-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WSYE2jvx9PFmxmSQPz1eNnXF8Q8ibuZWACNhM6kIFPyrOVbDVd/AbbDKzshpuJ1e rFuhFj9Fbn/p+PokbTifcQ== 0000071180-98-000014.txt : 19981109 0000071180-98-000014.hdr.sgml : 19981109 ACCESSION NUMBER: 0000071180-98-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEVADA POWER CO CENTRAL INDEX KEY: 0000071180 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 880045330 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04698 FILM NUMBER: 98739079 BUSINESS ADDRESS: STREET 1: 6226 W SAHARA AVE CITY: LAS VEGAS STATE: NV ZIP: 89102 BUSINESS PHONE: 7023675000 MAIL ADDRESS: STREET 1: P O BOX 230 CITY: LAS VEGAS STATE: NV ZIP: 89151 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHERN NEVADA POWER CO DATE OF NAME CHANGE: 19701113 10-Q 1 10-Q SEPTEMBER 30, 1998 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended September 30, 1998 Commission File No. 1-4698 ------------------ ------ Nevada Power Company (Exact name of registrant as specified in its charter) ------------------------------------------------------ Nevada 88-0045330 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6226 West Sahara Avenue, Las Vegas, Nevada 89146 - ------------------------------------------ --------- (Address of principal executive offices) (Zip Code) (702) 367-5000 ---------------------------------------------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ---- --- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Common Stock outstanding November 3, 1998, 51,265,117 shares. ---------- 1 PART I. FINANCIAL INFORMATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Amounts) (Unaudited) FOR THE FOR THE THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- ELECTRIC REVENUES ......................$327,776 $284,994 $691,974 $640,318 OPERATING EXPENSES AND TAXES: Fuel .............................. 58,291 49,712 115,712 105,272 Purchased and interchanged power .. 104,361 96,821 232,558 225,342 Deferred energy cost adjustments, net ................. (18,206) (24,797) (30,626) (46,397) -------- -------- -------- -------- Net energy costs ................. 144,446 121,736 317,644 284,217 Other production operations ....... 6,399 6,168 16,301 15,154 Other operations .................. 31,756 27,079 84,985 75,330 Maintenance and repairs ........... 11,750 13,610 39,457 41,213 Provision for depreciation ........ 18,236 16,747 53,792 48,933 General taxes ..................... 5,739 5,282 16,892 15,740 Federal income taxes .............. 32,531 27,889 39,933 41,510 -------- -------- -------- -------- 250,857 218,511 569,004 522,097 -------- -------- -------- -------- OPERATING INCOME ....................... 76,919 66,483 122,970 118,221 -------- -------- -------- -------- OTHER INCOME (EXPENSES): Allowance for other funds used during construction .............. 2,011 2,116 6,924 6,270 Miscellaneous, net ................ (321) (1,046) (1,363) (2,742) -------- -------- -------- -------- 1,690 1,070 5,561 3,528 -------- -------- -------- -------- INCOME BEFORE INTEREST DEDUCTIONS ...... 78,609 67,553 128,531 121,749 -------- -------- -------- -------- INTEREST DEDUCTIONS: Interest on long-term debt ........ 13,522 12,583 42,047 37,546 Other interest .................... 2,188 407 4,027 1,155 Allowance for borrowed funds used during construction .............. (1,525) (621) (4,223) (1,960) -------- -------- -------- -------- 14,185 12,369 41,851 36,741 -------- -------- -------- -------- Distribution requirements on company-obligated mandatorily redeemable preferred securities of subsidiary trust .............. 2,437 2,437 7,311 4,820 -------- -------- -------- -------- NET INCOME ............................. 61,987 52,747 79,369 80,188 DIVIDEND REQUIREMENTS ON PREFERRED STOCK ................................. 42 46 131 1,080 -------- -------- -------- -------- EARNINGS AVAILABLE FOR COMMON STOCK ....$ 61,945 $ 52,701 $ 79,238 $ 79,108 ======== ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ........................... 51,198 49,902 50,902 49,499 ======== ======== ======== ======== EARNINGS PER AVERAGE COMMON SHARE ......$ 1.21 $ 1.06 $ 1.56 $ 1.60 ======== ======== ======== ======== DIVIDENDS PER COMMON SHARE .............$ .40 $ .40 $ 1.20 $ 1.20 ======== ======== ======== ======== See Notes to Condensed Consolidated Financial Statements. 2 CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (Unaudited) September 30, December 31, 1998 1997 ------------- ------------ (In Thousands) ELECTRIC PLANT: Original cost ..................................... $2,452,330 $2,378,296 Less accumulated depreciation ..................... 689,706 647,208 ---------- ---------- Net plant in service ............................ 1,762,624 1,731,088 Construction work in progress ..................... 254,548 158,029 Other plant, net .................................. 68,162 71,592 ---------- ---------- 2,085,334 1,960,709 ---------- ---------- INVESTMENTS ......................................... 22,977 13,571 ---------- ---------- CURRENT ASSETS: Cash and temporary cash investments ............... 1,027 720 Customer receivables .............................. 126,060 71,722 Other receivables ................................. 16,464 16,415 Receivable for proceeds from sale of Company- obligated mandatorily redeemable preferred securities of the Company's subsidiary trust, NVP Capital III....................................... 70,000 - Fuel stock and materials and supplies ............. 36,564 42,370 Deferred energy costs ............................. 63,170 30,597 Prepayments ....................................... 4,039 6,711 ---------- ---------- 317,324 168,535 ---------- ---------- DEFERRED CHARGES .................................... 209,858 196,607 ---------- ---------- $2,635,493 $2,339,422 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common shareholders' equity: Common stock, 51,265,117 and 50,399,746 shares issued, respectively .................... $ 53,886 $ 53,604 Premium and unamortized expense on capital stock 683,713 662,987 Retained earnings ............................... 135,370 117,032 ---------- ---------- 872,969 833,623 ---------- ---------- Cumulative preferred stock ........................ 3,265 3,463 ---------- ---------- Company-obligated mandatorily redeemable preferred securities of the Company's subsidiary trust, NVP Capital I, holding solely $122.6 million principal amount of 8.2% junior subordinated debentures of the Company, due 2037 ............................ 118,872 118,872 Company-obligated mandatorily redeemable preferred securities of the Company's subsidiary trust, NVP Capital III, holding solely $72.2 million principal amount of 7.75% junior subordinated debentures of the Company, due 2038 ............................ 70,000 - Long-term debt .................................... 898,109 895,439 ---------- ---------- 1,963,215 1,851,397 ---------- ---------- CURRENT LIABILITIES: Notes payable ..................................... 103,290 - Current maturities and sinking fund requirements .. 5,258 19,937 Accounts payable .................................. 84,768 64,737 Accrued taxes ..................................... 38,904 7,543 Accrued interest .................................. 15,348 7,284 Deferred taxes on deferred energy costs ........... 22,110 10,709 Customers' service deposits and other ............. 42,610 37,649 ---------- ---------- 312,288 147,859 ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES: Deferred investment tax credits ................... 28,449 29,544 Deferred taxes on income .......................... 250,253 235,846 Customers' advances for construction and other .... 81,288 74,776 ---------- ---------- 359,990 340,166 ---------- ---------- $2,635,493 $2,339,422 ========== ========== See Notes to Condensed Consolidated Financial Statements. 3 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1998 1997 -------- -------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income .......................................... $ 79,369 $ 80,188 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization ...................... 63,499 56,392 Deferred income taxes and investment tax credits ... 10,843 15,944 Allowance for other funds used during construction . (6,924) (6,270) Changes in- Receivables ........................................ (54,257) (54,704) Fuel stock and materials and supplies .............. 5,806 (3,978) Accounts payable and other current liabilities ..... 24,989 24,771 Deferred energy costs .............................. (33,373) (45,098) Accrued taxes and interest ......................... 39,425 26,122 Other assets and liabilities ........................ (5,513) (1,163) -------- -------- Net cash provided by operating activities ......... 123,864 92,204 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures and gross additions ....... (179,989) (135,076) Investment in subsidiaries and other ................ (994) (137) -------- -------- Net cash used in investing activities ............. (180,983) (135,213) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of capital stock ........................... 21,006 25,221 Issuance of company-obligated mandatorily redeemable preferred securities ................... - 118,872 Deposit of funds held in trust ...................... (1,491) (1,592) Withdrawal of funds held in trust ................... 7,269 - Retirement of long-term debt ........................ (18,325) (3,864) Retirement of preferred stock ....................... (199) (38,200) Change in short-term borrowing ...................... 103,290 - Cash dividends ...................................... (61,047) (61,204) Other financing activities .......................... 6,923 1,604 -------- -------- Net cash provided by financing activities ......... 57,426 40,837 -------- -------- CASH AND TEMPORARY CASH INVESTMENTS: Net increase (decrease) during the period ........... 307 (2,172) Beginning of period ................................. 720 2,544 -------- -------- End of period ....................................... $ 1,027 $ 372 ======== ======== CASH PAID DURING THE PERIOD FOR: Interest, net of amounts capitalized ................ $ 48,186 $ 45,335 ======== ======== Income taxes ........................................ $ - $ 3,520 ======== ======== See Notes to Condensed Consolidated Financial Statements. 4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated financial statements included herein have been prepared by the registrant, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), and reflect all adjustments which, in the opinion of management are necessary for a fair presentation and are of a normally recurring nature. Certain information and footnote disclosures have been condensed in accordance with generally accepted accounting principles and pursuant to such rules and regulations. The registrant believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements and notes thereto be read in conjunction with the financial statements and the notes thereto included in the registrant's latest annual report. Certain prior period amounts have been reclassified, with no effect on income or common shareholders' equity, to conform with the current period presentation. (1) CONSOLIDATION POLICY: The condensed consolidated financial statements include the accounts of Nevada Power Company (Company) and its wholly-owned subsidiaries NVP Capital I and NVP Capital III. All significant intercompany transactions and balances have been eliminated in consolidation. (2) RECENTLY ISSUED ACCOUNTING STANDARDS: The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 131 (FASB 131), Disclosures about Segments of an Enterprise and Related Information, which is effective for annual financial statements for periods beginning after December 15, 1997. FASB 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Due to recent legislation enacted in Nevada for restructuring the electric utility industry, the Company cannot predict the effect adoption of FASB 131 will have on disclosures in its condensed consolidated financial statements. The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 132 (FASB 132), Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and 106, which is effective for financial statements for fiscal years beginning after December 15, 1997. FASB 132 revises employer's disclosures about pension and other postretirement benefit plans but does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis and eliminates certain disclosures that are no longer as useful as they were when the above mentioned FASB statements were originally issued. The adoption resulted in no material effect on the disclosures in the Company's condensed consolidated financial statements. The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 133 (FASB 133), Accounting for Derivative Instruments and Hedging Activities, which is effective for financial statements for all fiscal quarters of all fiscal years beginning after June 15, 1999. FASB 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption of FASB 133 will have no material effect on the disclosures in the Company's condensed consolidated financial statements. (3) FEDERAL INCOME TAXES: For interim financial reporting purposes, the Company reflects in the computation of the federal income tax provision liberalized depreciation based upon the expected annual percentage relationship of book and tax depreciation and reflects the allowance for funds used during construction on an actual basis. The total federal income tax expense as set forth in the accompanying consolidated statements of income results in an effective 5 federal income tax rate different than the statutory federal income tax rate. The table below shows the effects of those transactions which created this difference. THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- ------------------- 1998 1997 1998 1997 ------- ------- ------- ------- (In Thousands) (In Thousands) Federal income tax at statutory rate .$33,414 $28,439 $42,846 $43,287 Investment tax credit amortization ... (365) (365) (1,095) (1,095) Other ................................ 433 433 1,299 1,299 ------- ------- ------- ------- Recorded federal income taxes ........$33,482 $28,507 $43,050 $43,491 ======= ======= ======= ======= Federal income taxes included in- Operating expenses .................$32,531 $27,889 $39,933 $41,510 Other income, net .................. 951 618 3,117 1,981 ------- ------- ------- ------- Recorded federal income taxes ........$33,482 $28,507 $43,050 $43,491 ======= ======= ======= ======= (4) COMMITMENTS AND CONTINGENCIES: On February 6, 1997, the Public Utilities Commission of Nevada (PUCN) issued its opinion and order in the last phase of the 1995 deferred energy case concerning the prudency of the Company's fuel and purchased power expenditures during the period June 1993 to May 1995, a buyout of a coal supply agreement and a credit to customers related to the use of coal reserves in an unregulated subsidiary company. The PUCN order resulted in a fourth quarter 1996 charge of $5.5 million, net of tax, for amounts disallowed by the PUCN. On May 7, 1997, the Company filed a Petition for Judicial Review in the First District Court in Carson City, Nevada challenging the PUCN's findings which resulted in disallowances. The Grand Canyon Trust and Sierra Club filed a lawsuit in the U.S. District Court, District of Nevada, in February 1998 against the owners of the Mohave Generating Station (Mohave) alleging violations of the Clean Air Act regarding emissions of sulfur dioxide and particulates. The owners believe the emission limits referenced in the suit are not applicable to Mohave. Also, the owners previously partnered with the Environmental Protection Agency (EPA) and the National Park Service on a multi-year study to determine the impacts, if any, of Mohave emissions on visibility in the Grand Canyon (see the following paragraph). The environmental groups want the owners to install pollution control equipment at an estimated cost of $200 to $300 million. The Company owns a 14 percent interest in Mohave. The outcome of this action cannot be determined at this time. The United States Congress authorized the EPA to study the potential impact Mohave may have on visibility in the Grand Canyon area. Results of this study are expected in the fourth quarter of 1998. The Federal Clean Air Act Amendments of 1990 (Amendments) include provisions for reduction of emissions of oxides of nitrogen by establishing new emission limits for coal-fired generating units. This will require the installation of additional pollution-control technology at two of the Reid Gardner Station generating units at an estimated cost to the Company of no more than $6 million. Installation will occur in the first quarter of 1999; $1.4 million has already been spent to retrofit a third unit. In 1991, the EPA published an order requiring the Navajo Generating Station (Navajo) to install scrubbers to remove 90 percent of sulfur dioxide emissions beginning in 1997. As an 11.3 percent owner of Navajo, the Company will be required to fund an estimated $48.9 million for installation of the scrubbers. The first of three scrubber units was placed in commercial operation in November 1997. The second scrubber entered start-up April 6, 1998 and will be in commercial operation by November 1998, with the last scrubber unit operational by August 1999. Currently, the project is approaching 95 percent complete. The Company has spent approximately $44.4 million through August 1998 on the scrubbers' construction. In 1992, the Company received resource planning approval from the PUCN for its share of the cost of the scrubbers. 6 (5) SHORT-TERM BORROWING: In April 1998, the Company obtained an additional $50 million bank revolving credit facility which expires on April 16, 1999 and pays a facility fee based on the Company's senior unsecured debt rating. Borrowing rates under the bank line are determined by both current market rates and the Company's senior unsecured debt rating. (6) MERGER; DIVIDEND POLICY: On April 30, 1998, Nevada Power Company and Sierra Pacific Resources announced that their boards of directors unanimously approved an agreement providing for a proposed merger of equals combination with stock and cash consideration. Based upon then current market prices and expected financing requirements, the combination would create a company with a total market capitalization of approximately $4.0 billion ($2.3 billion in equity, $1.5 billion in debt and $240 million in preferred stock). In conjunction with the Company's approval of the proposed merger, the Company's Board of Directors stated that, beginning with the November 1998 dividend, it intends to adopt the expected combined company initial annual dividend rate. This would result in an indicated annual dividend rate of $1.00 per share for periods following the August 1998 dividend payment. For further information regarding the proposed merger please refer to the Company's Form 8-K filed with the SEC on April 30, 1998. On July 7, 1998 Sierra Pacific Resources and Nevada Power Company issued a press release announcing the filing of a joint merger application with the PUCN for approval of their proposed merger. In the filing, Sierra Pacific Resources and Nevada Power Company propose selling their generating plants if the merger is completed and a long-term freeze in prices for regulated utility services (transmission and distribution). Capital raised by the sale of generating plants will be reinvested primarily in new transmission and distribution facilities. An incentive mechanism through which net merger and other benefits are shared by customers and investors has also been proposed. Among other issues addressed in the PUCN merger application are: the impact of the merger on competition and electricity prices; operation of the electric transmission system to ensure competing energy suppliers have equal access to customers; and benefits of the merger to employees and stockholders. The first phase of hearings to be held over three weeks will start on November 9 in Las Vegas and will concentrate on structural features of the merger, effects on competition and existing contracts of the Company and Sierra Pacific Resources. Phase two will concentrate on the breakdown of costs and effect on rates and quality of service. Phase three will address PUCN jurisdiction and any remaining issues. For further information regarding this filing please refer to the Company's SEC Form 8-K filed with the SEC on July 8, 1998. Both the Company and Sierra Pacific Resources held special stockholder meetings during which stockholders of both companies voted to approve the proposed merger. The proposed merger is conditioned, among other things, upon further regulatory approvals including the PUCN and the Federal Energy Regulatory Commission. (7) PREFERRED SECURITIES: On September 28, 1998, NVP Capital III (Trust), a wholly-owned subsidiary of the Company, sold 2,800,000 7 3/4% Cumulative Quarterly Trust Issued Preferred Securities at $25 per security. The proceeds of $70 million were received at closing on October 6, 1998. The Company owns all the common securities, 86,598 shares issued by the trust for $2.2 million. The trust issued preferred securities and the common securities represent undivided beneficial ownership interests in the assets of the Trust, a statutory business trust formed under the laws of the state of Delaware. The existence of the Trust is for the sole purpose of issuing the trust issued preferred securities and the common securities and using the proceeds thereof to purchase from the Company its 7 3/4% Junior Subordinated Deferrable Interest Debentures due September 30, 2038, extendible to September 30, 2047 under certain conditions, in a principal amount of $72.2 million. The sole asset of the Trust is the deferrable interest debentures. Holders of the trust issued preferred securities are entitled to receive preferential cumulative cash distributions accruing from the date of original issuance and payable quarterly in arrears on the last day of March, June, September and December of each year. The trust issued preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the deferrable interest debentures at maturity or their earlier redemption in an amount equal to the amount of related deferrable interest debentures maturing or being redeemed. The trust issued preferred securities are redeemable at $25 per preferred security plus 7 accumulated and unpaid distributions thereon to the date of redemption. The Company's obligations under the guarantee agreement entered into in connection with the trust issued preferred securities when taken together with the Company's obligation to make interest and other payments on the deferrable interest debentures issued to the Trust, and the Company's obligations under the Indenture pursuant to which the deferrable interest debentures are issued and its obligations under the Declaration, including its liabilities to pay costs, expenses, debts and liabilities of the Trust, provides a full and unconditional guarantee by the Company of the Trust's obligations under the trust issued preferred securities. Financial statements of the Trust are consolidated with the Company's. Separate financial statements are not filed because the Trust is wholly-owned by the Company and essentially has no independent operations, and the Company's guarantee of the Trust's obligations is full and unconditional. The $70 million in net proceeds to the Company will be used for general corporate utility purposes which may include capital expenditures, repayment of debt and working capital. A portion of the proceeds were used to repay short-term debt incurred for general corporate utility purposes. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Overall net cash flows increased during the first nine months of 1998, as compared to 1997, primarily due to more cash being provided by operating activities and more cash being provided by financing activities partially offset by more cash being used in investing activities. The increase in cash being provided by operating activities was primarily due to an energy rate increase effective February 1, 1998. The increase in cash used in investing activities was primarily due to increased construction expenditures. The increase in net cash provided by financing activities was primarily due to increased short-term borrowing. On April 30, 1998, Nevada Power Company and Sierra Pacific Resources announced that their boards of directors unanimously approved an agreement providing for a proposed merger of equals. On July 7, 1998 Sierra Pacific Resources and Nevada Power Company issued a press release announcing the filing of a joint merger application with the PUCN for approval of their proposed merger. Stockholders of both companies voted to approve the proposed merger. (See Note 6 to the condensed consolidated financial statements included in this quarterly report.) In April 1998, the Company filed a request with the PUCN for authorization to increase energy rates under the state's deferred energy accounting procedures by approximately $43 million for increased energy costs and $9.9 million for remaining issues from the 1997 deferred energy rate case. On October 6, the PUCN approved $7.4 million of the $9.9 million increase requested in connection with the 1997 deferred energy rate case. The effective date and the effect on various customer classes has not been determined yet. The $43 million energy rate increase request was dismissed by the PUCN on July 15, 1998. After the dismissal, the Company immediately filed a request with the PUCN for authorization to increase energy rates by approximately $49 million using a different test period. Because of the October 6 decision in the 1997 deferred energy rate case referred to in the above paragraph, part of this case will have to be refiled with the PUCN. The Company's customer growth rate during 1997 and 1996 was 6.4 and 7.2 percent, respectively. The increase in customers for the first nine months of 1998 was at an annualized rate of 5.8 percent. At September 30, 1998, the Company provided electric service to 540,938 customers. Pursuant to Nevada law, every three years the Company is required to file with the PUCN a forecast of electricity demands for the next 20 years and the Company's plans to meet those demands. The Company filed its 1997 Resource Plan on June 3, 1997. On October 20, 1997, the PUCN rendered a decision on this plan. Among the major items in the Company's 1997 Resource Plan which were approved by the PUCN are the following: (1) the Company will proceed to build a 500 kV transmission project known as the Crystal Transmission Project, with an in-service date of June 1, 1999; (2) the Company will continue to pursue a strategy of relying on bulk 8 power purchases to meet near-term incremental increases in load; (3) the Company will proceed with a joint 230 kV transmission project with the Colorado River Commission with costs subject to prudency review in a future rate case; (4) the Company received limited approval to proceed with six switchyard projects; (5) the Company received approval for pre-development costs to build two 144 megawatt (MW) combustion turbines in 2002 and 2003 which would be converted to a 410 MW combined cycle plant in 2004. An amendment to the 1997 Resource Plan will need to be filed by September 1999 for full approval if the Company wants to proceed with building the turbines. To meet capital expenditure requirements through 1998, the Company plans to utilize internally generated cash, the proceeds from industrial development revenue bonds (IDBs), FMBs, unsecured borrowings, preferred securities and common stock issues through public offerings. Under the Stock Purchase and Dividend Reinvestment Plan (SPP) the Company issued 1,515,716 and 869,895 shares, respectively, of its common stock in 1997 and the first nine months of 1998. Beginning in the third quarter of 1998, the Company began using open market purchases of its common stock to meet the requirements of the SPP. On November 20, 1997, Clark County, Nevada issued $52.3 million Series 1997A IDBs (Nevada Power Company Project) due 2032 and Coconino County, Arizona Pollution Control Corporation issued $20 million 5.8% Pollution Control Revenue Bonds (PCRBs) Series 1997B (Nevada Power Company Project) due 2032. Net proceeds from the sale of the IDBs were placed on deposit with a trustee and are being used to finance the construction of certain facilities which qualify for tax-exempt financing. At September 30, 1998, $47.2 million remained on deposit with the trustee. Net proceeds from the sale of the PCRBs were placed on deposit with a trustee and were used to finance the construction of the Navajo scrubber facilities which qualify for tax-exempt financing. In April 1998, the Company obtained an additional committed bank line for $50 million which expires on April 16, 1999. The short-term financing is expected to be utilized to fund some of the Company's construction expenditures until long-term financing is secured. In April 1998, the plant workers of the International Brotherhood of Electrical Workers Union (IBEW) Local 396 ratified a new contract presented by Company management. Clerical workers of the IBEW have been working without a contract since February 1998. The contract for the clerical workers has been scheduled for a vote on November 18. INDUSTRY RESTRUCTURING In July 1997, the Governor of the state of Nevada signed into law Assembly Bill 366 (AB 366) which provides for competition to be implemented in the electric utility industry in the state no later than December 31, 1999. In August 1997, the PUCN opened an investigatory docket of the following issues to be considered as a result of restructuring of the electric industry. (1) Identification of all cost components in utility service and establishment of allocation methods necessary for later pricing of noncompetitive services; (2) Designation of services as potentially competitive or noncompetitive; (3) Determination of rate design and non-price terms and conditions for noncompetitive services; (4) Establishment of licensing requirements for alternative sellers of potentially competitive services; (5) Past (stranded) costs; (6) Criteria and standards by which the PUCN will apply the legislative requirements concerning affiliate relations; 9 (7) Criteria and process by which the PUCN will appoint providers of bundled electric service; (8) Consumer protection; (9) Anti-competitive behavior codes of conduct and enforcement; (10) Price regulation for potentially competitive services in immature markets; (11) Compliance plans in accordance with regulation; (12) Options for complying with legislative mandates for integrated resource planning and portfolio standards; (13) Innovative pricing for noncompetitive services. The PUCN issued a final order regarding the first issue, the identification of services. The PUCN designated unbundled services in eight major categories with twenty-six unbundled services in total. The PUCN issued another order on October 12, 1998 establishing principles for the creation of an independent System Operator. The purpose of this order is to direct the parties, including Nevada Power Company, to continue the efforts of the established working group in establishing an independent system operator. The Company is in the process of reviewing this order. The other topics are still open issues and are in various stages of completion. Nevada Power filed a motion for reconsideration after the PUCN filed its final ruling on the second issue, the designation of services as potentially competitive or noncompetitive. The PUCN approved the motion for reconsideration and is rehearing the second issue. Workshops and/or hearings have been held on licensing, affiliate relations, non-price distribution tariffs, and generation tariffs. Final orders are expected on these issues by the fourth quarter of 1998 or early in 1999. CONTINUING APPLICABILITY OF FASB 71 The Company's rates are currently subject to approval by the PUCN and are designed to recover the Company's costs of providing services to its customers. A primary difference between a rate regulated entity and an unregulated entity is the timing of recognizing certain assets and expenses for financial reporting purposes. The Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (FASB 71), prescribes the method to be used to record the financial transactions of a regulated entity. The criteria for applying FASB 71 include the following: (i) rates are set by an independent third party regulator, (ii) approved rates are intended to recover the specific costs of the regulated products or services, (iii) rates set at levels that will recover costs, can be charged to and collected from customers. If the Company determines as a result of competitive changes in Nevada, PUCN orders or otherwise that its business, or a portion of its business, fails to meet any of these three criteria of FASB 71, it may have to eliminate from its Consolidated Financial Statements the related transactions prescribed by the regulators that would not have been recognized if it had been a non-regulated company, which could result in an impairment of or write-off of utility assets. The Company believes, however, that it continues to meet the criteria for operating as a rate regulated entity, as prescribed by FASB 71. In July 1997, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board reached a consensus on several issues which have arisen due to deregulation of the electric utility industry and the continuing applicability of FASB 71. The EITF reached a consensus that a company should stop applying FASB 71 to a separable portion of its business when deregulatory legislation or a rate order which results in deregulation gives enough detail for the company to reasonably determine how the transition plan to deregulation will effect that separable portion. Once FASB 71 is no longer applied to that separable portion of the business, it will be disclosed separately in the company's financial statements. Any regulatory assets and liabilities that originated in that separable portion of the company should be evaluated on the basis of which portion of the business the regulated cash flows to settle them will come from and will not be eliminated until they are recovered, individually impaired or eliminated by the regulator or the portion of the business where the regulated cash flows come from can no longer apply FASB 71. Any new regulatory assets and liabilities are recognized within the portion of the company where the regulated cash flows for their recovery or settlement 10 are derived and are eliminated in the same manner as existing regulatory assets and liabilities as described above. YEAR 2000 The Company has made Year 2000 readiness a top priority for all of its departments. With officer oversight, the Company is committed to reviewing all of its computers, software programs and electrical systems to verify that appropriate actions are being taken in order to be Year 2000 ready, including the ability to process, calculate, compare and sequence date data into the next century, and, to make all necessary leap year corrections. A plan is in place to identify, correct and test problems related to the Year 2000 issue, including verification of the level of Year 2000 readiness of business partners and suppliers. The responses of business partners and suppliers are evaluated individually. A centralized data base is used to identify and track the progress of work. A centralized control over incoming correspondence and inquiries relating to Year 2000 and external communication efforts is being maintained. The Company's readiness plan is reviewed monthly. The Company's general policy requires that all newly purchased products be Year 2000 ready or designed to allow the Company to determine whether such products present Year 2000 issues. The Company's Year 2000 readiness activities are tracked through monthly reporting to the North American Electric Reliability Council (NERC). Overall status for the Company as of September 30, 1998 shows identification of potential problems at 95% complete, assessment at 50% complete and remediation/testing at 10% complete. This status is within the NERC guidelines and the Company's Year 2000 Project Schedule which calls for the Company to achieve Year 2000 readiness by the end of June, 1999. One generation plant will be remediated and tested in September of 1999 to conform with its annual scheduled outage, however, this plant is similar to others in the Company's system which will have been remediated and tested by the end of June 1999. No material difficulties are anticipated at that time. Even though the Company is confident that its critical systems will be fully remediated by year-end 1999, the Company is engaged in early stages of contingency planning. Contingency planning will likely be partially affected by the responses received from business partners and suppliers received in upcoming months. The contingency plan is expected to be finalized by the second quarter of 1999. The Company is also working with utility and non- utility suppliers, generation and transmission operators and regional organizations to develop external contingency plans, where appropriate. Due to the need to assess the readiness of business partners, suppliers, and interconnected operators, the risk factors which will form the basis for the Company's contingency plan are not fully known at this time and the reasonably worst case scenario is also unknown, at this time. Due to the speculative nature of contingency planning, it is uncertain whether such plans actually will be sufficient to reduce the risk of material impacts on our operations due to Year 2000 problems. However, if the Company or significant business partners or suppliers fail to achieve Year 2000 readiness with respect to critical systems, there could be a materially adverse impact on the utility's financial position, results of operations and cash flows. The estimated total cumulative cost to the Company of addressing Year 2000 readiness is in the range of $7 to $15 million, including operating and capital expenditures. To date, approximately $925,000 in operating expenses and approximately $32,000 in capital additions have been incurred. 11 OPERATING RESULTS OF THE THIRD QUARTER OF 1998 COMPARED TO THIRD QUARTER OF 1997 Earnings per average common share were $1.21 for the third quarter of 1998, compared to $1.06 for the same period in 1997. Revenues and earnings available for common stock increased due to higher kilowatthour sales from warmer weather and customer growth. Revenues also increased due to an energy rate increase effective February 1, 1998. The average number of customers increased 6.09 percent and kilowatthour sales, excluding sales for resale, were up 8.76 percent, as compared to the third quarter of 1997. Fuel expense increased $8.6 million due to increased generation. Purchased power increased $7.5 million due to increased power purchases. Other operations expense increased $4.7 million primarily due to increased administrative and general expense. Maintenance and repairs expense decreased $1.9 million due to higher maintenance expense in 1997 for Reid Gardner Generating Station. Depreciation expense increased $1.5 million because of a growing asset base. Other interest expense increased $1.8 million due to increased short-term borrowing. Average common shares increased because of the sale of additional common shares through the SPP to partially provide funds for the construction of facilities necessary to meet increased customer demand for electricity. OPERATING RESULTS OF THE FIRST NINE MONTHS OF 1998 COMPARED TO FIRST NINE MONTHS OF 1997 Earnings per average common share were $1.56 for the first nine months of 1998, compared to $1.60 for the same period in 1997. Although earnings available for common stock were flat, earnings per share decreased due to an increase in average common shares outstanding. Revenues increased due to higher kilowatthour sales and an energy rate increase effective February 1, 1998. The average number of customers increased 6.30 percent and kilowatthour sales, excluding sales for resale, were up 2.79 percent, as compared to the first nine months of 1997. Fuel expense increased $10.4 million due to increased generation. Purchased power increased $7.2 million due to higher average purchased power costs. Other operations expense increased $9.7 million primarily due to increased administrative and general expense. Depreciation expense increased $4.9 million because of a growing asset base. Interest on long term debt increased by $4.5 million primarily due to the issuance in November 1997 of the new Series 1997A $52.3 million IDBs and Series 1997B $20 million PCRBs and the remarketing at fixed rates in January 1998 of variable rate revenue bonds $76.75 million Series 1995A, $44 million Series 1995C, $20.3 million Series 1995D and $13 million Series 1995E. Distribution requirements on company- obligated preferred securities of a subsidiary trust increased by $2.5 million due to the issuance in April 1997 of the Quarterly Income Preferred Securities. Average common shares increased because of the sale of additional common shares through the SPP to partially provide funds for the construction of facilities necessary to meet increased customer demand for electricity. 12 PART II. OTHER INFORMATION Items 1 through 5. None. Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. Exhibits Filed Description -------------- ----------- 27 Financial Data Schedule b. Reports on Form 8-K. Form 8-K filed on April 30, 1998. Form 8-K filed on July 8, 1998. Signatures ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Nevada Power Company -------------------- (Registrant) STEVEN W. RIGAZIO -------------------------------------- (Signature) Date: November 6, 1998 Steven W. Rigazio ---------------- Vice President, Finance and Planning, Treasurer, Chief Financial Officer 13 EX-27 2 FINANCIAL DATA SCHEDULE 10-Q SEPTEMBER 30, 1998
UT THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET OF NEVADA POWER COMPANY AS OF SEPTEMBER 30, 1998 AND THE RELATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 SEP-30-1998 PER-BOOK $2,085,334 22,977 317,324 209,858 0 2,635,493 53,886 683,713 135,370 872,969 188,872 3,265 811,850 103,290 0 0 250 200 86,259 4,808 563,730 2,635,493 691,974 39,933 529,071 569,004 122,970 5,561 128,531 49,162 79,369 131 79,238 60,899 0 123,864 1.56 0 INAPPLICABLE
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