ar 01 CON C O N T E N T S p. 01 POWER OF WATER p. 06 p. 14 p. 19 p. 57 a. R

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2 CON ar 01 C O N T E N T S a. R L E T T E R POWER O WATER C A P R E V I E W I N A N C I A L S T H E B O A R D p a g e p. 01 p. 06 p. 14 p. 19 p. 57

3 LETTER or T O O U R C U S T O M E R S A N D C O N S T I T U E N T S : Central Arizona Project the year 2001 was a year of challenge. ar 01 w a t e r A C T 1 Nearly 2.2 billion people in more than 62 countries, one-third of the world s population, are starved for water. The first year in the new millennium was a challenging one for Central Arizona Project as it was for all Americans. The tragedy of September 11 stunned all of us and the images, feelings and actions on that and following days will be with us forever. But, just as the United States was staggered yet continued and recovered, so, too, did Central Arizona Project. Not only did CAP fill all customer water orders and deliver a total of 1,321,657 acre-feet of water, but it did so while increasing its security measures both internally and externally. In addition, CAP overcame a myriad of operational challenges during Those challenges, such as shutting down and recoating the Salt River Siphon, installing the new ERP computer system, installing a new impeller in the Mark Wilmer Pumping Plant and starting a new recharge project in Maricopa County, are discussed in this annual report. However, there is not enough room in this report to explain the true success and highest accomplishments of CAP because that would require that we talk about each and every one of our employees. The people of CAP from those who work on the aqueduct to those who work in the water control center, from those who work inside our plants to those who patrol the 336-mile-long system are the ones who make it possible to bring the desperately needed water from the Colorado River to the cities, towns, businesses, Indian communities and agricultural fields in central and southern Arizona. That is important because, while water is one of the simplest compounds in nature, it also is one of the most powerful. Water means life. While that is true everywhere, it is especially evident in the desert. In fact, in all places through all time water has been required not only for life, but for mankind s livelihood, success, economy, and community. That is what gives water its power. The Central Arizona Project, its leadership and employees, understand the power of water and are dedicated to making sure its presence in Arizona remains assured. That way, ultimately, the power of that water lies in the hands and imagination of the people of Arizona. a. R David S. Wilson Jr. DAVID S. SID WILSON JR. GENERAL MANAGER p. 02 p. 03

4 ar 01 P O W E R O W A T E R POW 04 H 05 p. 2 0 p.

5 ar 01 e ph 002 Water. WATER GENERATES POWER. COLORADO RIVER WATER, AS IT PASSES THROUGH GLEN CANYON, HOOVER AND OTHER DAMS, PRODUCES POWER USED BY PEOPLE THROUGHOUT THE SOUTHWEST. H2O One of the simplest compounds in nature: Two hydrogen molecules combined with one oxygen molecule. This microscopic, inaudible, odorless, and texture free particle of no particular tang determines human destiny. Civilization evolved at the confluence of rivers. The Romans built great aqueducts to expand their empire. In all places, through all time, water has directed man s livelihood, success, economy, and community. G c As a natural force, water is p o w e r f u l. The southwestern United States was molded by the power of Colorado River water. That water carved the Grand Canyon. Its flood has scoured the Canyon and adjacent flood plains. At one point, the floodwater breached a canal and created the Salton Sea. Water, released through Glen Canyon, Hoover and other dams, generates electricity used throughout the Southwest. ph 003 THE POWER O WATER CAN BE DESTRUCTIVE DURING LOODS, BUT IT ALSO HAS CREATED THE GRANDEUR AND AWESOME BEAUTY O THE GRAND CANYON. H ph 001 WATER MAKES UP ALMOST TWO-THIRDS O THE HUMAN BODY AND 70 PERCENT O THE BRAIN. H O In healthcare, ice-water is poured into the pericardial sack to slow and preserve the heart during a bypass operation. p. 06 p w a t e r A C T ME D

6 or individuals, water is powerful. ar P O W E R The impact of water on mankind is immeasurable, ranging from determining where you can live to how much land you can farm or develop. Humans can live without food for a far longer time than without water. Central Arizona Project has the power to provide water. As a political force, water is powerful. The pursuit of water can unite people as it did with the construction of Hoover Dam or it can lead to disputes. or example, the long battle over Colorado River water saw the mobilization of the Arizona National Guard at one point in time. The Guard was sent to the river to prevent California from building a dam. That dispute, like many others, eventually was settled. Regionally, water remains a force and source of dispute. Some issues coming to the fore in the 21st century are the movement to provide more water for the Mexican Delta, the cry to drain Lake Powell, the proposed lining of Imperial Irrigation District s All-American Canal, the implementation of California s 4.4 plan, interstate water banking and the Multi-Species Conservation Program. Meteorologists do notcaution us of the sunny day with bluesky. They inform us of the approach of water vapor: The pleasure of aspringshower, prudence for a monsoon, and dry shelter from a hurricane. In Arizona, the Governor s Water Management Commission met throughout the year with the intent of tweaking the state s water laws. The recommendations should eventually result in new legislation for the state. 3 w a t e r A C T m O N soon CAP The various demands and impacts of water on Arizona are being monitored and met by the water managers at Central Arizona Project. Central Arizona Project, its leadership and employees, understand the power of water and are dedicated to providing that water, and its The impact of water s power on cities is tremendous. The decision by the U.S. Environmental Protection Agency to change the allowable arsenic levels in drinking (potable) water from 50 parts per billion (ppb) to 10 ppb will force many cities to depend more upon surface supplies. In addition, the state s requirement of proving an assured 100-year water supply before building permits are issued also pushes cities to higher use of renewable surface water supplies. The scramble to secure more surface water will result in pressure to settle Indian water rights disputes and for CAP to develop a wheeling policy. power, to the people of Arizona. a. R p p. 09

7 PROVIDING THE WATER S A E deh The defining moment of 2001 came on the morning of September 11 when terrorist attacks stunned the United States ph 004 WHILE EVERYONE KNOWS A PERSON CANNOT LIVE WITHOUT WATER, MOST DON T REALIZE THAT 75 PERCENT O AMERICANS ARE CHRONICALLY DEHYDRATED, THAT IN 37 PERCENT O AMERICANS THE THIRST MECHANISM IS SO WEAK IT IS OTEN MISTAKEN OR HUNGER, THAT EVEN MILD DEHYDRATION WILL SLOW DOWN ONE S METABOLISM AS MUCH AS 3 PERCENT AND THAT A MERE 2 PERCENT DROP IN BODY WATER CAN TRIGGER UZZY SHORT-TERM MEMORY, TROUBLE WITH BASIC MATH AND DIICULTY OCUSING ON THE COMPUTER SCREEN OR ON A PRINTED PAGE. he pictures and videos of aircraft crashing into the twin towers of the World Trade Center, the collapse of the buildings, the later crashes into the Pentagon and in Pennsylvania, brought the nation to a standstill. Terrorism, and the declaration of war against terrorists by the United States, sent ripples of confusion, fear, sadness and determination throughout the country. Although water played no role in the initial volley of the war on terrorism, it wasn t long before everyone s attention turned to nature s most essential element, water. Nationwide, people feared a follow-up attack and, in Arizona, they began to ask if Arizona s water supply Colorado River water brought into the state by Central Arizona Project was safe. It is virtually impossible to fully protect a system that wends its way 336 miles through the desert in an open canal. Central Arizona Project (CAP) stretches from Lake Havasu where CAP draws water out of the Colorado River to Phoenix and the Valley and on to Tucson. But CAP does protect its system. Armed security agents patrol the aqueduct and provide aerial surveillance as well. Other security measures are also in place. There are still other factors that make CAP s water system safe. irst, water is not a good delivery system for most known bioterrorism weapons. The dilution factor and the fact that drinking water is treated also protect the supply. w a t e r 4 A C T Patients with wounds and injuries are given saline solutions ninety five percent water, five percent sodium to stabilize circulation, respiration, and cognition. The wonder that is a human being is sustained by water. s A a. R Ronald Dick, director of the BI s National Infrastructure Protection Center, told a Congressional committee: Contamination of a water reservoir with a biological agent would probably not pose a large risk to public health because of the dilution effect, filtration and disinfection of the water. To contaminate the water supply with a hazardous industrial chemical, it would take a truckload of the chemical to have any effect. CAP s system contains far more water than most reservoirs. There are more than 25,000 acrefeet of water in the CAP system at any given time. One acre-foot is about 326,000 gallons, which is enough to fill about 20 backyard swimming pools. Lake Pleasant, CAP s storage reservoir, contains another 500,000 acre-feet of water. That is a total of about 170 billion gallons of water in the CAP system. It would take an enormous amount of any material to make that much water harmful, let alone deadly. While that does not mean CAP is immune from a bioterrorism attack, it does make the danger of such an attack small. Security, while always paramount, was only one part of CAP s concerns in Most CAP activities during the year fall into one of five general categories: operations, internal matters, recharge, political activities and regional issues. p. 10 p. 11

8 OPER COLORADO RIVER WATER USE OR LOWER BASIN C A L I O R N I A : A R I Z O N A : 2,641,943 N E V A D A : acret 310,978 5,211,827 acret acret 8.17 WHERE THE LARGEST AZ CITIES GET THEIR WATER P H O E N I X S C O T T S D A L E Note: This tabulation is based on diversions including underground pumping, less measured return flow and less current estimated unmeasured return flow to the river. ATIONS M E S A G L E N D A L E P E O R I A T E M P E C H A N D L E R Source: Arizona Republic % 33% 4% CAP SRP GROUND 41% 10% 48% 1% CAP SRP GROUND OTHER 30% 53% 9.5% 7.5% CAP SRP GROUND OTHER 39% 48% 13% CAP SRP GROUND 14% 70% 16% DIRECT DELIVERED CAP RECHARGED CAP GROUND 7% 90% 1% 2% CAP SRP GROUND OTHER 21% 72% 7% CAP SRP GROUND During 2001, CAP delivered 1,321,657 acre-feet of water to its four major categories of customers in Maricopa, Pinal and Pima counties. The customer categories are municipal and industrial (M&I), Non-Indian Agricultural users, Indian communities and recharge sites. The more than 1.3 million acre-feet of water were delivered even though CAP had to overcome two major obstacles: irst, it had to cease deliveries for a month to all customers south of the Salt River while it made siphon repairs. Second, it had to replace an impeller at the Mark Wilmer Pumping Plant in Lake Havasu. THE SIPHON REPAIR Just past midnight on November 1, 2001 the CAP Control Center lowered the gates at Check 25 and water stopped moving through the canal. Crews from more than 14 CAP departments gathered in the pre-dawn hours to begin the work that would consume them for the next four weeks. The Salt River Siphon repair project had begun. Siphons carry CAP s water under riverbeds and large washes to protect the delivery system in times of flood and ensure that the Colorado River water is not contaminated by material carried by floodwaters. The Salt River Siphon, which is 21 feet in diameter and about 8,700 feet long, showed abrasion and coating defects during a 1999 inspection. Making repairs and recoating the siphon was a huge undertaking. irst, the siphon had to be drained. Two high-lift pumps capable of moving more than 2,000 gallons per minute were put to work. At one location, the water had to be lifted 70 feet to reach the surface. Once the siphon was empty, special lights that run off air, originally designed more than 100 years ago for mining, were used to illuminate the otherwise pitch-black underground work area. Each unit had a small air-driven generator that developed enough power to cause a 60-watt bulb to burn brightly. Rolling scaffolding were created by CAP employees to give the repair teams mobility and access to the 21-foot diameter ph 005 siphon. The four scaffolds were built on modified wheel assemblies of old Volkswagen Beetles, which allowed them to move easily through the siphon. Crews used an ultra high-pressure water jetting system to remove corroded material which was cleaned up by two 8- foot-tall vacuums before the more than two miles of siphon were recoated. The crews opted to stay and work Thanksgiving Day. Their turkey dinner was brought in and the crews shared their meal off the back of a flatbed trailer between shifts. On riday, November 30 one full week ahead of schedule water went back into the siphon and deliveries resumed. T H E I M P E L L E R The second major operations hurdle that CAP employees successfully overcame was the continuing effort to replace the impellers at the Mark Wilmer Pumping Plant. The first, and largest, pumping plant on the CAP system is Mark Wilmer in Lake Havasu. Six 60,000 horsepower pumps drive impellers that scoop up water from the Colorado River and hurl it 824 vertical feet through pipes up the side of a mountain. The water then enters an approximately 7 mile long tunnel through the Buckskin Mountains before it emerges into the aqueduct and begins its journey across the state. The impellers are being replaced to increase the efficiency of the pumping plant and to reduce the noise and vibration produced by the hydraulic pulsations of the original impellers. MODIIED VOLKSWAGEN CAP decided to install new, computer BEETLE WHEEL designed impellers that lower the intensity of the pulsations, which in turn lowers ASSEMBLIES WERE USED TO BUILD ROLLING SCAOLDS the sound and vibration levels. As a SO CREWS COULD WORK INSIDE bonus, they each pump an additional 100- THE 21-OOT DIAMETER SIPHON. plus cubic feet per second (cfs) of water. our of the six impellers have been replaced to date, and the last two will be replaced over the next two years. The project will be complete in p. 12 p. 13

9 As the calendar changed to the 21 st Century, CAP s internal capabilities also reflected the new century as it completed an 18-month upgrade to its computer systems and programs. ph 006 CAP COMPLETED AN 18-MONTH UPGRADE TO ITS COMPUTER SYSTEMS AND PROGRAMS THAT INCLUDED AN AVERAGE O 16 HOURS TRAINING OR EVERY ONE O CAP S APPROXIMATELY 450 EMPLOYEES. ph 007 CAP implemented an Enterprise Resource Planning (ERP) system consisting of a best of breed approach that integrates two software products, one for finance, accounting and human resources functions and a second for maintenance and asset management. The two products run on the same database and work together. Prior to the implementation of the ERP, CAP had separate systems for finance/ accounting and maintenance that could not communicate with each other, and human resources used mostly manual processes. This resulted in departments that worked in isolation, or silos. While both systems collected costs, they were often on different bases. This required duplicative input and reconciliation between the two systems. In addition, the financial and maintenance systems were becoming obsolete, and various departments were considering stand-alone replacement strategies. All this was compounded by outdated desktop hardware and software throughout CAP. The network, servers and database software were also in need of replacement. NTERNAL Most critically, the rates CAP charges its customers are based on its costs. Several rates require reconciliation of actual costs to set rates after the fact. Reliable capture of costs, access to cost details and visibility into reasons for cost variances are critical for CAP to manage its costs, properly set rates and forecast future costs and rates. Aging, stand-alone systems that only captured some of the required data would not support these needs. In addition, in 1998 CAP began to implement a Balanced Scorecard program, consisting of the identification of key performance indicators (KPIs) that would be used to identify gaps between its overall performance and its strategic goals. KPIs must be defined and measured, and the existing systems placed serious limitations on what could be accurately measured. CAP employees were involved at every level during the implementation of ERP. The Senior Management Team (SMT) appointed one of its members as executive sponsor of the project and authorized him to create a steering committee composed of members from the various functional groups. Twelve steering committee members spent all their time on the project. In addition, there were approximately super users, or functional experts, who were heavily involved in ERP configuration, testing and training. Every one of CAP s approximately 450 employees had an average of 16 hours of ERP training, ranging from basic computer training for those who needed it to all employees learning a new and calendar system. Benefits of the system relate primarily to improved work processes, elimination of duplicative data, manual work and reconciliation among various silo databases. Many improvements are tangible and measurable. or example, the replacement of a paper process, which required completing, reviewing, approving and inputting two timesheets, with a paperless single-entry process will save an estimated $200,000 per year. CAP now is a pioneer in the integration of Oracle 11i and Datastream MP5i. The implementation of an Enterprise Resource Planning system at CAP incorporated a number of best practices and unique approaches that helped to make the project a success. a R w a t e r 5 A C T If, as expected, the number of people on earth increases by more than athird, to more than 8billion, by 2025, 40 percent more waterwillbeneeded. a. R POP p. 14 p. 15

10 ph 009 THE HIEROGLYPHIC MOUNTAINS RECHARGE PROJECT IS SCHEDULED TO BEGIN OPERATIONS IN RECHARGE RE CAP protects against future shortages by partnering with One of CAP s four major customer classes recharge is water delivered now for future use in times of drought. the Arizona Water Banking Authority (AWBA) and some customers to recharge excess water by storing it underground where it recharges depleted aquifers. The water can then be pumped back out in times of shortage. Excess water, that is water under contract but not taken by the contract holder, is deemed to be excess water and can be sold by CAP to any customer. CAP has several recharge facilities and, in 2001, it broke new ground with the creation of the Agua ria River Recharge Project (ARRP). On September 18, 2001 CAP unveiled ARRP, Arizona s only recharge project that combines streambed recharge and infiltration basins at a single facility. CAP developed this project not only to better manage Arizona s water supply, but also to encourage the use of the state s largest renewable water supply, the Colorado River. After the ground breaking in May, ARRP began initial operations with the release of Colorado River water from CAP s Agua ria Siphon into the normally dry Agua ria riverbed. The project allowed CAP to increase use of hm Arizona s share of the Colorado River by storing this water underground for future use. By encouraging the use of surface water, which is a renewable water supply, instead of continued reliance on groundwater, ARRP mitigates the negative impacts of groundwater overdraft such as land subsidence, aquifer compaction and earth fissures. ARRP has two primary components, a four-mile in-channel recharge area where water is recharged in the natural river channel and a constructed facility where recharge occurs through 115 acres of spreading basins. The first phase of the ARRP became operational in Water was released into the riverbed at a rate of 40 cubic feet per second (cfs), which recharges about 80 acre-feet per day, or about 26 million gallons. The second phase of the project, which will utilize the spreading basins to increase the flow of recharge water to a maximum of 325 cfs, should begin in the first half of When complete and fully in operation, the $10 million project will be capable of storing up to 100,000 acre-feet of water a year. In addition to the ARRP, CAP also has recharge sites in Pima County. They are the Avra Valley Recharge Project, the Pima Mine Road Recharge Project and the Lower Santa Cruz River Recharge Project. A second Maricopa County recharge project, the Hieroglyphic Mountains Recharge Project at about 163 rd Avenue and the CAP aqueduct, is scheduled to come on-line in Other sites being considered for recharge include the Queen Creek area and several other areas in extreme western Maricopa County and in La Paz County. a. R fig 061-B R E C H A R G E WATER WELL CAP CANAL POLITICS WATER TABLE With the Governor s Water Management Commission completing its study of Arizona s water AQUIER policy in 2001, it was anticipated that several bills dealing with water and water issues would be LOW CAPACITY AQUIER introduced into the Legislature in January LOW CAPACITY AQUIER H w a t e r 2 0 CAP provided many participants who served on the Commission, which spent more than a IMPERMEABLE LAYER A C T DEEP SALTY year reviewing Arizona s water laws. Several AQUIER VOLCANIC (CAWCD) Board members, who oversee CAP operations, served as chairmen or key members of ROCK 6 GRANITE BEDROCK committees. This included CAWCD Board President George Renner and Board members Grady Global Gammage and Steve Weatherspoon. ormer CAWCD Board members Ron Rayner and Karl population has tripled in Polen also served on the Commission. In addition, many CAP employees worked for the the past 70years while water use Commission as committee members. ph 008 has grown sixfold THE AGUA RIA RIVER due to industrial To prepare for the January 2002 Legislative session, CAP launched a series of CAP tours for RECHARGE PROJECT development, key members of the Legislature. During October and November, CAP General Manager Sid WILL BE CAPABLE O widespread STORING UP TO irrigation, and Wilson and some CAWCD Board members conducted a series of briefings, tours and helicopter 100,000 ACRE-EET lack of O WATER A YEAR. conservation. flights with members of the Arizona Legislature in an attempt to help them become familiar with a Central Arizona Project, its operations and Colorado River water issues p. p. RECHARGE ZONE SATURATED ZONE

11 ar 01 as well as making some fiscal contribution toward capital repayment. Those costs have not yet been determined. In addition, CAP managers closely watched California s efforts to reduce its water usage as it struggled to comply with its 4.4 Plan. Currently, California uses more than 5.2 million-acre feet of water each year. That is about 800,000 acre-feet more than its annual allotment of 4.4 million acre-feet. The Lower Basin states, Arizona, California and Nevada, are allowed to take a total of 7.5 million acre-feet of water from the Colorado River each year. Of the 7.5 million acre-feet, Arizona is allowed to take a total of 2.8 million acre-feet, California is allotted 4.4 million acre-feet and Nevada takes 300,000 acre-feet. Arizona s allotment of 2.8 million acre-feet is divided between the communities and water users along the river who get 1.3 million acre-feet and CAP, which is allotted 1.5 million acre-feet. CAP remained an active leader and participant in regional water issues throughout The Arizona Water Banking Authority (AWBA) approved an agreement for Interstate Water Banking with the Southern Nevada Water Authority and the Colorado River Commission of Nevada. CAWCD President George Renner also serves as a member of the Water Bank board. This was the first of three agreements needed before Arizona begins banking water for Nevada. The remaining two agreements, a Storage and Interstate Release Agreement and an Agreement for Intentionally Created Unused Apportionment, are scheduled to be approved in The Storage and Release Agreement deals with the physical storage and recovery of Colorado River water by storing it underground in Arizona. The agreement for the Intentionally Created Unused Apportionment requires a negotiated agreement between REGIONAL the AWBA and CAWCD. That agreement will deal with how Nevada will recover, or collect, the water it has stored in Arizona. In the future, when Nevada wants to recover a portion of its banked water, CAP will intentionally leave some of its 1.5 million acre-foot allocation in the Colorado River for Nevada. If CAP needs the water it intentionally left in the river, it would recover the water from the AWBA by pumping the stored water from the ground and deliver it to its customers. The AWBA would then deduct that amount of water from Nevada s account. or example, if Nevada wanted to recover 20,000 acre-feet of water in 2020, CAP would take 1,480,000 acre-feet of water from the river. Nevada would take its allocation of 300,000 acre-feet as well as the 20,000 intentionally left by CAP. If CAP needed the 20,000 it left in the river, it would take the water from one of the storage sites used by the AWBA. Nevada would pay all costs of storing and recovering the water or years there were no disputes because Arizona never took its full 2.8 million acre-feet. Before CAP went into operation, California freely took whatever it needed. However, now that CAP takes most or all of its 1.5 million acre-feet, California must reduce its usage. By an agreement with the U.S. and all seven basin states (Colorado, New Mexico, Utah and Wyoming are the upper basin states), California has a 15 year period to reduce its usage from about 5.2 to 4.4 million acre-feet. CAP is in the forefront of those issues, and many others, as it monitors and strives to control the power of water so that its benefits continue to flow to the people of Arizona. 18 million acre-feet of WATER p. fig 07.5-W Ca Annual Allotment for Lower basin States 4.4 Az Ne 7.5 IN STA CENTRAL ARIZONA WATER CONSERVATION DISTRICT INANCIAL STATEMENTS AND OTHER INANCIAL INORMATION D E C E M B E R 3 1, C O N T E N T S MANAGEMENT S DISCUSSION AND ANALYSIS REPORT O INDEPENDENT AUDITORS A U D I T E D I N A N C I A L S T A T E M E N T S STATEMENTS O NET ASSETS STATEMENTS O REVENUES, EXPENSES AND CHANGES IN NET ASSETS STATEMENTS O CASH LOWS NOTES TO INANCIAL STATEMENTS O T H E R I N A N C I A L I N O R M A T I O N STATEMENT O NET ASSETS BY UND STATEMENT O REVENUES, EXPENSES AND CHANGES IN NET ASSETS BY UND SCHEDULE O SERIES A 1990, SERIES A 1993 AND SERIES A 2001 BOND UND ACTIVITY SCHEDULE O SERIES B 1991, SERIES A 1994 AND SERIES A 2001 BOND UND ACTIVITY S T A T I S T I C A L S E C T I O N SCHEDULE O AD VALOREM PROPERTY TAX ULL CASH VALUE AND ASSESSED VALUE SCHEDULE O AD VALOREM PROPERTY TAX TAX LEVY AND COLLECTIONS SCHEDULE O CUSTOMER ACTIVITY WATER O&M CHARGES AND CAPITAL CHARGES p a g e p. 20 p. 28 p. 29 p. 31 p. 32 p. 33 p. 57 p. 59 p. 60 p. 61 p. 63 p. 63 p. 64 p. 19

12 CENTRAL ARIZONA WATER CONSERVATION DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS OR THE YEAR ENDED DECEMBER 31, 2001 MANAGEMENT S DISCUSSION AND ANALYSIS CONDENSED INANCIAL INORMATION The following is management s discussion and analysis of the 2001 financial performance of the (District). It provides an overview of the District s financial activities and financial condition for the year and should be read in conjunction with the District s financial statements and accompanying notes. DISCUSSION O BASIC INANCIAL STATEMENTS The District s annual financial reporting includes three basic financial statements and accompanying notes for an enterprise fund. The District reports on a calendar year basis and all financial statements are presented on a comparative basis for 2001 and The three basic financial statements include the statements of net assets; the statements of revenues, expenses, and changes in net assets; and the statements of cash flows. The statements of net assets summarize the District s current and long-term obligations (liabilities) and the assets available to meet those obligations. The difference between total assets and total liabilities represents the District s net assets. The statements of revenues, expenses, and changes in net assets summarize the District s operating and non-operating expenses for the year and the revenues that were available to cover those expenses, as well as changes in net assets. The statements of cash flows summarize the District s uses of cash during the year and the sources of cash available to finance those uses. The statements of cash flows, as cash-based statements, include reconciliations to the statements of revenues, expenses, and changes in net assets, which are prepared on an accrual basis. Consolidating schedules of net assets and statements of revenues, expenses and changes in net assets, which provide more detailed information on the District s designated financial activities, are included after the notes to the financial statements. The District s activities are accounted for using the accrual method and incorporating the requirements of GASB Statement No. 34, Basic inancial Statements and Management s Discussion and Analysis for State and Local Governments. Under enterprise fund accounting, the District is a single accounting entity for financial reporting purposes. However, within this single accounting entity the District has identified a number of financial activities that it wishes to track separately, referred to as funds. These funds are as follows: General und, Central Arizona Groundwater Replenishment District (CAGRD) und, State Demonstration Projects und, Ak-Chin und, and several Bond unds. With the exception of the CAGRD und, which is a component-unit enterprise fund within the District, the use of the term fund for these separate activities does not have any particular accounting significance. The District is not required to and does not publish separate financial statements for any of the individual funds, except for the consolidating statements referenced above. The General und represents the District s primary activity, the delivery of Colorado River water to central Arizona through the Central Arizona Project (CAP) and is, by an order of magnitude, the largest fund within the District. The CAGRD und represents the activities of the Central Arizona Groundwater Replenishment District. The State Demonstration Project und represents the activities related to the construction of State Demonstration underground water recharge projects. The Ak-Chin und represents the activities related to a trust fund established to acquire or conserve water to supplement Colorado River supplies. The Bond unds represent the activities related to several revenue bond series issued by the District. Please refer to the notes to the financial statements for additional information on these funds. The following condensed financial information provides an overview of the District s financial activities for the years ended December 31, 2001 and December 31, Total Assets Capital Assets: The largest component of the District s capital assets is the permanent service right, net of accumulated amortization. or 2001, the permanent service right (net) decreased from $1.59 billion to $1.56 billion. The permanent service right represents the District s right to operate the Central Arizona Project system and collect revenues from operations, for which the District has incurred a repayment obligation to the United States. While property and equipment assets grow annually as a result of ongoing capital projects, such additions are presently more than offset by amortization of the permanent service right, which is approximately $31 million per year. As a result, net capital assets tend to decrease each year. Other Assets: Other asset categories include cash, receivables and other current assets, restricted and unrestricted reserves and investments, and funds held by or advanced to the federal government. The net decrease of $32 million or 9 percent is primarily associated with a reduction of $14 million in cash and investments and a $23 million reduction in the repayment credit. Cash and investments declined in 2001 primarily due to two factors. irst, spending on pumping power was greater due to an increase in the cost and use of over-threshold power. Second, interest earnings were lower than in 2000 due to falling interest rates. The repayment credit resulted from the settlement Stipulation, which is discussed in Note 3 of the inancial Statements, and is used to offset the amount needed to meet the District s annual repayment obligation. This credit will be exhausted in (Dollars in Millions) Total Liabilities Change Capital Assets: Permanent service right, net $ 1,555 $ 1,586 $ (31) Property and equipment, net Other Assets: Cash and Investments (14) Repayment Credit (23) Other Total assets $ 1,926 $ 1,980 $ (54) Long-Term Liabilities: The two largest components of the District s long-term liabilities are the federal repayment obligation and the contract revenue bonds. The long-term federal repayment obligation decreased from $1.53 billion in 2000 to $1.51 billion in In addition, contract revenue bonds decreased $20 million. Generally, long-term liabilities will decrease each year as the repayment obligation and revenue bonds are paid off. p p.

13 MANAGEMENT S DISCUSSION AND ANALYSIS MANAGEMENT S DISCUSSION AND ANALYSIS Other Liabilities: Other liabilities include payables, accrued interest, current principal obligations, and the OM&R obligation. Overall, the net decrease in other liabilities was $4 million for The OM&R obligation decreased $12 million and represents the rebate liability owed to subcontract and ederal customers associated with the difference between the reconciled water rates and the set rates. Offsetting this decrease is an accumulation of several items, the largest of which is accrued liabilities for pumping power and a land easement associated with the Agua ria Recharge Project. (Dollars in Millions) Change Long-Term Liabilities: Repayment obligation, net $ 1,506 $ 1,526 $ (20) Contract revenue bonds (20) Other Other Liabilities: OM&R reconciliation provision 4 16 (12) Other Total liabilities $ 1,783 $ 1,825 $ (42) Total Net Assets Net assets, the difference between assets and liabilities, decreased 8 percent or $12 million from In comparison, net assets for 2000 decreased 11 percent or $16 million from (Dollars in Millions) Change Assets Capital assets, net $ 1,587 $ 1,609 (22) (1%) Other assets (32) (9%) Total assets 1,926 1,980 (54) (3%) Liabilities Long-term liabilities 1,676 1,714 (38) (2%) Other liabilities (4) (4%) Total liabilities 1,783 1,825 (42) (2%) Net Assets Invested in capital assets, net of debt (109) (126) 17 (13%) Restricted % Unrestricted (32) (14%) Total net assets (12) (8%) Total liabilities and net assets $ 1,926 $ 1,980 (54) (3%) Investments in capital assets, net of related debt, increased 13 percent or $17 million in This increase reflects that the District is paying off the debt faster than the associated amortization and depreciation on these assets. Over time, investments in capital assets (net) will become less negative and become positive. The decrease in the debt associated with the contract revenue bonds accounts for $18 million of the increase in investments in capital assets (net). As discussed in Note 10 of the inancial Statements, the contract revenue bonds will be paid off in Also, property and equipment (net) increased about $9 million in Offsetting these increases is a decrease in the net investment in the District s interest in the Central Arizona Project. As discussed in Note 2 of the inancial Statements, the District s interest in the Central Arizona Project represents a permanent service right pursuant to the Master Repayment Agreement and the settlement Stipulation. Currently, amounts associated with the amortization of the permanent service right (asset) exceed the District s annual principal payment to the federal government for the repayment obligation (liability). The annual repayment obligation is based on paying a percentage (which increases over time) of the remaining outstanding balance, plus interest, over a 50-year period, while amortization remains relatively flat over time. Consequently, the asset is presently being amortized more quickly than the debt is being paid. As the payment percentage increases, the annual principal payment will exceed amortization. Restricted net assets increased 5 percent or $3 million. The majority of the increase is attributable to the funding of the repayment and emergency OM&R reserve funds required under terms of the Master Repayment Agreement and discussed in Note 7 of the inancial Statements. Offsetting this increase is a reduction in the amount set aside for the rebate liability associated with the District s contract revenue bonds. The amount needed to fund this reserve is determined by the annual arbitrage calculation and the rebate fund is adjusted accordingly. Unrestricted net assets decreased 14 percent or $32 million primarily due to increased expenses for pumping power and lower interest earnings caused by falling interest rates. The change in restricted and unrestricted net assets will fluctuate depending on operational needs and any actions that may result from the District s reserve study. Total Revenues The District s principal sources of revenues are water delivery charges, water service capital charges, power sales, property taxes, and interest earnings. Total revenues for 2001 declined $4 million or 2 percent from 2000 to $185 million, primarily due to decreased water deliveries, a decrease in rates for water service capital charges, and a decline in interest rates. Offsetting these decreases was an increase in other Basin Development und revenues associated the Navajo Generating Station O&M (timing) and new Calpine transmission revenues. (Dollars in Millions) Change Operating revenues $ 145 $ 144 $ 1 Nonoperating revenues (5) Total revenues $ 185 $ 189 $ (4) 22 p. 23 p.

14 MANAGEMENT S DISCUSSION AND ANALYSIS MANAGEMENT S DISCUSSION AND ANALYSIS M I L L I O N S M I L L I O N S $80 $60 $40 $20 $ 0 $80 $60 $40 $20 $ 0 TOTAL REVENUES WATER Total Expenses CAPITAL CHARGES POWER TAXES INTEREST OTHER Total expenses for 2001 exceeded 2000 by $24 million as shown below. Several factors influenced the increase in 2001 expenses. irst, pumping power costs experienced a significant increase. Second, costs associated with the enterprise resource planning system (ERP) and repair of the Salt River Siphon caused increases in several line items. Third, spending increased on State Demonstration Projects for the construction of several projects. TOTAL EXPENSES The District sets rates annually each June for the following year. Rates are set in a manner that will recover an appropriate share of the District s expected operating expenses from customers while maintaining adequate reserve levels. Since rates are set in advance, actual expenses may differ from the estimates used to calculate rates, and reserves may consequently fluctuate. The District is in the process of finalizing a reserve study, the purpose of which is to develop a model that can be used to forecast future repairs and replacements that will assist the District in setting appropriate reserve targets and setting rates accordingly. (Dollars in Millions) SALARIES POWER PSR AMORT INTEREST OTHER Change Operating expenses $149 $123 $26 Nonoperating expenses (2) Total expenses $97 $173 $ Change In Net Assets and Ending Net Assets As shown below, the decrease in net assets for 2001 was $12 million, which is 8 percent lower than 2000 primarily due to higher expenses in (Dollars in Millions) Change Total operating revenues $ 145 $ 144 $ 1 Total operating expenses (149) (123) (26) Operating income (loss) (4) 21 (25) Nonoperating revenues (expenses) (8) (6) (2) Change in net assets (12) 15 (27) Beginning net assets (15) Ending net assets $ 143 $ 155 $ (12) ANALYSIS O OVERALL INANCIAL POSITION AND RESULTS O OPERATIONS CURRENTLY KNOWN ACTS, DECISIONS OR CONDITIONS THAT ARE EXPECTED TO HAVE A SIGNIICANT EECT ON INANCIAL POSITION The overall financial position of the District is strong. The District has General und cash reserves of over $200 million, which represents in excess of one year s cash expenditures including operating expenses, capital projects and debt service (the Bond unds have their own restricted reserves as required by the applicable Indentures). The restricted portion of the General und cash reserves, approximately $40 million, is required under the District s Master Repayment Agreement (see Note 3 of the inancial Statements). The balance of the General und cash reserves has accumulated over the years, funded primarily through property tax collections and interest earnings in excess of operating cost subsidies required for rates which are set lower than cost by District policy. The cash reserves serve several purposes. irst, there is a great deal of seasonality in the District s cash flow. The annual installment on the repayment obligation to the United States occurs each January 15, and usually involves a substantial cash payment. Timing of electricity purchases is another consideration, since most of the diversions from the Colorado River take place from late fall to early spring as Lake Pleasant is filled. During the summer, the lake is drawn down. The District s power sales contracts (see Note 4 of the inancial Statements) specify a threshold level of electricity that can be purchased essentially at cost. At current water delivery levels, the threshold purchases are exhausted in the late third quarter of each year, requiring the District to purchase power on the open market, which is more expensive. The combination of the timing impacts of water diversions and electricity prices has the net effect of concentrating over one-half of the District s electricity costs into a few months in the winter and early spring. Property tax and water service capital charge revenues are received in two semiannual installments in the spring and the winter. The combination of all of the seasonal effects results in the reserve levels fluctuating up to $40 million between the high points at the end of the year and during the summer and the low points in midwinter and late fall. The cash reserves also serve as a hedge against operating uncertainties, which include changes in water demand, electricity costs and water supply. In 2001, falling interest rates also impacted the District s cash flows. 24 p. 25 p.

15 MANAGEMENT S DISCUSSION AND ANALYSIS MANAGEMENT S DISCUSSION AND ANALYSIS The cash reserves also serve as a source of funds for capital projects and other project spending. The District recovers a portion of its ongoing capital expenditures through rates, since depreciation is included as a recoverable cost. In addition, beginning in 2002, the District has included $2/acre-foot in the fixed OM&R rate component as a contribution towards ongoing replacements. The balance of capital spending is funded through property tax revenues and interest income. As the CAP ages there may be capital spending for major repairs, replacements or refurbishment that are not entirely predictable. inally, reserves are a hedge against strategic uncertainties, which at the present time are primarily those surrounding the repayment dispute and settlement Stipulation (see Note 3 of the inancial Statements), not the least of which is the amount of the repayment obligation itself. Results of operations may be evaluated by both analyzing the change in net assets versus expectations and the change in General und cash reserve levels. The consolidated change in net assets may be difficult to assess, since it includes the Bond unds (which should typically experience an increase in net assets because revenues are sufficient to cover both interest expense and principal payments) and the State Demonstration Project fund (which should typically experience a decrease in net assets, since the tax proceeds collected in earlier years that are now being spent have already been recorded as non-exchange transaction revenues). The General und in the near future can usually be expected to experience a decrease in net assets, due to timing differences between the effectively straight-line amortization of the permanent service right and the associated debt service. In 2001, the General und experienced a decrease in net assets of $22 million, which is somewhat more than expected due to higher energy costs and lower interest rates. However, this performance is within the normal range of expected fluctuation. The change in net assets for the General und over the last five years has fluctuated between a nominal increase (2000) and a decrease of $28 million (1999). The current policy of the District s Board of Directors is to set rates in such a way that cash reserves can be maintained at approximately the same level, until such time as uncertainties associated with the settlement Stipulation are resolved or the reserve strategy is modified. Over the last five years, total General und cash reserves have fluctuated between $203 million (1996) and $229 million (1998), the absolute value of any annual change has not exceeded 7 percent, and the cumulative change over that period of time is less than 1 percent, which management considers to be an indication of satisfactory operating results and the successful implementation of the Board s cash reserve policy. An example of the operation of this policy is the reduction in the ad valorem property tax and M&I capital charge rates by 10 percent each beginning in 2001 in conjunction with the reduced level of debt service arising out of the settlement Stipulation. CAPITAL ASSET AND LONG-TERM DEBT ACTIVITY Capital Assets: At December 31, 2001, the District had a net investment of $1.587 billion in capital assets. This amount represents a net decrease (including additions and deductions) of $22 million, or 1.4 percent from the prior year as follows. SCHEDULE O CAPITAL ASSETS (Net of Depreciation and Amortization) (Dollars in Millions) Change Permanent service right $ 1,555 $ 1,586 $ (31) Other capital assets Land 1 1 Construction in progress Capital equipment Structures and improvements 1 1 Total other capital assets Total Capital Assets $ 1,587 $ 1,609 $ (22) More information about the District s capital assets is provided in Note 2 of the inancial Statements. Long-Term Debt: As of December 31, 2001, the District s long-term debt decreased $39 million from the prior year as follows. SCHEDULE O LONG-TERM DEBT (Including Current Portion) (Dollars in Millions) Change Repayment obligation $ 1,526 $ 1,546 $ (20) Reneue bonds (19) Total Long-Term Debt $ 1,697 $ 1,736 $ (39) More information about the District s repayment obligation is provided in Note 3 of the inancial Statements. During 2001, the District refunded a portion of the Series A 1990 and Series B 1991 bonds. The major factor that drove this refunding was the savings the District realized from lower interest rates. The refunding bonds were sold at an average yield of 2.5 percent versus an average coupon rate on the refunded debt of approximately 6.4 percent. The net present value of the savings to the District from this transaction was approximately $1.1 million. More information about the District s revenue bonds is provided in Note 10 of the inancial Statements. CONTACTING THE DISTRICT S INANCIAL MANAGEMENT The information contained in the Management s Discussion and Analysis is intended to give our customers, taxpayers, and bond holders a general overview of the District s finances, issues that impact the District s financial position, and accountability for the money it receives. If you have questions about the report or need additional financial information, contract Theodore C. Cooke, Assistant General Manager of inance at: Post Office Box 43020Phoenix, Arizona tcooke@cap-az.com 2 p p.

16 R E P O R T O I N D E P E N D E N T A U D I T O R S S T A T E M E N T S O N E T A S S E T S The Board of Directors DECEMBER We have audited the accompanying statements of net assets of as of December 31, 2001 and 2000, and the related statements of revenues, expenses and changes in net assets, and cash flows for the years then ended. These financial statements are the responsibility of the District s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of at December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Our audits were conducted for the purpose of forming an opinion on the basic financial statements of the Central Arizona Water as of and for the years ended December 31, 2001 and 2000 taken as a whole. The other financial information is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Management s discussion and analysis is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. The statistical section has not been subjected to the procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. ASSETS (In thousands) Current assets: Cash $ 152 $ 38 Investment in Arizona Local Government Investment Pools 2,586 5,896 Total cash and cash equivalents 2,738 5,934 Receivables: Accrued interest receivable on unrestricted investments 1,731 4,142 Due from water customers, less allowance for doubtful accounts of $2,007 and $1,875 at December 31, 2001 and 2000, respectively 3,239 1,866 Other Repayment Credit (Note 3) 12,865 35,584 Materials and supplies inventory 3,497 2,939 Water Inventory 14,868 12,647 Other 4, Total current assets 43,416 64,699 Noncurrent assets: unds held by federal government 32,559 26,679 Investment in State Treasurer CAP investment pool (Note 6) 160, ,962 Restricted assets (Note 7) 100,593 99,130 Advances to federal government (Note 8) 378 5,930 Property and equipment, less accumulated depreciation of $18,545 and $14,966 at December 31, 2001 and 2000, respectively 32,011 23,192 Permanent service right, less accumulated amortization of $239,390 and $208,851 at December 31, 2001 and 2000, respectively 1,555,307 1,585,846 Bond issuance costs, net of accumulated amortization of $1,954 and $2,726 at December 31, 2001 and 2000, respectively 1,145 1,252 Total noncurrent assets 1,882,595 1,914,991 Total assets $ 1,926,011 $ 1,979,690 See accompanying notes. M a r c h 1 5, p. 8 p. 29

17 S T A T E M E N T S O N E T A S S E T S C O N T I N U E D STATEMENTS O REVENUES, EXPENSES AND CHANGES IN NET ASSETS DECEMBER DECEMBER LIABILITIES (In thousands) Current liabilities: Accounts payable $ 21,748 $ 12,901 Accrued payroll, payroll taxes and other accrued expenses 5,044 4,479 Current liabilities payable from restricted assets, advances to federal government, and other noncurrent assets: Accrued interest payable 37,721 38,580 Repayment obligation, due within one year (Note 3) 20,272 20,272 Contract revenue bonds, due within one year (Note 10) 18,915 18,050 OM&R reconciliation obligations (Note 14) 3,618 16,240 Total current liabilities 107, ,522 Noncurrent liabilities: Repayment obligation, due after one year (Note 3) 1,505,741 1,526,013 Contract revenue bonds, due after one year, net of unamortized discounts of $13,680 and $16,015 at December 31, 2001 and 2000, respectively (Note 10) 152, ,768 Provision for retiree health insurance Water operations and capital charges deferred revenue 17,306 16,044 Total noncurrent liabilities 1,675,678 1,714,138 Total liabilities 1,782,996 1,824,660 NET ASSETS Investment in capital assets, less related debt (108,795) (125,812) Restricted 62,533 60,114 Unrestricted 189, ,728 Total net assets 143, ,030 Total liabilities and net assets $ 1,926,011 $ 1,979,690 See accompanying notes. OPERATING REVENUES Water operations and maintenance charges $ 56,892 (In thousands) $ 60,516 Water service capital charges 25,417 28,283 Power and Basin und revenues (Note 5) 56,747 51,533 Reimbursements and other operating revenues 5,561 3,729 Total operating revenues 144, ,061 OPERATING EXPENSES Salaries and related costs 30,908 27,933 Pumping power 58,559 44,564 Power transmission 1,601 1,922 Hoover capacity charges 2,785 3,072 Amortization of permanent service right 30,538 30,538 Depreciation 4,315 3,393 Provision for OM&R reconciliation (Note 14) 304 Provision for doubtful accounts Other operating expenses 19,493 11,974 Total operating expenses 148, ,424 Operating income (loss) (4,024) 20,637 NONOPERATING REVENUES (EXPENSES) Property taxes, less assignment to Arizona Water Banking Authority of $10,691 and $9,967 in 2001 and 2000, respectively 24,152 23,629 Interest income and other nonoperating revenues 15,201 19,526 Interest income reserved for Ak-Chin fund Interest income and other nonoperating revenues reserved for State Demonstration Project 965 1,147 Interest expense and other nonoperating expenses (48,553) (49,895) Total nonoperating revenues (expenses) (7,991) (5,257) Change in net assets (12,015) 15,380 Net assets at beginning of year 155, ,650 Net assets at end of year $ 143,015 $ 155,030 See accompanying notes. 30 p. p. 31

18 STATEMENTS O CASH LOWS DECEMBER (In thousands) CASH LOWS ROM OPERATING ACTIVITIES Cash received from customers $ 75,050 $ 90,429 Cash received from power sales 50,867 54,090 Cash paid to employees (30,343) (25,554) Cash paid to suppliers (79,629) (69,180) Net cash provided by operating activities 15,945 49,785 CASH LOWS ROM NONCAPITAL INANCING ACTIVITIES Cash received from property taxes, net 24,152 23,629 Net cash provided by noncapital financing activities 24,152 23,629 CASH LOWS ROM CAPITAL AND RELATED INANCING ACTIVITIES Payments on contract revenue bonds, including interest and other expenses (30,871) (27,681) Payments on repayment obligation, including interest (57,277) (58,616) Additions to property and equipment (13,134) (10,327) (Increase)/Decrease in Repayment Credit 22,719 (35,584) Decrease in Repayment Obligation -0- (101,553) Decrease in advances to federal government 5,552 (908) Decrease in permanent service right ,806 Net cash used in capital and related financing activities (73,011) (89,863) CASH LOWS ROM INVESTING ACTIVITIES (Increase) in restricted assets (1,463) (6,504) Decrease in investment in state pool 12, Interest on investments 18,821 18,456 Net cash provided by investing activities 29,718 12,467 Net (decrease) in cash and cash equivalents (3,196) (3,982) Cash and cash equivalents at beginning of year 5,934 9,916 Cash and cash equivalents at end of year $ 2,738 $ 5,934 RECONCILIATION O NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net operating income (loss) $ (4,024) 20,637 Adjustments to reconcile operating income (loss) to net cash used in operating activities: Amortization of permanent service right 30,538 30,538 Depreciation 4,315 3,393 Provision for doubtful accounts Changes in operating assets and liabilities: Due from water customers (1,511) 82 Due from other receivables 356 (121) Inventory (558) (212) Lake Pleasant Inventory (2,221) (6,166) Other (3,247) 817 unds held by federal government, net (5,880) 1,110 Accounts payable 8,847 (996) Increase (decrease) in deferred payment 1,261 (257) OM&R reconciliation obligation (12,622) (1,760) Accrued payroll, payroll taxes and other accrued expenses 565 2,379 Accrued pension (12) 313 Net cash provided by operating activities $ 15,945 $ 49,785 NOTES TO INANCIAL STATEMENTS D E C E M B E R 3 1, ORGANIZATION AND REPORTING ENTITY The (District) is a multi-county water conservation district organized within the state of Arizona encompassing Maricopa, Pima, and Pinal counties. The District s popularly elected Board of Directors serves as its governing body. Under the requirements of Governmental Accounting Standards Board (GASB) Statement No. 14, The inancial Reporting Entity, the District is a primary government, which includes an ancillary project, the Central Arizona Groundwater Replenishment District (CAGRD). The District was authorized in 1971 by the Arizona State Legislature for the primary purpose of creating a single entity to enter into an agreement (Note 3) with the United States Department of the Interior, Bureau of Reclamation (Reclamation), for repayment of the reimbursable cost of the Central Arizona Project (CAP). The District is further empowered to serve as the operating agent of the CAP (see Note 15). In 1993, the State legislature gave the District additional authority to provide replenishment services within the District s three-county service area. This authority is commonly referred to as the Central Arizona Groundwater Replenishment District. The CAGRD began enrolling members in 1995, and as of December 31, 2001, there were 390 member lands (individual subdivisions) and 17 member service areas. The CAGRD is responsible for using renewable water supplies to replenish (or recharge) excess groundwater used by its members. All costs of the CAGRD are to be paid by its members through assessments based on replenishment services provided. Through 2001, the CAGRD s total net replenishment obligation was approximately 7,463 acre-feet. The CAP is a multi-purpose water resource project authorized by the Congress of the United States in 1968 by the Colorado River Basin Project Act and was constructed by Reclamation. The CAP is intended to deliver an average of approximately 1.5 million acre-feet of Arizona s annual share of Colorado River water to central and southern Arizona, which will partially replace existing groundwater uses and supplement surface water supplies. It also provides flood control, power, recreation, and fish and wildlife benefits. The major authorized project features include (1) a 335-mile aqueduct system (water supply system), (2) New Waddell and Modified Roosevelt Dams (regulatory storage facilities), (3) replacement features or programs for Cliff Dam (Cliff Dam Alternative), (4) Hooker Dam or suitable alternative (Hooker Dam Alternative), (5) Buttes Dam, (6) Navajo Power Project (Navajo), and (7) Indian and non-indian water distribution systems. The District has the authority to levy ad valorem taxes against all taxable property within its boundaries. The first ad valorem tax, which may not exceed 10 cents per $100 of assessed valuation, is for the District s operations and repayment of the construction cost repayment obligation of the CAP (Note 3). The second ad valorem tax, which may not exceed 4 cents per $100 of assessed valuation, is for water storage to the extent that it is not required for the District s operations or repayment of the construction cost repayment obligation of the project. Through December 1995, this tax was used to fund water recharge activities under State Demonstration Projects and was levied only in Maricopa and Pima Counties (see Note 7). In April 1996, the Arizona State Legislature amended the law relating to this second ad valorem tax (see Note 7). The ad valorem tax for operations and repayment was levied at 10 cents per $100 of assessed valuation for the tax year ending June 30, 2000, and 9 cents per $100 of assessed valuation for the tax years ending June 30, 2001 and June 30, The ad valorem tax for water storage was levied at 4 cents per $100 of assessed valuation in the tax years ending June 30, 2001 and June 30, 2002, and proceeds have been transferred to the Arizona Water Banking Authority (see Note 7). Property taxes are collected on behalf of the District by the respective counties. See accompanying notes. 32 p. 33 p.

19 NOTES TO INANCIAL STATEMENTS NOTES TO INANCIAL STATEMENTS 2 SUMMARY O SIGNIICANT ACCOUNTING POLICIES Basis of Accounting SUMMARY O SIGNIICANT ACCOUNTING POLICIES Permanent Service Right The accounting policies of the District conform to generally accepted accounting principles as applicable to an enterprise fund of a governmental unit. Accordingly, the accrual basis of accounting is utilized, whereby revenues are recorded when they are earned, and expenses are recorded when the liability is incurred. The District has elected, in accordance with GASB Statement No. 20, Accounting and inancial Reporting for Proprietary unds and Other Governmental Activities That Use Proprietary und Accounting, and GASB Statement No. 29, The Use of Not-for-Profit Accounting and inancial Reporting Principles by Governmental Entities, not to apply inancial Accounting Standards Board Statements and Interpretations issued after November 30, The District elected to implement GASB Statement No. 34, Basic inancial Statements and Management s Discussion and Analysis for State and Local Government, as well as GASB Statement No. 33, Accounting and inancial Reporting for Nonexchange Transactions,in The District s books and records include separate accounts and projects that are described as funds : a general fund, Ak-Chin fund, State Demonstration Project fund, CAGRD project, and debt service funds. These funds have been combined in the accompanying financial statements. All material interfund transactions have been eliminated. Use of Estimates The preparation of financial statements that conform to generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. See also Notes 3 and 11 regarding the District s repayment obligation and the settlement Stipulation. Cash and Unrestricted Investments All funds are to be invested in obligations issued or guaranteed by the United States or any of its agencies, collateralized repurchase agreements, obligations of the state and local governments, prime quality commercial paper, and other instruments as set forth in the District s enabling legislation. Investments are managed by the State Treasurer and maintained in investment pools (the CAP Pool, the state of Arizona Local Government Investment Pool and the state of Arizona Pool 3). The Local Government Investment Pool (LGIP) consists of investments with maturities of less than one year and therefore are recorded at cost. The CAP Pool and Pool 3 are recorded at fair value in accordance with GASB Statement No. 31, Accounting and inancial Reporting for Certain Investments and for External Investment Pools (see Note 6). Inventory Inventory is comprised of maintenance, office, auto, and safety supplies and was carried at the lower of cost (first-in, firstout) or market until September Effective September 2001, when the new computer system was implemented, the inventory valuation method used is average costs. The effect of this change was not material to the financial statements. The District s interest in the CAP represents a permanent service right pursuant to the Master Repayment Agreement and the settlement Stipulation (Note 3). The permanent service right represents the District s right to use the CAP water delivery system for the purpose of fulfilling its responsibility of delivering water as provided in the Master Repayment Agreement. The District has used the repayment obligation specified in the settlement Stipulation, plus certain advances to the federal government and other adjustments, in recording the permanent service right. The cost of the permanent service right may be adjusted in the future as a result of determinations to be made as a consequence of the settlement Stipulation (see Notes 3 and 11). Although the District s interest in the CAP is reflected in the accompanying balance sheets, the United States retains a paramount right or claim in the CAP arising from the original construction and operation of the CAP as a ederal Reclamation Project. The District s right to the possession and use of, and to all revenues produced by, the CAP is evidenced by the Master Repayment Agreement, various laws, and other agreements with the United States. Legal title to the CAP will remain with the United States until otherwise provided by Congress. The District amortizes the permanent service right on the straight-line method over the estimated useful lives of the major components of the CAP, generally 100 years for the aqueduct, 30 years for the Navajo power plant and related transmission facilities, 50 years for buildings and structures, and 20 years for the pumping plant equipment. The cost of periodic maintenance is charged to operations expense and the cost of major replacements is capitalized. Bond Issuance Costs, Discounts and Premiums Bond issuance costs, discounts and premiums are deferred and amortized over the term of the related bonds on the interest method. Bond discounts and premiums are presented as a reduction or increase of the face amount of bonds payable whereas issuance costs are recorded as deferred charges. Revenue Recognition The District records revenue from the sale of water, the sale of power, the collection of property taxes and the provision of certain contract services to other outside entities. Water rates consist of a water service capital charge and an operations, maintenance and replacement (OM&R) charge (see Note 4). Generally, OM&R charges are determined by the Board of Directors after giving consideration to the amount of OM&R costs to be paid by the various subcontractors and through property taxes. Water is delivered to subcontractors and other customers based on delivery requests. Revenue from OM&R charges is recognized as it is earned and revenue from water service capital charges is recognized ratably over the period of the billing. Generally, OM&R charges for scheduled water deliveries are due in advance. Property and Equipment Property and equipment are stated at cost. Assets are depreciated on the straight-line method over the estimated useful lives of the assets ranging from five to forty years. p p.

20 NOTES TO INANCIAL STATEMENTS NOTES TO INANCIAL STATEMENTS SUMMARY O SIGNIICANT ACCOUNTING POLICIES Revenues from contract services and the sale of power are recorded when earned. 3 MASTER REPAYMENT AGREEMENT The Agreement Property taxes are recorded as revenue when received. Tax equivalency charges are recorded when received if there is no obligation to deliver any services or provision for refund. Statement of Cash lows or the purpose of the statement of cash flows, investments in the state of Arizona Local Government Investment Pools are treated as cash equivalents due to their liquidity. Water Inventory Adjustment In 1998, the District adopted a new accounting policy for recording changes in the water inventory stored in Lake Pleasant. The water inventory adjustment is a means to adjust the pumping energy component of water service charges to recognize that the cost of power used to pump water into Lake Pleasant should be recovered, through OM&R charges, in the year the water is delivered to customers, not the year in which it is pumped into Lake Pleasant. Based on a typical operating year, which involves pumping water into Lake Pleasant between late October and April and releasing water from Lake Pleasant in June through early October, the expected amount of storage at year end is approximately 300,000 to 325,000 acre-feet. Since the District s share of Lake Pleasant storage at December 31, 1997 was approximately 324,000 acre-feet, this level was chosen as a base level storage from which future deviations would be measured. The value of the water storage inventory below 324,000 acre-feet was included in the permanent service right. In 2000, the District further modified this policy to reclassify the water storage inventory below 324,000 acre-feet from the permanent service right to the water inventory adjustment. The amount of this adjustment was $9,790,000. In 2000, the water inventory adjustment represented the weighted average energy cost associated with the change in storage level in Lake Pleasant over the calendar year. In 2001, the water inventory adjustment is valued at the threshold rate only. It does not include surcharge rates. The District s share of Lake Pleasant storage as of December 31, 2001 and 2000 was 485,000 acre-feet and 359,000 acre-feet, respectively. Application of GASB Statement No. 31 GASB Statement No. 31 changed the current practice of reporting most investments held by governmental entities from a cost basis to a fair value basis. At December 31, 2000, fair value exceeded cost by $232,000. At December 31, 2001, cost exceeded fair value by $678,000. These adjustments are included in interest income in the statements of revenues, expenses and changes in net assets. Reclassification Certain amounts in the 2000 financial statements have been reclassified to conform with the 2001 presentation. Reclamation and the District entered into a contract for delivery of water and repayment of costs of the CAP in December 1972 (1972 Master Repayment Agreement). The 1972 Master Repayment Agreement implemented the Colorado River Basin Project Act of 1968 (Project Act). Among other things, Reclamation agreed in the 1972 Master Repayment Agreement to construct the CAP and the District agreed to repay (1) the reimbursable construction costs of the CAP properly allocated to the municipal and industrial (M&I) and non-indian agricultural water supply and the commercial power functions of the CAP, (2) OM&R costs during construction properly allocated to the non-indian water supply and commercial power functions, and (3) interest during construction on costs allocated to the M&I water and the commercial power functions. An amended contract (1988 Master Repayment Agreement) was executed in December 1988, which superseded and replaced the 1972 Master Repayment Agreement. (The 1972 Master Repayment Agreement as superseded and replaced by the 1988 Master Repayment Agreement is referred to herein as the Master Repayment Agreement.) Commencement of Repayment The Master Repayment Agreement provides that the Secretary of the Interior (Secretary) shall issue notice of completion of each CAP construction stage. Reclamation notified the District that the water supply system, the first construction stage, was substantially complete on October 1, This notification initiated repayment by the District for the water supply system. Reclamation notified the District that the regulatory storage facilities stage, consisting of New Waddell and Modified Roosevelt Dams, was substantially complete on September 30, This notification initiated repayment by the District for the regulatory storage facilities stage. The Master Repayment Agreement requires the District to make annual payments to the United States on the repayment obligation related to the completed construction stages. These payments are required to be made over a 50-year period and are based on paying a percentage of the remaining outstanding repayment obligation, plus interest, with each construction stage having a separate 50-year repayment period as follows: contract years 1-7: 1 percent; 8-14: 1.3 percent; 15-21: 1.6 percent; 22-28: 2 percent; 29-35: 2.6 percent; and 36-50: 2.7 percent. Repayment Litigation and Stipulation In July 1995, the District filed a lawsuit against the United States seeking a judicial determination of the District s repayment obligation. The United States also filed a lawsuit against the District. The two lawsuits were consolidated into a single action in the ederal District Court (the Court) in Phoenix, Arizona (the Repayment Litigation). In May 2000, the District and the United States entered into a Stipulation Regarding a Stay of Litigation, Resolution of Issues During the Stay and for Ultimate Judgment upon the Satisfaction of Conditions (the Stipulation) to resolve all the issues in the Repayment Litigation. The Stipulation was approved by the Court on May 9, p. 36 p. 37

21 NOTES TO INANCIAL STATEMENTS NOTES TO INANCIAL STATEMENTS MASTER REPAYMENT AGREEMENT MASTER REPAYMENT AGREEMENT The ultimate effectiveness of the Stipulation is subject to a number of conditions, including settlement of certain Indian water rights claims, and will require certain State of Arizona and federal legislation. If the conditions are not met by May 9, 2003, and the parties do not amend the Stipulation or extend the deadline, the Stipulation will terminate and litigation will resume. If it appears prior to May 9, 2003, that the conditions cannot be met by the deadline, the parties may agree to amend the Stipulation, or either party may petition the Court to terminate the Stipulation and resume litigation. The District has concluded that all of the conditions will not be met by May 9, The District and the United States are discussing possible amendment of the Stipulation. It is not possible to predict whether the Stipulation will become finally effective, be amended, or terminate, or whether litigation will resume. If litigation resumes, it is not possible to predict the outcome of such litigation. If litigation resumes, and results in an adverse determination on any of the major issues raised, it could have a material adverse effect on the financial operations of the District. The major issues addressed in the Stipulation are described below. Repayment Obligation The Stipulation establishes the District s repayment obligation for the CAP water supply system and the regulatory storage facilities at $1.65 billion, premised on a total allocation of 665,224 acre-feet of CAP water for federal use. Currently, 453,224 acre-feet of CAP water is allocated for federal use; one condition of the Stipulation is that additional CAP water be made available for federal use. The Stipulation provides that the $1.65 billion repayment obligation is subject to adjustment if the total amount of CAP water ultimately made available for federal use is not 665,224 acre-feet. In the Repayment Litigation, Reclamation had taken the position that the repayment ceiling in the Master Repayment Agreement on the District s repayment obligation for the water supply system and the regulatory storage facilities (Repayment Ceiling) was $2.0 billion. The District had argued that the Repayment Ceiling on these facilities was not more than $1.781 billion. Notwithstanding the Repayment Ceiling, Reclamation contended that the District s repayment obligation for these facilities was $2.183 billion, premised on a total allocation of 453,224 acre-feet of CAP water for federal use. In November 1998, the Court issued an interlocutory order to the effect that the District s repayment obligation for the water supply system and regulatory storage facilities is limited to $1.781 billion. However, the United States appealed the Court order. After the Stipulation was entered, the appeal was voluntarily dismissed without prejudice. The Stipulation preserves the United States appeal rights if the Repayment Litigation resumes. Interest on Repayment Obligation The Stipulation provides that 73 percent of the District s $1.65 billion repayment obligation will bear interest at the rate established in the Master Repayment Agreement of percent per annum, and 27 percent of the repayment obligation will be non-interest bearing. The Stipulation fixes these percentages for the duration of the repayment period. Before the Stipulation, the Master Repayment Agreement provided that Reclamation would perform a cost allocation that would then determine both the amount of the District s repayment obligation and the portion of that obligation that would bear interest. Costs allocated to the non-indian agricultural water supply function were to be repaid by the District without interest, while costs allocated to the M&I water supply and the commercial power functions were to be repaid with interest at percent per annum. The Master Repayment Agreement also provided that Reclamation would periodically revise its cost allocation to reflect actual water deliveries, which could have the effect of altering the percentage of the District s repayment obligation that bears interest. In the Repayment Litigation, the District disputed Reclamation s cost allocation. If the litigation resumes, the portion of the District s repayment obligation that bears interest would be subject to periodic revision by Reclamation based on its cost allocations. Construction Deficiencies When Reclamation issued notices of completion for the water supply system and regulatory storage facilities stages of the CAP, a number of construction deficiencies remained. The Stipulation provides that the construction deficiencies will be corrected without increasing the District s repayment obligation. The Stipulation identifies those deficiencies that will be corrected by the United States, at no additional cost to the District, and those that the District will correct itself and for which it will receive a corresponding credit against its annual repayment obligation. The Stipulation also provides a repayment credit for the District s past expenditures to correct construction deficiencies. In the Repayment Litigation, the District had sought to hold the United States responsible for costs incurred by the District in correcting CAP construction deficiencies. The United States had argued that it had no obligation to fund the correction of CAP construction deficiencies because of the dispute regarding the Repayment Ceiling and the fact that Reclamation had determined that the ceiling had been exceeded. The United States had also disclaimed any responsibility for costs incurred by the District in correcting those deficiencies. Application of Development und Revenues The Stipulation provides that all miscellaneous revenues and net power revenues accumulating in the Lower Colorado River Basin Development und (Development und) of the United States Treasury in each year will be credited annually against the amount due from the District on its repayment obligation. In the Repayment Litigation, the United States had asserted that it was not obligated to apply Development und revenues toward the District s repayment obligation, but could use those revenues to pay Reclamation s operating costs. Payments Due on the District s Repayment Obligation The Stipulation establishes a new repayment schedule based on the revised $1.65 billion repayment obligation and reconciles the District s past payments, Development und credits and construction deficiency credits against that revised payment schedule. The annual payments due from the District and the credits available from Development und revenues, construction deficiency corrections and other sources were among the issues in dispute in the Repayment Litigation. As of January 15, 2000, there was a difference of $118,903,000 between the amounts billed by the United States and the amount acknowledged by Reclamation to have been paid by the District on the District s repayment obligation. At that time, Reclamation was assessing penalties of approximately $1,189,000 per month against the District on the amounts in dispute. 3 p p.

22 NOTES TO INANCIAL STATEMENTS NOTES TO INANCIAL STATEMENTS MASTER REPAYMENT AGREEMENT Amounts Recorded in inancial Statements The repayment obligation and amounts due on that obligation reported in these financial statements reflect the terms of the Stipulation, including credit amounts that were revised as a result of continuing negotiations. The District s repayment obligation and the amounts due could be adjusted in the future if the Repayment Litigation resumes. Payments to Maturity The required payments on the repayment obligation are the following: Principal Interest Total (In thousands) 2002 $ 20,272 $ 36,365 $ 56, ,272 35,724 55, ,450 35,083 56, ,450 34,403 55, ,450 33,713 55,163 Thereafter 1,421, ,642 1,966,761 Total $ 1,526,013 $ 720,930 $ 2,246,943 4 OPERATIONS Operations and Maintenance Agreement Reclamation has transferred responsibility for operation and maintenance of completed CAP features to the District. The District performs these responsibilities under the Master Repayment Agreement, a 1987 agreement with Reclamation for the operation and maintenance of the facilities (the OM&R Transfer Contract), and an Operating Agreement between Reclamation and the District that took effect as part of the settlement Stipulation. Water Delivery Contracts and Subcontracts Long-term CAP water service began pursuant to contracts and subcontracts on October 1, 1993, upon issuance by the Secretary of notice of completion of the water supply system. The term of the contracts and subcontracts is generally 50 years beginning January 1, 1994, and the contracts and subcontracts are renewable. Water deliveries for 2001 were 1,321,657 acre-feet. Long-term subcontracts have been signed by M&I entities for approximately 87 percent of the total CAP M&I water allocation of 638,823 acre-feet. All ten Indian entities originally allocated CAP water by the Secretary have signed long-term CAP contracts for the CAP Indian water allocation of 309,828 acre-feet. An additional 355,396 acre-feet of CAP water has been or is expected to be allocated to Indian entities or treated as Indian water supplies as a result of completed, pending or future Indian water rights settlements. The remaining available CAP water was allocated to non-indian agricultural entities. The cities of Tucson, Phoenix, Mesa, Scottsdale, Peoria and Glendale account for approximately 67 percent of the CAP water currently under M&I subcontracts. The non-indian subcontracts require the payment of a water service capital charge and an OM&R charge. or the M&I subcontractors, the water service capital charge is applicable to each subcontractor s maximum annual entitlement to CAP water. Under the current M&I water service subcontracts and current District pricing structure, the M&I water service capital charge is an escalating charge, which began at an annual rate of $10.50 per acre-foot of entitlement in 1994, increasing to $48 per acrefoot of entitlement by The M&I water service capital charge remained at $48 per acre-foot for 2000 and was reduced to $43 per acre-foot for The amount of this M&I water service capital charge may be adjusted periodically by the District as a result of repayment determinations provided for in the Master Repayment Agreement and to reflect all sources of revenue, but the water service capital charge will not be greater than necessary to amortize project capital costs allocated to the M&I function with interest. Indian contractors of CAP water pay no water service capital charge, since the capital costs associated with the delivery of CAP water to Indian entities are not reimbursable by the District pursuant to the Master Repayment Agreement. The OM&R costs of the CAP are of two types: energy costs and fixed costs. Energy costs are incurred to pump water from the Colorado River through the CAP aqueduct system and fixed costs are the non-energy costs associated with operation, maintenance and replacement. The District has completed a cost of service study to better define what components properly constitute fixed OM&R costs and how to allocate those costs among classes of CAP water users. M&I subcontractors and Indian contractors must pay OM&R charges on water scheduled for delivery. 40 p. 41 p.

23 NOTES TO INANCIAL STATEMENTS NOTES TO INANCIAL STATEMENTS OPERATIONS OPERATIONS The District anticipates that Indian entities, or the United States on behalf of the Indian entities, will pay Indian fixed OM&R charges. Payment by the United States of Indian fixed OM&R charges would require annual appropriations by Congress, specific net billing arrangements, or other special arrangements that do not currently exist. The United States has paid OM&R charges on water delivered to the Ak-Chin Indian Community. Disputes that existed with respect to the amounts of those charges and the proper method of calculating OM&R charges were conditionally resolved as part of the settlement Stipulation. District Repayment Plan An important assumption in the development of the CAP was that non-indian agricultural water users would take and pay for significant quantities of CAP water, particularly during the early years of project operation when M&I and Indian uses of CAP water were expected to be relatively low. The Secretary s allocation of CAP water, the physical configuration of the water delivery system, and the financial structure of the CAP were predicated upon such participation by non-indian agricultural water users. Long-term subcontracts for approximately 70 percent of the total non-indian agricultural CAP water supply were signed. Two irrigation districts represented approximately 38.5 percent of that total. The non-indian agricultural CAP subcontracts have been understood to require those subcontractors to pay fixed OM&R charges based on the full amount of CAP water available for delivery to the subcontractor, not just the amount scheduled for delivery (the take-or-pay OM&R charges), plus energy charges and a $2 per acre-foot water service capital charge for water scheduled for delivery. Many of the District s non- Indian agricultural subcontractors indicated that the take-or-pay requirement and the cost of CAP water would result in substantial reductions in CAP water use by the agricultural subcontractors and potential default by the subcontractors on their obligations under the subcontracts. Under the Master Repayment Agreement, prior to its modification by the Stipulation, diminished use of CAP water by non-indian agricultural water users would also have increased the interest bearing portion of the District s repayment obligation and would have reduced the number of revenue sources available to meet the District s repayment obligation and to pay the OM&R costs of the CAP. urthermore, OM&R costs would be allocated among fewer users, which would result in significantly higher per acre-foot charges to the remaining users. As a result of these circumstances, the District s Board of Directors adopted a repayment adjustment plan in October 1993 (Plan). Under the Plan, each non-indian agricultural subcontractor was provided the opportunity to waive its percentage entitlement to CAP agricultural water under its CAP subcontract and avoid its corresponding obligation for take-or-pay OM&R charges. As of December 31, 2001, all of the remaining non-indian agricultural subcontractors had waived some or all of their long-term entitlements to CAP agricultural water under their CAP subcontracts. The District in turn waived its right to collect take-or-pay OM&R charges from such subcontractors. Existing and former subcontractors of non-indian agricultural CAP water were also given the opportunity by the District to enter into alternative contracts for the delivery of CAP water on a short-term basis. Under the Plan, the pool of CAP water available for delivery to non-indian agricultural water users has been divided into various categories for purposes of determining water delivery priority and water service charges. Water service charges are assessed only on the amount of CAP water scheduled for delivery. As of December 31, 2001, nine existing and former subcontractors of agricultural CAP water had contracts with the District for the delivery of CAP water for agricultural purposes on these conditions. The contract terms are in effect through December 31, 2003, but delivery of water is subject to (1) the availability of CAP water in each year after first providing for the delivery of water to contractors and subcontractors of long-term water service, including existing M&I subcontractors, Indian contractors and agricultural subcontractors who retained a percentage entitlement of CAP agricultural water under their CAP subcontracts, and (2) payment of water service charges determined by the District in each year. In the Repayment Litigation, the United States disputed the validity of these contracts. The Stipulation required certain revisions to the form of those contracts, but confirmed the District s right to sell CAP water under such alternative contracts. If the litigation resumes, the validity of these contracts will again be in issue. The District s Board of Directors reviews charges annually and sets a schedule for the succeeding five years. The water service charges to be charged M&I subcontractors and the United States on behalf of Indian contractors of CAP water service for 2002 were confirmed by the Board of Directors in June In order to facilitate water planning, and subject to the assumptions contained in the Plan, the Board of Directors also established advisory rates for the period 2003 through During 1997, The Board amended the Plan to provide for a computation of the M&I water service charge by dividing the District s estimated annual operation and energy costs by the total estimated annual water delivery volume. If the assumptions reflected in the Plan prove to be materially incorrect or the objectives of the Plan are not achieved, and the Stipulation does not remain effective, the capital repayment and OM&R costs allocated to M&I subcontractors, and the OM&R costs allocated to the United States on behalf of Indian contractors, could be significantly higher than anticipated. M&I subcontractors use CAP water in their total water supply in various percentages and fund their payment of the District s charges in a variety of ways. Therefore, it is difficult to estimate the effect of possible increases in the water service charges on M&I subcontractors and on retail ratepayers, if applicable, including households in the service areas of CAP M&I subcontractors. 5 POWER Navajo Power Plant Reclamation is one of six participants in Navajo. Navajo consists of three 750,000 kilowatt coal-fired, steam-electric generating units which commenced operations in 1974 through 1976, a railroad to deliver fuel and 500 kilovolt transmission lines and switching stations to deliver the power and energy to the various participants. An agreement among the participants governs the construction, operation, and maintenance of Navajo. Reclamation entered into this agreement in order to acquire a portion of the capacity of Navajo for supplying the power requirements of the CAP. Reclamation has a 24.3 percent entitlement in the generating station, resulting in a power entitlement of 547,000 kilowatts of nominal capacity. The District is charged for the costs associated with the Navajo energy used to operate the CAP. 42 p. 43 p.

24 NOTES TO INANCIAL STATEMENTS NOTES TO INANCIAL STATEMENTS POWER POWER Hoover B Power Purchases The 1984 Hoover Power Plant Act (Hoover Act) authorized upgrading the Hoover power plant, located at Hoover Dam, to increase generating capacity at the plant by 503 megawatts (MW). This additional capacity and its associated energy is known as Hoover B Power. The Hoover Act allocated 188 MW and 212,000 megawatt hours (MWh) of associated firm annual energy of the Hoover B Power to purchasers in Arizona. The Arizona Power Authority (Authority) distributes Arizona s share of the Hoover B Power. On September 15, 1986, the District entered into a contract with the Arizona Power Authority for the purchase of Hoover B Power. On October 1, 1992, the Authority recaptured all but 26.5 MW of Hoover B Power from its other contractors and initiated delivery of available Hoover B Power to the District. Power Revenues Power revenues are derived from the sale of surplus power from Navajo (power associated with Reclamation s Navajo entitlement which is in excess of the pumping requirements of the CAP) and from a surcharge on energy sold in Arizona from the Hoover power plant. Additional Rate Component The Hoover Act authorized the establishment and collection of additional rate components on sales and exchanges of the capacity and energy associated with Reclamation s Navajo entitlement in excess of the pumping requirements of the CAP and any needs for desalting and protective pumping facilities as may be required under the Colorado River Basin Salinity Control Act (Navajo surplus). The Hoover Act further authorized the payment of revenues from such additional rate components to entities that have advanced funds for the construction and repayment of construction costs of the CAP. The Secretary of the Interior determined that the excess capacity and energy, which constitutes Navajo surplus to be marketed pursuant to long-term contracts, is 400,000 kilowatts of capacity and 760 kilowatt hours of energy per year per kilowatt of such capacity. The District and Reclamation entered into power sales contracts with Salt River Project Agricultural Improvement and Power District (Salt River Project) in 1990 and 1991 for the sale of an aggregate of 350,000 kilowatts of such capacity and the associated energy from May 1993 through September The additional rate component on the sale of such capacity has been established by the District at $6 per kilowatt of allocated capacity per month. Revenues from the additional rate component are paid directly to the District s bond trustee to repay the contract revenue bonds sold by the District (Note 10). Sale of Remaining Navajo Surplus In March 1994, the District entered into a contract with Salt River Project, Reclamation and the Department of Energy for the sale of the remaining Navajo surplus. The contract, which is for the period June 1994 through September 2011, grants Salt River Project the use of the remaining United States entitlement to output of the Navajo Generating Station, the right to schedule and integrate with the Salt River Project system the District s contractual rights to Hoover capacity and energy and to energy produced at New Waddell Dam, and certain transmission rights, and requires Salt River Project to sell energy at cost to the District to meet CAP pumping requirements up to a defined threshold level for each contract year. If CAP energy requirements exceed the threshold, the District must purchase additional energy either from Salt River Project or through other energy sources. Under the contract, Salt River Project pays a monthly charge of $1,812,500 to the Development und. The District records these revenues as funds held by the federal government as of December 31 of each year and then applies them against the annual payment due from the District under the Master Repayment Agreement the following January 15. The extent to which such revenues must be applied against the annual payments due from the District under the Master Repayment Agreement is among the issues that were in dispute in the Repayment Litigation and were conditionally resolved in the Stipulation (Note 3). Hoover Surcharge The Hoover Act also provided for the addition of a surcharge to the rates for energy sold from the Hoover and Parker-Davis power plants of 4.5 mills per kilowatt-hour for energy sold in Arizona. Revenues from the surcharge on Hoover power sales began in 1987 and revenues from Parker-Davis power sales will begin in Revenues from this surcharge are credited to the Development und. The District records these revenues as funds held by the federal government as of December 31 of each year and then applies them against the annual payment due from the District the following January 15. The extent to which such revenues must be applied against the annual payments due from the District under the Master Repayment Agreement is among the issues that were in dispute in the Repayment Litigation and were conditionally resolved in the Stipulation (Note 3). 6 INVESTMENTS As a multi-county water conservation district, the Arizona State Treasurer as prescribed by the District s enabling act holds the District s investments. Beginning March 1, 2000, the District s investments in the CAP pool were transferred to a shared investment pool (Pool 3) in order to eliminate the need for a separate pool just for the District. Since the investment policy objectives of the two pools are identical, the District has not experienced any material impact on safety of principal, liquidity, or return on investment. The investment policy objectives of the Arizona State Treasurer, in order of priority, are safety of principal, liquidity, and return on investments. The District s portion of investments held by Pool 3 as of December 31, 2001 and 2000, which are uncategorized, consist of the following (stated at fair value): DECEMBER (In thousands) ederal Agency Securities $ 21,982 $ 10,732 Commercial Paper 63,811 32,716 Corporate Securities 115, , , ,339 Less restricted funds (repayment and operating reserves; not including accrued interest) (40,615) (36,377) Investment of District $ 160,602 $ 172,962 p. 44 The Board of Directors has designated $86,700,000 of the Pool 3 investments as capital projects and operating reserve funds, and $2,000,000 as insurance reserves (see Note 11) at December 31, p.

25 NOTES TO INANCIAL STATEMENTS NOTES TO INANCIAL STATEMENTS 7 RESTRICTED ASSETS The District s investments are categorized to give an indication of the level of risk assumed by the District at year-end. Category 2 includes investments that are uninsured and unregistered investments for which the securities are held by the counter-party s trust department or agent in the District s name. Investments held in pools are considered to be uncategorized. The bond trust funds noted above are Category 2 investments; while the State Demonstration project fund, Master Repayment Agreement and Operating Reserves, and the Ak-Chin fund, all held in pools, are considered to be uncategorized investments. Restricted assets, including accrued interest receivable, consist of the following: DECEMBER (In thousands) Bond trust funds, primarily debt service funds $ 36,796 $ 39,066 State Demonstration Project fund 17,283 17,908 Master Repayment Agreement repayment and operating reserves 40,882 36,767 Ak-Chin fund 5,632 5,389 Bond Trust unds $ 100,593 $ 99,130 Bond trust funds held by the trustee may be invested in direct obligations of, or obligations guaranteed by the U.S. government, NMA or HLMC securities, certificates of deposit, obligations of any state or political subdivision, or a guaranteed investment contract, all subject to meeting certain ratings by national agencies, and maximum maturity limits. The trustee holds the investments in trust for the District and the bondholders pursuant to the trust agreements. State Demonstration Projects The Arizona Legislature passed the original State Demonstration Recharge legislation in 1990 that authorized the District to levy an ad valorem tax of 4 cents per $100 assessed valuation in Maricopa and Pima Counties. Tax revenues collected through 1996 were deposited in the Arizona Water Storage und. Costs incurred by the District for planning and developing State Demonstration Recharge projects continue to be reimbursed from this fund. The District is developing multiple State Demonstration Recharge Projects pursuant to its responsibilities under the 1990 legislation. During 2001, four recharge projects were operational, one project was under construction and two regional recharge feasibility studies were being conducted. State Demonstration Recharge Projects store currently unused CAP water underground to provide an additional source of water supply for future periods of shortage. Municipal water providers, the Central Arizona Groundwater Replenishment District and the Arizona Water Banking Authority contract with the District to purchase and store water at the recharge projects. In April 1996, the State Demonstration Project statute was amended by the Arizona Legislature. The amended statute created the Arizona Water Banking Authority (AWBA) for the purpose of increasing the utilization of Arizona s allocation of Colorado River water by delivering excess CAP water to various groundwater recharge projects through the CAP canal system. RESTRICTED ASSETS The amended statute expanded the District s 4 cent ad valorem taxing authority to include Pinal County in addition to Maricopa and Pima Counties and created the Arizona Water Banking und. The amended statute permits the District to transfer revenues derived from this tax to the Arizona Water Banking und to fund AWBA activities if the District s Board of Directors approves the levy and concludes that the revenues are not needed for CAP operations or CAP repayment. Pursuant to this authority, the District levied an ad valorem tax of 4 cents per $100 assessed valuation in Maricopa, Pinal, and Pima Counties in 2000 and 2001 and approved the transfer of these revenues to the Arizona Water Banking und (Note 1). During 2001 and 2000, the District sold 294,813 and 293,576 acre-feet of excess CAP water to the AWBA at $45 and $44 per acrefoot, respectively, for underground storage. Master Repayment and Operating Reserves The District is required under the terms of the Master Repayment Agreement to establish and fund over a ten-year period (1) an operations and maintenance reserve fund of $4,000,000 for extraordinary costs of operations, maintenance and replacement of project works, and (2) a repayment reserve fund of $40,000,000 for the purpose of assuring payments of future obligations. unding of the operations and maintenance reserve fund and repayment reserve fund commenced on October 1, 1993 and July 1, 1993, respectively. At December 31, 2001, the fair value of the reserves totaled $3,749,000, and $37,133,000, respectively, including interest. Ak-Chin und In August 1985, the District s Board of Directors approved participation in a fund established pursuant to legislation enacted by the Congress of the United States for the acquisition or conservation of water to supplement CAP water supplies (Ak-Chin fund). The District and the United States Government each have contributed $1,000,000 to this fund, which is administered by the District. The District, acting as administrator of the fund, is empowered to direct the expenditure of the trust funds in accordance with the provisions of a trust agreement between the District and the Arizona State Treasurer. The Ak-Chin fund investment is in the LGIP, which invests primarily in certificates of deposit, commercial paper, federal government and federal agency securities. Investments in the LGIP are recorded at cost as they consist of investments with maturities of less than one year. 8 ADVANCES TO EDERAL GOVERNMENT At December 31, 2001 and 2000, the District has incurred $378,000 and $5,930,000, respectively, in costs related to repairs of CAP construction deficiencies which have been recorded in the accompanying financial statements as advances to the federal government. The District applied these amounts against its annual payments due under the Master Repayment Agreement on January 15, 2002 and 2001, respectively. On a cumulative basis, the District has incurred costs of $42,262,000 for the correction of CAP construction deficiencies and applied this amount against its annual payments under the Master Repayment Agreement. Under the Stipulation, credits available for application against the amounts due from the District are subject to audit by the United States (see Note 3). p p.

26 NOTES TO INANCIAL STATEMENTS NOTES TO INANCIAL STATEMENTS 9 UNDERGROUND WATER STORAGE AND RECOVERY In 1992, the District entered into an agreement with the Metropolitan Water District of Southern California (MWD) and subsequently with Southern Nevada Water Authority (SNWA), whereby up to an aggregate of 100,000 acre-feet of interstate underground water storage credits would be set aside for potential assignment to MWD and SNWA if the Secretary declares a surplus of Colorado River water. Once assigned, MWD and SNWA can recover these credits in years in which the Secretary has declared a normal supply of Colorado River water. The water will be delivered through exchange of the interstate underground water storage credits back to the District for diversion of water from the Colorado River by MWD and SNWA. The District must reduce its maximum level of diversions from the Colorado River equal to the amount diverted by MWD and SNWA. In 1995, an amendatory agreement was executed between the District and MWD increasing the amount of water that can be stored from 100,000 acre-feet to 300,000 acre-feet of water and the time for placing the water into storage from December 31, 1996 to December 31, As of December 31, 1995, the District had received $11,386,000 related to 139,000 acre-feet that was recorded as a reduction in the costs capitalized in connection with the underground water storage projects. As of December 31, 1998, all of the 139,000 acre-feet of underground storage credits were assigned to MWD (89,000 acrefeet) or SNWA (50,000 acre-feet). On November 1, 1999, the Secretary adopted a final rule entitled Offstream Storage of Colorado River Water and Development of Intentionally Created Unused Apportionment in the Lower Division States. These regulations became effective on December 1, 1999, and allowed the Arizona Water Banking Authority (AWBA), with the approval of its governing board, to engage in interstate banking of Colorado River water in cooperation with other states of the Lower Division. On July 3, 2001, the AWBA entered into an Interstate Water Banking Agreement with SNWA. Under the terms of the agreement, the AWBA will attempt to store approximately 1,200,000 acre-feet of credits in Arizona for SNWA. The District will transfer credits previously stored by the District on behalf of SNWA to the AWBA to hold in its SNWA storage account. However, prior to initiation of interstate water banking pursuant to this agreement, two additional agreements are required: A Storage and Interstate Release Agreement among the AWBA, the Secretary of the Interior, and SNWA, and an Agreement for Intentionally Created Unused Apportionment (ICUA) between the District and AWBA. Significant progress has been made in 2001 toward the completion of these two agreements. It is anticipated that interstate storage may occur in 2002 or 2003, pending approval by the District s Board. The agreement to develop ICUA will identify the process, mechanisms, and payment for the recovery of interstate storage credits by the District and forbearance by the District of diversion of Colorado River water. The forbearance of Colorado River water diversions by the District will provide unused apportionment of Colorado River water to SNWA consistent with the rules adopted by the Secretary in BONDS PAYABLE Bonds payable consist of the following: DECEMBER (In thousands) (Central Arizona Project) Contract Revenue Bonds, Series A 1990 (1990 Bonds) (original maturity amount of $19,470,000, excluding 1990 Bonds which have been refunded), due in varying annual amounts through 2011; interest rate for Capital appreciation is a yield of 7.25 percent Serial $ $ 9,985 Special term 8,305 Capital appreciation (maturity value of $11,760,000) 7,763 7,230 7,763 25,520 (Central Arizona Project) Contract Revenue Bonds, Series B 1991 (1991 Bonds) (original maturity amount of $29,685,000, excluding 1991 Bonds which have been refunded), due in varying amounts through 2011; interest rates vary among individual maturities ranging from 5.80 percent to 6.80 percent Serial 20,701 Term Capital appreciation (maturity value of $23,095,000) 18,239 17,072 18,339 37,882 (Central Arizona Project) Contract Revenue Refunding Bonds, Series A 1993 (1993 Bonds) (original maturity amount of $106,535,000), due in varying annual amounts through 2010; interest rates vary among individual maturities ranging from 5.0 percent to 5.50 percent 90,652 92,327 (Central Arizona Project) Contract Revenue Refunding Bonds, Series B 1994 (1994 Bonds) (original maturity amount of $53,430,000), due in varying amounts through 2009; interest rates vary among individual maturities ranging from 4.50 percent to 4.75 percent Serial 30,876 32,403 Subordinate serial 5,312 5,812 Deferred loss on refunding (3,583) (4,126) 32,605 34,089 4 p p.

27 NOTES TO INANCIAL STATEMENTS NOTES TO INANCIAL STATEMENTS 50 p. BONDS PAYABLE Changes in bonds payable during the year ended December 31, 2001, are summarized below: DECEMBER (In thousands) (Central Arizona Project) Contract Revenue Bonds, Series A 2001 (2001 A Bonds) (original maturity amount of $8,035,000), due in 2002; interest rate is 3.75 percent Serial $ 8,131 $ Deferred loss on refunding (253) 7,878 (Central Arizona Project) Contract Revenue Bonds, Series B 2001 (2001 B Bonds) (original maturity amount of $14,120,000), due in varying amounts through 2003; interest rates vary among individual maturities ranging from 3.30 percent to 3.75 percent Serial 14,287 Deferred loss on refunding (278) 14, , ,818 Less current portion (18,915) (18,050) $ 152,331 $ 171,768 BALANCE BALANCE AMOUNTS DUE DECEMBER 31 REDEMPTION/ ACCRETION AND DECEMBER 31 WITHIN ONE 2000 ADDITIONS REUNDING AMORTIZATION 2001 YEAR 1990 Bonds (In thousands) Serial $ 9,985 $ 9,985 $ $ Special term 8,305 8, Capital appreciation 7, , Bonds Serial 20,701 20, Term Capital appreciation 17,072 1,167 18, Bonds 92,327 1, ,652 1, Bonds Serial 32,403 1, ,876 1,670 Subordinate serial 5, , Deferred loss (4,126) 543 (3,583) 2001 A Bonds Serial(and Original Issue Premium) 8,150 (19) 8,131 8,035 Deferred loss (329) 76 (253) 2001 B Bonds Serial(and Original Issue Premium) 14,321 (34) 14,287 6,900 Deferred loss (316) 38 (278) $ 189,818 $ 21,826 $ 43,060 $ 2,662 $ 171,246 $ 18,915 The 1990 Bonds, 1993 Bonds and 2001 A Bonds are secured by a pledge of revenues, and related interest thereon, from the additional rate component charged by the District to the Salt River Project on the sale of 200 MW of allocated capacity of surplus power associated with Reclamation's 24.3 percent entitlement in Navajo. The 1991 Bonds, 1994 Bonds and 2001 B Bonds are secured by a similar pledge of revenues from the additional rate component charged Salt River Project on the sale of an additional 150 MW of allocated Navajo capacity (Note 5). BONDS PAYABLE The 1990 and 1991 Bonds are not subject to optional redemption. The 1994 Bonds are subject to optional redemption commencing in 2004 at a price of 102 percent with a declining price to par in Debt service requirements to maturity, which include the sinking fund requirement and interest of $37,966,000 are as follows: Years ending 2002: $26,434,000; 2003: $26,889,000; 2004: $27,159,000; 2005: $27,157,000; : $54,315,000; : $60,942,000. In April 1993 and ebruary 1994, the District refinanced through advanced refunding arrangements approximately $89,545,000 and $44,525,000 of outstanding 1990 Bonds and 1991 Bonds, respectively. The net proceeds were used to purchase U.S. Government securities. Those securities were deposited in an irrevocable trust to provide for all future debt service payments on the refunded 1990 Bonds and 1991 Bonds. As a result, the refunded 1990 Bonds and 1991 Bonds are considered to be defeased and the liability for those bonds of $134,070,000 at December 31, 2001 has been removed from the balance sheet. In 1994, the District adopted Governmental Accounting Standard Board Statement No. 23 (GASB No. 23), Accounting and inancing Reporting for Refundings of Debt Reported by Proprietary Activities, and has deferred the accounting loss of $8,109,000 related to the 1991 Bonds. The accounting loss is amortized to income on the interest method over the life of the 1994 Bonds. In October 2001, the District issued $8,035,000 and $14,120,000 of the Series A 2001 and Series B 2001 Bonds with interest rates of 3.30 to 3.75 percent to advance refund $10,775,000 of outstanding 1990 Bonds and $14,235,000 of outstanding 1991 Bonds with interest rates of 7.30 to 7.65 percent and 6.30 to 6.40 percent, respectively. The net proceeds of $8,032,000 and $14,116,000 (after premium of $114,900 and $200,754 and payment of $117,900 and $205,000 in underwriting fees, issuance and other costs) were used to purchase U.S. Government securities. Those securities were deposited in an irrevocable trust to provide for all future debt service payments on the refunded 1990 Bonds and 1991 Bonds. As a result, the refunded 1990 Bonds and 1991 Bonds are considered to be defeased and the liability for those bonds of $25,010,000 at December 31, 2001 has been removed from the balance sheet. The 2001 refunding resulted in an accounting loss of $328,800 and $316,500 (on the 1990 Bonds and 1991 Bonds, respectively), but a reduction in the aggregate debt service payments of approximately $5,120,788 over the next 10 years, resulting in an economic gain of approximately $1,121,389. Under GASB No. 23, the District has deferred the accounting loss. The accounting loss is amortized to income on the interest method over the life of the 2001 Bonds. 11 COMMITMENTS AND CONTINGENCIES Insurance Reserve The District s Board of Directors has designated $2,000,000 of noncurrent unrestricted investments to act as a reserve for property and liability damages to be available to respond to any claims, judgments, and related costs against the District, its officers, directors, and employees, if any, in excess of the outstanding insurance coverage. Litigation The District is a party to certain litigation and other proceedings that could have the effect of increasing the District s costs or reducing or eliminating certain sources of revenues available to the District to meet those costs. The most significant of these is the Repayment Litigation with the United States, in the event that the conditions to the Stipulation are not satisfied, or if the Stipulation terminates and litigation resumes for any other reason (Note 3). 51 p.

28 NOTES TO INANCIAL STATEMENTS NOTES TO INANCIAL STATEMENTS 12 PENSION PLANS Retirement benefits are provided to District employees through two separate plans as of December 31, Benefits were provided for service prior to July 1, 1998, through the Retirement Plan (the District Plan) and from July 1, 1998 through December 31, 2001, through the Arizona State Retirement System. Employees retired or terminated prior to July 1, 1998, or their beneficiaries, continue to be provided benefits through the District Plan. Retirement Plan The District maintains the Retirement Plan, a single-employer defined benefit pension plan covering substantially all of its employees who retired or terminated prior to July 1, The District s Board of Directors amended the District Plan on May 7, 1998, providing certain changes in benefits. The amendment provides that active employees as of June 30, 1998, are eligible to participate in the District Plan as of their date of employment. No credited service is earned or credited for any period of employment after July 7, Upon normal retirement date, participants are entitled to a retirement income equal to 2 percent of their average monthly compensation multiplied by years of service. Average monthly compensation is the average of monthly compensation during the 36 consecutive-month period within the last 120-month period of service that yields the highest average. The change in the present value of accumulated benefits as a result of these amendments totaled $5,014,114 at December 31, There were no amendments in 2000 or All active employees of the District Plan were given the option to transfer their accounts from the District Plan to the Arizona State Retirement System Plan as of July 1, All active employees elected to transfer their accounts to the Arizona State Retirement System Plan. Accordingly, funds in the amount of $18,581,000 were transferred from the District Plan to the Arizona State Retirement System Plan in ebruary The District Plan also offers certain early retirement options and death benefits. These benefit provisions and all other requirements are established by the District s Board of Directors. The District Plan does not issue a stand-alone financial report. As of December 31, 2001, there were 93 participants in the District Plan. There were 43 retirees and beneficiaries receiving benefits and 50 terminated members and beneficiaries entitled to, but not yet receiving benefits. The net pension benefit obligation and annual pension cost were computed as part of an actuarial valuation performed as of January 1, 2001, the beginning of the District Plan s year. The District Plan s pension liability was determined in accordance with the provisions of Governmental Accounting Standards Board Statement No. 27. Significant actuarial assumptions used in the valuation include a rate of return on the investment of present and future assets of 6.5 percent a year compounded annually, and projected salary increases of 4.0 percent a year compounded annually. In previous years, the District s liability was calculated as of the end of each plan year. Beginning in 1999, the liability is calculated looking forward at the beginning of each plan year. The District s funding policy provides for an actuarially determined contribution within the range of contributions as specified under the Internal Revenue Code. The contribution for normal cost is determined using the entry-age normal cost method. The District uses the level percentage of payroll method to amortize the unfunded liability. Beginning in 1998, the District elected to change the amortization period for the unfunded liability from 30 to 15 years. A copy of the report is available at the District s headquarters. PENSION PLANS The annual pension cost and net pension obligation (asset) for 2001 are as follows: Annual required contribution for 2001 $ 82,883 Adjustment to annual required contribution 605 Annual pension cost 83,488 Contributions made for 2001 (82,883) Increase in net pension obligation 605 Net pension obligation (asset), beginning of year (12,084) Net pension obligation (asset), end of year $ (11,479) The significant actuarial assumptions used to compute the actuarially determined contribution requirement are the same as those used to compute the pension benefit obligation. Contributions to the District Plan for the years ended December 31, 2001 and 2000, were approximately $83,000 and $64,000, respectively, each of which was made in accordance with actuarially determined requirements. The District records the actuarially determined contributions for the Plan year as an expense in the corresponding year. Trend information for the District Plan years ended December 31, 1997 through 2001 is as follows: PERCENTAGE O ANNUAL PENSION ANNUAL AMOUNT COST NET PENSION YEAR ENDING PENSION COST CONTRIBUTED CONTRIBUTED OBLIGATION December 31, 1997 $ 1,720,578 $ 1,718, % $ (13,633) December 31, , , (13,158) December 31, ,564 72, (12,643) December 31, ,537 63, (12,084) December 31, ,488 82, (11,479) The actuarial value of the District Plan assets and actuarial accrued liabilities for plan years ended December 31, 1997 through 2001 are as follows: ACTUARIAL VALUE UNUNDED O ASSETS AS ACTUARIAL ACCRUED UNUNDED PERCENTAGE O LIABILITY AS ACTUARIAL ACTUARIAL ACTUARIAL ANNUAL PERCENTAGE O VALUATION ACTUARIAL VALUE ACCRUED ACCRUED ACCRUED COVERED ANNUAL COVERED DATE O ASSETS LIABILITY LIABILITY LIABILITY PAYROLL PAYROLL December 31, 1997 $16,322,894 $17,951,007 $1,628, % $18,221, % December 31, ,407,198 26,710,573 6,303, ,846, January 1, ,036,664 21,686, , ,470, January 1, ,687,777 3,237, , ,649* * January 1, ,556,276 3,232, , , * During 1999, all but 4 active participants elected to forfeit all benefits under this plan in exchange for receiving credited service in the Arizona State Retirement System for service accrued through June 1998 in this plan. The majority of remaining liabilities under this plan are for inactive participants. The actuarial value of assets represents the market value as determined by the District Plan trustee. Investments with the ederal Home Loan Mortgage Corporation exceed 5 percent of total investments. 52 p. 53 p.

29 NOTES TO INANCIAL STATEMENTS NOTES TO INANCIAL STATEMENTS PENSION PLANS Arizona State Retirement System Plan Effective July 1, 1998, the District became a member of the Arizona State Retirement System (ASRS), a cost-sharing, multiple-employer, public employee retirement system established by the State of Arizona to provide benefits for employees of the State and participating political subdivisions and school districts. The ASRS Board administers the Arizona State Retirement System Plan (ASRS Plan), which is a defined benefit pension plan. The ASRS Plan provides for retirement, disability, health insurance premium benefits, and death and survivor benefits as established by State statute. Substantially all employees of the District are covered by the ASRS Plan. The ASRS Plan issues a Comprehensive Annual inancial Report, including financial statements and supplemental information, which may be obtained by writing to Arizona State Retirement System, 3300 North Central Avenue, P.O. Box 33910, Phoenix Arizona or by calling (602) or The Arizona Revised Statutes provide statutory authority for determining the employees and employers contribution amounts as a percentage of covered payroll. Employers are required to contribute at the same rate as employees. The employee and employer contribution rates for the ASRS Plan years ending June 30, 2000 and June 30, 2001, were set at 2.66 percent, and for the plan year ending June 30, 2002, 2.49 percent of covered wages as determined by an actuarial computation based on June 30, 2000 information. Contributions for 2001, 2000 and 1999 were $1,310,715, $1,254,395 and $1,411,536, respectively, for both employees and the District. The District pays both the employee and employer portions of the contribution. Post Employment Benefit Plan The District provides post employment health care benefits to employees who are eligible for monthly retirement benefits under the pension plan and who have received coverage under the District s group medical plan for at least five years preceding retirement. Coverage is also available to the employee s legal spouse provided that certain conditions are met and to other dependents as required by law. This post employment benefit plan is funded on a pay-as-you-go basis and there are currently 11 employees eligible to receive benefits. The current annual cost is $19,800 per year. Based on life expectancies, the District recorded an expense and a liability of $313,000 during The liability on December 31, 2001 is $300, DEERRED COMPENSATION AND SAVINGS PLAN The District has adopted and maintains the Savings Plan (Savings Plan) in accordance with Section 401(k) of the Internal Revenue Code. The Savings Plan provides that all active, nonunion employees are eligible to participate as of their date of employment. The Savings Plan was amended on December 7, 2000, to clarify that certain temporary and part-time employees do not participate. Eligible employees are allowed to contribute up to 16 percent of their biweekly compensation, and the District has agreed to contribute to an employee s account an amount equal to one-half of the amount contributed by the employee up to three percent of the employee s biweekly compensation. Contribution expense for the Savings Plan for the years ended December 31, 2001 and 2000 was approximately $656,000 and $629,000, respectively. Accrued benefits attributable to the District s contributions on behalf of participants vest 20 percent for each year of completed service. 14 OM&R COST RECONCILIATION In accordance with CAP M&I and agricultural subcontracts, the District annually estimates its OM&R costs for the following year and uses that estimate along with projected water deliveries to establish water service OM&R charges for that following year. The subcontracts also provide that the District will determine whether its actual OM&R costs for each year differed from the estimated OM&R costs that were used to establish water charges for that year, and the District will make adjustments in the following year s charges to account for any difference identified.the District has determined that the annual OM&R cost reconciliations should include a reconciliation of both fixed OM&R and pumping energy costs for each year to charges for each year previously established based on estimates. The Stipulation specifies that actual OM&R costs allocable to federal customers are to be reconciled on a basis consistent with the methodology used in each applicable year to assess charges. Reconciliations through 1999 were communicated in January 2001, and customers were given a choice between receiving a credit or a refund. Beginning with 2000, annual costs are to be calculated and refunded, surcharged or offset, as the case may be, by May 30 of the following year. The District recorded a provision at December 31, 1999 for its estimated OM&R reconciliation obligation through 1999 in the total amount of $18 million. Subsequently, the District completed its analysis of OM&R costs through December 31, 2000 and determined that the actual OM&R obligation through 1999 was $15.6 million and for 2000 the obligation was $707,500. Consequently, the District recorded a revenue item in 2000 in the amount of $1.7 million corresponding to the reduction in its OM&R reconciliation liability. or 2001, the analysis of the OM&R costs resulted in subcontract and federal customers owing the District for underpayment of OM&R expenses. As a result in 2001, the District recorded revenue of $3.2 million and the corresponding receivable is included in other assets in the accompanying statement of net assets. 15 TAX LEVY AUTHORITY The District has the authority to levy two limited ad valorem taxes against all taxable property within its boundaries. The first ad valorem tax, which may not exceed 10 cents per $100 of assessed valuation, is for the District s operations and payment of the District s repayment obligation to the United States. The second ad valorem tax, which may not exceed 4 cents per $100 of assessed valuation, is for water storage to the extent that it is not required for the District s operations or payment of the repayment obligation. The ad valorem tax for operations and repayment was levied at 10 cents per $100 of assessed valuation for the tax year ending June 30, 2000, and 9 cents per $100 of assessed valuation for the tax years ending June 30, 2001 and June 30, The ad valorem tax for water storage was levied at 4 cents per $100 of assessed valuation for the tax years ending June 30, 2000, 2001, and The 2000, 2001, and 2002 ad valorem tax for water storage has been transferred to the Arizona Water Banking Authority. The respective counties collect property taxes on behalf of the District. The ad valorem property tax is levied against all taxable property in the District. In each county within the District, the County Assessor establishes a full cash value for each parcel of taxable property. Based on the applicable property classification ratio, the assessed value of each parcel is determined. (or example, commercial and industrial property is assessed at 25 percent of full cash value, owner occupied residential property is assessed at 10 percent of full cash value.) The property taxes due to the District are billed, along with State, County and other property taxes, in September of each year and are payable in two installments, October and March. The delinquent tax dates are November 1 and May 1 and delinquent taxes are subject to a penalty of 16 percent per annum unless the full year tax is paid by December 31. At the close of the tax collection period, the County Treasurer prepares a delinquent property tax list and the property so listed is advertised for sale in ebruary of the succeeding year. In the event that there is no purchaser for the property at the tax sale, the title to such property is vested in the State, and the property is reoffered for sale from time to time until such time as it is sold, subject to redemption, for an amount sufficient to cover all delinquent and current taxes. Additional information concerning the full cash value and assessed value of property within the District s service territory, tax levies and tax collections appears in the other statistical section. p p.

30 CENTRAL ARIZONA WATER CONSERVATION DISTRICT OTHER INANCIAL INORMATION IN p. 56 f i n01 S T A T E M E N T O N E T A S S E T S B Y U N D DECEMBER 31, 2001 (In thousands) p. 57 S T A T E M E N T O N E T A S S E T S B Y U N D CENTRAL AZ DECEMBER 31, 2001 STATE GROUND WATER (In thousands) RECLASSIICATIONS GENERAL AK-CHIN DEMONSTRATION REPLENISHMENT SERIES A & B TOTAL AND ELIMINATIONS UND UND PROJECT UND DISTRICT UND BOND UNDS ASSETS Current assets: Cash $ 152 $ q $ 151 $ x $ x $ 1 $ x Investment in Arizona Local Government Investment Pools 2,586 2,586 Total cash and cash equivalents 2,738 2,737 1 Receivables: Accrued interest receivable on unrestricted investments 1,731 1,731 Due from water customers, less allowance for doubtful accounts of $2,007 and $1,875 at December 31, 2001 and 2000, respectively 3,239 3,239 Other Repayment Credit 12,865 12,865 Materials and supplies inventory 3,497 3,497 Water Inventory 14,868 14, Interfund receivable ( 40,732) 8,985 1, ,695 Other 4,165 4,249 ( 84) Total current assets 43,416 ( 40,732) 52,357 1, ,611 Noncurrent assets: unds held by federal government 32,559 32,559 Investment in State Treasurer CAP investment pool 160, ,602 Restricted assets 100,593 40,882 5,632 17,283 36,796 Advances to federal government Property and equipment, less accumulated depreciation of $18,545 and $14,966 at December 31, 2001 and 2000, respectively 32,011 32,011 Permanent service right, less accumulated amortization of $239,390 and $208,851 at December 31, 2001 and 2000, respectively 1,555,307 1,555,307 Bond issuance costs, net of accumulated amortization of $1,954 and $2,726 at December 31, 2001 and 2000, respectively 1,145 1,145 Total noncurrent assets 1,882,595 1,821,739 5,632 17,283 37,941 Total assets $ 1,926,011 $ ( 40,732 ) $1,874,096 $ 5,632 $ 18,818 $ 645 $ 67,552

31 p. 58 S T A T E M E N T O N E T A S S E T S B Y U N D DECEMBER 31, 2001 (In thousands) f i n01 STATEMENT O REVENUE, EXPENSES AND CHANGES IN NET ASSETS B Y U N D DECEMBER 31, 2001 (In thousands) p. 59 S T A T E M E N T O N E T A S S E T S B Y U N D DECEMBER 31, 2001 (In thousands) CENTRAL AZ STATE GROUND WATER RECLASSIICATIONS GENERAL AK-CHIN DEMONSTRATION REPLENISHMENT SERIES A & B TOTAL AND ELIMINATIONS UND UND PROJECT UND DISTRICT UND BOND UNDS LIABILITIES AND EQUITY (DEICIT) Current liabilities: Accounts payable $ 21,748 $ q $ 21,410 $ x $ x $ x $ 338 Accrued payroll, payroll taxes and other accrued expenses 5,044 5,044 Interfund payable ( 40,732) 2,083 7,410 1,515 29,724 Current liabilities payable from restricted assets, advances to federal government, and other noncurrent assets: Accrued interest payable 37,721 36,365 1,357 Repayment obligation, due within one year 20,272 20,272 Contract revenue bonds, due within one year 18,915 18,915 OM&R reconciliation obligation 3,618 3,618 Total current liabilities: 107,318 ( 40,732) 88,791 7,410 1,515 50,334 Noncurrent liabilities: Repayment obligation, due after one year $ 1,505,741 $ 1,505,741 Contract revenue bonds, due after one year, net of unamortized discounts of $13,680 and $16,015 at December 31, 2001 and 2000, respectively 152, ,331 OM&R reconciliation obligation Provision for retiree health insurance Water operations and capital charges deferred revenue 17,306 17,306 Total noncurrent liabilities: 1,675,678 1,523, ,331 Total liabilities: 1,782,996 ( 40,732) 1,612,139 7,410 1, ,665 NET ASSETS Investment in capital assets, less related debt ( 108,795) 61,304 ( 170,100 ) Restricted 62,533 4,517 5,632 17,283 35,101 Unrestricted 189, ,134 ( 5,875) ( 870) ( 112) Total net assets: 143, ,957 5,633 11,406 ( 869) 135,112 Total liabilities and net assets: $ 1,926,011 $ ( 40,732 ) $ 1,874,096 $ 5,632 $ 18,818 $ 645 $ 67,552 STATEMENT O REVENUE, EXPENSES AND CHANGES IN NET ASSETS B Y U N D CENTRAL AZ DECEMBER 31, 2001 STATE GROUND WATER (In thousands) RECLASSIICATIONS GENERAL AK-CHIN DEMONSTRATION REPLENISHMENT SERIES A & B TOTAL AND ELIMINATIONS UND UND PROJECT UND DISTRICT UND BOND UNDS OPERATING REVENUES Water operations and maintenance charges $ 56,892 $ $ 56,892 $ $ $ $ Water service capital charges 25,417 25,417 Power and Basin und revenues 56,747 31,547 25,200 Reimbursements and other operating revenues 5, , Total operating revenues 144, , ,200 OPERATING EXPENSES Salaries and related costs 30,908 $ 29, Pumping power 58,559 58,559 Power transmission 1,601 1,301 Hoover capacity charges 2,785 2,785 Amortization of permanent service right 30,538 30,538 Depreciation 4,315 4,315 Provision for OM&R reconciliation Provision for doubtful accounts Other operating expenses 19,493 ( 828) 12,618 6, Total operating expenses 148,641 ( 828) 140,826 7, Operating income (loss) before unusual expense item ( 4,024 ) ( 22,110 ) ( 6,812) ( 290) 25,188 Unusual expense item Operating income (loss) after unusual expense item ( 4,024 ) ( 22,110 ) ( 6,812) ( 290) 25,188 NONOPERATING REVENUES (EXPENSES) Property taxes, less assignment to Arizona Water Banking Authority of $10,691 and $9,967 in 2001 and 2000, respectively 24,152 24,152 Interest income and other nonoperating revenues 15,201 ( 36 ) 12, ,983 Interest income reserved for Ak-Chin fund Interest income and other nonoperating revenues reserved for State Demonstration Project Interest expense and other nonoperating expenses ( 48,553) 36 ( 36,420 ) ( 36 ) ( 12,133 ) Total nonoperating revenues (expenses) ( 7,991 ) ( 17 ) ( 33 ) ( 9,150 ) Change in net assets ( 12,015 ) ( 22,127) 244 ( 5,847) ( 323 ) 16,038 Net assets at beginning of year 155, ,084 5,389 17,253 ( 546 ) ( 151,150 ) Net assets at end of year $ 143,015 $ $ 261,957 $ 5,633 $ 11,406 $ ( 869 ) $ ( 135,112 )

32 CENTRAL ARIZONA WATER CONSERVATION DISTRICT (Central Arizona Project) Contract Revenue Bonds, Series A 1990, and Contract Revenue Refunding Bonds, Series A 1993 Contract Revenue Refunding Bonds, Series A 2001 Schedule of Activity Bond und DECEMBER 31, 2001 (In thousands) CENTRAL ARIZONA WATER CONSERVATION DISTRICT (Central Arizona Project) Contract Revenue Bonds, Series B 1991, Contract Revenue Refunding Bonds, Series B 1994 and Contract Revenue Refunding Subordinate Bonds Series B 1994 Contract Reneue Refunding bonds, Series B 2001 Schedule of Activity Bond und DECEMBER 31, 2001 (In thousands) B O N D U N D Principal Interest Description Account Account Balance at January 1, 2000 $ 2,545 $ 1,052 Transfers from: Revenue und 9,933 6,140 Depository Trustee 10,858 Bond Proceeds 26 Interest payments ( 6,312) Redemptions ( 20,318 ) Interest earned on account Interest transferred to revenue fund ( 552) ( 161) Balance at December 31, 2001 $ 3,018 $ 906 B O N D U N D Principal Interest Subordinate Description Account Account Debt Account Balance at January 1, 2000 $ 1,497 $ 489 $ 376 Transfers from: Revenue und 8,361 2, Depository Trustee 59,935 1,447 Bond Proceeds 43 Interest payments ( 4,264) 196 Redemptions ( 68,020 ) 505 Interest and dividends earned on account Interest and dividends transferred to revenue fund ( 179) Balance at December 31, 2001 $ 1, $ 325 ( ) ( ) ( ) ( ) Note 1: The above schedule discloses only activity in the Principal and Interest Accounts of the Bond und as established by the Bond Indenture relating to the Contract Revenue Bonds, and Contract Revenue Refunding Bonds between the and Bank of New York (California), as trustee, dated May 1, 1990 as amended by the Supplemental Indenture dated March 1, 1993, and September 1, 2001, and does not include activity in various other accounts and funds held by the trustee pursuant thereto. There were no balances and no activity in the Sinking and Subordinate Debt Accounts of the Bond und as of and for the year ended December 31, Note 1: The above schedule discloses only activity in the Principal, Interest, and Subordinate Debt Accounts of the Bond und as established by the Bond Indenture relating to the Contract Revenue Bonds, Contract Revenue Refunding Bonds, and Contract Revenue Refunding Subordinate Bonds between the Conservation District and Bank of New York (California), as trustee, dated August 1, 1991 as amended by the Supplemental Indenture dated ebruary 1, 1994, and September 1, 2001, and does not include activity in various other accounts and funds held by the trustee pursuant thereto. There was no balance and no activity in the Sinking Account of the Bond und as of and for the year ended December 31, p. 60 p. 61

33 STA TS CENTRAL ARIZONA WATER CONSERVATION DISTRICT STATISTICAL SECTION (UNAUDITED) CENTRAL ARIZONA WATER CONSERVATION DISTRICT (Central Arizona Project) Statistical Information (Unaudited) SCHEDULE O AD VALOREM PROPERTY TAX ULL CASH VALUE AND ASSESSED VALUE Tax Year Ended June 30 ull Cash Value Assessed Value 1998 $ 167,921,203,091 $ 21,253,568, ,711,885,622 23,318,202, ,047,209,445 25,784,794, ,701,894,776 28,142,398,130 Source: Maricopa, Pinal and Pima County Assessor s Office SCHEDULE O AD VALOREM PROPERTY TAX TAX LEVY AND COLLECTIONS iscal Percent of Percent of Year Tax Levy Amount Tax Levy Amount Tax Levy $29,465,646 $28,867, % $29,365, % ,363,032 31,414, ,171, ,248,229 32,209, ,675, ,748,795 (c) (c) (c) (c) (a) (b) (c) Reflects collections made through June 30, the end of the taxing fiscal year, on each year s levy. Reflects collections made through December 31, 2001 against current and prior levies. In the process of collection. Source: Maricopa, Pinal and Pima County Treasurers Office Collected to June 30 End of Tax iscal Year (a) Total Collections (b) p. 62 p. 63

34 p. 64 CENTRAL ARIZONA WATER CONSERVATION DISTRICT STATISTICAL SECTION (UNAUDITED) Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2001 f i n01 CENTRAL ARIZONA WATER CONSERVATION DISTRICT STATISTICAL SECTION (UNAUDITED) Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2001 p. 65 Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2001 C U S T O M E R Agua ria (Citizens) Ak-Chin Indian Community Ancala Country Club Apache Junction Water Co. AZ-American Water AZ Pacific Materials AZ State Land Dept. AZ Water Bank AZ WAter Co/Apch. Jct. AZ Wholesale Growers ASARCO, Ray Mine Berneil Water Company BHI Copper Company Central AZ Groundwater Replenishment Dist (b) Carefree Water Company MUNICIPAL & INDUSTRY AGRICULTURE RECHARGE EDERAL TOTAL A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE 9,761 $566, , ,726 3, , , ,639 5, , , , ,040 W A T E R O & M C H A R G E S CAPITAL CHARGES $ $ 2, , ,409 9,394,101 1,255 56,475 $ 64,124 3,744,596 9,761 $566,138 64,124 3,744, ,349 2, ,461 3, , , , ,409 9,394,101 5, , , , ,040 ACRE-EET ALLOCATION REVENUE 11,093 $476,999 3, ,933 32,076 1,379,268 6, ,000 21, , ,600 2,271 97, ,200 TOTAL PAID $ 1,043,137 3,744,596 45, , ,533 7,373 1,410,907 9,394, , ,000 8,600 97, ,302 39,240 Casa Grande Systems (AZ Water Co.) Cave Creek Water Co. 1,202 69,716 1,110 64,380 1,202 69,716 1,110 64,380 8, ,012 1,600 68, , ,180 Central Arizona Irrigation & Drainage District Chandler Heights Citrus Irrigation District Chaparral City Water Co. 6, , ,404 3,736, ,092 11, , , ,420 3,967,412 1,393 35,537 6, , ,545 6, ,054 3,967,412 49, ,228 Circle City Water Co. 3, , ,076 Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2001 C U S T O M E R City of Avondale City of Chandler City of Eloy City of Glendale City of Goodyear City of Mesa City of Peoria City of Phoenix City of Scottsdale City of Surprise City of Tempe City of Tucson Community Water Co of Green Valley Coolidge System (AZ Water Company) Phelps Dodge, Inc. Del Webb (Ak-Chin) MUNICIPAL & INDUSTRY AGRICULTURE RECHARGE EDERAL TOTAL A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE 4, ,268 4, ,538 1, ,001 18,152 1,227,572 21,853 1,267,474 2, , ,781 6,193,298 37,641 2,183,178 4, ,552 19,176 1,112,208 W A T E R O & M C H A R G E S CAPITAL CHARGES 1,553 69,900 23,888 1,074,960 17, ,550 80,000 3,600,000 9, ,515 10, ,315 4, ,865 7, ,164 5, ,590 4, ,592 13, , , ,904 9, ,576 6, ,168 36,526 1,812,662 1, ,001 23,507 1,538,162 17, , ,777 5,153,066 2, , ,013 6,960,754 47,444 2,637,597 14, ,771 23,482 1,315,073 9, ,576 ACRE-EET ALLOCATION REVENUE 4, ,078 3, ,060 2,171 93,353 14, ,685 3, ,383 36,388 1,557,160 19, , ,914 4,884,670 48,529 2,086,471 7, ,039 4, , ,920 5,973,560 1,337 57,491 2,000 86,000 2, ,958 TOTAL PAID 549,246 1,958, ,354 2,139, ,933 6,710,226 1,021,980 11,845,424 4,724, , ,040 7,288,633 57,491 86, , ,576 Pine Water Company lowing Wells Irr. District Gardner Turfgrass Gila River Indian Community (Toka Sticks) Green Valley Water Co. H2O, Inc. Harquahala Valley Ass. 16 2, , , , , , , , ,923 4, ,222 1,900 81,700 6, ,222 2,768 5,794 81,700 4,747 6,696

35 p. 66 CENTRAL ARIZONA WATER CONSERVATION DISTRICT STATISTICAL SECTION (UNAUDITED) Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2001 f i n01 CENTRAL ARIZONA WATER CONSERVATION DISTRICT STATISTICAL SECTION (UNAUDITED) Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2001 p. 67 Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2001 C U S T O M E R Harquahala Valley Irrigation District HoHoKam Irrigation District Kai arms Litchfield Park Service Company Maricopa County Parks & Recreation Dept. Maricopa Drilling & Equipment company Maricopa-Stanfield Irr. & Drainage District Mazatzal Tree arm Mesa amily Golf Centers Metro. Domestic Water Improvement District Metro. Domestic Water Improvement Dist. (U.S. Bank Trust) Midvale arms New magma Irrigation & Drainage District New River Utility Company Oasis Golf resort & Community, LLC Odom arms MUNICIPAL & INDUSTRY AGRICULTURE RECHARGE EDERAL TOTAL A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE , , , , ,220 W A T E R O & M C H A R G E S CAPITAL CHARGES 102,980 3,621,072 20, , ,692 3,659,548 42,546 1,194, ,788 54,928 1,153,488 1,110 23,310 47,755 1,002,855 8, ,000 44, , ,980 3,621,072 75,473 1,857,288 1,110 23, , , ,447 4,662, , ,070 8, ,000 87,381 2,136, , ,788 ACRE-EET ALLOCATION REVENUE 5, , ,595 8, ,894 1,500 64,500 1,885 81,055 TOTAL PAID 3,621,072 1,857,288 23, ,940 62,844 1,096 4,662,403 2,626 7, , ,894 64,500 2,136,219 81,055 8,220 4,788 Oro Valley (U.S. Bank Trust) ,606 27,606 Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2001 C U S T O M E R Phoenix Memorial Park Cemetery Picacho Elementary School District No. 33 Pinal county Dept. of Public Works Pinnacle West Capital Corp. Queen Creek Irr. District Queen Creek Water Co. Quintero Golf Country Club Rancho Escalante Recreational center, Inc. Red Mountain Ranch Country Club Red Mountain Ranch Owners Association Rio Verde Utilities, Inc. Robson Communities Rogers, rank Roosevelt Water Salt River Project MUNICIPAL & INDUSTRY AGRICULTURE RECHARGE EDERAL TOTAL A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE 23 2, , , , , , , ,208 W A T E R O & M C H A R G E S CAPITAL CHARGES 26, ,386 1,059 38, ,300 3, ,744 1,003 47,060 9, ,880 1,000 45,000 14, , , ,188 1,033 47,060 35, , , ,164 1,059 38, , , , ,208 1,000 45, ,300 3, ,744 14, ,635 ACRE-EET ALLOCATION REVENUE 84 3, , ,916 TOTAL PAID 3,612 2,827 39,188 47, , ,697 77,164 38,124 7,906 59,725 1,644 45,124 45,000 33, , ,635 San Carlos Apache Tribe San Carlos Irrigation & Drainage District San Tan Irrigation District San Xavier Co-op arm Sonoran Land Group ,391 1,173 42,228 4, , ,600 4, ,628 1,173 42, , , , ,628 42,228 12,182 69,600 51,391

36 p. 68 CENTRAL ARIZONA WATER CONSERVATION DISTRICT STATISTICAL SECTION (UNAUDITED) Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2001 f i n01 CENTRAL ARIZONA WATER CONSERVATION DISTRICT STATISTICAL SECTION (UNAUDITED) Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2001 p. 69 Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2001 C U S T O M E R Spanish Trail Water Co. Springfield Golf Resort Sun City Utilities (Citizens Water Resources) Sun City Water Company (Youngtown) Sun City West Utilities (Citizens Water Resources) Sun Groves Homeowners Assoc. Sun State Rock & Materials Corp. Sunrise Water Company Temporary Water Permits Tohono O Odham Indian Nation Tonopah Irrigation District Tonto National orest Town of Buckeye Town of lorence Town of Gilbert MUNICIPAL & INDUSTRY AGRICULTURE RECHARGE EDERAL TOTAL A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE ,358 22, , , ,363 2, ,784 W A T E R O & M C H A R G E S CAPITAL CHARGES 6, ,664 8, ,173 4, , ,358 22, , ,675 8, ,173 6, , ,363 2, ,784 4, ,462 ACRE-EET ALLOCATION REVENUE 3, ,591 3, , ,340 2, , , ,662 2,048 88,064 7, ,661 TOTAL PAID 130,591 56, ,787 16, ,996 22,752 2,221 40,592 86, , ,644 6,363 18, , ,123 Town of Marana 2,047 92,115 2,047 92, ,021 94,136 Town of Oro Valley 2, ,500 2, ,500 1,652 71, ,536 Triple W arms 173 6, ,228 6,228 V.. Investments 2,057 74,052 2,057 74,052 74,052 Vail Water Company , , ,798 69,168 Vidler Water Company 2, ,955 2, , ,955 Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2001 C U S T O M E R Viewpoint R V & Golf Resort Water Utilities Com. acilities Dist. Water Utility of Greater Buckeye, Inc. Water Utility of Greater Tonopah, Inc. Webb arms West End Water Co. White Tank System (Arizona Water Co.) Subtotal Transfer of storage credits Total MUNICIPAL & INDUSTRY AGRICULTURE RECHARGE EDERAL TOTAL A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE A/ DELIVERED REVENUE , ,284 $16,019, ,284 $16,019,035 W A T E R O & M C H A R G E S CAPITAL CHARGES , ,203 $14,170, ,203 $14,170, ,586 $20,875, $ 36, ,946 $20,912, ,584 $7,380, ,584 $7,380, , ,528 1,321,657 $58,446, $ 36,390 1,322,017 $58,482,960 Notes: (a) Excess water deliveries include a component for facility use. Revenues of $1,590,816 were collected and reflected in Water O&M charges, but recorded in the Statement of Operations as Capital Charges. (b) Water O&M charges collected for water deliveries to the Central Arizona Ground Replenishment District (inter-company transaction) are eliminated on the consolidated Statement of Operations. ACRE-EET ALLOCATION REVENUE 2, , , , , , ,440 $23,825, ,440 $23,825,954 TOTAL PAID 56, ,517 1,849 2,752 12,528 6,751 41,624 $82,272,524 $ 36,390 $82,308,914

37 THE CAWCD BOARD THE CAWCD BOARD p. 70 The B Board of Directors is responsible for managing the Central Arizona Project (CAP) which annually delivers up to 1.5 million acre-feet of Colorado River water to most cities and many irrigation districts in central and southern Arizona. The 15-member board serves staggered six-year terms without pay. Every two years, as part of the general election ballot, the public elects one-third of the 15-member CAWCD Board. Candidates are drawn from CAP s three-county service area: Maricopa, Pinal and Pima counties. The candidates must be residents of the county they wish to represent. The composition of the board is based on population, so 10 are from Maricopa County, 4 from Pima County and 1 from Pinal County. The board generally meets monthly at CAP headquarters in Phoenix. A B C D E G H I J K L M N MARICOPA COUNTY PIMA COUNTY PINAL COUNTY A George L. Campbell T E R M E N D I N G B Robert Bob Burns T E R M E N D I N G C Daniel J. Donahoe T E R M E N D I N G D Grady Gammage, Jr. Esq. T E R M E N D I N G E Samuel P. Goddard, Jr. Esq. T E R M E N D I N G Mark Lewis T E R M E N D I N G G William Perry T E R M E N D I N G H Terry Goddard T E R M E N D I N G I George Renner T E R M E N D I N G J Susan Bitter Smith T E R M E N D I N G K Robert M. Bob Beaudry T E R M E N D I N G L Marybeth Carlile T E R M E N D I N G M Marilyn Ronstadt T E R M E N D I N G N Steve Weatherspoon, Esq. T E R M E N D I N G O Jim Hartdegen T E R M E N D I N G O 71 p.

38 THE SENIOR MANAGEMENT TEAM THE SYSTEM.01 cap sys LAKE HAVASU BUCKSKIN MOUNTAIN TUNNEL A B C D BOUSE HILLS LITTLE HARQUAHALA HASSAYAMPA WADDELL PHOENIX SALT-GILA E G H MARICOPA COUNTY A R I Z O N A M E X I C O PIMA COUNTY PINAL COUNTY TWIN PEAKS SANDARIO BRADY PICACHO RED ROCK BRAWLEY TUCSON A David S. Sid Wilson, Jr. G E N E R A L M A N A G E R B Donna Micetic E X E C U T I V E A S S O C I A T E C Donna Murphy A S S I S T A N T G E N E R A L M A N G E R, H U M A N R E S O U R C E S E R V I C E S D John Newman A S S I S T A N T G E N E R A L M A N A G E R, P L A N N I N G & R E S O U R C E S E Larry Dozier D E P U T Y G E N E R A L M A N A G E R, O P E R A T I O N S, M A I N T E N A M C E & E N G I N E E I N G Douglas Miller G E N E R A L C O U N S E L G Kathryn Schmitt D I R E C T O R O C O M M U N I C A T I O N S, P U B L I C A A I R S & G O V E R N M E N T R E G U L A T I O N S H Ted Cooke A S S I S T A N T G E N E R A L M A N A G E R, I N A N C E SAN XAVIER SNYDER HILL BLACK MOUNTAIN p. 72 SMT CAP COMMUNICATIONS STA Editor-in-Chief Kathryn B. Schmitt Editor Robert Barrett Contributing Writers Crystal Thompson Vicky Campo Cathy Carlat Photography Philip ortnam Design & Illustration Squeeze, Inc.