Annual report / Central Arizona Project

              D R O U G H T
D E F E N S E
C E N T R A L A R I Z O N A P R O J E C T
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ANNUAL REPORT-01-CAP-02 d 2
C A P
02
C A P
ACTION PLAN-01-CAP-02
implement system configuration to maximize
efficiency. regulate h2o supply control
usage accommodate demand.
d 2
d 2
02
C A P
ACTION PLAN-01-CAP-02
implement system configuration to maximize
efficiency. regulate h2o supply control
usage accommodate demand.
ACTION PLAN-01-CAP-02
implement system configuration to maximize
efficiency. regulate h2o supply control usage
accommodate demand.
C E N T R A L
A R I Z O N A
P R O J E C T
02
04
06
10
16
19
70
l e t t e r
D R O U G H T D E F E N S E
O V E R C O M I N G D R O U G H T
D E A L I N G W I T H D R O U G H T
D R O U G H T O N T H E R I V E R
f i n a n c i a l s
t h e b o a r d
C O N T E N T S
d2–ACTION PLAN-01-CAP-02
...it will enhance the state’s economy and
quality of life and ensure sustainable growth
C
David S. WilsonJr. ltr.p a g e
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02
D A V I D S . “ S I D ” W I L S O N J R . GENERAL MANAGER
While 2002 was a year of severe drought for Arizona, most residents
did not really notice nor feel the effects of the water shortage. In fact, I would suggest that until
the tragedy of the Rodeo-Chediski fire, most of the public didn’t realize just how dry conditions
were in Arizona.
That lack of realization was due to the foresight and planning of
Arizona’s water community.We are fortunate that in the past, visionaries foresaw Arizona’s water
needs and planned accordingly.
Initially, farmers diverted flows from the Salt River for irrigation as it
flowed through the Valley. But the river was an unpredictable source and the Bureau of Reclamation
built Roosevelt Dam to provide a dependable supply of water through the Salt River Project. SRP
expanded and now has a series of dams on the Salt and Verde rivers that provide needed surface
water to the Valley of the Sun. As the demand for water grew, groundwater provided the additional
needed supplies.
But our water managers realized that even that was not enough
because increased pumping was depleting the water nature had stored underground.
So they created the Central Arizona Project to bring much-needed
Colorado River water into Maricopa, Pinal and Pima counties. The political fight to get CAP
created and the physical challenges of building the 336-mile-long aqueduct paid off handsomely
for Arizona in 2002.
That’s when the effects of a multi-year drought in Arizona over-whelmed
SRP, leaving its reservoirs severely drained and depleted. But the creation of a second,
larger, source of surface water, CAP, literally saved Arizona in 2002.
The Colorado River storage system that includes Lake Mead and
Lake Powell had the much-needed water and CAP delivered it to the central part of the state.
CAP became a cornerstone of central Arizona’s defense against drought.
That does not mean Arizona is bullet proof. The drought throughout
the Colorado River basin that has reduced the amount of available water for SRP could eventually
also affect the Colorado River and CAP.We must continue water conservation and continue to
plan for the water needs of Arizona, keeping in mind that the drought could continue.
During 2002, the year the drought became noticeably severe, CAP
met and overcame many challenges.We are proud of the role we played in keeping the state
supplied with such a life-sustaining and vital resource. Our challenges and our role are discussed
in this annual report.
The Central Arizona Project, its leadership and employees, understand
our role in Arizona’s management of its water resources to meet the needs of its citizens even
when confronted with drought.We a re d e d i c at e d t o c o n t i n u i n g t h at e f fo r t .
T O O U R C U S T O M E R S A N D C O N S T I T U E N T S :
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A second fire started by a lost hiker two days later near Chediski
Peak, northwest of Cibeque also began to spread rapidly in the dry
conditions. The two fires, about 15 miles apart, eventually merged
into what became known as the Rodeo-Chediski fire. It was not
“contained” until June 26 and, by that time, it had consumed an area
larger than Los Angeles. The fire burned down more than 400 homes and
forced approximately 32,000 people to flee.
In the metropolitan Phoenix area, things were also bad. Officials at Salt River Project
bemoaned the lack of rain as they watched the water levels in SRP’s
storage reservoirs drop lower and lower. It reached a point where the
Verde River flowing across the dry Horseshoe Lake bed resembled a nar-row
canal of water. Roosevelt Lake, which normally looks almost like an
ocean when it is full, fell to 12 percent of capacity, a dangerously low level.
Before the end of 2002 SRP officials said if 2003 is another dry year
Roosevelt will be virtually dry. SRP also announced that it was reducing by one-third its 2003
water deliveries to all customers.
The announcement left water providers in the Valley changing plans to use alternate sources of
water. It left agricultural water users scratching their heads, reevaluating the cost and availability
of alternate sources needed to make up the shortages.
But most residents of Phoenix and the surrounding cities as well as those in Tucson never
really noticed the drought. Throughout 2002 they continued to fill swimming pools, water their
lawns and wash their cars. There were no “water police” such as those in Las Vegas where resi-dents
had water restrictions. Those who violated the restrictions in Las Vegas got tickets and
fines. In Flagstaff, water restrictions were imposed.
So why are the cities in the Valley of the Sun, Tucson and
surrounding areas not noticeably affected by one of the worst
droughts to ever hit Arizona?
Answer: because of Central Arizona Project (CAP). CAP
was Arizona’s drought defense.
Each year CAP brings Colorado River water into the center of the state. The 336-mile-long
aqueduct annually brings about 1.5 million acre-feet of water to cities, agricultural users and Indian
communities in Maricopa, Pinal and Pima counties. One acre-foot is about 326,000 gallons or
enough water for a family for a year.
Without CAP, SRP customers would have had even further reduced deliveries in 2002.
Without CAP, agricultural users would have had fallow fields. Without CAP, Indian communities
would have been dry. Without CAP, most residents in metropolitan Phoenix and Tucson would
have been facing water restrictions that were so severe they would have had to use paint to have
green lawns.
CAP made it easy for many of Arizona’s residents to ignore the drought.
C A P
The weather throughout 2002 seemed like the Chamber of
Commerce ordered it. The blue skies rarely were darkened by
storm clouds and the sunshine seemed endless.
It not only seemed that way, it was that way.
D R O U G H T R U L E D .
Death Valley and Phoenix got almost the same amount of rain in 2002. In Phoenix, the rainfall was
officially 2.82 inches, making it tied with 1956 as the driest year on record. For the last 30 years, Phoenix
has had an average rainfall of 8.32 inches.
Dry conditions prevailed throughout Arizona. Every rain gauge in the state registered below normal
rainfall. In Phoenix, there was no rainfall in February and only a trace in August. By April, Phoenix had
recorded the second-driest seven-month period in the last 107 years for Arizona, according to the
National Weather Service. The driest seven-month period was in 1903-04.
Along with the lack of rain came the heat. April was the fourth warmest on record. June was the
second warmest on record. July and August both were the third warmest
on record.
The lack of moisture and the heat contributed to dust
storms in the Phoenix area. By mid summer there
had barely been one inch of rainfall and that,
combined with more than 3,400 construc-tion
sites scattered throughout the Valley,
contributed to the dust problem. The
summer’s monsoon storms never
really materialized, but the high
winds did. It made for intense
dust storms, known by the
National Weather Service as
haboobs.
Along with the hot, dry
summer came forest fires.
On June 18, a fire started in
a grove of juniper, sage and
dry grass near the Rodeo
Fairgrounds just northeast
of Cibeque on the Fort
Apache Reservation. Given
the dry conditions due to the
statewide drought, the fire—
named the Rodeo fire—quickly
began to spread.
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2
A L G
5 . 2
2002 WAS A YEAR OF DROUGHT.
WHAT! YOU DIDN’T NOTICE?
Acre FT-p-CAP-02
1,525,677
NV USg-p-CAP-02
C A P
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1.5T H O U S A N D
acre FT
D.2-DESCRIPTOR-01-CAP-02
DSCR01: one major drought
impact: the green area
behind horseshoe dam
should be a lake.
D.2-GRAPHIC.REP-01-CAP-02
GRPH01: 2002 cap water deliveries
D.2.MISSION-01-CAP-02
CAP’S MISSION: deliver its full allocation of
colorado river water to central arizona
AZ State MP–FT-p-CAP-02
CL AM PHOTO BY N O E L B U R K H E A D
D.2-DESCRIPTOR-01-CAP-02
DSCR02: aquatic pests, primarily
clams and algae, are
present year round and
removing clams and
scraping algae are
on-going tasks.
CAL USg-p-CAP-02
584,929
134,897
TOTAL M & I AGRICULTURAL INDIAN
805,851
2002 CAP H2O DELIVERIES TO CUSTOMERS-CAP-02
2002 CAP H2O DELIVERIES TO CUSTOMERS-CAP-02
2002 CAP H2O DELIVERIES TO CUSTOMERS-CAP-02
2002 CAP H2O DELIVERIES TO CUSTOMERS-CAP-02
NV USg-p-CAP-02
CAL USg-p-CAP-02
C O R B I C U L A F L U M I N E A
As far reaching and devastating as the statewide drought was in 2002, most residents in Maricopa,
Pinal and Pima counties were not directly affected. The drought was just something they read about in the
newspaper or saw on television.
Water leaders in Arizona have done an amazing job of providing drought protection for the state.
Two surface water providers, the Central Arizona Project (CAP) and the Salt River Project (SRP), serve
the metropolitan Phoenix area. Each entity gets its surface water, that is water that comes from lakes and
streams and is supplied by snowfall and storm runoff, from different sources. For CAP, the source is the
mighty Colorado River. For SRP, it is essentially the Salt and Verde rivers.
In 2002, drought continued to strike hard in Arizona and throughout the West. Reservoirs managed by
SRP, such as Horseshoe, Bartlett, and Roosevelt lakes, were drawn down to dangerously low levels as SRP
worked to meet its water orders from Valley cities. SRP turned to CAP in 2002 to “borrow” 150,000
acre-feet of additional water from CAP in order to preserve what little water was left in Roosevelt. It ended
the year with Horseshoe Lake looking like an irrigation canal and Roosevelt in danger of going dry. That
situation necessitated a reduction of deliveries in 2003.
Many of the cities turned to CAP to sustain their water supply and to replace the anticipated loss of water
from SRP in 2003. CAP has been able to meet their needs due to the foresight of Arizona’s water planners.
In 1968, construction of CAP was authorized. The 336-mile-long engineering marvel annually moves
Colorado River water from the Mark Wilmer Pumping Plant in Lake Havasu to the Phoenix area and then
southeast to where it terminates about 10 miles south of Tucson. It provides its annual allotment of 1.5
million acre-feet to municipal and industrial (M&I) customers, Non-Indian Agricultural users, Indian
communities and to recharge sites along its length.
In 2002, with the drought and loss of water experienced by almost all its customers, CAP moved a total of
1,704,405 acre-feet of water in customer deliveries and exchanges. That was 10 percent more water than it
moved in 2001. In July, CAP delivered a record 230,902 acre-feet of water and its daily peak delivery reached
4,009 cubic feet per second (cfs) on August 12. One cubic-foot of water is about 7.5 gallons.
CAP moved a record amount of water in 2002 despite having to overcome operational obstacles that
included aquatic pests and maintenance outages.
Aquatic pests, primarily clams and algae, are present year round. However, they present a significant
challenge to operations during peak months and peak days when deliveries are pushed to maximum levels.
So removing the clams and scraping the algae off the sides of the aqueduct was an on-going task.
In the fall, 29 million gallons of water were drained from the canal and operations were stopped for two
weeks to allow for the inspection of three siphons (Centennial, Jackrabbit, and Hassayampa), and two
tunnels (Buckskin Mountain and Burnt Mountain). When CAP crosses riverbeds or large washes, it goes
under the obstacles via a siphon. The siphons are about 22 feet in diameter, large enough to accommodate
a city bus, and can stretch for more than a mile.
In addition, CAP crews also inspected the pumping plant discharge lines of Hassayampa, Little
Harquahala and Bouse Hills and also the Black Mountain pipeline.
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824
CREATING THE OPERATIONS
MODEL FOR 2003 WAS
UNUSUALLY CHALLENGING
6.0
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D.2.MISSION-02-CAP-02
reliably, cost effectively and in
an environmentally sound manner
T H O U S A N D HP
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p h o t o . I D - 0 0 2 . c a p . 0 0 0 2 - a r !  
 
v e r t i c a l f e e t
D.2-DESCRIPTOR-01-CAP-02
DSCR03: Five of six new impellers
have been installed at
mark wilmer pumping
plant in lake havasu.
D.2-DESCRIPTOR-01-CAP-02
DSCR04: cap is a 336-mile long
system of aquaducts,
tunnels, pumping plants
and pipelines reaching
from lake havasu
to tucson.
D.2-DESCRIPTOR-01-CAP-02
DSCR05: lake pleasant is cap’s
storage reservoir and its
water level fluctuates
about 75 feet each year
> > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > >
> > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > >
> > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > >
CAP crews managed the replacement of an impeller despite record water demands. The first, and largest,
pumping plant on the CAP system is Mark Wilmer Pumping Plant in Lake Havasu. There, six 60,000 horse-power
pumps drive impellers that scoop up water from the Colorado River and hurl it 824 vertical feet
through pipes up the side of Buckskin Mountain. The water then enters an approximately 7 mile long tunnel
through the Buckskin Mountains before it emerges into the aqueduct and begins its journey across the state.
The impellers are being replaced to increase the efficiency of the pumping plant and to reduce noise
and vibration produced by the hydraulic pulsations of the original impellers. CAP decided to install new,
computer-designed impellers. In addition to reducing the pulsations, which in turn lowers the sound and
vibration levels, the new impellers move an additional 100-plus cfs of water. While the replacement work
is being performed, crews are also installing new mechanical shaft seals that will reduce maintenance
problems and increase reliability. Five of the six impellers have been replaced to date, the first was
replaced in 1998, and the last is scheduled to be done in 2003.
Another major task that the drought turned into an operational issue in 2002 was scheduling water deliver-ies.
This became a complicated process because customer demands for water increased, but the supply did not.
Late each year CAP’s customers project the amount of water they will need in the upcoming year and
submit an order to CAP for its delivery. So in October, customers began placing orders for 2003, knowing
that SRP had announced reduced deliveries. Once those orders are placed with CAP, CAP then draws up
its operational plan. CAP employees review delivery requests, compare orders against allocations and
entitlements, ensure that delivery requests comply with contract criteria and verify order preferences for
those who take multiple classes of water.
The “operations model” includes information such as how much Colorado River water CAP will be able
to deliver, how customer demands compare to CAP’s delivery capacity in each segment of the canal, how
much water will be available for the Arizona Water Banking Authority, how much water can be stored in
CAP recharge projects, and how much water will be used to fill, and later be released from, Lake Pleasant.
For the first time in its history, in 2002 CAP was unable to meet its November 15th deadline to provide
2003 water projections to Bureau of Reclamation (BOR). In fact, it took 30 refinements before an acceptable
Plan of Operation was submitted to BOR on December 18, 2002. Because demand for water exceeded supply,
Water Operations, Planning, Aqueduct Maintenance, the pumping plants, other river operators and a wide
variety of CAP customers cooperated to develop the plan.
The reality of the drought had hit home.
Being forced to “reduce” delivery requests because of supply issues also impacts other essential aspects
of CAP’s business: pumping energy, water storage in the Active Management Areas, availability of alterna-tive
water supplies and funding of certain water classes.
Clearly the drought’s impact on “business as usual” was huge. However, CAP’s managers responded
with strategy, flexibility, creativity and perseverance to overcome the obstacles and continue the delivery of
Arizona’s supply of the precious Colorado River water.
O
s A
C A P
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D R O U G H T &
P U B L I C
 
a n d d e a l i n g w i t h
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5.2
SRP “BORROWED” 150,000 ACRE-FEET
OF WATER IN 2002
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s r p
a b e t t e r i n f o r m e d
Acre FT-p-CAP-02
7.5
D.2-GRAPHIC.REP-01-CAP-02
GRPH02: 2002 cap LOWER BASIN ALLOCATIONS
TOTAL CALIFORNIA ARIZONA NEVADA
2002 CAP LOWER BASIN ALLOCATIONS-CAP-02
2002 CAP LOWER BASIN ALLOCATIONS-CAP-02
2002 CAP LOWER BASIN ALLOCATIONS-CAP-02
2002 CAP LOWER BASIN ALLOCATIONS-CAP-02
D.2-DESCRIPTOR-01-CAP-02
DSCR07: TWO VIEWS OF THE
INTERCONNECT BETWEEN CAP
AND SRP. THIS IS WHERE
SRP TAKES DELIVERY OF
CAP WATER. DUE TO THE
DROUGHT, SRP ANNOUNCED
IT WAS REDUCING ALL 2003
WATER DELIVERIES TO ITS
CUSTOMERS BY ONE-THIRD.
H2O
D.2.MISSION-03-CAP-02
PRESERVE THE PUBLIC’S TRUST AND THE LONG TERM VIABILITY
OF CAP BY PROMOTING RESPONSIBLE WATER USE.
4.4
2.8 0.3 M I L L I O N A C R E - F E E T
D.2-DESCRIPTOR-01-CAP-02
DSCR06: cooperation between cap
and srp meant most valley
residents were unaware
of the full extent of
the drought.
D.2-DESCRIPTOR-01-CAP-02
DSCR06: THE LOWER BASIN STATES:
ARIZONA, CALIFORNIA, AND
NEVADA, SHARE A COMBINED
ANNUAL ALLOCATION OF 7.5
MILLION ACRE-FEET.
Central Arizona Project (CAP) provided extra effort in working with its customers and other entities
during the 2002 drought.
Salt River Project (SRP), hard hit by the drought, needed more water from CAP than it normally pur-chases.
CAP and SRP achieved a change in state law so that SRP was able to “borrow” 150,000 acre-feet
of water from CAP with the promise that the water will be paid back at a later date, when normal runoff
levels return on the Salt and Verde watersheds. Prior to the change, SRP would have had to either pay back
the water within 12 months, or pay cash for it.
The drought also brought home to water managers the need to find and bring into Maricopa, Pinal and
Pima counties additional water supplies. To help facilitate this need, CAP led the way by forming Project
Wheel 2002 to begin the process of developing a wheeling policy for non-Project water.
Wheeling non-Project water means using CAP’s aqueduct to move non-CAP water from one point to
another. An example of wheeling would be for the City of Phoenix to pump groundwater at McMullen
Valley in the western part of the state, put the water in CAP’s canal and move it to a Phoenix water treat-ment
plant where it would be taken out of the canal, treated and delivered to customers.
In a normal year, CAP takes 1.5 million acre-feet of water off the Colorado River. However, it’s estimated
the system can safely transport up to 1.8 million acre-feet each year on an on-going basis. Project Wheel
was established to make recommendations about how that approximately 300,000 acre-feet of additional
capacity should be used.
The year-long effort involved CAP employees, customers, water experts, state employees and interested
citizens. Together this diverse group helped CAP to develop a broad wheeling policy that calls for the
300,000 acre-feet to be divided between municipalities, private interests and CAP.
Part of the 300,000 acre-feet of extra capacity, up to one-third if needed, will be set aside to accommodate
municipalities, such as Phoenix, that have rights to groundwater in rural areas and to provide for the Central
Arizona Groundwater Replenishment District’s needs. Part of the space, about 100,000 acre-feet, will be set
aside for future use by municipalities and private companies. About 100,000 acre-feet of space will be set
aside for CAP. CAP is beginning a study to see if it can acquire water rights, either groundwater or additional
surface water or both. If so, CAP’s annual allocation would effectively climb from 1.5 million acre-feet to 1.8
200,000 
                       
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D.2-DESCRIPTOR-01-CAP-02
DSCR08: BLUEPRINT OF CAP’S
HIEROGLYPHIC MOUNTAINS
RECHARGE PROJECT IN
THE WEST VALLEY
D.2-DESCRIPTOR-01-CAP-02
DSCR09: THE HIEROGLYPHIC MOUNTAINS
RECHARGE PROJECT BECaME
A REALITY BY YEAR’S END.
                       
                       
                       
                       
                       
                       
                       
                       
                       
million acre-feet. CAP will work with the Arizona Department of Water Resources to develop an
appropriate method of allocating the additional water supplies.
The current drought underscores the strategic importance of CAP’s long term commitment
to recharging the state’s over-stressed aquifers with excess Colorado River water. Any unused
or excess CAP water is stored underground at CAP’s recharge projects, sort of a water savings
account that can be accessed to supplant our customer’s needs during future droughts.
Arizona was fortunate that it did not have to recover recharged water to offset the 2002
drought. CAP stored more than 100,000 acre-feet of water in Pima and Maricopa counties
during 2002. But the severity of the drought means that there may be less water available in
2003 for recharge. However, CAP and its managers continue to plan for the future by main-taining
current sites and searching for new ones that can be used to store excess water that
will become available when the drought is over.
Between 1996 and 2002, CAP developed more than 200,000 acre-feet of annual recharge
capacity in five separate recharge projects. Three are in Pima County: the Avra Valley, Lower
Santa Cruz and Pima Mine Road recharge projects. Two others are in Maricopa County: the
Agua Fria and the Hieroglyphic Mountains recharge projects. Hieroglyphic Mountains began
operation in January 2003.
In 2001, CAP initiated development of a sixth recharge site. It purchased 500 acres of land
for the Tonopah Desert Recharge Project which is in the upper Hassayampa groundwater
basin west of the Phoenix metro area. It is projected that it will store 100,000 acre-feet of
water each year. Preliminary designs and permits should be ready by the summer of 2003 and
construction is projected to begin in 2004.
Two more potential recharge sites in the eastern Salt River Valley were identified and feasi-bility
studies were started in 2002. One is near Queen Creek and the second is north of that
location. The studies will continue in 2003 and, if the sites are favorable, the projects will
begin development in 2004 with a projected operational date of 2005.
Still another potential recharge site is located in the Bouse area in far Western Arizona. This
site could be used for interstate water banking, where Arizona would store water for Nevada
and possibly California to be withdrawn at a later date. Development of this site would also
allow Arizona to capture future surplus flows of the Colorado River that would otherwise flow
unused into the Gulf of California. Drought has delayed the urgency to develop this site but it
is estimated that when operations begin, its added capacity will increase total CAP recharge
capacity to 400,000 acre-feet.
In addition to the recharge sites planned or under construction, CAP may need to build still
other recharge projects in the future to accommodate the needs of the Central Arizona
Groundwater Replenishment District (CAGRD).
In addition to their groundwater and surface water supplies, some cities also depend upon
CAGRD to meet the demands of continued growth. CAGRD provides a mechanism for devel-opers
and water providers to demonstrate a 100-year assured water supply using renewable
water supplies rather than relying on mined groundwater.
CAGRD enrolls members who do not have the resources to locate and secure enough
renewable water supplies on their own. CAGRD replenishes groundwater on behalf of its
members by recharging water in the Active Management Area where the excess pumping
occurs. Members are classified as member service areas such as cities, towns and private water
utilities, and member lands, which primarily include subdivisions located outside city water
service area boundaries. By the end of 2002, CAGRD member land enrollment exceeded
100,000 homes. In addition, 19 water providers have enrolled their service areas as members
of the CAGRD.
As the CAGRD continues to grow it is going to demand more and more replenishment or
recharge capacity. It’s possible that CAGRD’s needs will exceed the capacity available in the
currently existing recharge projects. If so, CAP will need to develop recharge projects specifi-cally
for the CAGRD in the future.
Two other recharge customers, municipalities and the Arizona Water Banking Authority
(AWBA), also contribute to the need for new sites.
The AWBA purchases excess CAP water and stores it in recharge sites for future use. In
2002 it stored more than 300,000 acre-feet of water but the drought and the state’s budget
crisis will reduce AWBA storage in 2003 to an estimated 170,000 acre-feet of water.
Municipalities also are beginning to step forward in an effort to acquire capacity in CAP
recharge sites. In 2002 the City of Peoria began discussions with CAP to purchase capacity in
the Agua Fria Recharge Project and the Hieroglyphic Mountains Recharge Project. CAP also
has existing partnerships with the City of Tucson at the Pima Mine Road Recharge Project and
with Pima County at the Lower Santa Cruz Recharge Project.
Project Wheel 2002 was not the only outreach program in 2002. CAP has established a
history of being a good “corporate citizen” and 2002 was no different as CAP involved many
people, organizations and agencies in activities throughout the year.
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D.2.MISSION-01-CAP-02
EFFECTIVELY MANAGING ITS HUMAN, FINANCIAL
AND CAPITAL RESOURCES.
 
D.2-DESCRIPTOR-01-CAP-02
DSCR11: The Water Resource
Research Center at the
University of Arizona
for the Project WET
Facilitator Workshop.
HERE ARE SOME OF THE MANY GROUPS
SPONSORED IN PART BY CAP’S COMMUNITY
INVESTMENT PROGRAM.
D.2-DESCRIPTOR-01-CAP-02
DSCR10: Arizona State
Envirothon in Phoenix
to provide water
education to high
school students.
D.2-DESCRIPTOR-01-CAP-02
DSCR13: Abracadabra, water
conservation magic
shows for children
at the Phoenix Zoo.
{ d e p t h
C a r _ 0 2 500 M-D.
2-DESCRIPTOR-01-CAP-02
DSCR12: Hohokam Resource
Conservation and
Development Area, Inc.
in Higley for a water
station at the Maricopa
Agricultural Center.
A nearly universal concern of water resource management organizations is finding, training and retaining
people to lead the organizations in the future. CAP responded to this need in 2002 by beginning its Water
Leadership Program in Tucson.
The purpose of the program is to increase awareness among the region’s future community leaders
about the importance of prudent water resource management. In a structured, three-evening session
workshop, participants learned how Arizona obtains, uses and manages its water supplies as well as how
future regional growth may be shaped by water management policies.
Participants met others interested in managing and preserving water resources in the Tucson basin,
engaged in dialogue with CAP Board members about local and state water law, learned about the organi-zation’s
history and mission and heard an overview of water supply issues and organizations in Pima
County. They identified current and future water-related issues facing the state and left with a general
understanding of the importance of water resource planning and management. CAP intends to offer this
free program to the public biannually.
CAP’s Community Investment Program also touched many residents. Now in its sixth year, the pro-gram
strengthens business relationships, answers community needs and reinforces lasting commitments
to the people and communities that CAP serves. CAP primarily contributes to organizations within its
three-county service area which are involved in water education issues and environmental projects that
support CAP’s efforts.
CAP also sponsors educational programs that are correlated to Arizona State Education standards for
teachers and students of all grade levels free of charge. In 2002, CAP updated the materials including a
6-lesson teacher’s guide, 30-minute video, computer game and state water map for “Arizona Water Story,”
an award-winning program for grades 4-8. CAP also unveiled a new program designed for students of K-3
grades called “H2O for Kids.” This program contains a 7-minute video, student activity books, and a
teacher’s guide complete with two lesson plans which focus on the history of water in the state and
water conservation.
Another important educational tool CAP began distributing is a CD-ROM which contains information
about CAP’s history, mission, and system operations and features video-based virtual tours of the Mark
Wilmer Pumping Plant, Control Center,New Waddell Dam and the Lower Santa Cruz Recharge Project.
CAP will continue these efforts and activities throughout 2003 and continue to search for other ways
to reach out to all Arizona residents and provide water surety for its service area.
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T H E R I V E R
 
o n
 
                     
             
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D.2-DESCRIPTOR-01-CAP-02 COLORADO RIVER
4.4 million acre-foot
D.2-DESCRIPTOR-01-CAP-02
DSCR16: HEADWATERS OF THE
COLORADO RIVER, WHICH
PROVIDES WATER TO MORE
THAN 25 MILLION PEOPLE
IN THE SOUTHWEST.
Acre FT-p-CAP-02
D.2-GRAPHIC.REP-01-CAP-02
GRPH03: 2002 cOLORADO RIVER WATER USE FOR
THE LOWER BASIN
TOTAL CALIFORNIA ARIZONA NEVADA
2002 COLORADO RIVER WATER H2O USE FOR THE LOWER BASIN-CAP-02
A C R E - F E E T
8,433,500
2002 COLORADO RIVER WATER H2O USE FOR THE LOWER BASIN-CAP-02
2002 COLORADO RIVER WATER H2O USE FOR THE LOWER BASIN-CAP-02
2002 COLORADO RIVER WATER H2O USE FOR THE LOWER BASIN-CAP-02
5,327,500 2,788,100 317,900
CA USg-p-CAP-02 AZ USg-p-CAP-02 NV USg-p-CAP-02
D.2-DESCRIPTOR-01-CAP-02
DSCR14: an unusual view view of
arizona, you can trace
THE BORDER BY LOOKING AT
THE COLORADO RIVER ON
THE LEFT SIDE.
D.2-DESCRIPTOR-01-CAP-02
DSCR15: INTERIOR SECRETARY GAIL
NORTON ORDERED CALIFORNIA
TO ADHERE TO ITS 4.4 MILLION
ACRE-FEET ALLOCATION
IN 2003.
Note: This tabulation is based on diversions including
underground pumping, less measured return flow and less
current estimated unmeasured return flow to the river.
p a g e
2 The continuing drought in 2002 highlighted the critical importance of Colorado River water to Central
Arizona Project (CAP) and Arizona.
Throughout the year CAP steadfastly focused on safeguarding Arizona’s allocation as California struggled
internally to reach an agreement over its chronic overuse of Colorado River water.
In 1921 Congress authorized the seven basin states to enter into a Colorado River Compact. The Compact
divided the seven member states—Arizona, California, Nevada,Colorado, Utah, New Mexico and Wyoming—
into the Upper Basin and Lower Basin with each Basin getting half of the estimated 15 million acre-feet of
water per year. Arizona, California and Nevada were designated as the Lower Basin states.
In 1928, the Boulder Canyon Project Act authorized construction of Boulder (now Hoover) Dam and
divided the Lower Basin’s annual 7.5 million acre-feet of water. California was allocated 4.4 million acre-feet
per year, Arizona received 2.8 million acre-feet and Nevada received 300,000 acre-feet.
For years California took more than its 4.4 million acre-foot allotment because, prior to construction of CAP,
Arizona never used its full entitlement. When CAP was declared “substantially complete” in 1993 and began
delivering a large volume of water, it quickly became apparent that California had come to rely on an annual
amount of about 5.2 million acre-feet, which is 800,000 acre-feet more than its 4.4 million acre-foot allotment.
After years of negotiations, the Basin states, along with the Secretary of the Interior, developed a 15-year
program to get California to wean itself from 5.2 to 4.4 million acre-feet. However, before the agreement
could be signed by the seven states, four water users in California had to reach an agreement to transfer
water from agricultural use to municipal use.
It appeared that the four California entities—Metropolitan Water District of Southern California, San
Diego Water Authority, Coachella Valley Water District and Imperial Irrigation District (IID)—all were in
agreement. But on December 9, the IID Board rejected the agreement. In late December, Interior Secretary
Gale Norton warned California that if it did not reach agreement internally and failed to sign the seven
state plan, California would be held to its 4.4 million acre-foot allocation in 2003. The four agencies failed
to agree and on January 2, 2003, Secretary Norton ordered California to adhere to its 4.4 million acre-foot
allocation. Internal negotiations have since resumed in California.
CAP and other Arizona water leaders monitored the dispute closely. California’s failure to reach an agreement
does not harm Arizona, however, it does leave some Colorado River water issues unresolved and affects
m i l l i o n a c r e - f t
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18
CAP will continue its role as
Arizona’s drought defense.
D.2-DESCRIPTOR-01-CAP-02
DSCR17: CAP STORES COLORADO RIVER
WATER IN LAKE PLEASANT
WHICH HAS A MAXIMUM
STORAGE CAPACITY OF 811,784
ACRE-FEET OF WATER. ONE
ACRE-FOOT IS 325,851
GALLONS OF WATER.
811,784
A C R E - F E E T cooperation efforts among the water users along the river.
The drought also had an impact on the Colorado River. The dry conditions were not restricted to Arizona
but were evident throughout the West. The amount of water that flowed in the Colorado River during 2002
was the lowest on record.However, the approximately 25 million people in the Southwest who depend on
the Colorado River for water were not impacted because two reservoirs—Lake Mead and Lake Powell—had
enough water in storage to offset the low flows.
The Colorado River system is designed to withstand drought. Just as CAP is Arizona’s drought defense,
Lake Mead and Lake Powell are the Lower Basin’s drought defense. The lack of rain and runoff were easily
made up by releases from the two impoundments. While the drop in the level of each lake was significant—
the “bathtub rings” are clear evidence of the drought—the remaining volumes in each lake are such that
the region can withstand continued drought in 2003.
So, given the foresight and planning of Arizona’s water managers, both CAP and Arizona were able
to withstand the dry, often brutal drought conditions of 2002. Although no one is sure if normal
weather patterns will resume in 2003, CAP stands ready to safeguard Arizona’s share of Colorado
River water and is prepared to bring the needed water into the state.
20
28
29
31
32
33
57
59
60
61
63
63
64
MANAGEMENT’S DISCUSSION AND ANALYSIS
REPORT OF INDEPENDENT AUDITORS
STATEMENTS OF NET ASSETS
STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS
STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
STATEMENT OF NET ASSETS – BY FUND
STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS – BY FUND
SCHEDULE OF SERIES A 1990, SERIES A 1993 AND SERIES A 2001 BOND FUND ACTIVITY
SCHEDULE OF SERIES B 1991, SERIES B 1994 AND SERIES B 2001 BOND FUND ACTIVITY
SCHEDULE OF AD VALOREM PROPERTY TAX – FULL CASH VALUE AND ASSESSED VALUE
SCHEDULE OF AD VALOREM PROPERTY TAX – TAX LEVY AND COLLECTIONS
SCHEDULE OF CUSTOMER ACTIVITY—WATER O&M CHARGES AND CAPITAL CHARGES
C O N T E N T S
C
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A U D I T E D F I N A N C I A L S T A T E M E N T S
O T H E R F I N A N C I A L I N F O R M A T I O N
S T A T I S T I C A L S E C T I O N
1 2 - 3 1 - 0 2
F I N A N C I A L S T A T E M E N T S A N D
O T H E R F I N A N C I A L I N F O R M A T I O N
C e n t r a l A r i z o n a W a t e r C o n s e r v a t i o n D i s t r i c t
D e c e m b e r 3 1 , 2 0 0 2
$
MANAGEMENT’ S D I S C U S SION AND ANALY S I S C O N T I N U E D
The following is management’s discussion and analysis of the 2002 financial performance of the Central Arizona Water
Conservation District (District). It provides an overview of the District’s financial activities and financial position for the year
and should be read in conjunction with the District’s financial statements and accompanying notes.
DISCUSSION OF BASIC FINANCIAL STATEMENTS
The District’s annual financial reporting includes three basic financial statements and accompanying notes for an enterprise
fund. The District reports on a calendar year basis and all financial statements are presented on a comparative basis for 2002
and 2001. The three basic financial statements include the statements of net assets; the statements of revenues, expenses, and
changes in net assets; and the statements of cash flows. The statements of net assets summarize the District’s current and long-term
obligations (liabilities) and the assets available to meet those obligations. The difference between total assets and total lia-bilities
represents the District’s net assets. The statements of revenues, expenses, and changes in net assets summarize the
District’s operating and non-operating expenses for the year and the revenues that were available to cover those expenses, as well
as changes in net assets. The statements of cash flows summarize the District’s uses of cash during the year and the sources of
cash available to finance those uses. The statements of cash flows, as cash-based statements, include reconciliations to the state-ments
of revenues, expenses, and changes in net assets, which are prepared on an accrual basis. Consolidating schedules of net
assets and statements of revenues, expenses and changes in net assets, which provide more detailed information on the District’s
designated financial activities, are included after the notes to the financial statements.
The District’s activities are accounted for using the accrual method and incorporating the requirements of GASB
Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments. Under
enterprise fund accounting, the District is a single accounting entity for financial reporting purposes. However, within this single
accounting entity the District has identified a number of financial activities that it wishes to track separately, referred to as
“funds.” These funds are as follows: General Fund, Central Arizona Groundwater Replenishment District (CAGRD) Fund,
State Demonstration Projects Fund, Ak-Chin Fund, and several Bond Funds. The use of the term “fund” for these separate
activities does not have any particular accounting significance. The District is not required to and does not publish separate
financial statements for any of the individual funds, except for the consolidating statements referenced above.
The General Fund represents the District’s primary activity, the delivery of Colorado River water to central Arizona
through the Central Arizona Project (CAP) and is, by an order of magnitude, the largest fund within the District. The CAGRD
Fund represents the activities of the Central Arizona Groundwater Replenishment District. The State Demonstration Project
Fund represents the activities related to the construction of State Demonstration underground water recharge projects. The
Ak-Chin Fund represents the activities related to a trust fund established to acquire or conserve water to supplement Colorado
River supplies. The Bond Funds represent the activities related to several revenue bond series issued by the District. Please
refer to the notes to the financial statements for additional information on these funds.
C O N D E N S E D F I N A N C I A L I N F O R M A T I O N
The following condensed financial information provides an overview of the District’s financial activities for the years
ended December 31, 2002 and December 31, 2001.
Total Assets
Capital Assets: The largest component of the District’s capital assets is the permanent service right, net of accumulated
amortization. For 2002, the permanent service right (net) decreased from $1.56 billion to $1.52 billion. The permanent service
right represents the District’s right to operate the Central Arizona Project system and collect revenues from operations, for which
the District has incurred a repayment obligation to the United States. While property and equipment assets grow annually as a
result of ongoing capital projects, such additions are presently more than offset by amortization of the permanent service right,
which is approximately $30 million to $31 million per year. As a result, net capital assets tend to decrease each year.
C E NT R A L A R I Z O N A WAT E R C O N S E RVAT I O N DI S T R I C T
MA NAG E M E NT ’ S DI S C U S S I O N A N D A NA LY S I S
FO R T H E Y E A R E N D E D DE C E M B E R 3 1 , 2 0 0 2
C e n t r a l A r i z o n a Wa t e r C o n s e r v a t i o n D i s t r i c t f - 02
Other Assets: Other asset categories include cash, receivables and other current assets, restricted and unrestricted reserves
and investments, and funds held by or advanced to the federal government.
The net decrease of $32 million or 2 percent is primarily associated with a reduction of $34.7 million in the permanent
service right and a $11.9 million reduction in the repayment credit. Approximately $30 million of the decline in the permanent
service right was due to the annual amortization. The balance was a result of the amendment of the settlement Stipulation,
which is discussed in Note 3. The repayment credit resulted from the settlement Stipulation, which is discussed in Note 3 of
the Financial Statements, and will be used to offset the amount needed to meet the District’s annual repayment obligation.
This credit will be exhausted in 2004.
Total Liabilities
Long-Term Liabilities: The two largest components of the District’s long-term liabilities are the federal repayment obligation
and the contract revenue bonds. The long-term federal repayment obligation decreased from $1.51 billion in 2001 to $1.48 billion
in 2002. Approximately $20 million of the decline in the repayment obligation was due to the scheduled payment for 2002 and
offsets of the repayment credit receivable. The balance was the result of the amendment of the settlement Stipulation. In addition,
contract revenue bonds decreased $17.5 million.
Generally, long-term liabilities will decrease each year as the repayment obligation and revenue bonds are paid off.
2002 2001 Change
Capital Assets:
Permanent service right, net $ 1,520.6 $ 1,555.3 $ (34.7)
Property and equipment, net 38.7 32.0 6.7
Other Assets:
Cash and Investments 263.3 263.9 (0.6)
Repayment Credit 1.0 12.9 (11.9)
Other 70.4 61.9 8.5
Total Assets: $ 1,894.0 $ 1,926.0 $ (32.0)
( D o l l a r s i n M i l l i o n s )
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MANAGEMENT ’ S DI S CUS S ION AND ANA LY S I S C O N T I N U E D MANAGEMENT ’ S DI S CUS S ION AND ANA LY S I S C O N T I N U E D
2002 2001 Change
Assets
Capital assets, net $ 1,559.3 $ 1,587.0 $ (27.7) (2%)
Other assets 334.7 339.0 (4.3) (1%)
Total assets 1,894.0 1,926.0 (32.0) (2%)
Liabilities
Long-term liabilities 1,639.4 1,675.7 (36.3) (2%)
Other liabilities 103.4 107.3 (3.9) (4%)
Total liabilities 1,742.8 1,783.0 (40.2) (2%)
Net Assets
Investments in capital assets, net of debt (99.5) (108.8) 9.3 9%
Restricted 57.4 62.5 (5.1) (8%)
Unrestricted 193.3 189.3 4.0 2%
Total net assets 151.2 143.0 8.2 6%
Total liabilities and net assets $ 1,894.0 $ 1,926.0 $ (32.0) (2%)
Other Liabilities: Other liabilities include payables, accrued interest, current principal obligations, and the OM&R
obligation. Overall, the net decrease in other liabilities was $3.9 million for 2002. The OM&R obligation decreased $3.6
million and represented the rebate liability owed to subcontract and Federal customers associated with the difference
between the reconciled water rates and the set rates.
2002 2001 Change
Long-Term Liabilities:
Repayment obligation $ 1,482.3 $ 1,505.7 $ 23.4
Contract revenue bonds 134.8 152.3 17.5
Other 22.3 17.7 4.6
Other Liabilities:
OM&R reconciliation provision – 3.6 3.6
Other 103.4 103.7 0.3
Total liabilities $ 1,742.8 $ 1,783.0 $ 40.2
( D o l l a r s i n M i l l i o n s )
Total Net Assets
Net assets, the difference between assets and liabilities, increased 6 percent or $8 million from 2001. In comparison, net
assets for 2001 decreased 8 percent or $12 million from 2000.
( D o l l a r s i n M i l l i o n s )
Investments in capital assets, net of related debt, increased 9 percent or $9.3 million in 2002. This increase reflects that the
District is paying off the debt faster than the associated amortization and depreciation on these assets. Over time, investments
in capital assets (net) will become less negative and become positive. The decrease in the debt associated with the contract rev-enue
bonds accounts for $16 million of the increase in investments in capital assets (net). As discussed in Note 10 of the
Financial Statements, the contract revenue bonds will be paid off in 2011. Also, property and equipment (net) increased about
$7 million in 2002. Offsetting these increases is a decrease in the net investment in the permanent service right. Currently,
amounts associated with the amortization of the permanent service right (asset) exceed the District’s annual principal pay-ment
to the federal government for the repayment obligation (liability). The annual repayment obligation is based on paying
a percentage (which increases over time) of the remaining outstanding balance, plus interest, over a 50-year period, while
amortization remains relatively flat over time.Consequently, the asset is presently being amortized more quickly than the debt
is being paid. As the payment percentage increases, the annual principal payment will exceed amortization.
Restricted net assets decreased 8 percent or $5.1 million. The majority of the decrease is related to additional spending of
$10 million to construct state demonstration projects. Offsetting this decrease is an increase of $4 million to fund the repay-ment
and emergency OM&R reserve funds required under the terms of the Master Repayment Agreement and discussed in
Note 7 of the Financial Statements, and $1 million for several other items, the largest of which is accrued interest payable.
Unrestricted net assets increased 2 percent or $4.0 million primarily due to additional revenue from the use of CAP trans-mission
lines by other entities for the period 1996 to 2001.
The change in restricted and unrestricted net assets will fluctuate depending on operational needs and any actions that
may result from the District’s reserve study.
Total Revenues
The District’s principal sources of revenues are water delivery charges, water service capital charges, power sales, property
taxes, and interest earnings. Total revenues for 2002 increased $21.6 million or 12 percent from 2001 to $206.8 million, pri-marily
due to increased water deliveries, which had a favorable effect on water O&M charges and water service capital charges,
and other Basin Development Fund revenues associated with other entities use of CAP transmission lines from 1996 to 2001.
Offsetting these increases was a decrease in interest earnings due to a decline in interest rates.
2002 2001 Change
Operating revenues $ 167.8 $ 144.6 $ 23.2
Nonoperating revenues 39.0 40.6 (1.6)
Total revenues $ 206.8 $ 185.2 $ 21.6
( D o l l a r s i n M i l l i o n s )
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( )
( )
( )
( )
( )
Change In Net Assets and Ending Net Assets
As shown below, the increase in net assets for 2002 was $8.1 million, which is $20.1 million higher than 2001 primarily
due to higher revenues in 2002.
MANAGEMENT ’ S DI S CUS S ION AND ANA LY S I S C O N T I N U E D MANAGEMENT ’ S DI S CUS S ION AND ANA LY S I S C O N T I N U E D
Total Expenses
Total expenses for 2002 exceeded 2001 by $1.5 million as shown below. This increase is a result of greater spending on
capital projects, which caused depreciation expense to increase. In addition, transmission charges increased to support the
additional transmission capacity required on the Parker-Davis and Intertie transmission systems to provide additional capac-ity
needed by the new impellers at Mark Wilmer Pumping Plant. Offsetting these increases is a decrease in pumping power
costs primarily caused by lower over-threshold energy costs due to purchasing energy on the open market as opposed to uti-lizing
the Salt River Project (SRP) contractual agreement.
The District sets rates annually each June for the following year. Rates are set in a manner that will recover an appropriate
share of the District’s expected operating expenses from customers while maintaining adequate reserve levels. Since rates are
set in advance, actual expenses may differ from the estimates used to calculate rates, and reserves may consequently fluctuate.
The District has completed a reserve study, which is used to forecast future repairs and replacements to assist the District in
setting appropriate reserve targets and strategies and then to set rates that accomplish those targets and strategies.
TOTAL REVENUES
$80 
$60 
$40 
$20 
$ 0
WATER CAPITAL 
CHARGES
POWER TAXES INTEREST OTHER
M I L L I O N S
74
57 57
29 25
61
27 24
12 16
4 6
2002
2001
2002 2001 Change
Operating expenses $ 150.0 $ 148.6 $ 1.4
Nonoperating expenses 48.7 48.6 0.1
Total expenses $ 198.7 $ 197.2 $ 1.5
( D o l l a r s i n M i l l i o n s )
ANALYSIS OF OVERALL FINANCIAL POSITION AND RESULTS OF OPERATIONS—CURRENTLY KNOWN
FACTS, DECISIONS OR CONDITIONS THAT ARE EXPECTED TO HAVE A SIGNIFICANT EFFECT ON
FINANCIAL POSITION
The overall financial position of the District continues to be strong. The District has General Fund cash reserves of over
$200 million, which represents in excess of one year’s cash expenditures including operating expenses, capital projects and
federal debt service (the Bond Funds have their own restricted reserves as required by the applicable Indentures). The restricted
portion of the General Fund cash reserves, approximately $44 million, is required under the District’s Master Repayment
Agreement (see Note 3 of the Financial Statements). The balance of the General Fund cash reserves has accumulated over the
years, funded primarily through property tax collections and interest earnings in excess of operating cost subsidies required
for rates that are set lower than cost by District policy.
The cash reserves serve several purposes. First, there is a great deal of seasonality in the District’s cash flow. The annual
installment on the repayment obligation to the United States occurs each January 15, and usually involves a substantial cash
payment. Timing of electricity purchases is another consideration, since most of the diversions from the Colorado River take
place from late fall to early spring as Lake Pleasant is filled. During the summer, the lake is drawn down. The District’s 1994
power sales contract with SRP (see Note 4 of the Financial Statements) specifies a “threshold” level of electricity that can be
purchased essentially at cost. At current water delivery levels, the threshold purchases are exhausted in the late third quarter of
each year, requiring the District to purchase power on either the open market or through the SRP contractual agreement, both
of which are more expensive. The combination of the timing impacts of water diversions and electricity prices has the net effect
of concentrating over one-half of the District’s electricity costs into a few months in the winter and early spring. Property tax
and water service capital charge revenues are received primarily in two semi-annual installments in the spring and the winter.
The combination of all of the seasonal effects results in the reserve levels fluctuating up to $40 million between the high point
at the end of the year and the low point in April prior to receipt of the first installment of property taxes and capital charges.
Cash reserves also serve as a hedge against operating uncertainties, which include changes in water demand, electricity
costs and water supply.
2002 2001 Change
Total operating revenues $ 167.8 $ 144.6 $ 23.2
Total operating expenses (150.0) (148.6) (1.4)
Operating income (loss) 17.8 (4.0) 21.8
Nonoperating revenues (expenses) (9.7) (8.0) (1.7)
Change in net assets 8.1 (12.0) 20.1
Beginning net assets 143.0 155.0 (12.0)
Ending net assets $ 151.1 $ 143.0 $ 8.1
( D o l l a r s i n M i l l i o n s )
TOTAL EXPENSES
$80 
$60 
$40 
$20 
$ 0
SALARIES POWER PSR AMORT INTEREST OTHER
M I L L I O N S
32 31 30 31
57
59
49 49
31
27
2002
2001
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In addition, cash reserves also serve as a source of funds for capital projects and other project spending. The District recovers
a portion of its ongoing capital expenditures through rates, since depreciation is included as a recoverable cost. Beginning in
2002, the District has included a $2 an acre-foot charge in the fixed OM&R rate component as a contribution towards ongoing
replacements. In 2004, this component increases to $4 an acre-foot. The balance of capital spending is funded through property
tax revenues and interest income. As the CAP ages there may be capital spending for major repairs, replacements or refurbishment
that are not entirely predictable. Finally, reserves are a hedge against strategic uncertainties.
The installation of scrubbers at the Navajo Generating Station (NGS) has enabled the plant to emit less sulfur dioxide
(SO2). As a result, the plant receives SO2 allowances from the Environmental Protection Agency, which may be marketed to
others. In 2002, the District entered into an agreement with the federal government to allow the District to market these credits
and use the net proceeds to reduce the CAP pumping energy charges for federal, M&I, and agricultural water users (energy rate
1). Total credits available for sale are estimated at 505,800 credits, are from vintage years 2000 to 2032, and can be sold in
advance of the actual vintage year. By decoupling the application of these proceeds from the actual sale of the credits, the
District is able to stabilize the impact of OM&R reconciliations to federal and subcontract customers.
Results of operations may be evaluated by both analyzing the change in net assets versus expectations and the change in
General Fund cash reserve levels. The consolidated change in net assets may be difficult to assess, since it includes the Bond
Funds (which should typically experience an increase in net assets because revenues are sufficient to cover both interest expense
and principal payments) and the State Demonstration Project fund (which should typically experience a decrease in net assets,
since the tax proceeds collected in earlier years that are now being spent have already been recorded as non-exchange transaction
revenues). The General Fund in the near future can usually be expected to experience a decrease in net assets, due to timing
differences between the effectively straight-line amortization of the permanent service right and the associated debt service.
Until 2003, the policy of the District’s Board of Directors was to set rates in such a way that cash reserves could be main-tained
at relatively the same level (around $200 million), until such time as uncertainties associated with the settlement
Stipulation were resolved or the reserve strategy was modified. As discussed in Note 3, the District and the United States have
agreed to extend the settlement Stipulation and this extension is expected to be in place until 2012. This extension will
provide the certainty needed to implement rate strategies that will enable the District to meet new reserve targets. The new
targets were developed to trend reserves down to between $160 to $165 million to ensure sufficient reserves exist to provide
working capital, maintain master contract reserves, and provide for at least two years of capital spending. To implement the
new reserve targets, the District reduced capital charges the second half of 2003 from $43 to $37 an acre-foot and adopted the
preliminary 2004 rates, which will reduce the capital charge to $32 an acre-foot and the ad valorem tax to $0.08 per $100 of
assessed valuation from $0.09 per $100 of assessed valuation. Final 2004 rates will be adopted in June 2003.
The extension of the settlement Stipulation will lower the District’s financial risk and correspondingly enable the District
to revise its reserve policy to trend reserves down slowly. The District’s Board and management considers this to be a prudent
financial strategy. 2002 ended with cash reserves of $213 million, which are anticipated to trend downward to $200 million
over the next two years.
CAPITAL ASSET AND LONG-TERM DEBT ACTIVITY
Capital Assets: At December 31, 2002, the District had a net investment of $1.56 billion in capital assets. This amount represents
a net decrease (including additions and deductions) of $28 million, or 2 percent from the prior year as follows.
MANAGEMENT ’ S DI S CUS S ION AND ANA LY S I S C O N T I N U E D MANAGEMENT ’ S DI S CUS S ION AND ANA LY S I S C O N T I N U E D
SCHEDULE OF CAPITAL ASSETS (Net of Depreciation and Amortization)
More information about the District’s capital assets is provided in Note 2 of the Financial Statements.
Long-Term Debt: As of December 31, 2002, the District’s long-term debt decreased $37 million from the prior year as follows.
2002 2001 Change
Permanent service right $ 1,520.6 $ 1,555.0 $ (34.4)
Other capital assets
Land 0.8 0.5 0.3
Construction in progress 17.0 12.4 4.6
Capital equipment 18.0 17.8 0.2
Structures and improvements 3.0 1.3 1.7
Total other capital assets 38.8 32.0 6.8
Total capital assets $ 1,559.4 $ 1,587.0 $ (27.6)
( D o l l a r s i n M i l l i o n s )
2002 2001 Change
Repayment obligation $ 1,504.6 $ 1,526.0 $ (21.4)
Reneue bonds 155.0 171.2 (16.2)
Total long-term debt $ 1,659.6 $ 1,697.2 $ (37.6)
( D o l l a r s i n M i l l i o n s )
More information about the District’s repayment obligation is provided in Note 3 of the Financial Statements. Note 10 of
the Financial Statements contains additional information on the District’s revenue bonds.
CONTACTING THE DISTRICT’S FINANCIAL MANAGEMENT
The information contained in the Management’s Discussion and Analysis is intended to give our customers, taxpayers,
and bond holders a general overview of the District’s finances, issues that impact the District’s financial position, and account-ability
for the money it receives. If you have questions about the report or need additional financial information, contact
Theodore C. Cooke, Assistant General Manager of Finance at:
Post Office Box 43020
Phoenix, Arizona 85080-3020
623-869-2167
tcooke@cap-az.com
SCHEDULE OF LONG-TERM DEBT (Including Current Portion)
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S T A T E M E N T S O F N E T A S S E T S
D E C E M B E R 3 1
2002 2001
A S S E T S
Current assets:
Cash $ 571 $ 152
Investment in Arizona Local Government Investment Pools 57,610 2,586
Total cash and cash equivalents 57,039 2,738
Receivables:
Accrued interest receivable on unrestricted investments 1,487 1,731
Due from water customers, less allowance for doubtful accounts
of $2,324 and $2,007 at December 31, 2002 and 2001, respectively 7,195 3,239
Other 2,551 313
Repayment credit (Note 3) 1,005 12,865
Materials and supplies inventory 3,891 3,497
Water inventory 13,744 14,868
Other 3,352 4,165
Total current assets 90,264 43,416
Noncurrent assets:
Funds held by federal government 36,633 32,559
Investment in State Treasurer CAP investment pool (Note 6) 111,446 160,602
Restricted assets (Note 7) 94,776 100,593
Advances to federal government (Note 8) 708 378
Property and equipment, less accumulated depreciation of $23,713
and $18,545 at December 31, 2002 and 2001, respectively 38,735 32,011
Permanent service right, less accumulated amortization of $268,990
and $239,390 at December 31, 2002 and 2001, respectively 1,520,636 1,555,307
Bond issuance costs, net of accumulated amortization of $2,339
and $1,954 at December 31, 2002 and 2001, respectively 772 1,145
Total noncurrent assets 1,803,706 1,882,595
Total assets $ 1,893,970 $ 1,926,011
See accompanying notes.
( I n t h o u s a n d s )
R E P O R T O F I N D E P E N D E N T A U D I T O R S
The Board of Directors
Central Arizona Water Conservation District
We have audited the accompanying statements of net assets of Central Arizona Water Conservation District as of December 31,
2002 and 2001, and the related statements of revenues, expenses and changes in net assets, and cash flows for the years then
ended. These financial statements are the responsibility of the District’s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Central
Arizona Water Conservation District at December 31, 2002 and 2001, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in the United States.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements of the Central Arizona
Water Conservation District as of and for the years ended December 31, 2002 and 2001, taken as a whole. The other financial infor-mation
on pages 45-50 is presented for purposes of additional analysis and is not a required part of the basic financial statements.
Such information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
Management’s discussion and analysis on pages 1 to 8 is not a required part of the basic financial statements but is supplementary
information required by the Governmental Accounting Standards Board.We have applied certain limited procedures, which consisted
principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information.
However, we did not audit the information and express no opinion on it. The statistical section on pages 51 to 60 has not been subjected
to the procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it.
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Y E A R E N D E D D E C E M B E R 3 1
2002 2001
O P E R A T I N G R E V E N U E S
Water operations and maintenance charges $ 73,964 $ 56,892
Water service capital charges 28,585 25,417
Power and Basin Fund revenues (Note 5) 61,333 56,747
Reimbursements and other operating revenues 3,914 5,561
Total operating revenues 167,796 144,617
O P E R A T I N G E X P E N S E S
Salaries and related costs 32,257 30,908
Pumping power 56,926 58,559
Power transmission 2,701 1,601
Hoover capacity charges 1,618 2,785
Amortization of permanent service right 30,437 30,538
Depreciation 6,266 4,315
Provision for OM&R reconciliation (Note 14) 28 304
Provision for doubtful accounts 318 138
Other operating expenses 19,426 19,493
Total operating expenses 149,977 148,641
Operating income (loss) 17,819 4,024
N O N O P E R A T I N G R E V E N U E S ( E X P E N S E S )
Property taxes, less assignment to Arizona Water Banking Authority
of $12,051 and $10,691 in 2002 and 2001, respectively 27,113 24,152
Interest income and other nonoperating revenues 11,344 15,201
Interest income reserved for Ak-Chin fund 118 244
Interest income and other nonoperating revenues reserved
for State Demonstration Project 458 965
Interest expense and other nonoperating expenses 48,736 48,553
Total nonoperating revenues (expenses) 9,703 7,991
Change in net assets 8,116 12,015
Net assets at beginning of year 143,015 155,030
Net assets at end of year $ 151,131 $ 143,015
See accompanying notes.
( I n t h o u s a n d s )
S T A T E M E N T S O F R E V E N U E S , E X P E N S E S A N D C H A N G E S
I N N E T A S S E T S
D E C E M B E R 3 1
2002 2001
L I A B I L I T I E S
Current liabilities:
Accounts payable $ 19,089 $ 21,748
Accrued payroll, payroll taxes and other accrued expenses 5,020 5,044
Current liabilities payable from restricted assets, advances to federal
government, and other noncurrent assets:
Accrued interest payable 36,772 37,721
Repayment obligation, due within one year (Note 3) 22,310 20,272
Contract revenue bonds, due within one year (Note 10) 20,235 18,915
OM&R reconciliation obligations (Note 14) – 3,618
Total current liabilities 103,426 107,318
Noncurrent liabilities:
Repayment obligation, due after one year (Note 3) 1,482,285 1,505,741
Contract revenue bonds, due after one year, net of unamortized discounts
of $10,966 and $13,680 at December 31, 2002 and 2001, respectively (Note 10) 134,810 152,331
Provision for retiree health insurance 166 300
Water operations and capital charges deferred revenue 22,152 17,306
Total noncurrent liabilities 1,639,413 1,675,678
Total liabilities 1,742,839 1,782,996
N E T A S S E T S
Investment in capital assets, less related debt (99,497) (108,795)
Restricted 57,327 62,533
Unrestricted 193,301 189,277
Total net assets 151,131 143,015
Total liabilities and net assets $ 1,893,970 $ 1,926,011
See accompanying notes.
S T A T E M E N T S O F N E T A S S E T S C O N T I N U E D
( I n t h o u s a n d s )
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01 No
 
O R G A N I Z A T I O N A N D R E P O R T I N G E N T I T Y
The Central Arizona Water Conservation District (District) is a multi-county water conservation district organized within
the state of Arizona encompassing Maricopa, Pima, and Pinal counties. The District’s popularly elected Board of Directors
serves as its governing body. Under the requirements of Governmental Accounting Standards Board (GASB) Statement No.
14, The Financial Reporting Entity, the District is a primary government. The District was authorized in 1971 by the Arizona State
Legislature for the primary purpose of creating a single entity to enter into an agreement (Note 3) with the United States
Department of the Interior, Bureau of Reclamation (Reclamation), for repayment of the reimbursable cost of the Central
Arizona Project (CAP). The District is further empowered to serve as the operating agent of the CAP (see Note 15).
In 1993, the State legislature gave the District additional authority to provide replenishment services within the District’s
three-county service area. This authority is commonly referred to as the Central Arizona Groundwater Replenishment District
(CAGRD). The CAGRD began enrolling members in 1995, and as of December 31, 2002, there were 433 member lands
(individual subdivisions) and 19 member service areas. The CAGRD is responsible for using renewable water supplies to
replenish (or recharge) excess groundwater used by its members. All costs of the CAGRD are to be paid by its members
through assessments based on replenishment services provided. Through 2002, the CAGRD’s total net replenishment
obligation was approximately 20,875 acre-feet.
The CAP is a multi-purpose water resource project authorized by the Congress of the United States in 1968 by the Colorado
River Basin Project Act and was constructed by Reclamation. The CAP is intended to deliver an average of approximately 1.5 million
acre-feet of Arizona’s annual share of Colorado River water to central and southern Arizona, which will partially replace existing
groundwater uses and supplement surface water supplies. It also provides flood control, power, recreation, and fish and wildlife
benefits. The major authorized project features include (1) a 335-mile aqueduct system (water supply system), (2) New Waddell and
Modified Roosevelt Dams (regulatory storage facilities), (3) replacement features or programs for Cliff Dam (Cliff Dam Alternative),
(4) Hooker Dam or suitable alternative (Hooker Dam Alternative), (5) Buttes Dam, (6) Navajo Power Project (Navajo), and
(7) Indian and non-Indian water distribution systems.
The District has the authority to levy ad valorem taxes against all taxable property within its boundaries. The first ad valorem
tax, which may not exceed 10 cents per $100 of assessed valuation, is for the District’s operations and repayment of the con-struction
cost repayment obligation of the CAP (Note 3). The second ad valorem tax, which may not exceed 4 cents per $100
of assessed valuation, is for water storage to the extent that it is not required for the District’s operations or repayment of the
construction cost repayment obligation of the project. Through December 1995, this tax was used to fund water recharge activities
under State Demonstration Projects and was levied only in Maricopa and Pima Counties (see Note 7). In April 1996, the
Arizona State Legislature amended the law relating to this second ad valorem tax (see Note 7). The ad valorem tax for
operations and repayment was levied at 10 cents per $100 of assessed valuation for the tax year ending June 30, 2000, and 9
cents per $100 of assessed valuation for the tax years ending June 30, 2001, June 30, 2002 and June 30, 2003. The ad valorem
tax for water storage was levied at 4 cents per $100 of assessed valuation in the tax years ending June 30, 2002 and June 30,
2003, and proceeds have been transferred to the Arizona Water Banking Authority (see Note 7). The respective counties
collect property taxes on behalf of the District.
N O T E S T O F I N A N C I A L S T A T E M E N T S
D E C E M B E R 3 1 , 2 0 0 1
Y E A R E N D E D D E C E M B E R 3 1
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 101,151 $ 75,050
Cash received from power sales 57,259 50,867
Cash paid to employees (32,281) (30,343)
Cash paid to suppliers (81,922) (79,629)
Net cash provided by operating activities 44,207 15,945
CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES
Cash received from property taxes, net 27,113 24,152
Net cash provided by noncapital financing activities 27,113 24,152
CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES
Payments on contract revenue bonds, including interest and other expenses (27,424) (30,871)
Payments on repayment obligation, including interest (57,783) (57,277)
Additions to property and equipment (12,990) (13,134)
Decrease in Repayment Credit 11,860 22,719
Increase/(Decrease) in advances to federal government (330) 5,552
Decrease in permanent service right 4,235 –
Net cash used in capital and related financing activities (82,432) (73,011)
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase)/Decrease in restricted assets 5,817 (1,463)
Decrease in investment in state pool 49,156 12,360
Interest on investments 10,439 18,821
Net cash provided by investing activities 65,412 29,718
Net Increase/(Decrease) in cash and cash equivalents 54,301 (3,196)
Cash and cash equivalents at beginning of year 2,738 5,934
Cash and cash equivalents at end of year $ 57,039 $ 2,738
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Operating income (loss) $ 17,819 (4,024)
Adjustments to reconcile operating income (loss) to net cash used in operating activities:
Amortization of permanent service right 30,437 30,538
Depreciation 6,266 4,315
Provision for doubtful accounts 318 138
Changes in operating assets and liabilities:
Due from water customers (4,689) (1,511)
Due from other receivables (1,823) 356
Materials and supplies Inventory (394) (558)
Water Inventory 1,124 (2,221)
Other 813 (3,247)
Funds held by federal government, net (4,074) (5,880)
Accounts payable (2,659) 8,847
Increase in deferred revenue 4,846 1,261
OM&R reconciliation obligation (3,618) (12,622)
Accrued payroll, payroll taxes and other accrued expenses (24) 565
Accrued pension (135) (12)
Net cash provided by operating activities $ 44,207 $ 15,945
See accompanying notes.
S T A T E M E N T S O F C A S H F L O W S
( I n t h o u s a n d s )
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02 No
 
S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S C O N T I N U E D
Permanent Service Right
The District’s interest in the CAP represents a permanent service right pursuant to the Master Repayment Agreement and
the settlement Stipulation (Note 3). The permanent service right represents the District’s right to use the CAP water delivery
system for the purpose of fulfilling its responsibility of delivering water as provided in the Master Repayment Agreement and
to collect revenues produced by the CAP. The District has used the repayment obligation specified in the settlement
Stipulation, plus certain advances to the federal government and other adjustments, in recording the permanent service right.
The cost of the permanent service right may be adjusted in the future as a result of determinations to be made as a consequence
of the settlement Stipulation (see Notes 3 and 11).
Although the District’s interest in the CAP is reflected in the accompanying balance sheets, the United States retains a
paramount right or claim in the CAP arising from the original construction and operation of the CAP as a Federal Reclamation
Project. The District’s right to the possession and use of, and to all revenues produced by, the CAP is evidenced by the Master
Repayment Agreement, various laws, and other agreements with the United States. Legal title to the CAP will remain with the
United States until otherwise provided by Congress.
The District amortizes the permanent service right on the straight-line method over the estimated useful lives of the major
components of the CAP, generally 100 years for the aqueduct, 30 years for the Navajo power plant and related transmission
facilities, 50 years for buildings and structures, and 20 years for the pumping plant equipment.
The cost of periodic maintenance is charged to operations expense and the cost of major replacements is capitalized.
Bond Issuance Costs, Discounts and Premiums
Bond issuance costs, discounts and premiums are deferred and amortized over the term of the related bonds on the interest
method. Bond discounts and premiums are presented as a reduction or increase of the face amount of bonds payable whereas
issuance costs are recorded as deferred charges.
Revenue Recognition
The District records revenue from the sale of water, the sale of power, the collection of property taxes and the provision of
certain contract services to other outside entities. Water rates consist of a water service capital charge and an operations,
maintenance and replacement (OM&R) charge (see Note 4). Generally, OM&R charges are determined by the Board of
Directors after giving consideration to the amount of OM&R costs to be paid by the various subcontractors and through
property taxes. Water is delivered to subcontractors and other customers based on delivery requests. Revenue from OM&R
charges is recognized as it is earned and revenue from water service capital charges is recognized ratably over the period of the
billing.Generally, OM&R charges for scheduled water deliveries are due in advance.
Revenues from contract services and the sale of power are recorded when earned.
Property taxes are recorded as revenue when received. Tax equivalency charges are recorded when received if there is no
obligation to deliver any services or provision for refund.
N O T E S T O F I N A N C I A L S T A T E M E N T S C O N T I N U E D
S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S
Basis of Accounting
The accounting policies of the District conform to generally accepted accounting principles as applicable to an enterprise
fund of a governmental unit. Accordingly, the accrual basis of accounting is utilized, whereby revenues are recorded when they
are earned, and expenses are recorded when the liability is incurred. The District has elected, in accordance with GASB
Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Activities That Use Proprietary Fund
Accounting, and GASB Statement No. 29, The Use of Not-for-Profit Accounting and Financial Reporting Principles by Governmental
Entities, not to apply Financial Accounting Standards Board Statements and Interpretations issued after November 30, 1989.
The District elected to implement GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis
for State and Local Government, as well as GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, in
2000. The District’s books and records include separate accounts and projects that are described as “funds”: a general fund,
Ak-Chin fund, State Demonstration Project fund, CAGRD fund, and debt service funds. These “funds” have been combined
in the accompanying financial statements. All material interfund transactions have been eliminated.
Use of Estimates
The preparation of financial statements that conform to generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. See also Notes 3 and 11 regarding the District’s repayment obligation and the
settlement Stipulation.
Cash and Unrestricted Investments
All funds are to be invested in obligations issued or guaranteed by the United States or any of its agencies, collateralized
repurchase agreements, obligations of the state and local governments, prime quality commercial paper, and other instruments
as set forth in the District’s enabling legislation.Investments are managed by the State Treasurer and maintained in investment
pools (the state of Arizona Local Government Investment Pool and the CAWCD Pools 12 and 13). The Local Government
Investment Pool (LGIP) consists of investments with maturities of less than one year and, therefore, are recorded at cost. The
Pools are recorded at fair value in accordance with GASB Statement No. 31, Accounting and Financial Reporting for Certain
Investments and for External Investment Pools (see Note 6).
Inventory
Inventory is comprised of maintenance, auto, and safety supplies and was carried at the lower of cost (first-in, first-out)
or market until September 2001. Effective September 2001, when the new computer system was implemented, the inventory
valuation method used is average cost. The effect of this change was not material to the financial statements.
Property and Equipment
Property and equipment are stated at cost. Assets are depreciated on the straight-line method over the estimated useful
lives of the assets ranging from five to forty years.
N O T E S T O F I N A N C I A L S T A T E M E N T S C O N T I N U E D
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03 No
 
M A S T E R R E P A Y M E N T A G R E E M E N T
The Agreement
Reclamation and the District entered into a contract for delivery of water and repayment of costs of the CAP in December
1972 (1972 Master Repayment Agreement). The 1972 Master Repayment Agreement implemented the Colorado River Basin
Project Act of 1968 (Project Act). Among other things, Reclamation agreed in the 1972 Master Repayment Agreement to
construct the CAP and the District agreed to repay: (1) the reimbursable construction costs of the CAP properly allocated to
the municipal and industrial (M&I) and non-Indian agricultural water supply and the commercial power functions of the CAP,
(2) OM&R costs during construction properly allocated to the non-Indian water supply and commercial power functions, and
(3) interest during construction on costs allocated to the M&I water and the commercial power functions. An amended
contract (1988 Master Repayment Agreement) was executed in December 1988, which superseded and replaced the 1972
Master Repayment Agreement. (The 1972 Master Repayment Agreement as superseded and replaced by the 1988 Master
Repayment Agreement is referred to herein as the Master Repayment Agreement.)
Commencement of Repayment
The Master Repayment Agreement provides that the Secretary of the Interior (Secretary) shall issue notice of completion
of each CAP construction stage. Reclamation notified the District that the water supply system, the first construction stage,
was substantially complete on October 1, 1993. This notification initiated repayment by the District for the water supply
system. Reclamation notified the District that the regulatory storage facilities stage, consisting of New Waddell and Modified
Roosevelt Dams, was substantially complete on September 30, 1996. This notification initiated repayment by the District for
the regulatory storage facilities stage.
The Master Repayment Agreement requires the District to make annual payments to the United States on the repayment
obligation related to the completed construction stages. These payments are required to be made over a 50-year period and are
based on paying a percentage of the remaining outstanding repayment obligation, plus interest, with each construction stage
having a separate 50-year repayment period as follows: contract years 1-7: 1 percent; 8-14: 1.3 percent; 15-21: 1.6 percent; 22-28:
2 percent; 29-35: 2.6 percent; and 36-50: 2.7 percent.
Repayment Litigation and Stipulation
In July 1995, the District filed a lawsuit against the United States seeking a judicial determination of the District’s repay-ment
obligation. The United States also filed a lawsuit against the District. The two lawsuits were consolidated into a single
action in the Federal District Court (the Court) in Phoenix, Arizona (the Repayment Litigation). In May 2000, the District
and the United States entered into a Stipulation Regarding a Stay of Litigation, Resolution of Issues During the Stay and for
Ultimate Judgment upon the Satisfaction of Conditions (the Stipulation) to resolve all the issues in the Repayment Litigation.
The Stipulation was approved by the Court on May 9, 2000.
The ultimate effectiveness of the Stipulation is subject to a number of conditions, including settlement of certain Indian
water rights claims, and will require certain State of Arizona and federal legislation. As originally filed in 2000, the Stipulation
provided that if the conditions were not met by May 9,2003, and the parties did not amend the Stipulation or extend the dead-line,
the Stipulation would terminate and litigation would resume. Recognizing that the conditions would not be met by the
N O T E S T O F I N A N C I A L S T A T E M E N T S C O N T I N U E D N O T E S T O F I N A N C I A L S T A T E M E N T S C O N T I N U E D
S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S C O N T I N U E D
Statement of Cash Flows
For the purpose of the statement of cash flows, investments in the state of Arizona Local Government Investment Pools
are treated as cash equivalents due to their liquidity.
Water Inventory Adjustment
In 1998, the District adopted a new accounting policy for recording changes in the water inventory stored in Lake
Pleasant. The water inventory adjustment is a means to adjust the pumping energy component of water service charges to rec-ognize
that the cost of power used to pump water into Lake Pleasant should be recovered, through OM&R charges, in the year
the water is delivered to customers, not the year in which it is pumped into Lake Pleasant. Based on a typical operating year,
which involves pumping water into Lake Pleasant between late October and April and releasing water from Lake Pleasant in
June through early October, the expected amount of storage at year-end is approximately 300,000 to 325,000 acre-feet. Since
the District’s share of Lake Pleasant storage at December 31, 1997 was approximately 324,000 acre-feet, this level was chosen
as a base level storage from which future deviations would be measured. The value of the water storage inventory below
324,000 acre-feet was included in the permanent service right.
In 2000, the District further modified this policy to reclassify the water storage inventory below 324,000 acre-feet from
the permanent service right to the water inventory adjustment. The amount of this adjustment was $9,790,000. In 2000, the
water inventory adjustment represented the weighted average energy cost associated with the change in storage level in Lake
Pleasant over the calendar year. In 2001 and 2002, the water inventory adjustment is valued at the threshold rate only (Note
5). It does not include surcharge rates. The District’s share of Lake Pleasant storage as of December 31, 2002 and 2001 was
317,000 acre feet and 485,000 acre-feet, respectively.
In 2002, the District entered into a water exchange agreement with Salt River Project that allowed for an exchange of up
to 150,000 acre-feet. In 2002, the District stored about 150,000 acre-feet with Salt River Project. The water inventory adjust-ment
represented the weighted average energy cost associated with the increase in storage level over the calendar year.
Investments
Investments held by governmental entities are reported at market value.At December 31, 2001, cost exceeded market value
by $678,000. At December 31, 2002, cost exceeded market value by $2,417,000. Market value adjustments are included in
interest income.
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N O T E S T O F I N A N C I A L S T A T E M E N T S C O N T I N U E D
M A S T E R R E P A Y M E N T A G R E E M E N T C O N T I N U E D
original deadline, the District and the United States have agreed to amend the Stipulation (the “Amended Stipulation”) to
extend the deadline for satisfying the conditions in the original Stipulation for nine additional years, so that the conditions
must be satisfied by May 9, 2012. If and when the Amended Stipulation is approved by the Court, as is expected, it will
supercede and replace the original Stipulation.
Except as noted below, all terms and conditions of the original Stipulation will remain in effect under the Amended
Stipulation. Thus, the ultimate effectiveness of the Amended Stipulation, and the entry of final judgment in the Repayment
Litigation in accordance with the terms of the Amended Stipulation, remain subject to the satisfaction of the conditions con-tained
in the original Stipulation, including the settlement of certain Indian water rights claims and the passage of state and
federal legislation necessary to implement those conditions. However, the Amended Stipulation affords the District and the
United States an additional nine years, until May 9, 2012, to satisfy the conditions. Either party may petition the Court to ter-minate
the Amended Stipulation and resume litigation prior to May 9, 2012, if it believes that the conditions cannot be satis-fied
by that date. The major issues addressed in the Amended Stipulation are described below.
Repayment Obligation
The original Stipulation established the District’s repayment obligation for the CAP water supply system and the regulatory
storage facilities at $1.65 billion, premised on a total allocation of 665,224 acre-feet of CAP water for federal use. Currently,453,224
acre-feet of CAP water is allocated for federal use. One condition of the Stipulation is that additional CAP water be made available
for federal use. The Amended Stipulation reduces the principal amount of the District’s repayment obligation for the water supply
system and regulatory storage facilities stages of the CAP from $1.65 billion to $1,646,462,500 in light of other agreements that
would increase the amount of CAP water allocated for federal use to 667,724 acre-feet, which is 2,500 acre-feet more than was
assumed when the Stipulation was originally executed. The Amended Stipulation provides that the repayment obligation is sub-ject
to further adjustment if the total amount of CAP water ultimately made available for federal use is not 667,724 acre-feet.
In the Repayment Litigation, Reclamation had taken the position that the repayment ceiling in the Master Repayment
Agreement on the District’s repayment obligation for the water supply system and the regulatory storage facilities (Repayment
Ceiling) was $2.0 billion. The District had argued that the Repayment Ceiling on these facilities was not more than $1.781 bil-lion.
Notwithstanding the Repayment Ceiling, Reclamation contended that the District’s repayment obligation for these facil-ities
was $2.183 billion, premised on a total allocation of 453,224 acre-feet of CAP water for federal use.
In November 1998, the Court issued an interlocutory order to the effect that the District’s repayment obligation for the
water supply system and regulatory storage facilities is limited to $1.781 billion. However, the United States appealed the Court
order. After the Stipulation was entered, the appeal was voluntarily dismissed without prejudice. The Amended Stipulation
preserves the United States’ appeal rights if the Repayment Litigation resumes.
The Stipulation provides that 73 percent of the District’s repayment obligation will bear interest at the rate established in
the Master Repayment Agreement of 3.342 percent per annum, and 27 percent of the repayment obligation will be non-inter-est
bearing. The Stipulation fixes these percentages for the duration of the repayment period.
N O T E S T O F I N A N C I A L S T A T E M E N T S C O N T I N U E D
M A S T E R R E P A Y M E N T A G R E E M E N T C O N T I N U E D
Before the Stipulation, the Master Repayment Agreement provided that Reclamation would perform a cost allocation that would
determine both the amount of the District’s repayment obligation and the portion of that obligation that would bear interest. Costs
allocated to the non-Indian agricultural water supply function were to be repaid by the District without interest, while costs allocated
to the M&I water supply and the commercial power functions were to be repaid with interest at 3.342 percent per annum. The Master
Repayment Agreement also provided that Reclamation would periodically revise its cost allocation to reflect actual water deliveries,
which could have the effect of altering the percentage of the District’s repayment obligation that bears interest.
In the Repayment Litigation, the District disputed Reclamation’s cost allocation. If the litigation resumes, the portion of the
District’s repayment obligation that bears interest would be subject to periodic revision by Reclamation based on its cost allocations.
However, the Amended Stipulation provides that the District’s repayment obligation for the period from October 1, 1993, until the
Amended Stipulation is terminated or expires will always be deemed to be 73 percent interest-bearing and 27 percent non-interest-bearing
regardless of any interest-bearing split that may be applicable after the Amended Stipulation is terminated or expires.
Construction Deficiencies
When Reclamation issued notices of completion for the water supply system and regulatory storage facilities stages of the
CAP, a number of construction deficiencies remained. The Stipulation provides that the construction deficiencies will be cor-rected
without increasing the District’s repayment obligation. The Stipulation identifies those deficiencies that will be cor-rected
by the United States, at no additional cost to the District, and those that the District will correct itself and for which it
will receive a corresponding credit against its annual repayment obligation. The Stipulation also provides a repayment credit
for the District’s past expenditures to correct construction deficiencies.
In the Repayment Litigation, the District had sought to hold the United States responsible for costs incurred by the
District in correcting CAP construction deficiencies. The United States had argued that it had no obligation to fund the cor-rection
of CAP construction deficiencies because of the dispute regarding the Repayment Ceiling and the fact that Reclamation
had determined that the ceiling had been exceeded. The United States had also disclaimed any responsibility for costs incurred
by the District in correcting the deficiencies.
Application of Development Fund Revenues
The Stipulation provides that all miscellaneous revenues and net power revenues accumulating in the Lower Colorado
River Basin Development Fund (Development Fund) of the United States Treasury in each year will be credited annually
against the amount due from the District on its repayment obligation.
In the Repayment Litigation, the United States had asserted that it was not obligated to apply Development Fund rev-enues
toward the District’s repayment obligation, but could use those revenues to pay Reclamation’s operating costs.
Payments Due on the District’s Repayment Obligation
The Stipulation established a new repayment schedule based on the revised $1.65 billion repayment obligation and rec-onciled
the District’s past payments, Development Fund credits and construction deficiency credits against that revised pay-ment
schedule. The Amended Stipulation further revises the District’s repayment schedule to reflect the adjusted repayment
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Operations and Maintenance Agreement
Reclamation has transferred responsibility for operation and maintenance of completed CAP features to the District. The
District performs these responsibilities under the Master Repayment Agreement, a 1987 agreement with Reclamation for the
operation and maintenance of the facilities (the OM&R Transfer Contract), and an Operating Agreement between
Reclamation and the District that took effect as part of the settlement Stipulation.
Water Delivery Contracts and Subcontracts
Long-term CAP water service began pursuant to contracts and subcontracts on October 1, 1993, upon issuance by the
Secretary of notice of completion of the water supply system. The term of the contracts and subcontracts is generally 50 years
beginning January 1, 1994, and the contracts and subcontracts are renewable.Water deliveries for 2002 were 1,525,677 acre-feet.
In addition, the District stored 149,570 acre-feet in the Salt River Project (SRP) system under an exchange agreement.
Exchange water is carried on the District Statement of Net Assets as Water Inventory.
Long-term subcontracts have been signed by M&I entities for approximately 87 percent of the total CAP M&I water allo-cation
of 638,823 acre-feet. Of the CAP water currently under M&I subcontracts the cities of Tucson, Phoenix, Mesa,
Scottsdale, Peoria and Glendale account for approximately 67 percent. All ten Indian entities originally allocated CAP water by
the Secretary have signed long-term CAP contracts for the CAP Indian water allocation of 309,828 acre-feet. An additional
357,896 acre-feet of CAP water has been or is expected to be allocated to Indian entities or treated as Indian water supplies as
a result of completed, pending or future Indian water rights settlements. The remaining available CAP water was allocated to
non-Indian agricultural entities.
The non-Indian subcontracts require the payment of a water service capital charge and an OM&R charge. For the M&I
subcontractors, the water service capital charge is applicable to each subcontractor’s maximum annual entitlement to CAP
water. Under the current M&I water service subcontracts and current District pricing structure, the M&I water service capital
charge is an escalating charge, which began at an annual rate of $10.50 per acre-foot of entitlement in 1994, increasing to $48
per acre-foot of entitlement by 1999. The M&I water service capital charge remained at $48 per acre-foot for 2000 and was
reduced to $43 per acre-foot for 2001 and remained at $43 per acre-foot for 2002. The amount of this M&I water service cap-ital
charge may be adjusted periodically by the District as a result of repayment determinations provided for in the Master
Repayment Agreement and to reflect all sources of revenue, but the water service capital charge will not be greater than neces-sary
to amortize project capital costs allocated to the M&I function with interest. Indian contractors of CAP water pay no water
service capital charge, since the capital costs associated with the delivery of CAP water to Indian entities are not reimbursable
by the District pursuant to the Master Repayment Agreement.
The OM&R costs of the CAP are of two types: energy costs and fixed costs. Energy costs are incurred to pump water from
the Colorado River through the CAP aqueduct system and fixed costs are the non-energy costs associated with operation,
maintenance and replacement. The District has completed a cost of service study to better define what components properly
constitute fixed OM&R costs and how to allocate those costs among classes of CAP water users.
M&I subcontractors and Indian contractors must pay OM&R charges on water scheduled for delivery.
N O T E S T O F I N A N C I A L S T A T E M E N T S C O N T I N U E D N O T E S T O F I N A N C I A L S T A T E M E N T S C O N T I N U E D
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Years Principal Interest Total
2003 $ 20,228 $ 35,648 $ 55,876
2004 21,404 35,009 56,413
2005 21,404 34,330 55,734
2006 21,404 33,642 55,046
2007 21,404 32,953 54,357
2008-2012 128,189 153,140 281,329
2013-2017 146,771 131,531 278,302
2018-2022 172,173 105,909 278,082
2023-2027 209,336 74,874 284,210
2028-2032 219,450 39,483 258,933
2033-2037 222,273 6,626 228,899
2038-2042 222,272 -0- 222,272
2043-2046 76,205 -0- 76,205
Total $ 1,502,513 $ 683,145 $ 2,185,658
M A S T E R R E P A Y M E N T A G R E E M E N T C O N T I N U E D
obligation of $1,646,462,500, retroactive to October 1, 1993. The District will receive a credit, to be applied against its January
2004 payment, for the amounts paid to date that are in excess of those due under the revised schedule, including interest at
the Arizona State Treasury investment rate. If litigation ultimately resumes, the Amended Stipulation provides that any over-or
underpayment that is determined to exist for the period from October 1, 1993, until the Amended Stipulation is terminated
or expires, including interest on the over- or underpayment, will be capitalized and amortized over the remainder of the
District’s repayment period.
The annual payments due from the District and the credits available from Development Fund revenues, construction defi-ciency
corrections and other sources were among the issues in dispute in the Repayment Litigation. As of January 15, 2000,
there was a difference of $118,903,000 between the amounts billed by the United States and the amount acknowledged by
Reclamation to have been paid by the District on the District’s repayment obligation. At that time, Reclamation was assessing
penalties of approximately $1,189,000 per month against the District on the amounts in dispute.
Payments to Maturity
The required payments under the Amended Stipulation on the repayment obligation are as follows:
Because of timing differences related to revenues and expenses in the Development Fund, the Statements of Net Assets
shows a liability of an additional $2.082 million that was included in the January 2003 payment.
Amounts Recorded in Financial Statements
The repayment obligation and amounts due on that obligation reported in these financial statements reflect the terms of
the Amended Stipulation. The District’s repayment obligation and the amounts due could be adjusted in the future if the
Repayment Litigation resumes.
It is not possible to predict whether the Amended Stipulation will become finally effective and result in the entry of final
judgment in the Repayment Litigation in accordance with the terms of the Amended Stipulation, be amended again, or termi-nate,
or whether litigation will resume. If litigation resumes, and results in an adverse determination on any of the major issues
in dispute, it could have a material adverse effect on the financial operations of the District.
( I n t h o u s a n d s )
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O P E R A T I O N S C O N T I N U E D
As of December 31,2002, nine existing and former subcontractors of agricultural CAP water had contracts with the District for
the delivery of CAP water for agricultural purposes on these conditions. The contract terms are in effect through December 31,2003,
but delivery of water is subject to: (1) the availability of CAP water in each year after first providing for the delivery of water to con-tractors
and subcontractors of long-term water service, including existing M&I subcontractors, Indian contractors and agricultural
subcontractors who retained a percentage entitlement of CAP agricultural water under their CAP subcontracts, and (2) payment of
water service charges determined by the District in each year. In the Repayment Litigation, the United States disputed the validity of
these contracts. The Stipulation required certain revisions to the form of those contracts, but confirmed the District’s right to sell
CAP water under such alternative contracts. If the litigation resumes, the validity of these contracts will again be an issue.
The District’s Board of Directors reviews charges annually and sets a schedule for the succeeding five years. The water
service charges to be charged M&I subcontractors and the United States on behalf of Indian contractors of CAP water service
for 2002 were confirmed by the Board of Directors in June 2001. In order to facilitate water planning, and subject to the
assumptions contained in the Plan, the Board of Directors also established advisory rates for the period 2003 through 2006.
During 1997, the Board amended the Plan to provide for a computation of the M&I water service charge by dividing the
District’s estimated annual operation and energy costs by the total estimated annual water delivery volume.
If the assumptions reflected in the Plan prove to be materially incorrect or the objectives of the Plan are not achieved, and the
Amended Stipulation is terminated or expires, the capital repayment and OM&R costs allocated to M&I subcontractors, and the
OM&R costs allocated to the United States on behalf of Indian contractors, could be significantly higher than anticipated. M&I
subcontractors use CAP water in their total water supply in various percentages and fund their payment of the District’s charges
in a variety of ways. Therefore, it is difficult to estimate the effect of possible increases in the water service charges on M&I sub-contractors
and on retail ratepayers, if applicable, including households in the service areas of CAP M&I subcontractors.
P O W E R
Navajo Power Plant
Reclamation is one of six participants in Navajo. Navajo consists of three 750,000 kilowatt coal-fired, steam-electric
generating units which commenced operations in 1974 through 1976, a railroad to deliver fuel and 500 kilovolt transmission
lines and switching stations to deliver the power and energy to the various participants. An agreement among the participants
governs the construction, operation, and maintenance of Navajo. Reclamation entered into this agreement in order to acquire
a portion of the capacity of Navajo for supplying the power requirements of the CAP. Reclamation has a 24.3 percent
entitlement in the generating station, resulting in a power entitlement of 546,750 kilowatts of nominal capacity. The District
is charged for the costs associated with the Navajo energy used to operate the CAP.
Hoover B Power Purchases
The 1984 Hoover Power Plant Act (Hoover Act) authorized upgrading the Hoover power plant, located at Hoover Dam,
to increase generating capacity at the plant by 503 megawatts (MW). This additional capacity and its associated energy is
known as Hoover B Power. The Hoover Act allocated 188 MW and 212,000 megawatt hours (MWh) of associated firm annual
energy of the Hoover B Power to purchasers in Arizona. The Arizona Power Authority (Authority) distributes Arizona’s share
N O T E S T O F I N A N C I A L S T A T E M E N T S C O N T I N U E D
O P E R A T I O N S C O N T I N U E D
The District anticipates that Indian entities, or the United States on behalf of the Indian entities, will pay Indian fixed
OM&R charges. Payment by the United States of Indian fixed OM&R charges would require annual appropriations by
Congress, specific net billing arrangements, or other special arrangements that do not currently exist. The United States has
paid OM&R charges on water delivered to the Ak-Chin Indian Community.Disputes that existed with respect to the amounts
of those charges and the proper method of calculating OM&R charges were conditionally resolved as part of the settlement
Stipulation.
District Repayment Plan
An important assumption in the development of the CAP was that non-Indian agricultural water users would take and
pay for significant quantities of CAP water, particularly during the early years of project operation when M&I and Indian uses
of CAP water were expected to be relatively low. The Secretary’s allocation of CAP water, the physical configuration of the water
delivery system, and the financial structure of the CAP were predicated upon such participation by non-Indian agricultural
water users.
Long-term subcontracts for approximately 70 percent of the total non-Indian agricultural CAP water supply were signed.
Two irrigation districts represented approximately 38.5 percent of that total. The non-Indian agricultural CAP subcontracts
have been understood to require those subcontractors to pay fixed OM&R charges based on the full amount of CAP water
available for delivery to the subcontractor, not just the amount scheduled for delivery (the take-or-pay OM&R charges), plus
energy charges and a $2 per acre-foot water service capital charge for water scheduled for delivery. Many of the District’s non-
Indian agricultural subcontractors indicated that the take-or-pay requirement and the cost of CAP water would result in sub-stantial
reductions in CAP water use by the agricultural subcontractors and potential default by the subcontractors on their
obligations under the subcontracts. Under the Master Repayment Agreement, prior to its modification by the Stipulation,
diminished use of CAP water by non-Indian agricultural water users would also have increased the interest bearing portion of
the District’s repayment obligation and would have reduced the number of revenue sources available to meet the District’s
repayment obligation and to pay the OM&R costs of the CAP. Furthermore, OM&R costs would be allocated among fewer
users, which would result in significantly higher per acre-foot charges to the remaining users.
As a result of these circumstances, the District’s Board of Directors adopted a repayment adjustment plan in October 1993
(Plan). Under the Plan, each non-Indian agricultural subcontractor was provided the opportunity to waive its percentage enti-tlement
to CAP agricultural water under its CAP subcontract and avoid its corresponding obligation for take-or-pay OM&R
charges. As of December 31, 2002, all of the remaining non-Indian agricultural subcontractors had waived some or all of their
long-term entitlements to CAP agricultural water under their CAP subcontracts. The District in turn waived its right to collect
take-or-pay OM&R charges from such subcontractors.
Existing and former subcontractors of non-Indian agricultural CAP water were also given the opportunity by the District
to enter into alternative contracts for the delivery of CAP water on a short-term basis. Under the Plan, the pool of CAP water
available for delivery to non-Indian agricultural water users has been divided into various categories for purposes of deter-mining
water delivery priority and water service charges.Water service charges are assessed only on the amount of CAP water
scheduled for delivery.
N O T E S T O F I N A N C I A L S T A T E M E N T S C O N T I N U E D
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Hoover Surcharge
The Hoover Act also provided for the addition of a surcharge to the rates for energy sold from the Hoover and Parker-Davis
power plants of 4.5 mills per kilowatt-hour for energy sold in Arizona. Revenues from the surcharge on Hoover power sales
began in 1987 and revenues from Parker-Davis power sales will begin in 2005. Revenues from this surcharge are credited to the
Development Fund. The District records these revenues as funds held by the federal government as of December 31 of each year
and then applies them against the annual payment due from the District the following January 15. The extent to which such rev-enues
must be applied against the annual payments due from the District under the Master Repayment Agreement is among the
issues that were in dispute in the Repayment Litigation and were conditionally resolved in the Stipulation (see Note 3).
I N V E S T M E N T S
As a multi-county water conservation district, the Arizona State Treasurer as prescribed by the District’s enabling act
holds the District’s investments. Beginning March 1, 2000, the District’s investments in the CAP pool were transferred to a
shared investment pool (Pool 3) in order to eliminate the need for a separate pool just for the District. Subsequently, certain
accounting and administrative issues at the State level prevented the District’s continued participation in Pool 3 and in July
2002, a portion of investments was transferred to separate CAWCD pools (Pools 12 & 13) established to provide the District
with investments in medium-term and long-term securities. The remaining balance of the Pool 3 investments was transferred
to LGIP-5 (Local Government Investment Pool). Only AAA-rated corporate securities and US Government fixed-income secu-rities
are permitted in the CAWCD pools. The investment policy objectives of the Arizona State Treasurer, in order of priority,
are safety of principal, liquidity, and return on investments.
Approximately $1,700,000 of the District’s funds in the LGIP-5 were invested in asset-backed securities of National
Century Financial Enterprises. In November 2002, National Century Financial Enterprises filed for bankruptcy amid
allegations of fraud and criminal conduct by the principals. The likelihood for the recovery of the securities is unfavorable and
as of December 31, 2002, the District has written the funds off as a loss.
The District’s portion of investments held by Pools 12 and 13 as of December 31, 2002 and Pool 3 as of December 31, 2001,
which are uncategorized (see Note 7), consist of the following (stated at fair value):
( I n t h o u s a n d s )
N O T E S T O F I N A N C I A L S T A T E M E N T S C O N T I N U E D N O T E S T O F I N A N C I A L S T A T E M E N T S C O N T I N U E D
D E C E M B E R 3 1
P O W E R C O N T I N U E D
of the Hoover B Power. On September 15, 1986, the District entered into a contract with the Arizona Power Authority for the
purchase of Hoover B Power. On October 1, 1992, the Authority recaptured all but 26.5 MW of Hoover B Power from its other
contractors and initiated delivery of available Hoover B Power to the District.
Power Revenues
Power revenues are derived from the sale of surplus power from Navajo (power associated with Reclamation’s Navajo
entitlement which is in excess of the pumping requirements of the CAP) and from a surcharge on energy sold in Arizona from
the Hoover power plant.
Additional Rate Component
The Hoover Act authorized the establishment and collection of additional rate components on sales and exchanges of the
capacity and energy associated with Reclamation’s Navajo entitlement in excess of the pumping requirements of the CAP and
any needs for desalting and protective pumping facilities as may be required under the Colorado River Basin Salinity Control
Act (Navajo surplus). The Hoover Act further authorized the payment of revenues from such additional rate components to
entities that have advanced funds for the construction and repayment of construction costs of the CAP.
The Secretary of the Interior determined that the excess capacity and energy, which constitutes Navajo surplus to be
marketed pursuant to long-term contracts, is 400,000 kilowatts of capacity and 760 kilowatt hours of energy per year per
kilowatt of such capacity. The District and Reclamation entered into power sales contracts with Salt River Project
Agricultural Improvement and Power District (Salt River Project) in 1990 and 1991 for the sale of an aggregate of 350,000
kilowatts of such capacity and the associated energy from May 1993 through September 2011.
The additional rate component on the sale of such capacity has been established by the District at $6 per kilowatt of allo-cated
capacity per month. Revenues from the additional rate component are paid directly to the District’s bond trustee to repay
the contract revenue bonds sold by the District (see Note 10).
Sale of Remaining Navajo Surplus
In March 1994, the District entered into a contract with Salt River Project, Reclamation and the Department of Energy
for the sale of the remaining Navajo surplus. The contract, which is for the period June 1994 through September 2011, grants
Salt River Project the use of the remaining United States entitlement to output of the Navajo Generating Station, the right
to schedule and integrate with the Salt River Project system the District’s contractual rights to Hoover capacity and energy
and energy produced at New Waddell Dam, and certain transmission rights, and requires Salt River Project to sell energy at
cost to the District to meet CAP pumping requirements up to a defined threshold level for each contract year. If CAP energy
requirements exceed the threshold, the District must purchase additional energy either from Salt River Project or through
other energy sources. Under the contract, Salt River Project pays a monthly charge of $1,812,500 to the Development Fund.
The District records these revenues as funds held by the federal government as of December 31 of each year and then applies
them against the annual payment due from the District under the Master Repayment Agreement the following January 15.
The extent to which such revenues must be applied against the annual payments due from the District under the Master
Repayment Agreement is among the issues that were in dispute in the Repayment Litigation and were conditionally resolved
in the Stipulation (see Note 3).
2002 2001
Federal Agency Securities $ 138,081 $ 21,982
Commercial Paper – 63,811
Corporate Securities 15,955 115,424
Money Market 1,530 –
155,566 201,217
Less restricted funds (repayment and operating reserves; not including accrued interest) (44,120) (40,615)
Investment of District $ 111,446 $ 160,602
The Board of Directors has designated $86,700,000 of the Pools 12 and 1 3 investments as capital projects and operat-ing
reserve funds, and $2,000,000 as insurance reserves (see Note 11) at December 31, 2002.
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R E S T R I C T E D A S S E T S C O N T I N U E D
The amended statute permits the District to transfer revenues derived from this tax to the Arizona Water Banking Fund to fund
AWBA activities if the District’s Board of Directors approves the levy and concludes that the revenues are not needed for CAP
operations or CAP repayment. Pursuant to this authority, the District levied an ad valorem tax of 4 cents per $100 assessed val-uation
in Maricopa, Pinal, and Pima Counties in 2001 and 2002 and approved the transfer of these revenues to the Arizona
Water Banking Fund. During 2002 and 2001, the District sold 345,889 and 294,813 acre-feet of excess CAP water to the AWBA
at $55 and $45 per acre-foot, respectively, for underground storage.
Master Repayment and Operating Reserves
The District is required under the terms of the Master Repayment Agreement to establish and fund over a ten-year period
(1) an operations and maintenance reserve fund of $4,000,000 for extraordinary costs of operations, maintenance and
replacement of project works, and (2) a repayment reserve fund of $40,000,000 for the purpose of assuring payments of
future obligations. Funding of the operations and maintenance reserve fund and repayment reserve fund commenced on
October 1, 1993 and July 1, 1993, respectively.
The operations and maintenance reserve can exceed $4,000,000. Interest and dividends accruing to the fund shall be
added to the fund in any year when the fund balance is greater than $4,000,000 provided that in no event should the fund be
increased to an amount greater than the actual amount of fixed operations and maintenance costs for the preceding year. In
2002, $736,076 of the repayment reserve was transferred to Unrestricted Assets to bring the balance to $40,000,000. At
December 31, 2002, the fair value of the reserves totaled $4,154,000, and $40,000,000, respectively, including interest.
Ak-Chin Fund
In August 1985, the District’s Board of Directors approved participation in a fund established pursuant to legislation
enacted by the Congress of the United States for the acquisition or conservation of water to supplement CAP water supplies
(Ak-Chin fund). The District and the United States Government each have contributed $1,000,000 to this fund, which is
administered by the District. The District, acting as administrator of the fund, is empowered to direct the expenditure of the
trust funds in accordance with the provisions of a trust agreement between the District and the Arizona State Treasurer.
The Ak-Chin fund investment is in the LGIP, which invests primarily in certificates of deposit, commercial paper, federal
government and federal agency securities. Investments in the LGIP are recorded at cost as they consist of investments with
maturities of less than one year.
A D V A N C E S T O F E D E R A L G O V E R N M E N T
At December 31, 2002 and 2001, the District has incurred $708,000 and $378,000, respectively, in costs related to
repairs of CAP construction deficiencies which have been recorded in the accompanying financial statements as advances to
the federal government. The District applied these amounts against its annual payments due under the Master Repayment
Agreement on January 15, 2003 and 2002, respectively. On a cumulative basis, the District has incurred costs of $42,971,000
for the correction of CAP construction deficiencies and applied this amount against its annual payments under the Master
Repayment Agreement. Under the Stipulation, credits available for application against the amounts due from the District are
subject to audit by the United States (see Note 3).
N O T E S T O F I N A N C I A L S T A T E M E N T S C O N T I N U E D
R E S T R I C T E D A S S E T S
The District’s investments are categorized to give an indication of the level of risk assumed by the District at year-end.
Category 2 includes investments that are uninsured and unregistered investments for which the securities are held by the
counter-party’s trust department or agent in the District’s name. Investments held in pools are considered to be uncategorized.
The bond trust funds noted below are Category 2 investments; while the State Demonstration project fund, Master Repayment
Agreement and Operating Reserves, and the Ak-Chin fund, all held in pools, are considered to be uncategorized investments.
Restricted assets, including accrued interest receivable, consist of the following:
N O T E S T O F I N A N C I A L S T A T E M E N T S C O N T I N U E D
( I n t h o u s a n d s )
D E C E M B E R 3 1
2002 2001
Bond trust funds, primarily debt service funds $ 37,617 $ 36,796
State Demonstration Project fund 7,255 17,283
Master Repayment Agreement repayment and operating reserves 44,154 40,882
Ak-Chin fund 5,750 5,632
$ 94,776 $ 100,593
Bond Trust Funds
Bond trust funds held by the trustee may be invested in direct obligations of, or obligations guaranteed by the U.S.
government, FNMA or FHLMC securities, certificates of deposit, obligations of any state or political subdivision, or a
guaranteed investment contract, all subject to meeting certain ratings by national agencies, and maximum maturity limits. The
trustee holds the investments in trust for the District and the bondholders pursuant to the trust agreements.
State Demonstration Projects
The Arizona Legislature passed the original State Demonstration Recharge legislation in 1990 that authorized the
District to levy an a