ML15140A421

Sacramento Municipal Utility District - 2014 Annual Financial Report

ML15140A421
Person / Time
Site:	Rancho Seco, 07200011
Issue date:	05/12/2015
From:	Tallman D A Sacramento Municipal Utility District (SMUD)
To:	Document Control Desk, Office of Nuclear Material Safety and Safeguards
References
DPG 15-136
Download: ML15140A421 (89)

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{{#Wiki_filter:Powering forward. Together.

• SMUD"May 12, 2015DPG 15-136U.S. Nuclear Regulatory Commission Document Control DeskWashington, DC 20555Docket No. 50-312Rancho Seco Nuclear Generating StationLicense No. DPR-54Docket No. 72-11Rancho Seco Independent Spent Fuel Storage Installation License No. SNM-2510ANNUAL FINANCIAL REPORTAttention:

Jack Parrott and Chris AllenIn accordance with 10 CFR 50.71(b) and 10 CFR 72.80(b), we are submitting the2014 Annual Financial Report for the Sacramento Municipal Utility District. If youor members of your staff have questions requiring additional information orclarification, please contact me at (916) 732-4817. Sincerely, Dan A. TallmaAssistant Superintendent, Rancho Seco Assets(DT/BG)Enclosure Cc: NRC, Region IVKc6'4~Rancho Seco Nuclear Generating Station 114440 Twin Cities Road I Herald, CA 95638-9799 I 1.209.333.2935 I smud.org 1-I iI , SMUD I Overview 2014Service Area Population 1.46 millionRecord Peak Demand3,299 megawatts (July 24, 2006)Total Authorized Budget$1.47 billionNumber of Customers (year end)614,143Employees (year end)2,071Credit RatingAA- Standard & Poor'sAa3 Moody'sAA- FitchExecutive Management Arlen OrchardCEO &General ManagerLaura LewisChief Legal OfficerJames A. TracyChief Financial OfficerPaul LauChief Grid Strategy& Operations OfficerGary KingChief Workforce OfficerFrankle McDermott Chief Generation &Grid Assets OfficerNicole HowardChief Customer OfficerMichael Glanunzio Chief Legislative &Regulatory OfficerNoreen Roche-Carter Treasurer SMUD service area and Board member wardsThe Sacramento Municipal Utility District generates, transmits and distributes electricity to a 900-square-mile territory that includes California's capital city,Sacramento County and a small portion of Placer County. As a municipal utility,SMUD is governed by a seven-member Board of Directors selected by the votersto staggered four-year terms. The SMUD Board of Directors determines policyand appoints the chief executive officer/general

manager, who is responsible forSMUD's day-to-day operations.

IiW ýSMUD Board of Directors Sandra MoormanDirector, Accounting & Controller Ren6e TaylorWard 1Gregg FishmanWard 3Dave TamayoWard 6Nancy Bul-Thompson Ward 2(Vice President 2015)Genevieve ShlromaWard 4(President 2014)Bill SlatonWard 7Printed in the USA on recycled papercontaining 100% post-consumer wasteProduced br Connunionkaiee Marketing and Community Relatior 02015 SMUDRob KerthWard 5(President 2015) The sun rises behind CEO & GeneralManager Arlen Orchard at SMUD'sCEO/General Manager's letter East Campus-Operations CenterAs SMUD turned the calendar on a successful 2014, Sacramento's economy turned thecorner on a debilitating recession. This is great news. A strong SMUD is well positioned and eager to assist in building a more prosperous future for residents and businesses across the entire region.Besides improving the prospects of many of our customers who have been struggling tomake ends meet, the economic upswing gives SMUD a chance to help shape excitingprojects such as the sports and entertainment complex downtown. And with theconstruction industry beginning to bounce back, we have an opportunity to incorporate more energy efficient features into homes and buildings. Particularly here in California's state capital, there's a commitment to clean power that dovetails nicely with SMUD'sactions and leadership. SMUD's financial house is in good order. Net income in 2014exceeded our target by a substantial margin. We were able to putan extra $40 million into a trust fund for retiree medical benefits. Inupgrading SMUD's credit worthiness to AA- from A+, Fitch Ratingscited our solid finances, competitive rates and a diverse energyresource mix. Even with a 2.5-percent rate increase in both 2014 and2015, SMUD's electric rates remain among the lowest in the state.In July, federal regulators issued a new operating license for SMUD'sUpper American River Project that assures the continued generation of carbon-free hydroelectricity for the next 50 years. As part of the new license, SMUDwill be upgrading facilities that serve thousands of visitors to the Crystal Basin Recreation Area each year. We also agreed to increase stream flows that will improve fish habitatand enhance whitewater rafting. CEO/General Manager's letter Continued It was a year of transition at SMUD, where the seven-member Board of Directors welcomed three new members in 2014. In April, I replaced John Di Stasio as CEO andgeneral manager. Thanks in no small part to the strong foundation established bymy predecessor and the Board of Directors, the transition proceeded smoothly. Thebiggest priority moving forward is making sure that SMUD is prepared for the changescoming our way in the utility industry. From an organization-wide effort to provide stronger customer service to performing due diligence on the Iowa Hill pumped-storage project and studying the feasibility ofbuilding a new transmission line that would import power from the Pacific Northwest, SMUD took concrete steps in 2014 to prepare for the changes ahead.The past year was not without its challenges. The King Fire in El Dorado County damagedsome of SMUD's hydroelectric facilities, but inspired work across all departments helpedrestore virtually all generation within two weeks.I'm pleased to report that for the 13th straight year, SMUD was the state's top-ranked electric utility in J.D. Power's customer satisfaction survey. Our employees raised morethan $350,000 for local charities and donated more than 10,000 hours of their time forvolunteer activities. SMUD also made progress in our ongoing effort to ensure the safetyof our employees and customers. On a personal level, it's a great honor to lead the organization I've worked for since1990. SMUD's value to the community it serves is deep and far reaching, and we'redoing everything in our power to make that relationship even stronger in the yearsand decades to come.Arlen OrchardCEO/General Manager 2014: Year in reviewBy the usual measuring sticks -financial health,customer satisfaction, safety, reliability andenvironmental stewardship -SMUD met orexceeded its targets in 2014. SMUD got thebasics right, in other words.Net income for the year was $83 million higherthan anticipated. The amount of SMUD's powercoming from renewable resources climbed to30 percent. SMUD met its goals for limiting thefrequency and duration of power outages. Newwork practices were established to improve thesafety of employees and customers. Once again,SMUD was the state's top-rated electric utility incustomer satisfaction. OneaanSU athe ~ stt' 0o -aeelcti utltyiHow our rates compareSMUD's residential rates are approximately 28 percent lower than neighboring PG&E's.Utlity M;onthly WISMUD $ 93.93Roseville $113.95LA. Dept. of Water and Power $120.53Modesto $136.63Southern California Edison $143.94PG&E $154.44San Diego Gas & Electric $ 166.62of doing business. Orchard rolled out a"SMUD 3.0" vision in 2014 aimed at keepingSMUD ahead of the transformation that'ssweeping the industry. These changes will encompass a wide rangeof areas, including customer expectations, new technologies, third-party

entrants, dataanalytics and how a low-carbon landscape willaffect operations through 2020 and beyond.Fortunately, it looks as though SMUD will beserving a region on the rebound following a prolonged recession.

Though electricity sales remained relatively flat due in part tothe effectiveness of SMUD's energy-efficiency

programs, the Sacramento region's economyonce again looks promising.

The downtownarena project is one of the most ambitious ventures in Sacramento

history, and the housingsector is springing to life.These accomplishments took place duringa period of transition.

The seven-member SMUD Board of Directors welcomed three newmembers, and General Counsel Arlen Orchardassumed the reins of CEO and general managerfollowing John Di Stasio's retirement. If there's an underlying theme to SMUD'sactivities in 2014, it's that simply getting thebasics right is no longer enough. Accordingly, to meet the needs of increasingly discerning customers, SMUD is improving its traditional way Year in review Continued SMUD did more than just make surethe lights stayed on in 2014. A reviewof an eventful year:STRONG FINANCIAL RESULTSDespite a drought that curtailed SMUD's hydroelectric generation, net income exceeded SMUD's financial goals by approximately $83 million. Exceeding its financial goals helped SMUD maintain its solidcredit ratings. Fitch Ratings upgraded SMUD's creditworthiness to AA- in late 2014.SMUD received a litigation settlement of $53.1 millionfrom the U.S. Department of Energy for reneging on apromise made decades ago to provide a permanent site for the storage of spent nuclear fuel at RanchoSeco. The payoff allowed SMUD to contribute $40million to its trust for future retiree medical expenses. In 2013, the SMUD Board approved 2.5-percent rate increases for both 2014 and 2015 and set thefoundation for the eventual implementation of time-of-use rates. Even with the increase, SMUD's ratesremained among the lowest in the state -27.8 percentlower than PG&E's among residential customers. Powerhouse IOWA HILL STUDY CONTINUES The new Upper American River Project license includedapproval from federal and state agencies for SMUD to builda pumped-storage facility at Iowa Hill. Should the SMUDBoard give the project final approval, a reservoir wouldbe built on top of Iowa Hill above the existing Slab Creekreservoir. The two reservoirs would be connected by tunnelsand a 400-megawatt powerhouse and would help SMUDintegrate more solar and wind power into its energy supply.HYDROELECTRIC LICENSE RENEWEDThe Federal Energy Regulatory Commission issuedSMUD a new license for the Upper American RiverProject (UARP), assuring a sustainable supply ofhydroelectricity for the next 50 years. The UpperAmerican River Project is a system of 11 reservoirs and eight powerhouses in neighboring El DoradoCounty that provides up to 15 percent of SMUD'spower in a normal water year.The UARP relicensing completes an agreement signed in 2007 with more than a dozen stakeholders, including El Dorado County, the U.S. Forest Service,recreation advocates and environmentalists. Inaddition to guaranteeing the continued supply ofclean, low-cost electricity, SMUD agreed in theterms of the new license to increase water flows forfishing and rafting and to upgrade campgrounds and bike trails for the thousands of visitors who usethe Crystal Basin Recreation Area. DROUGHT AND WILDFIREReceiving an extension of the UARP license wassome of the best news SMUD received in 2014.But nature threw a couple of major punches SMUD'sway in the form of drought and wildfire. The water year that ended in September 2014 wasone of the driest ever for SMUD's hydroelectric system. Rainfall was just 65 percent of the historical

average, and runoff into the three main storagereservoirs was 48 percent of normal. SMUD neededto use money from reserve funds to make up for the$37 million in power that needed to be purchased asa result of the diminished hydro generation.

The drought conditions fueled the King Fire nearPollock Pines that bumed almost 100,000 acres inSeptember. The blaze caused about $5 million ofdamage to the Upper American River Project hydrofacilities. SMUD employees raised about $5,000 toassist El Dorado County residents who lost homesand outbuildings in the fire.4SMUD'S RENEWIBLE SUPPLYBY RESOURCE TYPE 2014BOARD SELECTS NEW CEO/GMJohn Di Stasio stepped down as SMUD's CEOand general manager in April following ahighly successful five-and-a-half-year run. The SMUD Board conducted a nationwide search beforeappointing Arlen Orchard toreplace Di Stasio as the executive responsible for the organization's day-to-day activities. Eligible Hydro -30MW: 3%Geothermal: 4%Biogas: 5%Arlen Orchard Year in review Continued COMMUNITY SPIRITSMUD employees raised more than $350,000 for localcharities and volunteered more than 10,000 hours oftheir time in 2014. Their goodwill was recognized whenSMUD received the 2014 Exceptional Community Support Award from Community Link Capital Region,a non-profit organization founded in 1939.The SMUD volunteer program grewby more than 50 percentin the past year.ASATISFIED CUSTOMERS For the 13th straight year, SMUD was the topCalifornia utility in J.D. Power's residential customersatisfaction survey. SMUD's score jumped 14 pointsfrom 2013, with the biggest improvements comingin communications and price. SMUD's score was thesecond-highest of large utilities nationwide. Earlier in the year, in the J.D. Power survey ofcommercial customer satisfaction, SMUD had thehighest score of any utility in the nation.BIG TRANSMISSION PROJECTIn its final meeting of 2014, the SMUD Board approvedthe planning phase of the joint development of anew transmission line with the Western Area PowerAdministration. The project would increase SMUD'scapacity to transmit electricity to and from thePacific Northwest. DOWNTOWN ARENAArtistic renderinDowntown Sacramento will have a dramatically different look and atmosphere when the $477million Entertainment and Sports Center (ESC)project is completed in late 2016. Besidesproviding a 17,500-seat facility for Sacramento's National Basketball Association team, the Kings,the new arena will serve as the catalyst foradditional downtown construction. An ancillary development will consist of a 16-story tower thatincludes hotel rooms, office space, retail shops9 courtesy of the Sacramento Kings and condominium units.SiUD is providing the city and Kings officials withinformation about what it will take to power themassive project and offering expertise concerning energy efficiency, building design and renewable energy measures. In August, SMUD crewsperformed extensive electrical work during thedemolition of part of the Downtown Plaza.SMARTER REPORTING OF OUTAGESIn December, SMUD rolled out an option enablingcustomers to report power outages from smartphones. The mobile application is one of many tools SMUDhas been developing to create additional customervalue. Additional web enhancements are planned in2015, along with improvements to the automated answering system for outages; new billingand payment options; self-service loans forenergy-efficient upgrades; and anexpanded SolarSharesO program. I Region on the reboundFrom a downtown arena project to improvedemployment

numbers, the capital region'seconomy got its groove back in 2014. For manyresidents and businesses, the recovery fromrecession came not a day too soon.Almost $500 million in public and privatefunding is being invested in the Entertainment and Sports Center in downtown Sacramento (see pages 10-11), and the Sacramento RepublicFC has bought land in the long-dormant railyards to build a 20,000-seat soccer stadium.UC Davis is moving forward with plans to builda World Food Center to promote agriculture and sustainability.

The news for individuals was similarly encouraging. For the first time since mid-2006, the Sacramento region's seasonally adjustedannual unemployment rate was below thestatewide average. The unemployment ratefor the six-county region in November was 7.6percent, one point below the state average and1.6 percentage points below the region's rate12 months earlier. All five of the region's largestbusiness sectors experienced job growth in2014. And median home prices in Sacramento County climbed 6 percent in 2014. In December, sales volume grew 3.5 percent compared toDecember 2013.The rebound's effect on SMUD shouldn't be judged narrowly by customer growth orelectricity sales. SMUD added 3,958 customers in2014, and sales for the year were relatively flat."Flat growth" will most likely continue as moreresidential and business customers tap intoSMUD's energy efficiency programs. An improved economic climate gives SMUDadditional opportunities to assist customers in implementing energy solutions that reducetheir bills and help develop a more sustainable energy supply that improves air quality.SMUD added3,958 customers in 2014.Economic development is one of the SMUDBoard's key values. Of course, one of the bestways to foster economic growth is to keepelectric rates among the lowest in the state. Thedifference between SMUD's rates and thoseof neighboring utilities pumps an extra $400million into the regional economy each year.Additionally, SMUD offers a wide range ofrebates and incentives for businesses lookingto improve their energy efficiency; an economicdevelopment rate option to energy-intensive businesses that create at least 50 new jobs;commercial loan programs for energy efficiency building equipment; incentives for smallbusinesses to participate in SMUD's competitive bid process; and a "Savings By Design"program that encourages high performance building design and construction. 9 Sacramento's changing face:Entertainment and Sports CenterSMUD helped break ground in 2014 on a $477million construction project that will reshapedowntown Sacramento for decades to come.The Entertainment and Sports Center (ESC), thenew home of Sacramento's National Basketball Association team, is the centerpiece of a largerdowntown development project that will include1.5 million square feet of office and retail space,up to 550 new residential units, and 250 hotelrooms. SMUD is working with designers of boththe arena and the ancillary projects to ensuremaximum reliability and energy efficiency. In August and October, SMUD decommissioned and removed three transformer vaults near theDowntown Plaza site to make room for newelectrical infrastructure. Plans are in place for the17,500-seat ESC to incorporate two electrical circuits to mitigate the effects of any poweroutages by allowing a near-immediate switchfrom one circuit to the other.One of the more innovative aspects of the ESCis the expected installation of LED lightingabove the basketball court and throughout thebuilding. With LED lights and dual electrical

circuits, any outage time would be measuredin seconds rather than minutes since LED lightsrestrike immediately following the switch to asecond feeder. The inclusion of LED lightingwould be a first for a newly constructed U.S.sports facility.

Artistic rendering courtesy ofthe Sacramento Kings SMUD is pursuing the construction of an offsitephotovoltaic array that would meet almost all ofthe arena's energy needs with renewable solarpower. SMUD would sell renewable energy tothe arena on a per-kilowatt hour basis. SMUDalso is working with project architects to helpthe ESC achieve Leadership in Energy andEnvironmental Design (LEED) certification fromthe U.S. Green Building Council.While the NBA's Sacramento Kings will be theprimary tenant, the ESC is expected to attracta wide array of events, including ice shows andconcerts. In late 2014, the National Collegiate Athletic Association selected Sacramento to beone of the sites of the first and second roundsSMUD also is workingwith project architects to help the ESC achieveLeadership in Energy andEnvironmental Design(LEED) certification fromthe U.S. Green BuildingCouncil.of the 2017 NCAA Division I Men's Basketball Tournament. "March Madness" basketball hasn't been held in Sacramento since 2007.The ESC is scheduled to open in late 2016.Artistic rendering courtesy of theSacramento KingsConstruction on the Entertainment and Sports Center began in 2014.11

Better serving the customers of today and tomorrowSMUD has always cared about its customers, who reciprocate by consistently rating theirutility as the state's best.But the monopoly model of providing reliableand affordable electricity needs to be expandedto reflect the lightning-fast changes takingplace in the energy world and other industries. While reliable and affordable electricity are stillcritical, customers now expect the same level ofcustomization from their utility that they expectfrom any business. The baseline for utilityperformance is shifting. SMUD introduced changesin 2014 that make energyefficiency loans simplerfor customers to manage.To meet the current and future energy needsof a revitalized Sacramento region, SMUD'scustomer excellence effort kicked into high gearin 2014. The objective is to better understand each segment of SMUD customers, deliverexactly what they need, and meet theirexpectations in ways that make the best useof SMUD's resources. For instance, customers told SMUD they'dlike to better understand their energy use.With a new online tool in the "My Account"portal on smud.org, they now have moreinformation about their energy patterns thanever before. By simply clicking on "Bill & UsageComparison," they can compare their monthlyelectric bills for the last two years and see howweather, rates and days in the billing cycle willaffect their bills."My Energy Tools" is an online repository thathelps customers better manage their energyuse. The "Home Energy Analysis" provides a10-minute virtual inspection of the customer's home or business and offers specific ways tosave money by reducing energy costs.SMUD also introduced changes in 2014that make energy efficiency loans simplerfor customers to manage. SMUD offers acompetitive interest rate for both securedand unsecured loans, and the loan terms havebeen extended from 10 to 15 years.More improvements are coming in 2015. SMUDwill implement flexible payment options andwill develop comprehensive energy efficiency solutions for all customer groups. The goal isto ensure that SMUD remains the best choicefor the Sacramento region's diverse customers and communities -no matter what the futuremay hold.13 UARP license renewedIt took SMUD staff more than a dozen years tocomplete the work -leg and paper -neededto obtain! a new license to operate the UpperAmerican, River Project.The effort and wait were worth it.In July, SMUD received word that the FederalEnergy RFegulatory Commission had approveda 50-year license for operating the UARP, asystem 11 reservoirs and eight powerhouses in El Dorado County that provides theSacramento region with clean, inexpensive hydroelectricity. Since the UARP is located in the EldoradoNational Forest, the new operating licensereflects rublic priorities. More water willbypass powerhouses, improving fish habitatand whitewater rafting. SMUD will stockbetween 25,000 and 50,000 pounds of trouteach year to the three main reservoirs -UnionValley, Loon Lake and Ice House. Additionally, SMUD committed more than $150 million overthe next 20 years to upgrade and expand theoutdoor facilities in the adjoining Crystal BasinRecreation Area.UARP's hydroelectricity is a critical resourcefor meeting peak demand and stabilizing thegrid. Although large hydroelectric systems arenot counted in the state's regulatory definition of renewable energy, UARP generation emitsno greenhouse gases and greatly lessens theregion's carbon footprint. SMUD was in its first decade of operation andlooking for a long-term source of generation when the UARP was built in the late 1950s. Theoriginal operating license expired in 2007, atwhich point SMUD operated the system underannual extensions of the original license untilthe final approval came in July.14 --l-Securing a sustainable energy futureReliable and affordable electricity is essential to any thriving

economy, and Sacramento's revitalization will continue to depend onSMUD's ability to deliver one of modernsociety's indispensable resources.

Factor in California's ambitious clean energygoals, and it's clear that SMUD has to lookfar and wide, so to speak, for strategies andsolutions. That's exactly what SMUD did in 2014 bystudying two major projects that could providethe Sacramento region with sustainable powerfor decades to come: A pumped-storage facility in the Sierra Nevada and a 500-kilovolt transmission line that would import clean powerfrom the Pacific Northwest. The federal operating license for SMUD'sUpper American River Project approves theconstruction of a pumped-storage facilityat Iowa Hill outside the El Dorado Countycommunity of Camino. If the project isultimately approved by the SMUD Board, anew reservoir would be constructed above SlabCreek Reservoir. During off-peak hours, whenpower is abundant and inexpensive, waterwould be pumped up from Slab Creek to thenew reservoir for storage.During peak hours, water would be releasedfrom the new reservoir to flow down intoa 400-megawatt powerhouse situatedunderground next to Slab Creek Reservoir. The system would allow SMUD to use the waterover and over again. Iowa Hill would also helpSMUD integrate intermittent resources such aswind and solar into its power supply.In 2014, SMUD oversaw core drilling nearthe Iowa Hill site to determine whether theconstruction is feasible. Results thus far arepositive. Also in 2014, the SMUD Board approved theplanning phase for the joint development ofa new transmission line with the Western AreaPower Administration. The 500-kV line wouldextend 45 miles and connect the California-Oregon Transmission Project and Western's O'Banion substation in Sutter County.Among other benefits, the project wouldincrease the reliability of SMUD's systemwhen a great share of its energy comes fromrenewable sources. The planning phase of theproject dubbed "SAC500" is expected to takeup to four years. The project timeline targets acompletion date in 2023.SMUD is also developing plans to expandthe Solano Wind Project to add nearly 53megawatts of wind power to its renewable energy mix. An additional 16 turbineswould be constructed on a 700-acre parcelpurchased from PG&E in 2014 and would beoperational in 2020. /a Neighborhood of the futureSMUD recently participated in a midtownhousing project that provides a fascinating glimpse into the future -and why innovation and technology are so vital to the new way ofdoing business. Later, during the late-afternoon and early-evening peak hours, residents are able to selltheir stored solar power to SMUD -at threetimes the price they paid for the off-peak power.The 2500 R Street project is an example ofresidential energy storage tied directly withsolar generation. In today's electric

industry, battery storageis one of the most exciting

-and potentially transformative -technologies on the horizon.Energy storage can supply power when the sundoesn't shine and the wind doesn't blow. Thishelps balance supply and demand across theelectric grid.At 2500 R Street, 34 new homes are among thefirst in the nation to use the latest smart-grid technology. Each house has its own lithium-ion battery that stores electricity and backsup the rooftop solar panels. An automated home energy management system controlsthe home's smart thermostats as well as thesolar and battery functions. In the event ofa power outage, the energy storage systemkeeps electricity flowing to essential lights andappliances. During the morning and afternoon hours, thesolar panels pump electricity into the batteryand the resident buys power from SMUD at theoff-peak discount rate.A closet-sized box contains

abattery, inverter and controlsfor the rooftop solar panels.19 Sacramento Municipal Utility District I 2014 Annual ReportFINANCIAL STATEMENTS 20 Sacramento Municipal Utility District 1 2014 Annual Report5 YEAR SUMMARY (Unaudited)

Operating Statistics (i)20142013201220112010Customers at year-endKWH Sales (thousands) Sales to customers -Residential Commercial, industrial & otherSubtotalSales of surplus powerTotalRevenues (thousands of dollars)Sales to customers -Residential Commercial, industrial & otherSubtotalSales of surplus powerSales of surplus gasTotal (ii)Average kWh sales per residential customerAverage revenue per residential kWh sold (cents)Power supply (thousands of kWh)Hydroelectric Cogeneration Windpower Photovoltaic Purchases Net system peak demand -I hour (kW)Employees at year-endFinancial Statistics (thousands of dollars)Operating revenuesOperating expenses -Purchased and interchanged powerOperation and maintenance Depreciation and amortization Regulatory amounts collected in ratesTotal operating expensesOperating incomeOther incomeIncome before interest chargesInterest chargesChange in net positionbefore extraordinary incomeExtraordinary incomeChange in net positionFunds available for revenue bond debt serviceRevenue bond debt service (iii)Revenue bond debt service coverage ratio (iii)Electric utility plant -netCapitalization Long-term debtNet Position614,143 610,185 604,053 599,826 597,0974,639,175 10,497,960 1,906,263 $ 594,644711,2081,305,852 84,15882,104$1,472,114 8,54512.92765,1905,919,981 211,35955,963,656 3,003,000 2,0714,651,219 5,795,408 10,446,627 $ 572,7011,269,140 78,31652,814$1,400,270 8,63412.471,018,659 5,880,239 237,410515,846,971 3,014,000 2,0734,640,238 5,814,531 10,454,769 2442,9012,896,859 $ 569,2101,264,589 60,03348,679$1,73,301 8,69912.381,425,443 5,276,572 230,1492956,440,277 2,954,000 2,0284,587,205 5,797,808 10,385,013 2,49,7512,877,988 $ 559,4241,252,383 70,37088,202$ 1,410,955 8,65212.332,823,979 4,762,183 221,0671,6275,599,183 2,840,000 2,0344,486,241 5,798,569 10,284,810 12,121,767 $526,8601,196,349 59,49359,998$ 1,315,840 8,49711.911,926,783 5,468,825 236,3521,9525,013,814 2,990,000 2,064$1,529,34 $1,428,395 $ 1,382,274 $ 1,360,008 $1,323,288 316,082817,179184,810205,87279,125284,997121,931$ 163,066$163,066$ 424,262$190,7022.22$3,331,965 273,596794,728180,7181,255,182 173,21322,441195,654125,956$69,698$ 69,698$ 437,414$ 176,2702.48$ 3,322,977 241,847735,201165,46010,5741,153,8229,19257,319286,511126,453$160,058$ 160,058$ 521,627$ 160,7573.24$ 3,339,709 237,360744,446169,98710,0471,161,840 198,16812,797210,965140,837$70,128$134$70,262$472,367$ 167,2712.82$ 3,248,294 255,523733,377162,7084,7041,156,312 166,9763,843170,819140,06930,750$ 3$30,753$ 336,451$ 170,3181.98$3,004,216 $2,881,701 $3,075,802 $ 3,091,405 $ 3,012,935 $ 3,156,447 $1,009,771 $ 846,705 $ 777,007 $ 616,949 $ 546,687iFinancial information is consolidated (except the debt service information). ii Prior to the net deferral/transfer of revenues to/from the Rate Stabilization Fund andnet deferral/recognition of Public Good, Senate Bill 1, and Assembly Bill 32 revenues. iii Includes senior and subordinate bond debt service.SMUD ANNUAL REPORT 2014 21 Sacramento Municipal Utility District I 2014 Annual ReportTABLE OF CONTENTSReport of Independent Auditors 23Management's Discussion and Analysis 25Financial Statements 36Notes to Financial Statements Note 1. Organization 41Note 2. Summary of Significant Accounting Policies 41Note 3. Accounting Change 50Note 4. Utility Plant 50Note 5. Investment in Joint Powers Agency 51Note 6. Component Units 53Note 7. Cash, Cash Equivalents, and Investments 57Note 8. Regulatory Deferrals 59Note 9. Derivative Financial Instruments 61Note 10. Long-term Debt 67Note 11. Commercial Paper Notes 71Note 12. Rancho Seco Decommissioning Liability 72Note 13. Pension Plans 73Note 14. Other Postemployment Benefits 76Note 15. Insurance Programs and Claims 78Note 16. Commitments 79Note 17. Claims and Contingencies 81Note 18. Subsequent Event 83Required Supplementary Information (Unaudited) 8422 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportBAKER TILLYINDEPENDENT AUDITORS' REPORTTo the Board of Directors of Sacramento Municipal Utility District, Sacramento, California Report on the Financial Statements We have audited the accompanying consolidated financial statements of Sacramento Municipal Utility Districtand its blended component units, which comprise the Consolidated Statements of Net Position as of December31, 2014 and 2013, and the related Consolidated Statements of Revenues, Expenses and Changes in NetPosition, and Consolidated Statements of Cash Flows for the years then ended and the related notes to thefinancial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes thedesign, implementation, and maintenance of internal control relevant to the preparation and fair presentation ofthe consolidated financial statements that are free from material misstatement, whether due to fraud or error.Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. Weconducted our audits in accordance with auditing standards generally accepted in the United States of Americaand the standards applicable to financial audits contained in Government Auditing Standards issued by theComptroller General of the United States. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in theconsolidated financial statements. The procedures selected depend on the auditors'

judgment, including theassessment of the risks of material misstatement of the financial statements, whether due to fraud or error. Inmaking those risk assessments, the auditor considers internal control over financial reporting relevant to theSacramento Municipal Utility District's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Sacramento Municipal Utility District's internal control.Accordingly, we express no such opinion.

An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well asevaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ouraudit opinion.OpinionIn our opinion, the consolidated financial statements referred to above present fairly, in all material

respects, the financial position of Sacramento Municipal Utility District and its blended component units at December 31,2014 and 2013, and the changes in their financial position and their cash flows for the years then ended, inaccordance with accounting principles generally accepted in the United States of America.continued SMUD ANNUAL REPORT 2014 23 INDEPENDENT AUDITORS' REPORT continued Other MatterAccounting principles generally accepted in the United States of America require that the Management's Discussion and Analysis and Schedule of Funding Progress information as listed in the table of contents bepresented to supplement the financial statements.

Such information, although not a part of the consolidated financial statements, is required by the Governmental Accounting Standards Board who considers it to be anessential part of financial reporting for placing the consolidated financial statements in an appropriate operational,

economic, or historical context.

We have applied certain limited procedures to the requiredsupplementary information in accordance with auditing standards generally accepted in the United States ofAmerica, which consisted of inquiries of management about the methods of preparing the information andcomparing the information for consistency with management's responses to our inquiries, the consolidated financial statements, and other knowledge we obtained during our audit of the consolidated financial statements. We do not express an opinion or provide any assurance on the information because the limitedprocedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we will also issue a report on our consideration ofSacramento Municipal Utility District's internal control over financial reporting and on our tests of itscompliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters.The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control overfinancial reporting or on compliance. That report is an integral part of an audit performed in accordance withGovernment Auditing Standards in considering Sacramento Municipal Utility District's internal control overfinancial reporting and compliance.

Madison, Wisconsin February 20, 201524 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportMANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited)

Using this Financial ReportThis annual financial report for Sacramento Municipal Utility District (SMUD) consists of management's discussion and analysis and the consolidated financial statements, including notes to the financial statements. TheConsolidated Financial Statements consist of the Statements of Net Position, the Statements of Revenue, Expensesand Changes in Net Position and the Statements of Cash Flows.SMUD maintains its accounting records in accordance with Generally Accepted Accounting Principles forproprietary 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 theFederal Energy Regulatory Commission (FERC), except as it relates to accounting for contributions of utilityproperty in aid of construction. Overview of the Financial Statements The following discussion and analysis of the financial performance of SMUD provides an overview of thefinancial activities for the years ended December 31, 2014 and 2013. This discussion and analysis should be readin conjunction with the consolidated financial statements and accompanying notes, which follow this section.The Consolidated Statements of Net Position provide information about the nature and amount of resources andobligations at a specific point in time.The Consolidated Statements of Revenues, Expenses and Changes in Net Position report all of SMUD's revenuesand expenses for the periods shown.The Consolidated Statements of Cash Flows report the cash provided and used by operating activities, as well asother cash sources, such as investment income and debt financing, and other cash uses such as payments for debtservice and capital additions. The Notes to the consolidated financial statements provide additional detailed information to support thefinancial statements. Nature of Operations Under provisions of California's Municipal Utility District Act, the citizens of Sacramento voted in 1923 to formtheir own electric utility -SMUD. The independently run community-owned utility began operations on December31, 1946 and is not subject to regulation or oversight by the California Public Utilities Commission (CPUC). It isnow the sixth largest community-owned electric utility in the nation.Governed by an elected board of directors (Board), SMUD has the rights and powers to fix rates and charges forcommodities and services it furnishes, incur indebtedness, and issue bonds or other obligations. SM7UD isresponsible for the acquisition, generation, transmission and distribution of electric power to its service area with apopulation of approximately 1.4 million -most of Sacramento County and small, adjoining portions of Placer andYolo counties. Its purpose is to provide solutions for meeting customers' electrical energy needs with a vision ofempowering customers with solutions and options that increase energy efficiency, protect the environment, reduceglobal warming, and lower the cost to serve the region.The Board has independent authority to set SMUD's rates and charges. Changes in rates require a public hearingand formal action by the Board. In August 2013, the Board approved a 2.5 percent rate increase effective January 1,2014, and an additional 2.5 percent rate increase effective January 1, 2015. The rate increases were designed toachieve a fixed charge ratio of at least 1.5. The Board also approved the gradual convergence of the residential twotier rate structure between 2014 and 2017, resulting in a single tier rate structure in 2017. On a system-wide basis,the rate tier convergence is expected to be revenue neutral in preparation for moving to time of use rates in 2018.SMUD ANNUAL REPORT 2014 25 Sacramento Municipal Utility District I 2014 Annual ReportMANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) Even with these increases, SMUD's rates continue to remain amongst the lowest in the state. In 2014, the averagesystem rate was 27.7 percent below the nearest investor owned utility's (IOU's) average rate. As a result of theextensive analysis of new rate designs, SMUD was recognized as a statewide leader in rate design by the Governor's Office, the CPUC, the U.S. Department of Energy (DOE), IOUs, and the academic community. SMUD's business strategy focuses on planning to service its customers in a forward looking manner, addressing current regulatory and legislative issues, and potential competitive forces. This includes ensuring financial stability by establishing rates that provide acceptable cash coverage of all fixed charges on a consolidated basis, taking intoconsideration the impact of capital expenditures and other factors on cash flow.Financial & Operational Highlights In 2014, the Board appointed a new General Manager (GM), Arlen Orchard, who is the Chief Executive Officer(CEO) of SMUD and responsible for SMUD's overall management and operation. The GM and CEO's executive vision is to increase emphasis on meeting increased customer expectations, data governance and management, andimproved operational efficiencies. Significant accomplishments in 2014 include Fitch upgrading SMUD's creditrating from A+ to AA- and the renewal of several letters of credit resulting in reduced credit support costs, SMUDbeing recognized by its residential customers as the top California utility for the thirteenth consecutive year byJ.D. Power and ranked first among midsize utilities in the West for business customer satisfaction, and FERCissuing a new license for SMJUD's hydro facilities. In July 2014, FERC issued a new fifty year license for the Upper American River Project (UARP), which includesauthority to build the Iowa Hill pumped-storage project. The UARP consists of three relatively large storagereservoirs and eight powerhouses containing eleven turbines. The UARP is one of SMUD's lowest cost powersources. In addition to providing clean hydroelectric power and operational flexibility, it provides habitat for fishand wildlife and a variety of recreational opportunities, including

camping, fishing,

boating, hiking, horseback riding, mountain biking, and cross-country skiing. The combined capacity of the UARP is approximately 673 MWand represents about 15 percent of SMUD's average annual retail energy requirements.

The Iowa Hill pumped-storage project is a proposed 3 unit, 400 MW variable speed powerhouse. The first phase of the geotechnical exploration plan and most of the required permitting was completed in 2014. SMUD's other power generation facilities include 3 MW of solar photovoltaic installations, 102 MW Solano Wind Project, five local gas-fired powerplants with total capacity of approximately 1012 MW. In addition SMUD has several power purchase agreements tohelp meet its power requirements. As part of the hydro relicensing

process, SMUD entered into long-term contracts to provide certain services tofour different government agencies

-U.S. Department of Interior Bureau of Land Management, U.S. Department of Agriculture Forest Service, El Dorado County, and the California Department of Parks and Recreation. Theaggregate present value of all contract payments of $56.1 million was recorded as a Noncurrent Liability atDecember 31, 2014.The impact of the drought continued to plague California in 2014. SMUD experienced a third year of belowaverage precipitation, which reduced its hydroelectric generation from the UARP by more than 50 percent.Reserve funds have been established to help absorb higher energy costs when hydroelectric production is downand to serve as a buffer against unexpected financial developments. In April 2014 and 2013, $24.3 million and$6.6 million, respectively, were transferred from the Hydro Rate Stabilization Fund (HRSF) to revenue as a resultof the lower precipitation. The balance of the HRSF at December 31, 2014 and 2013 was $3.1 million and $27.4million, respectively. SMUD's mitigation efforts have protected its rate payers from rate volatility due to higher26 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportMANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) operating costs; however, if the drought continues and reserves are not adequate to cover all costs, SMUD willapply a hydroelectric rate surcharge of up to 4 percent to customers' electric bills. SMUD also has a long-term agreement with the Western Area Power Administration (WAPA) to purchase power generated by the CentralValley Project, a series of federal hydroelectric facilities operated by the U.S. Bureau of Reclamation (USBR).SMUD uses the Rate Stabilization Fund (RSF) to offset any excess or deficits in WAPA energy deliveries. As aresult of the drought, WAPA's deliveries fell short by about 27 percent and in December 2014, $11.8 million wastransferred from the RSF due to the lower energy deliveries. In December 2013, $1.8 million was transferred tothe RSF due to excess energy deliveries. At December 31, 2014 and 2013, the balance of the RSF was $42.3million and $54.1 million, respectively. In September 2014, the UARP facilities were threatened by the King Fire that burned approximately 98,000 acresof forested area in El Dorado County, including lower elevation areas of the UARP. Damage to the UARP waslimited relative to the magnitude of the fire. Power generation was interrupted for one week while transmission lines were de-energized, causing SMUD to incur substitute power costs. SMUD incurred over $4.0 million of costsrelated to the fire and cleanup and is actively pursuing insurance claims, as well as federal and state disaster relief,if made available. Decommissioning During 2014, SMUD made significant progress toward completing the Decommissioning Plan for its Rancho Seconuclear facility, which was shut down in 1989. The plan consists of two phases that allow SMUD to terminate itspossession-only license. Phase I of the decommissioning was completed at the end of 2008. Phase 11 consists of astorage period for the Class B and Class C radioactive waste overseen by the existing facility staff, followed byshipment of the waste for disposal, and then complete termination of the possession-only license. SMUD alsoestablished 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. In September 2013, SMUD entered into a contractwith the operator of a low-level radioactive waste facility located in Andrews, Texas. Shipment of the previously stored Class B and Class C radioactive waste was completed in November 2014. The disposal and shipment costswere funded from the decommissioning trust fund in an amount over $22.0 million. At December 31, 2014 and2013, the balance of the decommissioning trust fund was $8.3 million and $31.1 million, respectively. The AccruedDecommissioning balance in the Consolidated Statements of Net Position includes $152.1 million and $169.1million for costs related to Rancho Seco as of December 31, 2014 and 2013, respectively. As part of the Decommissioning Plan, the nuclear fuel and Greater Than Class C (GTCC) radioactive waste isbeing stored in a dry storage facility constructed by SMIUD and licensed separately by the NRC. The DOE, underthe Nuclear Waste Policy Act of 1982, was responsible for permanent disposal of used nuclear fuel and GTCCradioactive waste and SMUD contracted with the DOE for removal and disposal of that waste. In 1998, SMUDfiled suit against the DOE for breach-of-contract because the DOE never provided a permanent waste disposal site.In September 2014, SMUD received $53.1 million following the signing of a final judgment by the U.S. Court ofFederal Claims for costs incurred from 1992 through 2003 as a result of the DOE's failure to provide a disposal sitefor spent fuel from the Rancho Seco nuclear power plant. This amount is included in Other Income-Net in theConsolidated Statements of Revenues,

Expenses, and Changes in Net Position.

SMUD ANNUAL REPORT 2014 27 Sacramento Municipal Utility District I 2014 Annual ReportMANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) Employee Relations and BenefitsEffective January 1, 2013, SMIUD began operating under a new five year memorandum of understanding (MOU)with both of its collective bargaining units, the International Brotherhood of Electrical Workers Local Union 1245and the Organization of SMUD Employees. SMUJD participates in the California Public Employees' Retirement System (PERS), an agent multiple-employer public employee defined benefit pension plan. In July 2014, SMUD exercised the option to prepay an annual lumpsum payment to PERS. Of the total $22.5 million contribution made, $11.2 million is included as a prepaid asset atDecember 31, 2014 and the $11.3 million was recorded as an expense in 2014.SMUD provides postemployment healthcare benefits (OPEB) to all employees who retire from SNMUD and theirdependents in accordance with SMUD policy and MOUs. These benefits are funded through the PERS California Employer's Retiree Benefit Trust, an agent multiple-employer plan. SMUD opted to make an additional $40.0million contribution to the trust in 2014. This contribution was in excess of the actuarial required contribution, increasing SMUD's funded level to 25.6 percent. The balance of the OPEB asset at December 31, 2014 and 2013was $77.7 million and $36.7 million, respectively. Developments in the Energy MarketNew developments in the energy market at both the federal and state level kept SMUD on high alert as itcontinued to monitor and address the potential impacts on the organization. Legislation at the federal level includethe Executive Order "Improving Critical Infrastructure Security" on cyber security, the Energy Policy Act of 1992related to federal regulation of transmission access that includes FERC Order 1000, the North American ElectricReliability Corporation reliability standards, anti-market manipulation rules, and greenhouse gas emissions. Legislation at the state level include Assembly Bill 32 Global Warming Solutions Act of 2006 (AB 32) establishing the cap-and-trade program for carbon allowances, renewable portfolio standards, Senate Bill 1 (SB-I) solarprogram, SB-2 IX the California Renewable Energy Resources Act that codifies the Renewable Portfolio Standards target, the Delta Reform Act of 2009 that impacts hydro generation, and the California Independent System Operator's development of the energy imbalance market.Significant Accounting PoliciesIn accordance with GASB Statement No. 62, "Regulated Operations," the Board has taken regulatory actions forratemaking that result in the deferral of expense and revenue recognition. These actions result in regulatory assetsand liabilities. SMUD has regulatory assets that cover costs related to decommissioning, Transmission Agency ofNorthern California (TANC) operations, USBR, derivative financial instruments, SB-I solar investments, and debtissuance costs. As of December 31, 2014 and 2013, total regulatory assets were $203.6 million and $192.2 million,respectively. SMUD also has regulatory credits that cover costs related to contributions in aid of construction, theRSF and HRSF, AB 32 carbon allowances, grant revenues, TANC, and precipitation hedges. As of December 3 1,2014 and 2013, total regulatory credits were $368.9 million and $403.2 million, respectively. 28 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportMANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) FINANCIAL POSITIONCondensed Consolidated Statements of Net Position2014December 31,2013(millions ofdollo's) 2012AssetsElectric Utility Plant- netRestricted and Designated AssetsCurrent AssetsNoncurrent AssetsTotal AssetsDeferred Outflows of Resources Total Assets and Deferred Outflows of Resources Liabilities Long-Term Debt -netCurrent Liabilities Noncurrent Liabilities Total Liabilities Deferred Inflows of Resources Net Position: Net Investment in Capital AssetsRestricted Unrestricted Total Liabilities, Deferred Inflows of Resources, and Net Position3,3321371,073819$ 5,361192$ 5,553$ 2,882661355$ 3,898646485127397$- 3,3231741,062784$ 5,343149$ 5,492$ 3,076589289$ 3,954691345116386$ 3,340233911862$ 5,346223$ 5,569$ 3,092643342$ 4,077715412127238$ 5,553 $ 5,492 $ 5,569ASSETS AND DEFERRED OUTFLOWS OF RESOURCES Electric Utility Plant -net2014 compared to 2013 As of December 31, 2014 SMUD has invested approximately $3,332.0 million inelectric utility plant assets and construction work in progress (CWIP) after accumulated depreciation. Net ElectricUtility Plant makes up about 60 percent of SMUD's Total Assets and Deferred Outflow of Resources, which isabout one percent less than 2013. In 2014, SMUD capitalized approximately $199.0 million of additions to electricutility plant in the Consolidated Statements of Net Position. The additions were primarily due to distribution linework, hardware and software

upgrades, and purchase of land for additional wind capacity and replacement of bulksubstations.

These additions were offset by the retirement of the UARP recreational facilities and somephotovoltaic assets.2013 compared to 2012 SMUD has invested approximately $3,323.0 million in electric utility plant assets andconstruction work in progress (CWIP) after accumulated depreciation at December 31, 2013. Electric UtilityPlant -net makes up about 62 percent of SMUD's Total Assets, which is the same percentage as the previousyear. In 2013, SMUD capitalized approximately $171.0 million of additions to electric utility plant in SMUD'sConsolidated Statements of Net Position. The additions were primarily due to distribution line work, hardwareand software

upgrades, the East Campus Operations Center, and distribution and transmission substation upgradesand modifications.

SMUD ANNUAL REPORT 2014 29 Sacramento Municipal Utility District I 2014 Annual ReportMANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) The following charts show the breakdown of Electric Utility Plant -net by major plant category -Generation (Gen), Transmission (Trans), Distribution (Distr), and Other:December 31, 2014 December 31, 2013 December 31, 2012U Gen25% U Trans6 4 3Distr6 .6% 6% lOtherRestricted and Designated Assets2014 compared to 2013 SMUD's restricted and designated assets are comprised of debt service reserves, nuclear decommissioning trust funds, rate stabilization

reserves, and other third party agreements or Board actions.These assets decreased by $37.4 million during 2014. The decrease was partially due to a transfer of $36.2 millionfrom the RSF (including the HRSF) as a result of lower precipitation and lower energy deliveries from WAPA. Inaddition, there was a decrease of $22.9 million in the nuclear decommissioning fund mainly due to payments madefor the shipment of the low level radioactive waste to a permanent waste disposal facility.

These decreases wereoffset by $11.0 million increase in the component units' overhaul and maintenance reserve and $13.7 million in thecurrent portion of these assets.2013 compared to 2012 SMUD's restricted and designated assets decreased by $58.7 million during 2013. Thedecrease was due to $28.7 million related to the component units' overhaul and operating funds, $14.5 million inthe nuclear decommissioning fund, $11.0 million in the revenue bond reserves due to the refunding of Series R03and S03, and $4.8 million in the RSF (including the HRSF) as a result of lower precipitation and higher energydeliveries from Western. These decreases were offset by a $0.3 million increase in the escrow fund.Current Assets2014 compared to 2013 Current assets remained relatively flat in 2014 compared to 2013 with a one percentincrease of $12.2 million. The unrestricted investments increased by $91.3 million along with a total increase of$8.9 million in the current portion of regulatory costs and prepaid gas, inventories, and credit support collateral deposits. These increases were offset by decreases of $59.0 million in unrestricted cash and cash equivalents, $13.7million in restricted and designated cash and cash equivalents and investments, $12.7 million in net receivables, and$2.6 million in the current portion of investment and hedging derivative instruments, and prepayments. 2013 compared to 2012 Current assets increased by $141.1 million in 2013 primarily due to increases in thefollowing: $249.5 million in unrestricted investments, $32.5 million in the current portion of restricted anddesignated cash and $10.6 million in the current portion of prepayments. This is partially offset by decreases in thefollowing: $71.5 million in unrestricted cash and cash equivalents, $71.4 million in net receivables, $5.0 million inthe current portion of regulatory costs, and $5.0 million in credit support collateral deposits. 30 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportMANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) Noncurrent Assets2014 compared to 2013 Total noncurrent assets increased by $35.0 million mainly due to a $40.0 millionadditional contribution to the OPEB trust fund.2013 compared to 2012 Total noncurrent assets decreased by $69.0 million mainly due to the following decreases: $30.2 million in regulatory costs for future recovery, $25.0 million in gas, power and other prepaidcosts, $10.5 million in hedging derivative instruments, and $3.3 million in net energy efficiency loans.Deferred Outflows of Resources 2014 compared to 2013 Total deferred outflows of resources increased $42.7 million due to a $49.7 millionincrease in the fair value of hedging derivative instruments, offset by $7.0 million amortization of bond losses.2013 compared to 2012 Total deferred outflows of resources decreased $73.6 million due to $61.9 million inthe fair value of hedging derivative instruments and $11.7 million in unamortized bond losses.LIABILITIES AND DEFERRED INFLOWS OF RESOURCES Long-term debt -net2014 compared to 2013 SMUD's long-term debt includes the component units' debt and consists of a variety offinancial instruments, including interest rate swap agreements, subordinated electric revenue bonds and variablerate bonds. Proceeds from the bonds provide financing for various capital improvement

projects, component unitcapital projects, and the prepayment of a 20 year supply of natural gas.In December 2014, SMUD redeemed

$8.7 million of 2004 Series T Bonds. The redemption resulted in a currentaccounting gain of $23 thousand, which is included in Interest on Debt. Redeeming the bonds will reduce theaggregate future debt service payments by $11.0 million.2013 compared to 2012 In May 2013, SMUD issued $118.6 million of 2013 Series B Electric RevenueRefunding Bonds. The proceeds from the issuance along with $6.7 million of available funds were used to refund$141.5 million of the outstanding 2003 Series R and 2004 Series T revenue bonds through a legal defeasance. InAugust 2013, SMUD issued $57.8 million of 2013 Series C Electric Revenue Refunding Bonds. The proceeds fromthe issuance along with $4.3 million of available funds were used to refund $65.9 million of the outstanding 2003Series S bonds through a legal defeasance. SMUD ANNUAL REPORT 2014 31 Sacramento Municipal Utility District I 2014 Annual ReportMANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) The following table shows SMUD's future debt service requirements through 2019 as of December 31, 2014:Debt Service Requirements 300250-.2 J9 Interest150 --.--- -.-- -*

• Principal w 100 ..5 0 -- -..... -----.-- -2015 2016 2017 201OMI8 2019As of December 31, 2014, SMUD's bonds had an underlying rating of "AA-" from Standard

& Poor's, "AA-" fromFitch, and "A I" from Moody's. SMUD's bonds were upgraded by Fitch from A+ to AA- in December 2014. Someof SMUD's bonds are insured and are rated by the rating agencies at the higher of the insurer's rating or SMUID'sunderlying rating.Current Liabilities 2014 compared to 2013 Current liabilities increased by $72.0 million during 2014. Current portion of long-term debt increased $32.8 million mainly due to a $29.9 million early call of a component unit's bonds. In addition, therewas a $38.7 million increase in investment and hedging derivative instruments. 2013 compared to 2012 Current liabilities decreased by $59.0 million during 2013. The decrease is primarily due to the following: investment and hedging derivative instruments maturing within one year of $77.5 million, $11.5million in customer deposits and other, and $3.7 million in accounts payable. These decreases were partially offsetby $18.4 million increase in long-term debt due within a year and $13.5 million in accrued decommission costs.Noncurrent Liabilities 2014 compared to 2013 Noncurrent liabilities increased by $65.7 million during 2014. The increase was mainlydue to a $56.1 million liability associated with the new hydro license and $18.4 million in investment and hedgingderivative instruments. 2013 compared to 2012 Noncurrent liabilities decreased by $48.0 million during 2013. The decrease was due to$14.0 million in accrued decommissioning costs, $14.9 million in investment derivative instruments, $8.3 milliondue to affiliated entity, $6.2 million due to USBR, and $7.8 million in self-insurance. These decreases were offsetby a $3.2 million increase in hedging derivative instruments. Deferred Inflows of Resources 2014 compared to 2013 Total deferred inflows of resources decreased $45.2 million due to a transfer of $36.2million from the RSF (including the HRSF) as a result of lower precipitation and lower energy deliveries fromWAPA and the amortization of $ 10.0 million for the Solano Phase 3 wind facilities. 32 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportMANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) 2013 compared to 2012 Total deferred inflows of resources decreased $24.0 million due to a decrease of $18.6million in financing obligations and $9.0 million in accumulated increase in fair value of hedging derivatives. Thesedecreases were offset by a $3.6 million increase in regulatory credits.RESULTS OF OPERATIONS Condensed Consolidated Statements of Revenues, Expenses and Changes in Net PositionDecember 31,2014 2013 2012(millions of doIlars)Operating revenues $ 1,529 $ 1,428 $ 1,382Operating expenses (1,323) (1,255) (1,153)Operating income 206 173 229Other revenues 79 22 57Interest charges (122) (125) (126)Change in net position 163 70 160Net position -beginning of year 847 777 617Net position -end of year $ 1,010 $ 847 $ 777Operating Revenues2014 compared to 2013 Operating revenues increased $100.9 million in 2014, of which $36.7 million includesthe 2.5 percent rate increase that went into effect January 1, 2014. As of December 31, 2014, the number ofcustomers had increased approximately one percent to 614,143 at a slightly higher average revenue per kilowatthour as compared to the end of 2013.SMiUD transferred $24.3 million from the RSF in 2014 compared to a transfer of $1.8 million to the RSF in 2013.SMUD also transferred $11.9 million and $6.6 million from the HRSF in 2014 and 2013, respectively. Wholesale revenues are comprised of both surplus gas and energy sales which are part of the operational strategyin managing fuel and energy costs. In 2014, surplus gas sales were higher than 2013 by $29.3 million due to highergas prices and more gas sold. Energy sales were also higher in 2014 by $5.8 million as compared to 2013 due tohigher prices offset by lower volume.2013 compared to 2012 Operating revenues were $1,428.4 million in 2013, an increase of $46.1 million from2012. Sales to retail customers were $1,252.4 million in 2013, an increase of $6.9 million, which was about 1 percenthigher than 2012. The number of customers increased from 604,053 in 2012 to 610,185 at the end of 2013, at anaverage revenue per kilowatt hour that remained flat.SMUD transferred $1.8 million to the RSF in 2013 as compared to a $0.6 million transfer to the fund in 2012.SMUD also transferred $6.6 million from the HRSF during 2013 as compared to a $6.4 million transfer from thefund in 2012. Additionally, SMUD spent more than it collected in SB-I revenues and has recorded a regulatory asset of $7.7 million.Wholesale revenues are composed of both surplus gas and energy sales. In 2013, surplus gas sales were $52.8million as compared to $48.7 million in 2012. Surplus gas sales were 8 percent higher and the average sales pricewas higher than the previous year. Surplus energy sales in 2013 were $18.3 million higher than in 2012 as a resultof higher prices offset by lower volumes.SMUD ANNUAL REPORT 2014 33 Sacramento Municipal Utility District I 2014 Annual ReportMANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) The following charts show the megawatt hour (MWh) sales, and sales revenue for the past three years by surplusenergy sales (Surplus), commercial and industrial (C&I) and residential (Res) customers. MWh Sales Sales Revenues7,0 00 ----.. --. ...-.. -. --. -. --. ------. --. .-....... $ 7 00 ,000 -- -.. ...... ...... ... .....6,000 .$600,0..s ooo0 ------ -- --- sswoowoo ii4,500 $400,000ERes

• U Res3 --.-530,000M=

....MIC&l2.oo0 Surplus s2ooo Surplus1,000- $100,0002014 2013 2012 2014 2W3 2012Operating Expenses2014 compared to 2013 Operating expenses increased $68.3 million compared to 2013 mainly due to theimpact of the drought on hydro generation. The reduction in hydro generation contributed significantly to the$42.5 million increase in purchased power expense, which is about 16 percent higher than in 2013. Production costs, which include depletion, were higher by $14.3 million. Net fuel costs for generation is included in production costs and was $37.0 million lower than 2013 mainly due to a 14 percent reduction in the average net fuel price.2013 compared to 2012 Operating expenses were $1,255.2 million in 2013, an increase of $102.1 million from2012. Purchased power expense was $31.7 million higher in 2013, mainly due to higher average prices offset bylower volume as compared to 2012. Approximately 9 percent less energy was purchased in 2013 at prices thataveraged 24 percent higher than in 2012.In 2013, net fuel costs for generation, a component of production costs, were approximately $257.2 million(inclusive of ineffective hedges reported as investment expense), or $12.6 million lower than 2012. Fuel usageincreased 10 percent primarily due to higher production at the component unit generation plants. Average net fuelprices were lower by 14 percent in 2013 as compared to 2012.Depreciation expense increased by $15.3 million due to higher depreciation related to software and hardware, general structures and improvements, Solano Wind plant, and distribution assets. The $4.4 million decrease inregulatory amounts collected in rates is due to the final year of amortization of North City Substation remediation obligations offset by higher decommissioning costs.Administrative,

general, and customer expenses were $14.6 million higher in 2013 than in 2012, mainly due tohigher expense in various customer programs.

34 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportMANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) The following charts show the breakdown of operating expenses: 2014Operating Expenses2013Operating Expenses2012Operating Expenses45% ..r/%12%-T-"

7WLJ Purchased PowerN Production EJ Otheri.-1 Purchased PowerN Production

..] OtherL-1 Power SupplyN Production .OtherOther Revenues and (Expenses) 2014 compared to 2013 Other revenues were $56.7 million higher in 2014 most of which was attributable to the$53.1 million settlement related to the Rancho Seco nuclear waste disposal litigation. Other changes include lowerinvestment expense of $13.2 million due to ineffective hedges, offset by $5.0 million lower revenues associated with grants.2013 compared to 2012 Other revenues were $38.9 million lower in 2013 as compared to 2012. Interest incomeis lower by $29.7 million mainly due to the Fru-Con settlement related to the Cosumnes Power Plant litigation. Grant revenue net of pass through expenditures is lower by $13.0 million due to lower costs from grant programs, and other income -net was lower by $4.8 million. In addition, there was a $12.6 million decrease in investment expense related to ineffective hedges.SMUD ANNUAL REPORT 2014 35 Sacramento Municipal Utility District I 2014 Annual ReportCONSOLIDATED STATEMENTS OF NET POSITIONDecember 31,Assets 2014 2013(thousnds of dollars)Electric Utility PlantPlant in service $ 5,575,013 $ 5,353,712 Less accumulated depreciation and depletion (2,354,642) (2,166,120) Plant in service -net 3,220,371 3,187,592 Construction work in progress 111,594 135,385Total electric utility plant -net 3,331,965 3,322,977 Restricted and Designated AssetsRevenue bond and debt service reserves 130,430 133,472Nuclear decommissioning trust fund 8,250 31,137Rate stabilization fund 45,306 81,474Other funds 66,752 55,773Less current portion (113,805) (127,524) Total restricted and designated assets 136,933 174,332Current AssetsUnrestricted cash and cash equivalents 237,709 296,679Unrestricted investments 396,575 305,296Restricted and designated cash and cash equivalents 37,765 42,425Restricted and designated investments 76,040 85,099Receivables -net:Retail customers 153,658 152,821Wholesale 7,837 8,390Other 26,479 39,464Regulatory costs to be recovered within one year 20,838 17,668Investment derivative instruments maturing within one year 39 279Hedging derivative instruments maturing within one year 9,025 9,879Inventories 52,626 49,866Prepaid gas to be delivered within one year 24,893 22,720Credit support collateral deposits 829 Prepayments 28,952 30,475Total current assets 1,073,265 1,061,061 Noncurrent AssetsRegulatory costs for future recovery 182,793 174,570Prepaid gas 315,612 340,504Prepaid power and capacity 140,507 145,362Investment derivative instruments 147Hedging derivative instruments 25,703 25,704Energy efficiency loans -net 33,173 36,378Credit support collateral deposits 3,171 Due from affiliated entity 7,687 Prepayments and other 110,575 61,568Total noncurrent assets 819,221 784,233Total Assets 5,361,384 5,342,603 Deferred Outflows of Resources Accumulated decrease in fair value of hedging derivatives 152,033 102,356Unamortized bond losses 39,830 46,790Total deferred outflows of resources 191,863 149,146Total Assets and Deferred Outflows of Resources $ 5,553,247 $ 5,491,749 The accompanying notes are an integral part of these consolidated financial statements. 36 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportCONSOLIDATED STATEMENTS OF NET POSITIONDecember 31,Liabilities 2014 2013(thousds of dolim)Long-Term Debt -net $2,881,701 $3,075,802 Current Liabilities Commercial paper notes 200,000 200,000Accounts payable 75,147 72,012Purchased power payable 21,423 19,448Credit support collateral obligation 160 160Long-term debt due within one year 170,430 137,600Accrued decommissioning 7,879 19,759Interest payable 42,219 44,345Accrued salaries and compensated absences 37,715 36,089Investment derivative instruments maturing within one year 12,295 9,063Hedging derivative instruments maturing within one year 51,727 16,212Customer deposits and other 42,238 34,512Total current liabilities 661,233 589,200Noncurrent Liabilities Accrued decommissioning 154,280 158,807Investment derivative instruments 19,888 15,689Hedging derivative instruments 100,306 86,144Due to affiliated entity 841Due to U.S. Bureau of Reclamation 391Self insurance, unearned revenue and other 80,340 27,213Total noncurrent liabilities 354,814 289,085Total Liabilities 3,897,748 3,954,087 Deferred Inflows Of Resources Accumulated increase in fair value of hedging derivatives 34,728 35,583Regulatory credits 368,931 403,197Financing obligation and other 242,069 252,177Total deferred inflows of resources 645,728 690,957Net PositionNet investment in capital assets 485,358 345,493Restricted 127,044 115,632Unrestricted 397,369 385,580Total Net Position 1,009,771 846,705Commitments And Contingencies (Notes 16 and 17)Total Liabilities, Deferred Inflows of Resources, and Net Position $ 5,553,247 $ 5,491,749 The accompanying notes are an integral part of these consolidated financial statements. SMUD ANNUAL REPORT 2014 37 Sacramento Municipal Utility District I 2014 Annual ReportCONSOLIDATED STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITIONYear Ended December 31,2014 2013(1hou.,Mds of dollant)Operating RevenuesResidential $ 594,644 $ 572,701Commercial and industrial 676,972 663,356Street lighting and other 34,236 33,083Wholesale 166,262 131,130Senate Bill -I revenue (331) 10,711AB-32 revenue 21,393 12,656Rate stabilization fund transfers 36,168 4,758Total operating revenues 1,529,344 1,428,395 Operating ExpensesOperations: Purchased power 316,082 273,596Production 402,310 388,139Transmission and distribution 63,475 57,312Administrative, general and customer 168,353 168,522Public good 73,315 77,098Maintenance 98,496 92,573Depreciation 184,810 180,718Depletion 11,230 11,084Regulatory amounts collected in rates 5,401 6,140Total operating expenses 1,323,472 1,255,182 Operating Income 205,872 173,213Non-Operating Revenues and ExpensesOther revenues and (expenses) Interest income 7,759 7,457Investment expense (8,515) (21,678)Revenue -Grants 4,830 16,323Pass through expenditures -Grants (1,827) (8,308)Other income -net 76,878 28,647Total other revenues and (expenses) 79,125 22,441Interest chargesInterest on debt 123,253 128,959Allowance for funds used during construction (1,322) (3,003)Total interest charges 121,931 125,956Change in Net Position 163,066 69,698Net Position -Beginning of Year 846,705 777,007Net Position -End of Year $1,009,771 $ 846,705The accompanying notes are an integral part of these consolidated financial statements. 38 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportCONSOLIDATED STATEMENTS OF CASH FLOWSYear Ended December 31,2014 2013(thousands of dollars)Cash Flows From Operating Activities Receipts from retail customers $ 1,302,475 $1,264,147 Receipts from surplus power sales 83,758 80,569Receipts from surplus gas sales 83,203 52,432Receipts from steam sales 5,474 5,411Settlement proceeds 53,140 Other receipts 31,804 19,282Payments/receipts for credit support collateral (4,000) 4,900Issuance/repayment of energy efficiency loans, net 3,611 3,413Payments to employees -payroll and other (240,038) (229,287) Payments for wholesale power (314,052) (274,952) Payments for gas purchases (274,791) (273,386) Payments to vendors/others (328,787) (258,482) Payments for decommissioning (18,846) (15,036)Net cash provided by operating activities 382,951 379,011Cash Flows From Noncapital Financing Activities Repayment of debt (22,380) (21,795)Receipts from federal and state grants 13,103 23,011Pass through payments for federal and state grants (2,188) (9,424)Interest on debt (15,128) (15,977)Net cash provided used in noncapital financing activities (26,593) (24,185)Cash Flows From Capital and Related Financing Activities Proceeds from Solano Wind Phase 3 financing obligation 63,147Construction expenditures (142,416) (184,046) Contributions in aid of construction 11,285 8,523Net proceeds from bond issues 353,521Repayments and refundings of debt (123,910) (309,763) Interest on debt (118,645) (118,425) Net cash used in capital financing activities (373,686) (187,043) Cash Flows From Investing Activities Sales and maturities of securities 449,698 199,382Purchases of securities (483,049) (431,509) Interest and dividends received 7,772 6,313Investment revenue/expenses, net (8,572) (21,677)Net cash used in investing activities (34,151) (247,491) Net decrease in cash and cash equivalents (51,479) (79,708)Cash and cash equivalents at the beginning of the year 388,540 468,248Cash and cash equivalents at the end of the year $ 337,061 $ 388,540Cash and cash equivalents included in:Unrestricted cash and cash equivalents $ 237,709 $ 296,679Restricted and designated cash and cash equivalents 37,765 42,425Revenue bond and debt service reserves (a component of the total of$130,430 and $133,742 at December 31, 2014 and 2013, respectively) 61,587 49,436Cash and cash equivalents at the end of the year $ 337,061 $ 388,540The accompanying notes are an integral part of these consolidated financial statements. SMUD ANNUAL REPORT 2014 39 Sacramento Municipal Utility District I 2014 Annual ReportSUPPLEMENTAL CASH FLOW INFORMATION A reconciliation of the consolidated statements of cash flows operating activities to operating income is as follows:Year Ended December 31,2014 2013(thouwods of dollars)S 205,872 $ 173,213Operating incomeAdjustments to reconcile operating income to net cash providedby operating activities: Depreciation Depletion Regulatory amortization Amortization of advance capacity & otherAmortization of prepaid gas supplyRevenue (recognized from) deferred to regulatory

credits, netSettlement proceedsPayments/receipts for credit support collateral, netOther receipts/payments Changes in operating assets and liabilities:

Customer and wholesale receivables Energy efficiency loansOther assetsPayables and accrualsDecommissioning Net cash provided by operating activities 184,81011,2305,40192922,720(33,939)53,140(4,000)2,7565583,611(69,997)18,706(18,846)S 382,951180,71811,0846,1401,97221,627(16,579)-0-4,9005,9761,5003,413(8,417)8,500(15,036)$ 379,011The supplemental disclosure of noncash financing and investing activities is as follows:Year Ended December 31,2014 2013Amortization of debt related costsUnrealized holding gain or (loss)Change in valuation of derivative financial instruments Amortization of revenue for assets contributed in aid of construction Allowance for funds used during construction Construction costs included in accounts payableThe accompanying notes are an integral part of these consolidated financial statements. (thousands of dollars)8,148(681)(58,350)17,9701,32216,5886,787(389)80,59316,1563,00320,21640 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION The Sacramento Municipal Utility District (SMUD) was formed and operates under the State of California Municipal Utility District Act (Act). The Act gives SMUD the rights and powers to fix rates and charges forcommodities 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 servicearea, which includes most of Sacramento County and small adjoining portions of Placer and Yolo Counties. TheBoard of Directors (Board) determines SMUD's rates.SMUD is exempt from payment of federal and state income taxes and, under most circumstances, real and personalproperty taxes. SMUD is not exempt from real and personal property taxes on assets it holds outside of California. In addition, SMUD is responsible for the payment of a portion of the property taxes associated with its real propertyin California that lies outside of its service area.NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESMethod of Accounting. SMUD's accounting records are maintained in accordance with Generally AcceptedAccounting 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 andLicensees prescribed by the Federal Energy Regulatory Commission (FERC), except as it relates to the accounting for contributions of utility property in aid of construction. SMUD's Consolidated Financial Statements are reportedusing the economic resources measurement focus and the accrual basis of accounting. Revenues are recordedwhen earned and expenses are recorded when a liability is incurred, regardless of the timing of the related cashflows. Electric revenues and costs that are directly related to the acquisition, generation, transmission, anddistribution of electricity are reported as operating revenues and expenses. All other revenues and expenses arereported as non-operating revenues and expenses. Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of thefinancial statements and reported amounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates. The Financial Reporting Entity. These Consolidated Financial Statements include SMUD and its component units. Although the component units are legally separate from SMUD, they are blended into and reported as partof 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 Power Authority (SPA), the Sacramento Municipal Utility DistrictFinancing Authority (SFA), and the Northern California Gas Authority No. I (NCGA). The primary purpose ofCVFA, SCA, SPA and SFA is to own and operate electric utility plants that supply power to SMUD. The primarypurpose of NCGA is to prepay for natural gas and to sell the natural gas to SMUD. SMUD's Board comprises theCommissions that govern these entities (see Note 6).SMUD ANNUAL REPORT 2014 41 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Plant in Service. Capital assets are generally defined by SMUD as tangible assets with an initial, individual cost ofmore than three thousand dollars and an estimated useful life in excess of two years. The cost of additions to Plantin Service and replacement property units is capitalized. Repair and maintenance costs are charged to expense whenincurred. 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 removaland the related salvage value, if any, are charged or credited as appropriate to Accumulated Depreciation. SMUDgenerally computes depreciation on Plant in Service on a straight-line, service-life basis. The consolidated averageannual composite depreciation rates for 2014 and 2013 were 3.5 and 3.6 percent, respectively. Depreciation iscalculated using the following estimated lives:Generation 7 to 80 yearsTransmission and Distribution 15 to 50 yearsGas Pipeline 5 to 90 yearsGeneral 5 to 60 yearsInvestments in Joint Power Agency (JPA). SMUD's investment in the Transmission Agency of Northern California (TANG) is accounted for under the equity method of accounting and is reported as a component of Plant in Service.SMUD's share of the TANC debt service costs and operations and maintenance

expense, inclusive of depreciation, is included in Transmission and Distribution expense in the Consolidated Statements of Revenues, Expenses andChanges in Net Position.

SMUD's investment in Balancing Authority of Northern California (BANC) is accounted for under the equity methodof accounting. SMUD's share of the BANC operations and maintenance expense is included in Transmission andDistribution expense in the Consolidated Statements of Revenues, Expenses and Changes in Net Position. Investments in Gas Properties. SMUD has an approximate 21 percent non-operating ownership interest in theRosa Unit gas properties in New Mexico of which, SMUD's portion of the extracted gas is transported for use in itscomponent unit natural gas-fired power plants (see Note 6). SMUD uses the successful efforts method of accounting for its investment in gas producing properties. Costs to acquire mineral interests in gas properties, to drill and equipexploratory wells that find proved reserves, and to drill and equip development wells are capitalized as a component of Plant in Service on the Consolidated Statements of Net Position. Costs to drill exploratory wells that do not findproved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties areexpensed. SMUD has purchased proven reserves and has not participated in exploratory drilling. Capitalized costs ofproducing gas properties, after considering estimated residual salvage values, are depleted by the unit-of-production method based on the estimated future production of the proved developed producing wells. SMUD's investment ingas properties is reported as a component of Plant in Service.Restricted and Designated Assets. Cash, cash equivalents, and investments, which are restricted under terms ofcertain agreements for payments to third parties or Board actions limiting the use of such funds, are included asrestricted assets. When SMUD restricts funds for a specific

purpose, and both restricted and unrestricted resources areavailable for use, it is SMUD's policy to use restricted resources first, then unrestricted resources as they are needed.42 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restricted Bond Funds. SMUD's Indenture Agreements (Indenture) requires the maintenance of minimum levelsof reserves for debt service on the 1997 Series K Bonds and the 2003 Series R Bonds.Nuclear Decommissioning Trust Fund. SMUD made annual contributions to its Nuclear Decommissioning TrustFund (Trust Fund) through 2008 to cover the cost of its primary decommissioning activities associated with theRancho Seco facility.

Primary decommissioning excludes activities associated with the spent fuel storage facilityafter 2008 and most non-radiological decommissioning tasks. SMUD determined early in 2008 that there wereenough funds in the trust to complete the radiological decommissioning of the Rancho Seco nuclear plant site, andstopped contributing to the Trust Fund (see Note 12). Interest earnings on the Trust Fund assets are recorded asInterest Income and are accumulated in the Trust Fund.Accrued Decommissioning. SMUD accrues decommissioning costs related to Utility Plant when an obligation todecommission facilities is legally required. Adjustments are made to such liabilities based on estimates by SMUDstaff in accordance with FASB ASC 410, Asset Retirement and Environmental Obligations (FASB ASC 410). Foractive plants, such costs are included in the Utility Plant's cost and included as a component of Operating Expenseover the Utility Plant's life. Expenditures for decommissioning activities are recorded as reductions to AccruedDecommissioning liability. Changes in the Rancho Seco decommissioning liability estimates arising from inflation, annual accretion, and other changes to the cost assumptions are recorded to Accrued Decommissioning with acorresponding adjustment to the related regulatory deferral. The current portion of the Accrued Decommissioning liability represents SMUD's estimate of actual expenditures in the next year, as set forth in the annual budget.SMUD has identified potential retirement obligations related to certain generation, distribution and transmission facilities. SMUD's non-perpetual leased land rights generally are renewed continuously because SMUD intends toutilize these facilities indefinitely. Since the timing and extent of any potential asset retirements are unknown, thefair value of any obligations associated with these facilities cannot be reasonably estimated. Accordingly, a liability has not been recorded. At December 31, 2014 and 2013, SMUD's Accrued Decommissioning balance in the Consolidated Statements ofNet Position relating to Rancho Seco was $152.1 million and $169.1 million, respectively (see Note 12). TheAccrued Decommissioning balance in the Consolidated Statements of Net Position relating to other electricity generation and gas production facilities totaled $10.1 million and $9.4 million as of December 31, 2014 and 2013,respectively. Cash and Cash Equivalents. Cash and cash equivalents include all debt instruments purchased with an originalmaturity of 90 days or less, all investments in the Local Agency Investment Fund (LAIF), and money market mutualfunds. LAW has an equity interest in the State of California (State) Pooled Money Investment Account (PMIA).PMIA funds are on deposit with the State's Centralized Treasury System and are managed in compliance with theCalifornia Government Code according to a statement of investment policy which sets forth permitted investment

vehicles, liquidity parameters, and maximum maturity of investments.

SMUD's deposits with LAW comprise cashrepresenting demand deposits up to $50.0 million maximum and cash equivalents representing amounts which maybe withdrawn once per month after a thirty-day period. The debt instruments and money market mutual funds arereported at amortized cost, which approximates fair value, and the LAIF is reported at the value of its pool shares.SMUD ANNUAL REPORT 2014 43 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Investments. SMUD's investments held for more than one year are reported at fair value. Realized and unrealized gains and losses are included in Other Income -net in the Consolidated Statements of Revenues, Expenses andChanges in Net Position. Premiums and discounts on zero coupon bonds are amortized using the effective interestmethod. Premiums and discounts on other securities are amortized using the straight-line method, whichapproximates the effective interest method.Electric Operating Revenues. Electric revenues are billed on the basis of monthly cycle bills and are recorded asrevenue when the electricity is delivered. SMUD records an estimate for unbilled revenues earned from the dates itsretail customers were last billed to the end of the month. At December 31, 2014 and 2013, unbilled revenues were$69.1 million and $73.6 million, respectively. Purchased Power Expenses. A portion of SMUD's power needs are provided through power purchase agreements. Expenses from such agreements, along with associated transmission costs paid to other utilities, are charged toPurchased Power expense on the Consolidated Statements of Revenues, Expenses and Changes in Net Position inthe period the power is received. The costs, or credits, associated with energy swap agreements (gas and electricity) or other arrangements that affect the net cost of Purchased Power are recognized in the period in which theunderlying power delivery occurs. Contract termination payments and adjustments to prior billings are included inPurchased 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 payment. Such costs are generally recorded as an asset and amortized over the length of the contract. Credit and Market Risk. SMUD enters into forward purchase and sales commitments for physical delivery of gasand electricity with utilities and power marketers. SMUD is exposed to credit risk related to nonperformance by itswholesale 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 anacceptable risk level, and the use of standardized agreements that allow for the netting of positive and negativeexposures associated with a single counterparty.

SMUD is also subject to similar requirements for many of its gasand power purchase agreements. SMUJD uses a combination of cash, securities and a letter of credit facility tosatisfy its collateral requirements to counterparties. SMUD had a $50 million letter of credit facility to supportcollateral requirements under SMUD's various energy and natural gas purchase, sale and swap agreements, with$50 million available at December 31, 2013. The letter of credit facility expired on January 17, 2014, and was notrenewed. At December 31, 2014 and 2013, SMUD held $0.2 million on deposit by counterparties. The amount isrecorded as unrestricted cash with an associated current liability. At December 31, 2014 and 2013, SMUD postedcash collateral of $4.0 million and $0.0 million, respectively, with counterparties. Accounts Receivable and Allowance for Doubtful Accounts. Accounts Receivable is recorded at the invoicedamount and does not bear interest, except for accounts related to energy efficiency loans. SMUD recognizes anestimate of uncollectible accounts for its receivables related to electric

service, energy efficiency loans, and othernon-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 issuesfor each account.

SMUD records bad debts for its estimated uncollectible accounts related to electric service as areduction to the related operating revenues in the Consolidated Statements of Revenues, Expenses and Changes inNet Position. SMUD records bad debts for its estimated uncollectible accounts related to energy efficiency loansand other non-electric billings in Administrative, General and Customer expense in the Consolidated Statements ofRevenues, Expenses and Changes in Net Position. 44 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The summarized activity of the changes in the allowance for doubtful accounts during 2014 and 2013 ispresented below:Balance at Write-offs Balance atbeginning of and end ofYear Additions (Recoveries) Year(thousands of doll[]=)Other Non-Electric: December 31, 2014 $ 2,346 $ 623 $ 976 $ 1,993December 31, 2013 $ 1,239 $ 1,374 $ 267 $ 2,346Retail Customers: December 31, 2014 $ 4,194 $ 4,887 $ 6,064 $ 3,017December 31, 2013 $ 3,310 $ 7,530 $ 6,646 $ 4,194Energy Efficiency Loans:December 31, 2014 $ 2,104 $ (982) $ (205) $ 1,327December 31, 2013 $ 2,362 $ (358) $ (100) $ 2,104Regulatory Deferrals. The Board has the authority to establish the level of rates charged for all SMUD services. As a regulated entity, SMUD's financial statements are prepared in accordance with GASB No. 62, Regulated Operations, which requires that the effects of the rate-making 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 andcredits to reflect rate-making actions of the Board (See Note 8).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 rightsto the benefits. SMUD does not record sick leave as a liability until it is taken by the employee, since there are nocash payments for sick leave made when employees terminate or retire. At December 31, 2014 and 2013, the totalestimated liability for vacation and other compensated absences was $23.0 million and $21.9 million, respectively. Public Good. Public Good expenses consist of non-capital expenditures for energy efficiency

programs, low incomesubsidies, renewable energy resources and technologies, and research and development.

Gains/Losses on Bond Refundings. Gains and losses resulting from bond refundings are included as acomponent of Deferred Inflows of Resources or Deferred Outflows of Resources on the Consolidated Statements of Net Position and amortized as a component of Interest on Debt in the Consolidated Statements of Revenues, Expenses and Changes in Net Position over the shorter of the life of the refunded debt or the new debt using theeffective interest method.Gains/Losses on Bond Defeasances or Extinguishments. Gains and losses resulting from bond defeasances orextinguishments that were not financed with the issuance of new debt are included as a component of Interest onDebt in the Consolidated Statements of Revenues, Expenses and Changes in Net Position. SMUD ANNUAL REPORT 2014 45 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Allowance for Funds Used During Construction (AFUDC). SMUD capitalizes, as an additional cost ofConstruction Work In Progress (CWIP), AFUDC, which represents the cost of borrowed funds used for suchpurposes. The amount capitalized is determined by a formula prescribed by FERC. The AFUDC rate for 2014and 2013 was 3.3 percent and 3.5 percent, of eligible CWIP, respectively. Derivative Financial Instruments. SMUD records derivative financial instruments (interest rate swap and gasprice swap agreements, certain wholesale sales agreements, certain power purchase agreements and optionagreements) at fair value on its Consolidated Statements of Net Position. SMUD does not enter into agreements for speculative purposes. Fair market value is estimated by comparing contract prices to forward market pricesquoted by third party market participants and/or provided in relevant industry publications. SMUD is exposed torisk of nonperformance if the counterparties default or if the swap agreements are terminated. SMUD reportsderivative financial instruments with remaining maturities of one year or less and the portion of long-term contracts with scheduled transactions over the next twelve months as current on the Consolidated Statements ofNet Position (see Note 9).Interest Rate Swap Agreements. SMUD enters into interest rate swap agreements to modify the effective interestrates on outstanding debt (see Notes 9 and 10).Gas and Electricity Price Swap and Option Agreements. SMUD uses forward contracts to hedge the impact ofmarket volatility on gas commodity prices for its gas-fueled power plants and for energy prices on purchased powerfor SMUD's retail load (see Note 9).Solano Wind Sale. SMUD entered into an agreement to sell the Solano Wind Phase 3 plant in December 2011 witha corresponding Power Purchase Agreement for all the output of the plant. In April 2012, under the terms of theConstruction Management Agreement, SMUD, on behalf of the purchaser, completed construction of the plant,with the revenue recognition from the transaction, which was accounted for as a financing agreement, to occur overthe life of the contracts. Pursuant to the Facility Administration Agreement, SMUD will perform services at thefacility under the direction and for the benefit of the purchaser. Pursuant to the ground and property lease, SMUDis leasing the site to the purchaser for a term of twenty years with an option to extend for five additional years.The sale proceeds have been recorded as Deferred Inflows of Resources on the Consolidated Statements of NetPosition and will be amortized as Purchased Power Expense on the Consolidated Statement of Revenues,

Expenses, and Changes in Net Position over the life of the agreement.

Sale proceeds in the amount of $63.1 million werereceived in 2013. The prepayment for purchased power over the life of the contract has been recorded as PrepaidPower and Capacity on the Consolidated Statements of Net Position and will be amortized as Purchased PowerExpense on the Consolidated Statement of Revenues,

Expenses, and Changes in Net Position over the life of theagreement (see Note 16 for language about the Power Purchase Agreement).

Precipitation Hedge Agreements. SMUD enters into non-exchange traded precipitation hedge agreements to hedgethe cost of replacement power caused by low precipitation years (Precipitation Agreements). SMUD records theintrinsic value of the Precipitation Agreements on the Consolidated Statements of Net Position. Settlement of thePrecipitation Agreements is not performed until the end of the period covered (water year ended September 30). Theintrinsic 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.46 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District 1 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Insurance Programs.

SMUD records liabilities for unpaid claims at their present value when they are probable inoccurrence 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 bySMUD'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 15).Pollution Remediation. In December 2009, SMUD identified a pollution remediation obligation at its North CitySubstation. This substation was built on a former landfill, and the site requires remediation. SMUD recorded apollution remediation liability of $12.0 million.Hydro License. SMUD owns and operates the Upper American River Hydroelectric Project (UARP). The originallicense to construct and operate the UARP was issued in 1957 by FERC and expired in 2007. Since then, SMUDhad been operating under an extension of the original license. In 2014, SMUD received the new hydro license for aterm of 50 years, effective July 1, 2014. 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 thelicense.

SMUD recorded a liability for the present value of the sum of the annual payments in the amount of $56.1million at December 31, 2014 (see Note 16).Assembly Bill 32. California Assembly Bill 32 (AB-32) is an effort by the State of California to set a 2020greenhouse gas emissions reduction goal into law. The goal is to reach a statewide emission limit of 427 millionmetric tons of carbon dioxide equivalent of greenhouse gases (GHG). Central to this initiative is the implementation of a cap and trade program, which covers major sources of GHG emissions in the State including power plants. Thecap and trade program includes an enforceable emissions cap that will decline over time. The State will distribute allowances, which are tradable

permits, equal to the emissions allowed under the cap. Sources under the cap willneed to surrender allowances and offsets equal to their emissions at the end of each compliance period. SMUD issubject to AB-32. SMUD participated in the program auctions in 2013 and 2014. SMUD expects its free allocation of allowances from the Air Resources Board will cover its compliance costs associated with electricity delivered toits retail customers.

SMUD expects to recover compliance costs associated with wholesale power sales costs throughits wholesale power sales revenues. SMUD is monitoring legislation and proposed programs that would impactAB-32 (see Note 8).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 andoutflows of resources that are attributable to the acquisition, construction or improvement of those assets orrelated debt are also included. " Restricted -This component of net position consists of assets with constraints placed on their use, eitherexternally or internally. Constraints include those imposed by debt indentures (excluding amounts considered innet capital, above), grants or laws and regulations of other governments, or by law through constitutional provisions or enabling legislation or by the Board. These restricted assets are reduced by liabilities and deferredinflows 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 incapital assets" or "Restricted." SMUD ANNUAL REPORT 2014 47 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Contributions in Aid of Construction (CIAC). SMUD records CIAC from customer contributions, primarily relating to expansions to SMUD's distribution facilities, as Other Income -Net in the Consolidated Statements ofRevenues, Expenses and Changes in Net Position. Contributions of capital are valued at estimated market cost.For rate-making

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

Revenues and Expenses. SMUD distinguishes operating revenues and expenses from 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 of SMUJD are charges to customers for sales and services. Operating expenses include the cost of sales and services, administrative

expenses, anddepreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses.

Grants. SMUD receives grant proceeds from federal and state assisted programs for its advanced and renewable technologies, electric

vehicle, and energy efficiency programs.

SMUD also periodically receives grant proceedsfrom federal or state assistance programs as partial reimbursements for costs it has incurred as a result of stormdamages. Additionally, SMUD received several large American Recovery and Reinvestment Act (ARRA) grants in2009. When applicable, these programs may be subject to financial and compliance audits pursuant to regulatory requirements. SMUD considers the possibility of any material disallowances to be remote. During 2014, SMUDrecorded $3.2 million of grant proceeds and recognized $4.8 million as a component of Revenue -Grants, in theConsolidated Statements of Revenues, Expenses and Changes in Net Position, $1.6 million as a Regulatory Credit(see Note 8), and a $3.2 million decrease in unearned revenue as a component of Customer Deposits and Other onthe Consolidated Statements of Net Position. During 2013, SMUD recorded $5.0 million of grant proceeds andrecognized $16.3 million as Revenue -Grants, in the Consolidated Statements of Revenues, Expenses and Changesin Net Position, $6.4 million as a Regulatory Credit (see Note 8), and a $17.7 million decrease in unearned revenueas a component of Customer Deposits and Other on the Consolidated Statements of Net Position. In 2010, SMUD issued taxable Build America Bonds. SMUD receives an interest subsidy from the federalgovernment equal to 35 percent of the interest paid (see Note 10). SMUD received a reduced subsidy paymentin November 2014 and 2013 due to budget sequestration by the federal government. In 2014 and 2013, SMUDrecognized $9.1 million and $9.5 million, respectively, in revenues for its Build America Bonds, as a component of Other Income -Net, in the Consolidated Statements of Revenues, Expenses and Changes in Net Position. Customer Sales and Excise Taxes. SMUD is required by various governmental authorities, including states andmunicipalities, to collect and remit taxes on certain customer sales. Such taxes are presented on a net basis andexcluded from revenues and expenses in the Consolidated Statements of Revenues, Expenses and Changes inNet Position. 48 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Rancho Seco Settlement. In June 1983, SMUD and the U.S. Department of Energy (DOE) entered into a contractwhereby the DOE would build a repository for the acceptance and disposal of SMUD's spent nuclear fuel (SNF)and/or high-level radioactive waste (HLW). SMUD paid the DOE a total of approximately $40.0 million in feesunder the contract, thus satisfying its obligation of performance under the contract. DOE did not build a repository and therefore breached its obligation under the contract to commence acceptance of SNF and HLW by January 3 1,1998. As a result, SMUD incurred costs to design, license, and fabricate its own on-site storage facility for the longterm dry storage of its spent fuel at Rancho Seco. SMUD filed a suit against the DOE in 1998 which covered costsincurred from 1992 to 2003. In September 2014, SMUD received a $53.1 million settlement which was recorded asOther Income -Net in the Consolidated Statements of Revenues, Expenses and Changes in Net Position. Subsequent events. Subsequent events for SMUD have been evaluated through February 20, 2015, which is thedate that the financial statements were available to be issued.Reclassifications. Certain amounts in the 2013 Consolidated Financial Statements have been reclassified in orderto conform to the 2014 presentation. Recent Accounting Pronouncements. In June 2012, GASB issued Statement of Governmental Accounting Standards (SGAS) No. 68 "Accounting and Financial Reporting for Pensions -An Amendment of GASBStatement No. 27" (GASB No. 68). The primary objective of GASB No. 68 is to improve accounting andfinancial reporting by state and local governments for pensions. This statement establishes standards formeasuring and recognizing liabilities, deferred outflows and deferred inflows of resources, and expenses. Fordefined benefit pensions, this statement identifies the methods and assumptions that should be used to projectbenefit payments, discount projected benefit payments to their actuarial present value, and attribute that presentvalue to periods of employee service. Note disclosure and required supplementary information requirements about pensions also are addressed. This statement is effective for SMUD for 2015. SMUD is currently assessing the financial statement impact of adopting this statement. In January 2013, GASB issued SGAS No. 69, "Government Combinations and Disposals of Government Operations" (GASB No. 69). GASB No. 69 establishes accounting and financial reporting standards related togovernment combinations and disposals of government operations. As used in this statement, the term government combinations includes a variety of transactions referred to as mergers, acquisitions, and transfers of operations. This statement is effective for SMUD in 2014. SMUD has assessed the financial statement impact of adopting thisstatement, and since SMUD is not involved in any government combinations or disposals of operations thisstatement currently has no impact on SMUD.In November 2013, GASB issued SGAS No. 7 1, "Pension Transition for Contributions Made Subsequent to theMeasurement Date, an amendment of GASB Statement No. 68" (GASB No. 71). GASB No. 71 addresses anissue regarding application of the transition provisions of GASB No. 68. The issue relates to amounts associated with contributions, if any, made by a state or local government employer or nonemployer contributing entity to adefined benefit pension plan after the measurement date of the government's beginning net pension liability. GASBNo. 71 amends paragraph 137 of GASB No. 68 to require that, at transition, a government recognize a beginning deferred outflow of resources for its pension contributions, if any, made subsequent to the measurement date of thebeginning net pension liability. This statement is effective for SMUD in 2015, to be applied simultaneously with theprovisions of GASB No. 68. SMUD is currently assessing the financial statement impact of adopting this statement. SMUD ANNUAL REPORT 2014 49 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. ACCOUNTING CHANGEIn April 2013, GASB issued SGAS No. 70, "Accounting and Financial Reporting for Nonexchange Financial Guarantees" (GASB No. 70). The objective of GASB No. 70 is to improve accounting and financial reporting bystate and local governments that extend and receive nonexchange financial guarantees. GASB No. 70 requires agovernment that extends a nonexchange financial guarantee to recognize a liability when qualitative factors andhistorical data, if any, indicate that it is more likely than not that the government will be required to make apayment on the guarantee. This statement requires a government that has issued an obligation guaranteed in anonexchange transaction to report the obligation until legally released as an obligor. This statement specifies theinformation required to be disclosed by governments that extend nonexchange financial guarantees. In addition, GASB No. 70 requires new information to be disclosed by governments that receive nonexchange financial guarantees. This statement is effective for SMUD in 2014. SMUD extends financial guarantees to two component units, CVFA and SCA, and has included the required note disclosures to the Component Unit Bonds disclosure inNote 10.NOTE 4. UTILITY PLANTThe summarized activity of SMUD's utility plant during 2014 is presented below:Balance Transfers BalanceDecember 31, and December 31,2013 Additions Disposals Reclassifications 2014(thousands of doll[[=)Nondepreciable Utility Plant:Land $ 118,532 $ 9,382 $ $ $ 127,914CWIP 135,385 197,090 (220,881) 111,594Total nondepreciable utility plant 253,917 206,472 (220,881) 239,508Depreciable Utility Plant:Generation 1,654,315 5,079 (26,414) 1,632,980 Transmission 290,431 2,907 (418) 292,920Distribution 1,943,217 71,192 (6,490) 44,335 2,052,254 Investment in gas properties 206,158 40 206,198Investment in JPAs 14,841 (676) 14,165Intangibles 237,314 109,101 (147) 346,268General 888,904 24,960 (11,550) 902,3145,235.180 213,279 (45,695) 44,335 5,447,099 Less: accumulated depreciation and depletion (2,161,032) (195,939) 52,065 (44,335) (2,349,241) Less: accumulated amortization on JPAs (5,088) (313) (5,401)(2,166,120) (196,252) 52,065 (44,335) (2,354,642) Total depreciable plant 3,069,060 17,027 6,370 3,092,457 Total Utility Plant-net $ 3,322,977 $ 223,499 $ (214,511) $ $ 3,331,965 50 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The summarized activity of SMUD's utility plant during 2013 is presented below:Balance Transfers BalanceDecember 31, and December 31,2012 Additions Disposals 2013(thousands of dollars)Nondepreciable Utility Plant:Land $ 117,051 $ 1,549 $ (68) $ 118,532CWIP 334,488 168,869 (367,972) 135,385Total nondepreciable utility plant 451,539 170,418 (368,040) 253,917Depreciable Utility Plant:Generation 1,629,761 28,390 (3,836) 1,654,315 Transmission 287,990 2,023 418 290,431Distribution 1,839,348 104,619 (750) 1,943,217 Investment in gas properties 204,951 1,207 206,158Investment in JPAs 13,100 1,741 14,841Intangibles 210,519 26,795 237,314General 703,488 203,995 (18,579) 888,9044,889,157 368,770 (22,747) 5,235,180 Less: accumulated depreciation and depletion (1,996,213) (194,184) 29,365 (2,161,032) Less: accumulated amortization on JPAs (4,774) (314) (5,088)(2,000,987) (194,498) 29,365 (2,166,120) Total depreciable plant 2,888,170 174,272 6,618 3,069,060 Total Utility Plant- net $3,339,709 $ 344,690 $ (361,422) $3,322,977 NOTE 5. INVESTMENT IN JOINT POWERS AGENCYTANC. SMUD and fourteen other California municipal utilities are members of TANC, a JPA. TANC, alongwith 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 payapproximately 39.0 percent of TANC's COTP debt service and operations costs in exchange for entitlement toapproximately 536 megawatts (MW) of TANC's 1,390 MW transfer capability. Additionally, SMUD has a 48 MWshare of TANC's 300 MW firm, bi-directional transmission over Pacific Gas and Electric's (PG&E) system betweenPG&E's Tesla and Midway substations (SOT). The total entitlement shares for the COTP and SOT described aboveinclude the long-term agreements listed below.In December 2009, SMUD entered into a long-term reallocation agreement with TANC and the City of Santa Clara.Effective January 2010 through July 1, 2013, SMUD had an additional 30 MW entitlement share of the SOT. Thisagreement expired July 1, 2013.SMUD ANNUAL REPORT 2014 51 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS In 2009, SMUD entered into a 15-year long-term layoff agreement with TANC and certain members, expiringJanuary 31, 2024. This agreement provides for the assignment of all rights and obligations of City of Palo Alto andCity of Roseville related to their COTP and SOT entitlements. This agreement increased SMUD's COTP entitlement by 36 MW and SOT entitlement by 2MW Effective July 1, 2014, an amendment provides for the return to City ofRoseville of all rights and obligations related to the COTP entitlements, which decreased SMUD's COTP entitlement by 13 MW.In 2014, SMUD entered into a 25-year long-term layoff agreement with TANC and certain members effective July 1,2014. This agreement provides for the assignment of all rights and obligations of Northern California Power Agencyand partial rights and 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 of TANC, which totals $314.2 million (unaudited) at December 31, 2014, is collateralized bya pledge and assignment of net revenues of TANC supported by take or pay commitments of SMUD and othermembers. Should other members default on their obligations to TANC, SMUD would be required to make additional payments to cover a portion of such defaulted

payments, up to 25 percent of its current obligation.

Copies of the TANC annual financial reports may be obtained from SMUD at 6201 S Street, P.O. Box 15830,Sacramento, California 95852.SMUD recorded transmission expenses related to TANC of $20.6 million and $18.9 million in 2014 and 2013,respectively. Summary financial information for TANC is presented below:December 31,2014 2013(Unaudited) (Unaudited) (thousands of doll[=)Total Assets $ 399,873 $ 415.468Total Deferred Outflows of Resources 3,987 4,769Total Assets and Deferred Outflows of Resources $ 403,860 $ 420,237Total Liabilities $ 390,574 $ 403,513Total Deferred Inflows of Resources 226 609Total Net Position 13,060 16,115Total Liabilities, Inflows of Resources and Net Position $ 403,860 $ 420,237Changes in Net Position for the Six Months Ended December 31 $ 2 $ 2BANC. SMUD, City of Redding, City of Roseville, Modesto Irrigation District and Trinity Public Utilities Districtare members of BANC, a JPA formed in 2009. In 2011, operational control of Balancing Authority (BA) operations was transferred from SMUD to BANC. BANC performs FERC approved BA reliability functions that are managedby North American Electric Reliability Corporation (NERC), nationally, and by Western Electricity Coordinating Council functions in the west.Copies of the BANC annual financial reports may be obtained from SMUD at 6201 S Street, P.O. Box 15830,Sacramento, California 95852.SMUD recorded expenses related to BANC of $0.8 million in 2014 and $0.7 million in 2013.52 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary financial information for BANC is presented below:December 31,2014 2013(Unaudited) (Audited) (thoosands of dolhlrs)Total Assets 543 $ 392Total Liabilities $ 543 $ 392Total Net Position -0-Total Liabilities and Net Position $ 543 $ 392Changes in Net Position for the Year Ended December 31 $ $ NOTE 6. COMPONENT UNITSCVFA Carson Cogeneration Project. CVFA is a JPA formed by SMUD and the Sacramento Regional CountySanitation District. CVFA operates the Carson Project, a 65 MW (net) natural gas-fired cogeneration facility and a43 MW (net) natural gas-fired simple cycle peaking plant. The revenue stream to pay the CVFA bonds' debt serviceis provided by a take or pay purchase power agreement between SMUD and CVFA.SCA Procter & Gamble Cogeneration Project. SCA is a JPA formed by SMUD and the SFA. SCA operatesthe Procter & Gamble Project, a 136 MW (net) natural gas-fired cogeneration facility and a 50 MW (net) naturalgas-fired simple cycle peaking plant. The revenue stream to pay the SCA bonds' debt service is provided by a takeor pay purchase power agreement between SMUD and SCA.SFA Cosumnes Power Plant Project. SFA is a JPA formed by SMUD and the Modesto Irrigation District. SFAoperates the Cosumnes Power Plant Project, a 501 MW (net) natural gas-fired, combined cycle facility. The revenuestream to pay the SFA bonds' debt service is provided by a take and pay power purchase agreement between SMUDand SFA.SPA Campbell Soup Cogeneration Project. SPA is a JPA formed by SMUD and the SFA. SPA operates theCampbell Soup Project, a 160 MW (net) natural gas-fired cogeneration

facility, and the McClellan

Project, a72 MW (net) natural gas-fired simple cycle peaking plant. The revenue stream to pay the SPA bonds' debt serviceis provided by a take and pay power purchase agreement between SMUD and SPA.NCGA. NCGA is a JPA formed by SMUD and the SFA. NCGA has a prepaid gas contract with Morgan StanleyCapital Group (MSCG) expiring in 2027, which is financed primarily by NCGA revenue bonds. SMUD hascontracted with NCGA to purchase all of the gas delivered by MSCG to NCGA, based on market prices. NCGA isobligated to pay the principal and interest on the bonds. Neither SMUD nor SFA is obligated to make debt servicepayments on the bonds. NCGA can terminate the prepaid gas contract under certain circumstances, including afailure 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.As described in Note 2, all of the activities and balances of the component units are blended into and reported aspart of SMUJD because of the extent of their operational and financial relationships with SMUD. Copies of CVFA's,SCA's, SFA's, SPA's and NCGA's annual financial reports may be obtained from their Executive Office at 6201 SStreet, P.O. Box 15830, Sacramento, California 95852 or online at SMUD.org.

SMUD ANNUAL REPORT 2014 53 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The summarized activity of SMUD's component units for 2014 is presented below:CONDENSED STATEMENTS OF NET POSITIONDecember 31, 2014(thousands of dollars)CVFASCASFASPANCGAAssetsElectric Utility Plant -NetRestricted and Designated AssetsCurrent AssetsNoncurrent AssetsTotal AssetsDeferred Outflows of Resources Total Assets and Deferred Outflows ofResources Liabilities Long-term Debt -NetCurrent Liabilities Noncurrent Liabilities Total Liabilities Net PositionTotal Liabilities and Net PositionCONDENSED STATEMENTS OF$ 57,861-0-14,66015872,6791,095$ 84,537-0-23,422218108,1771,430$ 253,20469,88749,4633,468376,022-0-$ 77,54411,81054,081797144.2321,597$ 40-0-43,479316,997360,476-0-$ 73,774 $ 109,607 $ 376,022 $ 145,829 $ 360,476$ 25,56310,1678,46044,19029,584$ 73,774$ 36,88514,663-0-51,54858,059$ 109,607$ 228,92842,791-0-271,719104,303$ 376,022$ 35,15148,987-0-84,13861.691$ 145,829$ 318,79527.297-0-346,09214,384$ 360,476REVENUES,

EXPENSES, AND CHANGES IN NET POSITIONDecember 31, 2014(thousands of dollars)CVFASCASFASPANCGAOperating RevenuesOperating ExpensesOperating IncomeNon-Operating Revenues and ExpensesOther RevenuesInterest Charges and OtherChange in Net Position Before Distributions and Contributions Distribution to MemberMember Contributions and Adjustments Change in Net PositionNet Position

-Beginning of YearNet Position -End of Year$ 32,98332,0359481(1,593)(644)-0--0-(644)30,228$ 29.584$ 59,37853,8375,5411(2,082)3,460(2,000)-0-1,46056,599$ 58,059$ 231,388206,42924,959151(10,895)14,215(4,500)-0-9,71594,588$ 104,303$ 54,64552,6491,99645(3,744)(1,703)-0-29,90528,20233,489$ 61,691$ 37,91222,92714,985621(14,901)705(671)8211614,268$ 14,38454 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED STATEMENTS OF CASH FLOWSDecember 31, 2014(thousands of dollars)CVFASCASFASPA NCGANet Cash Provided by Operating Activities Net Cash Used by Noncapital Financing Activities Net Cash Used by Capital Financing Activities Net Cash Provided by Investing Activities Net Increase (Decrease) in Cash andCash Equivalents Cash and Cash Equivalents at theBeginning of the YearCash and Cash Equivalents at theEnd of the Year$ 6,510 $ 11,557 $ 44,003$ 8,581 $ 37,891 (38,180) (2,000)(4,500)(5,894)(7,676) (23,206) (11,469)-0-1 2 2826171,88316,5791,098 621(1,790) 33213,806 14,710$ 12,016 $ 15,0424,755 6,738 53,301$ 5,372 $ 8,621 $ 69,880The summarized activity of SMUD's component units for 2013 is presented below:CONDENSED STATEMENTS OF NET POSITIONDecember 31, 2013(thousands of dollars)CVFASCASFASPA NCGAAssetsElectric Utility Plant -NetRestricted and Designated AssetsCurrent AssetsNoncurrent AssetsTotal AssetsDeferred Outflows of Resources Total Assets and Deferred Outflows ofResources Liabilities Long-term Debt -NetCurrent Liabilities Noncurrent Liabilities Total Liabilities Net PositionTotal Liabilities and Net Position63.014 $ 90,446 -0-143788 22,058193 25877,995 112.7621,463 1,832$ 79,458 $ 114,594$ 30,156 $ 42,22911,184 15,7667,890 49,230 57,99530,228 56,599$ 79,458 $ 114,594$ 269,11756,38352,7553,708381,963-0-$ 83,83214,65225,371920124,7751,988$ -0-40,958342,009382,967-0-$ 381,963 $ 126,763 $ 382,967$ 239,65247,723-0-287,37594,588$ 381,963$ 72,95620,318-0-93,27433,489$ 126,763$ 342,48026,219-0-368,69914,268$ 382,967SMUD ANNUAL REPORT 2014 55 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED STATEMENTS OF REVENUES,

EXPENSES, AND CHANGES IN NET POSITIONDecember 31, 2013(thousands of dollars)CVFASCASFASPANCGAOperating RevenuesOperating ExpensesOperating IncomeNon-Operating Revenues and ExpensesOther RevenuesInterest Charges and OtherChange in Net Position Before Distributions and Contributions Distribution to MemberMember Contributions and Adjustments Change in Net PositionNet Position

-Beginning of YearNet Position -End of Year$ 40.26939,56670353(1,725)(969)(3,000)-0-(3,969)34,197$ 30,228$ 66,72562,3084,4175(2,296)2,126(7,500)-0-(5,374)61,973$ 56,599$ 242,511220,46022,051143(11,295)10,899(37,000)-0-(26,101)120.689$ 94,588$ 65,31058,1687,14226(4,024)3,144(2,000)-0-1,14432,345$ 33,489$ 37,91221,82616,086611(15,767)930(672)7533313,935$ 14,268CONDENSED STATEMENTS OF CASH FLOWSDecember 31, 2013(thousands of dollars)CVFASCASFASPANCGANet Cash Provided by Operating Activities Net Cash Used by Noncapital Financing Activities Net Cash Used by Capital Financing Activities Net Cash Provided (Used) by Investing Activities Net Increase (Decrease) in Cash and CashEquivalents Cash and Cash Equivalents at theBeginning of the YearCash and Cash Equivalents at theEnd of the Year$ 6,588 $ 10,819$ 38,273 $ 12,930 $ 37,950(1,825)(5,710)2(945)(7,500) (37,000)(2,000) (38,444)(7,033) (34,023) (11,308)6 20,258 (72)4610(3,708) (12,492)(450)1165,700 10,446$ 4,755 $ 6,73865,793 14,256 14,594$ 53,301 $ 13,806 $ 14,71056 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 unconditionally guaranteed by the United States (U.S.) Government or its agencies or instrumentalities; direct and general obligations of the State or any local agency within the State; bankers' acceptances; commercial paper; certificates of deposit;repurchase agreements; corporate notes; and taxable government and tax-exempt money market portfolios. SMUD'sinvestment policy includes restrictions for investments relating to maximum amounts invested as a percentage oftotal portfolio and with a single issuer, maximum maturities, and minimum credit ratings.Credit Risk. To mitigate the risk that an issuer of an investment will not fulfill its obligation to the holder of theinvestment, SMUD limits investments to those rated, at a minimum, "A-I" or equivalent for commercial paper and"A" or equivalent for medium-term corporate notes by a nationally recognized rating agency.Custodial Credit Risk. This is the risk that, in the event of the failure of a depository financial institution orcounterparty to a transaction, SMUD's deposits may not be returned or SMUD will not be able to recover the valueof its deposits, investments or collateral securities that are in the possession of another party. SMUD does not havea deposit policy for custodial credit risk.As of December 31, 2014 and 2013, $9.7 million and $7.3 million in deposits were uninsured, respectively. The bankbalance is also, per a depository pledge agreement between SMUD and SMUD's bank, collateralized at 132 percentand 124 percent of the collective funds on deposit (increased by the amount of accrued but uncredited

interest, reduced by deposits covered by FDIC) at December 31, 2014 and 2013, respectively.

At December 31, 2014 and2013, SMUD had money market deposit accounts and mutual funds of $161.4 million and $101.3 million whichwere uninsured, respectively. SMUD's investments and money market mutual funds are held in SMUD's name.Concentration of Credit Risk. This is the risk of loss attributed to the magnitude of an entity's investment in asingle issuer. SMUD places no limit on the amounts invested in any one issuer for repurchase agreements andfederal agency securities. The following are the concentrations of risk greater than five percent in either year:December 31,2014 2013Investment Type:Federal National Mortgage Association (Fannie Mae) 6% 13%Federal Home Loan Banks 18% 12%Freddie Mac 16% 10%Federal Farm Credit Bank 5% 9%Corporate Note -Bank of New York 5% 2%Corporate Note -Wells Fargo & Company 6% 3%Interest Rate Risk. This is the risk of loss due to the fair value of an investment falling due to interest rates rising.Though SMUD has restrictions as to the maturities of some of the investments, it does not have a formal policythat limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates.The following schedules indicate the credit and interest rate risk at December 31, 2014 and 2013. The credit ratingslisted are from Standard & Poors (S&P). (N/A is defined as not applicable to the rating disclosure requirements). SMUD ANNUAL REPORT 2014 57 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2014, SMUD's cash, cash equivalents, and investments consist of the following: Remaining Maturities (in years)Credit LessRating Than IMore Total FairDescription 1-5than 5Value(thousands of dollm)Cash and Cash Equivalents: CashLAIFMoney Market Mutual FundsMoney Market Deposit AccountDeposit at NoticeCommercial PaperTotal cash and cash equivalents Investments: Fannie MaeFederal Farm Credit BankFederal Home Loan BankFreddie MacUS TreasuryCorporate NotesMunicipal BondsCommercial PaperTotal investments Total cash, cash equivalents, and investments Not RatedNot RatedAAAm/N/AN/AN/AA-IAA+AA+AA+AA+N/AAA+/AA/A+/A/A-A+/AAA-I+$ 4,350150,745124,99036,3909,31911,267337,06120,24832,05747,89919,9683,055100,4762,50226,954253,159$ -0--0--0--0--0--0-19,9625,54575,84395,48413,14283,3251,501-0-294,802$ -0--0--0--0--0--0--0--0--0--0--0--0--0--0--0-$ 4,350150,745124,99036,3909,31911.267337,06140,21037,602123,742115,45216,197183,8014,00326,954547,961$ 590,220 $ 294,802 $ $ 885,022At December 31, 2013, SMUD's cash, cash equivalents, and investments consist of the following: Credit LRatinq ThaDescription Remaining Maturities (in years)ess Morean 1 1-5 than 5(thousands of dollars)Total FairValueCash and Cash Equivalents: CashLAIFMoney Market Mutual FundsMoney Market Deposit AccountDeposit at NoticeCommercial PaperTotal cash and cash equivalents Investments: Fannie MaeFederal Farm Credit BankFederal Home Loan BankFreddie MacUS TreasuryCorporate NotesMunicipal BondsCommercial PaperTotal investments Total cash, cash equivalents, and investments 58 SMUD ANNUAL REPORT 2014Not Rated $ 4,358Not Rated 270,749AAAm/N/A 94,317AAAm 6,990N/A 1,414A-i 10,712388,540AA+ 10,650AA+ 30.032AA+ 65,995AA+ 2,005N/A 25,059AA+/A+/A I/A/A- 52,714AI/SP-I+ 8.,067A-I 43,916238,438$ -0--0--0--0--0--0-85,60637.57727,81371,6583,10348,5882,508-0-276,853$ -0--0--0--0--0--0--0--0--0--0--0--0--0--0--0-$ 4,358270,74994,3176,9901,41410,712388,54096,25667,60993,80873,66328,162101,30210,57543,916515,291$ 903,831$ 626,978 $ 276,853 $ Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS SMUD's cash, cash equivalents, and investments are classified in the Consolidated Statements of Net Positionas follows:December 31,2014 2013(thousands of dollr)Total Cash, Cash Equivalents, and Investments: Revenue bond reserve and debt service funds:Revenue bond reserve fund $ 8,659 $ 9,844Debt service fund 67,551 69,815Component unit bond reserve and debt service funds 54,220 53,813Total revenue bond reserve and debt service funds 130,430 133,472Nuclear decommissioning trust fund 8,250 31,137Rate stabilization fund 45.306 81,474Component unit other restricted funds 65,198 54,519Other restricted funds 1,554 1,254Unrestricted funds 634,284 601,975Total cash, cash equivalents, and investments $ 885,022 $ 903,831NOTE 8. REGULATORY DEFERRALS The Board has taken various regulatory actions that result in differences between the recognition of revenues andexpenses for rate-making purposes and their treatment under generally accepted accounting principles for non-regulated entities. These actions result in regulatory assets and liabilities, which are summarized in the tables below.Changes to these balances, and their inclusion in rates, occur only at the direction of the Board.Regulatory Assets (Costs)Decommissioning. SMUD's regulatory asset relating to the unfunded portion of its decommissioning liability isbeing collected through interest earnings on the Trust Fund. Nuclear fuel storage costs and non-radiological decommissioning costs have been collected in rates since 2009.TANC Operations Costs. SMUD's regulatory asset relating to deferred TANC costs comprises the difference between its cash payments made to TANC and its share of TANC's accrual-based costs of operations. This regulatory asset is being collected in rates over the life of TANC's assets during the period that cash payments to TANC exceedTANC's accrual-based costs. In 2014, SMUD's cash payments to TANC exceeded TANC's accrual-based costs andhas recorded a regulatory credit.U.S. Bureau of Reclamation. In December 2004, SMUD established a regulatory asset to defer recognizing theexpense related to the U.S. Bureau of Reclamation (Bureau). This regulatory asset will be collected in rates overthe period SMUD is committed to making rate payments to the Bureau. In 2014, SMUD made its final paymentto the Bureau.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 costbasis, if any. Investment Derivative Instruments are reflected in rates at contract cost and as such, the balance ischarged or credited into rates as the related asset or liability is utilized (see Note 9).Senate Bill 1. SMUD implemented a per kilowatt hour solar surcharge, effective January 1, 2008 in order to fundinvestments in solar required by Senate Bill I (SB-I). The difference between the surcharge revenues received andthe funds spent on solar initiatives will be recognized or deferred into future years. SMUD has spent more than ithas collected in SB-I revenues and has recorded a regulatory asset.SMUD ANNUAL REPORT 2014 59 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Debt Issuance Costs. SMIUD established a regulatory asset for costs incurred in connection with the issuance ofdebt obligations, principally underwriter fees and legal costs. The regulatory asset will be collected in rates overthe life of the bonds. Debt issuance costs after December 31, 2013 are expensed. SMUD's total regulatory costs for future recovery are presented below:December 31,2014 2013(thousands of dollars)Regulatory Costs for Future Recovery: Decommissioning $ 149,337 $ 142,485TANC operations costs 841U.S. Bureau of Reclamation 391Derivative financial instruments 32,144 24,326Senate Bill 1 7,398 7,729Debt Issuance Costs 14,752 16,466Total regulatory costs 203,631 192.238Less: regulatory costs to be recovered within one year (20,838) (17,668)Total regulatory costs for future recovery -net $ 182,793 $ 174,570Regulatory CreditsCIAC. In 2014 and 2013 SMUD added CIAC totaling $20.2 million and $10.6 million, respectively, to Regulatory Credits in the Consolidated Statements of Net Position and recorded $10.4 million and $10.0 million of amortization, respectively, to Other Income -Net in the Consolidated Statements of Revenues, Expenses and Changes in NetPosition. SMUD's regulatory credit relating to CIAC is intended to offset the revenue and expense associated withthis accounting treatment. Thus, this regulatory credit is being amortized into rates over the depreciable lives of therelated 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 futurerate increases when costs exceed existing rates. At the direction of the Board, amounts may be either transferred into this fund (which reduces revenues), or amounts are transferred out of this fund (which increases revenues). The Board authorizes Rate Stabilization Fund (RSF) transfers on an event driven basis. In 2014, $11.8 million wastransferred from the RSF to revenue as a result of lower than budgeted energy deliveries from Western Area PowerAdministration (Western). Hydro Rate Stabilization. The Hydro Rate Stabilization Fund (HRSF) was established through the HydroGeneration 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 ordeposits to the HRSF. The maximum balance of the HRSF is 5 percent of the budgeted retail revenue and themaximum annual transfer in or out of the HRSF is 4 percent of budgeted retail revenue. If the HRSF is depletedSMUD will apply a hydro rate surcharge to customers' bills up to 4 percent. When the HRSF is fully replenished, a wet year can trigger a hydro rebate or credit on the customers' bills. In 2014, $24.3 million was transferred fromthe HRSF to revenue as a result of below average precipitation. No additional rate adjustments were necessary. Assembly Bill 32. SN4UD participated in the carbon allowance auctions under AB-32, the Global WarmingSolutions Act (see Note 2). In 2012, the Board authorized the deferral of AB-32 auction proceeds to match therevenue recognition with the related expenses. The difference between the auction proceeds received and thefunds spent on AB-32 programs will be deferred into future years. SMUD has spent less than it has collected inAB-32 revenues and has recorded a regulatory credit.60 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Grant Revenues. In 2009, SMUD was awarded several large grants under the ARRA, which provided large amountsof reimbursements for capital expenditures. In 2010, the Board authorized the deferral of grant income for capitalexpenditures as regulatory liabilities. Thus, this regulatory credit will be deferred to match the depreciable lives ofthe related capital assets in order to offset the earnings effect of these non-exchange transactions. Precipitation Hedges. Settlements of Precipitation Agreements are included in rates in the year settled andaccordingly, the intrinsic value of open precipitation hedges is deferred as regulatory assets or liabilities. SMUD's total regulatory credits for future revenue recognition are presented below:December 31,2014 2013(I1housmds of do[[a=)Regulatory Credits:CIAC $ 241,427 $ 231,612Rate stabilization 42,251 54,070Hydro rate stabilization 3,055 27,404Assembly Bill 32 5,339 3,441Grant revenues 69,172 75,123TANC operations Costs 7,687 Precipitation hedge 11,547Total regulatory credits $ 368,931 $ 403,197NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS To help provide stable electric rates and to meet the forecasted power needs of its retail customers

reliably, SMUDenters into various physical and financial fixed price purchase contracts for electricity and natural gas. These fixedprice 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, or to enhance the relationship between the risk and return regarding SMUD's assets or debt obligations.

SMiUD utilizes these derivative financial instruments to mitigate its exposure to certain market risks associated with ongoing operations. SMUD hasestablished policies set by an executive committee for the use of derivative financial instruments for tradingpurposes. These contracts are evaluated pursuant to SGAS No. 53 "Accounting and Financial Reporting forDerivative 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 pricerisk exposures. SMUD applies hedge accounting for derivatives that are deemed effective hedges. Under hedge accounting, theincrease or (decrease) in the fair value of a hedge is reported as a Deferred Inflow or Deferred Outflow on theConsolidated Statements of Net Position. Derivatives that do not meet the effectiveness tests are deferred for rate-making purposes as regulatory assets or liabilities on the Consolidated Statements of Net Position (see Note 8).During 2014 and 2013, SMUD executed numerous new gas and power related purchase agreements, some of whichare recorded as hedging or investment derivatives and are therefore included in the following table. All hedging orinvestment derivatives are recorded at fair value on the Consolidated Statements of Net Position. For electricity and gas derivatives, fair values are estimated by comparing contract prices to forward market pricesquoted by an independent external pricing service. When external quoted market prices are not available forderivative contracts, SMUD uses an internally developed valuation model utilizing short term observable inputs.For interest rate derivatives, SMUD subscribes to a financial information service that it uses to verify fair valueestimates obtained from its counterparties. SMUD ANNUAL REPORT 2014 61 Sacramento Municipal Utility District 1 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of the fair values, changes in fair value and notional amounts of derivative instruments, grouped by trading strategy, outstanding at December 31, 2014 (amounts in thousands; gains shown as positiveamounts, losses as negative): 2014 Changes in Fair ValueFair Value at December 31, 2014CurrentAmountNoncurrent AmountCurrentAmountNoncurrent AmountCash Flow Hedges:(thousands of doll=rs)(Ihousands of Dokathcr-s (Dth))NotionalAsset: Investment Derivative Instruments Gas -Commodity $ (272)Gas -Storage (7)Gas -Transportation 39Total Investment Derivative Instruments $ (240)$ (147) $ $ ) -0- 39 ) $ (147) $ 39 $ 380 DthAsset: Hedging Derivative Instruments Gas -Basis $ 37Gas -Commodity (1,115)Gas -Storage 21Gas -Transportation 688Interest Rate (485)Total HedgingDerivative Instruments $ (854)$ (476)(176)-0-(826)1,477$ 560860421,0236,540$ 179-0--0-14925,3759,860 Dth893 Dth528 Dth10,955 Dth$131,030$ (I) $ 9,025 $ 25,703Liability: Investment Derivative Instruments Gas -Basis $Gas -Commodity (4Gas -StorageInterest Rate ITotal Investment Derivative Instruments $ (3(331) $ ,552) (3,914)2 ,649 (285)$ 3314,589-0-7,375$ 4,228-0-15,660300 Dth10,510 Dth$227,190.232) $ (4,199) $ 12,295 $ 19,888Liability: Hedging Derivative Instruments Gas -Basis $ (2,290)Gas -Commodity (33,552)Gas -Storage 376Gas -Transportation (49)Total HedgingDerivative Instruments $ (35,515)$ (14,162)-0--0-$ 2,29049,3701849$ 100.306-0--0-2.140 Dth101,268 Dth288 Dth3,270 Dth$ (14,162) $ 51,727 $ 100,30662 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of the fair values, changes in fair value and notional amounts of derivative instruments, grouped by trading strategy, outstanding at December 31, 2013 (amounts in thousands; gains shown as positiveamounts, losses as negative): 2013 Changes in Fair ValueCurrent Noncurrent Amount AmountFair Value at December 31, 2013Current Noncurrent Amount AmountCash Flow Hedges:(thousands of dollams)(thousands of DekMaterh s (Dth))Asset: Investment Derivative InstrumGas -Commodity Gas -StorageTotal Investment Derivative Instruments Notional$ 272 $ 112 $ 272(12) 7$ 147-0-3,235 Dth78 Dth260 $112 $ 279 $ 147Asset: Hedging Derivative Instrumeni Gas -BasisGas -Commodity Gas -StorageGas -Transportation Interest RateTotal HedgingDerivative Instruments Liability: Investment Derivative InstriGas -Commodity Gas -StorageGas -Transportation Interest RateTotal Investment Derivative Instruments Liability: Hedging Derivative InstrurrGas -BasisGas -Commodity Gas -StorageGas -Transportation Total HedgingDerivative Instruments $ 523 $ 655 $ 5231,975 (677) 1,975(514) 21335 975 33557 (12,349) 7,025$ 2,376 $ (11,396) $ 9,879iments$ 10.,994 $ 19 $ 374 27 -0-615 15,691 9,024$ 11,620 $ 15,710 $ 9,063ients$ 85 $ $ 65,367 (3,245) 15,818(384) 39488 -0-$ 65,156 $ (3,245) $ 16,212$ 655176-0-97523,898$ 25,704$ 314-0--0-15,375$ 15,689$ 86,144-0--0-$ 86,14410,950 Dth13,373 Dth148 Dth16,425 Dth$131,0302,938 Dth78 Dth$260,48089,698 Dth1,428 DthSMUD ANNUAL REPORT 2014 63 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Objectives and terms of hedging derivative instruments. The objectives and terms of SMUD's hedging derivative instruments that were outstanding at December 31, 2014 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. Detailsof SMUD's interest rate derivative instruments can be found in Note 10.Notional Beginning Ending Minimum MaximumAmount Dth Date Date Price/Dth Price/Dth Gas -Basis 12,300 01101/15 12/31/16 $ (0.82) $ 3.39Gas -Commodity 112,671 01/01/08 12/31/22 3.15 7.17Gas -Storage 816 01/01/15 03/31/15 .25 .40Gas -Transportation 14,605 01/01/15 12/31/16 (0.36) (0.13)The objectives and terms of SMUD's hedging derivative instruments that were outstanding at December 31, 2013are summarized in the table below. The table is aggregated by the trading strategy. Notional Beginning Ending Minimum MaximumAmount Dth Date Date Price/Dth Price/Dth Gas -Basis 10,950 01/01/14 12/31/15 $ (0.74) $ (0.62)Gas -Commodity 109,244 01/01/08 12/31/22 3.83 7.17Gas -Storage 1,732 01/01/14 03/31/14 .17 4.71Gas -Transportation 16,425 01/01/14 12/31/15 (0.36) (0.10)SMUD hedges its interest costs. The interest rate swaps are designed to synthetically fix the cash flows associated with variable rate bonds (see Note 10).SMUD hedges its power and natural gas costs so that it can offer predictable rates to its retail electric customers and support its credit rating. SMUD maintains a risk management program to control the price, credit, andoperational risks arising from its power and natural gas market activities. Under the program, authorized SMUDemployees assemble a portfolio of swaps, futures, and forward contracts over time with the goal of making SMUD'spurchased power and fuel budget more predictable. These hedged risks include those related to interest rate and commodity price fluctuations associated with certainforecasted transactions, including interest rate risk on long-term debt, and forward purchases of gas and electricity to meet load.Derivatives not designated as hedging instruments Gas and Electric Contracts. SMUD utilizes certain gas swap and electric swap agreements under GASB No. 53not designated as hedging derivative instruments to mitigate exposure to changes in the market price of natural gasand electricity. The fair value of each agreement, excluding the actual settlements to be paid or received as of theend of the period, is recorded in either Current or Noncurrent Assets, Investment Derivative Instruments on the64 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Net Position if in an asset position or Current or Noncurrent Liabilities, Investment Derivative Instruments on the Consolidated Statements of Net Position if in a liability position. An offsetting amountis included in Current or Noncurrent Regulatory Costs or Regulatory Credits for future recovery in the Consolidated Statements of Net Position. The actual settlement payable is recorded in Accounts Payable on the Consolidated Statements of Net Position, and the actual settlement receivable is recorded in Receivables -Net -Other on theConsolidated Statements of Net Position. The payments and receipts of the actual settlement are recorded asInvestment Expense in the Consolidated 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 changes in the fair value of variable rate debt resulting from fluctuations in interest rates. The fair value of each agreement, excluding the balance of interest to be paid orreceived as of the end of the period, is recorded in either Current or Noncurrent Assets, Investment Derivative Instruments on the Consolidated Statements of Net Position if in an asset position or Current or Noncurrent Liabilities, Investment Derivative Instruments on the Consolidated Statements of Net Position if in a liability position. An offsetting amount is included in Current or Noncurrent Regulatory Costs or Deferred Outflows orInflows of Resources in the Consolidated Statements of Net Position. The interest receivable is recorded inReceivables -Net -Other on the Consolidated Statements of Net Position, and the accrued interest is recorded inInterest Payable on the Consolidated Statements of Net Position. The payments or receipts of the actual settlement are recorded as Investment Expense in the Consolidated Statements of Revenues, Expenses and Changes in NetPosition. The Board has deferred recognition of the effects of reporting the fair value of Investment Derivative Instruments for rate-making

purposes, and maintains regulatory accounts to defer the accounting impact of these accounting adjustments (see Note 8). Market values may have changed significantly since December 31, 2014.Interest rate risk. Interest rate risk is the risk that changes in interest rates will adversely affect the fair values ofSMUD's interest rate swaps. SMUD is exposed to interest rate risk on its interest rate swaps.Basis risk. Basis risk is the risk that arises when a hedged item and a derivative that is attempting to hedge thatitem are based on different indices.

SMUD is exposed to basis risk when it hedges its natural gas purchases, whichare priced at various locations, with NYMEX futures contracts, which settle based on the price in Henry Hub,Louisiana. SMUD enters into basis swaps to hedge against this risk.Termination risk. Termination risk is the risk that a derivative will terminate prior to its scheduled maturity dueto a contractual event. Contractual events include bankruptcy, illegality,

default, credit events upon merger, andother events. One aspect of termination risk is that SMUD would lose the hedging benefit of a derivative thatbecomes subject to a termination event. Another aspect of termination risk is that, if at the time of termination the mark to market value of the derivative was a liability to SMUD, SMUD could be required to pay that amountto the counterparty.

Termination risk is associated with all of SMUD's derivatives up to the fair value amounts.SMUD ANNUAL REPORT 2014 65 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Credit Risk. Credit risk is the risk of loss resulting when the counterparty is unable or unwilling to fulfill itspresent and future financial obligations. SMUD can be exposed to significant counterparty credit risk on allderivative instruments. SMUD seeks to minimize credit risk by transacting with creditworthy counterparties. SMUD has established and maintained strict counterparty credit guidelines. SMUD continuously monitorscounterparty 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 of SMIUD's derivative master agreements contain credit contingent provisions that enable SMUD tomaintain unsecured credit as a result of positive investment quality credit ratings from each of the major creditrating agencies. If SMUD's debt were to be downgraded, there could be a step-down in SMUD's unsecured creditthresholds, and SMUD's counterparties would require additional collateral. If SMUD's debt were to decreasebelow investment grade, SMUD's unsecured credit thresholds would be reduced to zero, and counterparties to thederivative instruments would demand ongoing full collateralization on derivative instruments in net out of themoney positions (See Note 2).The counterparties' current credit rating at December 31, 2014 is shown in the table below. The credit ratings listedare from S&P or Moody's:Counterparty Counterparty Credit RatingGas Contracts: Barclays Bank PLC A-Bank of Montreal A+BNP Paribas Energy Trading GP. A+Citigroup Inc. Baa2Deutsche Bank AG A3EDF Trading North America LLC A3Goldman Sachs Group Inc. BaalJ.P. Morgan Ventures Energy Corp. A3Macquarie Bank Limited BBBBank of America Corp Baa2Morgan Stanley Capital Group, Inc. Baa2Interest Rate Contracts: Goldman Sachs Capital Markets, L.P. A-Goldman Sachs Mitsui Marine Derivative Products L.P. AAAMorgan Stanley Capital Services, Inc. A-66 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. LONG-TERM DEBTSMUD's total long-term debt is presented below:Electric revenue bonds, 3.0%-6.32%, 2015-2041 Subordinated electric revenue bonds, index rates, 2015-2041 Total electric revenue bondsComponent unit project revenue bonds, 3.75%-5.25%, 2015-2030 Gas supply prepayment bonds, index rates, 2015-2027 Total long-term debt outstanding Bond premiums -netTotal long-term debtLess: amounts due within one yearTotal long-term debt -netDecember 31,2014 2013(thousands of dollars)$ 1,873,105 $ 1,971,390 347,850 347,8502,220,955 2,319,240 373,670 399,295342,480 364,8602,937,105 3,083,395 115,026 130,0073,052,131 3,213,402 (170,430) (137,600) $ 2.881,701 $ 3,075,802 The summarized activity of SMUD's long-term debt during 2014 is presented below:December 31,2013Payments orAdditions Amortization (thousonds of dollars)$ $ (98,285) -0-AmountsDecember 31, Due Within2014 One YearElectric revenue bondsSubordinate electric revenue bondsComponent unit projectrevenue bondsGas supply prepayment bondsTotalUnamortized premiums -netTotal long-term debt$ 1,971,390 347,850399,295364,8603,083,395 130,007$ 3,213,402 -0--0--0-$ (25,625)(22,380)(146,290) (14,981)$ (161,271) $ 1,873,105 347,850373,670342,4802,937,105 115,026$ 3,052,131 $ 87,0253,00056,72023,685$ 170,430The summarized activity of SMUD's long-term debt during 2013 is presented below:December 31,2012Payments orAdditions Amortization (thousonds of dolla)$ 308,415 $ (280,155) -0-December 31,2013AmountsDue WithinOne YearElectric revenue bondsSubordinate electric revenue bondsComponent unit projectrevenue bondsGas supply prepayment bondsTotalUnamortized premiums -netTotal long-term debt$ 1,943,130 347,850423,915386,6553,101,550 109,065$ 3,210,615 -0-308,41545,106$ 353,521(24,620)(21,795)(326,570) (24,164)$ (350,734) $ 1,971,390 347,850399,295364,8603,083,395 130,007$ 3,213,402 $ 89,595425,62522,380$ 137,600SMUD ANNUAL REPORT 2014 67 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2014 scheduled annual principal maturities and interest are as follows:Principal 201520162017201820192020 -2024 (combined) 2025 -2029 (combined) 2030 -2034 (combined) 2035 -2039 (combined) 2040 -2041 (combined) Total Requirements $ 170,430147,675155,930155,975164,730736,965673,740397,775275,90057,985$2,937,105 Interest(thousands of dollars)$ 129,279123,299116,451109,088103,282423,265268,904141,76734,5543,388$1,453,277 Total$ 299,709270,974272,381265,063268,0121,160,230 942,644539,542310,45461,373$ 4,390,382 Interest in the preceding table includes interest requirements for fixed rate debt at their stated rates, variable ratedebt covered by interest rate swaps at their fixed rate, and variable rate debt not covered by interest rate swaps usingthe debt interest rate of 0.03 percent and 0.04 percent in effect at December 31, 2014 for the issues.The following bonds have been issued and are outstanding at December 31, 2014:FinalMaturityInterestRateOriginalAmountOutstanding AmountDateIssueElectric Revenue Bonds:06/15/1997 1997 Series K Bonds06/04/2003 2003 Series R Bonds06/09/2008 2008 Series U Bonds05/15/2009 2009 Series V Bonds07/29/2010 2010 Series W Bonds10/04/2011 2011 Series X Bonds05/31/2012 2012 Series Y Bonds05/21/2013 2013 Series A Bonds05/21/2013 2013 Series B Bonds08/20/2013 2013 Series C BondsJPA Electric Revenue Bonds08/19/2009 2009 CVFA Bonds08/19/2009 2009 SCA Bonds01/19/2006 2006 SFA Bonds04/20/2005 2005 SPA Bonds05/31/2007 2007B NCGA#1 BondsSubordinated Electric Revenue Bonds08/14/2008 2008 Series J Bonds08/14/2008 2008 Series K Bonds02/29/2012 2012 Series L Bonds02/29/2012 2012 Series M Bonds07/01/2024 08/1 5/201508/15/2028 05/15/2036 05/15/2036 08/15/2028 08/15/2033 08/15/2041 08/15/2033 08/1 5/201707/01/2020 07/01/2021 07/01/2030 07/01/2022 07/01/2027 08/15/2028 08/15/2028 08/15/2041 08/15/2041 5.25%-5.9% 3.25% -5.0%3.125% -5.0%6.322%6.156%3.0% -5.0%3.0% -5.0%3.75% -5.0%3.0% -5.0%5.0%2.25% -5.25%4.0% -5.25%3.25% -5.25%3.0% -5.5%Index Rate$ 131,030,000 481,275,000 521,730,000 200,000,000 250,000,000 325,550,000 196,945,000 132,020,000 118,615,000 57,780,000 $ 48,920,000 57,530,000 300,375,000 122,960,000 668,470,000 $ 120,000,000 77,850,000 75,000,000 75,000,000 131,030,000 25,270,000 473,800,000 200,000,000 250,000,000 304,545,000 195,170,000 132,020,000 118,615,000 42,655,000 29,115,000 40,120,000 233,155,000 71,280,000 342,480,000 Index RateIndex RateIndex RateIndex Rate$ 120,000,000 77,850,000 75,000,000 75,000,000 68 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2014 Bond Redemption. In December 2014, SMUD redeemed $8.7 million of 2004 Series T Electric RevenueRefunding Bonds. The redemption resulted in a current accounting gain of $23 thousand, which is included inInterest on Debt in the Consolidated Statements of Revenues,

Expenses, and Changes in Net Position.

Redeeming the bonds will reduce the aggregate future debt service payments by $11.0 million.2013 Bond Refundings and Redemptions. In May 2013, SMUD issued $118.6 million of 2013 Series B ElectricRevenue Refunding Bonds (2013 Series B bonds). Proceeds from the 2013 Series B bonds and $6.7 million ofavailable funds were used to refund $141.5 million of the outstanding 2003 Series R, and 2004 Series T bondsthrough a legal defeasance, and accordingly, the liability for the defeased bonds has been removed from Long-Term Debt in the Consolidated Statements of Net Position. The refunding resulted in the recognition of a deferredaccounting gain of $2.0 million, which is being amortized over the life of the refunding issue. The 2013 Series Brefunding reduced future aggregate debt service payments by $33.8 million and resulted in a total economic gain of$22.5 million, which is the present value of the difference between the old and new debt service payments. In August 2013, SMUD issued $57.8 million of 2013 Series C Electric Revenue Refunding Bonds (2013 Series Cbonds). Proceeds from the 2013 Series C bonds and $4.3 million of available funds were used to refund $65.9million of the outstanding 2003 Series S bonds through a legal defeasance, and accordingly, the liability for thedefeased bonds has been removed from Long-Term Debt in the Consolidated Statements of Net Position. Therefunding resulted in the recognition of a deferred accounting loss of $0.3 million, which is being amortized overthe life of the refunding issue. The 2013 Series C refunding reduced future aggregate debt service payments by$12.1 million and resulted in a total economic gain of $6.2 million, which is the present value of the difference between the old and new debt service payments. Interest Rate Swap Agreements. A summary of SMUD's three interest rate swap agreements are as follows.The credit ratings listed are from S&P:Notional Counterparty Amount SMUD Fixed Floating Termination Credit(thousands) Pays Rate Rate Date Rating$ 131,030 Variable 5.154% SIFMA 07/01/24 A-120,715 Fixed 4.345% 70% of LIBOR 08/15/18 AAA106,475 Fixed 2.894% 63% of LIBOR 08/15/28 A-SMUD has a fixed-to-variable interest rate swap agreement with a notional amount of $131.0 million, which isequivalent 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 SIFMA Index (0.04 percent at December 31, 2014) and receives fixedrate payments of 5.154 percent. In connection with the swap agreement, SMUD has a put option agreement, alsowith a notional amount of $13 1.0 million, which gives the counterparty the right to sell to SMUD, at par, either the1997 Series K Bonds, or a portfolio of securities sufficient to defease the 1997 Series K Bonds. The exercise of theoption terminates the swap at no cost to SMUD. The term of both the swap and the put is equal to the maturity ofthe 1997 Series K Bonds.Additionally, SMUD has two variable-to-fixed interest rate swap agreements with a combined notional amount of$227.2 million originally entered into for the purpose of fixing the effective interest rate associated with certain ofits subordinated bonds that were refunded during 2008. The notional values of the two swaps are amortized over thelife of the respective swap agreements. SMUD can terminate all swap agreements at any time, with payment orreceipt of the fair market value of the swaps as of the date of termination. The obligations of SNUD under the swapagreements are not secured by a pledge of revenues of SN4UD's electric system or any other property of SMUD.SMUD ANNUAL REPORT 2014 69 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Component Unit Interest Rate Swap Agreements. NCGA has three interest rate swap agreements, which aresummarized as follows. The credit ratings listed are from S&P:Credit SupportNotional ProviderAmount NCGA Fixed Floating Termination Credit(thousands) Pays Rate Rate Date Rating78,005 Fixed 4.062% 67% of LIBOR +.60% 07/01/17 A-65,865 Fixed 4.144% 67% of LIBOR +.63% 07/01/19 A-198,610 Fixed 4.304% 67% of LIBOR +.72% 07/01/27 A-At December 31, 2014 NCGA has three variable-to-fixed interest rate swap agreements with a counterparty for the purpose of fixing the effective interest rate associated with the 2007 Series B Bonds. NCGA pays thecounterparty a fixed rate on the notional amount and receives a floating rate equal to 67 percent of the threemonth LIBOR (0.26 percent at December 31, 2014) plus an interest rate spread, as specified in each swapagreement. The total notional amount of the three swaps at December 31, 2014 was $342.5 million and wasequivalent to the outstanding principal balance on the NCGA Bonds. The swaps are amortized over the life oftheir respective swap agreements in a manner corresponding to the principal repayment schedule of the NCGABonds. Early termination of the swaps would occur upon termination of the prepaid agreement for any reason.Upon early termination, the swaps would have no value to either party.Subordinated Electric Revenue Bonds. Payment of and interest on the Subordinated Electric Revenue Bonds issubordinate to the payment of the principal and interest on SMUD's Electric Revenue Bonds.Variable Rate Bonds. SMUD's Variable Rate Bonds bear interest at weekly rates, ranging from 0.03 percent to0.04 percent at December 31, 2014. SMUD can elect to change the interest rate period or fix the interest rate, withcertain limitations. SMUD's Variable Rate Bonds can be put to SMUD's Trustee by the bondholders;

however, if thebonds can't be remarketed, SMUD has in place reimbursement agreements with Bank of America, State Street, andUS Bank to enable SMUD to pay off the bonds over five years. Accordingly, SMUD has recorded such bonds asLong-Term Debt, less amounts scheduled for redemption within one year.Component Unit Bonds. The component units of SMUD have each issued bonds to finance their respective projects.

The revenue stream to pay the SPA., NCGA and SFA bonds' debt service is provided by a take and paypurchase agreement. Principal and interest associated with these bonds are paid solely from the component units'revenues and receipts collected in connection with the operation of the projects. Most operating revenues earnedby the component units are collected from SMUD in connection with the sale of gas or electricity to SMUD. Theability to service debt for SPA and SFA is dependent upon the successful availability of operations, and for NCGAis dependent on various parties (particularly MSCG, as gas supplier) meeting their contractual obligations. Theability of SCA and CVFA to service their debt is not dependent upon the successful operation of the project.SMUD guarantees to make payments sufficient to pay principal and interest and all other payments required to bemade under CVFA and SCA's indenture of trust, under a "take or pay" contract. CVFA and SCA are not requiredto repay SMUD for any amounts paid under this guarantee. In December 2014, SPA notified the bondholders about a partial redemption of the 2005 SPA Bonds. SPA willredeem $29.9 million of the Bonds maturing July 2020 through 2022 in January 2015. The $29.9 million principal amount is included in Long-term debt due within one year on the Consolidated Statements of Net Position. SeeNote 18 for Subsequent Event.70 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Callable Bonds. SMUD has $797.9 million of Electric Revenue Bonds that are currently

callable,

$450.0 millionof which are fixed rate Build America Bonds debt and $347.9 million of subordinate Variable Rate Demand Notes.SMUD also has $1,052.7 million of bonds that become callable from 2018 through 2024, and these bonds can becalled until maturity. Collateral. The principal and interest on SMUD's bonds are payable exclusively from, and are collateralized by apledge of, the net revenues of SMJD's electric system. Neither the credit nor the taxing power of SMUD is pledgedto 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 minimumdebt service coverage ratios, certain other financial ratios, stipulated minimum funding of revenue bond reserves, and various other requirements including a rate covenant to raise rates to maintain minimum debt service coverage. SMUD has pledged future net electric

revenues, component unit net project revenues, and net gas supply prepayment revenues to repay, in electric

revenue, component unit project revenue, and gas supply prepayment revenue bondsissued from 1997 through 2014. Proceeds from the bonds provided financing for various capital improvement

projects, component unit capital projects, and the prepayment of a twenty-year supply of natural gas. The bonds arepayable solely from the net revenues generated by SMUD's electrical sales, component unit project revenues, and gassupply prepayment revenues and are payable through 2041 at December 31, 2014.GASB Statement No. 48, "Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers ofAssets and Future Revenues",

disclosures for pledged revenues are as follows:December 31,2014 2013(thousands of dollars)Pledged future revenues $2,937,105 $3,083,395 Principal and interest payments for the year ended $ 271,373 $ 253,612Total net revenues for the year ended $ 834,442 $ 871,331Total remaining principal and interest to be paid $4,390,382 $ 4,687.275 Annual principal and interest payments as a percent of net revenuesFor the year ended 33% 29%NOTE 11. COMMERCIAL PAPER NOTESSMUD issues Commercial Paper Notes (Notes) to finance or reimburse capital expenditures. At December 3 1,2014 and 2013 Notes outstanding totaled $200.0 million. The effective interest rate for the Notes outstanding atDecember 31, 2014 was 0.1 percent and the average term was 77 days. SMUD has a $204.9 million letter of creditagreement, and there have not been any term advances under it.The summarized activity of SMUD's Notes during 2014 and 2013 is presented below:Balance at Balance atBeginning of End ofYear Additions Reductions Year(thousands of dollars)December 31, 2014 $ 200,000 $ $ $ 200,000December 31, 2013 $ 200,000 $ $ $ 200,000SMUD ANNUAL REPORT 2014 71 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12. RANCHO SECO DECOMMISSIONING LIABILITY Background. The Rancho Seco decommissioning liability relates to the nuclear decommissioning of the former913 MW nuclear power plant, which terminated commercial operations in 1989 and the separately licensedIndependent Spent Fuel Storage Facility (ISFSI). Nuclear decommissioning is the process of safely removingnuclear facilities from service and reducing residual radioactivity to a level that permits termination of the NuclearRegulatory Commission (NRC) license, and release of the property for unrestricted use. The NRC has approvedSMUD's decommissioning plan for the nuclear power plant, which delineates a phased process, and the first phaseof physical work was completed in 2008. Decommissioning of the ISFSI will occur after the DOE removes thespent nuclear fuel and high level waste from the site.In 2009, the NRC released all of the land formerly under the Part 50 license for unrestricted use with the exception of the 1 acre fenced area around the Interim Onsite Storage Building that was previously used to store low-level radioactive waste produced during the decommissioning of the nuclear reactor facility. This waste was disposed ofin 2014. The decommissioning of that remaining facility will begin in 2015 and when completed, will result intermination of the former operating license issued under Part 50.The DOE, under the Nuclear Waste Policy Act of 1982, is responsible for permanent disposal of spent nuclear fueland high-level radioactive waste which are currently in storage at the ISFSI. SMUD has a contract with the DOEfor the removal and disposal of spent nuclear fuel and high-level (greater than class "C": GTCC) radioactive waste.All of SMUD's spent fuel and GTCC waste are currently stored in sealed canisters in the ISFSI. However, the datewhen fuel and GTCC waste removal will be complete is uncertain. In 2010, the DOE formally withdrew theapplication for licensing of Yucca Mountain as a high-level waste repository, essentially removing Yucca Mountainas an option for disposal of SMUD's used nuclear fuel. The DOE also announced in January 2010 the creation of aBlue Ribbon Commission to study alternatives for developing a repository for the nation's used nuclear fuel. TheCommission provided a final report on alternatives in January 2012. The DOE evaluated the recommendations andpublished 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 Statesto consider the recommendations and enact legislation to implement the recommendations. At this time, there is nocredible information available to determine when the DOE would remove the used nuclear fuel from the RanchoSeco facility. The ISFSI will remain under the regulation of the NRC until the nuclear fuel and GTCC radioactive waste are removed and the site is decommissioned. Asset Retirement Obligations. These financial statements reflect SMUD's current estimate of its obligation forthe cost of decommissioning (including the cost of managing the Storage Facility until it can be decommissioned) under the requirements of FASB ASC 410, based on studies completed each year. Each year, SMUD evaluates theestimate of costs of decommissioning and there was a decrease in costs in the 2014 study. The ARO estimateassumes all spent nuclear fuel will be removed from the site by 2028.72 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Rancho Seco's ARO is presented below:December 31,2014 2013(thousands of dollars)Active decommissioning $ 16,067 $ 33,872Spent fuel management 136,010 135,252Total ARO $ 152,077 $ 169,124Less: current portion (7,879) (19,759)Total Non-current portion of ARO $ 144,198 $ 149,365The summarized activity of the Rancho Seco ARO during 2014 and 2013 are presented below. The annualadjustments include a savings computed as the difference between the fair value of the obligation as if thedecommissioning activities were performed by a third party and the amount actually incurred by SMUDperforming the decommissioning activities. December 31,2014 2013(thousands of dollar)ARO at beginning of year $ 169,124 $ 169,980Accretion 8,291 8,331Expenditures (27,587) (5,160)Change in Study (399) (1,967)Annual adjustments 2,648 (2,060)ARO at end of year $ 152,077 $ 169,124NOTE 13. PENSION PLANSDefined Benefit Pension Plan. SMUD participates in the California Public Employees' Retirement System (PERS),an agent multiple-employer public employee defined benefit pension plan. PERS provides retirement and disability

benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries.

PERS acts as acommon 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 providesretirement

benefits, survivor

benefits, and death and disability benefits based upon employees years of creditedservice, age, and final compensation.

Copies of PERS' annual financial report may be obtained from theirExecutive Office at 400 Q Street, Sacramento, California 95814.Funding Policy. Participants are required to contribute approximately seven percent of their annual covered salary.SMUD makes partial contributions required of SMUD employees on their behalf and for their account. SMUD iscurrently required to contribute approximately I I percent of payroll to the plan. The contribution requirements ofplan members and SMUD are established by PERS. On January 1, 2013, the public Employee's Pension ReformAct of 2013 took effect, requiring a public employer's contribution to a defined benefit plan, in combination withemployee contributions to that defined benefit plan, shall not be less than the normal cost rate.Annual Pension Cost. SMUD has the option to prepay an annual lump sum payment to PERS. In July 2014, SMUDmade a lump sum payment to PERS for the period July 1, 2014 -June 30, 2015 for $22.5 million. At December 31,2014, $11.2 million is included in the Consolidated Statements of Net Position as Prepayments. SMUD ANNUAL REPORT 2014 73 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Payments to PERS are presented below:2014 2013(thousands of dollars)SMUD payments for PERS contributions $ 32,373 $ 31,092Employee payments for additional service credits 487 584Employee payments for PERS contributions 4.304 2.375Total payments to PERS $ 37,164 $ 34,051Contributions are determined by actuarial valuations, which are performed based on the entry age normal actuarial cost method. The contribution for the first half of 2014 was determined by PERS as part of the annual actuarial valuation as of June 30, 2012; the contribution for the second half of 2014 was determined by PERS as part of theannual actuarial valuation as of June 30, 2013. The actuarial assumptions included: (a) a 7.5 percent investment rate of return (net of administrative expenses) for 2014 and 2013, (b) projected annual salary increases that varyby duration of service, and (c) a 3.0 percent per year payroll growth. Both (a) and (b) also included an inflation component of 2.75 percent. On April 13, 2013, PERS changed their amortization and smoothing policies. Effective with June 30, 2013 valuations, PERS no longer uses an actuarial value of assets but uses the market value of assets,and employs an amortization and smoothing policy that spreads rate increases or decreases over a 5-year period,and amortizes all experience gains and losses over a fixed 30-year period. All changes in liability due to planamendments, and changes in actuarial assumptions or methodology are amortized separately over a 20-year period.If a plan's accrued liability exceeds the actuarial value of assets, the annual contribution with respect to the totalunfunded liability may not be less than the amount produced by a 30-year amortization of the unfunded liability. Three-year trend information for PERS is presented below:Annual Pension Percentage ofFiscal Year Cost (APC) APC Contribution (thousonds of dollars)06/30/14 $ 31,028 100%06/30/13 $ 31,215 100%06/30/12 $ 32,064 100%Funded Status and Funding Progress. As of June 30, 2013, the most recent actuarial valuation date, the planwas 79.9 percent funded. The actuarial accrued liability for benefits was $1,778.4

million, and the actuarial valueof assets which equals the market value was $1,421.5

million, resulting in an unfunded actuarial accrued liability (UAAL) of $356.8 million.

The covered payroll (annual payroll of active employees covered by the plan) was$185.6 million, and the ratio of the UAAL to the covered payroll was 192.0 percent. The schedule of fundingprogress, presented as Required Supplementary Information (RSI) following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. 74 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other Plans. SMUD provides its employees with two cash deferred compensation plans: one pursuant to InternalRevenue Code (IRC) Section 401(k) [401(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 SMJUD'seligible full-time or permanent part-time employees may participate in either or both Plans, and amountscontributed 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 isresponsible for ensuring compliance with IRC requirements concerning the Plans and has the duty of reasonable care in the selection of investment alternatives, but neither SMUD, nor its Board or officers have any liability formarket variations in the Plans' asset values. SMUD employees are responsible for determining how their funds areto 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 dollarlimits 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 employeecontributions to the 401(k) Plan up to a set amount. SMUD made contributions into the 401(k) Plan of $2.9 millionin 2014 and $1.6 million 2013. SMUD does not match employee contributions, nor make contributions on behalf ofits employees to the 457 Plan. Participating employees made contributions into both Plans totaling

$16.8 million in2014 and $16.2 million in 2013.SMUD ANNUAL REPORT 2014 75 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. OTHER POSTEMPLOYMENT BENEFITSSMUD provides postemployment healthcare

benefits, in accordance with SMUD policy and negotiated agreements with employee representation groups in a single employer defined benefit plan, to all employees who retire fromSMUD, and their dependents.

SMUD also provides postemployment healthcare benefits to covered employees whoare eligible for disability retirement. SMUD contributes the full cost of coverage for retirees hired before January 1,1991, and a portion of the cost based on credited years of service for retirees hired after January 1, 1991. SMUDalso contributes a portion of the costs of coverage for these retirees' dependents. Retirees are required to contribute the portion that is not paid by SMUD. The benefits, benefit levels, retiree contributions and employer contributions are governed by SMUD and can be amended by SMUD through its personnel manual and union contracts. At June30, 2014, 5,181 postemployment participants, including

retirees, spouses of retirees, surviving

spouses, and eligibledependents, were eligible to participate in SMUD's healthcare benefits program.OPEB arises from an exchange of salaries and benefits for employee services

rendered, and refers topostemployment benefits other than pension benefits such as post employment healthcare benefits.

SMUDconsiders the following benefits to be OPEB: Medical, Dental and Long-Term Disability. Plan Description. SMUD is a member of the California Employers Retiree Benefit Trust (CERBT) for prefunding of OPEB obligations. The CERBT Fund is an IRC Section 115 Trust set up for the purpose of receiving employercontributions to prefund health and other postemployment benefits for retirees and their beneficiaries. The plan isan agent multiple employer plan administered by PERS, which provides

medical, dental and long-term disability benefits for retirees and their beneficiaries.

Any changes to these benefits would be approved by SMUD's Boardand union contracts. To obtain a CERBT report, please contact PERS at 888-CALPERS. The funding of a plan occurs when the following events take place: the employer makes payments of benefits directlyto or on behalf of a retiree or beneficiary; the employer makes premium payments to an insurer; or the employerirrevocably transfers assets to a trust or other third party acting in the role of trustee, where the plan assets arededicated to the sole purpose of the payments of the plan benefits, and creditors of the government do not haveaccess to those assets.Funding Policy. SMUD has elected to net fund to PERS, so the contributions are the Annual Required Contribution (ARC) less the estimated cash flow for retiree benefit costs for each year. SMUD can elect to put in additional contributions into the trust, and in 2014 funded an additional $40.0 million to the CERBT. In 2014 and 2013, thenet ARC contribution to the CERBT was $6.8 and $8.6 million, respectively. During 2014 and 2013, SMUD madehealthcare benefit contributions by paying actual medical costs of $23.6 million and $22.2 million, respectively. Funding Status and Funding Progress. At June 30, 2014 and 2013, SMUD estimates that the actuarially determined accumulated postemployment benefit obligation was approximately $505.1 and $492.7 million,respectively. At June 30, 2014 and 2013, the plan was 25.6 and 21.0 percent funded, respectively. The coveredpayroll (annual payroll of active employees covered by the plan) at June 30, 2014 and 2013, was $187.2 and$179.7 million, respectively. The ratio of the UAAL to covered payroll was 200.7 percent at June 30, 2014.Annual OPEB Cost. The annual OPEB cost (expense) is calculated based on the ARC of the employer, an amountactuarially determined in accordance with the parameters of SGAS No. 45, "Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions". The ARC represents a level of funding that,if paid on an ongoing basis, is projected to cover the normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 30 years. For 2014, SMUD's annual OPEB Cost (expense) was $29.4 million.76 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table shows the components of SMUD's annual OPEB cost for the year, the amount actually paid inpremiums, and changes in the net OPEB obligation: Year Ended December 31,2014 2013(thousands or dollars)Annual required contribution $ 29,833 $ 29,665Interest on net OPEB obligation (2,704) (2,671)Annual required contribution adjustment 2,251 2,153Annual OPEB cost 29,380 29,147Contributions made (70,361) (30,788)Increase / (Decrease) in net OPEB obligation (40,981) (1,641)Net OPEB (asset), beginning of year (36,742) (35,101)Net OPEB (asset), end of year $ (77,723) $ 36,742)SMUD's Net OPEB Obligation (asset) is recorded for 2014 as a component of Prepayments and other on theConsolidated Statements of Net Position. SMUD's annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEBobligation for 2014 and the two preceding years is as follows:Percentage of Annual Net OPEBYear Ending Annual OPEB Cost OPEB Cost Contributed (Asset)(thousoods of dollars)December 31, 2014 $29,380 239% (77,723)December 31, 2013 $29,147 106% (36,742)December 31, 2012 $26,123 229% (35,101)Actuarial Methods and Assumptions. Projections of benefits for financial reporting purposes are based on thesubstantive plan (the plan as understood by the employer and plan members) and include the types of benefitsprovided at the time of each valuation and the historical pattern of sharing the benefit costs between the employerand plan members to that point. The actuarial methods and assumptions used include techniques that are designed toreduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. The entry age normal was used in the June 30, 2014 and 2013 actuarial valuation. Actuarial assumptions used a 7.36percent investment rate of return (net of administrative expenses), and a 3.0 percent inflation assumption. For 2014,the actuarial assumptions for an annual healthcare cost trend growth rate ranged from 1.3 to 12.1 percent for thecurrent year, 7.5 to 8.0 percent for 2015, and 7.0 to 7.5 percent for 2016. The UAAL will be amortized as apercentage of payroll over an open 30-year period. At June 30, 2014 and 2013 the actuarial value of the assets was$129.5 and $103.3 million, respectively. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions aboutthe probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality and the healthcare cost trends. Amounts determined regarding the funded status of the plan and the ARCof the employer are subject to continual revision as actual results are compared with past expectations and newestimates are made about the future. The schedule of funding progress, presented as RSI following the notes to thefinancial statements, presents multiyear trend information that shows whether the actuarial value of plan assets isincreasing or decreasing over time relative to the actuarial accrued liabilities for benefits. SMUD ANNUAL REPORT 2014 77 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. INSURANCE PROGRAMS AND CLAIMSSMUD is exposed to various risks of loss related to torts, theft of and destruction to assets, errors and omissions, and natural disasters. In addition, SMUD is exposed to risks of loss due to injuries to, and illnesses of, its employees. SMUD carries commercial insurance coverage to cover most claims in excess of specific dollar thresholds, whichrange from $5 thousand to $2.5 million per claim with total excess liability insurance coverage for most claims of$120.0 million. SMUD's property insurance coverage is based on the replacement value of the asset. There have beenno significant reductions in insurance

coverage, and in some cases, certain coverages increased.

In 2014, 2013 and2012, the insurance policies in effect have adequately covered all settlements of the claims against SMUD. No claimshave exceeded the limits of property or liability insurance in any of the past three years.The claims liability is included as a component of Self Insurance, Unearned Revenue and Other in the Consolidated Statements of Net Position. SMUD's total claims liability, comprising claims received and claims incurred but not reported, at December 31,2014, 2013 and 2012 is presented below:2014 2013 2012(thousands of dollars)Workers' compensation claims $ 11,220 $ 11,291 $ 9,352General and auto claims 825 669 573Short- and long-term disability claims 121 391 168Claims liability $ 12,166 $ 12,351 $ 10,093Changes in SMUD's total claims liability during 2014, 2013, and 2012 is presented below:2014 2013 2012Claims liability, beginning of yearAdd: provision for claims, current yearIncrease in provision for claims inprior yearsLess: payments on claims attributable tocurrent and prior yearsClaims liability, end of year$ 12,3512,1222,930(thousonds of dollars)$ 10,0934,1053,433$ 10,2651,9414,205(5,237) (5,280) (6,318)$ 12,166 $ 12,351 $ 10,09378 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. COMMITMENTS Electric Power and Gas Supply Purchase Agreements. SMUD has numerous power purchase agreements withother power producers to purchase

capacity, transmission, and associated energy to supply a portion of its loadrequirements.

SMUD has minimum take-or-pay commitments for energy on some contracts. Certain contracts allowSMUD to exchange energy received primarily in the summer months, when SM1UD most needs the energy and toreturn energy during the winter months, or other subsequent periods. SMUD has numerous long-term natural gassupply, gas transportation and gas storage agreements with Canadian and U.S. companies to supply a portion of theconsumption needs of SMUD's natural gas-fired power plants, which expire through 2040.At December 31, 2014, the approximate minimum obligations for the take or pay contracts over the next five yearsare as follows:Electric Gas(thousands of dollars)2015 $ 31,874 $ 17,1642016 32,688 17,0152017 33,559 17,3092018 34,148 17,6352019 34,148 17,984At December 31, 2014, the approximate minimum obligations for the remaining contracts, assuming the energy orgas is delivered over the next five years, are as follows:Electric Gas(thousands of dollars)2015 $ 119,299 $ 149,4362016 119,782 130.9042017 127,421 132,7082018 119,594 133,5592019 126,643 123,819Contractual Commitments beyond 2019 -Electricity. Several of SMUD's purchase power and transmission contracts extend beyond the five-year summary presented above. These contracts expire between 2020 and 2033and provide for power under various terms and conditions. SMUD estimates its annual minimum commitments under the take or pay contracts ranges between $32.2 million in 2020 and $5.7 million in 2033. SMUD estimates its annual minimum commitments under the remaining contracts, assuming the energy is delivered, rangesbetween $134.3 million in 2020 and $1.6 million in 2033. SMUD's largest purchase power source is the WesternBase Resource

contract, whereby SMUD receives 25.4 percent of the amount of energy made available byWestern, after meeting Central Valley Project use requirements, in any given year at a 25.4 percent share of theirrevenue requirement.

The Western contract expires on December 31, 2024.Contractual Commitments beyond 2019 -Gas. Several of SMUD's natural gas supply, gas transportation andgas storage contracts extend beyond the five-year summary presented above. These contracts expire between 2020and 2040 and provide for transportation and storage under various terms and conditions. SMUD estimates itsannual minimum commitments under the take or pay contracts ranges between $18.3 million in 2020 and $10.0million in 2040. SNIUD estimates its annual minimum commitments under the remaining contracts, assuming thegas is delivered, ranges between $120.0 million in 2020 and $21.4 million in 2040.SMUD ANNUAL REPORT 2014 79 Sacramento Municipal Utility District 1 2014 Annual Report/NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additional Contracts. SMUD has entered into one additional power contract that has been excluded from the tableabove due to an unknown start date. This contract is based on generation that has not been built and is expected onlinebetween 2016 and 2017. Because of the uncertainty of the start date, it has been excluded from the table above.Solano Wind. In December 2011, SMUD entered into an agreement to sell the Solano Wind Phase 3 project (seeNote 2). SMUD will buy all output from the plant under the terms of the Power Purchase Agreement. The plantbegan commercial operation in April 2012 and SMUD receives all output generated. Under the terms of the variousagreements, SMUD has the option to buy the plant back at certain discrete future dates.Gas Price Swap Agreements. SMUD has entered into numerous variable to fixed rate swaps with notional amountstotaling 138,612,500 Dth 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 fixedrates ranging from $3.15 to $7.17 per Dth. The swap agreements expire periodically from January 2015 throughDecember 2022.Gas Transport Capacity Agreements. SMUD has numerous long-term natural gas transport capacity agreements with Canadian and U.S. companies to transport natural gas to SMUD's natural gas-fired power plants from thesupply basins in Alberta to the California-Oregon border and from supply basins in the southwest and RockyMountains to the Southern California border. These gas transport capacity agreements provide for the delivery ofgas into SMUD-owned pipeline capacity within California. The gas transport capacity agreements provide SMUDwith 56,000 Dth per day (Dth/d) of natural gas pipeline capacity from the North, including the Canadian Basinsthrough 2023 and 54,000 Dth/d from the Southwest or Rocky Mountain Basins through at least 2019.Gas Storage Agreements. SMUD also has an agreement for the storage of up to 2.0 million Dth of natural gas atregional facilities through March 2015, dropping to 1.0 million Dth through March 2016.Hydro License Agreements. SMUD has a hydro license for a term of 50 years effective July 1, 2014 (see Note 2).SMUD entered into four contracts with government agencies whereby SMUD makes annual payments to them forvarious services for the term of the license. Each contract is adjusted annually by an inflation index. The presentvalue of the sum of the annual payments is $56.1 million at December 31, 2014.80 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. CLAIMS AND CONTINGENCIES FERC Administrative Proceedings. SMUD is involved in a number of FERC administrative proceedings related tothe operation of wholesale energy markets, regional transmission

planning, gas transportation, and the development of North American Electric Reliability Corporation (NERC) reliability standards.

While these proceedings arecomplex 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 CAISOTariff 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 (IOUs)) to pass-through costs to their existing wholesale transmission customers; (iii) filings initiated by FERC or market participants to establish market design and behavior rules or tocomplain 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 planningprocess; (v) filings initiated by providers of firm gas transportation service under the Natural Gas Act; and (vi)filings initiated by NERC to develop reliability standards applicable to owners, users, and operators of the bulkelectric system. SMUD's management believes that the ultimate resolution of these matters will not have a materialadverse 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'smanagement believes that the ultimate resolution of these matters will not have a material adverse effect onSMUD's financial

position, liquidity or results of operations.

Environmental Matters. SMUD was one of many potentially responsible parties that had been named in a numberof actions relating to environmental claims and/or complaints. SMUD has resolved these environmental claimsand/or complaints and entered into settlement agreements and/or consent orders. These settlement agreements andconsent orders have statutory reopener provisions which allow regulatory agencies to seek additional funds forenvironmental remediation under certain limited circumstances. While SMUD believes it is unlikely that any of theprior settlement agreements or consent orders will be reopened, the possibility exists. If any of the settlement agreements or consent orders is reopened, SMUD management does not believe that the outcome will have amaterial adverse impact on SMUD's financial

position, liquidity or results of operations.

North City Remediation. In 1950, SMUD purchased property (North City Site) from the City of Sacramento andthe 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. SMUD currently operates a bulk substation on the North City Site. SMUDintends to assure compliance with State standards at closed landfill sites and is in the process of determining theappropriate remediation for the North City Site. In 2009, SMUD recorded a liability related to the investigation, design and remediation necessary for the North City Site in the amount of $12.0 million estimated for the entireproject. As the owner of the North City Site, SMUD will have a role in the remediation selection and activities, asmay those who operated or used the North City Site for landfill purposes. SMUD has estimated its exposure tosuch costs based on its proportionate share of the remedy. However, should others become unable to participate due to insolvency or otherwise unable to pay their share of the costs, SMUD's share of remediation costs wouldincrease. SMUD's management does not believe this will occur. Even if SMUD were to ultimately be responsible for all remediation costs associated with the North City Site, SMUD management believes that the outcome ofthese remediation costs will not have a material adverse impact on SMUD's financial

position, liquidity or resultsof operations.

SMUD ANNUAL REPORT 2014 81 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Former Community Linen Rental Services (Community) Property. In 1981, SMUD purchased property fromCommunity located at 1824 and 1826 61st Street (Site). That same year, Community sold its linen business andequipment to Mission Laundry (Mission). SMUD continued to lease portions of the property to Mission until1985. SMUD settled with these businesses and waived a potential future legal claim for cleanup funding. Theproperty to the north of the Site was owned by Kramer Carton Company (Kramer) and used for 60 years as acarton manufacturing facility. In 2009, Kramer filed for bankruptcy protection from its creditors. The Kramerproperty was encumbered by a first and second deed of trust, where the second deed of trust was held byWillamette Capital Management, Ltd. (Willamette). Willamette purchased the note on the first deed of trust. In2011, Willamette foreclosed on the Kramer property and now holds title to the Kramer property. Based onenvironmental investigations, it has been determined that there is contamination at the Kramer property, at theSite, and at areas south of the Kramer property. The contamination appears to emanate primarily from the Site,with some contribution from the Kramer property. Preliminary environmental investigations of the Kramerproperty, the Site and areas south of the Kramer property indicate that total remediation costs may exceed $2.0million. SMUD does not believe that it is the source of the contamination. Nonetheless, since Kramer is bankruptand Willamette contends it is exempt from liability under a secured creditor exemption, it is unclear whether itwould be beneficial for SMUD to take legal action for contribution. SMUD has estimated its exposure to suchcosts based on its proportionate share of the remedy. However, should others become unable to participate due toinsolvency or otherwise refuse to pay their entire share of the costs, SMUD's share of remediation costs wouldincrease; alternatively, SMUD could potentially acquire the Kramer property at a nominal or greatly reduced cost,giving SMUD an asset with value that will materialize after the cleanup. Even if SMUD were to ultimately beresponsible for all remediation costs associated with the Site, SMUD's management believes that the remediation of the Site will not have a material adverse impact on SMUD's financial

position, liquidity or results of operations.

East Campus -Operations Center Dispute (Turner Construction Company). In December 2010, SMUDentered into the East Campus -Operations Center Design-Build Agreement (Agreement) for $112.0 million withTurner Construction Company (Turner) to construct the East Campus -Operations Center (EC-OC) design-build project (Project). In April 2013, SMUD provided Turner with notice of substantial completion of the Project.Section 18.4(a) of the Agreement requires SMUD to purchase a project errors and omissions policy (Project E&OPolicy) for the Project. Turner has alleged that SMUD has breached the Agreement because the Project E&OPolicy purchased by SMUD does not comply with Section 18.4(a) of the Agreement for two reasons: (I) theProject E&O Policy does not cover "all claims" for design defects, because the Project E&O Policy's insured vs.insured exclusion prohibits Turner from recovering under the policy for design defects on the part of otherinsureds, and (2) SMUD purchased extended reporting period (tail) coverage for only five, rather than ten years.Turner asserts claims arising from the breach of the Agreement in the amount of $3.9 to $5.1 million. Turner hastriggered the dispute resolution process within the Agreement and provided Notice of Intent to Initiate Arbitration. Arbitration commenced on January 21, 2015. SMUD's management believes the claims are without merit. In anyevent, SMUD's management believes that the outcome of this matter will not have a material adverse impact onSMUD's financial

position, liquidity or results of operations.

82 SMUD ANNUAL REPORT 2014 Sacramento Municipal Utility District I 2014 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 effecton SMUD's financial

position, liquidity or results of operations.

NOTE 18. SUBSEQUENT EVENTOn January 5, 2015, SPA redeemed $29.9 million of 2005 SPA Bonds. See Component Unit Bonds in Note 10.SMUD ANNUAL REPORT 2014 83 Sacramento Municipal Utility District I 2014 Annual ReportREQUIRED SUPPLEMENTARY INFORMATION (unaudited) Schedules of Funding ProgressPERS Pension. The schedule of funding progress for PERS is presented below for the three most recent years forwhich SMUD has available data:Actuarial Valuation DateActuarial Value ofAssets*(a)Actuarial AccruedLiability (AAL) -Entry Age(b)UnfundedAAL(UAAL)(b-a)FundedRatio(a/b)CoveredPayroll(c)UAAL as aPercentage of CoveredPayroll((b-a)/c) 06/30/2013 06/30/2012 06/30/2011 $ 1,421,522 $ 1,778,351 (thousands of dol]] )$ 356,829 79.9%$ 131,966 92.2%$ 105,884 93.5%$ 1,561,647 $ 1,528,294 $ 1,693,613 $ 1,634,178 $ 185,863$ 177,772$ 182,872192.0%74.2%57.9%* Starting 6/30/13, Actuarial Value of Assets equals the market value of the assets per PERS smoothing policyapproved on April 13, 2013.OPEB. The schedule of funding progress for the other postemployment benefit healthcare plan is presented belowfor the three recent years for which SMUD has available data:Actuarial Valuation DateActuarial Value ofAssets(a)Actuarial AccruedLiability (AAL)(b)UnfundedAAL(UAAL)(b-a)FundedRatio(a/b)CoveredPayroll(c)UAAL as aPercentage of CoveredPayroll((b-a)/c) 06/30/2014 06/30/2013 06/30/2012 $$$129,493103,25152,724$$$505,142492,651424,738(Ihousmds of dollr)$ 375,649$ 389,400$ 372,01425.6%21.0%12.4%$$$187,151179,733174,618200.7%216.7%213.0%06/30/2011 $ 47,843 $ 362,469 $ 314,62613.2% $ 171,411 183.6%84 SMUD ANNUAL REPORT 2014 $4xr"I j}}