d 2 implement system configuration to maximize efficiency. regulate h2o supply control usage accommodate demand. ACTION PLAN-01-CAP-02

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1 C E N T R A L A R I Z O N A P R O J E C T C A P ACTION PLAN-01-CAP-02 implement system configuration to maximize efficiency. regulate h2o supply control usage accommodate demand. D R O U G H T D E F E N S E d 2 02 d C A P ANNUAL REPORT-01-CAP-02

2 C A P ACTION PLAN-01-CAP-02 implement system configuration to maximize efficiency. regulate h2o supply control usage accommodate demand. C O N T E N T S d2 ACTION PLAN-01-CAP-02...it will enhance the state s economy and quality of life and ensure sustainable growth C l e t t e r C E N T R A L A R I Z O N A P R O J E C T D R O U G H T D E F E N S E O V E R C O M I N G D R O U G H T ACTION PLAN-01-CAP-02 implement system configuration to maximize efficiency. regulate h2o supply control usage accommodate demand. D E A L I N G W I T H D R O U G H T D R O U G H T O N T H E R I V E R f i n a n c i a l s t h e b o a r d d 2

3 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 : ltr.p a While 2002 was a year of severe drought for Arizona, most residents did not really notice nor feel the effects of the water shortage. In fact, I would suggest that until the tragedy of the Rodeo-Chediski fire, most of the public didn t realize just how dry conditions were in Arizona. That lack of realization was due to the foresight and planning of Arizona s water community. We are fortunate that in the past, visionaries foresaw Arizona s water needs and planned accordingly. Initially, farmers diverted flows from the Salt River for irrigation as it flowed through the Valley. But the river was an unpredictable source and the Bureau of Reclamation built Roosevelt Dam to provide a dependable supply of water through the Salt River Project. SRP expanded and now has a series of dams on the Salt and Verde rivers that provide needed surface water to the Valley of the Sun. As the demand for water grew, groundwater provided the additional needed supplies. But our water managers realized that even that was not enough because increased pumping was depleting the water nature had stored underground. So they created the Central Arizona Project to bring much-needed Colorado River water into Maricopa, Pinal and Pima counties. The political fight to get CAP created and the physical challenges of building the 336-mile-long aqueduct paid off handsomely for Arizona in That s when the effects of a multi-year drought in Arizona overwhelmed SRP, leaving its reservoirs severely drained and depleted. But the creation of a second, larger, source of surface water, CAP, literally saved Arizona in The Colorado River storage system that includes Lake Mead and Lake Powell had the much-needed water and CAP delivered it to the central part of the state. CAP became a cornerstone of central Arizona s defense against drought. That does not mean Arizona is bullet proof. The drought throughout the Colorado River basin that has reduced the amount of available water for SRP could eventually also affect the Colorado River and CAP. We must continue water conservation and continue to plan for the water needs of Arizona, keeping in mind that the drought could continue. During 2002, the year the drought became noticeably severe, CAP met and overcame many challenges. We are proud of the role we played in keeping the state supplied with such a life-sustaining and vital resource. Our challenges and our role are discussed in this annual report. The Central Arizona Project, its leadership and employees, understand our role in Arizona s management of its water resources to meet the needs of its citizens even when confronted with drought. We are dedicated to continuing that effort. 02 g e 03 David S. Wilson Jr. D A V I D S. S I D W I L S O N J R. GENERAL MANAGER A R. A U T H.. C D C A P G M

4 dd R O U G H T C A P 02 D E F E N S E D D = X The weather throughout 2002 seemed like the Chamber of Commerce ordered it. The blue skies rarely were darkened by storm clouds and the sunshine seemed endless. It not only seemed that way, it was that way. D R O U G H T R U L E D. Death Valley and Phoenix got almost the same amount of rain in In Phoenix, the rainfall was officially 2.82 inches, making it tied with 1956 as the driest year on record. For the last 30 years, Phoenix has had an average rainfall of 8.32 inches. Dry conditions prevailed throughout Arizona. Every rain gauge in the state registered below normal rainfall. In Phoenix, there was no rainfall in February and only a trace in August. By April, Phoenix had recorded the second-driest seven-month period in the last 107 years for Arizona, according to the National Weather Service. The driest seven-month period was in Along with the lack of rain came the heat. April was the fourth warmest on record. June was the second warmest on record. July and August both were the third warmest on record. The lack of moisture and the heat contributed to dust storms in the Phoenix area. By mid summer there had barely been one inch of rainfall and that, combined with more than 3,400 construction sites scattered throughout the Valley, contributed to the dust problem. The summer s monsoon storms never really materialized, but the high winds did. It made for intense dust storms, known by the National Weather Service as haboobs. Along with the hot, dry summer came forest fires. On June 18, a fire started in a grove of juniper, sage and dry grass near the Rodeo Fairgrounds just northeast of Cibeque on the Fort Apache Reservation. Given 04 the dry conditions due to the statewide drought, the fire named the Rodeo fire quickly began to spread. 2 05! A second fire started by a lost hiker two days later near Chediski Peak, northwest of Cibeque also began to spread rapidly in the dry conditions. The two fires, about 15 miles apart, eventually merged into what became known as the Rodeo-Chediski fire. It was not contained until June 26 and, by that time, it had consumed an area larger than Los Angeles. The fire burned down more than 400 homes and forced approximately 32,000 people to flee. In the metropolitan Phoenix area, things were also bad. Officials at Salt River Project bemoaned the lack of rain as they watched the water levels in SRP s storage reservoirs drop lower and lower. It reached a point where the Verde River flowing across the dry Horseshoe Lake bed resembled a narrow canal of water. Roosevelt Lake, which normally looks almost like an ocean when it is full, fell to 12 percent of capacity, a dangerously low level. Before the end of 2002 SRP officials said if 2003 is another dry year Roosevelt will be virtually dry. SRP also announced that it was reducing by one-third its 2003 water deliveries to all customers. The announcement left water providers in the Valley changing plans to use alternate sources of water. It left agricultural water users scratching their heads, reevaluating the cost and availability of alternate sources needed to make up the shortages. But most residents of Phoenix and the surrounding cities as well as those in Tucson never really noticed the drought. Throughout 2002 they continued to fill swimming pools, water their lawns and wash their cars. There were no water police such as those in Las Vegas where residents had water restrictions. Those who violated the restrictions in Las Vegas got tickets and fines. In Flagstaff, water restrictions were imposed. So why are the cities in the Valley of the Sun, Tucson and surrounding areas not noticeably affected by one of the worst droughts to ever hit Arizona? Answer: because of Central Arizona Project (CAP). CAP was Arizona s drought defense. Each year CAP brings Colorado River water into the center of the state. The 336-mile-long aqueduct annually brings about 1.5 million acre-feet of water to cities, agricultural users and Indian communities in Maricopa, Pinal and Pima counties. One acre-foot is about 326,000 gallons or enough water for a family for a year. Without CAP, SRP customers would have had even further reduced deliveries in Without CAP, agricultural users would have had fallow fields. Without CAP, Indian communities would have been dry. Without CAP, most residents in metropolitan Phoenix and Tucson would have been facing water restrictions that were so severe they would have had to use paint to have green lawns. CAP made it easy for many of Arizona s residents to ignore the drought.

5 C A P 02 O V E R C O M I N G D R O U G H T As far reaching and devastating as the statewide drought was in 2002, most residents in Maricopa, Pinal and Pima counties were not directly affected. The drought was just something they read about in the newspaper or saw on television. Water leaders in Arizona have done an amazing job of providing drought protection for the state. Two surface water providers, the Central Arizona Project (CAP) and the Salt River Project (SRP), serve the metropolitan Phoenix area. Each entity gets its surface water, that is water that comes from lakes and streams and is supplied by snowfall and storm runoff, from different sources. For CAP, the source is the mighty Colorado River. For SRP, it is essentially the Salt and Verde rivers. In 2002, drought continued to strike hard in Arizona and throughout the West. Reservoirs managed by SRP, such as Horseshoe, Bartlett, and Roosevelt lakes, were drawn down to dangerously low levels as SRP worked to meet its water orders from Valley cities. SRP turned to CAP in 2002 to borrow 150,000 acre-feet of additional water from CAP in order to preserve what little water was left in Roosevelt. It ended the year with Horseshoe Lake looking like an irrigation canal and Roosevelt in danger of going dry. That situation necessitated a reduction of deliveries in Many of the cities turned to CAP to sustain their water supply and to replace the anticipated loss of water from SRP in CAP has been able to meet their needs due to the foresight of Arizona s water planners. In 1968, construction of CAP was authorized. The 336-mile-long engineering marvel annually moves Colorado River water from the Mark Wilmer Pumping Plant in Lake Havasu to the Phoenix area and then southeast to where it terminates about 10 miles south of Tucson. It provides its annual allotment of 1.5 million acre-feet to municipal and industrial (M&I) customers, Non-Indian Agricultural users, Indian communities and to recharge sites along its length. In 2002, with the drought and loss of water experienced by almost all its customers, CAP moved a total of 1,704,405 acre-feet of water in customer deliveries and exchanges. That was 10 percent more water than it moved in In July, CAP delivered a record 230,902 acre-feet of water and its daily peak delivery reached 4,009 cubic feet per second (cfs) on August 12. One cubic-foot of water is about 7.5 gallons. CAP moved a record amount of water in 2002 despite having to overcome operational obstacles that included aquatic pests and maintenance outages. Aquatic pests, primarily clams and algae, are present year round. However, they present a significant challenge to operations during peak months and peak days when deliveries are pushed to maximum levels. So removing the clams and scraping the algae off the sides of the aqueduct was an on-going task. In the fall, 29 million gallons of water were drained from the canal and operations were stopped for two weeks to allow for the inspection of three siphons (Centennial, Jackrabbit, and Hassayampa), and two tunnels (Buckskin Mountain and Burnt Mountain). When CAP crosses riverbeds or large washes, it goes under the obstacles via a siphon. The siphons are about 22 feet in diameter, large enough to accommodate a city bus, and can stretch for more than a mile. In addition, CAP crews also inspected the pumping plant discharge lines of Hassayampa, Little Harquahala and Bouse Hills and also the Black Mountain pipeline. o d 06 1,525,677 Acre FT-p-CAP T H 07 CLAM PHOTO BY NOEL BURKHEAD D.2.MISSION-01-CAP-02 CAP S MISSION: deliver its full allocation of colorado river water to central arizona 805, ,929 D.2-DESCRIPTOR-01-CAP-02 DSCR01: one major drought impact: the green area behind horseshoe dam should be a lake. { 2002 WAS A YEAR OF DROUGHT. ] WHAT! YOU DIDN T NOTICE? 134,897 TOTAL M & I AGRICULTURAL INDIAN 2002 CAP H2O DELIVERIES TO CUSTOMERS-CAP-02 D.2-GRAPHIC.REP-01-CAP-02 GRPH01: 2002 cap water deliveries 2002 CAP H2O DELIVERIES TO CUSTOMERS-CAP CAP H2O DELIVERIES TO CUSTOMERS-CAP CAP H2O DELIVERIES TO CUSTOMERS-CAP-02 O U S A N D acre FT NV USg-p-CAP-02 CORBICULA FLUMINEA CAL USg-p-CAP-02 AZ State MP FT-p-CAP-02 A L G D.2-DESCRIPTOR-01-CAP NV USg-p-CAP-02 DSCR02: aquatic pests, primarily clams and algae, are present year round and removing clams and scraping algae are on-going tasks. CAL USg-p-CAP-02

6 CAP crews managed the replacement of an impeller despite record water demands. The first, and largest, pumping plant on the CAP system is Mark Wilmer Pumping Plant in Lake Havasu. There, six 60,000 horsepower pumps drive impellers that scoop up water from the Colorado River and hurl it 824 vertical feet through pipes up the side of Buckskin Mountain. The water then enters an approximately 7 mile long tunnel through the Buckskin Mountains before it emerges into the aqueduct and begins its journey across the state. The impellers are being replaced to increase the efficiency of the pumping plant and to reduce noise and vibration produced by the hydraulic pulsations of the original impellers. CAP decided to install new, computer-designed impellers. In addition to reducing the pulsations, which in turn lowers the sound and vibration levels, the new impellers move an additional 100-plus cfs of water. While the replacement work is being performed, crews are also installing new mechanical shaft seals that will reduce maintenance problems and increase reliability. Five of the six impellers have been replaced to date, the first was replaced in 1998, and the last is scheduled to be done in Another major task that the drought turned into an operational issue in 2002 was scheduling water deliveries. This became a complicated process because customer demands for water increased, but the supply did not. Late each year CAP s customers project the amount of water they will need in the upcoming year and submit an order to CAP for its delivery. So in October, customers began placing orders for 2003, knowing that SRP had announced reduced deliveries. Once those orders are placed with CAP, CAP then draws up its operational plan. CAP employees review delivery requests, compare orders against allocations and D.2-DESCRIPTOR-01-CAP-02 DSCR03: Five of six new impellers have been installed at mark wilmer pumping plant in lake havasu D.2.MISSION-02-CAP-02 reliably, cost effectively and in an environmentally sound manner D.2-DESCRIPTOR-01-CAP DSCR04: cap is a 336-mile long system of aquaducts, tunnels, pumping plants and pipelines reaching from lake havasu to tucson. T H O U S A N D HP 824 v e r t i c a l f e e t 08 photo.id-002.cap.0002-ar >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> 09! entitlements, ensure that delivery requests comply with contract criteria and verify order preferences for those who take multiple classes of water. The operations model includes information such as how much Colorado River water CAP will be able to deliver, how customer demands compare to CAP s delivery capacity in each segment of the canal, how much water will be available for the Arizona Water Banking Authority, how much water can be stored in CAP recharge projects, and how much water will be used to fill, and later be released from, Lake Pleasant. For the first time in its history, in 2002 CAP was unable to meet its November 15th deadline to provide 2003 water projections to Bureau of Reclamation (BOR). In fact, it took 30 refinements before an acceptable Plan of Operation was submitted to BOR on December 18, Because demand for water exceeded supply, Water Operations, Planning, Aqueduct Maintenance, the pumping plants, other river operators and a wide variety of CAP customers cooperated to develop the plan. D.2-DESCRIPTOR-01-CAP-02 The reality of the drought had hit home. Being forced to reduce delivery requests because of supply issues also impacts other essential aspects of CAP s business: pumping energy, water storage in the Active Management Areas, availability of alternative water supplies and funding of certain water classes. Clearly the drought s impact on business as usual was huge. However, CAP s managers responded with strategy, flexibility, creativity and perseverance to overcome the obstacles and continue the delivery of Arizona s supply of the precious Colorado River water. DSCR05: lake pleasant is cap s storage reservoir and its water level fluctuates about 75 feet each year { MODEL FOR 2003 WAS ] UNUSUALLY CHALLENGING CREATING THE OPERATIONS

7 7.5 C A P 02 D R O U G H T & a n d d e a l i n g w i t h a b e t t e r i n f o r m e d P U B L I C Central Arizona Project (CAP) provided extra effort in working with its customers and other entities during the 2002 drought. Salt River Project (SRP), hard hit by the drought, needed more water from CAP than it normally purchases. CAP and SRP achieved a change in state law so that SRP was able to borrow 150,000 acre-feet of water from CAP with the promise that the water will be paid back at a later date, when normal runoff levels return on the Salt and Verde watersheds. Prior to the change, SRP would have had to either pay back the water within 12 months, or pay cash for it. The drought also brought home to water managers the need to find and bring into Maricopa, Pinal and Pima counties additional water supplies. To help facilitate this need, CAP led the way by forming Project Wheel 2002 to begin the process of developing a wheeling policy for non-project water. Wheeling non-project water means using CAP s aqueduct to move non-cap water from one point to another. An example of wheeling would be for the City of Phoenix to pump groundwater at McMullen Valley in the western part of the state, put the water in CAP s canal and move it to a Phoenix water treatment plant where it would be taken out of the canal, treated and delivered to customers. In a normal year, CAP takes 1.5 million acre-feet of water off the Colorado River. However, it s estimated the system can safely transport up to 1.8 million acre-feet each year on an on-going basis. Project Wheel was established to make recommendations about how that approximately 300,000 acre-feet of additional capacity should be used. The year-long effort involved CAP employees, customers, water experts, state employees and interested citizens. Together this diverse group helped CAP to develop a broad wheeling policy that calls for the 300,000 acre-feet to be divided between municipalities, private interests and CAP. Part of the 300,000 acre-feet of extra capacity, up to one-third if needed, will be set aside to accommodate municipalities, such as Phoenix, that have rights to groundwater in rural areas and to provide for the Central Arizona Groundwater Replenishment District s needs. Part of the space, about 100,000 acre-feet, will be set aside for future use by municipalities and private companies. About 100,000 acre-feet of space will be set aside for CAP. CAP is beginning a study to see if it can acquire water rights, either groundwater or additional surface water or both. If so, CAP s annual allocation would effectively climb from 1.5 million acre-feet to 1.8 M I L L I O N A C R E - F E E T Acre FT-p-CAP TOTAL CALIFORNIA ARIZONA NEVADA 2002 CAP LOWER BASIN ALLOCATIONS-CAP D.2-GRAPHIC.REP-01-CAP-02 GRPH02: 2002 cap LOWER BASIN ALLOCATIONS 2002 CAP LOWER BASIN ALLOCATIONS-CAP CAP LOWER BASIN ALLOCATIONS-CAP CAP LOWER BASIN ALLOCATIONS-CAP-02 d D.2-DESCRIPTOR-01-CAP-02 DSCR06: THE LOWER BASIN STATES: ARIZONA, CALIFORNIA, AND NEVADA, SHARE A COMBINED ANNUAL ALLOCATION OF 7.5 MILLION ACRE-FEET. 10 s A { H2O O SRP BORROWED 150,000 ACRE- ] FEET OF WATER IN 2002 s r p D.2.MISSION-03-CAP-02 PRESERVE THE PUBLIC S TRUST AND THE LONG TERM VIABILITY OF CAP BY PROMOTING RESPONSIBLE WATER USE. D.2-DESCRIPTOR-01-CAP-02 DSCR07: TWO VIEWS OF THE INTERCONNECT BETWEEN CAP AND SRP. THIS IS WHERE SRP TAKES DELIVERY OF CAP WATER. DUE TO THE DROUGHT, SRP ANNOUNCED IT WAS REDUCING ALL 2003 WATER DELIVERIES TO ITS CUSTOMERS BY ONE-THIRD D.2-DESCRIPTOR-01-CAP-02 DSCR06: cooperation between cap and srp meant most valley residents were unaware of the full extent of the drought.

8 million acre-feet. CAP will work with the Arizona Department of Water Resources to develop an appropriate method of allocating the additional water supplies. The current drought underscores the strategic importance of CAP s long term commitment to recharging the state s over-stressed aquifers with excess Colorado River water. Any unused or excess CAP water is stored underground at CAP s recharge projects, sort of a water savings account that can be accessed to supplant our customer s needs during future droughts. Arizona was fortunate that it did not have to recover recharged water to offset the 2002 drought. CAP stored more than 100,000 acre-feet of water in Pima and Maricopa counties during But the severity of the drought means that there may be less water available in 2003 for recharge. However, CAP and its managers continue to plan for the future by maintaining current sites and searching for new ones that can be used to store excess water that will become available when the drought is over. Between 1996 and 2002, CAP developed more than 200,000 acre-feet of annual recharge capacity in five separate recharge projects. Three are in Pima County: the Avra Valley, Lower Santa Cruz and Pima Mine Road recharge projects. Two others are in Maricopa County: the Agua Fria and the Hieroglyphic Mountains recharge projects. Hieroglyphic Mountains began operation in January In 2001, CAP initiated development of a sixth recharge site. It purchased 500 acres of land for the Tonopah Desert Recharge Project which is in the upper Hassayampa groundwater basin west of the Phoenix metro area. It is projected that it will store 100,000 acre-feet of water each year. Preliminary designs and permits should be ready by the summer of 2003 and construction is projected to begin in Two more potential recharge sites in the eastern Salt River Valley were identified and feasibility studies were started in One is near Queen Creek and the second is north of that location. The studies will continue in 2003 and, if the sites are favorable, the projects will begin development in 2004 with a projected operational date of Still another potential recharge site is located in the Bouse area in far Western Arizona. This site could be used for interstate water banking, where Arizona would store water for Nevada and possibly California to be withdrawn at a later date. Development of this site would also allow Arizona to capture future surplus flows of the Colorado River that would otherwise flow unused into the Gulf of California. Drought has delayed the urgency to develop this site but it is estimated that when operations begin, its added capacity will increase total CAP recharge capacity to 400,000 acre-feet. 200,000 D.2-DESCRIPTOR-01-CAP-02 DSCR08: BLUEPRINT OF CAP S HIEROGLYPHIC MOUNTAINS RECHARGE PROJECT IN THE WEST VALLEY D.2-DESCRIPTOR-01-CAP-02 DSCR09: THE HIEROGLYPHIC MOUNTAINS RECHARGE PROJECT BECaME A REALITY BY YEAR S END. In addition to the recharge sites planned or under construction, CAP may need to build still other recharge projects in the future to accommodate the needs of the Central Arizona Groundwater Replenishment District (CAGRD). In addition to their groundwater and surface water supplies, some cities also depend upon CAGRD to meet the demands of continued growth. CAGRD provides a mechanism for developers and water providers to demonstrate a 100-year assured water supply using renewable water supplies rather than relying on mined groundwater. CAGRD enrolls members who do not have the resources to locate and secure enough renewable water supplies on their own. CAGRD replenishes groundwater on behalf of its members by recharging water in the Active Management Area where the excess pumping occurs. Members are classified as member service areas such as cities, towns and private water utilities, and member lands, which primarily include subdivisions located outside city water service area boundaries. By the end of 2002, CAGRD member land enrollment exceeded 100,000 homes. In addition, 19 water providers have enrolled their service areas as members of the CAGRD. As the CAGRD continues to grow it is going to demand more and more replenishment or recharge capacity. It s possible that CAGRD s needs will exceed the capacity available in the currently existing recharge projects. If so, CAP will need to develop recharge projects specifically for the CAGRD in the future. Two other recharge customers, municipalities and the Arizona Water Banking Authority (AWBA), also contribute to the need for new sites. The AWBA purchases excess CAP water and stores it in recharge sites for future use. In 2002 it stored more than 300,000 acre-feet of water but the drought and the state s budget crisis will reduce AWBA storage in 2003 to an estimated 170,000 acre-feet of water. Municipalities also are beginning to step forward in an effort to acquire capacity in CAP recharge sites. In 2002 the City of Peoria began discussions with CAP to purchase capacity in the Agua Fria Recharge Project and the Hieroglyphic Mountains Recharge Project. CAP also has existing partnerships with the City of Tucson at the Pima Mine Road Recharge Project and with Pima County at the Lower Santa Cruz Recharge Project. Project Wheel 2002 was not the only outreach program in CAP has established a history of being a good corporate citizen and 2002 was no different as CAP involved many people, organizations and agencies in activities throughout the year

9 HERE ARE SOME OF THE MANY GROUPS SPONSORED IN PART BY CAP S COMMUNITY INVESTMENT PROGRAM. D.2-DESCRIPTOR-01-CAP-02 DSCR10: Arizona State Envirothon in Phoenix to provide water education to high school students. D.2-DESCRIPTOR-01-CAP-02 DSCR11: D.2-DESCRIPTOR-01-CAP-02 0k{ DSCR12: Hohokam Resource Conservation and Development Area, Inc. in Higley for a water station at the Maricopa Agricultural Center. The Water Resource Research Center at the University of Arizona for the Project WET Facilitator Workshop. d e p t h d e p t h 400 M- { 300 M- D.2.MISSION-01-CAP-02 EFFECTIVELY MANAGING ITS HUMAN, FINANCIAL AND CAPITAL RESOURCES. A nearly universal concern of water resource management organizations is finding, training and retaining people to lead the organizations in the future. CAP responded to this need in 2002 by beginning its Water Leadership Program in Tucson. The purpose of the program is to increase awareness among the region s future community leaders about the importance of prudent water resource management. In a structured, three-evening session workshop, participants learned how Arizona obtains, uses and manages its water supplies as well as how future regional growth may be shaped by water management policies. Participants met others interested in managing and preserving water resources in the Tucson basin, engaged in dialogue with CAP Board members about local and state water law, learned about the organization s history and mission and heard an overview of water supply issues and organizations in Pima County. They identified current and future water-related issues facing the state and left with a general understanding of the importance of water resource planning and management. CAP intends to offer this free program to the public biannually. CAP s Community Investment Program also touched many residents. Now in its sixth year, the program strengthens business relationships, answers community needs and reinforces lasting commitments to the people and communities that CAP serves. CAP primarily contributes to organizations within its three-county service area which are involved in water education issues and environmental projects that support CAP s efforts. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> CAP also sponsors educational programs that are correlated to Arizona State Education standards for >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> teachers and students of all grade levels free of charge. In 2002, CAP updated the materials including a >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> 6-lesson teacher s guide, 30-minute video, computer game and state water map for Arizona Water Story, >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> an award-winning program for grades 4-8. CAP also unveiled a new program designed for students of K-3 >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> grades called H2O for Kids. This program contains a 7-minute video, student activity books, and a >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> teacher s guide complete with two lesson plans which focus on the history of water in the state and >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>>>>>>>>>>> water conservation. Another important educational tool CAP began distributing is a CD-ROM which contains information about CAP s history, mission, and system operations and features video-based virtual tours of the Mark Wilmer Pumping Plant, Control Center, New Waddell Dam and the Lower Santa Cruz Recharge Project. CAP will continue these efforts and activities throughout 2003 and continue to search for other ways to reach out to all Arizona residents and provide water surety for its service area. D.2-DESCRIPTOR-01-CAP-02 DSCR13: Abracadabra, water conservation magic shows for children at the Phoenix Zoo d e p t h { 500 M-

10 o D R O U G H T C A P 02 T H E R I V E R D O T R The continuing drought in 2002 highlighted the critical importance of 5. Colorado River water to Central Arizona Project (CAP) and Arizona. Throughout the year CAP steadfastly focused on safeguarding Arizona s allocation as California struggled internally to reach an agreement over its chronic overuse of Colorado River water. In 1921 Congress authorized the seven basin states to enter into a Colorado River Compact. The Compact divided the seven member states Arizona, California, Nevada, Colorado, Utah, New Mexico and Wyoming into the Upper Basin and Lower Basin with each Basin getting half of the estimated 15 million acre-feet of water per year. Arizona, California and Nevada were designated as the Lower Basin states. In 1928, the Boulder Canyon Project Act authorized construction of Boulder (now Hoover) Dam and divided the Lower Basin s annual 7.5 million acre-feet of water. California was allocated 4.4 million acre-feet per year, Arizona received 2.8 million acre-feet and Nevada received 300,000 acre-feet. For years California took more than its 4.4 million acre-foot allotment because, prior to construction of CAP, Arizona never used its full entitlement. When CAP was declared substantially complete in 1993 and began delivering a large volume of water, it quickly became apparent that California had come to rely on an annual amount of about 5.2 million acre-feet, which is 800,000 acre-feet more than its 4.4 million acre-foot allotment. After years of negotiations, the Basin states, along with the Secretary of the Interior, developed a 15-year program to get California to wean itself from 5.2 to 4.4 million acre-feet. However, before the agreement could be signed by the seven states, four water users in California had to reach an agreement to transfer water from agricultural use to municipal use. It appeared that the four California entities Metropolitan Water District of Southern California, San Diego Water Authority, Coachella Valley Water District and Imperial Irrigation District (IID) all were in agreement. But on December 9, the IID Board rejected the agreement. In late December, Interior Secretary Gale Norton warned California that if it did not reach agreement internally and failed to sign the seven state plan, California would be held to its 4.4 million acre-foot allocation in The four agencies failed to agree and on January 2, 2003, Secretary Norton ordered California to adhere to its 4.4 million acre-foot allocation. Internal negotiations have since resumed in California. CAP and other Arizona water leaders monitored the dispute closely. California s failure to reach an agreement does not harm Arizona, however, it does leave some Colorado River water issues unresolved and affects n 2 D.2-DESCRIPTOR-01-CAP-02 DSCR14: an unusual view view of arizona, you can trace THE BORDER BY LOOKING AT THE COLORADO RIVER ON THE LEFT SIDE. m i l l i o n a c r e - f t D.2-DESCRIPTOR-01-CAP million acre-foot DSCR15: INTERIOR SECRETARY GAIL NORTON ORDERED CALIFORNIA TO ADHERE TO ITS 4.4 MILLION ACRE-FEET ALLOCATION IN A C R E - F E E T 8,433,500 Acre FT-p-CAP-02 5,327,500 2,788, ,900 CA USg-p-CAP-02 AZ USg-p-CAP-02 NV USg-p-CAP-02 TOTAL CALIFORNIA ARIZONA NEVADA D.2-GRAPHIC.REP-01-CAP COLORADO RIVER WATER H2O USE FOR THE LOWER BASIN-CAP-02 GRPH03: 2002 colorado RIVER WATER USE FOR THE LOWER BASIN 2002 COLORADO RIVER WATER H2O USE FOR THE LOWER BASIN-CAP-02 Note: This tabulation is based on diversions including 2002 COLORADO RIVER WATER H2O USE FOR THE LOWER BASIN-CAP-02 underground pumping, less measured return flow and less current estimated unmeasured return 2002 flow COLORADO to the river. RIVER WATER H2O USE FOR THE LOWER BASIN-CAP D.2-DESCRIPTOR-01-CAP-02 DSCR16: HEADWATERS OF THE COLORADO RIVER, WHICH PROVIDES WATER TO MORE THAN 25 MILLION PEOPLE IN THE SOUTHWEST. D.2-DESCRIPTOR-01-CAP-02 COLORADO RIVER

11 811,784 D.2-DESCRIPTOR-01-CAP-02 A C R E - F E E T F I N A N C I A L S TAT E M E N T S A N D O T H E R F I N A N C I A L I N F O R M A T I O N Central Arizona Water Conservation District December 31, DSCR17: CAP STORES COLORADO RIVER WATER IN LAKE PLEASANT WHICH HAS A MAXIMUM STORAGE CAPACITY OF 811,784 ACRE-FEET OF WATER. ONE ACRE-FOOT IS 325,851 GALLONS OF WATER. $ C O N T E N T S cooperation efforts among the water users along the river. The drought also had an impact on the Colorado River. The dry conditions were not restricted to Arizona but were evident throughout the West. The amount of water that flowed in the Colorado River during 2002 was the lowest on record. However, the approximately 25 million people in the Southwest who depend on the Colorado River for water were not impacted because two reservoirs Lake Mead and Lake Powell had enough water in storage to offset the low flows. The Colorado River system is designed to withstand drought. Just as CAP is Arizona s drought defense, Lake Mead and Lake Powell are the Lower Basin s drought defense. The lack of rain and runoff were easily made up by releases from the two impoundments. While the drop in the level of each lake was significant the bathtub rings are clear evidence of the drought the remaining volumes in each lake are such that the region can withstand continued drought in So, given the foresight and planning of Arizona s water managers, both CAP and Arizona were able to withstand the dry, often brutal drought conditions of Although no one is sure if normal weather patterns will resume in 2003, CAP stands ready to safeguard Arizona s share of Colorado River water and is prepared to bring the needed water into the state. CMANAGEMENT S DISCUSSION AND ANALYSIS REPORT OF INDEPENDENT AUDITORS AUDITED FINANCIAL STATEMENTS STATEMENTS OF NET ASSETS STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS STATEMENTS OF CASH FLOWS OTHER FINANCIAL INFORMATION STATEMENT OF NET ASSETS BY FUND 57 CAP will continue its role as Arizona s drought defense. STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS BY FUND SCHEDULE OF SERIES A 1990, SERIES A 1993 AND SERIES A 2001 BOND FUND ACTIVITY SCHEDULE OF SERIES B 1991, SERIES B 1994 AND SERIES B 2001 BOND FUND ACTIVITY STATISTICAL SECTION SCHEDULE OF AD VALOREM PROPERTY TAX FULL CASH VALUE AND ASSESSED VALUE SCHEDULE OF AD VALOREM PROPERTY TAX TAX LEVY AND COLLECTIONS SCHEDULE OF CUSTOMER ACTIVITY WATER O&M CHARGES AND CAPITAL CHARGES 63 64

12 20 21 C ENTRAL A RIZONA W A TER C ONSERVATION D ISTRICT M ANAGEMENT S D ISCUSSION AND A NALYSIS F OR THE Y EAR E NDED D ECEMBER 31, 2002 The following is management s discussion and analysis of the 2002 financial performance of the Central Arizona Water Conservation District (District). It provides an overview of the District s financial activities and financial position for the year and should be read in conjunction with the District s financial statements and accompanying notes. DISCUSSION OF BASIC FINANCIAL STATEMENTS The District s annual financial reporting includes three basic financial statements and accompanying notes for an enterprise fund. The District reports on a calendar year basis and all financial statements are presented on a comparative basis for 2002 and 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 longterm 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 Financial Statements and Management s Discussion and Analysis for State and Local Governments. Under enterprise fund accounting, the District is a single accounting entity for financial reporting purposes. However, within this single accounting entity the District has identified a number of financial activities that it wishes to track separately, referred to as funds. These funds are as follows: General Fund, Central Arizona Groundwater Replenishment District (CAGRD) Fund, State Demonstration Projects Fund, Ak-Chin Fund, and several Bond Funds. The use of the term fund for these separate activities does not have any particular accounting significance. The District is not required to and does not publish separate financial statements for any of the individual funds, except for the consolidating statements referenced above. The General Fund represents the District s primary activity, the delivery of Colorado River water to central Arizona through the Central Arizona Project (CAP) and is, by an order of magnitude, the largest fund within the District. The CAGRD Fund represents the activities of the Central Arizona Groundwater Replenishment District. The State Demonstration Project Fund represents the activities related to the construction of State Demonstration underground water recharge projects. The Ak-Chin Fund represents the activities related to a trust fund established to acquire or conserve water to supplement Colorado River supplies. The Bond Funds represent the activities related to several revenue bond series issued by the District. Please refer to the notes to the financial statements for additional information on these funds. MANAGEMENT S DISCUSSION AND ANALYSIS CONDENSED FINANCIAL INFORMATION The following condensed financial information provides an overview of the District s financial activities for the years ended December 31, 2002 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. For 2002, the permanent service right (net) decreased from $1.56 billion to $1.52 billion. The permanent service right represents the District s right to operate the Central Arizona Project system and collect revenues from operations, for which the District has incurred a repayment obligation to the United States. While property and equipment assets grow annually as a result of ongoing capital projects, such additions are presently more than offset by amortization of the permanent service right, which is approximately $30 million to $31 million per year. As a result, net capital assets tend to decrease each year. (Dollars in Millions) Change Capital Assets: Permanent service right, net $ 1,520.6 $ 1,555.3 $ (34.7) Property and equipment, net Other Assets: Cash and Investments (0.6) Repayment Credit (11.9) Other Total Assets: $ 1,894.0 $ 1,926.0 $ (32.0) Other Assets: Other asset categories include cash, receivables and other current assets, restricted and unrestricted reserves and investments, and funds held by or advanced to the federal government. The net decrease of $32 million or 2 percent is primarily associated with a reduction of $34.7 million in the permanent service right and a $11.9 million reduction in the repayment credit. Approximately $30 million of the decline in the permanent service right was due to the annual amortization. The balance was a result of the amendment of the settlement Stipulation, which is discussed in Note 3. The repayment credit resulted from the settlement Stipulation, which is discussed in Note 3 of the Financial Statements, and will be used to offset the amount needed to meet the District s annual repayment obligation. This credit will be exhausted in Total Liabilities Long-Term Liabilities: The two largest components of the District s long-term liabilities are the federal repayment obligation and the contract revenue bonds. The long-term federal repayment obligation decreased from $1.51 billion in 2001 to $1.48 billion in Approximately $20 million of the decline in the repayment obligation was due to the scheduled payment for 2002 and offsets of the repayment credit receivable. The balance was the result of the amendment of the settlement Stipulation. In addition, contract revenue bonds decreased $17.5 million. Generally, long-term liabilities will decrease each year as the repayment obligation and revenue bonds are paid off.

13 22 23 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 $3.9 million for The OM&R obligation decreased $3.6 million and represented the rebate liability owed to subcontract and Federal customers associated with the difference between the reconciled water rates and the set rates. (Dollars in Millions) Change Long-Term Liabilities: Repayment obligation $ 1,482.3 $ 1,505.7 $ 23.4 Contract revenue bonds Other Other Liabilities: OM&R reconciliation provision Other ( 0.3 ) Total liabilities $ 1,742.8 $ 1,783.0 $ 40.2 Total Net Assets Net assets, the difference between assets and liabilities, increased 6 percent or $8 million from In comparison, net assets for 2001 decreased 8 percent or $12 million from (Dollars in Millions) Change Assets Capital assets, net $ 1,559.3 $ 1,587.0 $ (27.7) (2%) Other assets (4.3) (1%) Total assets 1, ,926.0 (32.0) (2%) Liabilities Long-term liabilities 1, ,675.7 (36.3) (2%) Other liabilities (3.9) (4%) Total liabilities 1, ,783.0 (40.2) (2%) Net Assets Investments in capital assets, net of debt (99.5) (108.8) 9.3 9% Restricted (5.1) (8%) Unrestricted % Total net assets % Total liabilities and net assets $ 1,894.0 $ 1,926.0 $ (32.0) (2%) ( ) ( ) ( ) ( ) Investments in capital assets, net of related debt, increased 9 percent or $9.3 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 $16 million of the increase in investments in capital assets (net). As discussed in Note 10 of the Financial Statements, the contract revenue bonds will be paid off in Also, property and equipment (net) increased about $7 million in Offsetting these increases is a decrease in the net investment in the permanent service right. Currently, amounts associated with the amortization of the permanent service right (asset) exceed the District s annual principal 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 decreased 8 percent or $5.1 million. The majority of the decrease is related to additional spending of $10 million to construct state demonstration projects. Offsetting this decrease is an increase of $4 million to fund the repayment and emergency OM&R reserve funds required under the terms of the Master Repayment Agreement and discussed in Note 7 of the Financial Statements, and $1 million for several other items, the largest of which is accrued interest payable. Unrestricted net assets increased 2 percent or $4.0 million primarily due to additional revenue from the use of CAP transmission lines by other entities for the period 1996 to The change in restricted and unrestricted net assets will fluctuate depending on operational needs and any actions that may result from the District s reserve study. Total Revenues The District s principal sources of revenues are water delivery charges, water service capital charges, power sales, property taxes, and interest earnings. Total revenues for 2002 increased $21.6 million or 12 percent from 2001 to $206.8 million, primarily due to increased water deliveries, which had a favorable effect on water O&M charges and water service capital charges, and other Basin Development Fund revenues associated with other entities use of CAP transmission lines from 1996 to Offsetting these increases was a decrease in interest earnings due to a decline in interest rates. (Dollars in Millions) Change Operating revenues $ $ $ 23.2 Nonoperating revenues (1.6) Total revenues $ $ $ 21.6

14 24 25 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 74 WATER Total Expenses CAPITAL CHARGES 27 POWER TAXES INTEREST OTHER Total expenses for 2002 exceeded 2001 by $1.5 million as shown below. This increase is a result of greater spending on capital projects, which caused depreciation expense to increase. In addition, transmission charges increased to support the additional transmission capacity required on the Parker-Davis and Intertie transmission systems to provide additional capacity needed by the new impellers at Mark Wilmer Pumping Plant. Offsetting these increases is a decrease in pumping power costs primarily caused by lower over-threshold energy costs due to purchasing energy on the open market as opposed to utilizing the Salt River Project (SRP) contractual agreement. 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 has completed a reserve study, which is used to forecast future repairs and replacements to assist the District in setting appropriate reserve targets and strategies and then to set rates that accomplish those targets and strategies. (Dollars in Millions) SALARIES POWER PSR AMORT INTEREST OTHER Change Operating expenses $ $ $ 1.4 Nonoperating expenses Total expenses $ $ $ Change In Net Assets and Ending Net Assets As shown below, the increase in net assets for 2002 was $8.1 million, which is $20.1 million higher than 2001 primarily due to higher revenues in (Dollars in Millions) Change Total operating revenues $ $ $ 23.2 Total operating expenses (150.0) (148.6) (1.4) Operating income (loss) 17.8 (4.0) 21.8 Nonoperating revenues (expenses) (9.7) (8.0) (1.7) Change in net assets 8.1 (12.0) 20.1 Beginning net assets (12.0) Ending net assets $ $ $ 8.1 ANALYSIS OF OVERALL FINANCIAL POSITION AND RESULTS OF OPERATIONS CURRENTLY KNOWN FACTS, DECISIONS OR CONDITIONS THAT ARE EXPECTED TO HAVE A SIGNIFICANT EFFECT ON FINANCIAL POSITION The overall financial position of the District continues to be strong. The District has General Fund cash reserves of over $200 million, which represents in excess of one year s cash expenditures including operating expenses, capital projects and federal debt service (the Bond Funds have their own restricted reserves as required by the applicable Indentures). The restricted portion of the General Fund cash reserves, approximately $44 million, is required under the District s Master Repayment Agreement (see Note 3 of the Financial Statements). The balance of the General Fund cash reserves has accumulated over the years, funded primarily through property tax collections and interest earnings in excess of operating cost subsidies required for rates that are set lower than cost by District policy. The cash reserves serve several purposes. First, there is a great deal of seasonality in the District s cash flow. The annual installment on the repayment obligation to the United States occurs each January 15, and usually involves a substantial cash payment. Timing of electricity purchases is another consideration, since most of the diversions from the Colorado River take place from late fall to early spring as Lake Pleasant is filled. During the summer, the lake is drawn down. The District s 1994 power sales contract with SRP (see Note 4 of the Financial Statements) specifies a threshold level of electricity that can be purchased essentially at cost. At current water delivery levels, the threshold purchases are exhausted in the late third quarter of each year, requiring the District to purchase power on either the open market or through the SRP contractual agreement, both of which are more expensive. The combination of the timing impacts of water diversions and electricity prices has the net effect of concentrating over one-half of the District s electricity costs into a few months in the winter and early spring. Property tax and water service capital charge revenues are received primarily in two semi-annual installments in the spring and the winter. The combination of all of the seasonal effects results in the reserve levels fluctuating up to $40 million between the high point at the end of the year and the low point in April prior to receipt of the first installment of property taxes and capital charges. Cash reserves also serve as a hedge against operating uncertainties, which include changes in water demand, electricity costs and water supply.

15 26 27 MANAGEMENT S DISCUSSION AND ANALYSIS MANAGEMENT S DISCUSSION AND ANALYSIS In addition, cash reserves also serve as a source of funds for capital projects and other project spending. The District recovers a portion of its ongoing capital expenditures through rates, since depreciation is included as a recoverable cost. Beginning in 2002, the District has included a $2 an acre-foot charge in the fixed OM&R rate component as a contribution towards ongoing replacements. In 2004, this component increases to $4 an acre-foot. The balance of capital spending is funded through property tax revenues and interest income. As the CAP ages there may be capital spending for major repairs, replacements or refurbishment that are not entirely predictable. Finally, reserves are a hedge against strategic uncertainties. The installation of scrubbers at the Navajo Generating Station (NGS) has enabled the plant to emit less sulfur dioxide (SO 2 ). As a result, the plant receives SO 2 allowances from the Environmental Protection Agency, which may be marketed to others. In 2002, the District entered into an agreement with the federal government to allow the District to market these credits and use the net proceeds to reduce the CAP pumping energy charges for federal, M&I, and agricultural water users (energy rate 1). Total credits available for sale are estimated at 505,800 credits, are from vintage years 2000 to 2032, and can be sold in advance of the actual vintage year. By decoupling the application of these proceeds from the actual sale of the credits, the District is able to stabilize the impact of OM&R reconciliations to federal and subcontract customers. Results of operations may be evaluated by both analyzing the change in net assets versus expectations and the change in General Fund cash reserve levels. The consolidated change in net assets may be difficult to assess, since it includes the Bond Funds (which should typically experience an increase in net assets because revenues are sufficient to cover both interest expense and principal payments) and the State Demonstration Project fund (which should typically experience a decrease in net assets, since the tax proceeds collected in earlier years that are now being spent have already been recorded as non-exchange transaction revenues). The General Fund in the near future can usually be expected to experience a decrease in net assets, due to timing differences between the effectively straight-line amortization of the permanent service right and the associated debt service. Until 2003, the policy of the District s Board of Directors was to set rates in such a way that cash reserves could be maintained at relatively the same level (around $200 million), until such time as uncertainties associated with the settlement Stipulation were resolved or the reserve strategy was modified. As discussed in Note 3, the District and the United States have agreed to extend the settlement Stipulation and this extension is expected to be in place until This extension will provide the certainty needed to implement rate strategies that will enable the District to meet new reserve targets. The new targets were developed to trend reserves down to between $160 to $165 million to ensure sufficient reserves exist to provide working capital, maintain master contract reserves, and provide for at least two years of capital spending. To implement the new reserve targets, the District reduced capital charges the second half of 2003 from $43 to $37 an acre-foot and adopted the preliminary 2004 rates, which will reduce the capital charge to $32 an acre-foot and the ad valorem tax to $0.08 per $100 of assessed valuation from $0.09 per $100 of assessed valuation. Final 2004 rates will be adopted in June The extension of the settlement Stipulation will lower the District s financial risk and correspondingly enable the District to revise its reserve policy to trend reserves down slowly. The District s Board and management considers this to be a prudent financial strategy ended with cash reserves of $213 million, which are anticipated to trend downward to $200 million over the next two years. CAPITAL ASSET AND LONG-TERM DEBT ACTIVITY Capital Assets: At December 31, 2002, the District had a net investment of $1.56 billion in capital assets. This amount represents a net decrease (including additions and deductions) of $28 million, or 2 percent from the prior year as follows. SCHEDULE OF CAPITAL ASSETS (Net of Depreciation and Amortization) (Dollars in Millions) Change Permanent service right $ 1,520.6 $ 1,555.0 $ (34.4) Other capital assets Land Construction in progress Capital equipment Structures and improvements Total other capital assets Total capital assets $ 1,559.4 $ 1,587.0 $ (27.6) More information about the District s capital assets is provided in Note 2 of the Financial Statements. Long-Term Debt: As of December 31, 2002, the District s long-term debt decreased $37 million from the prior year as follows. SCHEDULE OF LONG-TERM DEBT (Including Current Portion) (Dollars in Millions) Change Repayment obligation $ 1,504.6 $ 1,526.0 $ (21.4) Reneue bonds (16.2) Total long-term debt $ 1,659.6 $ 1,697.2 $ (37.6) More information about the District s repayment obligation is provided in Note 3 of the Financial Statements. Note 10 of the Financial Statements contains additional information on the District s revenue bonds. CONTACTING THE DISTRICT S FINANCIAL MANAGEMENT The information contained in the Management s Discussion and Analysis is intended to give our customers, taxpayers, and bond holders a general overview of the District s finances, issues that impact the District s financial position, and accountability for the money it receives. If you have questions about the report or need additional financial information, contact Theodore C. Cooke, Assistant General Manager of Finance at: Post Office Box Phoenix, Arizona tcooke@cap-az.com

16 28 29 R E P O R T O F I N D E P E N D E N T A U D I T O R S S T A T E M E N T S O F N E T A S S E T S The Board of Directors Central Arizona Water Conservation District DECEMBER We have audited the accompanying statements of net assets of Central Arizona Water Conservation District as of December 31, 2002 and 2001, and the related statements of revenues, expenses and changes in net assets, and cash flows for the years then ended. These financial statements are the responsibility of the District s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Central Arizona Water Conservation District at December 31, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Our audits were conducted for the purpose of forming an opinion on the basic financial statements of the Central Arizona Water Conservation District as of and for the years ended December 31, 2002 and 2001, taken as a whole. The other financial information on pages is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Management s discussion and analysis on pages 1 to 8 is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. The statistical section on pages 51 to 60 has not been subjected to the procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. M a r c h 0 7, ASSETS Current assets: (In thousands) Cash $ ( 571 ) $ 152 Investment in Arizona Local Government Investment Pools 57,610 2,586 Total cash and cash equivalents 57,039 2,738 Receivables: Accrued interest receivable on unrestricted investments 1,487 1,731 Due from water customers, less allowance for doubtful accounts of $2,324 and $2,007 at December 31, 2002 and 2001, respectively 7,195 3,239 Other 2, Repayment credit (Note 3) 1,005 12,865 Materials and supplies inventory 3,891 3,497 Water inventory 13,744 14,868 Other 3,352 4,165 Total current assets 90,264 43,416 Noncurrent assets: Funds held by federal government 36,633 32,559 Investment in State Treasurer CAP investment pool (Note 6) 111, ,602 Restricted assets (Note 7) 94, ,593 Advances to federal government (Note 8) Property and equipment, less accumulated depreciation of $23,713 and $18,545 at December 31, 2002 and 2001, respectively 38,735 32,011 Permanent service right, less accumulated amortization of $268,990 and $239,390 at December 31, 2002 and 2001, respectively 1,520,636 1,555,307 Bond issuance costs, net of accumulated amortization of $2,339 and $1,954 at December 31, 2002 and 2001, respectively 772 1,145 Total noncurrent assets 1,803,706 1,882,595 Total assets $ 1,893,970 $ 1,926,011 See accompanying notes.

17 30 31 S T A T E M E N T S O F N E T A S S E T S C O N T I N U E D STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS DECEMBER YEAR ENDED DECEMBER LIABILITIES (In thousands) Current liabilities: Accounts payable $ 19,089 $ 21,748 Accrued payroll, payroll taxes and other accrued expenses 5,020 5,044 Current liabilities payable from restricted assets, advances to federal government, and other noncurrent assets: Accrued interest payable 36,772 37,721 Repayment obligation, due within one year (Note 3) 22,310 20,272 Contract revenue bonds, due within one year (Note 10) 20,235 18,915 OM&R reconciliation obligations (Note 14) 3,618 Total current liabilities 103, ,318 Noncurrent liabilities: Repayment obligation, due after one year (Note 3) 1,482,285 1,505,741 Contract revenue bonds, due after one year, net of unamortized discounts of $10,966 and $13,680 at December 31, 2002 and 2001, respectively (Note 10) 134, ,331 Provision for retiree health insurance Water operations and capital charges deferred revenue 22,152 17,306 Total noncurrent liabilities 1,639,413 1,675,678 Total liabilities 1,742,839 1,782,996 NET ASSETS Investment in capital assets, less related debt (99,497) (108,795) Restricted 57,327 62,533 Unrestricted 193, ,277 Total net assets 151, ,015 Total liabilities and net assets $ 1,893,970 $ 1,926,011 See accompanying notes. OPERATING REVENUES (In thousands) Water operations and maintenance charges $ 73,964 $ 56,892 Water service capital charges 28,585 25,417 Power and Basin Fund revenues (Note 5) 61,333 56,747 Reimbursements and other operating revenues 3,914 5,561 Total operating revenues 167, ,617 OPERATING EXPENSES Salaries and related costs 32,257 30,908 Pumping power 56,926 58,559 Power transmission 2,701 1,601 Hoover capacity charges 1,618 2,785 Amortization of permanent service right 30,437 30,538 Depreciation 6,266 4,315 Provision for OM&R reconciliation (Note 14) Provision for doubtful accounts Other operating expenses 19,426 19,493 Total operating expenses 149, ,641 Operating income (loss) 17,819 4,024 ( ) NONOPERATING REVENUES (EXPENSES) Property taxes, less assignment to Arizona Water Banking Authority of $12,051 and $10,691 in 2002 and 2001, respectively 27,113 24,152 Interest income and other nonoperating revenues 11,344 15,201 Interest income reserved for Ak-Chin fund Interest income and other nonoperating revenues reserved for State Demonstration Project Interest expense and other nonoperating expenses ( 48,736) 48,553 Total nonoperating revenues (expenses) 9,703 7,991 Change in net assets 8,116 12,015 Net assets at beginning of year 143, ,030 Net assets at end of year $ 151,131 $ 143,015 ( ) ( ) ( ) ( ) See accompanying notes.

18 32 33 STATEMENTS OF CASH FLOWS D E C E M B E R 3 1, YEAR ENDED DECEMBER (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $ 101,151 $ 75,050 Cash received from power sales 57,259 50,867 Cash paid to employees (32,281) (30,343) Cash paid to suppliers (81,922) (79,629) Net cash provided by operating activities 44,207 15,945 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Cash received from property taxes, net 27,113 24,152 Net cash provided by noncapital financing activities 27,113 24,152 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Payments on contract revenue bonds, including interest and other expenses (27,424) (30,871) Payments on repayment obligation, including interest (57,783) (57,277) Additions to property and equipment (12,990) (13,134) Decrease in Repayment Credit 11,860 22,719 Increase/(Decrease) in advances to federal government (330) 5,552 Decrease in permanent service right 4,235 Net cash used in capital and related financing activities (82,432) (73,011) CASH FLOWS FROM INVESTING ACTIVITIES (Increase)/Decrease in restricted assets 5,817 (1,463) Decrease in investment in state pool 49,156 12,360 Interest on investments 10,439 18,821 Net cash provided by investing activities 65,412 29,718 Net Increase/(Decrease) in cash and cash equivalents 54,301 (3,196) Cash and cash equivalents at beginning of year 2,738 5,934 Cash and cash equivalents at end of year $ 57,039 $ 2,738 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income (loss) $ 17,819 (4,024) Adjustments to reconcile operating income (loss) to net cash used in operating activities: Amortization of permanent service right 30,437 30,538 Depreciation 6,266 4,315 Provision for doubtful accounts Changes in operating assets and liabilities: Due from water customers (4,689) (1,511) Due from other receivables (1,823) 356 Materials and supplies Inventory (394) (558) Water Inventory 1,124 (2,221) Other 813 (3,247) Funds held by federal government, net (4,074) (5,880) Accounts payable (2,659) 8,847 Increase in deferred revenue 4,846 1,261 OM&R reconciliation obligation (3,618) (12,622) Accrued payroll, payroll taxes and other accrued expenses (24) 565 Accrued pension (135) (12) Net cash provided by operating activities $ 44,207 $ 15, N o ORGANIZATION AND REPORTING ENTITY The Central Arizona Water Conservation District (District) is a multi-county water conservation district organized within the state of Arizona encompassing Maricopa, Pima, and Pinal counties. The District s popularly elected Board of Directors serves as its governing body. Under the requirements of Governmental Accounting Standards Board (GASB) Statement No. 14, The Financial Reporting Entity, the District is a primary government. The District was authorized in 1971 by the Arizona State Legislature for the primary purpose of creating a single entity to enter into an agreement (Note 3) with the United States Department of the Interior, Bureau of Reclamation (Reclamation), for repayment of the reimbursable cost of the Central Arizona Project (CAP). The District is further empowered to serve as the operating agent of the CAP (see Note 15). In 1993, the State legislature gave the District additional authority to provide replenishment services within the District s three-county service area. This authority is commonly referred to as the Central Arizona Groundwater Replenishment District (CAGRD). The CAGRD began enrolling members in 1995, and as of December 31, 2002, there were 433 member lands (individual subdivisions) and 19 member service areas. The CAGRD is responsible for using renewable water supplies to replenish (or recharge) excess groundwater used by its members. All costs of the CAGRD are to be paid by its members through assessments based on replenishment services provided. Through 2002, the CAGRD s total net replenishment obligation was approximately 20,875 acre-feet. The CAP is a multi-purpose water resource project authorized by the Congress of the United States in 1968 by the Colorado River Basin Project Act and was constructed by Reclamation. The CAP is intended to deliver an average of approximately 1.5 million acre-feet of Arizona s annual share of Colorado River water to central and southern Arizona, which will partially replace existing groundwater uses and supplement surface water supplies. It also provides flood control, power, recreation, and fish and wildlife benefits. The major authorized project features include (1) a 335-mile aqueduct system (water supply system), (2) New Waddell and Modified Roosevelt Dams (regulatory storage facilities), (3) replacement features or programs for Cliff Dam (Cliff Dam Alternative), (4) Hooker Dam or suitable alternative (Hooker Dam Alternative), (5) Buttes Dam, (6) Navajo Power Project (Navajo), and (7) Indian and non-indian water distribution systems. The District has the authority to levy ad valorem taxes against all taxable property within its boundaries. The first ad valorem tax, which may not exceed 10 cents per $100 of assessed valuation, is for the District s operations and repayment of the 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, June 30, 2002 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, 2002 and June 30, 2003, and proceeds have been transferred to the Arizona Water Banking Authority (see Note 7). The respective counties collect property taxes on behalf of the District. See accompanying notes.

19 N o SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The accounting policies of the District conform to generally accepted accounting principles as applicable to an enterprise fund of a governmental unit. Accordingly, the accrual basis of accounting is utilized, whereby revenues are recorded when they are earned, and expenses are recorded when the liability is incurred. The District has elected, in accordance with GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Activities That Use Proprietary Fund Accounting, and GASB Statement No. 29, The Use of Not-for-Profit Accounting and Financial Reporting Principles by Governmental Entities, not to apply Financial Accounting Standards Board Statements and Interpretations issued after November 30, The District elected to implement GASB Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Government, as well as GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions,in The District s books and records include separate accounts and projects that are described as funds : a general fund, Ak-Chin fund, State Demonstration Project fund, CAGRD fund, and debt service funds. These funds have been combined in the accompanying financial statements. All material interfund transactions have been eliminated. Use of Estimates The preparation of financial statements that conform to generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. See also Notes 3 and 11 regarding the District s repayment obligation and the settlement Stipulation. Cash and Unrestricted Investments All funds are to be invested in obligations issued or guaranteed by the United States or any of its agencies, collateralized repurchase agreements, obligations of the state and local governments, prime quality commercial paper, and other instruments as set forth in the District s enabling legislation.investments are managed by the State Treasurer and maintained in investment pools (the state of Arizona Local Government Investment Pool and the CAWCD Pools 12 and 13). The Local Government Investment Pool (LGIP) consists of investments with maturities of less than one year and, therefore, are recorded at cost. The Pools are recorded at fair value in accordance with GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools (see Note 6). Inventory Inventory is comprised of maintenance, auto, and safety supplies and was carried at the lower of cost (first-in, first-out) or market until September Effective September 2001, when the new computer system was implemented, the inventory valuation method used is average cost. The effect of this change was not material to the financial statements. Property and Equipment Property and equipment are stated at cost. Assets are depreciated on the straight-line method over the estimated useful lives of the assets ranging from five to forty years. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Permanent Service Right The District s interest in the CAP represents a permanent service right pursuant to the Master Repayment Agreement and the settlement Stipulation (Note 3). The permanent service right represents the District s right to use the CAP water delivery system for the purpose of fulfilling its responsibility of delivering water as provided in the Master Repayment Agreement and to collect revenues produced by the CAP. The District has used the repayment obligation specified in the settlement Stipulation, plus certain advances to the federal government and other adjustments, in recording the permanent service right. The cost of the permanent service right may be adjusted in the future as a result of determinations to be made as a consequence of the settlement Stipulation (see Notes 3 and 11). Although the District s interest in the CAP is reflected in the accompanying balance sheets, the United States retains a paramount right or claim in the CAP arising from the original construction and operation of the CAP as a Federal Reclamation Project. The District s right to the possession and use of, and to all revenues produced by, the CAP is evidenced by the Master Repayment Agreement, various laws, and other agreements with the United States. Legal title to the CAP will remain with the United States until otherwise provided by Congress. The District amortizes the permanent service right on the straight-line method over the estimated useful lives of the major components of the CAP, generally 100 years for the aqueduct, 30 years for the Navajo power plant and related transmission facilities, 50 years for buildings and structures, and 20 years for the pumping plant equipment. The cost of periodic maintenance is charged to operations expense and the cost of major replacements is capitalized. Bond Issuance Costs, Discounts and Premiums Bond issuance costs, discounts and premiums are deferred and amortized over the term of the related bonds on the interest method. Bond discounts and premiums are presented as a reduction or increase of the face amount of bonds payable whereas issuance costs are recorded as deferred charges. Revenue Recognition The District records revenue from the sale of water, the sale of power, the collection of property taxes and the provision of certain contract services to other outside entities. Water rates consist of a water service capital charge and an operations, maintenance and replacement (OM&R) charge (see Note 4). Generally, OM&R charges are determined by the Board of Directors after giving consideration to the amount of OM&R costs to be paid by the various subcontractors and through property taxes. Water is delivered to subcontractors and other customers based on delivery requests. Revenue from OM&R charges is recognized as it is earned and revenue from water service capital charges is recognized ratably over the period of the billing. Generally, OM&R charges for scheduled water deliveries are due in advance. Revenues from contract services and the sale of power are recorded when earned. Property taxes are recorded as revenue when received. Tax equivalency charges are recorded when received if there is no obligation to deliver any services or provision for refund.

20 36 37 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MASTER REPAYMENT AGREEMENT Statement of Cash Flows For the purpose of the statement of cash flows, investments in the state of Arizona Local Government Investment Pools are treated as cash equivalents due to their liquidity. Water Inventory Adjustment In 1998, the District adopted a new accounting policy for recording changes in the water inventory stored in Lake Pleasant. The water inventory adjustment is a means to adjust the pumping energy component of water service charges to 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 and 2002, the water inventory adjustment is valued at the threshold rate only (Note 5). It does not include surcharge rates. The District s share of Lake Pleasant storage as of December 31, 2002 and 2001 was 317,000 acre feet and 485,000 acre-feet, respectively. In 2002, the District entered into a water exchange agreement with Salt River Project that allowed for an exchange of up to 150,000 acre-feet. In 2002, the District stored about 150,000 acre-feet with Salt River Project. The water inventory adjustment represented the weighted average energy cost associated with the increase in storage level over the calendar year. Investments Investments held by governmental entities are reported at market value. At December 31, 2001, cost exceeded market value by $678,000. At December 31, 2002, cost exceeded market value by $2,417,000. Market value adjustments are included in interest income. 03 N o The Agreement Reclamation and the District entered into a contract for delivery of water and repayment of costs of the CAP in December 1972 (1972 Master Repayment Agreement). The 1972 Master Repayment Agreement implemented the Colorado River Basin Project Act of 1968 (Project Act). Among other things, Reclamation agreed in the 1972 Master Repayment Agreement to construct the CAP and the District agreed to repay: (1) the reimbursable construction costs of the CAP properly allocated to the municipal and industrial (M&I) and non-indian agricultural water supply and the commercial power functions of the CAP, (2) OM&R costs during construction properly allocated to the non-indian water supply and commercial power functions, and (3) interest during construction on costs allocated to the M&I water and the commercial power functions. An amended contract (1988 Master Repayment Agreement) was executed in December 1988, which superseded and replaced the 1972 Master Repayment Agreement. (The 1972 Master Repayment Agreement as superseded and replaced by the 1988 Master Repayment Agreement is referred to herein as the Master Repayment Agreement.) Commencement of Repayment The Master Repayment Agreement provides that the Secretary of the Interior (Secretary) shall issue notice of completion of each CAP construction stage. Reclamation notified the District that the water supply system, the first construction stage, was substantially complete on October 1, 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 Federal District Court (the Court) in Phoenix, Arizona (the Repayment Litigation). In May 2000, the District and the United States entered into a Stipulation Regarding a Stay of Litigation, Resolution of Issues During the Stay and for Ultimate Judgment upon the Satisfaction of Conditions (the Stipulation) to resolve all the issues in the Repayment Litigation. The Stipulation was approved by the Court on May 9, The ultimate effectiveness of the Stipulation is subject to a number of conditions, including settlement of certain Indian water rights claims, and will require certain State of Arizona and federal legislation. As originally filed in 2000, the Stipulation provided that if the conditions were not met by May 9, 2003, and the parties did not amend the Stipulation or extend the deadline, the Stipulation would terminate and litigation would resume. Recognizing that the conditions would not be met by the

21 38 39 MASTER REPAYMENT AGREEMENT MASTER REPAYMENT AGREEMENT original deadline, the District and the United States have agreed to amend the Stipulation (the Amended Stipulation ) to extend the deadline for satisfying the conditions in the original Stipulation for nine additional years, so that the conditions must be satisfied by May 9, If and when the Amended Stipulation is approved by the Court, as is expected, it will supercede and replace the original Stipulation. Except as noted below, all terms and conditions of the original Stipulation will remain in effect under the Amended Stipulation. Thus, the ultimate effectiveness of the Amended Stipulation, and the entry of final judgment in the Repayment Litigation in accordance with the terms of the Amended Stipulation, remain subject to the satisfaction of the conditions contained in the original Stipulation, including the settlement of certain Indian water rights claims and the passage of state and federal legislation necessary to implement those conditions. However, the Amended Stipulation affords the District and the United States an additional nine years, until May 9, 2012, to satisfy the conditions. Either party may petition the Court to terminate the Amended Stipulation and resume litigation prior to May 9, 2012, if it believes that the conditions cannot be satisfied by that date. The major issues addressed in the Amended Stipulation are described below. Repayment Obligation The original Stipulation established the District s repayment obligation for the CAP water supply system and the regulatory storage facilities at $1.65 billion, premised on a total allocation of 665,224 acre-feet of CAP water for federal use. Currently, 453,224 acre-feet of CAP water is allocated for federal use. One condition of the Stipulation is that additional CAP water be made available for federal use. The Amended Stipulation reduces the principal amount of the District s repayment obligation for the water supply system and regulatory storage facilities stages of the CAP from $1.65 billion to $1,646,462,500 in light of other agreements that would increase the amount of CAP water allocated for federal use to 667,724 acre-feet, which is 2,500 acre-feet more than was assumed when the Stipulation was originally executed. The Amended Stipulation provides that the repayment obligation is subject to further adjustment if the total amount of CAP water ultimately made available for federal use is not 667,724 acre-feet. In the Repayment Litigation, Reclamation had taken the position that the repayment ceiling in the Master Repayment Agreement on the District s repayment obligation for the water supply system and the regulatory storage facilities (Repayment Ceiling) was $2.0 billion. The District had argued that the Repayment Ceiling on these facilities was not more than $1.781 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 Amended Stipulation preserves the United States appeal rights if the Repayment Litigation resumes. The Stipulation provides that 73 percent of the District s repayment obligation will bear interest at the rate established in the Master Repayment Agreement of 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 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. However, the Amended Stipulation provides that the District s repayment obligation for the period from October 1, 1993, until the Amended Stipulation is terminated or expires will always be deemed to be 73 percent interest-bearing and 27 percent non-interestbearing regardless of any interest-bearing split that may be applicable after the Amended Stipulation is terminated or expires. Construction Deficiencies When Reclamation issued notices of completion for the water supply system and regulatory storage facilities stages of the CAP, a number of construction deficiencies remained. The Stipulation provides that the construction deficiencies will be 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 the deficiencies. Application of Development Fund Revenues The Stipulation provides that all miscellaneous revenues and net power revenues accumulating in the Lower Colorado River Basin Development Fund (Development Fund) of the United States Treasury in each year will be credited annually against the amount due from the District on its repayment obligation. In the Repayment Litigation, the United States had asserted that it was not obligated to apply Development Fund 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 established a new repayment schedule based on the revised $1.65 billion repayment obligation and reconciled the District s past payments, Development Fund credits and construction deficiency credits against that revised payment schedule. The Amended Stipulation further revises the District s repayment schedule to reflect the adjusted repayment

22 40 41 MASTER REPAYMENT AGREEMENT obligation of $1,646,462,500, retroactive to October 1, The District will receive a credit, to be applied against its January 2004 payment, for the amounts paid to date that are in excess of those due under the revised schedule, including interest at the Arizona State Treasury investment rate. If litigation ultimately resumes, the Amended Stipulation provides that any overor underpayment that is determined to exist for the period from October 1, 1993, until the Amended Stipulation is terminated or expires, including interest on the over- or underpayment, will be capitalized and amortized over the remainder of the District s repayment period. The annual payments due from the District and the credits available from Development Fund revenues, construction 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. Payments to Maturity The required payments under the Amended Stipulation on the repayment obligation are as follows: Years Principal Interest Total 2003 $ 20,228 $ 35,648 $ 55, ,404 35,009 56, ,404 34,330 55, ,404 33,642 55, ,404 32,953 54, , , , , , , , , , ,336 74, , ,450 39, , ,273 6, , , , , ,205 Total $ 1,502,513 $ 683,145 $ 2,185,658 Because of timing differences related to revenues and expenses in the Development Fund, the Statements of Net Assets shows a liability of an additional $2.082 million that was included in the January 2003 payment. Amounts Recorded in Financial Statements (In thousands) The repayment obligation and amounts due on that obligation reported in these financial statements reflect the terms of the Amended Stipulation. The District s repayment obligation and the amounts due could be adjusted in the future if the Repayment Litigation resumes. It is not possible to predict whether the Amended Stipulation will become finally effective and result in the entry of final judgment in the Repayment Litigation in accordance with the terms of the Amended Stipulation, be amended again, or terminate, or whether litigation will resume. If litigation resumes, and results in an adverse determination on any of the major issues in dispute, it could have a material adverse effect on the financial operations of the District. 04 N o 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 2002 were 1,525,677 acrefeet. In addition, the District stored 149,570 acre-feet in the Salt River Project (SRP) system under an exchange agreement. Exchange water is carried on the District Statement of Net Assets as Water Inventory. Long-term subcontracts have been signed by M&I entities for approximately 87 percent of the total CAP M&I water allocation of 638,823 acre-feet. Of the CAP water currently under M&I subcontracts the cities of Tucson, Phoenix, Mesa, Scottsdale, Peoria and Glendale account for approximately 67 percent. All ten Indian entities originally allocated CAP water by the Secretary have signed long-term CAP contracts for the CAP Indian water allocation of 309,828 acre-feet. An additional 357,896 acre-feet of CAP water has been or is expected to be allocated to Indian entities or treated as Indian water supplies as a result of completed, pending or future Indian water rights settlements. The remaining available CAP water was allocated to non-indian agricultural entities. The non-indian subcontracts require the payment of a water service capital charge and an OM&R charge. For the M&I subcontractors, the water service capital charge is applicable to each subcontractor s maximum annual entitlement to CAP water. Under the current M&I water service subcontracts and current District pricing structure, the M&I water service capital charge is an escalating charge, which began at an annual rate of $10.50 per acre-foot of entitlement in 1994, increasing to $48 per acre-foot of entitlement by The M&I water service capital charge remained at $48 per acre-foot for 2000 and was reduced to $43 per acre-foot for 2001 and remained at $43 per acre-foot for 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.

23 42 43 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. Furthermore, OM&R costs would be allocated among fewer users, which would result in significantly higher per acre-foot charges to the remaining users. As a result of these circumstances, the District s Board of Directors adopted a repayment adjustment plan in October 1993 (Plan). Under the Plan, each non-indian agricultural subcontractor was provided the opportunity to waive its percentage 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, 2002, all of the remaining non-indian agricultural subcontractors had waived some or all of their long-term entitlements to CAP agricultural water under their CAP subcontracts. The District in turn waived its right to collect take-or-pay OM&R charges from such subcontractors. Existing and former subcontractors of non-indian agricultural CAP water were also given the opportunity by the District to enter into alternative contracts for the delivery of CAP water on a short-term basis. Under the Plan, the pool of CAP water available for delivery to non-indian agricultural water users has been divided into various categories for purposes of 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, 2002, nine existing and former subcontractors of agricultural CAP water had contracts with the District for the delivery of CAP water for agricultural purposes on these conditions. The contract terms are in effect through December 31, 2003, but delivery of water is subject to: (1) the availability of CAP water in each year after first providing for the delivery of water to 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 an issue. The District s Board of Directors reviews charges annually and sets a schedule for the succeeding five years. The water service charges to be charged M&I subcontractors and the United States on behalf of Indian contractors of CAP water service for 2002 were confirmed by the Board of Directors in June 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 Amended Stipulation is terminated or expires, the capital repayment and OM&R costs allocated to M&I subcontractors, and the OM&R costs allocated to the United States on behalf of Indian contractors, could be significantly higher than anticipated. M&I subcontractors use CAP water in their total water supply in various percentages and fund their payment of the District s charges in a variety of ways. Therefore, it is difficult to estimate the effect of possible increases in the water service charges on M&I subcontractors and on retail ratepayers, if applicable, including households in the service areas of CAP M&I subcontractors. 05 N o 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 546,750 kilowatts of nominal capacity. The District is charged for the costs associated with the Navajo energy used to operate the CAP. Hoover B Power Purchases The 1984 Hoover Power Plant Act (Hoover Act) authorized upgrading the Hoover power plant, located at Hoover Dam, to increase generating capacity at the plant by 503 megawatts (MW). This additional capacity and its associated energy is known as Hoover B Power. The Hoover Act allocated 188 MW and 212,000 megawatt hours (MWh) of associated firm annual energy of the Hoover B Power to purchasers in Arizona. The Arizona Power Authority (Authority) distributes Arizona s share

24 44 45 POWER POWER 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 (see Note 10). Sale of Remaining Navajo Surplus In March 1994, the District entered into a contract with Salt River Project, Reclamation and the Department of Energy for the sale of the remaining Navajo surplus. The contract, which is for the period June 1994 through September 2011, grants Salt River Project the use of the remaining United States entitlement to output of the Navajo Generating Station, the right to schedule and integrate with the Salt River Project system the District s contractual rights to Hoover capacity and energy and energy produced at New Waddell Dam, and certain transmission rights, and requires Salt River Project to sell energy at cost to the District to meet CAP pumping requirements up to a defined threshold level for each contract year. If CAP energy requirements exceed the threshold, the District must purchase additional energy either from Salt River Project or through other energy sources. Under the contract, Salt River Project pays a monthly charge of $1,812,500 to the Development Fund. The District records these revenues as funds held by the federal government as of December 31 of each year and then applies them against the annual payment due from the District under the Master Repayment Agreement the following January 15. The extent to which such revenues must be applied against the annual payments due from the District under the Master Repayment Agreement is among the issues that were in dispute in the Repayment Litigation and were conditionally resolved in the Stipulation (see Note 3). 06 N o 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 Fund. The District records these revenues as funds held by the federal government as of December 31 of each year and then applies them against the annual payment due from the District the following January 15. The extent to which such revenues must be applied against the annual payments due from the District under the Master Repayment Agreement is among the issues that were in dispute in the Repayment Litigation and were conditionally resolved in the Stipulation (see Note 3). 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. Subsequently, certain accounting and administrative issues at the State level prevented the District s continued participation in Pool 3 and in July 2002, a portion of investments was transferred to separate CAWCD pools (Pools 12 & 13) established to provide the District with investments in medium-term and long-term securities. The remaining balance of the Pool 3 investments was transferred to LGIP-5 (Local Government Investment Pool). Only AAA-rated corporate securities and US Government fixed-income securities are permitted in the CAWCD pools. The investment policy objectives of the Arizona State Treasurer, in order of priority, are safety of principal, liquidity, and return on investments. Approximately $1,700,000 of the District s funds in the LGIP-5 were invested in asset-backed securities of National Century Financial Enterprises. In November 2002, National Century Financial Enterprises filed for bankruptcy amid allegations of fraud and criminal conduct by the principals. The likelihood for the recovery of the securities is unfavorable and as of December 31, 2002, the District has written the funds off as a loss. The District s portion of investments held by Pools 12 and 13 as of December 31, 2002 and Pool 3 as of December 31, 2001, which are uncategorized (see Note 7), consist of the following (stated at fair value): DECEMBER (In thousands) Federal Agency Securities $ 138,081 $ 21,982 Commercial Paper 63,811 Corporate Securities 15, ,424 Money Market 1, , ,217 Less restricted funds (repayment and operating reserves; not including accrued interest) (44,120) (40,615) Investment of District $ 111,446 $ 160,602 The Board of Directors has designated $86,700,000 of the Pools 12 and 1 3 investments as capital projects and operating reserve funds, and $2,000,000 as insurance reserves (see Note 11) at December 31, 2002.

25 N o 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 below are Category 2 investments; while the State Demonstration project fund, Master Repayment Agreement and Operating Reserves, and the Ak-Chin fund, all held in pools, are considered to be uncategorized investments. Restricted assets, including accrued interest receivable, consist of the following: DECEMBER (In thousands) Bond trust funds, primarily debt service funds $ 37,617 $ 36,796 State Demonstration Project fund 7,255 17,283 Master Repayment Agreement repayment and operating reserves 44,154 40,882 Ak-Chin fund 5,750 5,632 Bond Trust Funds $ 94,776 $ 100,593 Bond trust funds held by the trustee may be invested in direct obligations of, or obligations guaranteed by the U.S. government, FNMA or FHLMC securities, certificates of deposit, obligations of any state or political subdivision, or a guaranteed investment contract, all subject to meeting certain ratings by national agencies, and maximum maturity limits. The trustee holds the investments in trust for the District and the bondholders pursuant to the trust agreements. State Demonstration Projects The Arizona Legislature passed the original State Demonstration Recharge legislation in 1990 that authorized the District to levy an ad valorem tax of 4 cents per $100 of assessed valuation in Maricopa and Pima Counties. Tax revenues collected through 1996 were deposited in the Arizona Water Storage Fund. 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 2002, four recharge projects were operational, one project was under construction, two regional recharge feasibility studies were being conducted and land was purchased for an anticipated recharge site. 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. 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 Fund. 08 N o RESTRICTED ASSETS The amended statute permits the District to transfer revenues derived from this tax to the Arizona Water Banking Fund to fund AWBA activities if the District s Board of Directors approves the levy and concludes that the revenues are not needed for CAP operations or CAP repayment. Pursuant to this authority, the District levied an ad valorem tax of 4 cents per $100 assessed valuation in Maricopa, Pinal, and Pima Counties in 2001 and 2002 and approved the transfer of these revenues to the Arizona Water Banking Fund. During 2002 and 2001, the District sold 345,889 and 294,813 acre-feet of excess CAP water to the AWBA at $55 and $45 per acre-foot, respectively, for underground storage. Master Repayment and Operating Reserves The District is required under the terms of the Master Repayment Agreement to establish and fund over a ten-year period (1) an operations and maintenance reserve fund of $4,000,000 for extraordinary costs of operations, maintenance and replacement of project works, and (2) a repayment reserve fund of $40,000,000 for the purpose of assuring payments of future obligations. Funding of the operations and maintenance reserve fund and repayment reserve fund commenced on October 1, 1993 and July 1, 1993, respectively. The operations and maintenance reserve can exceed $4,000,000. Interest and dividends accruing to the fund shall be added to the fund in any year when the fund balance is greater than $4,000,000 provided that in no event should the fund be increased to an amount greater than the actual amount of fixed operations and maintenance costs for the preceding year. In 2002, $736,076 of the repayment reserve was transferred to Unrestricted Assets to bring the balance to $40,000,000. At December 31, 2002, the fair value of the reserves totaled $4,154,000, and $40,000,000, respectively, including interest. Ak-Chin Fund In August 1985, the District s Board of Directors approved participation in a fund established pursuant to legislation enacted by the Congress of the United States for the acquisition or conservation of water to supplement CAP water supplies (Ak-Chin fund). The District and the United States Government each have contributed $1,000,000 to this fund, which is administered by the District. The District, acting as administrator of the fund, is empowered to direct the expenditure of the trust funds in accordance with the provisions of a trust agreement between the District and the Arizona State Treasurer. The Ak-Chin fund investment is in the LGIP, which invests primarily in certificates of deposit, commercial paper, federal government and federal agency securities. Investments in the LGIP are recorded at cost as they consist of investments with maturities of less than one year. ADVANCES TO FEDERAL GOVERNMENT At December 31, 2002 and 2001, the District has incurred $708,000 and $378,000, respectively, in costs related to repairs of CAP construction deficiencies which have been recorded in the accompanying financial statements as advances to the federal government. The District applied these amounts against its annual payments due under the Master Repayment Agreement on January 15, 2003 and 2002, respectively. On a cumulative basis, the District has incurred costs of $42,971,000 for the correction of CAP construction deficiencies and applied this amount against its annual payments under the Master Repayment Agreement. Under the Stipulation, credits available for application against the amounts due from the District are subject to audit by the United States (see Note 3).

26 N o 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 request recovery of these credits in years in which the Secretary has declared a normal supply of Colorado River water. At the time the agreements were entered into, the Secretary had not enacted rules to allow the creation and transfer of unused apportionment from one lower basin state to another for the purpose of interstate water banking. However, it was anticipated that to recover the stored water for MWD and SNWA, the District must forebear diversion of Colorado River water in an amount equal to the amount diverted by MWD and SNWA, and recover the stored credits in amount equal to CAWCD s reduced diversion of Colorado River water. 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, Subsequent to the 1995 agreement, the Arizona legislature created the Arizona Water Banking Authority (AWBA), which has the authority to conduct interstate water banking. As of December 31, 1995, the District had received $11,386,000 related to storing 139,000 acre-feet for MWD and SNWA. The funds were 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 acre-feet) 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 govern the accounting and delivery of interstate water banking credits from one lower basin state to another. The rules allow the AWBA, with the approval of its governing board, to engage in interstate banking of Colorado River water in cooperation with other lower basin states. The rules require agreements between the AWBA, the Secretary, and the authorized entity in the other lower basin state. As of December 31, 2002, the AWBA has completed the three agreements necessary to conduct interstate water banking with SNWA. On July 3, 2001, the AWBA entered into an Interstate Water Banking Agreement (IWBA) 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. On December 31,2002, the District transferred credits previously stored by the District on behalf of SNWA (50,000 acre-feet) to the AWBA to hold in its SNWA storage account, consistent with the IWBA. On December 18, 2002 the AWBA entered into a Storage and Interstate Release Agreement among the AWBA, the Secretary, and SNWA. The agreement governs the storage, accounting, and transfer of unused apportionment from Arizona to SNWA in the event of recovery of water stored in Arizona for SNWA. On December 5, 2002, the District entered into the Agreement for Intentionally Created Unused Apportionment (ICUA) between the District and AWBA. The ICUA agreement identifies 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 agreement requires AWBA and SNWA to provide the District with a notice of intent to recover three years prior to recovery and forbearance by the District. The forbearance of Colorado River water diversions by the District provides unused apportionment of Colorado River water to SNWA consistent with the rules adopted by the Secretary in During 2002, the AWBA stored 66,595 acre-feet of CAP water for SNWA. The District charged the AWBA $146 per acre-foot consistent with the 2002 AWBA Interstate Recharge rate. The 2002 rate includes the following components: a fee equivalent to the CAP M&I water service capital charge, the CAP fixed OM&R charge, the District s pumping energy rate 3, and a property tax equivalency fee. As of December 31, 2002, the AWBA holds about 116,000 acre-feet of storage credits in its SNWA account. As of December 31, 2002, the District holds 89,000 acre-feet of credits in its storage credit account on behalf of MWD. At present, MWD has yet not entered into interstate storage agreements with AWBA, as would be required for MWD to participate in interstate water banking consistent with the 1999 rules enacted by the Secretary. 10 N o BONDS PAYABLE Bonds payable consist of the following: DECEMBER (In thousands) Central Arizona Water Conservation District (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 $ $ Special term Capital appreciation (maturity value of $11,760,000) 8,336 7,763 8,336 7,763 Central Arizona Water Conservation District (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 Term Capital appreciation (maturity value of $23,095,000) 19,486 18,239 19,586 18,339 Central Arizona Water Conservation District (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 88,891 90,652 Central Arizona Water Conservation District (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 29,211 30,876 Subordinate serial 4,904 5,312 Deferred loss on refunding (3,058) (3,583) 31,057 32,605

27 50 51 BONDS PAYABLE Changes in bonds payable during the year ended December 31, 2002, are summarized below: DECEMBER (In thousands) Central Arizona Water Conservation District (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 Water Conservation District (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 7,301 14,287 Deferred loss on refunding ( 126) 278 ( ) 7,175 14, , ,246 ( ) ( ) $ 134,810 $ 152,331 Less current portion 20,235 18,915 BALANCE BALANCE AMOUNTS DUE DECEMBER 31 ACCRETION AND DECEMBER 31 WITHIN ONE 2001 ADDITIONS REDEMPTION AMORTIZATION 2002 YEAR 1990 Bonds (In thousands) Serial $ $ $ $ $ Special term Capital appreciation 7, , Bonds Serial Term Capital appreciation 18,239 1,247 19, Bonds 90,652 1, ,891 10, Bonds Serial 30,876 1, ,211 1,745 Subordinate serial 5, , Deferred loss ( 3,583 ) 525 ( 3,058 ) 2001 A Bonds Serial(and Original Issue Premium) 8,131 8,035 ( 96 ) Deferred loss ( 253 ) B Bonds Serial(and Original Issue Premium) 14,287 6,900 ( 86) 7,301 7,220 Deferred loss ( 278 ) 152 ( 126 ) $ 171,246 $ $ 18,915 $ 2,714 $ 155,045 $ 20,235 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). 11 N o 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 $30,447,000 for the six series of bonds are as follows: Years ending: 2003: $26,889,000; 2004: $27,159,000; 2005: $27,157,000; 2006: $27,160,000; : $54,289,000; : $33,809,000. In April 1993 and February 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 has been removed from the balance sheet. In 1994, the District adopted Governmental Accounting Standard Board Statement No. 23 (GASB No. 23), Accounting and Financing 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 2001 A Bonds and 2001 B 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 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. In November 2002, the 2001 A Bonds were paid in full. 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. 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 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 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 (see Note 3).

28 N o PENSION PLANS 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 Central Arizona Water Conservation District Retirement Plan (the District Plan) and from July 1, 1998 through December 31, 2002, 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. Central Arizona Water Conservation District Retirement Plan The District maintains the Central Arizona Water Conservation District 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 consecutivemonth 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 2001 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 February 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, 2002, there were 100 participants in the District Plan. There were 2 actively employed members, 47 retirees and beneficiaries receiving benefits and 51 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, 2002, 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. 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. The annual pension cost and net pension obligation (asset) for 2002 are as follows: Annual required contribution for 2002 $ 125,116 Adjustment to annual required contribution 656 Annual pension cost 125,772 Contributions made for ,116 Increase in net pension obligation 656 Net pension obligation (asset), beginning of year (11,479) Net pension obligation (asset), end of year $ (10,823) 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, 2002 and 2001, were approximately $125,000 and $83,000, 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, 1998 through 2002 is as follows: PERCENTAGE OF ANNUAL PENSION ANNUAL AMOUNT COST NET PENSION YEAR ENDING PENSION COST CONTRIBUTED CONTRIBUTED OBLIGATION December 31, 1998 $ 629,941 $ 629, % $ (13,158) December 31, ,564 72, (12,643) December 31, ,537 63, (12,084) December 31, ,488 82, (11,479) December 31, , , (10,823) The actuarial value of the District Plan assets and actuarial accrued liabilities for plan years ended December 31, 1998 through 2002 are as follows: ACTUARIAL VALUE UNFUNDED OF ASSETS AS ACTUARIAL ACCRUED UNFUNDED PERCENTAGE OF LIABILITY AS ACTUARIAL ACTUARIAL ACTUARIAL ANNUAL PERCENTAGE OF VALUATION ACTUARIAL VALUE ACCRUED ACCRUED ACCRUED COVERED ANNUAL COVERED DATE OF ASSETS LIABILITY LIABILITY LIABILITY PAYROLL PAYROLL December 31, 1998 $20,407,198 $26,710,573 $6,303, % $19,846, % December 31, ,036,664 21,686, , ,470, January 1, ,687,777 3,237, , ,649 * * January 1, ,556,276 3,232, , , January 1, ,294,540 3,256, , , * 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.

29 N o 14 N o 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 Financial 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, 2002 and June 30, 2001, were set at 2.49 percent of covered wages as determined by an actuarial computation based on June 30, 2001 information. Contributions for 2002, 2001 and 2000 were $1,361,868, $1,310,715 and $1,254,395, 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 6 employees eligible to receive benefits. The current annual cost is $11,100 per year. Based on life expectancies, the District recorded an expense and a liability of $313,000 during The liability on December 31, 2002 is $176,876. DEFERRED COMPENSATION AND SAVINGS PLAN The District has adopted and maintains the Central Arizona Water Conservation District 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 plan administrator changed January 1, Plan assets were valued at the end of trading on December 31, 2002 and transferred to the new administrator on January 3, 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, 2002 and 2001 was approximately $722,000 and $656,000, respectively. Accrued benefits attributable to the District s contributions on behalf of participants vest 20 percent for each year of completed service. 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. 15 N o OM&R COST RECONCILIATION 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. In 2002, the District delivered 66,595 acre-feet of interstate banking water to the AWBA on behalf of the state of Nevada. As specified in the agreement between CAWCD and AWBA, actual OM&R costs are to be reconciled to estimated OM&R costs. The methodology used to reconcile OM&R costs for interstate banking is consistent with the approach used for subcontract and federal customers. Beginning with 2000, annual OM&R reconciliation costs are calculated and the amount is refunded, surcharged or offset, as the case may be, by May 30 of the following year. For 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, the District recorded revenue of $3.2 million and the corresponding receivable is included in other assets in the accompanying statement of net assets. For 2002, the analysis of OM&R costs resulted in subcontract, federal and interstate banking customers owing the District $1.7 million for underpayment of OM&R expenses. However, the District chose to substantially reduce the impact of the OM&R reconciliation on the subcontract and federal customers by including the application of SO 2 credits that will be sold in future years in the calculation of the reconciled rate. As a result,the District recorded revenue of $417,400 to reflect the amount primarily owed by interstate banking customers and the corresponding receivable is included in other assets in the accompanying statement of net assets. 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, 2002 and 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 to The 2000 to 2003 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. (For 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 February 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 statistical section.

30 56 57 O T H E R F I N A N C I A L I N F O R M A T I O N Central Arizona Water Conservation District December 31, S T A T E M E N T O F N E T A S S E T S B Y DECEMBER 31, 2002 (In thousands) F U N D $ O T H E R F I N A N C I A L I N F O R M A T I O N OF I S T A T E M E N T O F N E T A S S E T S B Y F U N D CENTRAL AZ DECEMBER 31, 2002 STATE GROUND WATER (In thousands) RECLASSIFICATIONS GENERAL AK-CHIN DEMONSTRATION REPLENISHMENT SERIES A & B TOTAL AND ELIMINATIONS FUND FUND PROJECT FUND DISTRICT FUND BOND FUNDS ASSETS Current assets: Cash $ ( 571 ) $ $ ( 571 ) $ $ $ $ Investment in Arizona Local Government Investment Pools 57,610 57,610 Total cash and cash equivalents 57,039 57,039 Receivables: Accrued interest receivable on unrestricted investments 1,487 1,487 Due from water customers, less allowance for doubtful accounts of $2,324 and $2,007 at December 31, 2002 and 2001, respectively 7,195 7,195 Other 2,551 2, Repayment Credit 1,005 1,005 Materials and supplies inventory 3,891 3,891 Water Inventory 13,744 13, Interfund receivable ( 3,364 ) 3,364 Other 3,352 3, Total current assets 90,264 ( 3,364 ) 92, Noncurrent assets: Funds held by federal government 36,633 36,633 Investment in State Treasurer CAP investment pool 111, ,446 Restricted assets 94,776 44,154 5,750 7,255 37,617 Advances to federal government Property and equipment, less accumulated depreciation of $23,713 and $18,545 at December 31, 2002 and 2001, respectively 38,735 38,735 Permanent service right, less accumulated amortization of $268,990 and $239,390 at December 31, 2002 and 2001, respectively 1,520,636 1,520,636 Bond issuance costs, net of accumulated amortization of $2,339 and $1,954 at December 31, 2002 and 2001, respectively Total noncurrent assets 1,803,706 1,752,312 5,750 7,255 38,389 Total assets $ 1,893,970 $ ( 3,364 ) $1,845,096 $ 5,750 $ 7,255 $ 700 $ 38,

31 58 59 S T A T E M E N T O F N E T A S S E T S B Y F U N D STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS B Y F U N D DECEMBER 31, 2002 YEAR ENDED DECEMBER 31, 2002 (In thousands) (In thousands) S T A T E M E N T O F N E T A S S E T S B Y F U N D DECEMBER 31, 2002 (In thousands) CENTRAL AZ STATE GROUND WATER RECLASSIFICATIONS GENERAL AK-CHIN DEMONSTRATION REPLENISHMENT SERIES A & B TOTAL AND ELIMINATIONS FUND FUND PROJECT FUND DISTRICT FUND BOND FUNDS LIABILITIES AND FUND EQUITY (DEFICIT) Current liabilities: Accounts payable $ 19,089 $ q $ 18,413 $ $ $ $ 676 Accrued payroll, payroll taxes and other accrued expenses 5,020 5,020 Interfund payable ( 3,364 ) 2, Current liabilities payable from restricted assets, advances to federal government, and other noncurrent assets: Accrued interest payable 36,772 35,648 1,124 Repayment obligation, due within one year 22,310 22,310 Contract revenue bonds, due within one year 20,235 20,235 OM&R reconciliation obligation Total Current liabilities: 103,426 ( 3,364 ) 81,391 2, ,035 Noncurrent liabilities: Repayment obligation, due after one year $ 1,482,285 $ 1,482,285 Contract revenue bonds, due after one year, net of unamortized discounts of $10,966 and $13,680 at December 31, 2002 and 2001, respectively 134, ,810 OM&R reconciliation obligation Provision for retiree health insurance Water operations and capital charges deferred revenue 22,152 22,152 Total noncurrent liabilities: 1,639,413 1,504, ,810 Total liabilities: 1,742,839 ( 3,364 ) 1,585,994 2, ,845 NET ASSETS Investment in capital assets, less related debt ( 99,497 ) 54,776 ( 154,273 ) Restricted 57,327 8,505 5,750 7,255 35,817 Unrestricted 193, ,821 ( 2,635 ) ( 29 ) 144 Total net assets: 151, ,102 5,750 4,620 ( 29 ) ( 118,312 ) Total liabilities and net assets: $ 1,893,970 $ ( 3,364 ) $ 1,845,096 $ 5,750 $ 7,255 $ 700 $ 38,533 STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS B Y F U N D YEAR ENDED DECEMBER 31, 2002 CENTRAL AZ STATE GROUND WATER (In thousands) RECLASSIFICATIONS GENERAL AK-CHIN DEMONSTRATION REPLENISHMENT SERIES A & B TOTAL AND ELIMINATIONS FUND FUND PROJECT FUND DISTRICT FUND BOND FUNDS OPERATING REVENUES Water operations and maintenance charges $ 73,964 $ $ 73,964 $ $ $ $ Water service capital charges 28,585 28,585 Power and Basin Fund revenues 61,333 36,133 25,200 Reimbursements and other operating revenues 3,914 ( 1,119 ) 2, ,061 Total operating revenues 167,796 ( 1,119 ) 140, ,061 25,200 OPERATING EXPENSES Salaries and related costs 32,257 $ 31, Pumping power 56,926 56,926 Power transmission 2,701 2,701 Hoover capacity charges 1,618 1,618 Amortization of permanent service right 30,437 30,437 Depreciation 6,266 6,266 Provision for OM&R reconciliation Provision for doubtful accounts Other operating expenses 19,426 ( 1,119 ) 12,587 6, Total operating expenses 149,977 ( 1,119 ) ( 141,916 ) 7,975 1,199 6 Operating income (loss) before unusual expense item 17,819 ( 970 ) ( 7,267 ) ,194 NONOPERATING REVENUES (EXPENSES) Property taxes, less assignment to Arizona Water Banking Authority of $12,051 and $10,691 in 2002 and 2001, respectively 27,113 27,113 Interest income and other nonoperating revenues 11,344 ( 23 ) 8, ,940 Interest income reserved for Ak-Chin fund Interest income and other nonoperating revenues reserved for State Demonstration Project and CAGRD Interest expense and other nonoperating expenses ( 48,736 ) 23 ( 37,395 ) ( 29 ) ( 11,335 ) Total nonoperating revenues (expenses) ( 9,703 ) ( 1,883 ) ( 22 ) ( 8,395 ) Change in net assets 8,116 ( 2,853 ) 118 ( 6,788 ) ,799 Net assets at beginning of year 143, ,956 5,632 11,408 ( 869 ) ( 135,112 ) Net assets at end of year $ 151,131 $ $ 259,103 $ 5,750 $ 4,620 $ ( 29 ) $ ( 118,313 )

32 60 61 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 Fund YEAR ENDED DECEMBER 31, 2002 (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 Fund YEAR ENDED DECEMBER 31, 2002 (In thousands) B O N D F U N D Principal Interest Description Account Account Balance at December 31, 2001 $ 3,018 $ 906 Transfers from: Revenue Fund 10,936 5,180 Depository Trustee Bond Proceeds Interest payments ( 5,280) Redemptions ( 9,870 ) Interest earned on account Interest transferred to revenue fund ( 477) ( 116) Balance at December 31, 2002 $ 4,084 $ 806 B O N D F U N D Principal Interest Subordinate Description Account Account Debt Account Balance at December 31, 2001 $ 1,773 $ 413 $ 325 Transfers from: Revenue Fund 8,990 1, Depository Trustee Bond Proceeds Interest payments ( 2,064) 174 Redemptions ( 8,570 ) 475 Interest and dividends earned on account Interest and dividends transferred to revenue fund ( 173) Balance at December 31, 2002 $ 2,193 $ 292 $ 324 ( ) ( ) ( ) ( ) Note 1: The above schedule discloses only activity in the Principal and Interest Accounts of the Bond Fund as established by the Bond Indenture relating to the Contract Revenue Bonds, and Contract Revenue Refunding Bonds between the Central Arizona Water Conservation District 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 Fund 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 Fund as established by the Bond Indenture relating to the Contract Revenue Bonds, Contract Revenue Refunding Bonds, and Contract Revenue Refunding Subordinate Bonds between the Central Arizona Water Conservation District and Bank of New York (California), as trustee, dated August 1, 1991 as amended by the Supplemental Indenture dated February 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 Fund as of and for the year ended December 31, 2001.

33 62 63 S TAT I S T I C A L S E C T I O N ( UNAU D I T E D) CENTRAL ARIZONA WATER CONSERVATION DISTRICT (Central Arizona Project) Central Arizona Water Conservation District Statistical Section (Unaudited) December 31, $ S T A T I S T I C A L S E C T I O N ( U N A U D I T E D ) SCHEDULE OF AD VALOREM PROPERTY TAX FULL CASH VALUE AND ASSESSED VALUE Tax Year Ended June 30 Full Cash Value Assessed Value 1999 $ 181,711,885,622 $ 23,318,202,275 S ,047,209,445 25,784,794, ,701,894,776 28,142,398, ,193,366,728 30,164,820,448 Source: Maricopa, Pinal and Pima County Assessor s Office SCHEDULE OF AD VALOREM PROPERTY TAX TAX LEVY AND COLLECTIONS Collected to June 30 End of Tax Fiscal Year (a) Total Collections (b) Fiscal Percent of Percent of Year Tax Levy Amount Tax Levy Amount Tax Levy $ 32,363,032 $ 31,414, % $ 32,170, % ,248,229 32,209, ,051, ,273,596 34,933, ,584, ,223,271 (c) (c) (c) (c) (a) Reflects collections made through June 30, the end of the taxing fiscal year, on each year s levy. (b) Reflects collections made through December 31, 2002 against current and prior levies. (c) In the process of collection. Source: Maricopa, Pinal and Pima County Treasurers Office

34 64 65 CENTRAL ARIZONA WATER CONSERVATION DISTRICT STATISTICAL SECTION (UNAUDITED) Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2002 CENTRAL ARIZONA WATER CONSERVATION DISTRICT STATISTICAL SECTION (UNAUDITED) Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2002 Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2002 C U S T O M E R W A T E R O & M C H A R G E S CAPITAL CHARGES MUNICIPAL & INDUSTRY AGRICULTURE RECHARGE FEDERAL TOTAL A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE ACRE-FEET ALLOCATION REVENUE Ak-Chin Indian Community $ $ $ 71,626 $4,440,812 71,626 $4,440,812 $ Ancala Country Club , ,555 Anthem (Ak-Chin) 3, ,438 3, ,438 AZ-American Water (Agua Fria) 11, ,999 AZ-American Water (Paradise Valley) 2, ,017 2, ,017 3, ,933 AZ-American Water (Sun City) 10, ,382 10, ,382 4, ,127 AZ-American Water (Sun City West) 2, ,996 AZ Pacific Materials 74 9, ,442 AZ State Land Dept , ,147 32,076 1,379,268 AZ Water Bank 66,595 8,524, ,294 15,361, ,889 23,885,330 AZ Water Co/Apch. Jct. 5, ,598 5, ,598 6, ,000 AZ Wholesale Growers 12 1, ,260 ASARCO, Ray Mine 21, ,000 Berneil Water Company 200 8,600 Carefree Water Company , ,157 1,300 55,900 Casa Grande Systems (AZ Water Co.) Cave Creek Water Co. 2, ,686 1,298 80,476 2, ,686 1,298 80,476 8, ,012 1,600 68,800 Central AZ Groundwater Replenishment Dist (b) Central Arizona Irrigation & Drainage District Chandler Heights Citrus Irrigation District Chaparral City Water Co 7, ,660 6, , ,404 3,868, ,940 1,590 87,450 8, , ,404 3,868, ,940 6, , ,545 6, ,054 Circle City Water Co. 3, ,076 Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2002 C U S T O M E R W A T E R O & M C H A R G E S CAPITAL CHARGES MUNICIPAL & INDUSTRY AGRICULTURE RECHARGE FEDERAL TOTAL A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE ACRE-FEET ALLOCATION REVENUE City of Avondale 4, ,252 1,188 65,340 5, ,592 4, ,078 City of Chandler 7, ,390 15, ,875 7, ,424 31,140 2,006,689 3, ,724 City of Eloy 2, ,117 2, ,117 2,171 93,353 City of Glendale 12, ,668 5, ,762 18,022 1,117,430 14, ,869 City of Goodyear 23,121 1,276,050 23,121 1,276,050 3, ,383 City of Mesa 33,704 2,089,648 54,000 2,970,000 4, ,040 92,624 5,364,688 36,388 1,564,684 City of Peoria 5, ,440 3, ,500 9, ,940 19, ,487 City of Phoenix 107,199 6,690,756 13, , ,424 7,510, ,914 4,898,302 City of Scottsdale 48,890 3,031,180 2, , ,656 52,066 3,223,136 49,829 2,142,647 City of Surprise 7, ,039 City of Tempe 4, ,243 10, , ,656 14, ,274 4, ,545 City of Tucson 20,433 1,320,207 8, ,315 28,966 1,789, ,920 5,973,560 Community Water Co of Green Valley Coolidge System (AZ Water Company) Del Webb (Ak-Chin) 6, ,300 6, ,300 1,337 57,491 2,000 86,000 Flowing Wells Irr. District 4, ,222 Gardner Turfgrass 10 1, ,354 Gila River Indian Community (Toka Sticks) Green Valley Water Co. 4,560 68,150 2,317,072 68,150 2,321,632 1,900 81,700 H2O, Inc , ,070 Harquahala Generating 2,660 2,660 Harquahala Valley Ass , ,696 Harquahala Valley Farm Partnership , ,336 TOTAL PAID $ 4,440,812 51, , , , , ,996 9,442 1,404,415 23,885, ,598 1, ,000 8,600 80, , , ,110 3,868,480 38, , ,076 TOTAL PAID 563,670 2,164, ,470 1,727,299 1,421,433 6,929,372 1,388,427 12,409,008 5,365, ,039 1,059,819 7,763,082 57,491 86, , ,222 1,354 2,321,632 81,700 14,070 2,660 6,696 24,336

35 66 67 CENTRAL ARIZONA WATER CONSERVATION DISTRICT STATISTICAL SECTION (UNAUDITED) Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2002 CENTRAL ARIZONA WATER CONSERVATION DISTRICT STATISTICAL SECTION (UNAUDITED) Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2002 Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2002 C U S T O M E R W A T E R O & M C H A R G E S CAPITAL CHARGES MUNICIPAL & INDUSTRY AGRICULTURE RECHARGE FEDERAL TOTAL A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE ACRE-FEET ALLOCATION REVENUE Harquahala Valley Irrigation District HoHoKam Irrigation District Litchfield Park Service Company Maricopa County Parks & Recreation Dept. Maricopa Drilling & Equipment company Maricopa-Stanfield Irr. & Drainage District Mazatzal Tree Farm , , ,614 96,023 3,418,724 30,149 1,067, ,692 3,789,240 96,023 3,418,724 30,149 1,067, , , ,692 3,789, ,614 5, , ,595 Mesa Family Golf Centers 48 5, ,952 Metro. Domestic Water Improvement District Metro. Domestic Water Improvement Dist. (U.S. Bank Trust) Midvale Farms 7, ,720 7, ,720 8, ,894 1,500 64,500 New Magma Irrigation & Drainage District New River Utility Company 46,546 1,385,476 46,546 1,385,476 1,885 81,055 Oasis Golf resort & Community, LLC Odom Farms , , , ,400 Oro Valley (U.S. Bank Trust) ,606 Par Golf, LLC 51 5, ,355 Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2002 C U S T O M E R W A T E R O & M C H A R G E S CAPITAL CHARGES MUNICIPAL & INDUSTRY AGRICULTURE RECHARGE FEDERAL TOTAL A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE ACRE-FEET ALLOCATION REVENUE Phelps Dodge, Inc. 2, ,958 Phoenix Memorial Park Cemetery Picacho Elementary School District No. 33 Pinal County Water Augmentation Authority Pinal County Dept. of Public Works Pine Water Compnay 30 3, ,515 2, ,150 2, , , ,923 Pinnacle West Capital Corp , ,950 PPL Sundance Energy , ,675 Queen Creek Irr. District 31, ,480 31, ,480 Queen Creek Water Co , , ,964 Quintero Golf Country Club , ,185 Recreational Center, Inc , ,075 Red Mountain Ranch Country Club Red Mountain Ranch Owners Association Rio Verde Utilities, Inc , , , , , , ,916 Salt River Project 10,449 52,245 10,449 52,245 San Carlos Apache Tribe 7, ,000 7, ,000 San Carlos Irrigation & Drainage District San Tan Irrigation District 39,618 1,426,248 25,279 39,618 1,426,248 25, ,148 San Xavier Co-op Farm 1,208 88,690 1,208 88,690 TOTAL PAID 3,418,724 1,067, ,940 67,127 1,144 3,789,240 2,614 5, , ,894 64,500 1,385,476 81, ,400 27,606 5,355 TOTAL PAID 124,958 3,612 3,150 2,500 3,515 6,923 53,950 38, ,480 92,190 94,185 12,075 67,515 1,658 48,494 52, ,000 1,426,248 35,427 88,690

36 68 69 CENTRAL ARIZONA WATER CONSERVATION DISTRICT STATISTICAL SECTION (UNAUDITED) Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2002 CENTRAL ARIZONA WATER CONSERVATION DISTRICT STATISTICAL SECTION (UNAUDITED) Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2002 Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2002 C U S T O M E R W A T E R O & M C H A R G E S CAPITAL CHARGES MUNICIPAL & INDUSTRY AGRICULTURE RECHARGE FEDERAL TOTAL A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE ACRE-FEET ALLOCATION REVENUE TOTAL PAID Shea Sunbelt Pleasant Point, LLC Sonoran Land Group , , , ,645 13,860 57,645 Southern Dunes Golf Club 13 1, ,365 1,365 Spanish Trail Water Co. 3, , ,591 Springfield Golf Resort 54 6, ,126 6,126 SunEnvironments, Inc. 11 1, ,155 1,155 Sun Groves Homeowners Assoc. Sun State Rock & Materials Corp. Sunrise Water Company 77 26, , , , ,592 26,249 2,462 40,592 Temporary Water Permits 1, ,950 1, , ,950 Tohono O Odham Indian Nation Tonopah Irrigation District 5, ,655 9, ,071 9, ,071 5, , , ,655 Tonto Hills Utility Co ,053 3,449 Town of Buckeye ,662 18,662 Town of Florence 2, ,976 2, ,976 2,048 88, ,040 Town of Gilbert 7, ,500 3, ,221 11, ,721 7, , ,826 Town of Marana 1,047 57,585 1,047 57, ,021 59,606 Town of Oro Valley 2, ,500 2, ,500 1,652 71, ,536 Triple W Farms Partnership 180 6, ,480 6,480 Schedule of Customer Activity Water O&M Charges and Capital Charges YEAR ENDED DECEMBER 31, 2002 C U S T O M E R W A T E R O & M C H A R G E S CAPITAL CHARGES MUNICIPAL & INDUSTRY AGRICULTURE RECHARGE FEDERAL TOTAL A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE A/F DELIVERED REVENUE ACRE-FEET ALLOCATION REVENUE TOTAL PAID V.F. Investments 3, ,344 3, , ,344 Vail Water Company , , ,798 77,028 Vidler Water Company 10, ,975 10, , ,975 Viewpoint R V & Golf Resort , ,935 60,935 Water Utilities Com. Facilities Dist. Water Utility of Greater Buckeye, Inc. Water Utility of Greater Tonopah, Inc. West End Water Co. 48 2,976 2, ,565 2, ,541 2, , , , , ,058 1,849 2,752 6,751 White Tank System (Arizona Water Co.) Subtotal 372,853 $27,895, ,929 $18,570, ,998 $23,834, ,897 $8,429,020 1,525,677 $78,729, , ,440 $23,883,920 41,624 $102,613,348 Transfer of storage credits , ,107 $24,107 Adjustment ( 88,577 ) ( 88,577 ) Total 372,853 $27,895, ,929 $18,570, ,228 $23,859, ,897 $8,429,020 1,525,907 $78,664, ,440 $23,883,920 $102,548,878 Notes: (a) Excess water deliveries include a component for facility use. Revenues of $4,700,714 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.

37 70 71 T H E CAWCD B O A R D THE CAWCD BOARD Central Arizona Water Conservation District 02 Central Arizona Water Conservation District T H E C A W C D B O A R D A B C D E B F G H I J The Central Arizona Water Conservation District 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. K L M N O N o 2 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. There were several changes in Board membership after the November 2002 general election. Two of the four Pima County board members, Marybeth Carlile and Marilyn Ronstadt, opted not to run for re-election and the remaining two members, Steve Weatherspoon and Robert Bob Beaudry, were defeated. The four new Board members, seated in January 2003, are Mike Boyd, Diana Kai, David V. Modeer and Carol E. Zimmerman. In addition, two current Maricopa County board members, Robert Bob Burns and Terry Goddard, resigned. Burns was elected to the state Senate and Goddard was elected to be Arizona Attorney General. Lisa Atkins was appointed to complete the term of Burns and Frank Barrios will complete Goddard s term. P Q R S T MARICOPA COUNTY A George L. Campbell TERM ENDING 2006 B Robert Bob Burns TERM ENDING 2006 C Daniel J. Donahoe TERM ENDING 2004 D Grady Gammage, Jr. Esq. TERM ENDING 2004 E Samuel P. Goddard, Jr. Esq. TERM ENDING 2004 F Mark Lewis TERM ENDING 2004 G William Perry TERM ENDING 2006 H Terry Goddard TERM ENDING 2006 I George Renner TERM ENDING 2006 U J Susan Bitter Smith TERM ENDING 2004 APPOINTED K Lisa Atkins TERM ENDING 2006 APPOINTED L Frank Barrios TERM ENDING 2006 PIMA COUNTY M Robert M. Bob Beaudry TERM ENDING 2002 N Marybeth Carlile TERM ENDING 2002 O Marilyn Ronstadt TERM ENDING 2002 P Steve Weatherspoon, Esq. TERM ENDING 2002 NEWLY ELECTED Q Mike Boyd TERM ENDING 2008 NEWLY ELECTED R Diana Kai TERM ENDING 2008 NEWLY ELECTED S David Modeer TERM ENDING 2008 NEWLY ELECTED T Carol Zimmerman TERM ENDING 2008 PINAL COUNTY U Jim Hartdegen TERM ENDING 2008