities 3% 0.84%

REITS 8% 3.76%

Target Allocation Expected Real Asset Class CERBT Strategy 3 Rate of Return Global Equity 22% 4.82%

Fixed Income 49% 1.47%

TIPS 16% 1.29%

Commodities 5% 0.84%

REITS 8% 3.76%

63

Changes in the NOA/NOL. The following table shows the changes in NOA/NOL recognized over the year ended December 31, 2020:

Increase (Decrease) NetOPEB Total OPEB Plan Fiduciary Net (Asset) Liability Liabilin: (a) Position (b) (a)-(b)

(thousands of dollars)

Balances at January 1, 2020 $ 419 483 $ 387,272 $ 32,211 Changes recognized for the measurement period:

Service cost 8,903 8,903 Interest 26,653 26,653 Changes in assumptions (11,453) (11,453)

Differences between expected and actual experience (23,529) (23,529)

Contributions - employer 13,299 (13,299)

Net investment income 20,447 (20,447)

Benefit payments (23,848) (23,848) Administrative expense (191) 191 Net changes (23,274) 9 707 (32,981)

Balances at December 31, 2020 $ 396,209 $ 396,979 $ (770)

The following table shows the changes in NPL recognized over the year ended December 31, 2019:

Increase (Decrease) NetOPEB Total OPEB Plan Fiduciary Net Liability Liabilin: (a) Position (b) (a) - (b)

(thousands of dollars)

Balances at January 1, 2019 $ 399 845 $ 377,779 .$ 22,066 Changes recognized for the measurement period:

Service cost 8,946 8,946 Interest 26,766 26,766 Changes in assumptions 15,332 15,332

• Differences between expected and actual experience (6,885) (6,885)

Contributions - employer 13,963 (13,963)

Net investment income 20,132 (20,132)

Benefit payments (24,521) (24,521) Administrative expense (81) 81 Net changes 19 638 9 493 IO 145 Balances at December 31, 2019 $ 419,483 $ 387,272 * $ 32 211 64

Sensitivity of the NOA/NOL to Changes in the Discount Rate. The following presents the NOA/NOL ofSMUD as of the measurement date, calculated using the current discount rate, as well as what the NOA/NOL would be ifit were calculated using a discount rate that is 1 percentage-point lower or 1 percentage-point higher than the current discount rate:

1% Decrease Current Discount 1% Increase (5.37%) Rate (6.37%) (7.37%)

(thousands of dollars)

NOL/(NOA), December 31, 2020 $ 48,397 $ (770) $ (41,660) 1% Decrease Current Discount 1% Increase (5.40%) Rate (6.40%) (7.40%)

(thousands of dollars)

NOL/(NOA), December 31, 2019 $ 85,866 $ 32,211 $ (12,249)

Sensitivity of the NOA/NOL to Changes in the Healthcare Cost Trend Rates. The following presents the NOA/NOL of SMUD as of the measurement date, calculated using the current healthcare cost trend rate, as well as what the NOA/NOL would be ifit were calculated using a healthcare cost trend rate that is 1 percentage-point lower or 1 percentage-point higher than the current healthcare trend rate (see assumptions above for healthcare trend rate):

Current Healthcare 1% Decrease Trend Rate 1% Increase (thousands of dollars)

NOL/(NOA), December 31, 2020 $ (45,574) $ (770) $ 54,091 NOL/(NOA), December 31, 2019 $ (16,289) $ 32,211 $ 91,772 OPEB Plan Fiduciary Net Position. Detailed information about the OPEB Plan's fiduciary net position is available in the separately issued OPEB Plan's report. This report can be obtained at the PERS' website at www.calpers.ca.gov.

OPEB Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Related to OPEB. For the years ended December 31, 2020 and 2019, SMUD recognized OPEB expense of($3.2) million and ($0.2) million, respectively.

At December 31, 2020 and 2019, SMUD reported deferred outflows ofresources and deferred inflows of resources related to OPEB from the following sources:

' December 31 2020 2019 (thousands of dollars)

Deferred outflows ofresources:

Changes of assumptions $ 11,448 $ 14,644 Differences between projected and actual earnings on OPEB plan investments 2,741 Employer's contributions to the OPEB Plan subsequent to the measurement of total OPEB liability 11 947 12 014 Total deferred outflows ofresources $ 26.136 $ 26 658 Deferred inflows of resources:

. Changes of assumptions $ 9,479 $ Differences between expected and actual experience 49,375 42,593 Differences between projected and actual earnings on OPEB plan investments 266 Total deferred inflows of resources $ 58,854 $ 42.859 65

Amounts reported as deferred outflows of resources and deferred inflows ofresources related to OPEB will be recognized in OPEB expense as follows:

Year ended December 31:

2021 $ (15,828) 2022 (14,669) 2023 (5,141) 2024 (4,202) 2025 (4,825)

Thereafter NOTE 16. INSURANCE PROGRAMS AND CLAIMS SMUD is exposed to various risks of loss related to torts, theft of an_d destruction to assets, errors and omissions, cyber activities, natural disasters, employee injuries and illnesses, and others. SMUD carries commercial insurance coverage to cover most claims in excess of specific dollar thresholds, which range from $5.0 thousand to $2.5 million per claim. General liability limits are $140.0 million, excess of a $5 .0 million self-insured retention. As of December 31, 2020, wildfire liability limits are $250.0 million ($173.0 million commercial insurance plus $77.0 million self-insured retention). As of December 31, 2019, SMUD had $186.5 million commercial coverage plus $63 .5 million self-insured retention within a $250.0 million total program value (i.e. this year's program has the same commercial coverage protection but a higher self-insured portion due to the continuing decrease in commercial capacity within the wildfire market). SMUD's property insurance coverage is based on the replacement value of the asset. There have been no significant reductions in insurance coverage, and in some cases, certain coverages increased. In 2020, 2019 and 2018, the insurance policies in effect have adequately covered all settlements of the claims against SMUD. No claims have exceeded the limits of property or liability insurance in any of the past three years.

The claims liability is included as a component ofSelflnsurance and Other in the Statements ofNet Position.

SMUD's total claims liability, comprising claims received and claims incurred but not reported, at December 31, 2020, 2019 and 2018 is presented below:

2020 2019 2018 (thousands of dollars)

Workers' compensation claims $ 9,166 $ 10,005 $ 10,993 General and auto claims 3,766 3,867 3,523 Short and long-terin disability claims 92 201 153 Claims liability $ 13.024 $ 14,073 $ 14,669 Changes in SMUD's total claims liability during 2020, 2019 and 2018 are presented below:

2020 2019 2018 (thousands of dollars)

Claims liability, begjnning of year $ 14,073 $ 14,669 $ 11,877 Add: provision for claims, current year 1,419 1,789 2,601 (Decrease) increase in provision for claims in prior years (8) 11,434 10,450 Less: payments on claims attributable to current and prior years (2,460) (13,819) (10,259)

Claims liability, end of year $* 13.024 $ 14.073 $ 14,669 66

NOTE 17. COMMITMENTS Electric Power and Gas Supply Purchase Agreements. SMUD has numerous power purchase agreements with other power producers to purchase capacity, transmission, and associated energy to supply a portion of its load requirements: SMUD has minimum take-or-pay commitments for energy on some contracts. SMUD has numerous long-term natural gas supply, gas transportation and gas storage agreements with Canadian and U.S. companies to supply a portion of the consumption needs of SMUD's natural gas-fired power plants.

At December 31, 2020, the approximate minimum obligations for the "take-or-pay" contracts over the next five years are as follows: '

Electric Gas (thousands of dollars) 2021 $ 99,746 $ 7,841 2022 99,917 7,395 2023 98,651 7,336 2024 33,039 6,592 2025 12,188 6,666

• At December 31, 2020, the approximate minimum obliga~ions for the remaining contracts, assuming the energy or gas is delivered over the next five years, are as follows:

Electric Gas (thousands of dollars) 2021 216,060 $ 131,197 2022 198,545 110,329 2023 194,677 115,194 2024 157,778 90,224 2025 156,955 66,848 Contractual Commitments beyond 2025- Electricity. Several ofSMUD's purchase power and transmission contracts extend beyond the five-year summary presented above. These contracts expire between 2026 and 2050 and provide for power under various terms and conditions. SMUD estimates its annual minimum commitments under the take-or-pay contracts ranges between $12.2 million in 2026 and $0.3 million in 2033. SMUD estimates its annual minimum commitments under the remaining contracts, assuming the energy is delivered, ranges between $146.1 million in 2026 and $9.9 million in 2050. SMUD's largest purchase power source (in volume) is the Calpine Sutter contract, where SMUD has contracted ownership of258 MW's of thermal generation capacity. The Calpine Sutter contract expires on December 31, 2023.

Contractual Commitments beyond 2025 - Gas. Several ofSMUD's natural gas supply, gas transportation and gas storage contracts extend beyond the five-year summary presented above. These contracts expire between 2026 and 2049 and provide for transportation and storage under various terms and conditions. SMUD estimates its annual minimum commitments under the take-or-pay contracts ranges between $6.7 million in 2026 and $3.4 million in 2049. SMUb estimates its annual minimum commitments under the remaining contracts, assuming the gas is delivered, ranges be~een $21.4 million in 2026 and $5.4 million in 2049.

Gas Price Swap Agreements. SMUD has entered into numerous variable to fixed rate swaps with notional amounts totaling 99,702,500 Dths for the purpose of fixing the rate on SMUD's natural gas purchases for its gas-fueled power plants and gas indexed electric contracts. These gas price swap agreements result in SMUD paying fixed rates ranging from $2.22 to $7.17 per Dth. The.swap agreements expire periodically from January 2021 through December 2024.

67

Gas Transport Capacity Agreements. SMUD has numerous long-term natural gas transport capacity agreements with Canadian and U.S. companies to transport natural gas to SMUD's natural gas-fired power plants from the supply basins in Alberta to the California-Oregon border and from supply basins in the southwest and Rocky Mountains to the Southern California border. These gas transport capacity agreements provide for the delivery of gas into SMUD-owned pipeline capacity within California. The gas transport capacity agreements provide SMUD with 58,300 Dth per day (Dth/d) of natural gas pipeline capacity from the North, including the Canadian Basins through 2021 and 41,200 Dth/d from the Southwest or Rocky Mountain Basins through at least 2021.

Gas Storage Agreements. SMUD also has an agreement for the storage ofup to 2.0 million Dth of natural gas at regional facilities through March 2022, dropping to 1.0 million Dth through March 2023.

Hydro License Agreements. SMUD has a hydro license for a term of50 years effective July 1, 2014 (see Note 2). SMUD entered into four contracts with government agencies whereby SMUD makes annual payments to them for various services for the term of the license. Each contract is adjusted annually by an inflation index. The present value of the sum of the annual payments is $64.8 million at December 31, 2020.

Construction Contracts. SMUD has entered into various construction contracts for the construction of a new substation and improvements to the White Rock Powerhouse in the UARP. As of December 31, 2020, the not-to-exceed price for these contracts totaled $90.8 million. The remaining contract obligations for these contracts as of December 31, 2020 was $30.7 million.

NOTE 18. CLAIMS AND CONTINGENCIES FERC Administrative Proceedings. SMUD is involved in a number ofFERC administrative proceedings related to the operation of wholesale energy markets, regional transmission planning, gas transportation, and the development ofNERC reliability standards. While these proceedings are complex and numerous, they generally fall into the following categories: (i) filings initiated by the California Independent System Operator Corporation (CAISO) (or other market participants) to \

adopt/modify the CAI SO Tariff and/or establish market design and behavior rules; (ii) filings initiated by existing transmission owners (i.e. PG&E and the other Investor Owned Utilities) to pass through costs to their existing wholesale transmission customers; (iii) filings initiated by FERC on market participants to establish market design and behavior rules or to complain about or investigate market behavior by certain market participants; (iv) filings initiated by transmission owners under their transmission owner tariffs for the purpose of establishing a regional transmission planning process; (v) filings initiated by providers of firm gas transportation services under the Natural Gas Act; and (vi) filings initiated by NERC to develop reliability standards applicable to owners, users, and operators of the bulk electric system. In addition, SMUD is an active participant in other FERC administrative proceedings, including those related to reliability and cybersecurity standards, variable resource integration, and transmission planning and cost allocation. SMUD's management believes that the ultimate resolution of these matters will not have a material adverse effect on SMUD's financial position, liquidity or results of operations.

Construction Matters. SMUD contracts with various firms to design and construct facilities for SMUD. Currently, SMUD is party to various claims, legal actions and complaints relating to such construction projects. SMUD's management believes that the ultimate resolution of these matters will not have a material adverse effect on SMUD's financial position, liquidity or results of operations.

Environmental Matters. SMUD was one of many potentially responsible parties that had been named in a number of actions relating to environmental claims and/or complaints. SMUD has resolved these environmental claims and/or complaints and entered into settlement agreements and/or consent orders. These settlement agreements and consent orders have statutory reopener provisions which allow regulatory agencies to seek additional-funds for environmental remediation under certain limited circumstances. While SMUD believes it is unlikely that any of the prior settlements or consent orders will be 68

reopened, the possibility exists. If any of the settlements or consent orders were to be reopened, SMUD management does not believe that the outcome will have a material adverse effect on SMUD's financial position, liquidity or results of operations.

North City Environmental Remediation. In 1950, SMUD purchased property (North City Site) from the City of Sacramento and the Western Railroad Company. Portions of the North City Site prior to the sale had been operated as a municipal landfill by the City of Sacramento and some of the property continued to be so after the sale. SMUD currently operates a bulk substation on the North City Site and plans to decommission the facility in the next few years. SMUD intends to assure compliance with State standards at closed landfill sites and is in the process of determining the appropriate remediation for the North City Site. In 2009, SMUD established a regulatory asset to defer recognition of the expense related to the investigation, design and remediation necessary for the North City Site, and recorded a liability for the full $12.0 million estimated for the project. In 2012, the regulatory asset was fully amortized. As the owner of the North City Site, SMUD will play the principal role in the remediation selection and activities. SMUD has estimated the total exposure for closing the site at as high as $12.0 million based on initial tests and studies of the site and approved and implemented cap designs for nearby former landfill areas. Costs could exceed that amount based on the need to design around transmission-related infrastructure improvements. SMUD's management does not, however, believe this will occur. Even if remediation costs associated with the North City Site were to increase, SMUD management believes that any increased costs will not have a material adverse effect on SMUD's financial position, liquidity or results of operations.

Patua Acquisition Company, LLC. On April 16, 2010, SMUD entered into a 23-year PPA with Patua Project, LLC. The fifth amendment to the PPA was signed on November 30, 2016, with the new project owner, Patua Acquisition Company, LLC (Patua). The PPA requires Patua to provide a warranty for the annual amount of energy and green attributes produced and delivered to SMUD, referred to as the Annual Delivery Warranty Amount (ADWA). If Patua fails to meet the ADWA for two consecutive years, it triggers SMUD's right to reduce the Guaranteed Capacity and Transmission Capacity Requirement as defined in the PP A.

On February 16, 2017, SMUD sent Patua a Notice of Failure to Meet Annual Performance Guarantee or the ADWA, Reduction of Phase 1 Guaranteed Capacity Resizing, and Reduction of Transmission Capacity Requirement pursuant to the terms of the PPA. Patua disagreed with the reductions and on June 9, 2017, after meetings with SMUD staff, sent a letter requesting a meeting with a senior officer to work towards a resolution in accordance with the dispute resolution provisions of the PPA. A meeting of the senior officers occurred. Staff continued to work through the issue with Patua to re~olve the matter. On January 19, 2021, Patua provided SMUD a written confirmation that it considers the dispute to be resolved and releases and waives any claims against SMUD related to the 2017 ADWA and associated reduction in Guaranteed Capacity and Transmission Capacity.

SMUD management does not believe that this outcome will have a material adverse effect on SMUD's financial position, liquidity or results of operations.

Other Matters. Currently, SMUD is party to various claims, legal actions and complaints relating to its operations, including but not limited to: property damage and personal injury, contract disputes, torts, and employment matters. SMUD's management believes that the ultimate resolution of these matters will not have a material adverse effect on SMUD's financial position, liquidity or results of operations.

NOTE 19. SUBSEQUENT EVENTS SMUD evaluated subsequent events through February 19, 2021, the date that the financial statements were available to be issued, for events requiring recording or disclosure in the financial statements.

69

Required Supplementary Information - Unaudited For the Years Ended December 31, 2020 and 2019 70

Schedule of Changes in ~et Pension Liability and Related R.,tios During the l\*Ieasurement Period - PERS Plan December 31, 2020 2019 2018 2017 2016 2015 2014 (thousands of dollm)

Total pension liabilit}*:

Sen*icecost s 38,901 s 38.061 s 36.029 s 35,040 s 29.044 s 27,991 s 28,170 Interest 164.044 157,976 151.354 150.119 147,497 142.468 137,546 Changes of assumptions (61.5S5) 123,043 (34.228) Difl:"erences between expected and actual experience 9,981 18,877 L293 (29,276) (8,357) (10.613) Benefit payments, including refunds of employee contn"butions (125.581) (117.548) (111.763) (104.428) (99,155) (94.636) (90.175)

Net change in total pension liabilit} 87345 97,366 15,32S 174.498 69,029 30,982 75,541 Total pension liability, beginning ofye:u 2,327.689 2.230.323 2.214.995 2.040.497 1.971.468 1.940,486 1.864.945 Total pension liability. end of year (a) S 2,415,034 S 2.327,689 S 2.230,323 S 2,214,995 S 2.040,497 S 1,971,468 $ 1,940,486 Plan fiduciary net position:

Contributions - employer s 98,344 s 69.119 s 90.141 s 32.389 s 27,645 s 22,499 s 21,511 Contnlmtions - employee 18.095 li.411 16.832 15,845 15,271 14,503 15,346 Net investment income 92,534 115,867 138,739 171,596 8,316 35.797 245,659 Benefit payments. including refunds of employee contributions (125.581) {117,548) (111,763) (104,428) (99,155) (94:636) (90.175)

Administrative e.'tpense (2,628) (1,270) CT.474) (2.275) (969) (1,795) (2,028)

Other 4 (4) 34 (25) Net change in plan fiduciaiy net position 80.764 83.583 126.471 113.127 (48.858) (23,657) 190,313

--.]

Plan fiduciary net position, beginning ofye31 1,864,450 1.780.867 1.654.396 1.541.269 1.590.127 1.613.784 1,423.471

.I-'

Plan fiduciaiy net position, end of year (b) s 1,945,214 S 1,864,450 S 1,780,867 S 1,654,396 s 1,541,269 S 1,590,127 $ 1,613,784 Net pension liabilit}*. ending (a) - (b) s 469,820 s 463.239 s 449.456 s 560.599 s 499,228 s 381,341 $ 326,702 Plan iiduci:uy net position as a percentage of the total pension 80.5% 80.1% 79.8% 74.i3/4 i5.5% 80.i3/4 83.2%

liability Covered pa}TOII s 254,756 s 247,759 s 235,902 s 223,685 s 207,119 s 197,481 $ 191,439 Net pension liability as a percentage of covered pa\Tor 184.4% 187.0% 190.5% 250.6% 241.0% 193.1% 170.7%

PERS Plan. The schedule of changes in NPL and related ratios is presented above for the years for \\"hich S!'.-HiD has available data. S:tvful) will add to this schedule each year and when it reaches 10 years it ,,,;11 contain the last 10 years data which will then be updated each year going foxward.

Note-s to Sche-dule:

BenefiJ Changes: The figures above do not include any liability impact that may have resulted from plan changes which occ\lITed after the June 30, 2019 \*aluation date. This applies for

,*oluntary benefit changes as well as any offers of two years additional senice credit.

Changes in Assumptions: No changes in 2020. In 2018. demographic assumptions and inflation rate were changed in accoxdance to the PERS Experience and Study and Review of Actuarial Assumptions December 2017. There were no changes in the discount rate. In 2017, the accounting discount rate reduced from 7.65 percent to 7.15 percent. In 2016, there were no changes. In 2015. amomus reported reflect an adjustment of the discount rate from 7.5 percent (net of administrative expense) to 7.65 pexcent (without a reduction for pension plan administrative expense).

In 2014, amount5 reported were based on the 7.5 percent discount rate.

Schedule of Changes in Net Pension Liability and Related Ratios During the :\feasm*em.eot Peliocl - SHY December 31.

2020 2019 2018 2017 2016 (thol!S3llds of dollars)

Total pension liability:

Seri.ice cost s s 203 s 216 $ 300 $ 218 Interest 184 194 193 195 Changes of assumptions (194) (76) (827) 1,118 Differences between expected and actual experience (316) (947) (914) Benefit pa:i,ments (57) Other - Write off Peusion Liability (4.40S) Net change in total pension liability (4,408) (180) (613) (1,248) 1,531 Total pension liability. beginning of year 4.408 4.588 5.201 6.449 4.918 Total pension liability, end of year s s 4.408 s 4,588 $ 5,201 $ 6,449 Covered pa;TOll NIA s 18.695 $ 20,466 $ 21.743 s 21.748 Net pension liability as a percentage of covered payroll

• NIA 23.6% 22.4% 23.9% 29.7%

SHY. The schedule of changes in NPL and related ratios is presented above for the years for which SMlJD has available data. SM:tJD v.ill add to this schedule each year and when it reaches

-J l'v 10 years it \\ill contain the la.st 10 years data which \\ill then be updated each year going fom*ard.

Notes to Schedule:

Benefit changes: There are no longer any benefits to active members:

Changes in Assumptions: In 2019. the discount rate \\"3S updated based on the municipal bond rate as of the measurement date and was updated from 3.S7 percent to 3.:5 percent. Inflation was updated from 2. 7:5 percetlt to 2.50 percent and the aggregate salary increase was updated from 3.00 percent to 2. 75 percent. In 2018, the discount rate was updated from 3.58 percent to 3.87 percent. Demographic assumptions were updated to the PERS 1997-2015 experience study. In 2017, the discount rate was updated from 2.85 percent to 3.58 percent.

Schedule of Plan Contributions for Pension -PERS Plan December 31, 2020 2019 2018 2017 2016 2015 . 2014 (thousands of dollars)

Actuarially detennined contribution s 52.276 s 49,119 $ 40,142 s 32,389 s 27,645 s 22.499 s 21,511 Contributions in relation to the actuarially detemiined contnlmtion (98,344) (69,119) (90,142) (32,389) (27,645) (22,499) (21,511)

Contribution excess $ (46,068} S (20.000} $ (50,000) 0- 0- 0- 0-Co\*ered payroll S 254,756 S 247,759 S 235,902 S 223,685 S 207,119 S 197,481 S 191,439 Contn'butions as a percentage of covered 38.6% 27.9% 38.2% 14.5% 13.4% 11.4% 11.2%

PERS Plan. The schedule of pension contributions is presented above for the years for which SMUD has available data.

SMUD will add to this schedule each year and when it reaches 10 years it will contain the last 10 years data which will then be updated each year going forward.

Notes to Schedule The actuarial methods and assumptions used to set the actuarially determined contributions for the year ended December 31, 2020 was der.ived from the June 30, 2017 funding valuation report.

Actuarial cost method Entry *age normal

• Amortization method/period For details, see June 30, 2017 Funding Valuation Report Asset valuation method Fair value of assets. For details, see June 30, 2017 Funding Valuation Report Inflation 2.625%

Salary increases Varies by entry age and service Payroll growth 2.875%

Investment rate of return 7.25% Net of pension plan investment and administrative expenses; includes inflation Retirement age The probabilities of retirement are based on the 2017 PERS Experience Study for the period from 1997 to 2015 Mortality The probabilities of mortality are based on the 2017 PERS Experience Study for the period from 1997 to 2015. Pre-retirement and post-retirement mortality rates include 15 years of projected mortality improvement using Scale BB published by the Society of Actuaries.

In 2019, the investment rate of return was 7.375%. Prior to 2020, the probabilities of mortality are based on the 2014 PERS Experience Study for the period from 1997 to 2011. Pre-retirement and post-retirement mortality rates include 2_0 years of projected mortality improvement using Scale BB published by the Society of Actuaries. Prior to 2017, the retirement age and mortality assumptions were based on the 2010 PERS Experience Study for the period from 1997 to 2007. In addition, the mortality assumption for pre-retirement and post-retiremenfrates included 5 years of projected mortality improvement using Scale AA published by the Society of Actuaries.

73

Schedule of Changes in Net OPEB Asset or Liability and Related Ratios During the Measurement Period DeC1llber:h, 2020 2019 *2018 2017

{thousands of dollars)

Total OPEB liability; Service cost $ 8,~03. $ 8,946 s 9,263 s . 8,993 lllterest on total OPEB liability 26,653 26,766 29,656 28,676 Changes of assumptions (11,453) 15,332 3,105 ~0-Differences between expected and acrual e:q,erience {23;529) (6,885) (59,9il) ;o-Benefit pa)IDlellU, including refunds.ofemployee contnb11tion, {23,848} (24,521} (24;67.i) (n;t9i)

• Net_~liange,in totai.OP.EB lialJili_ty (23,274) . 19;6_38" (42,569) 15;477.

Total OPEB liability;. beginnmg of yeai 419,483 399,845 442,414 4i6,937 Total or~.liability, end ofyear {a) ~ 396,209 :s 419,483 :s 399,845 $ 442,414.

Plan fiduciary net position:

Cont1ibuticiils - employei $ l~,i99 $ 13,963 s 34,243 s ivi,513 Net investment fucome 20,447 20,132 27;295 24,104 Benefit pa,.ments, including r¢und:s of employee contributiow (23,848) {24,521) (24,672) (22,foi)

Admiiµ,trati.,~ expellSe Mn (81) (635). (123)

Net. chljnge mplan liduciafy net position 9,707 9,493 36,231 116,362 P1ail fidoo.aiy netposition, beginning of ','e;u 387,272 377)79 34L548 225~18.6 Plan fidiiciiiry ~tpos1tion; en!l of year i.o) s 396,979 s 387,272 s 377,779 s 341,548 Net OP.EB liabilicyi(asset); enciiiig (a)- (b) $ (770) $ 32.211 .$ 22,066 s 100.866 Plan fiduci3!}' net position as a pen:entage of the total OPEB liability 100:i<>A, 92.3% 94:5% 77.2%

C6"1iered payroU s 2S7,0D1 s 282,993 s 269,753 s 252,211 Net OPEB liability/(asset) as a percentage of covered payi-ol -03% 11.4% 8,2% 40.0%

OPEB: The schedule of changes in NOA/NOL and related ratios is presented above for the years for which SMUD has available data. SMUD will add to this schedule each year and when it reaches 10 years it will contain the last 10 years data which will then be updated each year going forward.

Notes to Schedule Benefit Changes: There were no changes to benefits.

Changes in Assumptions: In 2020, the discount rate reflected the split of assets between Strategy 1 and Strategy 3, the mortality improvement scale was updated to Scale MP-2019, and the Kaiser Medicare trend rates were updated. In 2019, the discount rate was updated to reflect the split of assets between Strategy 1 and Strategy 3, and the mortality improvement scale was updated to Scale MP-2018.

74

Schedule of Plan Contributions for OPEB OPEB Plan. The schedule of OPEB contributions is presented below for the years for which SMUD has available data.

SMUD will add to this schedule each year and when it reaches 10 years it will contain the last 10 years data which will then be updated each year going forward.

December 31, 2020 2019 2018 *2017 (thousands of dollars)

Actuaria~y detemtined coniribtition $ 12.201 $ 10.710 $ 15,366 $ 16,,472 C-Onttibutions in rela!ion ti> the actuarially detetinin:ed contribution {13,233) (13,155) (35,128) (116,181}

Conttibution exc~ss $ (1,032} $ {2.445) $ (19,762} s ~9.709}

Goi*ered payroll $ 289,552. $ 286,835 $ 2_7'!,!93 s 260,210 Coilti.ibutions as a percentage *or covered* payTO~ 4.6% 4.6% 12.7% 4446~11 Notes to Schedule

\

The actuarial methods and assumptions used to set the actuarially determined contributions for the year ended December 31, 1 2020 were derived from the June 30, 2019 funding valuation report.

Actuarial cost method Entry age normal Amortization method Level percent of pay Amortization period 26-year fixed period for *2020 Asset valuation method Market value of assets Discount rate 6.75% for all actives and retirements after 6/30/2018, 5,50% for all retirements before 6/30/2018 Inflation 2.75%

Medical trend Non-Medicare: 7.25% for 2021, decreasing to an ultimate rate of 4.0%

in 2076 Medicare: 6.3% for 2021, decreasing to an ultimate rate of 4.0% in 2076 Mortality PERS 1997-2015 experience study Mortality improvement Post-retirement mortality projected fully generational with Scale MP-18 In 2020, the amortization period was for a 26-year fixed period. Mortality assumption used PERS 1997-2015 experience study.

The mortality improvement projected fully generational with Scale MP-18. In 2019, the amortization period was for a 27-year fixed period. Mortality assumption used PERS 1997-2015 experience study. The mortality improvement projected fully generational with Scale MP-17; In 2018, the amortization period was for a 28-year fixed period. Mortality assumption used PERS 1997-2011 experience study. The mortality improvement projected fully generational with Scale MP-16. In 2017, the amortization period was for a 29-year fixed period. The inflation rate was 3.0% and the discount rate was 7.25%. The mortality projected fully generational with Scale MP-14, modified to converge in 2022.

75