Managing
Efficiencies
to Maximize

Arizona’s Resources

arizona power authority
48th annual report 2006

“Common sense is not so common.”
– Voltaire

TABLE OF CONTENTS

1

LETTER TO THE GOVERNOR

2

REPORT OF THE COMMISSION

4

REPORT OF THE EXECUTIVE DIRECTOR

5

HISTORICAL ENERGY SALES

5

OPERATIONS AND ENVIRONMENT

6

SCHEDULE OF CAPACITY AND ENERGY SALES

7

MANAGEMENT’s DISCUSSION AND ANALYSIS

17

REPORT OF THE INDEPENDENT ACCOUNTANTS

18

FINANCIAL STATEMENTS

22

NOTES TO FINANCIAL STATEMENTS

Commission

Staff

John I. Hudson

Joseph W. Mulholland

Chairman

Executive Director

Dalton H. Cole

Michael A. Gazda

Vice-Chairman

Deputy Director

Michael C. Francis
Delbert R. Lewis
Richard S. Walden

Arizona Power Authority

Rita K. Gallant
Executive Secretary

1810 W. Adams Street • Phoenix, AZ 85007-2697
(602) 542-4263 • FAX (602) 253-7970

December 1, 2006
The Honorable
Janet A. Napolitano
Governor of Arizona
State Capitol
Ninth Floor, West Wing
Phoenix, AZ 85007
Dear Governor:
On behalf of the Arizona Power Authority’s Commissioners and staff, I submit the 48th Annual
Report. This report details the Authority’s operation and financial activities for the fiscal year ending
June 30, 2006, and features the Authority’s efforts in administering Arizona’s hydroelectric power
entitlement generated at the Hoover Dam and Power Plant located on the Colorado River. As you are
aware, the Colorado River system is experiencing a severe drought cycle of seven years, one of the
most severe in recorded history. This has adversely impacted the entire river system, including Lake
Mead and other reservoirs.
As a result of the lowered levels of water impounded in Lake Mead, the amount of hydroelectric
generation available to Arizona has been reduced by 13 percent from Arizona’s contractual
entitlement of 377 megawatts. The storage in Lake Mead is at approximately fifty-four percent (54%)
of its cabability. Nevertheless, the State’s water and power entitlements, although at reduced levels
of electric generation, are still available for the State’s use. The Authority continues its aggressive
and active involvelment in the federal and state efforts to mitigate the drought impacts.
The Authority is also continuing to investigate opportunities for development of various renewable,
electric power generating resources to assist our customers with greater diversity of electric
power generation and reduce their dependancy on fossil-fuel energy resources. These resources,
if developed, would supplement the hydro resource and provide clean energy for Arizona.
Sincerely,

John I. Hudson, LT GENERAL, USMC (Ret.)
Chairman

1

REPORT OF THE COMMISSION

Effective management has always been a key to fulfilling the Arizona Power
Authority’s mandate to provide the citizens of Arizona with low cost power. Now
more than ever the efficient administration of Arizona’s federal hydroelectric
power entitlement from Hoover Dam and Power Plant is essential. This includes
monthly oversight and the application of comprehensive cost containment
measures as well as exploring innovative approaches for delivering low-priced
electric power for Arizona. In this way, the Authority remains focused on
maximizing existing resources, as well as examining opportunities for leveraging
new energy sources.

John I. Hudson, LT GENERAL, USMC (Ret.)
Chairman
First appointed to the Arizona Power Authority Commission
in March 2000, John I. Hudson was elected Chairman in
January 2006 with his current term expiring in 2012. 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.

Dalton H. Cole
Vice-Chairman
Appointed to the Commission in January 2002 for a
term to run until 2008, Dalton Cole was elected to be the
Vice-Chairman in January 2006. 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.

2

Michael C. Francis
Starting his tenure on the Commission in 1999, Mr. Francis
was selected Chairman in April 2003 and re-elected to this
position in 2005. His current term expires in January 2008.
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 Francis Insurance Agency, which
insures Arizona and California farmers. Mr. Francis is a
Board of Directors member of M&I Bank, Arizona Region.
He is also a member of the American Rose Society.

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 wife, Sharon, have
been nationally recognized for their financial support and
commitment to education and community service.

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 Company,
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 former 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.

3

REPORT OF THE EXECUTIVE DIRECTOR

THE ENERGY TO EXCEL
Energy is in the news and will no doubt remain there for the
foreseeable future. Fluctuations in the availability and cost of
energy directly influence Arizona’s economy. So efficiency is
at a premium as never before. At the Arizona Power Authority,
this means maximizing resources and preparing now to meet
the needs of the future.

Without a doubt, the Authority’s most vital resource is its
people. Recent years have seen considerable staff turnover,
ushering in a younger, more energetic team who are truly
qualified and motivated to excel. We’re particularly pleased
to welcome our new Deputy Director, Mike Gazda, previously
with the Municipal Electric Authority of Georgia, who arrives
with a great deal of experience and knowledge in power
generation and transmission planning and operations.

As a team, we take great pride in understanding the
challenges at hand and developing innovative approaches for
meeting them. Professionalism is high and the commitment
to serve our customers is taken personally. As a result, we
have become a more able and responsive organization.

This year, the Arizona State Legislature extended the
Authority’s operating mandate through July 1, 2016. During
the review process, the Legislature expressed strong
interest in the Authority’s performance, reflecting the
heightened awareness regarding energy resources. In doing
so, the Legislature acknowledged a more dynamic role for
the Authority to play in the energy welfare of the state.

To mitigate these conditions and their impact on generation
capacity, modifications are being implemented at Hoover’s
power plant. Improved turbines and associated equipment
generate greater power per unit, thereby helping to offset
the power lost from lower water levels. In addition, superior
water flow systems have been implemented, to reduce
friction and help maintain generation capacity.

In addition, the Authority is exploring the possibility of
reducing transmission costs through a purchase in capacity
from the Western Transmission System, which Western could
use to reduce its debt service. The saving incurred would be
passed on directly to our customers. The Authority is also
exploring ways of integrating renewable energy resources,
such as solar and wind, to complement Hoover power and
ensure reliability.

Security remains a high
Hoover Dam requires
New methodologies are
on a continuous basis,
potential threats.

priority as well. As a national icon,
comprehensive safety measures.
being developed and implemented
in order to remain ahead of any

While the challenges are significant, the Authority has
never been better positioned to meet them. As we address
immediate needs of our customers, we continue to look
forward as well, in order to ensure efficiency and stability for
the long term.

In keeping with this mission, the Authority is actively
responding to on-going drought conditions throughout the
Colorado River system. Lake Mead, which provides the water
for generation at the Hoover Power Plant, is currently at 54%
of its capacity. Water levels are at 1125 feet above sea level,
whereas the 30-year average is about 1200 feet.

“Experience is one thing you can’t get
for nothing.”
– Oscar Wilde
4

HOOVER ENERGY SALES
SUPPLEMENTAL ENERGY SALES

GWh
1400

HISTORICAL ENERGY SALES

1300
1200

The following graph illustrates the Authority’s

1100

historical energy sales (GWh) since 1998 for

1000

power obtained from the Hoover Power Plant and

900

for supplemental sales. Supplemental power is

800

obtained by the Authority for sale to customers

700

on an “as requested” basis. This energy augments

600

the customers’ allocation from the Authority.		

500

							

400
300
200
100
0

1998 1999 2000 2001 2002 2003 2004 2005 2006

FISCAL YEAR

1998

1999

2000

2001

2002

2003

2004

2005

2006

HOOVER ENERGY

1,389

1,318

1,205

1,103

1,098

899

753

681

653

SUPPLEMENTAL ENERGY
TOTAL ENERGY

3

2

4

0

0

0

23

38

6

1,392

1,320

1,209

1,103

1,098

899

776

719

659

OPERATIONS AND ENVIRONMENT
COLORADO RIVER OPERATIONS
The Colorado River System experienced a “wet year”
primarily in the lower basin through heavy rainfall in the
mountains surrounding the various tributaries that drain
into Lake Mead and other smaller reservoirs. As a result,
deliveries to the International Boundary with Mexico were
satisfied through these inflows, which allowed the entire
8.23 million acre feet of releases from the upper basin to be
stored in Lake Mead, increasing its storage slightly. For water
year 2007, the Secretary of the Interior has indicated that
there may be some “partial domestic surpluses” available,
which would provide more water to the Hoover generators
and an increase in energy generation for the fifteen Hoover
customers, including the Arizona Power Authority.

During the 2006-2007 Winter overhaul period, two additional
unit overhauls and two unit modifications are planned
for a total of four units with improved capacities. These
improvements will potentially add another thirty-three
megawatts to the total Hoover capacity at lake levels below
1,145 feet, as well as substantial reductions in water leakage.
Since Lake Mead levels historically are below 1,145 feet about
90% of the time, these improvements will benefit customers
for many years to come.
ENVIRONMENT
The voluntary Lower Colorado River Multi-Species Conservation
Program is nearing the completion of its second year of the
50-year program. Many of the administrative procedural
processes are completed and the focus is now centered on
actual implementation of the program’s objectives.

Although below normal inflow to the Colorado River Basin
system continued through 2006, improvements to the
efficiencies of the Hoover generators have been accelerated
to mitigate the loss of capacity and total energy produced.
In the last two years, two of the Hoover generating units
have been overhauled with new, stainless-steel wicket gates
resulting in about fourteen MW of increased capacity at the
lower water levels, plus a substantial reduction of bypass
water leakage.

“It’s not what you look at that matters,
it’s what you see.”
– Henry David Thoreau
5

SALE OF HYDRO POWER

CUSTOMERS
Aguila Irrigation District

Average
Billing Demand
(kW)

Energy
Delivered
(kWh)

Sales
($)

Mills
Per
kWh

Prior
Year
Adj. ($)
(4,013)

4,964

9,128,000

$

242,489

26.57

497

2,215,000

$

49,846

22.50

(1,147)

2,352

6,778,000

$

158,642

23.41

(2,394)

127,515

120,428,000

$

4,817,867

40.01

(107,266)

734

3,263,000

$

65,164

19.97

(841)

5,081

13,616,000

$

232,559

17.08

(956)

Electrical District No. 2, Pinal

15,348

52,205,000

$

1,178,980

22.58

(18,380)

Electrical District No. 3, Pinal

12,546

58,458,000

$ 1,553,205

26.57

(19,378)

Electrical District No. 4, Pinal

15,348

61,228,000

$ 1,202,709

19.64

(22,521)

Electrical District No. 5, Pinal

11,655

43,836,000

$

861,511

19.65

(16,114)

276

3,277,000

$

59,616

18.19

(1,437)

6,320

17,607,000

$

351,830

19.98

(4,889)

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. 5, Maricopa
Electrical District No. 6, Pinal
Electrical District No. 7, Maricopa

8,285

16,521,000

$

391,543

23.70

(4,620)

Electrical District No. 8, Maricopa

19,096

44,029,000

$

1,114,549

25.31

(18,518)

Harquahala Valley Power District

1,964

7,481,000

$

169,124

22.61

(3,350)

Maricopa County Municipal Water District No. 1

6,976

21,547,000

$

488,666

22.68

(5,230)

McMullen Valley Water Conserv. & Drainage Dist.

26.13

(6,184)
(3,076)

7,173

13,187,000

$

344,520

Ocotillo Water Conservation District

1,886

11,892,000

$

224,253

18.86

Queen Creek Irrigation District

1,397

1,843,000

$

37,272

20.22

Roosevelt Irrigation District

2,541

12,620,000

$

258,554

20.49

$

Roosevelt Water Conservation District
Salt River Project
San Tan Irrigation District
Silverbell Irrigation & Drainage District

(3,906)

98,414

20.30

(225)

$ 2,250,600

22.21

(48,251)

1,699,000

$

19.30

5,334

4,847,000

30,609

101,351,000

410

32,786

560

4,336,000

$

78,956

18.21

(1,534)

Tonopah Irrigation District

1,223

3,767,000

$

88,059

23.38

(1,495)

Wellton-Mohawk Irrigation & Drainage District

2,296

7,610,000

$

163,679

21.51

(1,157)

821

848,000

$

18,473

21.78

1,641

3,470,000

$

86,815

25.02

(310)
(214)

City of Page
City of Safford
Town of Thatcher
Town of Wickenburg
TOTAL HYDRO POWER SALES

828

1,855,000

$

45,836

24.71

1,807

1,816,000

$

50,848

28.00

297,483

652,758,000

$ 16,717,365

$22.69

$ (297,406)

PRIOR YEAR (OY-05) CUSTOMER
$ (302,754)

REFUND ACCRUAL
CURRENT FISCAL YEAR CUSTOMER

$(1,201,939)

REFUND ACCRUAL
TOTAL SUPPLEMENTAL POWER SALES

$ 5,950,918

OTHER ELECTRIC SERVICES INCOME*

$ 5,462,409

TOTAL POWER INCOME

$ 26,328,596

* Includes Administrative fees, facilities charges, late charges, and Scheduling Entity revenue.

6

MANAGEMENT’S DISCUSSION AND ANALYSIS
AUTHORITY HIGHLIGHTS

The following is a discussion and analysis of the Arizona
Power Authority’s (“Authority”) financial performance for the
fiscal years ended June 30, 2006 and 2005. 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.

Scheduling Entity Agreement
The Authority and Salt River Project Agricultural Improvement
and Power District were parties to a Scheduling Entity
Agreement which expired on September 30, 2004, and
provided for Salt River Project (“SRP”) to pay the Authority
$8.4 million each year in return for allowing SRP to be the
Scheduling Entity of the Hoover generation in Arizona. The
new Agreement became effective as of October 1, 2004,
provides for SRP to pay the Authority $5.4 million each
year, 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 $3.0 million
each year, the rates for Hoover power increased accordingly.

The Management’s Discussion and Analysis (“MD&A”)
focuses on the 2006 and 2005 fiscal year’s activities, resulting
changes and known facts, and should be read in conjunction
with the Authority’s annual report for the years ended June 30,
2006 and 2005.
This MD&A 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

Transmission Agreement

The Fund Financial Statements begin on page 18 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.

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 years ended June 30, 2006 and 2005, the
Authority advanced a net prepaid deposit of $182,360, which
is included in the Statements of Net Assets. This new contract
gives Western greater flexibility and allows them to work more
effectively with the Authority and other customers.

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 18-21, 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.

Contributions
During fiscal years 2006 and 2005, the Authority contributed
$60,000 via the Arizona Power Authority Scholarship Program.
The following schools each received $20,000: Arizona State
University, The University of Arizona, and Northern Arizona
University.

Funds
On January 1, 1971, new Hoover contracts between the Authority
and its customers went into effect. At that time, previously
earned funds from “steam sales” and other sales were placed
into a fund identified as the APA Fund. Simultaneously, the
Arizona Power Authority Commission established the Hoover
Energy Fund to account for revenues and expenditures
applicable to the sale and transmission of power and energy
received by the Authority under its Hoover Energy Contract.

7

Effects of Drought on Hoover Energy

Economic Drought Condition

The Colorado River Basin has been experiencing severe
drought conditions for the past seven years. Although the
drought conditions have mitigated in recent years, there
has been a reduction in Lake Mead’s storage and the power
production at Hoover Dam. In response to customer requests,
the Authority continues to purchase supplemental power
to offset the reduced energy production at Hoover. The
supplemental power costs are significantly higher than
Hoover rates, 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.

Although the drought condition in the Colorado River Basin
continues, improvements at Hoover Dam have resulted in
increased efficiency and increased capacity from the generators.

EXPENSES
Introduction of New Programs
There were no changes during this fiscal year; however,
individual programs may be added or deleted to meet
changing Authority needs.

Increase/Decrease in Authorized Personnel
Changes in the Authority’s services may result in increasing/
decreasing authorized staffing. Fiscal year 2006 staffing
costs (salary and related benefits) represent 2.62% of the
Authority’s operating costs. For fiscal year 2005, staffing costs
represent 2.60% of the Authority’s operating costs.

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 wrote off the lost investment amount
as of June 30, 2003. As of June 30, 2006, a total of $88,785
has been recovered. In fiscal year 2006, $62,702 was received
and is presented as Other Income.

Salary Structure
(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
is reviewed annually, pursuant to State guidelines. During
fiscal years 2006 and 2005, changes in staffing resulted in a
net reduction in salaries.

REVENUES
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. The Arizona Power Authority Commission
is solely responsible for periodically adjusting rates, as
appropriate. In response to the reduced power production
from Hoover, and bond rating analysis, the Commission raised
rates by 15% in February 2006.

Market Impacts on Investment Income
Favorable market conditions during fiscal year 2006 resulted
in an increase in interest rates, yielding greater investment
income for the year.

8

FINANCIAL HIGHLIGHTS
• The Authority’s 2006 net assets increased by $561,639, or
20.4%, due mainly to increased rates.
• The Authority’s 2005 net assets decreased by $773,807, or
21.9%, primarily due to the timing in prepaid purchased
power usage.
• The Authority’s 2006 operating revenues decreased by
$143,839, or 0.5%, due to accrual of fiscal year 2006
customer refunds.
• The Authority’s 2005 operating revenues increased by
$1,026,668, or 4.0%, primarily due to increased
supplemental power sales volume.

STATEMENTS OF NET ASSETS
There are six normal transactions that will affect the
comparability of the Statements of Net Assets summary
presentation:
Net Results of Activities
which will impact (increase/decrease) current assets and
undesignated net assets.
Borrowing for Capital
which will increase assets and long-term debt.
Spending Borrowed Proceeds on New Capital
which will reduce current assets and increase capital assets.
There is a second impact, an increase in invested capital
assets and an increase in related net debt, which will not
change the investment in capital assets, net of debt.
Spending of Non-borrowed Current Assets on New Capital
which will (a) reduce current assets and increase capital
assets, and (b) will reduce undesignated net assets and
increase investment in capital assets, net of debt.
Principal Payment on Debt
which will reduce current assets and reduce long-term debt.
Reduction of Capital Assets through Depreciation
which will reduce capital assets and investment in capital
assets, net of debt.

9

CONDENSED STATEMENTS OF NET ASSETS
BUSINESS TYPE ACTIVITIES
June 30,
Current assets

2006

2005

$ 1 3,774,025

$ 1 1,558,522

49,307,084

52,113,652

235,769

211,786

63,316,878

63,883,960

7,077,825

5,261,291

1,816,534

34.5%

Long-term assets
Capital assets, net
Total assets
Current liabilities

Diff $
$ 2 ,215,503
(2,806,568)

Diff %
19.2%
(5.4%)

23,983

11.3%

(567,082)

(0.9%)

Long-term (bonds payable, net)

52,921,922

55,867,177

(2,945,255)

(5.3%)

Total liabilities

59,999,747

61,128,468

(1,128,721)

(1.8%)

235,769

211,786

23,983

11.3%

3,081,362

2,543,706

537,656

21.1%

3,317,131

2,755,492

561,639

20.4%

$ 63,316,878

$ 63,883,960

$ (567,082)

(0.9%)

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

Fiscal Year 2006 Condensed Statements
of Net Assets Discussion
Long-Term Liabilities
Decreased due to a pay down of the bond principal. See
further explanation on page 12.

Current Assets
Increased due to an increase in prepaid purchased power,
increased accounts receivable, and an increase in the Debt
Service cash account.

Net Assets
Are explained on page 13 and 14.

Long-Term Assets
Decreased because of a payment of principal for the current
year Uprating Program.

Capital Assets, Net
Increased due to the investment in the new parking lot for the
office building.

Current Liabilities
Increased due to an increase in amounts owed pursuant to
power contracts at June 30, 2006 and an accrual for fiscal
year 2006 customer refunds.

10

CONDENSED STATEMENTS OF NET ASSETS
BUSINESS TYPE ACTIVITIES
June 30,
Current assets

2005

2004

Diff $

Diff %

$ 11,558,522

$ 13,045,876

$ (1,487,354)

(11.4%)

52,113,652

54,296,784

(2,183,132)

211,786

159,403

63,883,960

67,502,063

(3,618,103)

(5.4%)

5,261,291

5,421,283

(159,992)

(3.0%)

Long-term assets
Capital assets, net
Total assets
Current liabilities

52,383

(4.0%)
32.9%

Long-term (bonds payable, net)

55,867,177

58,551,481

(2,684,304)

(4.6%)

Total liabilities

61,128,468

63,972,764

(2,844,296)

(4.4%)

211,786

159,403

2,543,706
2,755,492
$ 63,883,960

Net assets
Invested in capital assets
Unrestricted
Total net assets

52,383

32.9%

3,369,896

(826,190)

(24.5%)

3,529,299

(773,807)

(21.9%)

$ 67,502,063

$ (3,618,103)

(5.4%)

Total liabilities and
net assets

Fiscal Year 2005 Condensed Statements
of Net Assets Discussion
Long-Term Liabilities
Decreased due to a pay down of the bond principal. See
further explanation on page 12.

Current Assets
Decreased due to a reduction in prepaid purchased power and
an increase in customer refunds, which resulted in a reduction
in cash.

Net Assets
Are explained on pages 13 and 14.

Long-Term Assets
Decreased because of a payment of principal for the current
year Uprating Program.
Capital Assets
Net increased due to additions of new air conditioning units
for the office building, a new circuit breaker and a right-of-way
easement for the E.D. #5 substation. See further explanation
on page 12.
Current Liabilities
Decreased due to a reduction in amounts owed pursuant to
power contracts at June 30, 2005.

11

CAPITAL ASSETS

LIQUIDITY

As of June 30, 2006 and 2005, the Authority had $235,769
and $211,786, respectively, invested in a variety of capital
assets, as reflected in the following schedule, which represents
a net increase (additions less retirements and depreciation) of
$23,983, or 11.3% during fiscal year 2006 and a net increase
of $52,383 or 32.9% during fiscal year 2005.

Pursuant to Arizona Revised Statutes (A.R.S.) Section 30-124,
the Commission of the Authority shall establish electric rates to
include such price components as are necessary to maintain
the Authority, to provide and maintain reasonable working
capital and depreciation and other necessary and proper
reserves. Components that are necessary to maintain the
Authority include employee payroll, occupancy costs, cost of
purchases or construction of generation and transmission
services, and any cost factors chargeable to the cost of
providing service as the Commission deems necessary or
advisable to establish and maintain the financial integrity
of the Authority. Contracts for sale of electric power to the
Authority’s customers include rates which may be modified
upon 24-hour notice when such action is necessary in the sole
judgment of the Commission in order to achieve the purposes
of A.R.S. Section 30-124. The Commission, on a monthly
basis, reviews the financial status of the Authority, including
expenses and revenues and the adequacy of the rates to
maintain the Authority’s financial integrity.

		
Transmission plant
Distribution plant
General plant - office
Invested in capital assets,
end of year

June 30, 2006 June 30, 2005
$ 27,464

$ 30,516

31,757

40,482

176,548

140,788

$ 235,769

$ 211,786

The following reconciliation summarizes the change in
Capital Assets for the years ended June 30, 2006 and 2005,
which is presented in detail on page 25 of the Notes to the
Financial Statements:
		
Beginning balance

June 30, 2006 June 30, 2005
$ 211,786

$ 159,403

Additions

64,248

98,420

Disposals

-

(5,013)

(40,265)

(41,024)

$ 235,769

$ 211,786

Depreciation
Ending balance

DEBT OUTSTANDING
As of June 30, 2006, the Authority had $54,960,000 in debt
outstanding, compared to $57,520,000 in the prior year, as
a result of the payment of a principal payment of $2,560,000,
which was paid on October 1, 2005. As of June 30, 2005, the
Authority had $57,520,000 in debt outstanding, compared
to $60,065,000 in the prior year, as a result of the payment
of a principal payment of $2,545,000, which was paid on
October 1, 2004. Also see page 26 of the Notes to the
Financial Statements for a detailed summary of debt
activity during the year.

12

STATEMENTS OF REVENUES, EXPENSES,
AND CHANGES IN NET ASSETS
There are normal transactions that will affect the
comparability of the Statements of Changes in the Net
Assets summary presentation:

Operating Expenses
Which increase/decrease as a result of purchased power
costs, transmission costs, and operating costs.

Operating Revenues
Which increase/decrease as a result of economic conditions
and power usage.

Other Income (Deductions)
Which increase/decrease as a result of investment market
conditions.

STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS
BUSINESS TYPE ACTIVITIES
June 30,
2006
Operating revenues

Diff $

Diff %

$ 26,328,596

$ 26,472,435

2005

$ (143,839)

(0.5%)

19,404,200

20,805,429

(1,401,229)

(6.7%)

Operating expenses
Purchased power
Western credits

(5,167,368)

(5,119,484)

(47,884)

0.9%

Amortization of Hoover Uprating
5,167,368

5,119,484

47,884

0.9%

Transmission and distribution

Program costs

5,258,886

5,256,841

2,045

0.0%

Administrative and general

1,405,247

1,348,146

57,101

40,265

41,024

Depreciation
Other
Total operating expenses
Operating income (loss)

(759)

109,518

70,837

38,681

26,218,116

27,522,277

(1,304,161)

(1,049,842)

1,160,322

110,480

4.2%
(1.9%)
54.6%
( 4.7%)
110.5%

Other (deductions) income
Interest expense
Deferred interest expense

(2,862,363)

(2,990,812)

128,449

(4.3%)

2,347,319

2,520,052

(172,733)

(6.9%)

Amortization

120,255

124,304

Interest income

750,465

596,597

153,868

25.8%

95,483

25,894

69,589

268.7%

Other, net

(4,049)

(3.3%)

Total other (deductions)
income

451,159

276,035

Change in net assets

561,639

(773,807)

Net assets, beginning of year
Net assets, end of year

$

2,755,492

3,529,299

3 ,317,131

$ 2 ,755,492

13

175,124

63.4%

1,335,446

172.6%

(773,807)
$ 5 61,639

(21.9%)
20.4%

Fiscal Year 2006 Changes in Net Assets
Discussion
Net Assets increased overall because of the following:
• Operating Revenues decreased due to the accrual of fiscal
year 2006 customer refunds.

2006 REVENUES

• Total Operating Expenses decreased due to a decrease in
purchased power.

Hoover Power Sales
$20,315,268
74.43%

• Western Credits increased because of changes in debt
payments and associated costs related to the
Uprating Program.
• Amortization of the Uprating Program increased because of
the increase in the amortization of long-term bond costs.
• Administrative and General expenses increased due to
Lower Colorado River Multi-Species Conservation Program
(MSCP) expenses.
• Depreciation decreased due to the normal attrition of
capital assets.

Other Income
$215,738
0.79%

• Other expenses increased due to the initiation of special
expenses, such as the Colorado River Legal Defense Fund
and National Renewable Energy Laboratory (NREL).

Supplemental Power
Sales/Admin Charges
$6,013,328
22.03%

Interest Income
$750,465
2.75%

2006 EXPENSES
Supplemental Power
Purchased
$5,950,918
22.26%

Depreciation
$40,265
0.15%

Hoover Power
Purchased
$13,453,282
50.32%

Other Costs
$109,518
0.41%

Administrative & General
$1,405,247
5.26%

14

Transmission &
Distribution
$5,258,886
19.67%

Net Interest Expense
$515,044
1.93%

STATEMENTS OF REVENUES, EXPENSES,
AND CHANGES IN NET ASSETS
There are basic or normal transactions that will affect the
comparability of the Statements of Changes in the Net Assets
summary presentation:

Operating Expenses
Which increase/decrease as a result of purchased power
rates, transmission costs, and operating costs.

Operating Revenues
Which increase/decrease as a result of economic conditions
and power usage.

Other Income (Deductions)
Which increase/decrease as a result of investment market
conditions.

STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS
BUSINESS TYPE ACTIVITIES
June 30,
2005
Operating revenues

Diff $

Diff %

$ 26,472,435

$ 25,445,767

2004

$ 1,026,668

4.0%

20,805,429

18,014,692

2,790,737

Operating expenses
Purchased power
Western credits

15.5%

(5,119,484)

(5,224,715)

105,231

(2.0%)

(105,231)

(2.0%)

Amortization of Hoover Uprating
Program costs

5,119,484

5,224,715

Transmission and distribution

5,256,841

5,247,155

9,686

Administrative and general

1,348,146

1,564,083

(215,937)

41,024

35,870

5,154

14.4%

(31,485)

(30.8%)

Depreciation
Other

0.2%
(13.8%)

70,837

102,322

Total operating expenses

27,522,277

24,964,122

2,558,155

10.2%

Operating income (loss)

(1,049,842)

481,645

(1,531,487)

(318.0%)

Other (deductions) income
Interest expense

(2,990,812)

(3,209,937)

219,125

(6.8%)

Deferred interest expense

2,520,052

2,735,366

(215,314)

(7.9%)

Amortization

124,304

47,177

77,127

163.5%

Interest income

596,597

541,265

55,332

10.2%

25,894

2,882

23,012

798.5%

Other
Total other (deductions)
income
Change in net assets
Net assets, beginning of year
Net assets, end of year

276,035

116,753

(773,807)

598,398

159,282
(1,372,205)

3,529,299

2,930,901

598,398

$ 2 ,755,492

$ 3 ,529,299

$ ( 773,807)

15

136.4%
(229.3%)
20.4%
(21.9%)

Fiscal Year 2005 Changes in Net Assets
Discussion

Net Assets decreased overall because of the following:
• Operating Revenues increased as a result of increased
supplemental power sales.

2005 REVENUES

• Total Operating Expenses increased due to an increase in
purchased power costs.

Hoover Power Sales
$19,995,362
73.46%

• Western credits decreased because of changes in
debt payments and associated costs related to the
Uprating Program.
• Amortization of the Uprating Program increased because of
the increase in the amortization of long-term bond costs.
• Administrative and general expenses decreased due to a
reduction in annual report expenses, reduction in
Commission and staff travel, payroll costs, and a reduction
of legal expenses.
• Depreciation increased because additional capital assets
were acquired (such as new air conditioning units for
the office building, a new circuit breaker and a right-of-way
easement for the ED #5 substation).

Other Income
& Amortization
$150,198
0.55%

• Other operating expenses decreased due to reduced
costs in connection with utility organizations, such as
WestConnect, which is an independent system
operator-type organization that has suspended
further development.

Supplemental Power
Sales/Admin Charges
$6,477,073
23.80%

Interest Income
$596,597
2.19%

2005 EXPENSES
Supplemental Power
Purchased
$6,451,476
23.05%

Depreciation
$41,024
0.15%

Hoover Power
Purchased
$14,353,953
51.28%

Other Costs
$70,837
0.25%

Administrative & General
$1,348,146
4.81%

16

Transmission &
Distribution
$5,256,841
18.78%

Net Interest Expense
$470,760
1.68%

REPORT OF THE INDEPENDENT ACCOUNTANTS

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, 2006 and 2005, 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 21, 2006

17

FINANCIAL STATEMENTS

STATEMENTS OF NET ASSETS
JUNE 30, 2006 AND 2005
APA General Fund
2006

Hoover Uprating Fund

2005

2006

Total

2005

2006

2005

Assets
Current assets
Cash and cash equivalents

$

Investments held by Trustee

3,517,969

$ 3,619,626

$ 2,457,591

1,973,165

$ 5,975,560

-

-

2,818,376

$

2,426,277

2,818,376

$

2,426,277

5,592,791

598,577

464,188

2,349,602

2,181,432

2,948,179

2,645,620

20,331

15,477

128,733

122,963

149,064

138,440

170,063

50,702

-

-

170,063

50,702

Accounts receivable, customer
power purchases
Interest receivable
Other assets
Prepaid purchased power
Total current assets
Capital assets, net
Investments held by Trustee

-

-

1,712,783

704,692

1,712,783

704,692

4,306,940

4,149,993

9,467,085

7,408,529

13,774,025

11,558,522

235,769

211,786

-

-

235,769

211,786

-

-

6,546,569

6,766,682

6,546,569

6,766,682

-

-

42,578,155

45,164,610

42,578,155

45,164,610

Advances for Hoover Uprating
Program, net
Prepaid transmission
Total assets

182,360

182,360

-

-

182,360

182,360

$

4,725,069

$ 4,544,139

$ 58,591,809

$ 59,339,821

$ 63,316,878

$ 63,883,960

$

15,440

$

$

$

$

Liabilities
Current liabilities
Accounts payable and other
Customer refunds

$

33,640

96,239

112,920

111,679

146,560

-

-

1,504,693

-

1,504,693

-

Power contracts payable

593,456

461,973

1,335,405

1,353,166

1,928,861

1,815,139

Accrued interest payable

-

-

707,592

739,592

707,592

739,592

Bonds payable

-

-

2,825,000

2,560,000

2,825,000

2,560,000

608,896

495,613

6,468,929

4,765,678

7,077,825

5,261,291

Bonds payable

-

-

52,135,000

54,960,000

52,135,000

54,960,000

Premium (discounts) on

-

-

2,474,561

2,852,699

2,474,561

2,852,699

-

-

(1,687,639)

(1,945,522)

(1,687,639)

(1,945,522)

Total current liabilities

bonds payable
Deferred amounts, net
Bonds payable, net
Total liabilities

-

52,921,922

55,867,177

52,921,922

$

608,896

$

495,613

$ 59,390,851

$ 60,632,855

$ 59,999,747

$

235,769

$

211,786

$

$

$

55,867,177
$

61,128,468

Net Assets
Invested in capital assets
Unrestricted
Total net assets

-

-

235,769

$ 211,786

3,880,404

3,836,740

(799,042)

(1,293,034)

3,081,362

2,543,706

4,116,173

4,048,526

(799,042)

(1,293,034)

3,317,131

2,755,492

4,725,069

$ 4,544,139

$ 59,339,821

$ 63,316,878

$ 63,883,960

Total liabilities and
net assets

$

$ 58,591,809

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

18

FINANCIAL STATEMENTS

STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS
JUNE 30, 2006 AND 2005
APA General Fund
2006
Operating revenues

Hoover Uprating Fund

2005

2006

Total

2005

2006

2005

$ 6,013,328

$ 6,477,073

$ 20,315,268

$ 19,995,362

$ 26,328,596

$ 26,472,435

5,950,918

6,451,476

13,453,282

14,353,953

19,404,200

20,805,429

-

-

Operating expenses
Purchased power
Western credits

(5,167,368)

(5,119,484)

(5,167,368)

(5,119,484)

Amortization of Hoover Uprating
Program costs
Transmission and distribution

-

-

5,167,368

5,119,484

5,167,368

5,119,484

324

18,946

5,258,562

5,237,895

5,258,886

5,256,841

Administrative and general

70,558

67,666

1,334,689

1,280,480

1,405,247

1,348,146

Depreciation

40,265

41,024

-

-

40,265

41,024

Other
Total operating expenses
Operating income (loss)

82,899

40,110

26,619

30,727

109,518

70,837

6,144,964

6,619,222

20,073,152

20,903,055

26,218,116

27,522,277

(131,636)

(142,149)

242,116

(907,693)

110,480

(1,049,842)

Other (deductions) income
Interest expense
Deferred interest expense
Amortization
Interest income
Other

-

-

(2,862,363)

(2,990,812)

(2,862,363)

(2,990,812)

-

-

2,347,319

2,520,052

2,347,319

2,520,052

-

-

120,255

124,304

120,255

124,304

131,356

69,361

619,109

527,236

750,465

596,597

67,927

15,777

27,556

10,117

95,483

25,894

199,283

85,138

251,876

190,897

451,159

276,035

(57,011)

493,992

(716,796)

561,639

(773,807)

Total other (deductions)
income
Changes in net assets

67,647

Net assets, beginning of year

4,048,526

4,105,537

(1,293,034)

(576,238)

Net assets, end of year

$ 4,116,173

$ 4,048,526

$ ( 799,042)

$ ( 1,293,034)

$

2,755,492

3,529,299

3,317,131

$ 2 ,755,492

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

19

FINANCIAL STATEMENTS

STATEMENTS OF CASH FLOWS
JUNE 30, 2006 AND 2005
APA General Fund
2006

Hoover Uprating Fund

2005

2006

Total

2005

2006

2005

Cash flows from operating
activities
Cash received from customers

$ 5,759,578

$ 6,666,029

$ 21,651,791

$ 19,950,426

$

27,411,369

$ 26,616,455

Cash payments to suppliers
for goods or services

(5,991,416)

(6,783,401)

(20,512,553)

(19,407,140)

(26,503,969)

(26,190,541)

-

(603,132)

(612,545)

(603,132)

(612,545)

(117,372)

536,106

(69,259)

304,268

(186,631)

-

(2,894,363)

(3,023,260)

(2,894,363)

(3,023,260)

-

(2,560,000)

(2,545,000)

(2,560,000)

(2,545,000)

(64,248)

(98,420)

Cash payments to employees
for services

-

Net cash provided by
(used in) operating
activities

(231,838)

Cash flows from capital and
related financing activities
Interest payments on bonds
payable
Payments on bonds payable
Acquisition of capital assets

(64,248)

(98,420)

-

-

4,933,774

4,923,316

4,933,774

Advances for Hoover Uprating
Program

-

-

4,923,316

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

(64,248)

(98,420)

(520,589)

(644,944)

(584,837)

(743,364)

194,429

77,479

640,895

531,952

835,324

609,431

-

-

(7,467,429)

(10,429,978)

(7,467,429)

(10,429,978)

-

-

7,295,443

10,437,032

7,295,443

10,437,032

194,429

77,479

468,909

539,006

663,338

616,485

(138,313)

484,426

(175,197)

382,769

(313,510)

3,619,626

3,757,939

1,973,165

$ 3,517,969

$ 3,619,626

Cash flows from investing
activities
Interest on investments
Purchase of investments
Proceeds from sale and maturities
of investments
Net cash provided by
(used in) investing
activities
Net change in cash and
cash equivalents

(101,657)

Cash and cash equivalents,
beginning of year

2,148,362

5,592,791

5,906,301

Cash and cash equivalents,
end of year

$

2,457,591

$

1,973,165

$

5,975,560

$

5,592,791

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

20

FINANCIAL STATEMENTS

STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS (CONTINUED)
JUNE 30, 2006 AND 2005
APA General Fund
2006

Hoover Uprating Fund

2005

2006

Total

2005

2006

2005

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

$ (131,636)

$ (142,149)

$

242,116

$ (907,693)

$

110,480

$ (1,049,842)

Adjustments to reconcile operating
income (loss) to net cash provided
by (used in) operating activities
Depreciation
Loss on disposal of capital asset

40,265

41,024

-

-

40,265

41,024

-

5,013

-

-

-

5,013

Changes in assets and liabilities
(Increase) decrease in
accounts receivable

(134,389)

231,770

(119,361)

(42,814)

(168,170)

(44,936)

(302,559)

186,834

(Increase) decrease in
other assets

-

-

(119,361)

(42,814)

-

(1,008,091)

815,698

(1,008,091)

815,698

21,033

(16,681)

13,238

(34,881)

34,271

(Increase) decrease in
prepaid purchased power

-

Increase (decrease) in
accounts payable and other

(18,200)

Increase (decrease) in
customer refunds

-

-

1,504,693

-

1,504,693

-

Increase (decrease) in
power contracts payable

131,483

Total adjustments

(231,249)

(100,202)

(17,761)

24,777

293,990

54,434

113,722

(176,815)

838,434

193,788

863,211

Net cash provided by
(used in) operating
activities

$ (231,838)

$ (117,372)

$

536,106

$

(69,259)

$

304,268

$

(186,631)

$

-

$

-

$ 2,347,319

$ 2,520,052

$ 2,347,319

$ 2,520,052

$

-

$

-

$ 2,894,363

$ 3,023,260

$ 2,894,363

$ 3,023,260

Supplemental schedule of
noncash capital and related
financing activities
Deferred interest expense
Supplemental schedule of
cash paid for interest

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

21

NOTES TO FINANCIAL STATEMENTS
1. Description of Business and Summary of
Significant Accounting Policies

present increases (revenues) and decreases (expenses) in
total net assets. The Authority’s reported total net assets are
segregated into invested in capital assets and unrestricted
components.

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.

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 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 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.

Accounting Standards

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.

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 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.

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 implementing changes 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

22

NOTES TO FINANCIAL STATEMENTS
New Accounting Pronouncements

Capital Assets and Depreciation

In July 2004, the GASB published Statement No. 45,
Accounting and Financial Reporting by Employers for
Postemployment Benefits Other Than Pensions. This
Statement establishes standards for the measurement,
recognition, and display of OPEB expense/expenditures and
related liabilities (assets), note disclosures, and, if applicable,
required supplementary information (RSI) in the financial
reports of state and local governmental employers. GASB
Statement No. 45 is effective for fiscal periods beginning
after December 15, 2007. The Authority believes the
implementation of GASB Statement No. 45 will not have an
impact on the financial statements.

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.

In September 2006, the GASB published Statement No. 48,
Sales and Pledges of Receivables and Future Revenues and
Intra-Entity Transfers of Assets and Future Revenues. This
Statement establishes accounting and financial reporting
standards for transactions in which a government receives,
or is entitled to, resources in exchange for future cash flows
generated by collecting specific receivables or specific
future revenues. It also contains provisions that apply to
certain situations in which a government does not receive
resources but, nevertheless, pledges or commits future cash
flows generated by collecting specific future revenues. This
Statement is effective for financial statements for periods
beginning after December 15, 2006. GASB No. 48 is currently
being evaluated by the Authority.

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.

Revenue Recognition

Schedule C Energy

The Authority recognizes revenue when power is delivered to
the customers.

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 Statements of Net
Assets as of June 30, 2006 and 2005 has a $0 accrual for
Schedule C energy, as no Schedule C energy was available
during the operating years.

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. 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.

Operating Revenues
Operating revenues are derived from the sale of power to
customers or from other contractual agreements. Operating
revenues include $5,400,000 and $6,150,000 received

23

NOTES TO FINANCIAL STATEMENTS
from Salt River Project for scheduling entity services during
the years ended June 30, 2006 and 2005, respectively. The
revenues are the result of an agreement between the Authority
and the Salt River Project which will yield $5,400,000 annual
revenues to the Authority thereby reducing the overall revenue
requirements to be paid by the Authority’s customers through
power rates. The agreement will expire on September 30, 2011.

districts, and cities, which represent 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.
2. Fund Accounting
Hoover Uprating Fund
The Hoover Power Plant Act of 1984 (“Hoover Act”) authorized
the U.S. government to increase the capacity 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.

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.
Customer Credits
The Authority operates on a nonprofit basis and reduces charges
to its customers through credits on power bills or checks to
customers, 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.

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.

Refunds of $297,405 and $1,024,562 were paid to the customers
during the years ended June 30, 2006 and 2005, respectively.
During the year ended June 30, 2006, the accrued amount to be
refunded to the customers was $1,504,693.

APA General Fund

Income Taxes

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.

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

3. Capital Assets, net

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.

Capital assets, net, of the APA General Fund at June 30, 2006
and 2005 were as follows:
		
Transmission plant

Current liabilities include customer refunds of $1,504,693 for
fiscal year 2006.

2006
$

319,565

2005
$

319,565

Distribution plant

227,518

227,518

General plant

777,076

726,808

1,324,159

1,273,891

(1,088,390)

(1,062,105)

		
Less: Accumulated

Geographic and Product Concentration

depreciation

The Authority’s revenues are derived from the sale of electrical
power and services to water districts, electrical and irrigation

Capital assets, net

24

$

235,769

$

211,786

NOTES TO FINANCIAL STATEMENTS
June 30, 			
2005
Additions
Disposals

June 30,
2006

Capital assets
Transmission plant

$

Distribution plant
General plant - office
Total capital assets

319,565

$

-

$

-

$

319,565

227,518

-

-

227,518

726,808

64,248

(13,980)

777,076

1,273,891

64,248

(13,980)

1,324,159

(289,049)

(3,052)

-

(292,101)

(187,036)

(8,725)

-

(195,761)

(586,020)

(28,488)

13,980

(600,528)

(1,062,105)

(40,265)

13,980

(1,088,390)

211,786

$ 23,983

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

$

$

-

$

235,769

The transmission and distribution plant is comprised of
a substation and related equipment. Purchased power is
delivered over transmission facilities 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 $5,167,368 and $5,119,484 for the years ended
June 30, 2006 and 2005, 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.
5. Bonds Payable
Bonds payable consists of the following:
June 30, 				
2005
Increases
Reductions
Transfers
Bond payable current
Bond payable long-term
Total bonds payable

June 30,
2006

$ 2,560,000

$-

$ (2,560,000)

$ 2,825,000

$ 2,825,000

54,960,000

-

-

(2,825,000)

52,135,000

$ 57,520,000

$-

$ (2,560,000)

-

$ 54,960,000

25

$

NOTES TO FINANCIAL STATEMENTS
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
corresponding liability has been removed from the Hoover
Uprating Fund. Accordingly, the trust account assets
and related liabilities are not included in the Authority’s
financial statements.

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 5.00% and 5.25% payable on
April 1 and October 1, respectively, 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 $257,883 and $266,532 for the years
ended June 30, 2006 and 2005, respectively, resulting in
a net deferred amount of $1,687,639 and $1,945,522 in
the Statement of Net Assets, respectively. 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 $378,138 and $390,836
for the years ended June 30, 2006 and 2005, respectively,
resulting in a net premium of bonds payable
of $2,474,561 and $2,852,699 in the Statement of Net
Assets, respectively.

The Authority’s outstanding bonds, totaling $54,960,000, bear
interest ranging from 5.00% to 5.25%, are due from fiscal year
2006 through 2018, 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 ending June 30 and
thereafter are as follows: $2,825,000 in 2007, $3,120,000 in
2008, $3,450,000 in 2009, $3,815,000 in 2010, $4,220,000
in 2011 and $37,530,000 in 2012 through 2018. Interest
amounts due over the next five fiscal years ending June 30
and thereafter are as follows: $2,759,738 in 2007, $2,611,113 in
2008, $2,446,863 in 2009, $2,265,238 in 2010, $2,064,363 in
2011 and $7,291,771 in 2012 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
principal amount, maturity date and interest rates as the
crossover bonds. The Authority called the $62,630,000 of
the 1993 Series Power Resource Revenue Refunding Bonds
maturing on and after October 1, 2005.

6. Commitments and Contingencies
The Lower Colorado Multi-Species Conservation Program
(“MSCP”) is a cooperative effort between Federal and nonfederal entities that will create more than 8,100 acres of
riparian, marsh and backwater habitat for 31 species of fish,
birds, mammals and plants. The program became effective
on April 4, 2005 and expires April 30, 2055. As a party to this
Agreement, the Arizona Power Authority’s financial obligation
is approximately $119,000 per year (in 2003 dollars, adjusted
annually for inflation). For the year ended June 30, 2006, the
Authority paid $128,877.

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.

The Authority is involved in various claims arising in the
ordinary course of business, none of which, in the opinion of
management, if determined adversely against the Authority,
will have a material adverse effect on the business financial
condition or results of operations of the Authority.

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, 2006 and the

26

NOTES TO FINANCIAL STATEMENTS
7. Investments Held by Trustee

immediately. Total contributions to the Plan for the years
ended June 30, 2006 and 2005 by the Authority’s covered
employees were $45,864 and $35,527, respectively.

As of June 30, 2006 and 2005, investments are collateralized
with securities held by the Authority’s trustee. The fair value of
the investment securities at June 30 is as follows:
2006
Repurchase agreement
U.S. government securities

Matching employer member contributions were actuarially
determined and fixed at the same rate as employee member
contributions for the years ended June 30, 2006 and 2005.
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.

2005

$ 6,546,569

$ 6,766,682

2,818,376

2,426,277

$ 9,364,945

$ 9,192,959

Total investments held
by Trustee 		

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, 2006 and 2005 was $603,132 and $612,545,
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.

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, 2006, the aggregate market value of all purchased
securities exceeded the amount required under the repurchase
and custody agreement.

9. 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. A premium
benefit is applied to the member’s health insurance cost.
The following chart illustrates the maximum amount of the
monthly available benefit supplement for eligible members
and their dependents:

8. 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.

		
Member

Member and
Dependent(s)

Years of
% of
Not 		
Not
Credited Premium Medicare Medicare Medicare Medicare
Service Benefit
Eligible
Eligible
Eligible
Eligible

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. By actuarial
computation, employee member and Authority contributions
to the Plan were fixed at 8.25% (7.75% retirement and 0.50%
long-term disability) and 5.70% (5.20% retirement and 0.50%
long-term disability) of their compensation for the years ended
June 30, 2006 and 2005, respectively, with the contributions
made through payroll deductions. Employee contributions vest

27

5.0 - 5.9

50%

$ 75.00

$ 50.00

$ 130.00

$ 85.00

6.0 - 6.9

60%

90.00

60.00

156.00

102.00

7.0 - 7.9

70%

105.00

70.00

182.00

119.00

8.0 - 8.9

80%

120.00

80.00

208.00

136.00

9.0 - 9.9

90%

135.00

90.00

234.00

153.00

10.0+

100%

150.00

100.00

260.00

170.00

NOTES TO FINANCIAL STATEMENTS
10. 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 nineteen percent of Western’s revenue
requirements each operating year until the contract expires.
During the years ended June 30, 2006 and 2005, the Authority
paid $13,453,282 and $14,353,953, 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 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, 2006
and 2005, the Authority paid $5,950,918 and $6,451,476,
respectively, for purchased power under this contract for
its customers.

The Authority also has a contract with Western for transmission
services. During the years ended June 30, 2006 and 2005,
the Authority paid $5,258,562 and $5,237,895, 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, 2006
and 2005, the Authority recognized a prepaid deposit of
$182,360 that is refundable upon termination of the contract.

28

DEBT SERVICE COVERAGE RATIO
For Year Ended June 30, 2006
NET INCOME

$493,992

Add:		
Interest Expense
$2,862,363
Amortization

$257,883

Depreciation

$26,619

Western Credits

$5,167,368

Credits to Customers
$1,802,098
for Prior Years		
			
Total Additions
$10,610,323
Deduct:		
Deferred Interest Expenses
(2,347,319)
Premium Amortization
Total Deductions

$(378,138)
$(2,725,457)

Income available		
for debt service
$7,884,866
Debt Service

$5,621,113

Debt service		
Coverage ratio
1.40

ARIZONA POWER AUTHORITY
1810 WEST ADAMS STREET
PHOENIX, ARIZONA 85007
(602) 542-4263
FAX (602) 253-7970
PHOTOS COURTESY OF THE BUREAU OF RECLAMATION