SECURING RELIABILITY, BROADENING HORIZONS.

ARIZONA POWER AUTHORITY - 46TH ANNUAL REPORT

TA B L E O F C O N T E N T S

LETTER TO THE GOVERNOR

. . . . . . . . . . . . . . . . . . . . . . .2

REPORT OF THE EXECUTIVE DIRECTOR

. . . . . . . . . . . . . . . .3

REPORT OF THE COMMISSION . . . . . . . . . . . . . . . . . . . . .4
OPERATIONS AND THE ENVIRONMENT

. . . . . . . . . . . . . . .5

SCHEDULE OF CAPACITY AND ENERGY SALES . . . . . . . . . . .6
REPORT OF INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . .7
MANAGEMENT’S DISCUSSION AND ANALYSIS . . . . . . . . . .8
(REQUIRED SUPPLEMENTARY INFORMATION)

F I N A N C I A L TA B L E O F C O N T E N T S
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . .14
STATEMENT OF NET ASSETS . . . . . . . . . . . . . . . . . . . . .14
STATEMENT OF REVENUES, EXPENSES
AND CHANGES IN NET ASSETS . . . . . . . . . . . . . . . . . .15
STATEMENT OF CASH FLOW . . . . . . . . . . . . . . . . . . . .16
NOTES TO FINANCIAL STATEMENTS

. . . . . . . . . . . . . . . . .18

DEBT SERVICE COVERAGE RATIO . . . . . . . . . . . . . . . . . . . .26

LETTER TO THE GOVERNOR

December 1, 2004
The Honorable
Janet A. Napolitano
Governor of Arizona
State Capitol
Ninth Floor, West Wing
Phoenix, AZ 85007
Dear Governor:
This 46th Annual Report of the Arizona Power Authority details the Authority’s operation and
financial activities for the fiscal year ending June 30, 2004. This report highlights the Authority’s
efforts in administering Arizona’s hydroelectric power entitlement generated at Hoover Dam and
Powerplant located on the Colorado River. Although the Colorado River system is entering into the
sixth year of a severe drought condition the system, including Lake Mead and other reservoirs, is
impounding approximately fifty percent of its storage capability. Therefore, the state’s water and
power entitlements, although at reduced levels of electric generation, will be available.
The Authority is actively engaged in researching and studying supplemental electric power
generation resources that might be cost effective if developed within the state to supplement our
valuable hydro resource. The development of renewable, electric power resources within the state
will further the long-term goal of reducing Arizona’s dependency on external energy resources.
Sincerely,

Michael C. Francis
Chairman

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REPORT OF THE EXECUTIVE DIRECTOR

JOE MULHOLLAND

THE OPTIMISM OF EFFICIENCY

The drought in the Colorado River Basin remains a
serious challenge for the Authority, the state of Arizona
and its residents. Some contend it marks a new period
of reduced rainfall over time. Others consider that
given the dry years, wet winters are due. In fact, it is
virtually impossible to know for certain. What we do
know is it that improving performance is the best
preparation for either eventuality.
The Authority has achieved significant savings as a
result of streamlined budgets implemented this year.
In early 2005, the Authority will be refunding a total of
about $1 million to customers, which represents about
a 7% discount in their total expenditure. Monthly rate
reviews will continue to verify that rates are in line
with our costs, ensuring stability and the lowest rates
possible without jeopardizing operations.
To further control expenditures and mitigate any price
jumps that could result from drought-limited power
production, the Authority is exploring several additional
cost-saving measures. These include the possibility of
purchasing long-term transmission rights on Western
Transmission System through the pre-payment of high
interest debt, which in turn could lower charges to our
customers by approximately $800,000 annually.
The Authority has analyzed the flows of Colorado River
to develop a better understanding of what we might
expect for the future. In addition, we are examining
the feasibility of installing low water-level turbines at
Hoover, to facilitate effective operation if drought
conditions continue.

As always, security at Hoover Dam remains a top priority.
Construction to reroute non-essential traffic away from
the dam continues. The new bridge between Arizona
and Nevada is expected to be completed in 2008.
The Authority is participating in the Multi-Species
Conservation Program to protect the availability
of Hoover power as well as the environment. This
pro-active, 50-year program helps guard against any
interruptions in generation caused by judicial
intervention on behalf of endangered species.
The Authority is also looking ahead in the area of
renewable energy, having recently received a grant
from the National Renewable Energy Laboratory to
study integrating wind and hydro power generation. This
may lead to a multi-year feasibility contract to help
introduce new, renewable energy sources to Arizona.
Through these and other initiatives, we remain
optimistic about the Authority’s ability to meet its
mandate to provide low cost power, while assisting
in developing and improving power availability to
citizens throughout the State of Arizona.

REPORT OF THE COMMISSION

The Arizona Power Authority was established in 1944 to administer Arizona’s entitlement to hydroelectric power
generated at Hoover Dam and Powerplant located on the Colorado River. Additionally, the Authority is authorized
to develop low-cost, electrical power generation and transmission facilities within the state for Arizona’s citizens.
The Authority recently passed its 40th anniversary of faithfully providing low-cost hydroelectric power to the
consumers of the state. Due to the continued severe drought impacting the Colorado River Basin, the Authority is
aggressively investigating and researching new and sustainable renewable energy resources that could help reduce
Arizona’s dependency on external power resources.

MICHAEL C. FRANCIS – Chairman
Starting his tenure on the commission in 1999, Mr. Francis was selected Chairman in April 2003. In addition to his
invaluable work on the commission, Mr. Francis is a partner in Santa Lucia Farms, producer of over 3.7 million
garden rose bushes annually. Mr. Francis also owns and operates Frances Insurance Agency, which insures Arizona
and California farmers. Mr. Francis is a Board of Directors member for M&I Thunderbird Bank, Arizona Region.
He is also a member of the American Rose Society. His current term expires in January 2008.

LT GEN JOHN I. HUDSON – Vice Chairman
First appointed to the Arizona Power Authority Commission in March 2000, John I. Hudson was elected to the
Vice Chair in May 2003 with his current term expiring in 2006. A retired Lieutenant General in the U.S. Marine
Corps where he served for 37 years, John Hudson is a member of the Board of Directors of the Yuma Regional
Medical Center. In addition, he is a member and past chairman of the Greater Yuma Port Authority Board of
Directors, a founding Director of the Foothills Bank of Yuma, a member of the Foothills Rotary Club of Yuma
and past president of Yuma’s 78-CRIME Board of Directors.

RICHARD S. WALDEN
Appointed to the Commission in 1984 and re-appointed through his present term expiring in 2010, Mr. Walden is the
President and CEO of Farmers Investment Co., a family-owned, pecan growing and processing company headquartered
in Sahuarita, Arizona. Mr. Walden is a member of the board of the International Tree Nut Council and in that capacity
serves as the chairman of the Committee for Nutrition and Education associated with the Nutrition and Education
Foundation. Mr. Walden is also a member of the Advisory Council on Small Business and Agriculture for the
Federal Reserve Bank of San Francisco and a member of the Board of the National Pecan Shellers Association.

DALTON H. COLE
Appointed to the Commission in January 2002 for a term to run until 2008, Dalton Cole is a retired businessman
and farmer. A past member of the Central Arizona Water Conservation District Board, Mr. Cole co-founded and
chaired the HoHoKam Irrigation District. For 18 years he also served on the board of Electrical District No. 2 in
Pinal County and is a past chairman. In addition, Mr. Cole is a past chairman of the State Board of Directors for
Community Colleges. He has served on the Ground Water Management Committee for Pinal County, as well as
advisory committees to the Arizona Legislature regarding water and power issues.

DELBERT R. LEWIS
First appointed to the Arizona Power Commission in April 2003, Delbert Lewis has been reappointed for a
six-year term ending in January 2010. As one of the founders of KTVK Channel 3 and the CEO of MAC America
Communications, Inc, Mr. Lewis’ past and present civic affiliations include the Arizona Broadcasters Association,
Metropolitan Phoenix Broadcasters, Phoenix Chamber of Commerce, Samaritan Health Services, Greater Phoenix
Leadership, the National Conference, Maricopa County Sports Authority and Orpheum Theatre Foundation.
Now farming 4,000 acres of farmland near Florence, Arizona. Mr. Lewis and his late wife, Dr. Jewell Lewis, have
been nationally recognized for their financial support and commitment to education and community service.

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O P E R AT I O N S & T H E E N V I R O N M E N T

COLORADO RIVER OPERATIONS

THE ENVIRONMENT

Water year 2004 marked the fifth consecutive year with below average
inflow into Colorado River reservoirs, including Lake Mead. Unregulated
inflow to Lake Powell, upriver of Lake Mead, was 62, 59, 25, 51, and 51
percent for water years 2000 through 2004 respectively. Reservoir storage
at Lakes Powell and Mead declined for the fifth straight year. During the
year, Lake Mead reservoir storage decreased by 1.681 million acre-feet
(maf) and Powell decreased by 2.941 maf. At the beginning of the 2004
water year, the Colorado River system’s total storage was 57 percent of
capacity. As of September 30, 2004, total system storage was down 7 more
percent to 50 percent of capacity, a decrease of approximately 4.238 maf.

The voluntary Lower Colorado River
Multi-Species Conservation Program
has continued in development
throughout the past year. Most notably
accomplished, the Memorandum of
Agreement was executed among the
Secretary of the Interior and the states
of Arizona, California and Nevada on
September 14, 2004. This is a 50-year
agreement whereby the federal and
non-federal participants each share
fifty percent of the total $626 million
program cost. Various implementation
documents and agreements are now
being negotiated among the parties,
which will place the Memorandum of
Agreement into effect.

Under the most probable inflow scenario, the downstream delivery
requirements are expected to control water releases from Hoover Dam.
Therefore, the normal condition is the criterion governing the operation of
Lake Mead for calendar year 2005 pursuant to the Colorado River Annual
Operating Plan and Supreme Court Decree. Reclamation does not anticipate
any available unused state water apportionment for calendar year 2005.

HISTORICAL ENERGY SALES
The following graph illustrates
the Authority’s historical
energy sales (GWh) since
1996 for power obtained
from the Hoover Powerplant
and for supplemental sales.
Supplemental power is
obtained by the Authority for
sale to customers on an “as
requested” basis. This energy
augments the customers’
allocation from the Authority.

GWh

HOOVER ENERGY SALES

SUPPLEMENTAL ENERGY SALES

1500
1400
1300
1200
1100
1000
900
800
700
600
500
400
300
200
100
0

1996

FISCAL YEAR

1997

1998

1999

2000

2001

2002

2003

1996

1997

1998

1999

2000

2001

2002

2003

2004

HOOVER
792
SUPPLEMENTAL 224
TOTAL
1,016

1,485
79
1,564

1,389
3
1,392

1,318
2
1,320

1,205
4
1,209

1,103
0
1,103

1,098
0
1,098

899
0
899

753
0
753

2004

S C H E D U L E O F C A PA C I T Y A N D E N E R G Y S A L E S

SALE OF HYDRO POWER
Customers
Aguila Irrigation District
Avra Valley Irrigation & Drainage District
Buckeye Water Conseration District
Central Arizona Water Conservation District
Chandler Heights Citrus Irrigation District
Cortaro-Marana Irrigation District
Electrical District No. 1, Pinal
Electrical District No. 2, Pinal
Electrical District No. 3, Pinal
Electrical District No. 4, Pinal
Electrical District No. 5, Pinal
Electrical District No. 5, Maricopa
Electrical District No. 6, Pinal
Electrical District No. 7, Maricopa
Electrical District No. 8, Maricopa
Harquahala Valley Power District
Maricopa County Municipal Water District #1
McMullen Valley Water
Conservation & Drainage District
Ocotillo Water Conservation District
Queen Creek Irrigation District
Roosevelt Irrigation District
Roosevelt Water Conservation District
Salt River Project
San Tan Irrigation District
Silverbell Irrigation & Drainage District
Tonopah Irrigation District
Wellton-Mohawk Irrigation & Drainage District
City of Page
City of Safford
Town of Thatcher
Town of Wickenburg
Ak-Chin Indian Community
Arizona Electric Power Cooperative
Arizona Public Service Company
Citizens Utilities Company
City of Mesa
Tohono O’odham Utilities Authority
San Carlos Project
Tucson Electric Power Company
TOTAL HYDRO POWER SALES
TOTAL NET PRIOR YEAR ADJUSTMENT
TOTAL SUPPLEMENTAL POWER SALES
OTHER ELECTRIC SERVICES INCOME**
TOTAL POWER INCOME

ENERGY
DELIVERED
(KWH)

SALES
($)

MILLS
PER
KWH

PRIOR
YEAR
ADJ. ($)

4,740
475
2,245
121,758
701
4,852
0
14,656
11,980
14,655
11,129
265
6,035
7,910
18,234
1,876
6,661
6,850

9,430,000
2,495,000
7,243,000
175,918,000
2,681,000
22,007,000
0
54,281,000
70,735,000
51,809,000
37,443,000
1,421,000
18,264,000
12,350,000
57,236,000
9,262,000
14,444,000
15,297,000

181,636
35,298
122,391
3,796,409
33,580
273,761
0
854,213
1,055,343
745,062
534,532
17,879
242,632
253,418
972,224
142,538
272,793
284,204

19.26
14.15
16.90
21.58
12.53
12.44
0.00
15.74
14.92
14.38
14.28
12.58
13.28
20.52
16.99
15.39
18.89
18.58

($6,460.68)
($890.73)
($3,325.41)
($159,554.62)
($1,244.30)
($7,841.61)
$0.00)
($24,115.82)
($19,687.18)
($25,528.03)
($18,823.38)
($473.82)
($9,993.32)
($10,710.32)
($26,295.76)
($2,829.13)
($9,316.85)
($9,436.30)

1,801
1,334
2,426
5,094
29,225
393
536
1,168
2,192
784
1,568
792
1,725
0
0
0
0
0
0
0
0
284,056

6,962,000
2,121,000
12,579,000
18,361,000
119,046,000
1,641,000
4,455,000
4,668,000
8,824,000
983,000
3,598,000
2,476,000
4,916,000
0
0
0
0
0
0
0
0
752,946,000

88,363
27,138
190,512
257,522
1,727,480
20,724
54,058
75,324
129,992
23,399
62,057
36,887
82,757
0
0
0
0
0
0
0
0
$12,594,126

12.69
12.79
15.15
14.03
14.51
12.63
12.13
16.14
14.73
23.80
17.25
14.90
16.83
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
16.73

($2,930.23)
($2,035.17)
($3,986.75)
($8,779.92)
($47,430.34)
($797.03)
($1,129.46)
($1,770.70)
($3,559.02)
($1,031.91)
($2,371.92)
($1,287.19)
($2,982.24)
0)
0)
0)
0)
0)
0)
0)
0)

AVERAGE
BILLING DEMAND
(KW)

$(416,619)
781,443

22,626,000

$4,835,337
$8,433,127
$25,445,970 *

*Difference between Total Electric Sales and Operating Revenue is due to post-closing reconciliation of estimate to actuals between the Authority and Western Area Power Administration.
**Includes Administrative fees, facilities charges, late charges, and Scheduling Entity revenue.

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R E P O R T O F T H E I N D E P E N D E N T A C C O U N TA N T S

To the Arizona Power Authority Commission
In our opinion, the accompanying statements of net assets and the related statements of revenues,
expenses, and changes in net assets, and statements of cash flows present fairly, in all material respects,
the financial position of the Arizona Power Authority (the “Authority”) (A Body, Corporate and
Politic, of the State of Arizona) at June 30, 2004 and 2003, 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 of America. These financial statements are the responsibility of the Authority’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying management’s discussion and analysis is not a required part of the 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.

November 8, 2004

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S

The following is a discussion and analysis of the Arizona Power Authority’s (Authority) financial performance for the fiscal
year ended June 30, 2004. This discussion is designed to: (a) assist the reader in focusing on significant financial issues,
(b) provide an overview of the Authority’s financial activity and (c) identify changes in the Authority’s financial position.
The Management’s Discussion and Analysis (MD&A) focuses on the current year’s activities, resulting changes and known
facts, and should be read in conjunction with the Authority’s financial statements beginning on page fourteen.

HIGHLIGHTS
AUTHORITY HIGHLIGHTS
Scheduling Entity Agreement – The Authority and Salt River Project were parties to a Scheduling Entity Agreement,
which expired on September 30, 2004. A new Scheduling Entity Agreement provides for Salt River Project (SRP) to pay
the Authority $5.4 million each year in return for allowing Salt River Project to be the Scheduling Entity of the Hoover
generation in Arizona. This Agreement became effective as of October 1, 2004 and expires on September 30, 2011.
The effect of this agreement is that the energy banking program with SRP has been increased, to the advantage of our
customers. However, because payment from SRP has been reduced by $3 million each year, the rates for Hoover power
increased accordingly.
Transmission Agreement – On January 24, 2003, the Authority and the Western Area Power Administration (Western)
entered into an agreement for the Advancement of Funds for Transmission Services. The Authority had an existing agreement
with Western that provided for the delivery of power and energy. The agreement provides for the Authority to advance funds
to Western on a monthly basis to fund operations, maintenance and replacement costs associated with Western’s transmission
services. For the year ended June 30, 2004, the Authority advanced a net prepaid deposit of $182,360, which is included in
the Statements of Net Assets. This has demonstrated our cooperation and has given our customers greater flexibility in
working with Western.
Arizona State Treasurer-held investment write-off – The Authority is statutorily required to invest funds through the
Arizona State Treasurer (Treasurer), who has sole investment decision-making authority. In November 2002, the Authority
was advised that one of the Treasurer’s chosen investments managed by National Century Financial Enterprises was under
investigation for fraud. In December 2002, the Authority was informed that the Treasurer was vitiating the investment in
question, thereby reducing the value to zero. Since that time, litigation was initiated and continues. There is no guarantee
that the litigation will result in the recovery of the Authority’s funds, which total $227,224. Therefore, the Authority has
written off the lost investment amount as of June 30, 2003.
Effects of Drought on Hoover Energy – The Colorado River Basin has been experiencing severe drought conditions
for the past five years. This has resulted in a reduction in Lake Mead’s storage and the power production at Hoover Dam.
Several Authority customers requested that the Authority purchase supplemental power to offset the reduced energy
production at Hoover. The supplemental power costs are significantly higher, and are passed directly to the requesting
customers. These supplemental revenues and costs are reflected on the Authority’s books, resulting in higher revenue and
purchased power costs.

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S

Contributions – During Fiscal Year 2004, the Authority contributed $20,000 via the Arizona Power
Authority Scholarship Program to each of the following schools: the Arizona State University, the University of Arizona,
and Northern Arizona University.
APA Fund – The APA Fund was established by the Arizona Power Authority Commission in 1971 and has grown
significantly over the years. The APA Fund’s Operating Revenues exceeded 2004 Budget by $1,441,450 (or 30%) due to
increased supple mental power sales. Correspondingly, the Fund’s Operating Expenses exceeded the budgeted amount by
$1,352,051 (or 27%) due to increased supplemental power purchases.
Other Changes That Will Improve or Provide Future Benefit to the Arizona Power Authority – No other
agreements or new customers were added nor were there any other significant impacting events during the reporting period.
FINANCIAL HIGHLIGHTS
· The Authority’s net assets increased by $598,398, or 20 percent, partly due to reduced amount of long-term debt
payable associated with the defeasance of the 1993 Bonds in October 2003.
· The Authority’s Revenue increased by $432,317, primarily due to an increase in the sale of supplemental power.
The purchase and concomitant sale of additional supplemental power resulted from additional customer energy
requirements brought on by reduced Hoover power generation caused by the sustained drought currently being
experienced throughout the Colorado River Basin. See Authority Highlights, above.

USING THIS ANNUAL REPORT
This annual report consists of a series of financial statements. The Statements of Net Assets, the Statements of Revenues,
Expenses and Changes in Net Assets and the Statements of Cash Flows (on pages 14 - 17, respectively) provide information
about the activities of the Authority as a whole and present a longer-term view of the Authority’s finances. The Authority is a
body, corporate and politic, of the State of Arizona and is a special-purpose government entity engaged only in business-type
activities. Accordingly, the financial statements presented in this Annual Report are the required basic financial statements in
accordance with the provisions of Governmental Accounting Standards Board Statement No. 34, Basic Financial Statements –
and Management’s Discussion and Analysis – for State and Local Governments.
There are six basic or normal transactions that will affect the comparability of the Statements of Net
Assets summary presentation:
Net Results of Activities – which impact (increase/decrease) current assets and unrestricted net assets.
Borrowing for Capital – which increases assets and long-term debt.
Spending Borrowed Proceeds on New Capital – which reduces current assets and increases capital assets.
There is a second impact, an increase in invested capital assets and an increase in related net debt, which however,
does not change the investment in capital assets, net of debt.
Spending of Non-borrowed Current Assets on New Capital – which (a) reduces current assets and increases
capital assets and (b) reduces unrestricted net assets and increases investment in capital assets, net of debt.
Principal Payment on Debt – which reduces current assets and reduces long-term debt.
Reduction of Capital Assets through Depreciation – which reduces capital assets and investment in capital
assets, net of debt.

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S

OVERVIEW OF THE FINANCIAL STATEMENTS
This Discussion and Analysis is an introduction to the basic financial statements of the Authority,
which are comprised of two components.
(1) Fund Financial Statements
(2) Notes to the Financial Statements.
The Fund Financial Statements begin on page14 and provide detailed information about the individual funds. A fund is a
fiscal and accounting entity with a self-balancing set of accounts that the Authority uses to keep track of specific sources of
revenues and disbursements for specific purposes. The Authority’s funds are treated as proprietary and are independent of
each other. Most of the Authority’s financial dealings are with contracts outside of state government. A separate fund is not
maintained for government activities. The Authority does not act as a fiduciary.

CONDENSED STATEMENTS OF NET ASSETS

Current assets

June 30, 2004

June 30, 2003

$ 13,045,876

Long-term assets
Capital assets
Current liabilities
Long-term (bonds payable, net)
Net assets
Invested in capital assets
Unrestricted
Net assets, end of year

$

Diff $

Diff %

$ 14,952,938

$ (1,907,062)

(13%)

54,296,784

56,666,028

(2,369,244)

(4%)

159,403

160,664

(1,261)

(1%)

67,502,063

71,779,630

(4,277,567)

(6%)

5,421,283

4,854,228

58,551,481

63,994,501

(5,443,020)

(9%)

63,972,764

68,848,729

(4,875,965)

(7%)

159,403

160,664

(1,261)

(1%)

3,369,896

2,770,237

599,659

22%

598,398

20%

3,529,299

$

2,930,901

567,055

$

12%

CONDENSED STATEMENT OF NET ASSETS DISCUSSION
Current Assets decreased because the Cash with Trustee was used to reduce long-term debt.
Long Term Assets decreased because of the reduction in the cost of the current year Uprating Program, associated with
debt and other costs related to improvements at Hoover Dam.
Current Liabilities increased primarily due to the increased bonds payable for principal and increased power contracts payable.
Long Term Liabilities decreased due to a change in the investments held by the Trustee, attributable to the Crossover
Refunding of the 1993 Bonds, and the paydown of bond principal.
Net Assets are explained on page 12.
These are the basic or normal transactions that will affect the comparability of the Statements of Changes in the Net Assets
summary presentation.

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M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S

REVENUES
Economic Drought Condition – The sustained drought condition in the Colorado River Basin has resulted
in a decline in power production from Hoover Dam, and this has caused an increase in supplemental power consumption,
and revenues from power sold.
Increase/Decrease in Commission Approved Power Rates – State statute requires the rates be set at levels to recover
the cost of supplying service. In addition, contracts between the Authority and its customers provide specific details
regarding rate determination. In addition, by State statute, the Arizona Power Authority’s Commission is solely
responsible for periodically modifying rates, as appropriate.
Market Impacts on Investment Income – Market conditions cause investment income to fluctuate in both the long-term
and shorter-term venues.
EXPENSES
Introduction of New Programs – Individual programs may be added or deleted to meet changing Authority needs;
however, none has been added during this fiscal year.
Increase/Decrease in Authorized Personnel – Changes in the Authority’s services may result in increasing/decreasing
authorized staffing. Staffing costs (salary and related benefits) represent 3.53 percent of the Authority’s operating costs,
and are stable.
Salary Increases (cost of living, merit and market adjustment) – The ability to attract and retain competent personnel
requires the Authority to provide a competitive salary structure, which are reviewed annually.

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S

The following condensed financial information was derived from the Statements of Revenues, Expenses and Changes in
Net Assets and reflects how the Authority’s net assets changed during the fiscal year.

STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS - BUSINESS TYPE ACTIVITIES

Operating revenues

June 30, 2004

June 30, 2003

$ 25,445,767

$ 25,013,450

Diff $
$

432,317

Diff %
2%

Operating expenses
Purchased Power
Western Credits
Amortization of Hoover Uprating
Program Costs

18,014,692
(5,224,715)

18,048,125
(5,325,522)

(33,433)
100,807

(0.2%)
(2%)

5,224,715

5,325,522

(100,807)

(2%)

Transmission and Distribution

5,247,155

5,229,802

17,353

Administrative and general

1,564,083

1,427,504

136,579

10%

35,870

30,711

5,159

17%

102,322
24,964,122

155,357
24,891,499

(53,035)
72,623

(34%)
.30%

481,645

121,951

359,694

295%

(3,209,937)

(3,593,036)

383,099

11%

2,735,366

2,958,718

(223,352)

(8%)

Depreciation
Other
Total operating expenses
Operating income (loss)

0.3%

Other (deductions) income
Interest expense
Deferred interest expense
Amortization
Interest income
Other, net
Total other (deductions)
income
Change in net assets

(82,842)

130,019

157%

627,332

(86,067)

(14%)

2,882

(225,382)

228,264

101%

116,753

(315,210)

431,963

137%

791,657

410%

598,398

Net Assets, Beginning of Year
Net Assets, End of Year

47,177
541,265

(193,259)

2,930,901
$

3,529,299

3,124,160
$

2,930,901

$

(193,259)

(6%)

598,398

20%

CHANGES IN NET ASSETS DISCUSSION
Net Assets increased overall because of the following:
· Operating Revenues and Total Operating Expenses increased because of increased supplemental
power sales. Both of these items are discussed elsewhere in this report.
· Uprating credits decreased because of decreases in debt payments and other costs related to the Uprating Program.
· Amortization of the Uprating Program decreased because of the decrease in interest payments, due to the Crossover
Refunding of the 1993 bonds.
· Administrative and General expenses increased due to increases in personnel costs, occupancy expenses, and
CREDA expenses.
· Depreciation increased because additional capital assets were acquired.
· “Other” Expenses decreased due to the fact that the LGIP loss was recorded as of 6/30/03. This is discussed elsewhere
in the Authority Highlights under the “Arizona State Treasurer - held investment write-off” section.

12

13

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S

CAPITAL ASSETS
As of fiscal year end, the Authority had $159,403 invested in

The following reconciliation summarizes the change in

a variety of capital assets, as reflected in the following

Capital Assets, which is presented in detail on page 22

schedule, which represents a net decrease (additions less

of the Notes to the Financial Statements:

retirements and depreciation) of $1,261 or one (1) percent

June 30, 2004

from the end of last year.

June 30, 2004

June 30, 2003

Beginning Balance

$

Additions

Distribution Plant
General Plant - Office

$

24,203
135,200

$

32,273
128,391

$

159,403

$

160,664

34,609

Depreciation
Ending Balance

160,664

(35,870)
$

159,403

DEBT OUTSTANDING
As of fiscal year-end, the Authority had $60,065,000 in debt outstanding, compared to $67,495,000 last year, as a result of the
defeasance of the 1993 Bonds, including a principal payment of $2,320,000, which was paid on October 1, 2003. Also see
page 23 of the Notes to the Financial Statements for a detailed summary of debt activity during the year.

BUSINESS TYPE ACTIVITIES
1

2

3

4

The following chart depicts the sources of revenues for the fiscal year.

1- Hoover Power Sales - $20,577,506 (79.17%)
2- Supplemental Power Sales/Administrative Charges - $4,868,261 (18.73%)
3 - Interest Income - $541,265 (2.08%)
4 - Other Income - $2,882 (0.01%)
The Authority’s revenues from sale of Hoover power may decrease in the coming
year(s) due to drought conditions. Insufficient rain and snow pack results in less water
through the turbines at Hoover Dam, thereby producing less hydroelectric power
available for sale. Additional wet years, and other factors, could help stabilize revenues.
1

2

3

4 5

The following chart depicts the types of expenses for the fiscal year.
67

1- Hoover Purchased Power - $13,179,355 (51.81%)
2- Transmission & Distribution - $5,247,155 (20.63%)
3 - Supplemental Power Purchased - $4,835,337 (19.01%)
4 - Administrative & General - $1,564,083 (6.15%)
5 - Net Interest Expense - $474,571 (1.87%)
For further information and/or questions on
6 - Other Costs - $102,322 (0.40%)
this report, please call the Power Authority
Office at 602-542-4263.
Depreciation
$35,870
(0.14%)
7-

F I N A N C I A L S TAT E M E N T S

STATEMENTS OF NET ASSETS
June 30th, 2004 and 2003
APA General Fund
2004

Hoover Uprating Fund

2003

2004

Total

2003

2004

2003

Assets
Current assets
Cash and cash equivalents

$

3,757,939 $

3,894,085

Cash with Trustee

-

-

Investments held by Trustee

-

-

Accounts receivable, customers
power purchases
Interest receivable
Prepaid purchased power

Capital assets, net

2,148,362 $
-

2,098,840

$

2,694,576

5,906,301 $
-

5,992,925
2,694,576

2,653,463

2,592,771

2,653,463

2,592,771

703,846

235,854

2,136,496

1,950,056

2,840,342

2,185,910

7,818

10,802

117,562

130,383

125,380

141,185

1,520,390

1,345,571

1,520,390

1,345,571

8,576,273

10,812,197

13,045,876

14,952,938

159,403

160,664

-

Total current assets

$

-

4,469,603

4,140,741

159,403

160,664

-

-

Investments held by Trustee

-

-

6,546,550

7,146,663

6,546,550

7,146,663

Advances for Hoover Uprating
Program, net

-

-

47,567,874

49,337,005

47,567,874

49,337,005

182,360

182,360

Prepaid transmission

182,360

Total assets

182,360

$

4,811,366 $

4,483,765

$

12,607 $

3,830

-

-

$ 62,690,697 $ 67,295,865 $ 67,502,063 $ 71,779,630

Liabilities
Current liabilities
Accounts payable and other
Power contracts payable

693,222

$

232,500

99,682 $

107,768

$

112,289 $

111,598

1,298,732

1,296,311

1,991,954

1,528,811

Accrued interest payable

-

-

772,040

893,819

772,040

893,819

Bonds payable

-

-

2,545,000

2,320,000

2,545,000

2,320,000

4,715,454

4,617,898

5,421,283

4,854,228

Total current liabilities

705,829

236,330

Bonds payable

-

-

57,520,000

65,175,000

57,520,000

65,175,000

Premium (discounts) on bonds payable

-

-

3,243,535

(1,180,499)

3,243,535

(1,180,499)

Deferred amounts, net

-

-

(2,212,054)

Bonds payable, net

-

Total liabilities

-

-

58,551,481

(2,212,054)

63,994,501

58,551,481

63,994,501

$

705,829 $

236,330

$ 63,266,935 $ 68,612,399

$ 63,972,764 $ 68,848,729

$

159,403 $

160,664

$

$

Net Assets
Net assets
Invested in capital assets
Unrestricted
Total net assets
Total liabilities and net assets

$

-

$

-

159,403 $

160,664

3,946,134

4,086,771

(576,238)

(1,316,534)

3,369,896

2,770,237

4,105,537

4,247,435

(576,238)

(1,316,534)

3,529,299

2,930,901

4,811,366 $

4,483,765

$ 62,690,697 $ 67,295,865

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

$ 67,502,063 $ 71,779,630

14

15

F I N A N C I A L S TAT E M E N T S

STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS
June 30th, 2004 and 2003
APA General Fund
2004

Operating revenues

$

Operating expenses
Purchased power

Hoover Uprating Fund

2003

4,868,261

$

4,835,337

3,117,041

2004

Total

2003

2004

$ 20,577,506 $ 21,896,409

3,076,952

2003

$ 25,445,767 $ 25,013,450

13,179,355

14,971,173

18,014,692

18,048,125

Western credits

-

-

(5,224,715)

(5,325,522)

(5,224,715)

(5,325,522)

Amortization of Hoover Uprating
Project costs

-

-

5,224,715

5,325,522

5,224,715

5,325,522

Transmission and distribution

19,593

11,996

5,227,562

5,217,806

5,247,155

5,229,802

Administrative and general

81,471

68,552

1,482,612

1,358,952

1,564,083

1,427,504

Depreciation

35,870

30,711

-

35,870

30,711

Other

76,299

133,846

26,023

21,511

102,322

155,357

5,048,570

3,322,057

19,915,552

21,569,442

24,964,122

24,891,499

661,954

326,967

481,645

121,951

Total operating expenses
Operating income (loss)

(180,309)

-

(205,016)

Other (deductions) income
Interest expense

-

-

(3,209,937)

(3,593,036)

(3,209,937)

(3,593,036)

Deferred interest expense

-

-

2,735,366

2,958,718

2,735,366

2,958,718

Amortization

-

Interest income

38,411

Other, net

-

Total other (deductions) income
Increase (decrease) in
net assets
Net assets, beginning of
the year
Net assets, end of the year

47,177

(82,842)

47,177

(82,842)

502,854

561,155

541,265

627,332

(137,441)

2,882

(87,941)

2,882

(225,382)

38,411

(71,264)

78,342

(243,946)

116,753

(315,210)

(141,898)

(276,280)

740,296

83,021

598,398

(193,259)

2,930,901

3,124,160

4,247,435
$

66,177

4,105,537

4,523,715
$

4,247,435

(1,316,534)
$

(576,238) $

(1,399,555)
(1,316,534)

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

$

3,529,299 $ 2,930,901

F I N A N C I A L S TAT E M E N T S

STATEMENTS OF CASH FLOWS
June 30th, 2004 and 2003
APA General Fund
2004

Cash flows from operating activities
Cash received from customers

$

Cash payments to suppliers for goods
or services

2003

4,400,269 $
(4,543,201)

Cash payments to employees for services

Hoover Uprating Fund

-

3,096,556

2004

$

(3,457,807)
-

Total

2003

20,391,066 $

21,595,325

2004

$

2003

24,791,335 $

24,691,881

(19,436,486)

(22,264,987)

(23,979,687)

(25,722,794)

(659,550)

(611,569)

(659,550)

(611,569)

Net cash provided by (used in)
operating activities

(142,932)

(361,251)

295,030

(1,281,231)

152,098

(1,642,482)

Cash flows from capital and related
financing activities
Interest payments on obligations

-

-

(3,331,716)

(3,610,797)

(3,331,716)

(3,610,797)

Payments on obligations

-

-

(62,255,424)

(1,450,000)

(62,255,424)

(1,450,000)

Proceeds from refunding, net

-

-

59,779,157

(34,609)

(9,877)

-

-

4,507,379

(34,609)

(9,877)

(1,300,604)

Acquisition of capital assets
Advances for Hoover Uprating Program

-

-

59,779,157

-

(34,609)

5,456,308

4,507,379

(9,877)
5,456,308

Net cash provided by (used in) capital
and related financing activities

395,511

(1,335,213)

385,634

Cash flows from investing activities
Interest on investments

41,395

73,144

Loss on investments

-

(137,441)

515,675

Purchase of investment securities

-

-

(6,189,167)

(7,355,125)

(6,189,167)

(7,355,125)

-

-

6,728,588

7,331,264

6,728,588

7,331,264

41,395

(64,297)

1,055,096

451,984

1,096,491

387,687

(136,146)

(435,425)

49,522

-

565,628

557,070

(89,783)

-

638,772
(227,224)

Proceeds from sale and maturities
of investment securities
Net cash provided by (used in)
investing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year

$

3,894,085

4,329,510

3,757,939 $

3,894,085

$

(433,736)

2,098,840

2,532,576

2,148,362 $

2,098,840

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

(86,624)

$

(869,161)

5,992,925

6,862,086

5,906,301 $

5,992,925

16

17

F I N A N C I A L S TAT E M E N T S

STATEMENTS OF CASH FLOWS (CONTINUED)
June 30th, 2004 and 2003
APA General Fund
2004

Hoover Uprating Fund

2003

2004

Total

2003

2004

2003

Reconciliation of operating income (loss)
to net cash provided by (used in)
operating activities
Operating income (loss)

$

(180,309) $

(205,016)

35,870

30,711

(467,992)

(20,485)

$

661,954 $

326,967

$

481,645 $

121,951

35,870

30,711

(654,432)

(321,569)

Adjustments to reconcile operating income
(loss) to net cash provided by (used in)
operating activities
Depreciation
Changes in assets and liabilities
(Increase) in accounts receivable
(Increase) in prepaid transmission

-

(Increase) decrease in prepaid
purchased power

-

-

8,777

(3,858)

Increase (decrease) in accounts payable
and other
Increase (decrease) in power
contracts payable
Total adjustments
Net cash provided by (used in)
operating activities

$

(186,440)

(182,360)

460,722

19,757

37,377

(156,235)

(142,932) $

(361,251)

(301,084)

-

-

(174,819)

183,739

(8,086)

21,115

2,421
(366,924)

$

295,030 $

(174,819)

691

(182,360)
183,739

17,257

(1,511,968)

463,143

(1,492,211)

(1,608,198)

(329,547)

(1,764,433)

(1,281,231)

$

152,098 $

(1,642,482)

Supplemental schedule of noncash
capital and related financing activities
Deferred interest

$

-

$

-

$

2,735,366 $

2,958,718

$

2,735,366 $

2,958,718

$

-

$

-

$

3,209,937 $

3,593,036

$

3,209,937 $

3,593,036

Supplemental schedule of cash
paid for interest

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

N O T E S T O F I N A N C I A L S TAT E M E N T S

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Arizona Power Authority (the “Authority”) is a body, corporate and politic, without taxing power, established by the
Arizona Legislature on May 27, 1944 by the Power Authority Act.Under the Power Authority Act, the Authority is directed
to obtain electric power developed from the mainstream of the Colorado River and sell such power to certain qualified
purchasers. The Power Authority Act provides that the Authority must be a self-supporting agency and prohibits the
Authority from incurring any obligation, which would be binding upon the State of Arizona.
The Authority supplies capacity and energy on a wholesale basis to certain power purchasers in the State of Arizona.
The Authority’s primary source of power and energy is the Hoover Power Plant at Hoover Dam, located approximately 25
miles from Las Vegas, Nevada. Hoover power is produced by the Boulder Canyon Project hydropower plant owned by the
Bureau of Reclamation. Hoover Dam is the highest and third largest concrete dam in the United States of America.
Hoover Dam was dedicated in 1935 and the first generator of the Hoover Power Plant was in full operation in October
1936 and has been in continuous operation since. Power and energy from the Hoover Power Plant is transmitted to load
centers in Arizona, California and Nevada. The Authority first contracted for Arizona’s share of Hoover power in 1952 and
has continuously provided power and energy to its customers since that time.
The Authority is governed by a commission of five members appointed by the Governor and approved by the Senate
(the “Commission”). The term of office for each member is six years and the members select a chairman and vice-chairman
from among its membership for two-year terms.
Pursuant to Arizona law, the Commission serves as the Authority’s regulatory body with the exclusive authority to establish
electric prices. The Authority is required to follow certain procedures, pertaining to public notice requirements and public
meetings, before implementingchanges in electric price schedules.
Measurement Focus
The Authority’s funds are accounted for on a flow of economic resources measurement focus. All assets and liabilities
(whether current or noncurrent) associated with their activity are included in the Statements of Net Assets. The Statements
of Revenues, Expenses, and Changes in Net Assets present increases (revenues) and decreases (expenses) in total net
assets. The Authority’s reported total net assets are segregated into invested capital assets and unrestricted components.
Basis of Accounting
Basis of Accounting refers to the time at which revenues and expenses are recognized in the accounts and reported in the
financial statements, regardless of the measurement focus applied. The accrual basis of accounting is used by the
Authority whereby revenues are recognized in the accounting period in which they are earned and become measurable,
and expenses are recognized when incurred.
The accompanying financial statements are presented in conformity with accounting principles generally accepted in the
United States of America (“GAAP”). The accompanying financial statements have been prepared in accordance with the
reporting model defined by Governmental Accounting Standards Board (“GASB”) Statement No. 34, Basic Financial
Statements - and Management’s Discussion and Analysis - for State and Local Governments, as amended by GASB
Statement No. 37, Basic Financial Statements and Management’s Discussion and Analysis - for State and Local
Governments: Omnibus - an Amendment of GASB Statements No. 21 and No . 34, and GASB Statement No. 38, Certain
Financial Statement Note Disclosures.

18

19

N O T E S T O F I N A N C I A L S TAT E M E N T S

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Accounting Standards
GASB No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use
Proprietary Fund Accounting, requires that governments’ proprietary activities apply all GASB pronouncements as well as
the following pronouncements issued on or before November 30, 1989, unless those pronouncements conflict with or
contradict GASB pronouncements, Financial Accounting Standards Board (“FASB”) Statements and Interpretations,
Accounting Principles Board Opinions and Accounting Research Bulletins. Governments are given the option whether or
not to apply all FASB Statements and Interpretations issued after November 30, 1989, except for those that conflict with
or contradict GASB pronouncements. The Authority has elected not to implement FASB Statements and Interpretations
issued after November 30, 1989.
New Accounting Pronouncements
In November 2003, the GASB published Statement No. 42, Accounting and Financial Reporting for Impairment of
Capital Assets and for Insurance Recoveries. The provisions of this Statement require governments to report the effects
of capital asset impairment in their financial statements when it occurs. Furthermore, the Statement requires that all
governmental entities consistently account for insurance recoveries. The Statement requires governments to evaluate
major events affecting capital assets to determine whether they are impaired. Those events include physical damage,
changes in legal or environmental factors, technological changes or obsolescence, changes in manner or duration of use
and construction stoppage. GASB Statement No. 42 is effective for fiscal periods beginning after December 15, 2004. The
Authority believes the implementation of GASB Statement No. 42 will not have a material impact on the financial statements.
Revenue Recognition
The Authority recognizes revenue when power is delivered and billed to the customers.
Cash and Cash Equivalents
The Authority treats short-term temporary cash investments with original maturities when purchased, of three months or
less as cash equivalents.
All cash and cash equivalent balances are maintained by the State of Arizona Treasurer within the Local Government
Investment Pool (“LGIP”). The LGIP is not registered with the Securities and Exchange Commission and investments
are not subject to custodial credit risk. The State Board of Investment conducts monthly reviews of investment activity
and performance. LGIP amounts are carried at fair value which is substantially the same as the value of the LGIP shares.
Participant shares are purchased and sold based on the Net Asset Value (“NAV”) of the shares. The NAV is determined
by dividing the fair value of the portfolio by the total shares outstanding.

N O T E S T O F I N A N C I A L S TAT E M E N T S

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Capital Assets and Depreciation
Capital assets are stated at original cost less accumulated depreciation. Depreciation is provided on the straight-line method
based on the estimated useful lives of the property items, which range from 3 to 20 years. The costs of additions and
replacements are capitalized. Repairs and maintenance are charged to expense as incurred. Retirements, sales and disposals
are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts
with any resulting gain or loss reflected in Other within the Statements of Revenues, Expenses, and Changes in Net Assets.
Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may
not be recoverable. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference.
Advances for Hoover Uprating Program
Proceeds from bonds payable were advanced by the Authority for uprating the Hoover Power Plant and are recorded as
advances. Such advances, including debt issue costs, plus net interest expense incurred by the Authority are reimbursed in
the form of credits on the monthly power bills rendered by the Western Area Power Administration of the Department of
Energy (“Western”). These credits are issued over the 30-year life of the bonds. Substantially all advances, net interest
expense and other related costs on the bonds are charged to the Uprating Program as amounts to be recovered from
future credits.
Schedule C Energy
Under its Electric Service Contract with Western, the Authority has preferential rights to excess energy (“Schedule C energy”)
generated at the Hoover Power Plant. The Authority buys Schedule C energy when available from Western during an
operating year (October 1 to September 30). The Authority’s financial statements are prepared on a fiscal year (July 1 to
June 30) basis. When excess energy is available, the Authority bills its customers as Schedule C energy is delivered and
receives payment during a given operating year, but Western does not bill for the cost of such Schedule C energy until the
following operating year. An estimate of such amounts is accrued at the end of the fiscal year. The Statement of Net Assets
as of June 30, 2004 does not include an accrual for Schedule C energy as no Schedule C energy was available during
the operating year.
Operating and Nonoperating Revenues
Operating revenues are revenues derived from the sale of power to customers or from other contractual agreements.
Operating revenues include $8,400,000 received from Salt River Project for scheduling entity services during the years
ended June 30, 2004 and 2003, respectively. The revenue is the result of an agreement between the Authority and the Salt
River Project which will yield $8,400,000 annual revenues to the Authority thereby reducing the overall revenue requirements
to be paid by the Authority’s customers through power rates. The agreement expired September 30, 2004. A new agreement
was executed on December 16, 2003, which will yield $5,400,000 annual revenues, effective October 1, 2004. The
agreement will expire on September 30, 2011. Nonoperating revenues are from sources other than the sale of power to
customers and primarily consist of income earned on investments.
Application of Net Assets to Expenses Incurred
The Authority applies unrestricted, undesignated net assets to expenses incurred. To the extent undesignated net assets
are unavailable, unrestricted, designated net assets will be applied to expenses incurred.

20

21

N O T E S T O F I N A N C I A L S TAT E M E N T S

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Customer Credits
The Authority operates on a nonprofit basis and reduces charges to its customers, through credits on power bills, for any
revenues in excess of expenses after the close of the operating year. Likewise, the Authority bills its customers for any
deficit in revenues versus expenses incurred during the operating year.
As of June 30, 2004, there were no accrued credits to be applied to customers’ power bills based upon rates from Western’s
operating year ending September 30, 2004.
Income Taxes
The Authority is exempt from federal and Arizona state income taxes. Accordingly, no provision for income taxes has been
recorded for the Authority in the accompanying financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from these estimates.
Geographic and Product Concentration
The Authority’s revenues are derived from the sale of electrical power and services to contracted customers in the state of
Arizona. The Hoover Uprating Fund is used to purchase electric power solely from Western. The Authority’s APA General
Fund is used to purchase electric power from various providers.
Reclassifications
Certain amounts in the accompanying financial statements for June 30, 2003 have been reclassified to conform to the
June 30, 2004 presentation. Such reclassifications had no effect on net assets as previously reported.
2. FUND ACCOUNTING
Hoover Uprating Fund
The Hoover Power Plant Act of 1984 (“Hoover Act”) authorized the U.S. government to increase the capacity i.e., “uprate,”
of existing generating equipment at the Hoover Dam Power Plant (“Uprating Program”). Instead of appropriating further
federal funds for the Uprating Program,Congress implemented an advancement of funds procedure whereby prospective
nonfederal purchasers of the uprated Hoover capacity and associated energy contribute to the financing of the Uprating
Program. The Uprating Program was determined to be complete in September 1995. The Authority financed a portion of
the total Uprating Program by issuing bonds.
The Hoover Uprating Fund accounts for advances by the Authority in connection with the Uprating Program. Effective
June 1, 1987, the Authority executed new power contracts with Western and its customers which expire in 2017. The
revenues and expenditures applicable to the sale and transmission of power and energy received by the Authority from
Western under these contracts are accounted for in the Hoover Uprating Fund.

N O T E S T O F I N A N C I A L S TAT E M E N T S

2. FUND ACCOUNTING (CONTINUED)
APA General Fund
The Authority’s operations other than those applicable to the Hoover Uprating Fund are accounted for in the APA General
Fund. The purchase of supplemental power and the sale and transmission of such power to the Authority’s customers
comprise the majority of this fund’s activity.
3. CAPITAL ASSETS, NET
Capital assets, net, of the APA General Fund at June 30, 2004 and 2003 were as follows:
2004
Transmission and distribution plant
General plant

$

Less: Accumulated depreciation
$

June 30, 2003

$

Total capital assets

289,049
219,634
669,766

Additions

$

1,178,449

Accumulated depreciation
Transmission plant
Distribution plant
General plant - office
Total accumulated
depreciation
Capital assets, net

508,683
694,719
1,203,402

$

(1,043,999)

Capital assets, net

Capital assets
Transmission plant
Distribution plant
General plant - office

2003

34,609

159,403

(1,017,785)
$

Disposals

$

508,683
669,766
1,178,449
160,664

June 30, 2004

(9,656)

$

289,049
219,634
694,719

34,609

(9,656)

(289,049)
(187,361)
(541,375)

(8,069)
(27,801)

9,656

(289,049)
(195,430)
(559,520)

(1,017,785)

(35,870)

9,656

(1,043,999)

$

160,664

$

(1,261)

$

-

1,203,402

$

159,403

The transmission and distribution plant is comprised of a substation and related equipment. Purchased power is delivered
over transmission facilit ies owned by Western.
4. ADVANCES FOR HOOVER UPRATING PROGRAM
Advances for the Hoover Uprating Program were reimbursed by Western through credits on the Authority’s power bills in
the amount of $5,224,715 and $5,325,522 for the years ended June 30, 2004 and 2003, respectively. Credits were received
for the upraters’ portion of principal and interest expense on the bonds and other costs associated with the Hoover
Uprating Program. During the year ended June 30, 2004, principal amortization, interest expense and other related
costs on the bonds issued to finance the Uprating Program exceeded interest income by $5,312,526.

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5. BONDS PAYABLE
Bonds payable consists of the following:
June 30, 2003

Increases

Reductions

Transfers

June 30, 2004

Bond payable current $ 2,320,000
Bond payable long-term 65,175,000

$

57,520,000

$ (2,320,000)
(62,630,000)

$ 2,545,000
(2,545,000)

$ 2,545,000
57,520,000

Total bonds payable

$ 57,520,000

$(64,950,000)

$

$ 60,065,000

$ 67,495,000

-

In prior years, the Authority defeased various issues of bonds by purchasing U.S. government securities which were
deposited in an irrevocable trust with an escrow agent to provide for future debt service until the call dates. As a result,
those bonds are considered to be defeased and the liability for these bonds has been removed from the Hoover Uprating
Fund. Accordingly, these trust account assets and related liabilities are not included in the Authority’s financial statements.
The Authority’s outstanding bonds, totaling $60,065,000, bear interest ranging from 5.0% to 5.3%, are due from 2004
through 2017, and are secured by the pledged property, as defined by the resolution, which includes the proceeds from
the sale of the bonds, rights and interest in various contracts and revenues. The Authority amortizes the bond premium
(discount) using the effective interest method. Principal amounts due over the next five fiscal years ended June 30 and
thereafter are as follows: $2,545,000 in 2005, $2,560,000 in 2006, $2,825,000 in 2007, $3,120,000 in 2008, $3,450,000 in
2009, $22,495,000 in 2010 through 2014, and $23,070,000 in 2015 through 2018. Interest amounts due over the next five
fiscal years ended June 30 and thereafter are as follows: $3,023,261 in 2005, $2,894,363 in 2006, $2,759,738 in 2007,
$2,611,113 in 2008, $2,446,863 in 2009, $9,121,321 in 2010 through 2014, and $2,500,051 in 2015 through 2018.
Crossover Refunding
On September 12, 2001, the Authority issued $57,520,000 of Special Obligation Crossover Refunding Bonds. Proceeds
from the sale of the bonds along with a fund contribution by the Authority were held in an escrow trust account invested in
government securities until October 1, 2003 (the “Crossover Date”) when a crossover refunding took place. The crossover
refunding resulted in $57,520,000 of Special Obligation Crossover Refunding Bonds being exchanged for 2001 Series
Power Resource Revenue Refunding Bonds of the same principle amount, maturity date and interest rates as the crossover
bonds. In addition, as part of the crossover and as required by regulation, the Authority applied an additional $600,113 of
funds held in the Debt Service Reserve Account (see page 4 - Statement of Net Assets, Investment held by Trustee) to
effect the crossover transaction and called the $62,630,000 of the 1993 Series Power Resource Revenue Refunding Bonds
maturing on and after October 1, 2005.
The proceeds in the government securities escrow trust account, together with the income realized from investment of
trust assets served as collateral for the Special Obligation Crossover Bonds and paid the debt service on those bonds until
the Crossover Date. The Special Obligation Crossover Bonds were payable solely from the amounts in the escrow trust
account and were not payable from any other source. Because they were not payable from revenues derived by the
Authority or secured by any assets held by the Authority, neither the Special Obligation Crossover Bonds nor the assets
held in the escrow trust account were reflected on the Authority’s Statements of Net Assets at June 30, 2003. However, in
conjunction with the issuance of the Crossover Bonds, the Authority depos ited $2,694,676 with a crossover bond trustee
which is reflected as “Cash with Trustee” in the Authority’s Statement of Net Assets at June 30, 2003.

N O T E S T O F I N A N C I A L S TAT E M E N T S

5. BONDS PAYABLE (CONTINUED)
(Crossover Refunding - Continued)
As a result of the crossover refunding transaction on October 1, 2003, the 2001 Series Bonds are reflected as obligations of
the Authority at June 30, 2004 and the called portion of the 1993 Series Bonds are no longer outstanding and cease to be
entitled to any lien on the revenues pledged to payment of those bonds. Instead, the revenue stream originally pledged to
secure the called portion of the 1993 Series bonds “crossed over” to pay debt service on the 2001 Series Bonds on
October 1, 2003. The 2001 Series Bonds bear interest at a rate of 5% and 5.25% payable on April 1 and October 1 of each
year, commencing April 1, 2004 and maturing in 2017. In addition, the Authority recognized an economic gain (difference
between the present value of the old and new debt service payments) of $2,095,648. The crossover refunding also resulted
in the recognition of a deferred amount of $2,411,956 that has been reflected as a decrease in bonds payable and which
will be amortized using the effective interest method as a component of interest expense over the life of the refunded
bonds. The Authority amortized $199,902 for the year ended June 30, 2004 resulting in a net deferred amount of
$2,212,054 in the Statement of Net Assets. The Authority also recognized a premium of $3,536,652 on the crossover
refunding which has been reflected as an increase in bonds payable and which will be amortized using the effective interest
method. The Authority amortized $293,117 for the year ended June 30, 2004. The cash flows required to service the new
debt are $4,572,093 less than the cash flows required to service the old debt.
6. Investments Held by Trustee
As of June 30, 2004 and 2003, investments are collateralized with securities held by the Authority’s trustee. The fair value
of the investment securities at June 30 is as follows:

Repurchase agreement
U.S. government securities
Total investments held by Trustee

2004

2003

$ 6,546,550

$ 7,146,663

2,653,463

2,592,771

$ 9,200,013

$ 9,739,434

On September 19, 1996, the Authority entered into a repurchase and custody agreement with MBIA Investment
Management Corporation (“IMC”) wherein the Authority agreed to effect a series of repurchase transactions
with IMC, in investments allowable under the bond resolution agreements and state law, with a fixed earnings
rate of 6.95%. The securities are held in trust by JP Morgan Institutional Trust Services. If at any time the
aggregate market value of all purchased securities is less than the amount required under the repurchase and
custody agreement (calculated using a percentage of 104%), the Authority may require IMC to transfer
additional securities so the aggregate market value of all securities will equal or exceed such requirement. At
June 30, 2004, the aggregate market value of all purchased securities exceeded the amount required under the
repurchase and custody agreement.

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N O T E S T O F I N A N C I A L S TAT E M E N T S

7. Retirement Plan
The Authority contributes to the retirement plan described below. Benefits are established by state statute and generally
provide retirement, death, long-term disability, survivor, and health insurance premium benefits.
The Arizona State Retirement System (the “Plan” or “ASRS”) administers a cost-sharing multiple-employer defined benefit
pension plan that covers permanent, full-time employees of the Authority. The ASRS is governed by the Arizona State
Retirement System Board according to the provisions of ARS Title 38, Chapter 5, Article 2. The ASRS issues a publicly
available financial report that includes its financial statements and required supplementary information. A report may
be obtained by writing or calling the Plan at 1020 East Missouri Avenue, Phoenix, Arizona 85014, (602) 255-5575. The Plan
was established by the State of Arizona to provide benefits for employees of the state and employees of participating
political subdivisions and school districts. The Plan became effective on July 1, 1971. By actuarial computation, employee
member and Authority contributions to the Plan were fixed at 5.70% (5.20% retirement and .50% long-term disability) of
their compensation for the years ended June 30, 2004 and 2003, with the contributions made through payroll deductions.
Employee contributions vest immediately. Total contributions to the Plan for the years ended June 30, 2004 and 2003 by
the Authority’s covered employees were $38,991 and $14,854, respectively.
Matching employer member contributions were actuarially determined and fixed at the same rate as employee member
contributions for the years ended June 30, 2004 and 2003. In the event the Plan’s actuary determines that additional
contributions are needed in order to amortize an unfunded accrued liability, every employer member will be required to
contribute the revised contribution percentage which is established by the Arizona State Legislature.
All full-time employees of the Authority are required to become members of the Plan. The Authority’s total payroll for
employees covered by this Plan for the years ended June 30, 2004 and 2003 were $659,550 and $611,569, respectively.
Contributions to the Plan by the Authority for its covered employees vest over five years. All required employer
contributions are made to the Plan by the end of each month.
8. Additional Benefits
In addition to the pension benefits described above, ASRS offers health care benefits to retired and disabled members who
are no longer eligible for health care benefits through their former member employer’s group health plan. Retired is
defined as actively receiving an annuity benefit and disabled is defined as receiving a long-term disability (“LTD”) benefit
through the LTD program administered by ASRS. The following chart illustrates the maximum amount of the monthly
available benefit for eligible members and their dependents:

Member
Years of
Credited
Service

Percent of
Premium
Benefit

5.0 - 5.9
6.0 - 6.9
7.0 - 7.9
8.0 - 8.9
9.0 - 9.9
10.0+

50%
60%
70%
80%
90%
100%

Member and Dependent(s)

Not
Medicare
Eligible

Medicare
Eligible

Not
Medicare
Eligible

Medicare
Eligible

$ 75.00
90.00
105.00
120.00
135.00
150.00

$ 50.00
60.00
70.00
80.00
90.00
100.00

$ 130.00
156.00
182.00
208.00
234.00
260.00

$ 85.00
102.00
119.00
136.00
153.00
170.00

N O T E S T O F I N A N C I A L S TAT E M E N T S

9. Purchased Power, Sales and Transmission Commitments
The Authority is party to Firm Electric Service and Transmission Service Contracts with terms expiring September 30, 2017.
This requires the Authority to pay approximately 19% of Western’s revenue requirements each operating year until the
contract expires. During the years ended June 30, 2004 and 2003, the Authority paid $13,179,355 and $14,971,173,
respectively, for purchased power under this contract. The Authority is obligated to pay these costs under the contract
even in the unlikely event that no power is supplied.
The Authority also has a contract with Western for transmission services. During the years ended June 30, 2004 and 2003, the
Authority paid $5,227,562 and $5,217,806, respectively, for transmission costs to Western. On January 24, 2003, the Authority
entered into the Advancement of Funds for Transmission Services contract with Western. The contract provides for the
Authority to advance funds to Western on a monthly basis to fund operations, maintenance and replacement costs associated
with Western’s transmission services. The advanced funds are then applied to the subsequent month’s transmission invoice.
As of June 30, 2004, the Authority recognized a prepaid deposit of $182,360 that is refundable upon termination of the contract.
The Authority has sales contracts with all customers. Under these contracts, customers are obligated to pay for their
percentage allocation if any Hoover power is delivered or made available for delivery. These sales contracts expire
September 30, 2017, but some can be terminated by the Authority on June 1, 2007 or thereafter.
The Authority also has contracts with Salt River Project for the purchase and transmission of power to the Authority’s
customers. Under the transmission contract, the Authority must pay an annual transmission fee of $63,898 until
September 30, 2017. The Authority has a power contract with SRP in which supplemental power purchases can be made
by the Authority on behalf of its customers. There are no minimum quantities that the Authority is required to purchase.
This agreement is applicable when supplemental power is necessary, during such times of low production of Hoover energy,
and during summer months when customers require higher levels of energy. During the years ended June 30, 2004 and
2003, the Authority paid $4,835,337 and $3,067,952, respectively, for purchased power under this contract for its customers.

DEBT SERVICE COVERAGE RATIO
NET INCOME
Add:
Interest Expense (1)
Amortization (1)
Depreciation (1)
Western Credits
Credits to Customers
for Prior Year

$

740,296
3,209,937
245,940
26,023
5,224,715
416,619

Total Additions

9,863,530

Deduct:
Deferred Interest Expense
Premium Amortization

(2,735,366)
(293,125)

Total Deductions

(3,028,491)

Income available
for debt service

$ 6,835,039

Debt Service

$ 5,698,687

Debt service
coverage ratio

1.2
(1)

Interest expense, depreciation expense and amortization of Uprating Costs are not expenses under the Bond Resolution.

(2)

Debt Service is the total of Principal and Interest Expense accrued between July 1, 2003 and June 30, 2004.

26

ARIZONA POWER AUTHORITY
1810 WEST ADAMS STREET

|

PHOENIX, ARIZONA 85007

|

(602) 542-4263

|

FAX (602) 253-7970