ML023100363

Part 9 of 10, Palo Verde, 2001 Annual Financial Report, Salt River Project 2001 Annual Report

ML023100363
Person / Time
Site:	Palo Verde
Issue date:	10/30/2002
From:	Bauer S Arizona Public Service Co
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
102-04859-SAB/TNW/CJJ
Download: ML023100363 (44)

Text

Value to the Valley Salt River Project 2001 Annual Report

Energy Water Community 6 12 16 Letter from the President

& Vice President 3

e Valley Message from the General Manager Value to the Valley is as RP today as it was in our 4 arly a century ago. Today, oenix metropolitan area is est-growing in the country. Financial Section alue to the Valley by 20 quality of life for the people our customers, this means ble power. For our SRP Boards and Councils it means time-tested water 38 For our communities, it support.

companies: the Salt River ltural Improvement and

, and the Salt River Valley ssociation.

ct, a public power system, ricity to more than 745,000 resenting about 1.75 million copa, Gila and Pinal counties ona. The District is an ity, providing generation, SRP received the Award for Excellence in Corporate nd distribution services.

Community Service for 2000 iation, a private corporation, from the Points of Light tem that delivers 1 million Foundation. The award is one ter annually to agricultural, of the worlds highest and nicipal water users in the most distinguished honors for community service.

hree-Year Financial & Operational Review nancial Data ($000) 2001 2000 1999 otal operating revenues $3,026,787 $1,797,745 $1,714,158 ectric revenues 3,014,205 1,784,554 1,701,486 ater & irrigation revenues 12,582 13,191 12,672 otal operating expenses 2,612,036 1,556,706 1,424,678 otal other income, net 65,485 50,047 48,719 et financing costs 170,540 172,406 171,979 et revenues for the year 309,696 118,680 111,519 axes and tax equivalents 82,335 90,931 91,819 tility plant, gross 6,968,803 6,662,945 6,435,177 ong-term debt 3,098,273 3,164,866 3,235,386 ectric revenue contributions support water operations 47,469 40,924 42,987 elected Data otal energy sources (million kWh)* 40,004 36,262 33,663 otal electric sales (million kWh) 36,323 32,801 31,615 otal resources peak month (kW)* 6,340,000 5,892,000 5,740,000 eak-SRP retail customers (kW) 5,002,000 4,653,000 4,666,000 eak-Total system (kW) 6,205,000 5,725,000 5,534,000 ater deliveries (acre-feet)** - 998,972 1,030,584 unoff (acre-feet)** - 456,937 471,875 ebt service coverage ratio 4.72 3.35 3.20 ebt ratio (percent) 57.3 60.8 63.0 mployees at year-end 4,096 4,050 4,025 ustomers at year-end 746,368 727,070 701,196 ncludes SRP participation in jointly owned projects.

Water data is by calendar year, all other data is by fiscal year ending April 30.

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to bring value to our eholders and communities in

, the hub of the second-fastest-the nation. Overall, our services ed more people - in more ways re.

ed to share the news of yet ful financial year for SRP, due to economy and despite the olatile energy market. Our total o $3 billion, with net revenues of ese results help to ensure stable, ing for our retail customers, and urces we need to make capital essary for the future.

John M. Williams Jr. William P. Schrader accomplishments during the als of two SRP urban generating spotlight. An additional 1,075 ctricity will be available to reducing groundwater pumping was the Central customers once both plants are Arizona Project, which provided excess water es worked long and hard to from the Colorado River to SRP for the second these approvals, and we again straight year.

iation to SRPs dedicated and We also acknowledge the strong working ce. We also extend our relationship that continues between SRP elected he many community leaders officials and management. Together, as a team, supported the planning and we were able to keep the years initiatives sses of these two facilities.

moving forward toward shared goals.

on of community commitment At SRP, our mission is always to deliver the

w. Of particular note, the Points best value to the Valley. We are focused on doing ion recognized SRP this year so again in the new fiscal year.

Excellence in Corporate ce Award. This honor nce again, that the efforts of our William P. Schrader beyond expectations. President s primary water steward, SRP water and groundwater icipalities, agriculture and other John M. Williams Jr.

upporting us again this year in Vice President 2001 SRP ANNUAL REPORT 3

deregulation that enhancements to our core businesses and services are what our customers need, expect and appreciate the most. Therefore, SRPs focus remains on providing the best reliability, lowest cost and highest value to our customers.

For example, SRP this year developed personalized annual reports for our largest e from the General Manager residential energy customers, with tips for saving money and suggestions on SRP programs.

asure to report here. However, it is worthwhile The response was extremely a remarkably to note that for SRP in Arizona, positive. We dramatically all respects. deregulation did not require improved the terms of our lts are very divestiture or discourage long- bill equalization plan, providing are customer term supply contracts, nor did better service to those who

s. Our safety it adopt a single-point market participate. We also enhanced mplary, and our structure. These factors are our time-of-use price plans for rvice is at an all- allowing a temperate transition even-greater savings to have maintained to competition, which we customers, which helped boost of reliability, and believe is in the best interest of customer participation by more the incremental our customers. than 10 percent.

essary to keep it SRP recorded a banner We expanded what is

, we have year, marked by strong retail already the nations largest ompleted the sales and wholesale prices. network of automated pay r service Robust customer growth and stations, and rolled out the ugh only a handful warmer weather boosted sales, second generation of a pre-have switched to and wholesale prices payment technology we jointly rs. throughout the West (not developed with Motorola.

ast to other limited to California) resulted Upgrades to our phone center, he industry could in higher-than-projected with the latest communication ramatic. wholesale revenues. Our net technology, help us provide the price spikes are revenues will permit debt best service possible. In ized and retirement and infrastructure addition, we are working on ly, so it is not investment to enhance our other innovations to provide discuss them financial viability, and will better and timelier information NUAL REPORT

appreciate the most. Therefore, SRPs focus manage their price risk and reduce costs. The pool is providing the best reliability, lowest cost and essentially a mutual fund of energy that allows the e to our customers.

participants to determine the level of market price volatility that they are able to manage.

tomers manage will help ensure our facilities The pool has proven to be a use. We look operate at peak performance convenient and beneficial tool e exciting this year. for the participants.

he coming year. The significance of In our water business, ear, we transmission investment runoff this past year was fforts to adding cannot be overstated. adequate but still below resources. Historically, transmission lines normal. However, thanks to urces will come have been designed to move a supplemental water purchased hers are under utilitys generation resources from the Central Arizona nd still others to its customers. In the new Project, we are in a ing stages. All environment, transmission is comfortable situation with o meet our an interstate highway. respect to water in storage.

gation to serve Merchant power plant owners It is imperative that we mers. We simply interconnect to the recognize the tremendous nt in our ability nearest transmission system accomplishments of our h the process of and have no obligation to employees. We are in a g plants and move generation to a successful position today due nes grows particular load center. to the dedication of SRPs mplex and Independent transmission workforce. And, as always, system operation is still SRPs hardworking elected vels of energy evolving in the Southwest, and officials continue to provide w in the West crucial decisions will be made the stability that has been a ected to rise in upcoming months. As well, a hallmark of SRP for almost 100 the next two significant transmission study years. Given this winning team, erve levels will for substantial portions of we feel confident as we look to irements in the Arizona is underway and is what the future holds for SRP.

t summers expected to identify needed operate transmission.

s more than SRP has developed a plan n enhanced to assist small public power Richard H. Silverman quirements this entities in Arizona who have General Manager s investment in suffered under the volatile maintenance wholesale market. The Arizona 2001 SRP ANNUAL REPORT 5

the Valleys continued economic success. Its the ue we bring to our region, and our mission is to p it that way.

Energy In high-growth states like the growth of energy resources Arizona, an adequate supply in Arizona and in the Western of electricity is essential. U.S. In fact, by the late 80s, the During a year when talk about West had an oversupply of electricity - especially supply base load resources (coal and and price - reached a fever nuclear generating facilities) pitch across the country, SRP from the build-out of the moved ahead with plans to prior years.

meet the ever-increasing Consequently, many energy demand in our utilities in the West, including 2,900 - square-mile electric SRP, purchased low-cost service area. wholesale power from other markets to meet increasing Generation Resources retail peak loads. This strategy To understand generation worked well for several years.

planning, a look at the past 20 By the late 1990s, however, years provides perspective. excess supplies began to The 1980s were boom years for dwindle as local and regional SRP lineman Ruben Cardenas, a 25-year employee, is one of hundreds of linemen who work around the clock to repair distribution wires and re-energize neighborhoods after outages from summer monsoon storms, other weather incidents, and accidents.

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had dropped substantially and stair-step fashion that balances demand for power had capital costs with customer increased beyond projections. demand. The addition of two Today, generation supply urban generating facilities by is not only tight in the SRP 2005 will bring 1,075 megawatts service area, but throughout (MW) in new SRP resources, a Arizona and the West. SRP is healthy step toward the planning for reserve levels of additional resources we will about 12 percent for the need to meet future demand.

remainder of this decade. At Other resources may be the same time, the wholesale acquired by increasing SRP market has become a less- ownership percentage in reliable source for short-term participation plants, and by power purchases, due to the long-term purchases of decrease in excess supply and generation from plants owned the uncertainties throughout by others.

the West and Southwest.

For SRP, a vertically Transmission integrated public power utility, SRPs plans for new high-new resources are needed to voltage transmission lines continue to keep prices at depend upon generation affordable levels and meet facilities. The location of customer demand. SRPs generation affects the siting of generation planning for the new transmission lines. SRP next decade includes the owns major transmission lines Value to the Valley While energy costs climb in neighboring states, SRP prices have been reduced three times over the past six years and are on average 10 percent less than a decade ago.

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d transport it other suppliers wishing to sell ones, again contingent upon n as needed. power to the region. the location of new generation ission system With major system resources.

ue to energy improvements, we can This past year, SRP in our service maintain our low-price, reliable completed the Browning tive by the supply. SRP has a six-year Substation in the growing Regulatory transmission plan that calls for eastern region of the service area. This triple-function substation will help maintain reliability while supporting SRPs load serving capability and increasing import capacity.

The substation is named for the late Ronald D. Browning, a 25-year SRP employee.

More than 20,000 MW of new generation from merchant plants either is approved or being sited in Arizona.

Transmission upgrades could bring some of this power into the Valley as well as export it to other regional areas. A new 500 kilovolt (kV) switchyard near Palo Verde Nuclear Generating Station is under construction by SRP for just this purpose.

SRP and another utility are building the Southwest Valley achieve success is SRPs goal. SRP customer Executive Door s custom wood doors for homes and businesses throughout the 500kV Transmission Project to yden, controller for Executive Door, says that SRPs reliable and provide another connection lps the company to maintain uninterrupted production and sts. As a time-of-use customer, Executive Door saved nearly from Palo Verde to the Valley.

ectricity bill last year by shifting power use to off-peak hours. This project will bring an additional 1,200 MW of power to the Valley and protect the Valley load during major line outages. The most significant transmission project tied to 2001 SRP ANNUAL REPORT 9

service by mid-2003. continues its dramatic growth, Statewide and regional maintenance and construction transmission planning and on the SRP distribution system expansion also are issues. increases. The capital plan for Several efforts are underway to distribution projects inside the establish cooperative planning service area focuses on infill that best serves the intercon- needs, consistent with the past nected power superhighway several growth years.

of the West. One such effort in Nearly 50 distribution which SRP is involved is the substations are planned in the Central Arizona Transmission next five years, as well as System Study, a three-phase multiple receiving station process to identify the best transformers, due to load locations for new major trans- growth resulting from a mission, desired in-service continued strong local dates, and joint efforts for economy.

construction of the facilities. Distribution system SRP also is working with reliability is critical for other utilities in Arizona, New customers. This past year, Mexico, Colorado, eastern SRPs reliability index shows Wyoming and western Texas to the distribution systems develop a regional performance at its best ever transmission organization recorded. This success can be (RTO) known as Desert STAR attributed in great part to an (Southwest Transmission and aggressive underground cable Reliability Operator). This is in upgrade program, as well as response to FERC orders for systematic replacements of utilities to voluntarily form wood distribution poles.

RTOs that will be independent transmission system operators. Renewables The RTOs are to focus on To complement SRPs ensuring reliability and non- generation mix, and to further discriminatory access to demonstrate our commitment transmission to help develop to the environment, SRP this robust energy markets as the year constructed a 200 kilowatt industry transitions to both solar generation facility, which deregulated wholesale and doubled our solar portfolio. A retail marketplaces. 4 MW landfill-gas-energy facility NUAL REPORT

a new enerating plant.

working together, SRP and electricity consumers can new sources of gy, SRP ensure that SRP remains one of the best energy values en power in the West.

ail customers.

support the enewable This year, we boosted SRP also provides a large r 100-kilowatt-enrollment on our time-of-use and expanding base of thwise Energy' price plans. Benefits of the plan freestanding, self-service pay of a $29 million are twofold: customers save on stations, located at popular o fund their electric bills, and peak shopping locations for gy options for demand is reduced. Another customer convenience. Other ers.

voluntary program for value-enhancing offers include customers is SRPs M-Power, '

an expanded menu of programs cy the largest prepaid electricity and services for our customers s sharpens on program in North America. The that can be accessed on our and demand, program helps participants save Web site at www.srpnet.com.

up efforts to as well as reduces consumption omers to on the SRP system.

iciency of their r energy aign promotes options to Fuel Mix ption and Natural Gas y working 13%

nd electricity Nuclear ensure that SRP 14%

the best energy Coal 40%

est. Hydro 1%

ice ce efforts all aim and convenient Purchased Power 32%

with us while through Coal and nuclear comprise the majority of and increased SRP generating resources. Purchased power increased this year due to favorable wholesale market conditions.

2001 SRP ANNUAL REPORT 11

re than 1 million acre-feet of water every year to ns, cities, agriculture and other water systems.

ats enough to cover the city of San Francisco in ter 35 feet deep.

Water Across the SRP water municipalities and other service area are majestic water entities.

mountains and arid desert, little towns and booming cities. Groundwater Management Water is critical to this SRPs water stewardship is beautiful and diverse reflected in many ways, none environment, where SRP more important than manages a system of dams, groundwater recharge efforts.

reservoirs, canals and A major SRP underground underground facilities. storage facility in the Salt River Our water stewardship bed is one of the largest ranges from storage to recharge projects in the delivery. Even during this past country and will provide water year, the seventh driest on to the Valley in the event of a record, we delivered the water shortage in surface water needed by our shareholders, supplies.

Don Whitmer, environmental resource specialist, and Cindy Murray, environmental laboratory technician, both SRP employees, sample water of the Salt River just below Stewart Mountain Dam. Such testing is just one of the many water management responsibilities for SRP, the Valleys largest water supplier.

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record-setting pace for water Groundwater Management storage, and in the past seven Code. The code provides the years, 500,000 acre-feet of framework for conserving water from the Central Arizona water in Arizonas populous Project has been recharged. areas, and SRP works in This allowed Arizona to concert with regulators and maximize its Colorado River policymakers to ensure a allotment, and reduced the secure water supply for the need for groundwater pumping future.

in the drier-than-normal past three years. To meet Water Rights anticipated needs, we are SRPs service area planning to increase recharge continues to experience robust capacity, and a similar project population growth, as do other is under consideration at areas of the state. To support another Valley location. the Valleys water requirements, Preservation of the Valleys we continue to maintain the groundwater supply is a surface water and ground-water constant concern. SRP is rights that are the foundation participating in the governors of SRPs 100-year water history.

Water Management As such, we are Commission, which is expected participating in various to make recommendations watershed-planning groups to Value to the Valley The mountains of eastern and northern Arizona make up a 13,000-square-mile watershed for the Valley and provide about two-thirds of SRPs water supply.

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l stakeholders. watershed and the Salt River Our water-use specialists P has provided watershed are the two major regularly consult with blish a research water supply sources for SRP agricultural and municipal program at and the Valley. users to help them manage na University their water consumption, and e ways to satisfy Conservation we upgrade our system to ted demand In our role as water improve measurement and r supplies in steward, SRP provides many minimize water delivery losses.

Conservation also includes the use of alternative water supplies such as municipal effluent. For example, at two power plant expansions, SRP plans to exchange surface water for effluent for cooling purposes. This would reduce fresh water use at the plants and provide the cities with a new surface water source for their customers.

In addition, SRP this year launched - with several municipalities in the Valley - a public campaign on water conservation called Water: Use It Wisely. This educational program helps consumers identify specific and simple ways to save water without affecting quality of life.

uzanne Breitenstein and Dan Corredor are among the countless and cyclists who enjoy the appeal of SRPs canal banks oenix area. From sunup to sundown, the canal banks are a in urban areas. More and more, SRP is working with Valley hese unique areas for neighborhood recreational purposes. For about SRP canals, and a map of canal routes for running and eck out www.srpnet.com/water/canals.

2001 SRP ANNUAL REPORT 15

asured along with the business products and vices delivered. We have a responsibility as a porate citizen to be a good neighbor.

Community It starts as a commitment: means we are able to help Service to others. It continues more business and community every day, week, month and leaders in developing the tools, year at SRP, through organized skills and resources for volunteer initiatives, collaborative solutions to educational programs and community issues.

environmental efforts that Volunteering is a core SRP reach across our communities. business value. Volunteering This year, we received the takes many forms at SRP, coveted Excellence in Corporate including hands-on projects, Community Service Award by board involvement, community the Points of Light Foundation. leadership programs, As one of six companies company-sponsored events worldwide to be so recognized, and financial support of non-SRP is attracting attention as a profit organizations. More than national leader in community 85 percent of SRP employees involvement and volunteerism. participate in community Such best practices recognition outreach activities.

Second-graders at Maryland Elementary School in Phoenix became junior agriculturalists last year, thanks to an SRP Project RESOURCE grant to fund their garden project. The children raised a full vegetable garden, a project that brought them a cross-curriculum lesson in science, math and social studies.

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education grants close a gap and play.

for schools by providing funding for special projects Environmental Stewardship such as science equipment, Protecting and improving reading workshops for parents, the environment is a critical and other learning-skills community commitment, and enhancement efforts. SRP often pairs such efforts This year, as we approach with education for greater our centennial celebration, SRP results.

funded several museum and At our annual Fresh Air cultural projects that will result Science Fair, for example, urban in exhibits to educate the students develop creative ways public about SRPs historic of reducing air pollution with connections to the Valley. assistance from SRP engineers.

Our educational outreach Other initiatives include the also includes a volunteer water resources mentor component, with a literacy program, in which students program for children and a work with SRP water experts to mentorship program for learn conservation strategies, homeless students. In addition, and a micro-society program because safety education is for schoolchildren that always a concern, SRP has provides water and energy launched a comprehensive lessons.

public safety program, SRP Our annual Mowing Down Safety Connection, with season- Pollution campaign scoops up specific messages that build polluting lawn equipment Value to the Valley More than 75 percent of Valley residents say SRP is heavily involved in the local community. This is particularly compelling in view of the fact that nearly one-third of all residents have lived in the area for five years or less.

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nes. Nearly program, which benefits mentoring and cultural ered asthmatic children in education.

ve been elementary schools. Over six In addition, SRPs customer ecycled as a years, these donations exceed assistance program helps ntly removing $25,000. hundreds of families who are d tons of air in a crisis by helping to pay eeds from the Family Enrichment their electric bills. SRP lting scrap SRP actively supports the customers can voluntarily ed to the Valleys Hispanic community contribute to this fund, which raised more than $350,000 last year including matching funds from SRP.

Volunteer efforts also regularly result in returns for non-profit groups that help families. For example, Hospice of the Valley received $40,000 from the Scottsdale Arabian Horse Show, which was staffed by volunteers including SRP employees.

Other family outreach efforts by SRP employees include holiday gift programs, neighborhood clean-ups and home building.

Financial Contributions As well as our corporate-funded community activities, lunteers helped to build their fifth Habitat for Humanity home SRP and its employees last ding a permanent residence for another family in need. Michael perations manager, worked with more than 100 SRP volunteers year donated $1.2 million to ke the home complete.

the United Way and other health and human service organizations. Beyond that, SRP provides $2 million in funding support for other community-based efforts including the arts, environment and recreation.

2001 SRP ANNUAL REPORT 19

57.3 Financial Section Managements Financial and Operational Summary 21 99 00 01 A steady decline in SRPs debt ratio is the result of Combined Financial continued emphasis on Statements reduction of debt capitalization.

22 Notes to Combined Debt Service Coverage Ratio Financial Statements 26 4.72 Report of Independent Public Accountants 37 3.35 3.20 99 00 01 Reductions in debt, combined with operational cost controls, create a positive trend in SRPs debt service coverage ratio.

Net Financing Costs

($Millions) 172.4 172.0 170.5 99 00 01 We continue to realize significant financing cost savings as a result of prior years debt reductions and refundings.

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2001 was an increased 68 percent, mostly reinvested into the company for e for SRP, with due to increased production the benefit of our customers, omic growth in costs. Purchased power costs shareholders and bondholders.

n Phoenix area, increased 148 percent from the ritory retail prior year and fuel expenses Operating Code of Conduct ased wholesale were up 85 percent. Also In accordance with the included in operating expenses requirements of the 1998 Arizona evenues of are the usual and standard Electric Power Competition Act, w 68 percent allowances taken to offset SRP has developed and year with amounts at risk from counter implemented a Code of Conduct.

rom retail parties in the power business. The underlying principles of th, more energy Financing costs held steady, the Code are to protect the public omer due to the maintaining our progress to interest and provide all er homes, reduce and refinance company competitors a fair opportunity to

, and higher- debt. compete in the electric retail sales from In water operations, generation and other competitive w West Energy. delivery revenues were services markets. Effective rowth and sales $12.6 million, compared with January 1, 2001, SRP amended the n expected for $13.2 million the previous year. Code of Conduct to more-clearly and commercial Water-related operating isolate the distribution functions olesale sales expenses were slightly higher and services provided by SRP and n expected due than the prior year. SRPs to simplify the Code.

d demand, and reservoir storage was below We are subject to an annual power in the normal with 1.2 million acre- independent audit of our orable feet stored at the end of the adherence to the Code. Our ts help SRP fiscal year, up about 25 percent second audit covering calendar st, reliable from the previous year. year 2000 was completed in tail customers, Overall, SRPs net revenues February 2001. The audit report as particularly for this fiscal year were confirmed that SRP has complied hat regard. $309.7 million. All of SRPs net in all material respects with the ting expenses revenues are recommitted and Codes requirements.

2001 SRP ANNUAL REPORT 21

$ 5,948,320 $ 5,765,976 234,392 227,423 391,698 396,627 ervice 6,574,410 6,390,026 ulated depreciation on plant in service (3,102,243) (2,926,142) 3,472,167 3,463,884 future use 31,134 31,134 ork in progress 326,215 200,805 et 37,044 40,980 3,866,560 3,736,803 nd Investments perty and other investments 87,573 103,762 ds, net of current portion 352,302 557,642 439,875 661,404 equivalents 636,954 88,935 estments 348,031 366,858 n of segregated funds 72,312 74,294 et of allowance for doubtful accounts 348,307 180,370 25,480 27,610 supplies 60,500 62,669 assets 39,519 29,136 1,531,103 829,872 and Other Assets 516,410 747,545

$ 6,353,948 $ 5,975,624 re an integral part of these combined balance sheets.

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$ 3,098,273 $ 3,164,866 Revenues and Other Comprehensive Income 2,312,014 2,038,893 on 5,410,287 5,203,759 s

n of long-term debt 71,940 74,255 ble 207,129 112,427 and tax equivalents 31,551 32,772 st 52,279 53,029 posits 23,336 22,082 liabilities 159,148 92,686 545,383 387,251 and Other Non-Current Liabilities 398,278 384,614 Contingencies (Notes 3, 5, 7, 8, 9 and 10)

$ 6,353,948 $ 5,975,624 re an integral part of these combined balance sheets.

2001 SRP ANNUAL REPORT 23

es $ 3,026,787 $ 1,797,745 es ed 914,646 368,628 ectric generation 514,049 278,263 g expenses 471,670 304,237 156,002 146,631 nd amortization 473,334 368,016 equivalents 82,335 90,931 ing expenses 2,612,036 1,556,706 ng revenues 414,751 241,039 penses) e 68,147 55,699 s, net (2,662) (5,652) ncome (expenses), net 65,485 50,047 s before financing costs 480,236 291,086 ds, net of capitalized interest 141,578 146,070 f bond discount and issuance expenses 4,951 5,449 er obligations 24,011 20,887 g costs 170,540 172,406 309,696 118,680 sive Income n (loss) on securities (36,575) 21,279 ncome $ 273,121 $ 139,959 re an integral part of these combined financial statements.

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Operating Activities

$ 309,696 $ 118,680 o reconcile net revenues to net cash provided by operating activities:

on and amortization 473,334 368,016 ent benefits expense 23,800 18,000 on of provision for loss on long-term contracts (13,281) (13,281) on of bond discount and issuance expenses 4,951 5,449 on of spent nuclear fuel storage 1,333 1,222 e of property 99 952 rease) in -

and materials & supplies 4,299 (6,482) s, including unbilled revenues, net (167,937) (21,491) s (11,620) (8,795) ease) in -

ayable 94,702 (20,857) xes and tax equivalents (1,221) (4,041) terest (750) (495) lities, net 70,861 (14,029) by operating activities 788,266 422,848 Investing Activities o utility plant, net (372,962) (271,702) increase) in investments 228,138 (78,575) for investing activities (144,824) (350,277)

Financing Activities t of long-term debt, including refundings (73,859) (73,349) segregated funds (21,564) (23,337) for financing activities (95,423) (96,686) rease) in Cash and Cash Equivalents 548,019 (24,115) ning of Year in Cash and Cash Equivalents 88,935 113,050 Year in Cash and Cash Equivalents $ 636,954 $ 88,935 ormation erest (Net of Capitalized Interest) $ 166,339 $ 167,452 re an integral part of these combined financial statements.

2001 SRP ANNUAL REPORT 25

A N Y The Salt River Project Agricultural Improvement and Power District (the District) is an agricultural nt district organized in 1937 under the laws of the State of Arizona. It operates the Salt River Project (the Project),

clamation project, under contracts with the Salt River Valley Water Users Association (the Association) by which ed the obligations of the Association to the United States of America for the care, operation and maintenance of the District owns and operates an electric system that generates, purchases and distributes electric power and energy.

tion operates an irrigation system as the Districts agent.

997, the District established a wholly-owned, taxable subsidiary, New West Energy Corporation (New West Energy),

t retail, energy available to the District that is surplus to the needs of its retail customers, and energy that may be rplus by retail competition in Arizona in the supply of generation. In addition, New West Energy provides other retail ed services to current and prospective energy customers as part of its program to market surplus energy.

N A N D U S E O F U T I L I T Y P L A N T The United States of America retains a paramount right or claim in the Project rom the original construction and operation of certain facilities as a federal reclamation project. Rights to the and use of, and to all revenues produced by these facilities, are evidenced by contractual arrangements with the s.

S O F C O M B I N AT I O N The accompanying combined financial statements reflect the combined accounts of the and the District (together referred to as SRP).The Districts financial statements are consolidated with its two wholly-ble subsidiaries, New West Energy and Papago Park Center, Inc. (PPC). PPC is a real estate management company.

intercompany transactions and balances have been eliminated.

O N A N D P R I C I N G P O L I C I E S Under Arizona law, the Districts publicly elected Board of Directors (the Board) regulatory body and has the exclusive authority to establish electric prices.The District is required to follow certain including public notice requirements and special Board meetings, before implementing changes in standard electric ules.

icant Accounting Policies ACCOUNTING The accompanying combined financial statements are presented in conformity with accounting enerally accepted in the United States (GAAP) and reflect the pricing policies of the Board.The Districts regulated apply Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of (SFAS No. 71), while non-regulated operations follow GAAP for enterprises in general. Classification of regulated ulated operations is determined in accordance with applicable GAAP accounting guidelines.

tion of financial statements in compliance with GAAP requires management to make estimates and assumptions he reported amounts in the financial statements and disclosures of contingencies.Actual results could differ from the L A N T Utility plant is stated at the historical cost of construction, less any impairment losses. Capitalized n costs include labor, materials, services purchased under contract, and allocations of indirect charges for engineering,

, transportation and administrative expenses and capitalized interest or an allowance for funds used during n (AFUDC).AFUDC is the estimated cost of debt and equity funds used to finance regulated plant additions and is n prices through depreciation expense over the useful life of the related asset.The cost of property that is replaced, abandoned, together with removal costs, less salvage, is charged to accumulated depreciation.

e rate of 5.54% and 5.41% was used in fiscal years 2001 and 2000 to calculate interest on funds used to finance n work in progress, resulting in $6.0 million and $5.3 million of interest capitalized, respectively.

n expense is computed on the straight-line basis over the estimated useful lives of the various classes of plant assets.

ng table reflects the Districts average depreciation rates on the average cost of depreciable assets, for the fiscal years 30:

2001 2000 ectric depreciation rate 3.58% 3.34%

igation depreciation rate 2.20% 1.97%

mmon depreciation rate 5.84% 6.81%

E N S E Bond discount and issuance expenses are being amortized using the effective interest method over the related bond issues.

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U E L The District amortizes the cost of nuclear fuel using the units of production method.The nuclear fuel and the disposal expense are components of fuel expense.Accumulated amortization of nuclear fuel at 1 and 2000 was $301.0 million and $283.2 million, respectively.

DECOMMISSIONING The total cost to decommission the Districts 17.49% share of Palo Verde Nuclear Generating NGS) is estimated to be $271.8 million, in 1998 dollars.This estimate is based on a site specific study prepared by an t consultant, assuming the prompt removal/dismantlement method of decommissioning authorized by the Nuclear Commission (NRC).This study is updated as required, every three years, and was last updated in the fall of 1998. Based site study, the District estimates its share of ultimate decommissioning expenditures will be $1.9 billion.The estimate nings on the decommissioning funds of 7.65%, as well as a future annual escalation rate of 5.92% in decommissioning tual decommissioning costs may vary from the estimate. Expenditures for decommissioning activities are anticipated een-year period beginning in 2024. Estimated decommissioning costs are accrued over the estimated useful life of liability associated with decommissioning is included in deferred credits and other non-current liabilities in the ing Combined Balance Sheets and amounted to $84.9 million and $76.8 million as of April 30, 2001 and 2000, Decommissioning expense, net of earnings on trust fund assets, of $4.3 million and $4.1 million was recorded in 2001 and 2000, respectively.The District contributes to a trust set up in accordance with the NRC requirements.

oning funds of $113.5 million and $122.1 million, stated at market value, as of April 30, 2001 and 2000, respectively, he trust and are classified as segregated funds in the accompanying Combined Balance Sheets. Unrealized gains issioning fund assets of $30.2 million and $46.6 million at April 30, 2001 and 2000, respectively, are included in d comprehensive income as a component of accumulated net revenues.

NG FOR ENERGY RISK MANAGEMENT ACTIVITIES The District has an energy risk management program to re to risks inherent in normal energy business operations.The goal of the energy risk management program is to d minimize exposure to price risks, credit risks, and control risks. Specific goals of the energy risk management lude reducing the impact of market fluctuations on energy commodity prices associated with customer energy s, excess generation and fuel expenses, meeting customer pricing needs, and maximizing the value of physical ssets.The District employs established policies and procedures to meet the goals of the energy risk management ng various physical and financial instruments, including forward contracts, futures, swaps and options.These activities ed for primarily using hedge accounting methods with gains and losses on these transactions initially deferred and other current assets or liabilities in the accompanying Combined Balance Sheets and then recognized as a of fuel or purchased power expense when the hedged transaction occurs.

struments that do not qualify for hedge accounting are minimal and resulting gains and losses are immaterial.

s contractual commitments to purchase and sell energy are accounted for using the aggregate lower of cost or market ccounting.

AT I O N S O F M A R K E T A N D C R E D I T R I S K Market risk is the risk that changes in market prices or customer l adversely affect earnings and cash flows. Industry movements towards competition in electric generation subject the arket risk associated with energy commodities such as electric power and natural gas. Recovery of costs to produce a non-regulated environment will be affected by changes in competitive market prices for both production resources ket price of energy sales to ultimate customers.

ontractual arrangements to manage the risks associated with changes in energy commodity prices creates credit risk sulting from the possibility of nonperformance by counterparties pursuant to the terms of their contractual In addition, volatile energy prices can create significant credit exposure from energy market receivables.The District Policy for wholesale counterparties, and monitors credit exposures continuously, routinely assesses the financial ts counterparties, and minimizes credit risk by dealing primarily with creditworthy counterparties and by requiring dit, parent guarantees or other collateral when it does not consider the financial strength of a counterparty sufficient.

X E S The District is exempt from federal and Arizona state income taxes.Accordingly, no provision for income en recorded for the District in the accompanying combined financial statements.

nergy recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been n its financial statements or tax returns. Deferred tax liabilities and assets are determined based on differences financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the ch the differences are expected to reverse. Since its inception in May 1997, the tax effect of New West Energys results s has been immaterial.

I VA L E N T S The District treats short-term temporary cash investments with original maturities of three months sh equivalents.

2001 SRP ANNUAL REPORT 27

S A N D S U P P L I E S , A N D F U E L S T O C K S Material and supplies are stated at average cost. Fuel stocks are stated the last-in, first-out method.

I S S U E D A C C O U N T I N G S TA N D A R D S Effective May 1, 2001, the District adopted SFAS No. 133, Accounting e Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards at every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded ce sheet as either an asset or liability measured at its fair value. It also requires that changes in the fair value of the e recognized each period in current earnings or other comprehensive income depending on the purpose for using e and/or its qualification, designation, and effectiveness as a hedging transaction.The statement requires a formal ion of hedge designation and assessment of the effectiveness of transactions that receive hedge accounting.Any e fair value resulting from ineffectiveness, as defined by SFAS No. 133, is recognized currently in earnings.Adoption tandard did not result in a material impact on the Districts earnings, as most derivative activities qualified for hedge under SFAS No. 133.

to April 30, 2001, the Financial Accounting Standards Board (FASB) reached a tentative conclusion regarding an n of SFAS No. 133 dealing with extending the eligibility of qualifying for the normal purchases and sales exception to racts for the purchase and sale of electricity by public electric utilities.The tentative conclusion reached allows these tracts to qualify for the normal purchases and sales exception if certain criteria are met.The conclusion also applies rchase or sale agreements, even if they are subject to being booked out (subject to unplanned netting of

).

this type entered into by the District generally meet the above criteria and would therefore qualify under the normal nd sales exception. If the FASB reverses its position in its tentative conclusion, the District may be required to mark its ption purchase contracts to fair market value, which could have either a positive or negative material impact on the ancial statements.

atory Issues:

TA L C H A N G E S I N T H E E L E C T R I C U T I L I T Y I N D U S T RY The District historically operated in a highly regulated t in which it had an obligation to deliver electric service to customers within its service area. In May 1998, the Arizona er Competition Act (the Act) authorized competition in the retail sale of electric generation, recovery of stranded ompetition in billing, metering and meter reading.

ws a temporary surcharge on electric distribution service prices to pay for all or a portion of unmitigated stranded tric generation service that were incurred as a direct result of the onset of competition. Such costs must have been serve customers in Arizona before December 26, 1996.This surcharge may not continue past December 31, 2004, and use prices to exceed the prices that were in effect on December 30, 1998.

he Arizona Corporation Commission (the Commission), which regulates public service corporations, has been o settlement agreements with each of its regulated utilities, establishing terms and conditions precedent to a or stranded cost recovery and unbundled tariffs. Beginning January 1, 2001, all customers may select an alternative rovider.

Energy Regulatory Commission (FERC) regulates the electric utility industry under the authority of various statutes.

rules in 1996 mandating, among other things, open nondiscriminatory access to transmission lines.The rules require transmission service in order to use the transmission systems of public utilities.The District has filed a comparable transmission tariff to ensure reciprocal access, pursuant to rules FERC developed for nonjurisdictional entities like In addition, FERC issued its Order No. 2000 in December 1999, requiring all jurisdictional public utilities that own, ontrol interstate transmission to attempt to develop proposals for regional transmission organizations (RTO).The rticipating in the development of an RTO for the Southwest region and parts of the Rocky Mountain region.

P O N S E T O T H E C H A N G I N G R E G U L AT O RY E N V I R O N M E N T The Board passed resolutions in August 1998 and 998 to open 20% of the Districts 1995 retail load to competition for the retail sale of electric generation on December ing the first two years of competition, customers who elected competitive electric services could also choose billing, nd meter reading services on a competitive basis if their demand exceeded one megawatt. In April 2000, the Board olution opening the Districts entire service area to generation competition to electricity suppliers approved by the

.The service area was opened to generation competition beginning June 1, 2000, and to competition in billing, d meter reading beginning December 31, 2000.The Districts electric distribution area will remain regulated by its he District will not provide distribution services in the distribution areas of other utilities.

NNUAL REPORT

asses. On April 10, 2000, the District approved a price plan redesign that resulted in an overall average 1.0% further ion.The new price plans more closely align the components of the unbundled price plans to costs. In almost all ergy price (shopping credit) has been increased, further promoting competition.The new price plans were effective

.The District prices its electric generation based upon market and cost induced factors.The new price plans do not vel of competitive transition charge (CTC) to be collected.

on with the August 1998 and December 1998 resolutions, the Board authorized the District to recover a non-bypassable

.0 million. In June 2001, the Board passed an additional resolution which stated the District would stop collecting the e June 1, 2004.As a result of this resolution, management has determined, based upon projections using current onditions, it is no longer probable that the full CTC amount may be collected. Management has, therefore, reduced of the CTC asset and taken a charge to depreciation and amortization expense of $85.0 million as of April 30, 2001.

through a surcharge to the Districts transmission and distribution customers, the Board also allowed for recovery of rograms that benefit the general public, such as discounted rates for the elderly or impoverished, efficiency programs, e management measures, renewable energy programs, economic development, research and development and ommissioning, including the cost of spent fuel storage.These surcharges have been separately identified and included cts price plans for the regulated portion of its operations.

as provided mechanisms for evaluation of the CTC during the transition period, with respect to actual market price om the 2.6 cent market price per kWh used to determine the CTC, and with respect to activities to mitigate operation nance costs. If the CTC is fully recovered before the end of the planned collection period, the District will cease f the CTC.Additionally, if cost mitigation exceeds certain targets, some of the savings from mitigation will be used to CTC charge.

RY A C C O U N T I N G The District accounts for the financial effects of the regulated portion of its operations in with the provisions of SFAS No. 71, which requires cost-based, rate-regulated utilities to reflect the impacts of ecisions in their financial statements.

f the Board actions in August 1998, the District discontinued the application of SFAS No. 71 for its electric generation n fiscal year 1999. From that time forward, the provisions of SFAS No. 101, Regulated Enterprises: Accounting for the ion of Application of FASB Statement No. 71, have been applied to the portion of its business which no longer meets ns of SFAS No. 71.

r 1999, the District evaluated the carrying amounts of its generation operations in relation to future cash flows be generated from their use in a competitive environment and determined that $850.2 million of these assets were pairment of $631.8 million was attributable to generation operations, and $163.7 million was attributable to long-term racts. Of the total impairment, a maximum of $795.0 million may be recovered through the CTC, and such amount was a regulatory asset (CTC asset).The CTC asset will be recovered through the competitive transition charge over the began December 31, 1998, and will continue through May 31, 2004. Since December 31, 1998, the District has amortized

$403.4 million of CTC asset to depreciation and amortization and recovered $312.0 million through CTC revenue.

ssets for spent nuclear fuel storage are being amortized over the life of the nuclear plant. Other regulatory assets are ized over an eight-year period, which began in fiscal year 1997. Regulatory assets are included in deferred charges sets on the accompanying Combined Balance Sheets.

arges and other assets consist primarily of the following at April 30 (in thousands):

2001 2000 tory asset $ 392,097 $ 608,900 asance regulatory asset 36,600 50,815 ear fuel storage regulatory asset 21,974 21,565 nsion benefits 32,700 22,100 33,039 44,165

$ 516,410 $ 747,545 re to occur making full recovery of these regulatory assets no longer probable, the District would be required to write ining balance of such assets as a one-time charge to net revenues.

2001 SRP ANNUAL REPORT 29

or contract losses $ 132,741 $ 146,021 ost-retirement benefit liability 113,200 96,400 ecommissioning costs 84,946 76,862 ent nuclear fuel storage 24,915 23,173 42,476 42,158

$ 398,278 $ 384,614 sults from the separable portion of the Districts operations that do not meet the provisions of SFAS No. 71 are as housands):

Fiscal Fiscal Year Ended Year Ended April 30, 2001 April 30, 2000 evenues $ 2,277,240 $ 1,019,144 expenses 1,770,065 899,072 g revenues from non-regulated operations $ 507,175 $ 120,072 in the separable portion of the Districts operations that no longer meet the provisions of SFAS No. 71 are as follows at thousands):

2001 2000 nt in service $ 3,460,089 $ 3,115,865 ulated depreciation (1,985,330) (1,797,266) ed in non-regulated operations $ 1,474,759 $ 1,318,599 ulated Net Revenues and Other Comprehensive Income:

g table summarizes accumulated net revenues and other comprehensive income (in thousands):

Accumulated Accumulated Net Revenues Accumulated Other & Other Net Comprehensive Comprehensive Revenues Income Income April 30, 1999 $ 1,817,415 $ 81,519 $ 1,898,934 es 118,680 118,680 zed gain on available-for-sale securities 21,279 21,279 April 30, 2000 1,936,095 102,798 2,038,893 es 309,696 309,696 zed loss on available-for-sale securities (36,575) (36,575)

April 30, 2001 $ 2,245,791 $ 66,223 $ 2,312,014 of unrealized gain (loss) originates from decommissioning trust and segregated fund investments. Net unrealized n available-for-sale securities consists of gross unrealized gain (loss) on equity funds of $(41.1) million and $24.1 gross unrealized gain (loss) on debt funds of $4.5 million and $(2.8) million at April 30, 2001 and 2000, respectively.

NNUAL REPORT

ebt consists of the following at April 30 (in thousands):

Interest Rate 2001 2000 onds (mature through 2031) 4.3 - 7.0% $ 2,713,999 $ 2,787,589 ed bond discount (68,786) (73,468) ue bonds outstanding 2,645,213 2,714,121 al paper 2.9 - 4.3% 525,000 525,000 erm debt 3,170,213 3,239,121 ent portion (71,940) (74,255) rm debt net of current portion $ 3,098,273 $ 3,164,866 maturities of long-term debt (excluding commercial paper and unamortized bond discount) as of April 30, 2001, due in the nding April 30, are as follows (in thousands):

2002 $ 71,940 2003 94,812 2004 100,102 2005 113,253 2006 107,237 Thereafter 2,226,655

$ 2,713,999 B O N D S Revenue bonds are secured by a pledge of, and a lien on, the revenues of the electric system, after perating expenses, as defined in the bond resolution. Under the terms of the bond resolution, the District is required a debt service fund for the payment of future principal and interest. Included in segregated funds in the ing Combined Balance Sheets is $283.7 million and $346.9 million of debt service related funds as of April 30, 2001 spectively.

has $80.4 million of mini-revenue bonds outstanding which can be redeemed at the option of the bondholder under umstances.The District has a $25.0 million revolving line-of-credit agreement available to refinance these bonds if edemption requests occur. Based on historical redemptions made on these bonds, management believes that these ments are more than sufficient.

rvice coverage ratio, as defined in the bond resolution, is used by bond rating agencies to help evaluate the financial he District. For the years ended April 30, 2001 and 2000, the debt service coverage ratio was 4.72 and 3.35, respectively.

the amortization of the bond discount and issue expense on the various issues results in an effective rate of he remaining term of the bonds.

has authorization to issue additional Electric System Revenue Bonds totaling $497.7 million principal amount and em Refunding Revenue Bonds totaling $2.9 billion principal amount. On March 1, 2001, the District filed an with the Commission for authorization to issue an additional $500.0 million Electric System Revenue Bonds and on Electric System Refunding Revenue Bonds.This application was amended June 11, 2001 requesting an additional on Electric System Revenue Bonds and $200.0 million Electric System Refunding Revenue Bonds.

I A L PA P E R The District has issued $525.0 million of tax-exempt commercial paper consisting of $375.0 million e and $150.0 million Series A Issue, initiated in fiscal year 1998.The issues have an average weighted interest rate to of 3.3%.The commercial paper matures not more than 270 days from the date of issuance and is an unsecured f the District.The commercial paper has been classified as long-term debt in the accompanying Combined Balance nnection with refinancing terms under two revolving line-of-credit agreements that support the commercial paper.

erms of these agreements, the District may borrow up to $525.0 million through May 6, 2003.

volving credit agreements contain covenants that could prohibit borrowing under certain conditions, management t financing would be available.The District has never borrowed under the two agreements and management does not o so in the future.Alternative sources of funds to support the commercial paper program include existing funds on issuance of alternative debt, such as revenue bonds.

O B L I G AT I O N B O N D S In 1984, the District refunded its then-outstanding general obligation bonds.Although the onstituted an in-substance defeasance of the prior lien on revenues which secured the bonds, the general obligation nue to be general obligations of the District, secured by a lien upon the real property of the District, the authority of to assess taxes, and a guarantee by the Association.As of April 30, 2001, the amount of defeased general obligation anding was $4.4 million.

2001 SRP ANNUAL REPORT 31

alue of Financial Instruments:

g methods and assumptions were used to estimate the fair value of each class of financial instruments identified in g items in the accompanying Combined Balance Sheets.

T S I N M A R K E TA B L E S E C U R I T I E S The District invests in U.S. government obligations, certificates of deposit arketable investments. Such investments are classified as other investments, segregated funds, cash and cash or temporary investments in the accompanying Combined Balance Sheets depending on the purpose and duration ment.The fair value of marketable securities with original maturities greater than one year is based on published

.The carrying amount of marketable securities with original maturities of one year or less approximates their fair se of their short-term maturities.

M DEBT The fair value of the Districts revenue bonds, including the current portion, was estimated by using es from independent sources.The carrying amount of commercial paper approximates the fair value because of its aturities.

RRENT ASSETS AND LIABILITIES The carrying amounts of receivables, accounts payable, customers other current liabilities in the accompanying Combined Balance Sheets approximate fair value because of their aturities.

ed carrying amounts and fair values of the Districts financial instruments, at April 30, are as follows (in thousands):

2001 2000 Carrying Fair Carrying Fair Amount Value Amount Value s in marketable securities:

nvestments $ 13,000 $ 13,117 $ 30,000 $ 29,332 ated funds 424,614 422,788 631,936 633,385 rary investments 348,031 348,060 366,858 366,858 debt $ 3,170,213 $ 3,342,096 $ 3,239,121 $ 3,309,597 N G F O R D E B T A N D E Q U I T Y S E C U R I T I E S The Districts investments in debt securities are reported at ost if the intent is to hold the security to maturity. At April 30, 2001, the Districts investments in debt securities have es ranging from May 1, 2001 to November 15, 2010. Other debt and equity securities are reported at market, with ains or losses included as a separate component of Accumulated Net Revenues and Other Comprehensive Income.

s investments in debt and equity securities are included in temporary investments, segregated funds and non-utility her investments in the accompanying Combined Balance Sheets.

yee Benefit Plans, Incentive Program and Severance Plans:

ENEFIT PENSION PLAN AND OTHER POST-RETIREMENT BENEFITS SRPs Employees' Retirement Plan overs substantially all employees.The Plan is funded entirely from SRP contributions and the income earned on n assets. No contributions were required in fiscal years 2001 or 2000.

ets consist primarily of stocks, U.S. government obligations, corporate bonds and real estate funds.The unrecognized n asset is being amortized over 15 years, beginning in 1988.

s a non-contributory defined benefit medical plan for retired employees and their eligible dependents and a non-defined benefit life insurance plan for retired employees. Employees are eligible for coverage if they retire at age with at least five years of vested service, or any time after attainment of age 55 with a minimum of ten years of vested funding policy is discretionary and is based on actuarial determinations.The unrecognized transition obligation is ized over 20 years, beginning in 1994.

g tables outline changes in benefit obligations, plan assets, the funded status of the plans, and amounts included in ned financial statements as of April 30, based on January 31 valuation dates (in thousands):

NUAL REPORT

benefits obligation:

bligation at beginning of year $ 510,800 $ 575,900 $ 170,400 $ 142,500 ost 14,300 17,400 4,400 3,700 ost 40,100 36,800 13,400 9,100 ents 8,400 loss (gain) 17,700 (96,600) 34,200 21,500 paid (24,000) (22,700) (7,000) (6,400) it obligations at end of year $ 567,300 $ 510,800 $ 215,400 $ 170,400 plan assets:

of plan assets at beginning of year $ 699,100 $ 672,600 $ $

turn on plan assets 30,000 49,200 contributions 7,000 6,400 paid (24,000) (22,700) (7,000) (6,400) alue of plan assets at end of year $ 705,100 $ 699,100 $ $

tus $ 137,800 $ 188,300 $ (215,400) $ (170,400) ed transition obligation (asset) (4,000) (8,000) 67,900 73,600 ed net actuarial (gain) loss (111,000) (160,200) 32,500 (1,200) ed prior service cost 9,900 2,000 y 31 contributions 1,800 1,600 set (liability) recognized $ 32,700 $ 22,100 $ (113,200) $ (96,400) nefit cost $ 32,700 $ 22,100 $ $

enefit liability (113,200) (96,400) mount recognized $ 32,700 $ 22,100 $ (113,200) $ (96,400) plan was amended effective January 1, 2001 to provide a retiree pension enhancement, as well as enhanced benefits employees.

internally funds its other benefits obligation.At April 30, 2001 and 2000, $148.0 million and $151.7 million of unds, respectively, are designated for this purpose.

erage assumptions used to calculate actuarial present values of benefit obligations were as follows:

Pension Benefits Other Benefits 2001 2000 2001 2000 te 7.5% 8.0% 7.5% 8.0%

eturn on plan assets 9.0% 9.5% N/A N/A mpensation increase 4.0% 4.0% 4.0% 4.0%

es who retire at age 65 or younger, for measurement purposes, an 8.0% annual increase before attainment of age 65 annual increase on and after attainment of age 65 in per capita costs of health care benefits were assumed during ates were assumed to decrease 0.5% per year until equaling 6.0% in all future years.

s of net periodic benefit (gain) costs for the years ended April 30, are as follows (in thousands):

Pension Benefits Other Benefits 2001 2000 2001 2000 t $ 14,300 $ 17,400 $ 4,400 $ 3,700 t 40,100 36,800 13,400 9,100 eturn on plan assets (59,100) (44,600) on of transition obligation (asset) (4,000) (4,000) 5,700 5,700 d net actuarial (gain) loss (2,400) 300 (800) on of prior service cost 400 400 c benefit (gain) cost $ (10,700) $ 6,000 $ 23,800 $ 17,700 2001 SRP ANNUAL REPORT 33

One- One-Percentage- Percentage-Point Point Increase Decrease tal service cost and interest cost components $ 2,100 $ (1,600) ost-retirement benefit obligation $ 23,000 $ (20,700)

O N T R I B U T I O N P L A N SRPs Employees' 401(k) Plan (the 401(k) Plan) covers substantially all employees.

Plan receives employee contributions and partial employer matching contributions. Employer matching contributions

) Plan were $5.9 million and $5.4 million during fiscal years 2001 and 2000, respectively.

I N C E N T I V E C O M P E N S AT I O N P R O G R A M SRP has an incentive compensation program that covers sub-regular employees.The incentive compensation amount is based on achievement of pre-established targets.An 28.2 million and $25.9 million for fiscal years ended April 30, 2001 and 2000, respectively, is included in other current the accompanying Combined Balance Sheets.This liability is stated net of a receivable from participants in jointly ric utility plants of $3.3 million and $3.0 million at April 30, 2001 and 2000, respectively.

sts in Jointly Owned Electric Utility Plants:

has entered into various agreements with other electric utilities for the joint ownership of electric generating and facilities. Each participating owner in these facilities must provide for the cost of its ownership share.The Districts enses of the jointly owned plants is included in operating expenses in the accompanying Combined Statements nues.

g table reflects the Districts ownership interest in jointly owned electric utility plants as of April 30, 2001 ds):

Construction Station Ownership Plant in Accumulated Work in Share Service Depreciation Progress rs (NM) (Units 4 & 5) 10.00% $ 102,564 $ (75,638) $ 1,776 V) (Units 1 & 2) 10.00% 63,668 (42,481) 3,120

) (Units 1, 2 & 3) 21.70% 345,099 (186,058) 1,142 O) (Unit 2) 50.00% 110,939 (55,210) 1,876 (Units 1 & 2) 29.00% 238,490 (140,637) 5,253

) (Units 1, 2 & 3) 17.49% 1,095,272 (748,342) 24,494

$ 1,956,032 $ (1,248,366) $ 37,661 acts as the operating agent for the participants in the Navajo Generating Station (NGS).

itments:

Y G U A R A N T E E S The District acts as guarantor for New West Energys contractual obligations as necessary to rmance security requirements under agreements with utility distribution companies, brokers and counterparties for dge transactions, and power purchasers and sellers.

ENT PROGRAM The improvement program represents SRPs six-year plan for major construction projects and nditures for existing generation, transmission, distribution and irrigation assets. For the 2002-2007 period, SRP estimates nditures of approximately $3.2 billion. Major construction projects include generation expansion at the Kyrene and erating Stations, as well as other key strategic distribution and transmission projects.The six-year improvement program s for future increased ownership in the Mohave Generating Station.

M POWER CONTRACTS The District entered into three contracts, collectively, with the United States Bureau of (United States), the Western Area Power Administration and the Central Arizona Water Conservation District r the long-term sale, through September 2011 to the District, of power and energy associated with the United States to NGS.The amount of energy available to the District varies annually and is expected to decline over the life of the e District pays a fixed amount under the contracts, pays the cost of NGS generation and other related costs, and rgy at cost to CAWCD for Central Arizona Project facilities.The fixed portion of the Districts payment obligations ree contracts totals $47.0 million annually through fiscal year 2006, and $254.3 million thereafter. Of the total 25.2 million annually through fiscal year 2006 and $136.5 million thereafter are unconditionally payable regardless of ity of power. Payments under these contracts totaled $76.5 million and $84.7 million in fiscal years 2001 and 2000, NNUAL REPORT

tal payments under these two contracts, including the minimum payments, were $62.9 million and $57.9 million in 001 and 2000, respectively. In conjunction with the impairment analysis performed on generation-related operations, as recorded provisions for losses on these contracts.The provisions recorded in August 1998, of $163.7 million, are ized over the life of the contracts, commencing January 1, 1999.Amortization of $13.3 million has been reflected as a fuel expense in fiscal years 2001 and 2000.The remaining liability at April 30, 2001 of $132.7 million is included in dits and other non-current liabilities in the Combined Balance Sheets.

2001, the District entered into a ten-year contract for the long-term exclusive purchase of power and energy a generating facility (Facility) located in Southern Arizona.The amount of energy available to the District is ly 596 MW annually and payments are fixed at $65.5 million for fiscal year 2002, $61.3 million in each of fiscal years h 2006, and $285.5 million thereafter.These payments include costs for both capacity and operation and maintenance y.

ion of the contract, the present value of the fixed payment attributable to capacity costs meets the requirement for or this contract as a capital lease; therefore, the District will record the present value of the capacity payments nt and capital lease obligation in the Combined Balance Sheet in fiscal year 2002.The cost recorded to utility plant eciated over the term of the contract and payments under the contract attributable to the capacity cost will be the capital lease obligation and interest expense.

bove Facility contract, the District exercised an option to supply all natural gas required to operate the Facility.

n with exercising this option, the District entered into a ten-year gas index basis swap agreement with the Facility ich provides that both parties will share equally, based on the volume of natural gas purchased daily, in the price etween the SoCal Gas Daily Index and the Permian Basin Gas Daily Index.To mitigate its exposure to fluctuations in rices of natural gas under the swap, the District has purchased natural gas financial swaps on both the SoCal Gas and the Permian Basin Gas Daily Index to hedge a portion of the estimated natural gas requirements.The natural gas annually through December 2005.

LY At April 30, 2001, minimum payments under long-term coal contract commitments are estimated to be n annually in fiscal years 2002 and 2003, $121.4 million in fiscal year 2004, $117.9 million in fiscal year 2005, n in fiscal year 2006, and $427.6 million thereafter.

gencies:

N S U R A N C E Under existing law, public liability claims that could arise from a single nuclear incident are

.5 billion. PVNGS participants insure for this potential liability through commercial insurance carriers to the mount available ($200.0 million) with the balance covered by an industry-wide retrospective assessment program as the Price-Anderson Act. If losses at any nuclear power plant exceed available commercial insurance, the District could retrospective premium adjustments.The maximum assessment per reactor per nuclear incident under the program is $88.1 million including a 5% surcharge, which could be applicable in certain circumstances, but not 10.0 million per reactor may be charged in any one year for each incident.

e Districts ownership share in PVNGS, the maximum potential assessment would be $46.2 million, including the 5%

ut would be limited to $5.2 million per incident in any one year.

LEAR FUEL Under the Nuclear Waste Policy Act of 1982, the District pays 1/10 of one cent per kWh on its energy generation at PVNGS to the Department of Energy (DOE).The DOE was responsible for the selection and t of repositories for permanent storage and disposal of spent nuclear fuel not later than December 31, 1998. However, not yet accepted spent nuclear fuel and high-level radioactive waste from operators of any nuclear power plants.

he significant delays in the DOEs schedule, it is not certain when the DOE will accept PVNGS waste or waste from ners of nuclear power plants. Extended delays or default by the DOE would lead to consideration of costly nvolving serious siting and environmental issues.

tates Court of Appeals for the District of Columbia Circuit has ruled that the DOE had an obligation to begin ed nuclear fuel in 1998. However, the court refused to issue an order compelling the DOE to begin accepting used rt ruled that any damages incurred by utilities should be sought under the standard contract between the DOE utilities.This ruling is under appeal and the final determination is pending.

capacity in existing fuel storage pools to accommodate spent fuel discharges from normal operations through 2002.

storage is being augmented with new facilities for on-site dry cask storage of spent fuel for at least the balance of the ensed life beyond 2002, subject to obtaining any required government approvals.The Districts share of on-site interim NGS is estimated to be $24.9 million for costs to store spent nuclear fuel from inception of the plant to date, and per year going forward.These costs have been included in the Districts regulated operations price plans for and distribution.

2001 SRP ANNUAL REPORT 35

using the United States to breach its fiduciary duty to the Navajo Nation and for violating federal racketeering statutes.

arises out of the renegotiations in 1987 of coal royalty and lease agreements to mine coal for the Navajo and Mohave Stations.The suit alleges $600.0 million in damages and seeks treble damages along with punitive damages of not less llion.The District denies all charges and is vigorously defending itself. On March 15, 2001, the court granted the motion Tribe to intervene in the suit. However, on May 16, 2001, the court granted the Districts earlier motions to dismiss in

. An appeal by the Navajo Nation is probable. In addition, the court has not yet addressed the Districts motions to Hopi Tribes claims. Because this litigation is still in preliminary stages, the District is unable to assess the extent of its bility, if any, or the potential impact of the lawsuit to the Districts financial position or results of operations.

E N TA L SRP is subject to numerous legislative, administrative and regulatory requirements relative to air quality, y, hazardous waste disposal, and other environmental matters. SRP conducts ongoing environmental reviews of its r compliance and to identify those properties it believes may require remediation. Such requirements have resulted tinue to result in increased costs associated with the operation of existing properties.

TY The federal Clean Air Act (CAA), as amended, among other things, requires reductions in sulfur dioxide and de emissions from electric generating stations and regulates emissions of hazardous air pollutants by generating ution control equipment has already been installed at both the Navajo Generating Station and the Hayden Generating r 1999, the participants in Mohave Generating Station agreed to a settlement in a lawsuit alleging numerous and iolations of opacity and sulfur dioxide standards. Under the terms of the settlement, the participants must install by 006, a sulfur dioxide scrubber and other pollution control equipment. Capital costs are estimated at $300.0 million, of istricts share would be $30.0 million.These costs are included in the capital contingencies portion of the 2002-2007 t Program.

001, the participants in the Craig Generating Station agreed to settle a lawsuit alleging, among other things, numerous opacity standards by Craig Units 1 and 2. Under the terms of the settlement, the participants must install fabric filter nd other equipment on Units 1 and 2 by December 31, 2003 and June 30, 2004, respectively. Capital costs are

$123.0 million, of which the Districts share would be $35.6 million.These costs are included in the capital es portion of the 2002-2007 Improvement Program.

E R E C L A M AT I O N In managements opinion, there are sufficient accruals in the accompanying combined tements for the Districts obligation to reimburse certain coal providers for amounts due for certain coal mine costs. However, the District is contesting certain other coal mine reclamation costs. Neither the Districts responsibility ate amount of liability, if any, can be determined at this time. Management does not believe that the outcome of these have a material adverse effect on the Districts financial position or results of operations.

A E N E R G Y M A R K E T I S S U E S In 1996, California adopted a restructuring program for the electric utility t combined generation divestiture and reliance on wholesale spot markets with rigid retail price controls.The situation compounded by significant increases in fuel costs, transmission constraints between northern and southern nd a relatively dry period in the northwest, which has significantly reduced the amount of hydroelectric power e result has been a dysfunctional energy market, exponentially high wholesale prices, bankruptcy of Californias tor owned utility (Pacific Gas and Electric Company), and inadequate resources to serve customers.

he Districts close ties to the California energy market, both as a seller and buyer of wholesale energy, the activities Energy in marketing energy and related energy services in California and the role of Southern California Edison of the Mohave Generating Station and a participant in other jointly owned facilities, the District is closely monitoring ts in California and their potential impact on the District. Nevertheless, based upon transactions to date, the District lieve that the foregoing matters will have a material adverse effect on its financial position or liquidity. However, the not predict with certainty the impact that any future resolution, or attempted resolution, of the California energy tion may have on it, New West Energy, or the regional energy market in general.

T T E R S From time to time, SRP is involved in litigation and disputes with various Indian tribes on issues regulatory jurisdiction, royalty payments, taxes and water rights, among others (see Navajo Nation Lawsuit above).

f these matters may result in increased operating expenses.

I G AT I O N In the normal course of business, SRP is exposed to various litigation or is a defendant in various tters. In managements opinion, the ultimate resolution of these matters will not have a material adverse effect on ial position or results of operations.

RANCE The District maintains various self-insurance retentions for certain casualty and property exposures. In District has insurance coverage for amounts in excess of its self-insurance retention levels.The District provides for ed on managements best estimate of claims, including incurred but not reported claims. In managements opinion, established for these claims are adequate and any changes will not have a material adverse effect on the Districts sition or results of operations.

NNUAL REPORT

rd of Directors, roject Agricultural Improvement District, and overnors, alley Water Users Association:

udited the accompanying combined balance sheets of the SALT RIVER PROJECT AGRICULTURAL ENT AND POWER DISTRICT AND SUBSIDIARIES, and the SALT RIVER VALLEY WATER USERS ON (collectively, the Company) as of April 30, 2001 and 2000, and the related combined statements nues and comprehensive income and cash flows for the years then ended.These financial are the responsibility of the Companys management. Our responsibility is to express an opinion nancial statements based on our audits.

cted our audits in accordance with auditing standards generally accepted in the United States.

dards require that we plan and perform the audit to obtain reasonable assurance about whether al statements are free of material misstatement.An audit includes examining, on a test basis, upporting the amounts and disclosures in the financial statements.An audit also includes assessing ting principles used and significant estimates made by management, as well as evaluating the ncial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

ion, the financial statements referred to above present fairly, in all material respects, the financial the Company as of April 30, 2001 and 2000, and the results of its operations and its cash flows for hen ended in conformity with accounting principles generally accepted in the United States.

ersen LLP rizona 01 2001 SRP ANNUAL REPORT 37

dergast Jr. Elvin E. Gene Fleming Gilbert R. Rogers Carl E. Weiler James L. Diller Ann Maitland Burton Keith Woods sion 2 District/Division 3 District/Division 4 District/Division 5 District/Division 6 Division 7 District 7 mpton Dale C. Riggins Jr. Dwayne E. Dobson Eldon Rudd William W. Arnett Fred J. Ash James R. Marshall ion 8 District/Division 9 District/Division 10 Director-at-large, Seat 11 Director-at-large, Seat 12 Director-at-large, Seat 13 Director-at-large, Seat 14 ds SRP Councils wo Boards of Salt River four-year terms. Ten District The two Councils of Salt rk with management to Board members are elected from River Project enact and amend olicies to further the voting divisions and four are bylaws relating to business affairs ffairs of SRP. elected at-large by landowners of SRP and serve as liaisons to 0 members of the Salt within the Districts boundaries. District electors and Association y Water Users The District is SRPs public power shareholders.

n Board of Governors utility and a political subdivision As with the SRP Boards, there gered four-year terms and of Arizona. Most often, is one Council for the District and from voting districts by candidates seek one for the Association.

ners within the water election to both The 30 District Council Peoria ritory. The Association is 1 Boards. members are elected to staggered Glendale ate water corporation, 6 Scottsdale four-year terms from 10 divisions.

2 inisters the water rights 4 Phoenix The 30 Association Council 7

0,000-acre area, and members are elected to staggered nd maintains the 3 Mesa four-year terms from 10 districts.

5 Tempe 9 and drainage system. Most often, candidates seek 4 members of the Salt 8 10Gilbert election to both Councils.

ect Agricultural Chandler ent and Power District District and Association irectors serve staggered voting districts NUAL REPORT

Robert L. Cook District/Division 2 John A. Vanderwey Paul E. Rovey Wayne A. Hart left to right District/Division 3 Robert T. Van Hofwegen Mario J. Herrera John E. Anderson District/Division 4 Lloyd E. Banning Leslie C. Williams Charles D. Coppinger right t/Division 5 n Williams A. Weiler

. Cheatham t/Division 6 t W. Warren (District only)

Rousseau (Chairman)

. Butler (Division only) ce J. Duncan left to right District/Division 7 Mark A. Lewis Harmen Tjaarda Jr.

Keith Woods (Division only)

Ann Maitland Burton (District only)

District/Division 8 John R. Hoopes Deborah Hendrickson Mark V. Pace left to right District/Division 9 Arthur L. Freeman W. Curtis Dana Edward E. Johnson District/Division 10 Lawrence P. Schrader Orland R. Hatch C. Dale Willis 2001 SRP ANNUAL REPORT 39

President William P. Schrader Vice President John M. Williams Jr.

Secretary Terrill A. Lonon Treasurer Cynthia J. Baker ve Management General Manager Richard H. Silverman Associate General Managers David G. Areghini Mark B. Bonsall D. Michael Rappoport John F. Sullivan L.J. URen Corporate Counsel Jane D. Alfano Manager Richard M. Hayslip Corporate Headquarters Street address Mailing address SRP SRP 1521 N. Project Drive P.O. Box 52025 Tempe, Arizona 85281-1298 Phoenix, AZ 85072-2025 SRP on the Internet Visit SRPs home page at www.srpnet.com for an electronic version of our annual report.

Inquiries Dean Yee, Manager, SRP Financial Services (602) 236-5319 Requests for Annual Reports For additional copies of this report, or SRP quarterly reports, call (602) 236-2598. Or send a request to investor@srpnet.com.

Bondholder Information Regarding all bond information, contact the SRP Treasury Department, (602) 236-2222.

NNUAL REPORT