ARIZONA POWER AUTHORIT Y reliable affordable dynamic 2016 ANNUAL REPORT • NO. 58 table of contents 01 Presentation of the Report 04 Report of the Executive Director 05 Operations & Environments 06 Management’s Discussion & Analysis 15 Independent Auditors' Report 16 Financial Statements 16 Statement of Net Position 17 Statement of Revenues, Expenses and Changes in Net Position 18 Statement of Cash Flows 18 Notes to Financial Statements 32 Supplementary Information Arizona Power Authority 2016 Annual Report presentation of the report COMMISSION July 2017 Joe A. Albo Chairman 10/01/15 - 09/16/16 Dalton H. Cole Chairman 09/17/16 - 09/30/16 Vice Chairman 10/01/15 - 09/16/16 The Arizona Power Authority (Authority) presents the Operating Year 2016 Annual Report. This report accounts for the Authority’s operational and financial activities for the operating year ending September 30, 2016. It also covers the Authority’s administration of Arizona’s hydroelectric power entitlement generated at Hoover Dam and Powerplant. The Authority continues to support federal and state efforts to address and Stephen M. Brophy mitigate the significant, ongoing drought which impacts the Colorado River 10/01/15 - 09/30/16 System. During Operating Year 2016, Lake Powell and Lake Mead again Boyd W. Dunn received below normal inflows. Despite challenging conditions, the Authority continued delivering Hoover power to its Arizona customers. 04/20/16 - 09/30/16 Russell L. Jones 10/01/15 - 09/30/16 The Arizona Power Authority will remain focused on its mission to ensure that irrigation and electrical districts, cities, and towns located throughout the State of Arizona have access to low cost, dependable hydroelectric power. Richard S. Walden 10/01/15 - 04/19/16 Arizona Power Authority 1810 W. Adams St. Phoenix, AZ 85007 STAFF Robert W. Johnson Interim Executive Director John T. Underhill, Jr. Interim Deputy Director (602) 368-4265 | Fax (602) 253-7970 1 Joe A. Albo 2 Chairman Appointed to the Commission in 2010 and re-appointed through his present term expiring in 2016, Joe retired from the Arizona Power Authority in September 2016. He served an earlier partial term as Commissioner on the Arizona Power Authority Commission from 1983 to 1984. Joe Albo is a fourth generation native Arizonan. He is a career public sector attorney. Mr. Albo is a graduate of Northern Arizona University and of the University of Arizona College of Law. Dalton H. Cole Vice Chairman Appointed to the Commission in January 2002 and re-appointed through his present term expiring in 2020, Dalton assumed the Chairman's role in September 2016. He 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. He also served on the board of Electrical District No. 2 in Pinal County for 18 years 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. Stephen M. Brophy Commissioner Appointed to the Commission in 2009 and re-appointed though his present term expiring in 2020, Stephen M. Brophy is president of Page Land & Cattle Co, Aztec Land and Cattle Company, Ltd. and The Apache Railway Co., and a partner in Santa Lucia Farms. Among his affiliations, he is a member of the boards of the Arizona Cattle Growers Association, Mountain States Legal Foundation, The National Cowboy Museum and former Chairman and member of the Economic Advisory Counsel of the Federal Bank of San Francisco. He received a bachelor’s degree from the University of Arizona and an M.B.A. from Stanford University. Boyd Dunn Arizona Power Authority 2016 Annual Report 3 Commissioner - 04/20/16 - 09/30/16 Appointed to the Arizona Power Authority Commission in April 2016, Boyd Dunn was appointed upon the retirement of Richard S. Walden after 32 years of service to the APA. Boyd Dunn is a retired Maricopa County Superior Court judge who also served as an Assistant Attorney General. He was a trial attorney and a Judge Pro-Tem. He also served as the Chandler mayor from 2002-11, the Chandler vice mayor, a City Council member and he chaired the Chandler Planning & Zoning Commission. Boyd attended Arizona State University and received a Juris Doctorate, Sandra Day O’Connor College of Law 1978, a Bachelor of Science – Political Science, Highest Honors 1975, and was an intern for John J. Rhodes, Office of the Minority Leader. Boyd is a member of the Arizona Judges Association, The Arizona State Bar Association, and the Maricopa County Bar Association. Boyd has served as a member of numerous Board of Directors for valley community service organizations. Russell L. Jones Vice Chairman Appointed to the Commission in January, 2014, upon the retirement of Lt. Gen. John I. Hudson, U.S.M.C. (Ret.), for a term expiring in 2018, Russ Jones assumed the role of Vice Chairman in September 2016. He is the Chairman of the Board of R.L. Jones Management Group and R.L. Jones Customs Brokers, with seven (7) offices, serving key Ports of Entry along the U.S./Mexican Border, established in 1938 by his Grandfather. Russ served three (3) terms in the Arizona House of Representatives, where he was the Chairman of the Agriculture and Water Committee. As well as holding a National Customs Broker license, he is a licensed Surplus Lines Insurance Broker, and sits on the Executive Committee and Boards of several organizations including the Arizona/Mexico Commission, Arizona Community Foundation of Yuma, the U.S./Mexico Border Philanthropy Partnership, is the Chairman of the Border Trade Alliance and sits on the ArizonaSonora Desert Museum Board of Directors. An active Rotarian and pilot in the Civil Air Patrol, Russ is, also, a proud member of VFW Post 19 in Yuma. Richard S. Walden Commissioner - 10/01/15 - 04/19/16 Appointed to the Commission in 1984 and re-appointed through his present term expiring in 2016, Richard Walden is the President and CEO of Farmers Investment Co., a family‑owned, pecan growing and processing company headquartered in Sahuarita, Arizona. He 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 Research and Education associated with the Nutrition Research and Education Foundation. He is also a former member of the Advisory Council on Small Business and Agriculture for the Federal Reserve Bank of San Francisco and a past member of the Board of the National Pecan Shellers Association. 4 Reliable • Affordable • Dynamic report of the executive director Post-2017: The Future of Arizona Power This is a significant and exciting time in the Arizona Power In September, the commissioners held an important Strategic Authority’s history. Contracts are in place and final touches are Planning Session designed to reflect on our history, assess being made on a new power allocation that goes into effect current strengths and define both near-term and long-term October 1, 2017 for districts, cities, tribes and utilities throughout opportunities heading into the post-2017 era. Leveraging our the state, helping spur the next 50 years of Arizona’s agricultural significant strengths of low-cost overhead, experienced staff and economic growth. and an iconic power facility, we discussed the challenges of The new contracts are the result of a multi-year reallocation process completed in July 2016. The objective was to achieve a fair allocation of power for both new and existing customers, while conducting a transparent, public process that considered serving such a geographically diverse customer base. We also identified opportunities to enhance our power operation services, lower costs and improve the value we deliver to our customers. perspectives from a variety of communities, stakeholders and Some of the Authorities near-term initiatives involve holding agents throughout Arizona. The updated 50-year agreements regular education meetings with Arizona legislators, launching span from 2017 through 2067. an educational program for energy resource management, and In March 2016, Hoover celebrated its 80th year of delivering clean, renewable energy to the southwest. During this time, we surveying our customers to learn more about their plans for regulation, ramping and reserves (the 3 R’s). recognized two staff members whose collective service with Just as the Hoover Dam is a symbol of strength and solidity the APA totaled the same time-span. James (Jim) Horton was that has weathered more than 80 years of history, the APA honored for 48 years of service, mostly as legal counsel. We symbolizes stability and consistency in meeting the ongoing also honored Dick Walden, who had served on the commission power needs of Arizona customers. Post 2017, we look forward for 32 years. Their work and dedication is greatly appreciated. to continuing to deliver reliable, affordable and efficient energy Also during 2016, the APA focused on transmission-related that will support Arizona’s ongoing prosperity. issues, held a Dynamic Signal workshop and finalized the Energy Services Contract with the Western Area Power Administration, while continuing to keep costs and overhead low. Executive Director Arizona Power Authority 2016 Annual Report 5 operations & environments On September 16, 2016 Commission Chairman Joe Albo signed 63 customer contracts and a 50-year contract with the Western Area Power Administration for the delivery of Hoover Dam power to Arizona entities beginning October 1, 2017. OPERATIONS ENVIRONMENT The last low head turbine runner, N5, was delivered in May Low soil moisture in the fall resulted in below normal runoff. 2015. But due to some equipment breakdowns, and the need There was a strong El Nino weather effect, which typically for an unplanned packing sleeve repair and contractor support produces greater rainfall. But the jet stream moved more issues, the scheduled completion date for the N5 Runner northward than expected delivering less precipitation to the install was extended to August 1, 2017. Colorado River Basin than average. The snow pack was 94% The generator life extension program is ongoing, maximizing the longevity of Hoover plant infrastructure. The typical generator life span is thirty years plus. The Bureau of Reclamation’s objective is to extend time between unit of average for the 2015-2016 winter season. The precipitation was 96% of average for the year. Inflow to Lake Powell was 89% of normal. Lake Mead elevation decreased 3 feet during the operating year. rewinds by assessing the rotor and stator condition as well as The drought conditions continue to effect Hoover power. The inspecting the insulation degradation and mechanical fatigue. drought in the basin extended throughout OY 2016, as a result This work is being conducted on a regular basis, adding to energy production was reduced from previous years. Lake the overall maintenance efficiency of the Hoover plant and Powell operated in the Upper Elevation Balancing Tier which Hoover power. resulted in releases of 9 million acre feet. Close monitoring of water levels continues and policies to maximize power generation efficiency are in effect. 6 Reliable • Affordable • Dynamic management’s discussion & analysis Introduction Using This Financial Report The following is a discussion and analysis of the Arizona Power This financial report consists of a series of financial statements. Authority’s (“Authority”) financial performance for the operating The Statement of Net Position, the Statement of Revenues, year ended September 30, 2016. This discussion is designed to: Expenses and Changes in Net Position and the Statement of Cash Flows (on pages 16, 17, 18-19, respectively) provide (a) assist the reader in focusing on significant financial issues, information about the activities of the Authority as a whole and (b) provide an overview of the Authority’s financial activity, and present a longer-term view of the Authority’s finances. The (c) identify changes in the Authority’s financial position. Authority is a body, corporate and politic, of the State of Arizona and is a special-purpose government entity engaged only in The Management’s Discussion and Analysis (“MD&A”) focuses business-type activities. Accordingly, the financial statements on the 2016 operating year’s activities, resulting changes and presented are the required basic financial statements in known facts, and should be read in conjunction with the accordance with the provisions of Governmental Accounting Authority’s basic financial statements as of and for the year Standards Board Statement No. 34, Basic Financial Statements ended September 30, 2016. – and Management’s Discussion and Analysis – for State and Local Governments, as amended. 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 The Fund Financial Statements begin on page 12 and provide detailed information about the individual funds. A fund is a operating 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. Arizona Power Authority 2016 Annual Report 7 The Authority Highlights TRANSMISSION AGREEMENT EFFECTS OF DROUGHT ON HOOVER ENERGY On January 24, 2003, the Authority and the Western Area The Colorado River Basin has been experiencing severe drought Power Administration (“Western”) entered into an agreement conditions for the past seventeen years. This has resulted in a for the Advancement of Funds for Transmission Services. The reduction in Lake Mead’s storage and the power production at Authority had an existing agreement with Western that provided Hoover Dam. In response to customer requests, the Authority for the delivery of power and energy. The agreement provides continues to purchase supplemental power to offset the for the Authority to advance funds to Western on a monthly reduced energy production at Hoover. The supplemental basis to fund operations, maintenance and replacement costs power costs are significantly higher than Hoover rates, and associated with Western’s transmission services. For the years are passed directly to the requesting customers. These ended September 30, 2016 and 2015, the Authority advanced supplemental revenues and costs are reflected on the Authority’s a net prepaid deposit of $634,855 and $613,373, respectively, records, resulting in higher revenue and purchased power costs. which is included in the Statement of Net Position. This contract gives Western greater flexibility and allows them to work more effectively with the Authority and other customers. Revenues Expenses INCREASE/DECREASE IN COMMISSION APPROVED POWER RATES INTRODUCTION OF NEW PROGRAMS State statute requires the rates be set at levels to recover the operating year; however, individual programs may be added or cost of supplying services. In addition, contracts between the deleted to meet changing Authority needs. There were no changes to existing programs during this Authority and its customers provide specific details regarding rate determination. The Arizona Power Authority Commission is solely responsible for periodically adjusting rates, as appropriate. INCREASE/DECREASE IN AUTHORIZED PERSONNEL Changes in the Authority’s services may result in increasing/ MARKET IMPACTS ON INVESTMENT INCOME decreasing authorized staffing. Operating year 2016 staffing costs (salary and related benefits) represented 2.74% of the During operating year 2016 market conditions have resulted in Authority’s operating costs. For operating year 2015, staffing historic low investment returns. costs represented 2.88% of the Authority’s operating costs. ECONOMIC DROUGHT CONDITION SALARY STRUCTURE Although the drought condition in the Colorado River Basin The ability to attract and retain competent personnel requires continues, increased efficiency improvements at Hoover Dam the Authority to provide a competitive salary structure, which is have helped to offset the decreases resulting from reduced reviewed annually, and is within State guidelines. water levels. 8 Reliable • Affordable • Dynamic Financial Highlights Statements Of Net Position • The Authority’s 2016 net position increased by $1,563,776 There are three normal transactions that will affect the primarily due to a decrease in expenditures associated with comparability of the Statements of Net Position summary the Advances for Hoover Uprating Program, as the deferred presentation: outflow of resources became fully amortized during the year. Net Results of Activities which will impact (increase/decrease) • The Authority’s 2015 net position decreased by $2,108,698 current assets and unrestricted net position. primarily due to GASB 68 pension liability reporting and Principal Payment on Debt which will reduce current assets amortization of future benefit of reduced power rates and reduce long-term debt, and impact restricted net position. associated with the Power Resource Revenue Bonds, 2014 Series (Hoover Prepayment Project). • The Authority’s 2016 operating revenues increased by $355,410 or 1.20% due largely to an increase in the base charge and transmission costs, offset by reduced supplemental power sales. • The Authority’s 2015 operating revenues increased by $1,505,069 or 5.50% due largely to an increase in supplemental power sales, and is partially offset by reduced rates from refinancing of the Hoover Prepayment Project. Reduction of Capital Assets through Depreciation which will reduce capital assets and net investment in capital assets. “ If you don’t know where you are going, you’ll end up someplace else. -YOGI BERRA 9 Arizona Power Authority 2016 Annual Report Condensed Statements of Net Position BUSINESS-TYPE ACTIVITIES 2016 Current Assets $ 16,263,264 2015 $ 15,824,860 $ DIFFERENCE DIFFERENCE IN AMOUNT IN % 438,404 2.8 Long-term assets 8,408,462 8,375,379 33,083 0.4 Capital assets, net 119,530 78,011 41,519 53.2 TOTAL ASSETS 24,791,256 24,278,250 513,006 2.1 DEFERRED OUTFLOWS OF RESOURCES 21,332,831 25,959,115 (4,626,284) (17.8) Current liabilities 9,233,095 8,857,741 375,354 4.2 Long-term bonds payable, net 33,721,812 39,632,776 (5,910,964) (14.9) 42,954,907 48,490,517 (5,535,610) (11.4) 203,413 344,857 (141,444) 41.0 119,530 78,011 41,519 53.2 15,138,764 14,906,735 232,029 1.6 (12,292,527) (13,582,755) 1,290,228 (9.5) 1,563,776 111.5 TOTAL LIABILITIES DEFERRED INFLOWS OF RESOURCES Net investment in capital assets Restricted for debt service Unrestricted TOTAL NET POSITION $ 2,965,767 $ 1,401,991 $ Operating Year 2016 Condensed Statement of Net Position Discussion Current Assets increased due to the timing of the payments of Long-Term Liabilities decreased due to a pay down of the payables and an increase on the debt service reserve. 2001 bond principal. See further explanation on page 10. Long-Term Assets were flat. Deferred Inflows of Resources decreased due to the change in the pension liability accrual. Capital Assets, Net increased due to the purchases of a data server, copy machine, and air conditioning unit. Net Position increased primarily due to a decrease in expenditures associated with the Advances for Hoover Uprating Deferred Outflows of Resources decreased primarily due Program, as the deferred outflow of resources became fully to the full amortization of the Advances for Hoover Uprating amortized during the year. Program. Current Liabilities increased due to an increase in the 2001 Series Bonds current maturities and an increase in customer refunds payable. 10 Reliable • Affordable • Dynamic Capital Assets As of September 30, 2016, the Authority had $119,530 invested in a variety of capital assets, as reflected in the following schedule, which represents a net increase (additions less retirements and depreciation) of $41,519 during operating year 2016, and a net decrease of $10,677 during operating year 2015. BALANCES SEPTEMBER 30 2016 Distribution plant $ General plant - office NET INVESTMENT IN CAPITAL ASSETS, END OF YEAR 1,728 2015 $ 117,802 $ 119,530 4,031 73,980 $ 78,011 The following reconciliation summarizes the change in capital assets for the years ended September 30, 2016 and 2015, which is presented in detail in Note 4: BALANCES SEPTEMBER 30 2016 Beginning balance $ Additions Depreciation ENDING BALANCE $ 78,011 2015 $ 88,688 55,904 3,187 (14,385) (13,864) 119,530 $ 78,011 Debt Outstanding As of September 30, 2016, the Authority had $12,125,000 in debt outstanding for the 2001 Series Bonds, compared to $17,740,000 in the prior year, as a result of a principal payment of $5,615,000, which was paid on October 1, 2015. In addition, the Authority had $26,565,000 in debt outstanding for the 2014 Series Bonds, which were issued on March 27, 2014. As of September 30, 2015, the Authority had $17,740,000 in debt outstanding for the 2001 Series Bonds, compared to $23,070,000 in the prior year, as a result of a principal payment of $5,330,000, which was paid on October 1, 2014. These payments were scheduled principal payments during the year. In addition, the Authority had $26,565,000 in debt outstanding for the 2014 Series Bonds, which were issued on March 27, 2014. See Note 6 to the Financial Statements for a detailed summary of debt activity during the year. Arizona Power Authority 2016 Annual Report Liquidity Pursuant to Arizona Revised Statutes (A.R.S.) Section 30-124, 11 Statements Of Revenues, Expenses, And Changes In Net Position the Commission of the Authority shall establish electric rates to There are normal transactions that will affect the comparability include such price components as are necessary to maintain of the Statements of Revenues, Expenses and Changes in Net the Authority, to provide and maintain reasonable working Position summary presentation capital and depreciation and other necessary and proper reserves. Components that are necessary to maintain the Operating Revenues which increase/decrease as a result of Authority include employee payroll, occupancy costs, cost economic conditions and power usage. of purchases or construction of generation and transmission services, and any cost factors chargeable to the cost of Operating Expenses which increase/decrease as a result of providing service as the Commission deems necessary or purchased power costs, transmission costs, and operating costs. advisable to establish and maintain the financial integrity of the Authority. Contracts for sale of electric power to the Other Income (Expenses) which increase/decrease as a result Authority’s customers include rates which may be modified of investment market conditions. 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. During operating year 2016, the Commission did not change rates. During operating year 2015, the Commission increased rates by 4.35%. “ Energy and persistence conquer all things. -BENJAMIN FRANKLIN 12 Reliable • Affordable • Dynamic 2016 Operating revenues $ 29,449,935 2015 $ 29,094,525 $ DIFFERENCE DIFFERENCE IN AMOUNT IN % 355,410 1.2 Operating expenses Purchased power 18,508,108 18,071,042 437,066 2.4 Western credits (8,969,179) (6,575,745) (2,393,434) 36.4 Amortization of Hoover Uprating Program costs 6,622,244 6,575,745 46,499 0.7 Transmission and distribution 7,460,166 7,303,644 156,522 2.1 Administrative and general 1,794,050 2,113,325 (319,275) (15.1) 14,385 13,864 521 3.8 (2,072,101) (7.5) Depreciation TOTAL OPERATING EXPENSES $ 25,429,774 OPERATING INCOME $ 27,501,875 $ 4,020,161 1,592,650 2,427,511 152.4 (1,832,675) (2,127,461) 294,786 (13.9) 601,315 892,351 (291,036) (32.6) (1,264,340) (1,251,968) (12,372) 1.0 33,153 9,013 24,140 267.8 6,162 – 6,162 100.0 21,680 (0.9) OTHER INCOME (EXPENSES) Interest expense Deferred interest expense Amortization Interest income Other, net NET OTHER INCOME (EXPENSES) $ (2,456,385) $ (2,478,065) $ Changes in net position 1,563,776 (885,415) 2,449,191 (276.6) Net Position, Beginning of Year 1,401,991 2,287,406 (885,415) (38.7) 1,563,776 111.5 NET POSITION, END OF YEAR $ 2,965,767 $ 1,401,991 $ Operating Year 2016 Changes in Net Position Discussion NET POSITION INCREASED OVERALL BECAUSE OF THE FOLLOWING: • Operating Revenues increased due largely to an increase • Amortization of the Hoover Uprating Program costs in the base charge and transmission costs offset by changed because of the debt payments and associated reduced supplemental power sales. costs related to the Uprating Program. • Total Operating Expenses decreased primarily due • Administrative and General Expenses decreased primarily to a decrease in expenditures associated with the due to reduced staffing costs and outside services related Hoover Uprating Program, and decreased general and to the post 2017 allocation. administrative expenses. • Western Credits changed because of scheduled debt payments and associated costs related to the Uprating Program. • Depreciation increased due to addition of capital assets. • Net other income decreased during operating year 2016 due to amortization of the future benefit associated with the 2014 Series Bond. Arizona Power Authority 2016 Annual Report 13 BUSINESS TYPE ACTIVITIES The following chart depicts the sources of revenues for the operating year 2016: 2016 Revenues 0.10% // $33,153 Interest Income 0.02% // $6,162 Other Income 7.37% // $2,346,935 Western Credits, Net 10.24% // $3,259,658 Supplemental Power Revenues 82.27% // $26,190,277 Hoover Power Sales 2016 Expenses The following chart depicts the sources of expenses for the operating year 2016: 4.18% // $1,246,340 Amortization 5.93% // $1,794,050 Administrative and General 4.07% // $1,231,360 0.04% // $14,385 Net Interest Expense Depreciation 24.64% // $7,460,166 Transmission and Distribution 50.40% // $15,257,377 Hoover Power Purchased 10.74% // $3,250,731 Supplemental Power Purchased “ In order to carry a positive action we must develop here a positive vision. -DALAI LAMA 14 Reliable • Affordable • Dynamic Request For Financial Information The information contained in the Management’s Discussion and Analysis is intended to provide a general overview of the Authority’s finances. Questions concerning any of the information provided in this report, or requests for additional financial information should be addressed to the Accounting Department: Arizona Power Authority, 1810 West Adams Street, Phoenix, Arizona, 85007 Arizona Power Authority 2016 Annual Report 15 independent auditors report Arizona Power Authority Commission Phoenix, Arizona REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of the Arizona Power Authority (A Body, Corporate and Politic, of the State of Arizona) (the Authority), which comprise the statement of net position as of September 30, 2016, and the related statements of revenues, expenses and changes in net position, and cash flows for the year then ended, and the related notes to the financial statements, which collectively comprise the Authority’s basic financial statements as listed in the table of contents. MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. AUDITORS’ RESPONSIBILITY Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Arizona Power Authority as of September 30, 2016, and the changes in its financial position and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. OTHER MATTERS Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management discussion and analysis and schedule of the Authority’s proportionate share of the net pension liability and contributions on pages 3 - 11 and pages 32 - 34 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board which considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Phoenix, Arizona March 21, 2017 16 Reliable • Affordable • Dynamic Statement of Net Position September 30, 2016 APA GENERAL FUND ASSETS HOOVER UPRATING FUND TOTAL CURRENT ASSETS Cash and cash equivalents $ Investments – short-term 3,442,555 $ 3,118,241 $ 6,560,796 – 7,365,157 7,365,157 2,676 2,334,635 2,337,311 3,445,231 12,818,033 16,263,264 119,530 – 119,530 – 7,773,607 7,773,607 263,754 371,101 634,855 383,284 3,828,515 8,144,708 20,962,741 8,527,992 24,791,256 Arizona State Retirement System – 71,838 71,838 Advances for Hoover Uprating Program, net – – – Future benefit of reduced power rates, net – 21,260,993 21,260,993 – 21,332,831 21,332,831 Accounts receivable, Customer Power Purchases TOTAL CURRENT ASSETS NON CURRENT ASSETS Capital assets, net Investments – long-term Prepaid transmission TOTAL NON CURRENT ASSETS TOTAL ASSETS DEFERRED OUTFLOWS OF RESOURCES TOTAL DEFERRED OUTFLOWS OF RESOURCES TOTAL ASSETS $ 3,828,515 $ 42,295,572 $ 46,124,087 $ 1,747 $ 1,411,850 $ 1,413,597 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts payable and other Customer refunds – 998,158 998,158 Accrued interest payable – 916,340 916,340 Bonds payable – short-term – 5,905,000 5,905,000 1,747 9,231,348 9,233,095 Bonds payable – long-term – 32,785,000 32,785,000 Premium on bonds payable, net of discounts – 13,699 13,699 Pension liability – 923,113 923,113 – 1,747 33,721,812 42,953,160 33,721,812 42,954,907 – 203,413 203,413 – 203,413 203,413 119,530 – 119,530 – 15,138,764 15,138,764 3,707,238 (15,999,765) (12,292,527) 3,826,768 (861,001) 2,965,767 TOTAL CURRENT LIABILITIES LONG-TERM LIABILITIES TOTAL LONG-TERM LIABILITIES TOTAL LIABILITIES DEFERRED INFLOWS OF RESOURCES Arizona State Retirement System TOTAL DEFERRED INFLOWS OF RESOURCES NET POSITION Net investment in capital assets Restricted for debt service Unrestricted TOTAL NET POSITION TOTAL LIABILITIES AND NET ASSETS $ 3,828,515 $ 42,295,572 $ 46,124,087 Arizona Power Authority 2016 Annual Report 17 Statement of Revenues, Expenses, and Changes in Net Position Year Ended September 30, 2016 OPERATING REVENUES APA GENERAL FUND $ 3,259,658 HOOVER UPRATING FUND $ 26,190,277 TOTAL $ 29,449,935 OPERATING EXPENSES Purchased power 3,250,731 15,257,377 18,508,108 Western credits – (8,969,179) (8,969,179) Amortization of Hoover Uprating Program costs – 6,622,244 6,622,244 34,043 7,426,123 7,460,166 – 1,794,050 1,794,050 14,385 – 14,385 (12,082) 3,287,077 12,082 22,142,697 – 25,429,774 (27,419) 4,047,580 4,020,161 Interest expense – (1,832,675) (1,832,675) Deferred interest expense – 601,315 601,315 Amortization – (1,264,340) (1,264,340) 9,308 23,845 33,153 – 6,162 6,162 9,308 (2,465,693) (2,456,385) (18,111) 1,581,887 1,563,776 3,844,879 (2,442,888) 1,401,991 Transmission and distribution Administrative and general Depreciation Other Total Operating Expenses OPERATING INCOME (LOSS) OTHER INCOME (EXPENSES) Interest Income Other, net Total Other Income (Expenses) CHANGES IN NET POSITION NET POSITION, BEGINNING OF YEAR NET POSITION, END OF YEAR See accompanying Notes to Financial Statements. $ 3,826,768 $ (861,001) $ 2,965,767 18 Reliable • Affordable • Dynamic Statement of Cash Flows APA GENERAL FUND HOOVER UPRATING FUND TOTAL CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $ Cash payments to suppliers for goods or services 3,257,081 $ $26,379,267 $ $29,636,348 (3,012,104) (21,803,591) (24,815,695) – (475,445) (475,445) 244,977 4,100,231 4,345,208 9,308 23,845 33,153 Purchase of investments, net – (7,827,098) (7,827,098) Proceeds from sale and maturities of investments – 7,595,069 7,595,069 9,308 (208,184) (198,876) Interest payments on bonds payable – (1,980,067) (1,980,067) Payments on bonds payable – (5,615,000) (5,615,000) (55,904) – (55,904) Other costs related to Hoover Uprating Program – (357,078) (357,078) Reduction in advances for Hoover Uprating Program – 4,266,107 4,266,107 (55,904) (3,686,038) (3,741,942) 198,381 206,009 404,390 3,244,174 2,912,232 6,156,406 Cash payments to employees for services NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES CASH FLOWS FROM CAPITAL AND RELATED FINANCIAL ACTIVITIES Acquisition of capital assets NET CASH USED IN CAPITAL AND RELATED FINANCING ACTIVITIES Net INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash and Cash Equivalents, Beginning of Year CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,442,555 $ 3,118,241 $ 6,560,796 NOTE 1 – 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 Powerplant at Hoover Dam, located approximately 25 miles from Las Vegas, Nevada. Hoover power is produced by the Boulder Canyon Project hydro-power plant owned by the Bureau Arizona Power Authority 2016 Annual Report 19 Statement of Cash Flows APA GENERAL FUND HOOVER UPRATING FUND TOTAL RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income (loss) $ (27,419) $ 4,047,580 $ 4,020,161 Adjustments to reconcile operating income (loss) to net cash provided by operating activities: 14,385 – 14,385 – (87,016) (87,016) Accounts receivable (2,576) 188,990 186,414 Prepaid transmission 263,753 (285,235) (21,482) (3,166) (39,658) (42,824) Customer refunds – 201,902 201,902 Power contracts payable – 73,668 73,668 272,396 52,651 325,047 Depreciation Adjustment to pension expense Increase (decrease) in cash resulting from changes in: Accounts payable and other TOTAL ADJUSTMENTS NET CASH PROVIDED BY OPERATING ACTIVITIES $ 244,977 $ 4,100,231 $ 4,345,208 SUPPLEMENTAL SCHEDULE OF NON-CASH CAPITAL AND RELATED FINANCING ACTIVITIES Deferred interest expense Amortization of Future Benefit of Reduced Power Rates 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. The Hoover Power Plant has been in continuous operation since that time. 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 State 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 – $ – 601,315 $ 1,291,088 601,315 $ 1,291,088 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, deferred outflows and inflows, (whether current or non-current) associated with their activity are included in the Statements of Net Position. The Statements of Revenues, Expenses and Changes in Net Position present increases (revenues) and decreases (expenses) in total net position. The Authority’s reported total net position is segregated into net investment in capital assets, restricted and unrestricted components. 20 Reliable • Affordable • Dynamic NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) BASIS OF ACCOUNTING INVESTMENTS The accompanying financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) applicable to a governmental entity. The Authority’s investments are U.S. Treasury obligations which are used to fund its debt service obligation. All such investments are stated at fair value based on quoted market prices. 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. CAPITAL ASSETS AND DEPRECIATION ACCOUNTING STANDARDS Retirements, sales and disposals are recorded by removing the cost and accumulated depreciation from the asset, with any resulting gain or loss reflected in other income or expense within the Statement of Revenues, Expenses and Changes in Net Position. 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. For the year ended September 30, 2016, the financial statements include the impact, if any, of Governmental Accounting Standards Board Statement (GASBS) Number 72 – Fair Value Measurement and Application, GASBS Number 73 – Accounting and Financial Reporting for Pensions and Related Assets that are not within the Scope of GASBS Number 68 and Amendments to Certain Provisions of GASBS Numbers 67 and 68, GASBS Number 76 – the Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, and GASBS Number 79 – Certain External Investment Pools and Pool Participants. 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 a number of 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 those estimates. REVENUE RECOGNITION The Authority recognizes revenue when power is delivered to the customers. Capital assets are initially 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. PRESENTATION OF DEFERRED OUTFLOWS AND DEFERRED INFLOWS OF RESOURCES Deferred outflows and inflows of resources are reported in the basic statements of net position in a separate section following assets and liabilities, respectively. The Authority elected the optional statement of net position presentation. The Authority recognizes the consumption of net position that is applicable to a future reporting period as deferred outflows of resources. The deferred outflows of resources are related to the Authority’s pension plan, the advance for the Hoover Uprating Program and the future benefit of reduced power rates associated with the 2014 Series Bonds (Hoover Prepayment Program). The Authority recognizes the acquisition of net position that is applicable to a future reporting period as deferred inflows of resources. The deferred inflows of resources relate to the Authority’s pension plan. CASH AND CASH EQUIVALENTS ADVANCES FOR HOOVER UPRATING PROGRAM The Authority treats short-term temporary cash investments with original maturities, when purchased, of three months or less as cash equivalents. Proceeds from Hoover Uprating Bonds were advanced by the Authority to the Bureau of Reclamation for uprating the Hoover Power Plant and are recorded as advances. Such advances, Arizona Power Authority 2016 Annual Report 21 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) including debt issuance costs, plus most of 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 life of the bonds, which will mature October 1, 2017. Substantially all advances, net interest expense and other related costs on the 2001 Series Hoover Uprating Bonds are charged to the Uprating Program as amounts to be recovered from future credits. These amounts are included in the amortization of Hoover Uprating Program Costs in the Statement of Revenues, Expenses and Changes in Net Position HOOVER PREPAYMENT PROGRAM The Power Resource Revenue Bonds, 2014 Series Bonds (Hoover Prepayment Project) were issued to prepay the Authority’s proportionate share of the obligations incurred by the United States Bureau of Reclamation for certain improvements at Hoover Dam. This prepayment of $23,843,169 will result in a reduction of future costs paid by the Authority for the power and energy from the Boulder Canyon Project. The Authority reports the future benefit of reduced power rates as a deferred outflow of resources in the Statement of Net Position. The future benefit of reduced power rates are amortized over the life of the bonds which will mature October 1, 2045. The amortization expense is reported in the Statement of Revenues, Expenses and Changes in Net Position. The unamortized balance of the prepayment was $ 21,260,993 as of September 30, 2016. PENSION PLANS For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the Arizona State Retirement System (ASRS) and additions to/deductions from ASRS’s fiduciary net position have been determined on the same basis as they are reported by ASRS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. OPERATING REVENUES Operating revenues are derived from the sale of power to customers and from other contractual agreements. Operating revenues include funds received as a result of a scheduling entity agreement between the Authority and the Salt River Project. These revenues amounted to $5,452,000 during the year ended September 30, 2016. These scheduling entity revenues reduce the overall revenue requirements to be paid by the Authority’s customers through power rates. The current Scheduling Entity Agreement was approved and implemented as of October 1, 2013, and that Agreement will expire on September 30, 2017. APPLICATION OF NET POSITION TO EXPENSES INCURRED The Authority’s restricted resources are funds held by the Trustee in the debt service and debt service reserve accounts. The Authority uses restricted resources solely for debt service associated with its outstanding bonds. The Authority would apply unrestricted, un-designated net position to expenses incurred which are not restricted. To the extent un-designated net position is unavailable, unrestricted, designated net position will be applied to expenses incurred. CUSTOMER CREDITS The Authority operates on a non-profit basis and reduces charges to its customers through credits on power bills or checks to customers during the subsequent operating year for any revenues collected in excess of expenses during the current operating year. The Authority is required under State statute to set the rates at levels sufficient to pay all expenses incurred during the operating year. Refunds of $796,256 were paid to the customers during the year ended September 30, 2016. INCOME TAXES The Authority is exempt from federal and Arizona state corporate income taxes. Accordingly, no provision for income taxes has been recorded in the accompanying financial statements. GEOGRAPHIC AND PRODUCT CONCENTRATION The Authority’s revenues are derived from the sale of electrical power and services to water districts, electrical and irrigation 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. 22 Reliable • Affordable • Dynamic NOTE 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 non-federal 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 September 30, 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. 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 NOTE 3 – CASH AND CASH EQUIVALENTS All cash and cash equivalent balances except for bond funds held by the Trustee 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. The Authority’s LGIP investment balance represents its cash and cash equivalents as of September 30, 2016. Arizona Power Authority 2016 Annual Report 23 Note 4 – FAIR MARKET VALUE OF INSTRUMENTS In determining fair value, the Authority uses various valuation approaches within the fair value measurement framework. Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. Fair value measurements framework establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Fair value measurements define levels within the hierarchy based on the reliability of inputs as follows: • Level 1 – Valuations based on unadjusted quoted prices for identical assets or liabilities in active markets; • Level 2 – Valuations based on quoted prices for similar assets or liabilities or identical assets or liabilities in less active markets, such as dealer or broker markets; and • Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable, such as pricing models, discounted cash flow models and similar techniques not based on market, exchange, dealer or broker-traded transactions. The Authority’s investments at September 30, 2016, categorized within the fair value hierarchy detailed above were as follows: FAIR VALUE MEASUREMENTS USING TOTAL (LEVEL 1) (LEVEL 2) (LEVEL 3) Investments by Fair Value Level Direct U.S. Treasury obligations $ TOTAL INVESTMENTS BY FAIR VALUE LEVEL 15,138,764 15,138,764 External investment pools measured at fair value State Treasurer’s Investment Pool TOTAL INVESTMENTS MEASURED AT FAIR VALUE 6,560,796 $ 21,699,560 $ 15,138,764 15,138,764 $ – – $ – – 24 Reliable • Affordable • Dynamic NOTE 5 – CAPITAL ASSETS Capital assets of the Authority at September 30, 2016 were as follows: BALANCES SEPTEMBER 30 BALANCES SEPTEMBER 30 2015 Transmission plant $ 319,565 Additions $ – Deletions $ – 2016 $ 319,565 Distribution plant 227,518 – – 227,518 General plant - office 772,555 55,904 (38,474) 789,985 1,319,638 55,904 (38,474) 1,337,068 Transmission plant 319,565 – – 319,565 Distribution plant 223,487 2,303 – 225,790 General plant - office 698,575 12,082 (38,474) 672,183 1,241,627 14,385 (38,474) 1,217,538 TOTAL DEPRECIABLE ASSETS Less accumulated depreciation for: TOTAL ACCUMULATED DEPRECIATION CAPITAL ASSETS, NET $ 78,011 $ 41,519 $ – $ 119,530 The Authority’s depreciation expense was $14,385 for the year ended September 30, 2016. The transmission and distribution plants are comprised of a substation and related equipment. Purchased power is delivered over transmission facilities owned by Western. NOTE 6 – ADVANCES FOR HOOVER UPRATING PROGRAM NOTE 7 – ADVANCES FOR HOOVER UPRATING PROGRAM Advances for the Hoover Uprating Program were reimbursed The future benefit of reduced power rates reported as a deferred by Western through credits on the Authority’s power bills in the outflow of resources at September 30, 2016 was as follows: amount of $6,622,244 for the year ended September 30, 2016. Credits were received for the upraters’ portion of principal and interest expense on the bonds and other costs associated with “ the Hoover Uprating Program. Future benefit of reduced power rates Accumulated amortization FUTURE BENEFIT OF REDUCED POWER RATES, NET Pessimism leads to weakness, optimism to power. -WILLIAM JAMES $ 23,843,169 (2,582,176) $ 21,260,993 The Authority’s amortization of future benefit of reduced power rates was $1,264,340, for the year ended September 30, 2016. 25 Arizona Power Authority 2016 Annual Report NOTE 8 – BONDS PAYABLE Bonds payable consists of the following: BALANCES SEPTEMBER 30 2015 Bonds payable short-term $ Bonds payable long-term BALANCES SEPTEMBER 30 Increases 5,615,000 $ – $ 38,690,000 – Reductions Transfers (5,615,000) $ – 5,905,000 2016 $ 5,905,000 (5,905,000) 32,785,000 TOTAL BONDS PAYABLE $ 44,305,000 $ – $ (5,615,000) $ – $ 38,690,000 PREMIUM ON BONDS PAYABLE, NET DISCOUNTS $ 40,447 $ – $ (26,748) $ – $ 13,699 In prior years, the Authority defeased various issues of bonds by deferred amount of $2,411,956 that has been reflected as a purchasing U.S. government securities which were deposited in decrease in bonds payable and which will be amortized using an irrevocable trust with an escrow agent to provide for future the interest method as a component of interest expense over debt service until the call dates. As a result, those bonds are the life of the refunded bonds. The Authority amortized $57,348 considered to be defeased and the corresponding liability has for the year ended September 30, 2016, resulting in a net been removed from the Hoover Uprating Fund. deferred amount of $29,437 in the Statement of Net Position. The Authority’s outstanding bonds, totaling $38,690,000, bear interest ranging from 1.799% to 5.25%, are due through Operating Year 2045, 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) 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 interest method. The Authority amortized $84,096 for the year ended September 30, 2016, resulting in a net premium of bonds payable of $43,136 in the Statement of Net Position. using the interest method. Principal and interest amounts due over the next five operating years ending September 30 and Fiscal Year thereafter are as shown in the chart at right. 2017 CROSSOVER REFUNDING On September 12, 2001, the Authority issued $57,520,000 of Special Obligation Crossover Refunding Bonds which refunded on October 1, 2003 $62,630,000 1993 Series Power Resource Principal $ 5,905,000 Interest $ 1,832,675 2018 6,220,000 1,522,662 2019 540,000 1,196,112 2020 550,000 1,186,398 2021 560,000 1,174,303 Revenue Refunding Bonds maturing on and after October 1, 2022-2026 3,085,000 5,598,802 2005. The 2001 Series Bonds bear interest at a rate of 5.00% 2027-2031 3,725,000 4,963,635 2032-2036 4,660,000 4,015,794 addition, the Authority recognized an economic gain (difference 2037-2041 5,920,000 2,751,622 between the present value of the old and new debt service 2042-2045 7,525,000 1,145,894 and 5.25% payable on April 1 and October 1, respectively, of each year, commencing April 1, 2004 and maturing in 2017. In payments) of $2,095,648 in 2003 as a result of the cross-over. The crossover refunding also resulted in the recognition of a TOTAL $ 38,690,000 $ 25,387,897 26 Reliable • Affordable • Dynamic NOTE 9 – RETIREMENT PLANS The Authority contributes to the Arizona Statement Retirement System plan described below. The plan is a component unit of the State of Arizona. September 30, 2016, the Authority reported the following amounts related to the pension plan to which it contributes: Statement of Net Position and Statement of Activities Business-Type Activities Net Pension Liability $ 923,113 Deferred Outflows of Resources 71,838 Deferred Inflows of Resources 203,413 Pension Expense (Recovery) (87,016) ARIZONA STATE RETIREMENT SYSTEM • Plan Descriptions – Authority employees participate in the Arizona State Retirement System (ASRS). The ASRS administers a cost-sharing, multiple-employer defined benefit pension plan; a cost-sharing, multiple-employer defined benefit health insurance premium benefit (OPEB); and a cost-sharing, multiple-employer defined benefit long-term disability (OPEB). The Arizona State Retirement System Board governs the ASRS according to the provisions of A.R.S. Title 38, Chapter 5, Articles 2 and 2.1. The ASRS issues a publicly available financial report that includes its financial statements and required supplementary information. The report is available on its Web site at www.azasrs.gov. • Benefits Provided – The ASRS provides retirement, health insurance premium supplement, long-term disability, and survivor benefits. State statute establishes benefit terms. Retirement benefits are calculated on the basis of age, average monthly compensation, and service credit as follows: Years of service/age required to receive benefit Before July 1, 2011 On or After July 1, 2011 Sum of years and age equals 80 30 years/age 55 10 years/age 62 25 years/age 60 5 years/age 50* 10 years/age 62 Any years/age 65 5 years/age 50* Any years/age 65 * With actuarially reduced benefits FINAL AVERAGE SALARY IS BASED ON: Benefit percentage per year of service Highest consecutive 36 months of last 120 months Highest consecutive 60 months of last 120 months 2.1% to 2.3% 2.1% to 2.3% Retirement benefits for members who joined the ASRS prior to September 13, 2013, are subject to automatic cost-of-living adjustments based on excess investment earnings. Members with a membership date on or after September 13, 2013, are not eligible for cost-of-living adjustments. Survivor benefits are payable upon a member’s death. For retired members, the survivor benefit is determined by the retirement benefit option chosen. For all other members, the beneficiary is entitled to the member’s account balance that includes the member’s contributions and employer’s contributions, plus interest earned. 27 Arizona Power Authority 2016 Annual Report NOTE 9 – RETIREMENT PLANS (CONTINUED) ARIZONA STATE RETIREMENT SYSTEM (CONTINUED) • Contributions – In accordance with state statutes, annual actuarial valuations determine active member and employer contribution requirements. The combined active member and employer contribution rates are expected to finance the costs of benefits employees earn during the year, with an additional amount to finance any unfunded accrued liability. For the year ended September 30, 2016, active ASRS members were required by statute to contribute at the actuarially determined rate of 11.47 percent (11.35 percent for retirement and 0.12 percent for long-term disability) of the members’ annual covered payroll, and the Authority was required by statute to contribute at the actuarially determined rate of 11.47 percent (10.85 percent for retirement, 0.50 percent for the health insurance premium benefit, and 0.12 percent for long-term disability) of the active members’ annual covered payroll. In addition, the Authority was required by statute to contribute at the actuarially determined rate of 9.36 percent (9.17 percent for retirement, 0.13 percent for the health insurance premium benefit and 0.06 percent for long-term disability) of annual covered payroll of retired members who worked for the Authority in positions that would typically be filled by an employee who contributes to the ASRS. The Authority’s contributions to the pension plan were $46,648 for the year ended September 30, 2016. The Authority’s contributions for the current and two preceding years for OPEB, all of which were equal to the required contributions, were as follows: Years Ended June 30 2016 Health Benefit Supplement Fund $ Long-Term Disability Fund 2,126 $ 510 2015 3,230 657 2014 3,298 660 During the operating year ended September 30, 2016, the Authority paid all ASRS pension and OPEB contributions out of the Hoover Uprating Fund. • Pension Liability – At September 30, 2016, the Authority reported a liability of $923,113 for its proportionate share of the ASRS’ net pension liability. The net pension liability was measured as of September 30, 2015. The total pension liability used to calculate the net pension liability was determined using update procedures to roll forward the total pension liability from an actuarial valuation as of June 30, 2014, to the measurement date of September 30, 2015. The Authority’s reported liability at October 1, 2015 decreased from the Authority’s initial liability because of the changes in ASRS’ net pension liability and the Authority’s proportionate share of that liability. The ASRS’ publicly available financial report provides details on the change in the net pension liability. The Authority’s proportion of the net pension liability was based on the Authority’s FY 2015 contributions. The Authority’s proportion measured as of June 30, 2015, was 0.0059263 percent, which was a decrease of 0.0001719 percent from its proportion measured of 0.0060982 percent as of June 30, 2014. • Pension Expense and Deferred Outflows/Inflows of Resources – The Authority reported a pension expense adjustment of ($87,016) in administrative and general expense on its statement of revenues, expenses and changes in net position. The negative pension expense represents the net amount recognized after the amortization of deferred inflows and outflows, as well as the decrease in the Authority’s proportionate share of the ASRS’ net pension liability. For the year ended September 30, 2016, the Authority recognized pension expense for ASRS of ($40,548). At September 30, 2016, the Authority reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: 28 Reliable • Affordable • Dynamic NOTE 9 – RETIREMENT PLANS (CONTINUED) ARIZONA STATE RETIREMENT SYSTEM (CONTINUED) Deferred Outflows of Resources Difference between expected and actual experience $ Deferred Inflows of Resources 25,190 $ 48,372 Changes of assumptions or other inputs – – Net difference between projected and actual earnings on pension plan investments – 29,584 Changes in proportion and differences between Authority contributions and proportionate share of contributions – 125,457 46,648 – Contributions subsequent to the measurement date TOTAL 71,838 $ $ The $46,648 reported as deferred outflows of resources Year Ended June 30 related to ASRS pensions resulting from the Authority 2017 contributions subsequent to the measurement date will be 203,413 Amount $ 109,889 2018 66,520 year ended September 30, 2017. Other amounts reported 2019 23,170 as deferred outflows of resources and deferred inflows of 2020 (21,356) recognized as a reduction of the net pension liability in the resources related to ASRS pensions will be recognized in pension expense as shown in chart at right. • Actuarial Assumptions – The significant actuarial assumptions used to measure the total pension liability are shown at right. Actual Valuation Date Actuarial Roll Forward Date Actuarial Cost Method June 30, 2014 September 30, 2015 Entry Age Normal Actuarial assumptions used in the June 30, 2014 valuation Investment Rate of Return 8% were based on the results of an actuarial study for the 5-year Projected Salary Increases 3% - 6.75% period ended June 30, 2013. “ Inflation Permanent Benefit Increase Mortality Rates Efficiency is doing better what is already being done. Effectiveness is deciding what to do better. -PETER F. DRUCKER 3% Included 1994 GAM Scale BB 29 Arizona Power Authority 2016 Annual Report NOTE 9 – RETIREMENT PLANS (CONTINUED) ARIZONA STATE RETIREMENT SYSTEM (CONTINUED) The long-term expected rate of return on ASRS pension plan investments was determined to be 8.79% using a building block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table: Target Allocations Long-Term Expected Portfolio Real Rate of Return Equity 58% 3.94% Fixed Income 25% 0.93% Commodities 2% 0.08% 10% 0.42% 5% .17% 100% 5.54% 0% 3.25% 100% 8.79% Asset Class Real Estate Multi-Asset Class Total Inflation TOTAL (INCLUDING INFLATION) • Discount Rate – The discount rate used to measure the ASRS total pension liability was 8 percent, which is less than the long-term expected rate of return of 8.79%. The projection of cash flows used to determine the discount rate assumed that contributions from participating employers will be made based on the actuarially determined rates based on the ASRS Board’s funding policy, which establishes the contractually required rate under Arizona statutes. Based on those assumptions, the pension plan’s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. • Sensitivity of the Authority’s Proportionate Share of the ASRS Net Pension Liability to Changes in the Discount Rate – The following table presents the Authority’s proportionate share of the net pension liability calculated using the discount rate of 8 percent, as well as what the Authority’s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1 percentage point lower (7%) or 1 percentage point higher (9%) than the current rate. 1% Decrease (7%) Authority’s proportionate share of the net pension liability $ 1,209,593 $ Current Discount Rate (8%) 923,113 $ 1% Increase (9%) 726,780 • Pension Plan Fiduciary Net Position – Detailed information about the pension plan’s fiduciary net position is available in the separately issued ASRS financial report 30 Reliable • Affordable • Dynamic NOTE 10 – COMMITMENTS AND CONTINGENCIES The Lower Colorado River Multi-Species Conservation Program (MSCP) is a cooperative effort between Federal and non-federal 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 NOTE 11 – INVESTMENTS HELD BY TRUSTEE Certain funds of the Authority are secured under the Authority’s bond resolution and held by the Authority’s Trustee. The Authority has no formal policy concerning exposure to custodial credit risk, interest rate risk or credit risk. The Authority invests in U.S. Government securities collateralized with U.S. Government obligations held by the Authority’s trustee. The fair value of the investment securities at September 30, 2016 is as follows: U.S. Treasury obligations $ 15,138,764 TOTAL $ 15,138,764 Arizona Power Authority’s financial obligation is approximately $119,000 per year (in 2003 dollars, adjusted annually for inflation). For the year ended September 30, 2016, the Authority paid $165,232, for the MSCP. These funds are invested in direct U.S. Treasury obligations, which mature on dates coinciding with the principal and interest payment dates for the Authority’s outstanding bonds. The Authority is involved in various As of September 30, 2016, the investments held by the Trustee consist of U.S. claims arising in the ordinary course of Treasury obligations, which are direct obligations of the United States of America, business, none of which, in the opinion of as required by the Bond Resolution. The U.S. Treasury obligations are rated AA+ management, if determined adversely against by Standard & Poor’s Rating Services and AAA by Moody’s Investors Service. the Authority, will have a material adverse There is minimal credit or interest rate risk. effect on the financial condition or results of operations of the Authority. NOTE 12 – 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: MEMBER Years of Credited Sevice Percent of Premium Benefit Not Medicare Eligible Medicare Eligible MEMBER & DEPENDENT(S) Not Medicare Eligible Medicare Eligible 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 Arizona Power Authority 2016 Annual Report 31 NOTE 13 – PURCHASED POWER, SALES AND TRANSMISSION COMMITMENTS The Authority has sales contracts with its customers. Under these contracts, customers are obligated to pay for their proportionate share of Hoover power and transmission costs if 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 is party to a contract for electric service with Western which expires 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 year ended September 30, 2016, the Authority paid $15,257,377 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 year ended September 30, 2016, the Authority paid $7,424,376, 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 September 30, 2016, the Authority recognized a prepayment of $634,855, which applies to the last payment upon termination of the contract. The Authority has power contracts with SRP and the Southwest Public Power Agency, Inc. (SPPA) 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 year ended September 30, 2016, the Authority paid $3,250,731, for purchased power under this contract for its customers. NOTE 14 – SUBSEQUENT EVENTS Management evaluated subsequent events through March 21, 2017, the date the financial statements were available to be issued. SUPPLEMENTARY INFORMATION Schedule of the Authority’s Proportionate Share of the Net Pension Liability in the Arizona State Retirement System (ASRS) Plan September 30, 2016 and two years prior. OPERATING YEAR Authority’s proportion of the net pensions liability 2016 (2015) 2015 (2014) 2014 (2013) 2013 through 2007 0.005930% 0.006098% 0.007712% Information not available Authority’s proportionate share of the net pension liability $ 923,113 $ 902,329 $ 1,282,102 Authority’s covered-employee payroll $ 429,939 $ 517,487 $ 491,323 Authority’s proportionate share of net pension liability as a percentage of it’s covered-employee payroll 214.71% 174.37% 260.95% Plan fiduciary net position as a percentage of the total pension liability 68.35% 69.49% Information not available 32 Reliable • Affordable • Dynamic Schedule of the Authority’s Contributions to the Arizona State Retirement System (ASRS) Plan September 30, 2016 and nine years prior. 2016 Contractually required contribution $ Contributions in relation to the contractually required contribution 46,648 $ Contributions as a percentage of coveredemployee payroll $ 59,623 2014 $ 58,819 2013 $ 70,239 2012 $ 71,733 2011 $ 66,816 2010 $ 60,860 2009 $ 56,569 2008 $ 56,730 2007 $ 53,248 46,648 59,623 58,819 70,239 71,733 66,816 60,860 56,569 56,730 53,248 – – – – – – – – – – Contribution Deficiency (Excess) Authority’s coveredemployee payroll 2015 429,939 $ 10.85% 517,487 11.52% $ 491,323 11.97% $ 683,359 10.28% $ 714,370 10.04% $ 695,896 $ 9.60% 678,912 8.96% $ 650,423 8.70% $ 657,905 8.62% $ 687,770 7.74% NOTES TO REQUIRED SUPPLEMENTARY INFORMATION September 30, 2016 NOTE 1 – ACTUARIALLY DETERMINED CONTRIBUTION RATE Actuarial determined contribution rates for ASRS are calculated as of September 30 one year prior to the end of the operating year in which contributions are made. The actuarial methods and assumptions used to establish the contribution requirements are as follows: ASRS Actuarial valuation date 6/30/2014 Actuarial roll forward date 9/30/2015 Actuarial cost method Entry age normal AMORTIZATION METHOD: Plan amendments Investment gain/loss Immediate 5 years Assumption gain/loss Avg. Future service lives Experience gain/loss Avg. Future service lives Asset valuation Discount rate Projected salary increases Inflation Permanent benefit increase Mortality Rates Fair value 8% 3-6.75% 3% Included 1994 GAM Scale BB “ You cannot get through a single day without having an impact on the world around you. What you do makes a difference, and you have to decide what kind of difference you want to make. -JANE GOODALL 33 Arizona Power Authority 2016 Annual Report DEBT SERVICE COVERAGE RATIO UNAUDITED; NOT COVERED BY THE INDEPENDENT AUDITORS’ REPORT OY 16 CHANGES IN NET POSITION Add: $ Interest Expense 1,832,675 Amortization 57,348 Depreciation 12,082 Amortization of Hoover Uprating Program Costs 6,622,244 Amortize Future Benefit of 2014 Refinancing 1,291,088 Credits to Customers for Prior Years TOTAL ADDITIONS Deduct: 1,581,887 998,158 $ 12,395,482 Pension Expense (87,016) Deferred Interest Expenses (601,315) Premium Amortization (84,096) TOTAL DEDUCTIONS $ (772,427) Income available for Debt Service $ 11,623,055 Debt Service 7,737,675 DEBT SERVICE COVERAGE RATIO 1.50 Note: Interest expense, depreciation expense, and amortization of costs are not expenses under the Bond Resolution. Debt Service is the total of principal payable and interest expense incurred between October 1, 2015 and September 30, 2016. The "Amortize Future Benefit of 2014 Refinancing" and "Pension Expense" items are non-cash items included in the Changes in Net Position. Reliable • Affordable • Dynamic Arizona Power Authority 1810 W. Adams St. • Phoenix, Arizona 85007 p: 602.368.4265 • f: 602.253.7970 • www.powerauthority.org