-----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, Na9Gyko8K1KEBB6sNW0KKFc7FJFfHEmxUFiEyPA1Vuvn929euHmdEiyLNvKcCQmk Ce1k8oh7cExKMCuYZKcxMQ== 0000950135-03-004231.txt : 20030808 0000950135-03-004231.hdr.sgml : 20030808 20030808065004 ACCESSION NUMBER: 0000950135-03-004231 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIERRA PACIFIC POWER CO CENTRAL INDEX KEY: 0000090144 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 880044418 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00508 FILM NUMBER: 03830086 BUSINESS ADDRESS: STREET 1: 6100 NEIL RD STREET 2: P O BOX 10100 CITY: RENO STATE: NV ZIP: 89520-0400 BUSINESS PHONE: 7026895408 MAIL ADDRESS: STREET 1: 6100 NEIL ROAD STREET 2: P.O. BOX 10100 CITY: RENO STATE: NV ZIP: 89520 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIERRA PACIFIC RESOURCES /NV/ CENTRAL INDEX KEY: 0000741508 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 880198358 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08788 FILM NUMBER: 03830085 BUSINESS ADDRESS: STREET 1: PO BOX 30150 STREET 2: 6100 NEIL RD CITY: RENO STATE: NV ZIP: 89511 BUSINESS PHONE: 7758344011 MAIL ADDRESS: STREET 1: P O BOX 30150 STREET 2: 6100 NEIL ROAD CITY: RENO STATE: NV ZIP: 89511 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: 1934 Act SEC FILE NUMBER: 002-28348 FILM NUMBER: 03830087 BUSINESS ADDRESS: STREET 1: 6226 W SAHARA AVE CITY: LAS VEGAS STATE: NV ZIP: 89146 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 b47188spe10vq.txt SIERRA PACIFIC RESOURCES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
REGISTRANT, ADDRESS COMMISSION OF PRINCIPAL EXECUTIVE OFFICES STATE OF I.R.S. EMPLOYER FILE NUMBER AND TELEPHONE NUMBER INCORPORATION IDENTIFICATION NUMBER - ----------- ------------------------------ ------------- --------------------- 1-08788 SIERRA PACIFIC RESOURCES Nevada 88-0198358 P.O. Box 10100 (6100 Neil Road) Reno, Nevada 89520-0400 (89511) (775) 834-4011 2-28348 NEVADA POWER COMPANY Nevada 88-0420104 6226 West Sahara Avenue Las Vegas, Nevada 89146 (702) 367-5000 0-00508 SIERRA PACIFIC POWER COMPANY Nevada 88-0044418 P.O. Box 10100 (6100 Neil Road) Reno, Nevada 89520-0400 (89511) (775) 834-4011
Indicate by check mark whether 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 by check mark whether any registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Sierra Pacific Resources Yes [X] No [ ]; Nevada Power Company Yes [ ] No [X]; Sierra Pacific Power Company Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 1, 2003 ----- ----------------------------- Common Stock, $1.00 par value 117,175,700 Shares of Sierra Pacific Resources
Sierra Pacific Resources is the sole holder of the 1,000 shares of outstanding Common Stock, $1.00 stated value, of Nevada Power Company. Sierra Pacific Resources is the sole holder of the 1,000 shares of outstanding Common Stock, $3.75 stated value, of Sierra Pacific Power Company. This combined Quarterly Report on Form 10-Q is separately filed by Sierra Pacific Resources, Nevada Power Company and Sierra Pacific Power Company. Information contained in this document relating to Nevada Power Company is filed by Sierra Pacific Resources and separately by Nevada Power Company on its own behalf. Nevada Power Company makes no representation as to information relating to Sierra Pacific Resources or its subsidiaries, except as it may relate to Nevada Power Company. Information contained in this document relating to Sierra Pacific Power Company is filed by Sierra Pacific Resources and separately by Sierra Pacific Power Company on its own behalf. Sierra Pacific Power Company makes no representation as to information relating to Sierra Pacific Resources or its subsidiaries, except as it may relate to Sierra Pacific Power Company. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SIERRA PACIFIC RESOURCES NEVADA POWER COMPANY SIERRA PACIFIC POWER COMPANY QUARTERLY REPORTS ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003 CONTENTS
PAGE ---- PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SIERRA PACIFIC RESOURCES -- Condensed Consolidated Balance Sheets -- June 30, 2003 and December 31, 2002........................................... 3 Condensed Consolidated Statements of Operations -- Three Months and Six Months Ended June 30, 2003 and 2002.......... 4 Condensed Consolidated Statements of Cash Flows -- Six Months Ended June 30, 2003 and 2002......................... 5 NEVADA POWER COMPANY -- Condensed Consolidated Balance Sheets -- June 30, 2003 and December 31, 2002........................................... 7 Condensed Consolidated Statements of Operations -- Three Months and Six Months Ended June 30, 2003 and 2002.......... 8 Condensed Consolidated Statements of Cash Flows -- Six Months Ended June 30, 2003 and 2002......................... 9 SIERRA PACIFIC POWER COMPANY -- Condensed Consolidated Balance Sheets -- June 30, 2003 and December 31, 2002........................................... 10 Condensed Consolidated Statements of Operations -- Three Months and Six Months Ended June 30, 2003 and 2002.......... 11 Condensed Consolidated Statements of Cash Flows -- Six Months Ended June 30, 2003 and 2002......................... 12 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS........ 13 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 37 Sierra Pacific Resources.................................... 50 Nevada Power Company........................................ 56 Sierra Pacific Power Company................................ 64 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........................................................ 80 ITEM 4. Controls and Procedures..................................... 82 PART II -- OTHER INFORMATION ITEM 1. Legal Proceedings........................................... 83 ITEM 4. Submission of Matters to a Vote of Security Holders......... 86 ITEM 5. Other Information........................................... 86 ITEM 6. Exhibits and Reports on Form 8-K............................ 86 Signature Page....................................................... 89
2 SIERRA PACIFIC RESOURCES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 2003 2002 ----------- ------------ (UNAUDITED) (DOLLARS IN THOUSANDS) ASSETS Utility Plant at Original Cost: Plant in service.......................................... $6,231,305 $5,989,701 Less accumulated provision for depreciation............. 2,036,399 1,944,351 ---------- ---------- 4,194,906 4,045,350 Construction work-in-progress............................. 193,957 263,346 ---------- ---------- 4,388,863 4,308,696 ---------- ---------- Investments and other property, net......................... 106,952 124,580 ---------- ---------- Current Assets: Cash and cash equivalents................................. 127,271 192,064 Restricted cash........................................... 63,413 13,705 Accounts receivable less provision for uncollectible accounts: 2003 -- $43,943; 2002 -- $44,184........................ 377,109 358,972 Deferred energy costs -- electric......................... 281,267 268,979 Deferred energy costs -- gas.............................. 5,563 17,045 Materials, supplies and fuel, at average cost............. 85,430 87,348 Risk management assets (Note 10).......................... 57,328 29,570 Other..................................................... 73,993 48,898 ---------- ---------- 1,071,374 1,016,581 ---------- ---------- Deferred Charges and Other Assets: Goodwill.................................................. 309,971 309,971 Deferred energy costs -- electric......................... 493,870 685,875 Regulatory tax asset...................................... 160,964 163,889 Other regulatory assets................................... 141,008 136,933 Risk management assets (Note 10).......................... 3,688 368 Risk management regulatory assets -- net (Note 10)........ 42,048 44,970 Other..................................................... 94,202 92,250 ---------- ---------- 1,245,751 1,434,256 ---------- ---------- Assets of Businesses Held for Sale (Note 8)................. 2,978 12,862 ---------- ---------- $6,815,918 $6,896,975 ========== ========== CAPITALIZATION AND LIABILITIES Capitalization: Common shareholders' equity............................... $1,249,389 $1,327,166 Preferred stock........................................... 50,000 50,000 NPC obligated mandatorily redeemable preferred trust securities.............................................. 188,871 188,872 Long-term debt............................................ 2,891,930 3,062,815 ---------- ---------- 4,380,190 4,628,853 ---------- ---------- Current Liabilities: Short-term borrowings..................................... 20,000 -- Current maturities of long-term debt...................... 749,018 672,963 Accounts payable.......................................... 191,584 232,424 Accrued interest.......................................... 63,861 50,308 Dividends declared........................................ 1,052 1,045 Accrued salaries and benefits............................. 29,038 20,798 Deferred taxes............................................ 143,065 123,507 Risk management liabilities (Note 10)..................... 62,386 69,953 Other current liabilities................................. 145,496 46,719 ---------- ---------- 1,405,500 1,217,717 ---------- ---------- Commitments & Contingencies (Note 11) Deferred Credits and Other Liabilities: Deferred federal income taxes............................. 217,403 336,875 Deferred investment tax credit............................ 46,766 48,492 Regulatory tax liability.................................. 40,726 42,718 Customer advances for construction........................ 121,889 116,032 Accrued retirement benefits............................... 102,039 107,580 Risk management liabilities (Note 10)..................... 1,111 3,917 Contract termination reserves (Note 11)................... 322,146 312,594 Other..................................................... 177,350 81,410 ---------- ---------- 1,029,430 1,049,618 ---------- ---------- Liabilities of Business Held for Sale (Note 8).............. 798 787 ---------- ---------- $6,815,918 $6,896,975 ========== ==========
The accompanying notes are an integral part of the financial statements. 3 SIERRA PACIFIC RESOURCES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ OPERATING REVENUES: Electric................................................. $ 630,538 $ 674,144 $ 1,167,643 $ 1,255,169 Gas...................................................... 35,873 25,583 100,491 80,666 Other.................................................... 215 797 1,302 1,622 ------------ ------------ ------------ ------------ 666,626 700,524 1,269,436 1,337,457 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Operation: Purchased power........................................ 275,446 660,228 481,881 941,711 Fuel for power generation.............................. 120,826 104,643 201,039 235,416 Gas purchased for resale............................... 27,865 13,107 70,199 51,701 Deferred energy costs disallowed....................... 90,964 53,101 90,964 487,224 Deferral of energy costs -- electric -- net............ 18,683 (253,537) 102,870 (267,778) Deferral of energy costs -- gas -- net................. 1,020 2,176 11,823 10,368 Impairment of subsidiary assets (Note 8)............... 32,911 -- 32,911 -- Other.................................................. 87,337 62,018 159,608 132,123 Maintenance.............................................. 22,103 17,015 40,827 33,922 Depreciation and amortization............................ 46,873 37,859 92,684 86,351 Taxes: Income taxes........................................... (54,040) (28,063) (69,890) (186,609) Other than income...................................... 11,575 11,562 22,622 23,251 ------------ ------------ ------------ ------------ 681,563 680,109 1,237,538 1,547,680 ------------ ------------ ------------ ------------ OPERATING INCOME (LOSS).................................... (14,937) 20,415 31,898 (210,223) ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Allowance for other funds used during construction....... 1,084 (3) 2,844 654 Interest accrued on deferred energy...................... 6,823 7,055 14,458 932 Other income............................................. 6,597 4,316 12,976 7,892 Other expense............................................ (3,268) (3,000) (6,999) (11,794) Income taxes............................................. 39,993 (2,781) 31,575 1,432 Unrealized loss on derivative instrument (Note 10)....... (123,503) -- (107,578) -- ------------ ------------ ------------ ------------ (72,274) 5,587 (52,724) (884) ------------ ------------ ------------ ------------ Total Income (Loss) Before Interest Charges.......... (87,211) 26,002 (20,826) (211,107) ------------ ------------ ------------ ------------ INTEREST CHARGES: Long-term debt........................................... 67,345 55,439 135,940 114,239 Other.................................................... 9,440 8,198 19,708 12,767 Allowance for borrowed funds used during construction.... (1,131) (1,078) (2,887) (2,581) ------------ ------------ ------------ ------------ 75,654 62,559 152,761 124,425 ------------ ------------ ------------ ------------ Dividend requirements of NPC obligated mandatorily redeemable preferred trust securities.................. 3,793 3,793 7,586 7,586 ------------ ------------ ------------ ------------ LOSS FROM CONTINUING OPERATIONS............................ (166,658) (40,350) (181,173) (343,118) ------------ ------------ ------------ ------------ DISCONTINUED OPERATIONS (NOTE 8) Loss from operations (including loss on disposal of $8,851 in 2003)........................................ (9,155) (862) (10,453) (1,106) Income tax benefit....................................... 3,368 271 3,658 342 ------------ ------------ ------------ ------------ Loss from discontinued operations........................ (5,787) (591) (6,795) (764) ------------ ------------ ------------ ------------ CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX...................................................... -- -- -- (1,566) ------------ ------------ ------------ ------------ NET LOSS................................................... (172,445) (40,941) (187,968) (345,448) ------------ ------------ ------------ ------------ Preferred stock dividend requirements of SPPC.............. 975 975 1,950 1,950 ------------ ------------ ------------ ------------ LOSS APPLICABLE TO COMMON STOCK............................ $ (173,420) $ (41,916) $ (189,918) $ (347,398) ============ ============ ============ ============ Amount per share -- basic and diluted Loss from continuing operations.......................... $ (1.42) $ (0.40) $ (1.58) $ (3.36) Loss from discontinued operations........................ $ -- $ (0.01) $ (0.01) $ (0.01) Loss on disposal of subsidiary........................... $ (0.05) $ -- $ (0.05) $ -- Cumulative effect of change in accounting principle (net of tax) per share...................................... $ -- $ -- $ -- $ (0.01) Per share loss applicable to common stock................ $ (1.48) $ (0.41) $ (1.66) $ (3.40) Weighted Average Shares of Common Stock Outstanding........ 117,144,486 102,110,336 114,337,776 102,110,536 ============ ============ ============ ============ Dividends Paid Per Share of Common Stock................... $ -- $ -- $ -- $ 0.20 ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements. 4 SIERRA PACIFIC RESOURCES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------- 2003 2002 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss.................................................. $(187,968) $(345,448) Non-cash items included in income: Depreciation and amortization........................... 92,683 87,554 Deferred taxes and deferred investment tax credit....... (36,043) 68,289 AFUDC and capitalized interest.......................... (5,731) (3,235) Amortization of deferred energy costs -- electric....... 105,835 59,976 Amortization of deferred energy costs -- gas............ 9,547 7,661 Deferred energy costs disallowed, net of taxes.......... 59,127 317,977 Unrealized gain on derivative instrument, net of taxes.................................................. 69,926 -- Impairment of assets of subsidiary, net of taxes........ 21,392 -- Loss on disposal of subsidiary, net of taxes............ 5,753 -- Other non-cash.......................................... (11,792) (20,395) Changes in certain assets and liabilities: Accounts receivable..................................... (18,137) (25,555) Deferral of energy costs -- electric.................... (1,333) (479) Deferral of energy costs -- gas......................... 1,936 1,099 Materials, supplies and fuel............................ 1,918 (2,749) Other current assets.................................... (74,803) (20,732) Accounts payable........................................ (40,840) (37,875) Income tax receivable................................... -- 79,048 Derivative instrument associated with convertible debt................................................... 72,078 -- Other current liabilities............................... 9,500 11,971 Change in nets assets of subsidiary held for disposal... 1,044 -- Other assets............................................ (24,925) -- Other liabilities....................................... 21,186 36,906 --------- --------- Net Cash from Operating Activities.......................... 70,353 214,013 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant.............................. (181,592) (181,352) AFUDC and other charges to utility plant................ 5,731 3,235 Customer advances for construction...................... 5,857 1,221 Contributions in aid of construction.................... 10,699 24,466 --------- --------- Net cash used for utility plant......................... (159,305) (152,430) Investments and other property -- net................... (12,243) (2,598) --------- --------- Net Cash from Investing Activities.......................... (171,548) (155,028) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in short-term borrowings....................... 20,000 173,000 Proceeds from issuance of long-term debt................ 228,764 -- Retirement of long-term debt............................ (209,808) (108,262) Sale of Common Stock.................................... (986) -- Dividends paid.......................................... (1,568) (22,518) --------- --------- Net Cash from Financing Activities.......................... 36,402 42,220 --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (64,793) 101,205 Beginning Balance in Cash and Cash Equivalents.............. 192,064 99,109 --------- --------- Ending Balance in Cash and Cash Equivalents................. $ 127,271 $ 200,314 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during period for: Interest.............................................. $ 142,095 $ 120,457 Income taxes.......................................... $ -- $(185,011) NONCASH FINANCING ACTIVITIES (NOTE 4): Exchanged Floating Rate Notes for SPR common stock...... $ 8,750 Exchanged Premium Income Equity Securities for SPR common stock........................................... $ 104,782
The accompanying notes are an integral part of the financial statements 5 NEVADA POWER COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31, 2003 2002 ----------- ------------ (UNAUDITED) ASSETS Utility Plant at Original Cost: Plant in service.......................................... $3,745,443 $3,542,300 Less accumulated provision for depreciation............. 1,072,387 1,017,494 ---------- ---------- 2,673,056 2,524,806 Construction work-in-progress............................. 87,608 173,189 ---------- ---------- 2,760,664 2,697,995 ---------- ---------- Investments and other property, net......................... 34,171 20,295 ---------- ---------- Current Assets: Cash and cash equivalents................................. 21,118 95,009 Restricted cash........................................... -- 3,850 Accounts receivable less provision for uncollectible accounts: 2003 -- $36,004; 2002 -- $33,841........................ 247,254 202,590 Deferred energy costs -- electric......................... 222,037 213,193 Materials, supplies and fuel, at average cost............. 42,867 44,074 Risk management assets (Note 10).......................... 37,657 28,173 Other..................................................... 56,597 31,602 ---------- ---------- 627,530 618,491 ---------- ---------- Deferred Charges and Other Assets: Deferred energy costs -- electric......................... 396,254 524,345 Regulatory tax asset...................................... 104,176 106,071 Other regulatory assets................................... 57,217 53,109 Risk management assets (Note 10).......................... 3,689 368 Risk management regulatory assets -- net (Note 10)........ 17,177 1,491 Other..................................................... 43,092 46,357 ---------- ---------- 621,605 731,741 ---------- ---------- $4,043,970 $4,068,522 ========== ========== CAPITALIZATION AND LIABILITIES Capitalization: Common shareholder's equity............................... $1,111,823 $1,149,131 NPC obligated mandatorily redeemable preferred trust securities.............................................. 188,872 188,872 Long-term debt............................................ 1,356,790 1,488,597 ---------- ---------- 2,657,485 2,826,600 ---------- ---------- Current Liabilities: Short-term borrowings..................................... 20,000 -- Current maturities of long-term debt...................... 485,123 354,677 Accounts payable.......................................... 105,575 143,002 Accounts payable, affiliated companies.................... 7,365 4,287 Accrued interest.......................................... 33,514 29,892 Dividends declared........................................ 78 78 Accrued salaries and benefits............................. 12,411 7,781 Deferred taxes............................................ 114,402 90,616 Risk management liabilities (Note 10)..................... 33,710 29,908 Other current liabilities................................. 24,847 22,115 ---------- ---------- 837,025 682,356 ---------- ---------- Commitments & Contingencies (Note 11) Deferred Credits and Other Liabilities: Deferred federal income taxes............................. 83,842 129,687 Deferred investment tax credit............................ 21,087 21,902 Regulatory tax liability.................................. 16,648 17,300 Customer advances for construction........................ 69,959 66,434 Accrued retirement benefits............................... 47,702 54,216 Contract termination reserves (Note 11)................... 235,368 225,816 Other..................................................... 74,854 44,211 ---------- ---------- 549,460 559,566 ---------- ---------- $4,043,970 $4,068,522 ========== ==========
The accompanying notes are an integral part of the financial statements. 7 NEVADA POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- --------------------- 2003 2002 2003 2002 -------- --------- -------- ---------- OPERATING REVENUES: Electric...................................... $425,512 $ 477,059 $757,164 $ 833,331 -------- --------- -------- ---------- OPERATING EXPENSES: Operation: Purchased power............................ 199,772 485,926 319,029 661,992 Fuel for power generation.................. 73,267 73,474 119,804 157,196 Deferred energy costs disallowed........... 45,964 -- 45,964 434,123 Deferral of energy costs-net............... 11,442 (185,199) 84,227 (194,835) Other...................................... 51,675 37,284 92,215 77,270 Maintenance................................... 15,650 11,876 29,187 23,526 Depreciation and amortization................. 26,714 17,140 52,621 47,949 Taxes:........................................ -- Income taxes............................... (16,274) (57) (26,822) (156,480) Other than income.......................... 6,818 6,453 13,042 13,187 -------- --------- -------- ---------- 415,028 446,897 729,267 1,063,928 -------- --------- -------- ---------- OPERATING INCOME (LOSS)......................... 10,484 30,162 27,897 (230,597) -------- --------- -------- ---------- OTHER INCOME (EXPENSE): Allowance for other funds used during construction............................... 483 80 1,641 501 Interest accrued on deferred energy........... 5,234 8,056 10,944 (3,095) Other income.................................. 4,018 1,195 7,356 1,341 Other expense................................. (1,618) (564) (3,050) (6,561) Income taxes.................................. (2,679) (3,102) (5,193) 2,543 -------- --------- -------- ---------- 5,438 5,665 11,698 (5,271) -------- --------- -------- ---------- Total Income (Loss) Before Interest Charges............................... 15,922 35,827 39,595 (235,868) -------- --------- -------- ---------- INTEREST CHARGES: Long-term debt................................ 28,927 22,876 59,029 46,954 Other......................................... 5,914 4,352 11,994 6,882 Allowance for borrowed funds used during construction............................... (520) (849) (1,576) (1,961) -------- --------- -------- ---------- 34,321 26,379 69,447 51,875 -------- --------- -------- ---------- Dividend requirements of NPC obligated mandatorily redeemable preferred trust securities................................. 3,793 3,793 7,586 7,586 -------- --------- -------- ---------- NET INCOME (LOSS)............................... $(22,192) $ 5,655 $(37,438) $ (295,329) ======== ========= ======== ==========
The accompanying notes are an integral part of the financial statements. 8 NEVADA POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------- 2003 2002 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss.................................................. $ (37,438) $(295,329) Non-cash items included in income: Depreciation and amortization.......................... 52,621 47,949 Deferred taxes and deferred investment tax credit...... (5,544) 51,987 AFUDC and capitalized interest......................... (3,217) (2,462) Amortization of deferred energy costs.................. 81,962 57,577 Deferred energy costs disallowed (net of taxes)........ 29,877 282,181 Other non-cash......................................... (5,218) (13,782) Changes in certain assets and liabilities: Accounts receivable.................................... (44,664) (81,949) Deferral of energy costs............................... (8,679) (20,317) Materials, supplies and fuel........................... 1,207 1,345 Other current assets................................... (21,145) (10,998) Accounts payable....................................... (34,349) (1,740) Income tax receivable.................................. -- 49,859 Other current liabilities.............................. 10,984 5,170 Other assets........................................... (25,819) (11,746) Other liabilities...................................... 37,612 43,692 --------- --------- Net Cash from Operating Activities.......................... 28,190 101,437 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant............................. (119,594) (139,634) AFUDC and other charges to utility plant............... 3,217 2,462 Customer advances (refunds) for construction........... 3,525 (220) Contributions in aid of construction................... 5,866 21,286 --------- --------- Net cash used for utility plant........................ (106,986) (116,106) Investments and other property -- net.................. (13,734) (942) --------- --------- Net Cash from Investing Activities.......................... (120,720) (117,048) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in short-term borrowings...................... 20,000 69,500 Retirement of long-term debt........................... (1,361) (2,523) Investment by parent company........................... -- 10,000 Dividends paid......................................... -- (9,994) --------- --------- Net Cash from Financing Activities.......................... 18,639 66,983 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (73,891) 51,372 Beginning Balance in Cash and Cash Equivalents.............. 95,009 8,505 --------- --------- Ending Balance in Cash and Cash Equivalents................. $ 21,118 $ 59,877 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during period for: Interest............................................... $ 67,401 $ 47,545 Income taxes........................................... $ -- $(102,904)
The accompanying notes are an integral part of the financial statements 9 SIERRA PACIFIC POWER COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31, 2003 2002 ----------- ------------ (UNAUDITED) ASSETS Utility Plant at Original Cost: Plant in service.......................................... $2,485,862 $2,447,401 Less accumulated provision for depreciation............. 964,013 926,857 ---------- ---------- 1,521,849 1,520,544 Construction work-in-progress............................. 106,350 90,157 ---------- ---------- 1,628,199 1,610,701 ---------- ---------- Investments and other property, net......................... 941 874 ---------- ---------- Current Assets: Cash and cash equivalents................................. 86,453 88,910 Restricted cash........................................... 6,626 9,605 Accounts receivable less provision for uncollectible accounts: 2003 -- $7,931; 2002 -- $10,343............... 128,884 154,821 Accounts receivable, affiliated companies................. 59,569 58,680 Deferred energy costs -- electric......................... 59,230 55,786 Deferred energy costs -- gas.............................. 5,563 17,045 Materials, supplies and fuel, at average cost............. 40,341 41,727 Risk management assets (Note 10).......................... 19,671 1,397 Other..................................................... 15,210 12,955 ---------- ---------- 421,547 440,926 ---------- ---------- Deferred Charges and Other Assets: Deferred energy costs -- electric......................... 97,616 161,530 Regulatory tax asset...................................... 56,787 57,818 Other regulatory assets................................... 63,612 64,149 Risk management assets (Note 10).......................... -- -- Risk management regulatory assets -- net (Note 10)........ 24,871 43,479 Other..................................................... 28,398 19,013 ---------- ---------- 271,284 345,989 ---------- ---------- $2,321,971 $2,398,490 ========== ========== CAPITALIZATION AND LIABILITIES Capitalization: Common shareholder's equity............................... $ 613,448 $ 639,295 Preferred stock........................................... 50,000 50,000 Long-term debt............................................ 913,778 914,788 ---------- ---------- 1,577,226 1,604,083 ---------- ---------- Current Liabilities: Current maturities of long-term debt...................... 101,400 101,400 Accounts payable.......................................... 56,666 71,247 Accrued interest.......................................... 14,814 12,136 Dividends declared........................................ 974 968 Accrued salaries and benefits............................. 13,781 10,812 Deferred taxes............................................ 28,663 32,891 Risk management liabilities (Note 10)..................... 28,676 40,045 Other current liabilities................................. 8,115 10,864 ---------- ---------- 253,089 280,363 ---------- ---------- Commitments & Contingencies (Note 11) Deferred Credits and Other Liabilities: Deferred federal income taxes............................. 229,985 251,487 Deferred investment tax credit............................ 25,678 26,590 Regulatory tax liability.................................. 24,078 25,418 Customer advances for construction........................ 51,930 49,598 Accrued retirement benefits............................... 45,837 44,856 Risk management liabilities (Note 10)..................... 1,111 3,917 Contract termination reserves (Note 11)................... 86,778 86,778 Other..................................................... 26,259 25,400 ---------- ---------- 491,656 514,044 ---------- ---------- $2,321,971 $2,398,490 ========== ==========
The accompanying notes are an integral part of the financial statements. 10 SIERRA PACIFIC POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 2003 2002 2003 2002 -------- -------- -------- -------- OPERATING REVENUES: Electric......................................... $205,026 $197,085 $410,480 $421,838 Gas.............................................. 35,873 25,583 100,490 80,666 -------- -------- -------- -------- 240,899 222,668 510,970 502,504 -------- -------- -------- -------- OPERATING EXPENSES: Operation: Purchased power............................... 75,674 174,302 162,852 279,719 Fuel for power generation..................... 47,559 31,169 81,235 78,220 Gas purchased for resale...................... 27,865 13,107 70,199 51,701 Deferred energy costs disallowed.............. 45,000 53,101 45,000 53,101 Deferral of energy costs -- electric -- net... 7,241 (68,338) 18,643 (72,943) Deferral of energy costs -- gas -- net........ 1,020 2,176 11,823 10,368 Other......................................... 31,625 22,893 60,838 50,655 Maintenance...................................... 6,453 5,139 11,640 10,396 Depreciation and amortization.................... 19,961 20,595 39,667 38,152 Taxes:........................................... -- Income taxes.................................. (18,298) (21,539) (16,208) (16,638) Other than income............................. 4,849 4,881 9,511 9,657 -------- -------- -------- -------- 248,949 237,486 495,200 492,388 -------- -------- -------- -------- OPERATING INCOME (LOSS)............................ (8,050) (14,818) 15,770 10,116 -------- -------- -------- -------- OTHER INCOME (EXPENSE): Allowance for other funds used during construction.................................. 601 (83) 1,203 153 Interest accrued on deferred energy.............. 1,589 (1,000) 3,514 4,026 Other income..................................... 1,035 1,733 2,100 3,570 Other expense.................................... (1,702) (1,347) (3,607) (3,809) Income taxes..................................... (476) 321 (779) (1,110) -------- -------- -------- -------- 1,047 (376) 2,431 2,830 -------- -------- -------- -------- Total Income (Loss) Before Interest Charges.................................. (7,003) (15,194) 18,201 12,946 -------- -------- -------- -------- INTEREST CHARGES: Long-term debt................................ 18,959 16,020 37,740 32,465 Other......................................... 2,604 2,966 5,729 4,108 Allowance for borrowed funds used during construction................................ (611) (229) (1,311) (620) -------- -------- -------- -------- 20,952 18,757 42,158 35,953 -------- -------- -------- -------- NET INCOME (LOSS).................................. (27,955) (33,951) (23,957) (23,007) -------- -------- -------- -------- Preferred Dividend Requirements.................... 975 975 1,950 1,950 -------- -------- -------- -------- Loss applicable to common stock.................... $(28,930) $(34,926) $(25,907) $(24,957) ======== ======== ======== ========
The accompanying notes are an integral part of the financial statements. 11 SIERRA PACIFIC POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------- 2003 2002 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................... $(23,957) $(23,007) Non-cash items included in income: Depreciation and amortization.......................... 39,667 39,064 Deferred taxes and deferred investment tax credit...... (26,951) 16,304 AFUDC and capitalized interest......................... (2,514) (773) Amortization of deferred energy costs -- electric...... 23,873 2,399 Amortization of deferred energy costs -- gas........... 9,547 7,661 Deferred energy costs disallowed (net of taxes)........ 29,250 35,796 Early retirement and severance amortization............ 1,249 1,458 Other non-cash......................................... (10,657) (8,932) Changes in certain assets and liabilities: Accounts receivable.................................... 25,048 (35,954) Deferral of energy costs -- electric................... 7,346 19,838 Deferral of energy costs -- gas........................ 1,936 1,099 Materials, supplies and fuel........................... 1,386 (3,840) Other current assets................................... 724 (10,522) Accounts payable....................................... (14,581) (33,774) Income tax receivable.................................. -- 28,752 Other current liabilities.............................. 2,897 1,421 Other assets........................................... 894 3,936 Other liabilities...................................... (12,274) 9,275 -------- -------- Net Cash from Operating Activities.......................... 52,883 50,201 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant............................. (61,997) (41,718) AFUDC and other charges to utility plant............... 2,514 773 Customer advances for construction..................... 2,332 1,441 Contributions in aid of construction................... 4,832 3,180 -------- -------- Net cash used for utility plant........................ (52,319) (36,324) Disposal of investments and other property -- net...... (67) 624 -------- -------- Net Cash from Investing Activities.......................... (52,386) (35,700) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in short-term borrowings...................... -- 103,500 Retirement of long-term debt........................... (1,010) (5,739) Investment by parent company........................... -- 10,000 Dividends paid......................................... (1,944) (21,838) -------- -------- Net Cash from Financing Activities.......................... (2,954) 85,923 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (2,457) 100,424 Beginning Balance in Cash and Cash Equivalents.............. 88,910 11,772 -------- -------- Ending Balance in Cash and Cash Equivalents................. $ 86,453 $112,196 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash (received) paid during period for: Interest............................................... $ 40,791 $ 33,997 Income taxes........................................... $ -- $(62,109)
The accompanying notes are an integral part of the financial statements 12 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. MANAGEMENT'S STATEMENT (SPR, NPC, SPPC) In the opinion of the management of Sierra Pacific Resources (SPR), Nevada Power Company (NPC), and Sierra Pacific Power Company (SPPC), the accompanying unaudited interim condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the condensed consolidated financial position, results of operations and cash flows for the periods shown. These condensed consolidated financial statements do not contain the complete detail or footnote disclosure concerning accounting policies and other matters which are included in full year financial statements; therefore, they should be read in conjunction with the audited financial statements included in SPR's, NPC's, and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002. The results of operations and cash flows of SPR, NPC and SPPC for the three-month and six-month periods ended June 30, 2003, are not necessarily indicative of the results to be expected for the full year. PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements of SPR include the accounts of SPR and its wholly-owned subsidiaries, NPC and SPPC (collectively, the "Utilities"), Tuscarora Gas Pipeline Company (TGPC), Sierra Gas Holding Company (SGHC), Sierra Pacific Energy Company (SPE), Lands of Sierra (LOS), Sierra Pacific Communications (SPC), and Sierra Water Development Company (SWDC). Sierra Energy Company dba e-three (e-three) is a discontinued operation and as such is no longer a consolidated subsidiary of SPR and is reported separately on the financial statements of SPR. The condensed consolidated financial statements of NPC include the accounts of NPC and its wholly-owned subsidiaries, NEICO, NVP Capital I (Trust) and NVP Capital III (Trust). The condensed consolidated financial statements of SPPC include the accounts of SPPC and its wholly-owned subsidiaries, GPSF-B, Pinon Pine Corp. (PPC), Pinon Pine Investment Co., Pinon Pine Company, L.L.C. and Sierra Pacific Funding L.L.C. All significant intercompany transactions and balances have been eliminated in consolidation. SIERRA PACIFIC RESOURCES SPR, on a stand-alone basis, had cash and cash equivalents of approximately $19.1 million at June 30, 2003. At July 31, 2003, SPR had cash balances of approximately $19.5 million. Currently, SPR has a substantial amount of outstanding debt and other obligations including, but not limited to: $300 million of its unsecured 8 3/4% Senior Notes due 2005; $240 million of its unsecured 7.93% Senior Notes due 2007; and $300 million of its 7.25% Convertible Notes due 2010. SPR's future liquidity and its ability to pay the principal of and interest on its indebtedness depend on SPPC's ability to continue to pay dividends to SPR, on NPC's financial stability and a restoration of its ability to pay dividends to SPR, and on SPR's ability to access the capital markets or otherwise refinance maturing and/or convertible debt. Further adverse developments at NPC or SPPC, including a material disallowance of deferred energy costs in future rate cases or an adverse decision in the pending lawsuit by Enron, could make it difficult to continue to operate outside of bankruptcy. See Note 5, Dividend Restrictions, for information regarding the dividend restrictions applicable to NPC and SPPC, and Note 11, Commitments and Contingencies, for additional information regarding uncertainties that could impact SPR's liquidity and financial condition. The provisions that currently restrict dividends payable by NPC or SPPC have adversely affected SPR's liquidity and will continue to negatively impact SPR's liquidity until those provisions are no longer in effect. Management is currently in the process of seeking consent for a modification of the financial covenant contained in NPC's first mortgage indenture. There can be no assurance that any such consent can be obtained or that any non-consenting first mortgage bonds could be redeemed or defeased prior to 13 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) their stated maturity. The regulatory limitation contained in the Public Utility Commission of Nevada's (PUCN) Compliance Order, Docket No. 02-4037, dated June 19, 2002, expires on December 31, 2003. Prior to the expiration date of the Compliance Order, management may seek PUCN approval for a payment of dividends by NPC or may seek a waiver from the PUCN of the dividend restriction. Financing Transactions. On February 14, 2003, SPR issued and sold $300 million of its 7.25% Convertible Notes due 2010. Approximately $53.4 million of the net proceeds from the sale of the notes was used to purchase U.S. government securities that were pledged to the trustee for the first five interest payments on the notes payable during the first two and one-half years. A portion of the remaining net proceeds of the notes was used to repurchase approximately $58.5 million of SPR's Floating Rate Notes due April 20, 2003. Of the remaining net proceeds, approximately $133 million was used to repay the remainder of SPR's Floating Rate Notes due April 20, 2003, and the remaining proceeds are available for general corporate purposes, including the payment of interest on SPR's other outstanding indebtedness. The Convertible Notes are not convertible prior to August 14, 2003. At any time on or after August 14, 2003 through the close of business February 14, 2010, holders of the Convertible Notes may convert their notes into shares of SPR's common stock and cash. Until SPR has obtained shareholder approval to permit the Convertible Notes to be fully convertible into shares of common stock, holders of the Convertible Notes will be entitled to receive 76.7073 shares of common stock and an amount of cash equal to the market value of 142.4564 shares of SPR's common stock at the time of conversion, based on the average closing price of SPR's common stock over five consecutive trading days, for each $1,000 principal amount of notes surrendered for conversion. At an assumed five-day average closing price of $5.00 per share (based on the last reported sale price of SPR's common stock on August 1, 2003), the total amount of the cash payable on conversion of the Convertible Notes would be approximately $214 million. If SPR does not obtain shareholder approval, SPR will be required to pay the cash portion of any Convertible Notes as to which the holders request conversion on or after August 14, 2003. The amount of cash payable on conversion of the Convertible Notes will increase as the average closing price of SPR's common stock increases. Although management does not believe it is likely that a significant amount of the Convertible Notes will be converted in the foreseeable future, in the event that SPR does not have available funds to pay the cash portion of the Convertible Notes upon the requested conversion, SPR may have to issue additional debt or equity to raise the necessary funds. There can be no assurance that SPR will be able to access the capital markets to issue such additional debt and/or equity or that it will be able to do so on terms favorable to SPR. If SPR does obtain shareholder approval, it may elect to satisfy the cash payment component of the conversion price of the Convertible Notes solely with shares of common stock. SPR has agreed to use reasonable efforts to obtain shareholder approval, not later than 180 days after the date of issuance of the Convertible Notes, for approval to issue and deliver shares of SPR's common stock in lieu of the cash payment component of the conversion price of the Convertible Notes. SPR has called a special shareholder meeting for August 11, 2003 to comply with the terms of the Convertible Notes. For further information regarding the terms of the Convertible Notes, see Note 4, Long-Term Debt. Effect of Holding Company Structure. Due to its holding company structure, SPR's right as a common shareholder to receive assets of any of its direct or indirect subsidiaries upon a subsidiary's liquidation or reorganization is junior to the claims against the assets of such subsidiary by its creditors. Therefore, SPR's debt obligations are effectively subordinated to all existing and future claims of its subsidiaries' creditors, particularly those of NPC and SPPC, including trade creditors, debt holders, secured creditors, taxing authorities, guarantee holders and NPC's and SPPC's preferred security holders. As of June 30, 2003, NPC, SPPC and their subsidiaries had approximately $2.89 billion of debt and other obligations outstanding and approximately $238.9 million of outstanding preferred securities. Although the Utilities are parties to agreements that limit the amount of additional indebtedness they may incur, the Utilities retain the ability to incur substantial additional indebtedness and other liabilities. 14 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The accompanying financial statements do not include any adjustments that might result from the outcome of the uncertainties discussed above. NEVADA POWER COMPANY NPC had cash and cash equivalents of approximately $21.1 million at June 30, 2003. At July 31, 2003, NPC had cash balances of approximately $35.7 million. In addition to anticipated capital requirements for construction, NPC has approximately $355 million of debt maturing through the end of 2003. NPC expects to finance these requirements with internally generated funds, including the recovery of deferred energy costs, and the issuance of debt. NPC's liquidity would be significantly affected by an adverse decision in the lawsuit by Enron, or by unfavorable rulings by the PUCN in future NPC or SPPC rate cases. Standard and Poor's Rating Group, Inc. (S&P) and Moody's Investors Service, Inc. (Moody's) have NPC's credit ratings on "negative outlook" and "stable", respectively. Future downgrades by either S&P or Moody's could preclude or reduce NPC's access to the capital markets. Furthermore, if NPC continues to experience financial difficulty or if its credit ratings are further downgraded, NPC may experience considerable difficulty entering into new power supply contracts, particularly under traditional payment terms. Most of NPC's suppliers will not sell power to NPC under traditional payment terms and are requiring NPC to pre-pay its power requirements or to make more frequent payments on its power purchases. If NPC does not have sufficient funds or access to liquidity to pre-pay its power requirements or to make more frequent payments on its power purchases, and is unable to obtain power through other means, NPC's results of operations, financial position, and cash flows will be adversely affected. Adverse developments with respect to any one or a combination of the foregoing could make it difficult to continue to operate outside of bankruptcy. NPC's General and Refunding Mortgage Indenture creates a lien on substantially all of NPC's properties in Nevada that is junior to the lien of the first mortgage indenture. As of June 30, 2003, $930 million of NPC's General and Refunding Mortgage securities were outstanding. Additional securities may be issued under the General and Refunding Mortgage Indenture on the basis of (i) 70% of net utility property additions, (ii) the principal amount of retired General and Refunding Mortgage Bonds, and/or (iii) the principal amount of first mortgage bonds retired after October 19, 2001. On the basis of (i), (ii) and (iii) above, as of June 30, 2003, NPC had the capacity to issue approximately $1.017 billion of additional General and Refunding Mortgage securities. Although NPC has substantial capacity to issue additional General and Refunding Mortgage securities on the basis of property additions and retired General and Refunding Mortgage securities and first mortgage bonds, the financial covenants contained in NPC's Series E Notes, Receivables Purchase Facility Agreements and NPC's $60 million Credit Agreement limit the amount of additional indebtedness that NPC may issue and the reasons for which such indebtedness may be issued. NPC has reserved $125 million of General and Refunding Mortgage bonds for issuance upon the initial funding of NPC's receivables facility. See Note 3, Short-Term Borrowings, for information regarding NPC's accounts receivable facility. NPC intends to use its accounts receivable purchase facility as a back-up liquidity facility and does not plan to activate this facility in the foreseeable future. NPC may activate the facility within five days upon the delivery of certain customary funding documentation and the delivery of the $125 million General and Refunding Mortgage Bond. The accompanying financial statements do not include any adjustments that might result from the outcome of the uncertainties discussed above. SIERRA PACIFIC POWER COMPANY SPPC had cash and cash equivalents of approximately $86.5 million at June 30, 2003. At July 31, 2003, SPPC had cash balances of approximately $75.6 million. 15 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In addition to anticipated capital requirements for construction, SPPC has approximately $21 million of debt maturing through the end of 2003. SPPC expects to finance these requirements with internally generated funds, including the recovery of deferred energy costs. SPPC's future liquidity could be significantly affected by unfavorable rulings by the PUCN in future SPPC or NPC rate cases. S&P and Moody's have SPPC's credit ratings on "negative outlook" and "stable", respectively. Future downgrades by either S&P or Moody's could preclude or reduce SPPC's access to the capital markets. Furthermore, if SPPC continues to experience financial difficulty or if its credit ratings are further downgraded, SPPC may experience considerable difficulty entering into new power supply contracts, particularly under traditional payment terms. Most of SPPC's suppliers will not sell power to SPPC under traditional payment terms and are requiring SPPC to pre-pay its power requirements or to make more frequent payments on its power purchases. If SPPC does not have sufficient funds or access to liquidity to pre-pay its power requirements, and is unable to obtain power through other means, SPPC's results of operations, financial position and cash flows will be adversely affected. Adverse developments with respect to any one or a combination of the factors and contingencies set forth above could make it difficult to continue to operate outside of bankruptcy. SPPC's General and Refunding Mortgage Indenture creates a lien on substantially all of SPPC's properties in Nevada that is junior to the lien of the first mortgage indenture. As of June 30, 2003, approximately $499.5 million of SPPC's General and Refunding Mortgage bonds were outstanding. On May 1, 2003, SPPC issued its $80 million General and Refunding Mortgage Note, Series D, due 2004, to secure SPPC's payment obligations with respect to $80 million of Washoe County, Nevada, Water Facilities Refunding Revenue Bonds (Sierra Pacific Power Company Project), Series 2001, which were issued for SPPC's benefit. Additional securities may be issued under the General and Refunding Mortgage Indenture on the basis of (i) 70% of net utility property additions, (ii) the principal amount of retired General and Refunding Mortgage bonds, and/or (iii) the principal amount of first mortgage bonds retired after April 8, 2002. On the basis of (i), (ii) and (iii) above, as of June 30, 2003, SPPC had the capacity to issue approximately $364.9 million of additional General and Refunding Mortgage securities. Although SPPC has substantial capacity to issue additional General and Refunding Mortgage securities on the basis of property additions and retired General and Refunding Mortgage securities and first mortgage bonds, the financial covenants contained in SPPC's Term Loan Agreement and Receivables Purchase Facility Agreements limit the amount of additional indebtedness that SPPC may issue and the reasons for which such indebtedness may be issued. SPPC has reserved $75 million of General and Refunding Mortgage Bonds for issuance upon the initial funding of its receivables purchase facility. SPPC intends to use its accounts receivable purchase facility as a back-up liquidity facility and does not plan to activate this facility in the foreseeable future. SPPC may activate the facility within five days upon the delivery of certain customary funding documentation and the delivery of the $75 million General and Refunding Mortgage Bond. See Note 3, Short-Term Borrowings, for information regarding SPPC's accounts receivable facility. The accompanying financial statements do not include any adjustments that might result from the outcome of the uncertainties discussed above. RECLASSIFICATIONS Certain items previously reported have been reclassified to conform to the current year's presentation. Net income and shareholders' equity were not affected by these reclassifications. NEVADA POWER COMPANY FINANCIAL STATEMENTS The presentation of NPC's condensed consolidated statement of operations for the three months and six months ended June 30, 2002, and NPC's condensed consolidated statement of cash flows for the six months ended June 30, 2002 have been revised. Specifically, the effects of the revisions were to eliminate 16 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the line item "Equity in losses of Sierra Pacific Resources" of $(47,571) and $(52,069) on NPC's Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2002, respectively, and to eliminate the line item "Equity in losses of SPR" of $(52,069) on NPC's Condensed Consolidated Statement of Cash Flows. For additional information regarding this change in presentation, see Note 1, Summary of Significant Accounting Policies of Notes to Financial Statements in SPR's, NPC's and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002. DEFERRAL OF ENERGY COSTS NPC and SPPC implemented deferred energy accounting procedures on March 1, 2001. See Note 1, Summary of Significant Accounting Policies, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002, for additional information regarding the implementation of deferred energy accounting by the Utilities. The following deferred energy costs were included in the condensed consolidated balance sheets as of June 30, 2003 (dollars in thousands):
JUNE 30, 2003 --------------------------------------- NPC SPPC SPPC SPR DESCRIPTION ELECTRIC ELECTRIC GAS TOTAL - ----------- -------- -------- ------ -------- Unamortized balances approved for collection in current rates........................... $396,812 $ 66,690 $3,268 $466,770 Balances accumulated since end of periods submitted for PUCN approval(1)............. (16,531) 8,255 2,295 (5,981) Terminated suppliers(2)(3)................... 238,010 81,901 -- 319,911 -------- -------- ------ -------- Total...................................... $618,291 $156,846 $5,563 $780,700 ======== ======== ====== ========
- --------------- (1) Credits represent over-collections, that is, the extent to which gas or fuel and purchased power costs recovered through rates exceed actual gas or fuel and purchased power costs. (2) Balances adjusted from amounts presented as of December 31, 2002, reflect, primarily, a reclassification between amounts for terminated suppliers and balances pending PUCN approval. (3) Amounts related to terminated suppliers are discussed in Note 17, Commitments and Contingencies, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002. STOCK COMPENSATION PLANS In December 2002, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," as an amendment to SFAS No. 123, "Accounting for Stock-Based Compensation." SPR has previously adopted the disclosure-only provisions of SFAS No. 123, and as of December 31, 2002 has adopted the updated disclosure requirements set forth in SFAS No. 148. At June 30, 2003, SPR had several stock-based compensation plans which are described more fully in Note 15 "Stock Compensation Plans," of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002. SPR applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for nonqualified stock options and the employee stock purchase plan. Had compensation cost for SPR's nonqualified stock options and the employee stock purchase plan been determined based on the fair value at the grant dates for awards under those plans, consistent with the provisions of SFAS No. 123, SPR's loss applicable to common stock 17 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) would have been increased to the pro forma amounts indicated below (dollars in thousands, except loss per share):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- --------------------- 2003 2002 2003 2002 --------- -------- --------- --------- Stock Compensation Cost included in Net Income (Loss) as Reported, net of related tax effects......................... As Reported $ 192 $ (1,446) $ 25 $ (770) ========= ======== ========= ========= Loss applicable to Common Stock... As Reported $(173,420) $(41,916) $(189,918) $(347,398) Less: Additional Stock Compensation Cost, net of related tax effects.......... Pro Forma 26 512 1,235 1,024 --------- -------- --------- --------- Loss applicable to Common Stock... Pro Forma $(173,446) $(42,428) $(191,153) $(348,422) ========= ======== ========= ========= Basic Loss Per Share.............. As Reported $ (1.48) $ (0.41) $ (1.66) $ (3.40) Pro Forma $ (1.48) $ (0.42) $ (1.67) $ (3.41) Diluted Loss Per Share............ As Reported $ (1.48) $ (0.41) $ (1.66) $ (3.40) Pro Forma $ (1.48) $ (0.42) $ (1.67) $ (3.41)
RECENT PRONOUNCEMENTS In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees" (FIN 45), which elaborates on the disclosures to be made in interim and annual financial statements of a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing a guarantee. Initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. As of June 30, 2003, all guarantees of SPR and its subsidiaries were intercompany, whereby the parent issued the guarantees on behalf of its consolidated subsidiaries to a third party. Therefore, there was no impact on the financial position, results of operation or cash flows of SPR, NPC or SPPC. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46), which elaborates on Accounting Research Bulletin No. 51, "Consolidated Financial Statements." Among other requirements, FIN 46 provides that a variable interest entity be consolidated by the enterprise that is the primary beneficiary of the variable interest entity. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Management is currently reviewing the effect of adopting this statement on the financial position, results of operation or cash flows of SPR, NPC or SPPC. On April 30, 2003, the FASB issued SFAS No. 149, which amends accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement clarifies the circumstances under which a contract with an initial net investment meets the characteristics of a derivative as discussed in SFAS 133. In addition, SFAS 149 clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after 18 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2003. Management is currently reviewing the effect of adopting this statement on the financial position and results of operations of SPR, NPC and SPPC. On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity," which requires that certain financial instruments with characteristics of both liabilities and equities be classified as liabilities by their issuers. The provisions of SFAS No. 150, which also include a number of new disclosure requirements, are effective for (1) instruments entered into or modified after May 31, 2003 and (2) pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. As a result, management expects that NPC's obligated mandatorily redeemable preferred trust securities will be classified as a liability once SFAS 150 goes into effect, which will be the quarter ending September 30, 2003. Additionally, management will continue to review the effect of adopting this statement on the financial position and results of operations of SPR, NPC and SPPC. NOTE 2. ASSET RETIREMENT OBLIGATIONS (AROS) Effective January 1, 2003, the Utilities adopted the provisions of SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 generally applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. SFAS No. 143 requires NPC to recognize an estimated liability for the retirement of generation plant assets specified in land leases for NPC's jointly-owned Navajo generating station because, at the expiration of the leases, the leases require the lessees to remove the facilities upon request of the Navajo Nation. However, the retirement obligation and corresponding charges recognized were immaterial to the financial statements of NPC. NPC also redesignated amounts from Accumulated Depreciation to a regulatory liability in order to reflect the estimated costs of removal collected through rates. NPC amortizes the amount added to Electric Plant In Service and recognizes accretion expense in connection with the discounted liability over the estimated remaining life of the Navajo generating station assets. SPPC has no significant asset retirement obligations. NPC and SPPC also collect removal costs in regulated rates for certain assets that do not have associated legal asset retirement obligations. As of June 30, 2003, NPC and SPPC estimate that they had approximately $133 million and $151 million related to such removal costs recorded in Accumulated Depreciation, respectively. NOTE 3. SHORT-TERM BORROWINGS NEVADA POWER COMPANY On June 30, 2003, NPC entered into a Credit Agreement, which provides for a $60 million revolving credit facility to provide additional liquidity to NPC for its summer 2003 power purchases. As of July 31, 2003, NPC had borrowed $20 million under this credit facility. NPC's Credit Agreement prohibits payments to SPR in respect of NPC's common stock and provides that NPC's ratio of consolidated total debt to consolidated total capitalization may not exceed .65 to 1.00. The Credit Facility, which is secured by NPC's $60 million Series F General and Refunding Mortgage Bond, will expire no later than September 8, 2003. On October 29, 2002, NPC established an accounts receivable purchase facility of up to $125 million. The accounts receivable purchase facility expires October 28, 2003. Currently, NPC intends to negotiate an extension of this facility. If NPC elects to activate the receivables purchase facility, NPC will sell all of its accounts receivable generated from the sale of electricity to customers to its newly created bankruptcy remote special purchase subsidiary. The receivables sales will be without recourse except for breaches of customary representations and warranties made at the time of sale. The subsidiary will, in turn, sell these receivables to a bankruptcy remote subsidiary of SPR. SPR's subsidiary will issue variable rate revolving 19 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) notes backed by the purchased receivables. The agreements relating to the receivables purchase facility contain various conditions to purchase, covenants and trigger events, termination events and other provisions customary in receivables transactions. In connection with NPC's receivables facility, SPR has agreed to guaranty NPC's performance of certain obligations as a seller and servicer under the facility. NPC has agreed to issue $125 million principal amount of its General and Refunding Mortgage Bonds upon activation of the accounts receivables purchase facility. The full principal amount of the Bond would secure certain of NPC's obligations as seller and servicer, plus certain interest, fees and expenses thereon to the extent not paid when due, regardless of the actual amounts owing with respect to the secured obligations. As a result, in the event of an NPC bankruptcy or liquidation, the holder of the Bond securing the receivables facility may recover more on a pro rata basis than the holders of other General and Refunding Mortgage securities, who could recover less on a pro rata basis than they otherwise would recover. However, in no event will the holder of the Bond recover more than the amount of obligations secured by the Bond. NPC intends to use the accounts receivables purchase facility as a back-up liquidity facility and does not plan to activate this facility in the foreseeable future. NPC may activate the facility within five days upon the delivery of certain customary funding documentation and the delivery of the $125 million General and Refunding Mortgage Bond. As of June 30, 2003, this facility had not been activated. SIERRA PACIFIC POWER COMPANY On October 29, 2002, SPPC established an accounts receivable purchase facility of up to $75 million. The accounts receivable purchase facility expires October 28, 2003. Currently, SPPC intends to negotiate an extension of this facility. If SPPC elects to activate the receivables purchase facility, SPPC will sell all of its accounts receivable generated from the sale of electricity and gas to customers to its newly created bankruptcy-remote special purpose subsidiary. The receivables sales will be without recourse except for breaches of customary representations and warranties made at the time of sale. The subsidiary will, in turn, sell these receivables to a bankruptcy-remote subsidiary of SPR. SPR's subsidiary will issue variable rate revolving notes backed by the purchased receivables. The agreements relating to the receivables purchase facility contain various conditions to purchase, covenants and trigger events, termination events and other provisions customary in receivables transactions. In connection with SPPC's receivables facility, SPR has agreed to guaranty SPPC's performance of certain obligations as a seller and servicer under the facility. SPPC has agreed to issue $75 million principal amount of its General and Refunding Mortgage Bonds upon activation of the accounts receivables purchase facility. The full principal amount of the Bond would secure certain of SPPC's obligations as seller and servicer, plus certain interest, fees and expenses thereon to the extent not paid when due, regardless of the actual amounts owing with respect to the secured obligations. As a result, in the event of an SPPC bankruptcy or liquidation, the holder of the Bond securing the receivables facility may recover more on a pro rata basis than the holders of other General and Refunding Mortgage securities, who could recover less on a pro rata basis than they otherwise would recover. However, in no event will the holder of the Bond recover more than the amount of obligations secured by the Bond. SPPC intends to use the accounts receivables purchase facility as a back-up liquidity facility and does not plan to activate this facility in the foreseeable future. SPPC may activate the facility within five days upon the delivery of certain customary funding documentation and the delivery of the $75 million General and Refunding Mortgage Bond. As of June 30, 2003, this facility had not been activated. 20 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4. LONG-TERM DEBT Substantially all utility plant owned by NPC and SPPC is subject to the liens of their respective indentures under which their First Mortgage bonds and General and Refunding Mortgage bonds are issued. SIERRA PACIFIC RESOURCES In January 2003, SPR acquired $8.75 million aggregate principal amount of its Floating Rate Notes due April 20, 2003 in exchange for approximately 1.3 million shares of its common stock, in two privately-negotiated transactions exempt from the registration requirements of the Securities Act of 1933. On February 5, 2003, SPR acquired 2.1 million of Premium Income Equity Securities (PIES) including approximately $104.8 million of 7.93% Senior Notes due 2007 that are a component of the PIES, in exchange for approximately 13.66 million shares of its common stock, in five privately negotiated transactions exempt from the registration requirements of the Securities Act. On February 14, 2003, SPR issued and sold $300 million of its 7.25% Convertible Notes due 2010. Approximately $53.4 million of the net proceeds from the sale of the notes was used to purchase U.S. government securities that were pledged to the trustee for the first five interest payments on the notes payable during the first two and one-half years. A portion of the remaining net proceeds of the notes was used to repurchase approximately $58.5 million of SPR's Floating Rate Notes due April 20, 2003. Of the remaining net proceeds, approximately $133 million was used to repay SPR's Floating Rate Notes due April 20, 2003, and the remaining proceeds are available for general corporate purposes. The Convertible Notes were issued with registration rights. The Convertible Notes are not convertible prior to August 14, 2003. At any time on or after August 14, 2003 through the close of business February 14, 2010, holders of the Convertible Notes may convert their notes into shares of SPR's common stock. Until SPR has obtained shareholder approval to permit the Convertible Notes to be fully convertible into shares of common stock, holders of the Convertible Notes will be entitled to receive 76.7073 shares of common stock and an amount of cash equal to the market value of 142.4564 shares of our common stock at the time of conversion, based on the average closing price of SPR's common stock over five consecutive trading days, for each $1,000 principal amount of notes surrendered for conversion. At an assumed five-day average closing price of $5.00 per share (based on the last reported sale price of SPR's common stock August 1, 2003), the total amount of the cash payable on conversion of the Convertible Notes would be approximately $214 million. If SPR does not obtain shareholder approval, SPR will be required to pay the cash portion of any Convertible Notes as to which the holders request conversion on or after August 14, 2003. The amount of cash payable on conversion of the Convertible Notes will increase as the average closing price of SPR's common stock increases. Although management does not believe it is likely that a significant amount of the Convertible Notes will be converted in the foreseeable future, in the event that SPR does not have available funds to pay the cash portion of the Convertible Notes upon the requested conversion, SPR may have to issue additional debt or equity to raise the necessary funds. There can be no assurance that SPR will be able to access the capital markets to issue such additional debt and/or equity or that it will be able to do so on terms favorable to SPR. If SPR does obtain shareholder approval, it may elect to satisfy the cash payment component of the conversion price of the Convertible Notes solely with shares of common stock. SPR has agreed to use reasonable efforts to obtain shareholder approval, not later than 180 days after the date of issuance of the Convertible Notes, to issue and deliver shares of SPR's common stock in lieu of the cash payment component of the conversion price of the Convertible Notes. SPR has called a special shareholder meeting for August 11, 2003 to comply with the terms of the Convertible Notes. 21 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In addition, until SPR has obtained shareholder approval to permit the Convertible Notes to be fully convertible into shares of common stock, SPR must satisfy part of this obligation in cash. Accordingly, the portion of the obligation relating to the amount to be settled upon conversion by issuing shares is classified as a long-term liability and the portion to be settled with working capital upon demand by the holder is classified as a current maturity. The Convertible Notes provide for the payment of dividends to the holders in an amount equal to any per share dividends on SPR common stock that would have been payable to the holders if the holders of the notes had converted their notes into shares of common stock at the applicable conversion rate on the record date for such dividend. The indenture under which the Convertible Notes were issued does not contain any financial covenants or any restrictions on the payment of dividends, the repurchase of SPR's securities or the incurrence of indebtedness. The indenture does allow the holders of the Convertible Notes to require SPR to repurchase all or a portion of the holders' Convertible Notes upon a change of control. The indenture also provides for an event of default if SPR or any of its significant subsidiaries, including NPC and SPPC, fails to pay any indebtedness in excess of $10 million or has any indebtedness of $10 million or more accelerated and declared due and payable. For further information regarding accounting for the conversion option, see Note 10, Derivatives and Hedging Activities. SIERRA PACIFIC POWER COMPANY On May 1, 2003, SPPC's $80 million Washoe County, Nevada, Water Facilities Refunding Revenue Bonds, Series 2001, were successfully remarketed. The interest rate on the bonds was adjusted from their prior two-year 5.75% term rate to a 7.50 % term rate for the period of May 1, 2003 to and including May 3, 2004. The bonds will be subject to remarketing on May 3, 2004 and will continue to be included in current maturities of long-term debt. In the event that the bonds cannot be successfully remarketed on that date, SPPC will be required to purchase the outstanding bonds at a price of 100% of principal amount, plus accrued interest. From May 1, 2003 to and including May 3, 2004, SPPC's payment and purchase obligations in respect of the bonds are secured by SPPC's $80 million General and Refunding Mortgage Note, Series D, due 2004. As of June 30, 2003, NPC's, SPPC's and SPR's aggregate annual amount of maturities for long-term debt (including obligations related to capital leases) for the balance of 2003, each of the next four years and thereafter is shown below (in thousands of dollars):
SPR HOLDING CO. SPR NPC SPPC AND OTHER SUBS.* CONSOLIDATED ---------- ---------- ----------------- ------------ 2003............................. $ 352,379 $ 19,853 $162,495 $ 534,727 2004............................. 135,570 83,400 -- 218,970 2005............................. 6,091 100,400 300,000 406,491 2006............................. 6,509 52,400 -- 58,909 2007............................. 5,949 2,400 240,218 248,567 Thereafter....................... 1,348,384 759,913 88,314 2,196,611 ---------- ---------- -------- ---------- Total............................ 1,854,882 1,018,366 791,027 3,664,275 Unamortized (Disc.).............. (12,969) (3,188) (7,170) (23,327) ---------- ---------- -------- ---------- Total............................ $1,841,913 $1,015,178 $783,857 $3,640,948 ========== ========== ======== ==========
* The 2003 SPR maturities of $162,495 include $142,180 of SPR's Convertible Notes due 2010 that are deemed current in 2003, discussed above. 22 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5. DIVIDEND RESTRICTIONS Since SPR is a holding company, substantially all of its cash flow is provided by dividends paid to SPR by NPC and SPPC on their common stock, all of which is owned by SPR. Since NPC and SPPC are public utilities, they are subject to regulation by state utility commissions which may impose limits on investment returns or otherwise impact the amount of dividends that the Utilities may declare and pay, and to federal statutory limitation on the payment of dividends. In addition, certain agreements entered into by the Utilities set restrictions on the amount of dividends they may declare and pay and restrict the circumstances under which such dividends may be declared and paid. The specific restrictions on dividends contained in agreements to which NPC and SPPC are party, as well as specific regulatory limitations on dividends, are summarized below. NEVADA POWER COMPANY First Mortgage Indenture. NPC's first mortgage indenture limits the cumulative amount of dividends and other distributions that NPC may pay on its capital stock to the cumulative net earnings of NPC since 1953, subject to adjustments for the net proceeds of sales of capital stock since 1953. At the present time, this restriction precludes NPC from making further payments of dividends on NPC's common stock and will continue to preclude payment of dividends until NPC, over time, generates sufficient earnings to eliminate the deficit under this provision (which was approximately $279.3 million as of June 30, 2003), unless the restriction is waived, amended, or removed by the consent of the first mortgage bondholders, or the first mortgage bonds are redeemed or defeased. Management is currently in the process of seeking consent for the modification of this restriction. There can be no assurance that any such consent can be obtained or that any non-consenting first mortgage bonds could be redeemed or defeased prior to their stated maturity. Under this provision, NPC continues to have capacity to repurchase or redeem shares of its capital stock. Series E Notes. NPC's 10 7/8% General and Refunding Mortgage Notes, Series E, due 2009, which were issued on October 29, 2002, limit the amount of payments in respect of common stock that NPC may pay to SPR. However, that limitation does not apply to payments by NPC to enable SPR to pay its reasonable fees and expenses (including, but not limited to, interest on SPR's indebtedness and payment obligations on account of SPR's PIES) provided that: - those payments do not exceed $60 million for any one calendar year, - those payments comply with any regulatory restrictions then applicable to NPC, and - the ratio of consolidated cash flow to fixed charges for NPC's most recently ended four full fiscal quarters immediately preceding the date of payment is at least 1.75 to 1. The terms of the Series E Notes also permit NPC to make payments to SPR in an aggregate amount not to exceed $15 million from the date of the issuance of the Series E Notes. In addition, NPC may make dividend payments to SPR in excess of the amounts described above so long as, at the time of payment and after giving effect to the payment: - there are no defaults or events of default with respect to the Series E Notes, - NPC can meet a fixed charge coverage ratio test, and - the total amount of such dividends is less than: - the sum of 50% of NPC's consolidated net income measured on a quarterly basis cumulative of all quarters from the date of issuance of the Series E Notes, plus - 100% of NPC's aggregate net cash proceeds from the issuance or sale of certain equity or convertible debt securities of NPC, plus 23 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - the lesser of cash return of capital or the initial amount of certain restricted investments, plus - the fair market value of NPC's investment in certain subsidiaries. If NPC's Series E Notes are upgraded to investment grade by both Moody's and S&P, these dividend restrictions will be suspended and will no longer be in effect so long as the Series E Notes remain investment grade. NPC's $60 million Credit Agreement. On June 30, 2003, NPC established a $60 million Credit Facility, which expires no later than September 8, 2003. This facility prohibits payments to SPR in respect of NPC's common stock. Accounts Receivable Facility. On October 29, 2002, NPC established an accounts receivable purchase facility, which expires on October 28, 2003. The agreements relating to the receivables purchase facility contain various conditions, including a limitation on the payment of dividends by NPC to SPR that is identical to the limitation contained in NPC's General and Refunding Mortgage Notes, Series E, described above. Preferred Trust Securities. The terms of NPC's preferred trust securities provide that no dividends may be paid on NPC's common stock if NPC has elected to defer payments on the junior subordinated debentures issued in conjunction with the preferred trust securities. At this time, NPC has not elected to defer payments on the junior subordinated debentures. PUCN Compliance Order. The PUCN issued a Compliance Order, Docket No. 02-4037, on June 19, 2002, relating to NPC's request for authority to issue long-term debt. The PUCN order requires that, until such time as the order's authorization expires (December 31, 2003), NPC must either receive the prior approval of the PUCN or reach an equity ratio of 42% before paying any dividends to SPR. If NPC achieves a 42% equity ratio prior to December 31, 2003, the dividend restriction ceases to have effect. As of June 30, 2003, NPC's equity ratio was 35.3%. Prior to the expiration date of the Compliance Order, management may seek PUCN approval for a payment of dividends by NPC or may seek a waiver from the PUCN of the dividend restriction. Federal Power Act. NPC is subject to the provisions of the Federal Power Act that state that dividends cannot be paid out of funds that are properly included in capital accounts. Although the meaning of this provision is unclear, it could be interpreted to impose an additional material limitation on a utility's ability to pay dividends in the absence of retained earnings. SIERRA PACIFIC POWER COMPANY Term Loan Agreement. SPPC's Term Loan Agreement dated October 30, 2002, as amended, which expires October 31, 2005, limits the amount of dividends that SPPC may pay to SPR. However, that limitation does not apply to payments by SPPC to enable SPR to pay its reasonable fees and expenses (including, but not limited to, interest on SPR's indebtedness and payment obligations on account of SPR's PIES) provided that those payments do not exceed $90 million, $80 million and $60 million in the aggregate for the twelve month periods ending on October 30, 2003, 2004 and 2005, respectively. The Term Loan Agreement also permits SPPC to make dividend payments to SPR in an aggregate amount not to exceed $10 million during the term of the Term Loan Agreement. In addition, SPPC may make dividend payments to SPR in excess of the amounts described above so long as, at the time of the payment and after giving effect to the payment, there are no defaults or events of default under the Term Loan Agreement, and such amounts, when aggregated with the amount of dividends paid to SPR by SPPC since the date of execution of the Term Loan Agreement, do not exceed the sum of: - (i) 50% of SPPC's Consolidated Net Income for the period commencing January 1, 2003 and ending with last day of fiscal quarter most recently completed prior to the date of the contemplated dividend payment, plus 24 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - (ii) the aggregate amount of cash received by SPPC from SPR as equity contributions on its common stock during such period. Accounts Receivable Facility. On October 29, 2002, SPPC established an accounts receivable purchase facility, which expires on October 28, 2003. The agreements relating to the receivables purchase facility contain various conditions, including a limitation on the payment of dividends by SPPC to SPR that is identical to the limitation contained in SPPC's Term Loan Agreement, described above. Articles of Incorporation. SPPC's Articles of Incorporation contain restrictions on the payment of dividends on SPPC's common stock in the event of a default in the payment of dividends on SPPC's preferred stock. SPPC's Articles also prohibit SPPC from declaring or paying any dividends on any shares of common stock (other than dividends payable in shares of common stock), or making any other distribution on any shares of common stock or any expenditures for the purchase, redemption or other retirement for a consideration of shares of common stock (other than in exchange for or from the proceeds of the sale of common stock) except from the net income of SPPC, and its predecessor, available for dividends on common stock accumulated subsequent to December 31, 1955, less preferred stock dividends, plus the sum of $500,000. At the present time, SPPC believes that these restrictions do not materially limit its ability to pay dividends and/or to purchase or redeem shares of its common stock. Federal Power Act. SPPC is subject to the provisions of the Federal Power Act that state that dividends cannot be paid out of funds that are properly included in capital accounts. Although the meaning of this provision is unclear, it could be interpreted to impose an additional material limitation on a utility's ability to pay dividends in the absence of retained earnings. NOTE 6. EARNINGS PER SHARE (SPR) The following table outlines the calculation for earnings per share (EPS). The difference, if any, between Basic EPS and Diluted EPS is due to common stock equivalent shares resulting from stock options, the employee stock purchase plan, performance and restricted stock plans and the non-employee director stock plan. However, due to net losses for the three-and six-month periods ended June 30, 2003 and 2002, these items are anti-dilutive. Accordingly, Diluted EPS for these periods are computed using the weighted average shares outstanding before dilution. Common stock equivalents were determined using the treasury stock method.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ BASIC EPS Numerator ($000) Loss from continuing operations............ $ (166,658) $ (40,350) $ (181,173) $ (343,118) Loss from discontinued operations.......... $ (34) $ (591) $ (1,042) $ (764) Loss on disposal of subsidiary............. $ (5,753) $ -- $ (5,753) $ -- Cumulative effect of change in accounting principle................................ $ -- $ -- $ -- $ (1,566) Loss applicable to common stock............ $ (173,420) $ (41,916) $ (189,918) $ (347,398) Denominator Weighted average number of shares outstanding.............................. 117,144,486 102,110,536 114,337,776 102,110,536 ------------ ------------ ------------ ------------ Per-Share Amount Loss from continuing operations................................. $ (1.42) $ (0.40) $ (1.58) $ (3.36) Loss from discontinued operations.......... $ -- $ (0.01) $ (0.01) $ (0.01) Loss on disposal of subsidiary............. $ (0.05) $ -- $ (0.05) $ -- Cumulative effect of change in accounting principle................................ $ -- $ -- $ -- $ (0.01) Loss applicable to common stock............ $ (1.48) $ (0.41) $ (1.66) $ (3.40) DILUTED EPS Numerator ($000) Loss from continuing operations............ $ (166,658) $ (41,325) $ (183,123) $ (345,068) Loss from discontinued operations.......... $ (34) $ (591) $ (1,042) $ (764)
25 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Loss on disposal of subsidiary............. $ (5,753) $ -- $ (5,753) $ -- Cumulative effect of change in accounting principle................................ $ -- $ -- $ -- $ (1,566) Loss applicable to common stock............ $ (173,420) $ (41,916) $ (189,918) $ (347,398) Denominator(1) Weighted average number of shares outstanding before dilution.............. 117,144,486 102,110,536 114,337,776 102,110,536 Stock options.............................. -- -- -- 15,806 Executive long term incentive plan -- performance shares(2).................... -- 7,815 -- 13,378 Executive long term incentive plan -- restricted shares(3)............. 43,256 -- 34,848 -- Non-Employee Director stock plan........... 17,168 11,288 17,168 10,321 Employee stock purchase plan............... 575 578 288 1,619 Convertible Stock.......................... 23,012,188 -- 23,012,188 -- ------------ ------------ ------------ ------------ 140,217,673 102,130,217 137,402,268 102,151,660 ------------ ------------ ------------ ------------ Per-Share Amount Loss from continuing operations............ $ (1.42) $ (0.40) $ (1.58) $ (3.36) Loss from discontinued operations.......... $ -- $ (0.01) $ (0.01) $ (0.01) Loss on disposal of subsidiary............. $ (0.05) $ -- $ (0.05) $ -- Cumulative effect of change in accounting principle................................ $ -- $ -- $ -- $ (0.01) Loss applicable to common stock............ $ (1.48) $ (0.41) $ (1.66) $ (3.40)
- --------------- (1) The denominator does not include anti-dilutive stock equivalents under the Stock Option Plan and Corporate PIES due to exercise or conversion prices being higher than market prices at June 30, 2003. (2) Plan terminated in 2002. (3) New plan adopted in 2003. NOTE 7. SEGMENT INFORMATION (SPR) SPR operates three business segments providing regulated electric and natural gas services. NPC has one business segment that provides electric service to Las Vegas and surrounding Clark County. SPPC has two business segments. One business segment provides electric service in northern Nevada and the Lake Tahoe area of California and the other segment provides natural gas service in the Reno-Sparks area of Nevada. Other segment information includes segments below the quantitative threshold for separate disclosure. Information as to the operations of the different business segments is set forth below based on the nature of products and services offered. SPR evaluates performance based on several factors, of which the primary financial measure is business segment operating income. Intersegment revenues are not material. Financial data for business segments is as follows (in thousands):
THREE MONTHS ENDED NPC SPPC TOTAL JUNE 30, 2003 ELECTRIC ELECTRIC ELECTRIC GAS OTHER CONSOLIDATED - ------------------ -------- -------- -------- ------- -------- ------------ Operating Revenues........... $425,512 $205,026 $630,538 $35,873 $ 215 $666,626 ======== ======== ======== ======= ======== ======== Operating Income (loss)...... $ 10,484 $ (8,832) $ 1,652 $ 782 $(17,371) $(14,937) ======== ======== ======== ======= ======== ========
26 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED NPC SPPC TOTAL JUNE 30, 2002 ELECTRIC ELECTRIC ELECTRIC GAS OTHER CONSOLIDATED - ------------------ -------- -------- -------- ------- ------ ------------ Operating Revenues............. $477,059 $197,085 $674,144 $25,583 $ 797 $700,524 ======== ======== ======== ======= ====== ======== Operating Income (Loss)........ $ 30,162 $(18,342) $ 11,820 $ 3,524 $5,071 $ 20,415 ======== ======== ======== ======= ====== ========
SIX MONTHS ENDED NPC SPPC TOTAL JUNE 30, 2003 ELECTRIC ELECTRIC ELECTRIC GAS OTHER CONSOLIDATED - ---------------- -------- -------- ---------- -------- -------- ------------ Operating Revenues......... $757,164 $410,480 $1,167,644 $100,490 $ 1,302 $1,269,436 ======== ======== ========== ======== ======== ========== Operating Income (Loss).... $ 27,897 $ 11,399 $ 39,296 $ 4,371 $(11,769) $ 31,898 ======== ======== ========== ======== ======== ==========
SIX MONTHS ENDED NPC SPPC TOTAL JUNE 30, 2002 ELECTRIC ELECTRIC ELECTRIC GAS OTHER CONSOLIDATED - ---------------- --------- -------- ---------- ------- ------- ------------ Operating Revenues.......... $ 833,331 $421,838 $1,255,169 $80,666 $ 1,622 $1,337,457 ========= ======== ========== ======= ======= ========== Operating Income (Loss)..... $(230,597) $ 5,059 $ (225,538) $ 5,057 $10,258 $ (210,223) ========= ======== ========== ======= ======= ==========
NOTE 8. DISPOSAL AND IMPAIRMENT OF LONG-LIVED ASSETS E-THREE SPR's subsidiary, e-three, was organized in October 1996 to provide energy and other business solutions in commercial and industrial markets. SPR's subsidiary, e-three Custom Energy Solutions, LLC ("CES"), was formed in October 1998 for the purpose of selling and implementing energy-related performance contracts and the construction and operation of a chilled water cooling plant in the downtown area of Las Vegas supplying indoor air-cooling requirements for a number of businesses in its immediate vicinity. In keeping with management's strategy to focus on its core utility businesses, SPR began negotiations in the second quarter of 2003 to sell e-three and CES. Management is currently negotiating with a single buyer who is expected to purchase both companies for approximately $2.2 million. The sale is expected to be completed during the third quarter of 2003. Accordingly, as of June 30, 2003, e-three and CES are reported as discontinued operations and the consolidated financial statements for all periods presented in this report have been reclassified to report separately the assets, liabilities and operating results of the companies to be sold. Also, the expected pre-tax loss on the disposal of $8.9 million was recognized as of June 30, 2003. The operations of e-three and CES are included in the "Other" business segment. 27 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Assets and liabilities for the businesses to be disposed of, which have been adjusted as of June 30, 2003, based on the expected sales price, consist of the following (dollars in thousands):
JUNE 30, 2003 DECEMBER 31, 2002 ------------- ----------------- Investments and other property, net..................... $1,778 $ 9,488 Cash and cash equivalents............................... 805 1,322 Accounts receivable..................................... 108 111 Materials and supplies.................................. 93 492 Current assets -- Other................................. 53 62 Goodwill................................................ -- 470 Deferred federal income taxes........................... -- 731 Deferred charges -- Other............................... 141 186 ------ ------- $2,978 $12,862 ====== ======= Common shareholder's equity............................. $2,180 $12,075 Long-term debt.......................................... -- 68 Accounts payable........................................ 602 675 Accrued salaries and benefits........................... 161 30 Deferred credits -- Other............................... 35 14 ------ ------- $2,978 $12,862 ====== =======
OTHER PROPERTY DISPOSALS During 2002, the Utilities began pursuing the sale of several non-essential properties. As a result, on January 15, 2003, NPC sold a parcel of land located on Flamingo Road near the Barbary Coast Casino in Las Vegas, Nevada. NPC received cash proceeds of approximately $18 million for the property and retained an easement and other rights necessary to maintain aerial power lines that cross the property. Also, it was agreed that NPC will receive an additional $2.6 million from the sale if the power lines that cross the property are removed and the other rights are relinquished within a five-year period from the date of the sale. The property had been originally transferred to NPC at no cost. The transaction resulted in a gain of $17.7 million, which will be recognized into revenue over a period of three years consistent with the accounting treatment directed by the PUCN. On July 17, 2003, NPC sold a parcel of land located on Centennial Road in North Las Vegas, Nevada. NPC received cash proceeds of approximately $5.0 million for the property. The property had a carrying value of approximately $1.2 million. The transaction resulted in an approximate gain of $3.7 million, which will be recognized into revenue over a period of three years consistent with the accounting treatment directed by the PUCN. NPC is pursuing the sale of land parcels located on Flamingo Road from Koval Lane to Maryland Parkway, commonly known as "the Flamingo Corridor." These properties are presently under long-term leases with restaurants, convenience stores, gas stations, etc. On April 21, 2003 NPC provided notice to the tenants of the Flamingo Corridor properties of its intent to sell the properties at a public auction. Currently the auction is scheduled for mid-August 2003. The carrying value of the properties is approximately $0.9 million. On November 11, 2002, SPPC agreed to sell land located in Nevada County and Sierra County, California, commonly referred to as Independence Lake. The sale was subject to review by a third party who retained certain rights, including water rights, after the sale is completed. Also, the sales agreement included a due diligence review period of 180 days which allowed the buyer to review and accept a variety 28 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of matters agreed to by both parties. In April 2003, the buyer terminated the agreement during the review period as provided for in the agreement. The carrying value of the property is approximately $108,000. SPPC plans to sell the property and is engaged in discussion with potential buyers. SIERRA PACIFIC COMMUNICATIONS In light of the bankruptcy of Touch America Holdings and Sierra Touch America LLC, Sierra Pacific Communications (SPC) evaluated its business to determine whether the bankruptcy has caused an impairment of SPC's assets. SPC anticipates that the market for fiber optic cable and conduits will likely become significantly over-supplied and has recognized an impairment charge of $32.9 million during the second quarter of 2003. The asset impairment charge consisted of $14.7 million of fiber optic cable, conduits, and other related business equipment write-downs related to SPC's metropolitan area network assets, and $18.2 million in fiber optic cable, conduits, and other related business equipment write-downs of its long haul network assets. This evaluation was conducted in conformance with the guidelines of FASB 144, and also considered factors such as the anticipated liquidation of Sierra Touch America LLC assets, resulting significant changes in business climate and projected discounted cash flows from the assets. SPC evaluated its metropolitan area network assets using projected discounted cash flows. The evaluation factored the undiscounted cash flows from current and projected sales contracts and continued operating expenses over the approximate 18-year remaining life of the assets and then discounted those cash flows to the end of the current reporting period. SPC evaluated its long haul network assets based in part on a pending sale for a portion of the long haul network assets currently under construction and in part by prices for similar assets adjusted for the markets factors that resulted from the Touch America bankruptcy discussed above. NOTE 9. REGULATORY ACTIONS NEVADA POWER COMPANY 2002 DEFERRED ENERGY CASE On November 14, 2002, NPC filed an application with the PUCN seeking repayment for purchased fuel and power costs accumulated between October 1, 2001, and September 30, 2002, as required by law. The application sought to establish a rate to collect accumulated purchased fuel and power costs of $195.7 million, together with a carrying charge, over a period of not more than three years. The application also requested a reduction to the going-forward rate for energy, reflecting reduced wholesale energy costs. The combined effect of these two adjustments resulted in a request for an overall rate reduction of 6.3%. The decision on this case was issued May 13, 2003 and authorized the following: - recovery of $147.6 million, with a carrying charge, and a $48.1 million disallowance; - a three-year amortization of the balance commencing on May 19, 2003; and - a reduction in the Base Tariff Energy Rate (BTER) to an effective non-residential rate of $0.04322 per kWh, and an effective residential rate of $0.04186 per kWh. The new rates went into effect on May 19, 2003. NEVADA POWER COMPANY DEMAND REDUCTION PROGRAMS On November 14, 2002, NPC filed an application with the PUCN seeking recovery of expenses incurred in the implementation and operation of programs for energy conservation and load management. In the filing, NPC requested a one-year recovery of approximately $1.9 million. This would result in an average 0.12% increase in NPC's present rates. NPC asked for this increase to become effective 29 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) simultaneously with the rate change to be ordered in its 2002 deferred energy case discussed above. The parties to the case subsequently negotiated a settlement agreement, which approved NPC's request for cost recovery with the exception of a nominal disallowance. The stipulation was approved at the agenda meeting held April 4, 2003. The rate change went into effect on May 19, 2003, coincident with the deferred energy rate change discussed above. SIERRA PACIFIC POWER COMPANY 2003 DEFERRED ENERGY CASE On January 14, 2003, SPPC filed an application with the PUCN, as required by law, seeking to clear deferred balances for purchased fuel and power costs accumulated between December 1, 2001 and November 30, 2002. The application sought to establish a rate to clear accumulated purchased fuel and power costs of $15.4 million and spread the cost recovery over a period of not more than three years. It also sought to recalculate the rate to reflect anticipated ongoing purchased fuel and power costs. The total rate increase request amounted to 0.01%. The interveners' testimony was received April 25, 2003, and included proposed disallowances from $34 million to $76 million. Prior to the hearing that was scheduled to begin on May 12, 2003, the parties negotiated a settlement agreement. The agreement included the following provisions: - A reduction in the current deferred energy balance of $45 million leaving a balance payable to customers of approximately $29.6 million. - A two-year amortization of the amount payable returning one third of the balance in the first year (approximately $9.9 million), and two thirds of the balance the second year (approximately $19.7 million). - Discontinue carrying charges on deferred energy balances that SPPC is already collecting from customers and on the $29.6 million amount payable as a result of the agreement. - Maintain the currently effective Base Tariff Energy Rate. - SPPC maintains the rights to claim the cost of terminated energy contracts in future deferred filings. - Parties agreed that with the $45 million reduction the remaining costs for purchasing fuel and power during the test year were prudently incurred and are just and reasonable. - SPPC and the Bureau of Consumer Protection agreed to file a motion to dismiss the civil lawsuits filed in relation to the 2001 SPPC deferred energy case. The agreement was approved by the PUCN at the agenda meeting held on May 19, 2003, and the new rates went into effect on June 1, 2003. SIERRA PACIFIC POWER COMPANY DEMAND REDUCTION PROGRAMS On January 14, 2003, SPPC filed an application with the PUCN seeking recovery of expenses incurred in the implementation and operation of programs for energy conservation and load management. In the filing, SPPC requested a one-year recovery of approximately $0.9 million, which would result in an average 0.12% increase in SPPC's rates. The parties to the case subsequently negotiated a settlement agreement, which called for complete recovery of the $0.9 million balance. The agreement, allowing recovery of the entire balance, was signed by all parties and approved at the PUCN's May 19, 2003 agenda meeting. Rates went into effect June 1, 2003, coincident with the deferred energy rate change discussed above. 30 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10. DERIVATIVES AND HEDGING ACTIVITIES (SPR, NPC, SPPC) SPR, SPPC, and NPC apply SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138 and SFAS No. 149. As amended, SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position, measure those instruments at fair value, and recognize changes in the fair value of the derivative instruments in earnings in the period of change unless the derivative qualifies as an effective hedge. SPR's and the Utilities' objective in using derivatives is to reduce exposure to energy price risk and interest rate risk. Energy price risks result from activities that include the generation, procurement and marketing of power and the procurement and marketing of natural gas. Derivative instruments used to manage energy price risk include forwards, options, and swaps. These contracts allow the Utilities to reduce the risks associated with volatile electricity and natural gas markets. At June 30, 2003, the fair value of energy price risk related derivatives resulted in the recording of $61 million, $41 million and $20 million in risk management assets and $63 million, $33 million and $30 million in risk management liabilities in the Consolidated Balance Sheets of SPR, NPC and SPPC, respectively. Due to deferred energy accounting under which the Utilities operate, regulatory assets and liabilities are established to the extent that electricity and natural gas derivative gains and losses are recoverable or payable through future rates. Accordingly, at June 30, 2003, $42 million, $17 million and $25 million in net risk management regulatory assets were recorded in the Consolidated Balance Sheets of SPR, NPC, and SPPC, respectively. In addition, for the six months ended June 30, 2003, the unrealized gains and losses resulting from the change in the fair value of derivatives designated and qualifying as cash flow hedges for SPR, NPC, and SPPC were recorded in Other Comprehensive Income. Such amounts are reclassified into earnings when the related transactions are settled or terminate. $1.5 million relating to SPR's terminated interest rate swap was reclassified into earnings during the six months ended June 30, 2003. The effects of SFAS No. 133 on comprehensive income and the components thereof at June 30, 2003, and 2002, are as follows (in thousands):
SPR NPC SPPC --------- --------- -------- Net Loss for the six months ended June 30, 2003.... $(189,918) $ (37,438) $(25,907) Change in market value of risk management assets and liabilities as of June 30, 2003, net of taxes of $940, $70, and $33 respectively............... 1,746 130 61 --------- --------- -------- Total Comprehensive Loss for the six months ended June 30, 2003.................................... $(188,172) $ (37,308) $(25,846) ========= ========= ======== Net Loss for the six months ended June 30, 2002.... $(347,398) $(295,329) $(24,957) Change in market value of risk management assets and liabilities as of June 30, 2002, net of taxes of $1,135, ($57), and $91, respectively.......... 2,108 (105) 169 --------- --------- -------- Total Comprehensive Loss for the six months ended June 30, 2002.................................... $(345,290) $(295,434) $(24,788) ========= ========= ========
In connection with SPR's issuance of its Convertible Notes, on February 14, 2003 (see Note 4, Long-Term Debt), the conversion option, which is treated as a cash-settled written-call option, was separated from the debt and accounted for separately as a derivative instrument in accordance with FASB's Emerging Issues Task Force Issue 90-19, "Convertible Bonds with Issuer Option to Settle for Cash upon Conversion". Upon issuance, the fair value of the option was recorded as a current liability in Other Current Liabilities. The change in the fair value is recognized in earnings in the period of the change. 31 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of the option is determined using closing stock prices, which were $5.94 as of June 30 and $3.18 as March 31, 2003, the strike price for conversion ($4.5628), a measurement for the volatility of the stock price and the time value of money. The option was valued at $179.7 million at June 30, 2003, resulting in an unrealized pre-tax loss of $123.5 million being recognized in earnings for the second quarter due to the change in the fair value of the conversion option. These unrealized pre-tax losses do not have an effect on cash flows. The value at March 31, 2003 was $56.2 million, and resulted in an unrealized pre-tax gain of $15.9 million during the first quarter. In the event SPR obtains shareholder approval to permit the Convertible Notes to be fully convertible into shares of common stock, Issue No. 00-19 of the Emerging Issues Task Force of the FASB ("EITF"), "Accounting for Derivative Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" provides for the recording of the fair value of the derivative in equity, if all of the other applicable provisions of EITF Issue No. 00-19 are met. Management believes that all such applicable provisions will be met. Accordingly, the fair value of the derivative on the date of the shareholder vote would be reclassified to equity. In addition, EITF Issue No. 00-19 indicates that subsequent changes in fair value should not be recognized as long as the derivative remains classified in equity and SPR would no longer mark this instrument to market. This would result in no unrealized gains or losses being recorded in earnings. The previous changes in fair value of the derivative instrument recorded in earnings would not be reversed. In the event SPR does not obtain shareholder approval to permit the Convertible Notes to be fully converted into shares of its common stock, the derivative will continue to be marked to market with the resulting unrealized gains or losses recorded in earnings in accordance with SFAS No. 133. The fair value of the conversion option derivative is determined using a pricing model that incorporates information and assumptions such as SPR's stock price, time to expiration, strike price, interest rates, and volatility. The use of different assumptions and variables in the model could have a significant impact on the valuation of the derivative. NOTE 11. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL Nevada Power Company 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 (including NPC) of the Mohave Generation Station ("Mohave"), alleging violations of the Clean Air Act regarding emissions of sulfur dioxide and particulates. An additional plaintiff, National Parks and Conservation Association, later joined the suit. The plant owners and plaintiffs have had numerous settlement discussions and filed a proposed settlement with the court in October 1999. The consent decree, approved by the court in November 1999, established emission limits for sulfur dioxide and opacity and required installation of air pollution controls for sulfur dioxide, nitrogen oxides and particulate matter. The new emission limits must be met by January 1, 2006 and April 1, 2006 for the first and second units, respectively. The estimated cost of new controls is $1.1 billion. As a 14% owner in Mohave, NPC's cost could be $154 million. NPC's ownership interest in Mohave comprises approximately 10% of NPC's peak generation capacity. Southern California Edison (SCE) is the operating partner of Mohave. On May 17, 2002, SCE filed with the CPUC an application to address the future disposition of SCE's share of Mohave. Mohave obtains all of its coal supply from a mine in northeast Arizona on lands of the Navajo Nation and the Hopi Tribe (the Tribes). This coal is delivered from the mine to Mohave by means of a coal slurry pipeline, which requires water that is obtained from groundwater wells located on lands of the Tribes in the mine vicinity. 32 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Due to the lack of progress in negotiations with the Tribes and other parties to resolve several coal and water supply issues, SCE's application states that it appears that it probably will not be possible for SCE to extend Mohave's operations beyond 2005. Due to the uncertainty over a post-2005 coal supply, SCE and the other Mohave co-owners have been prevented from commencing the installation of extensive pollution control equipment that must be put in place if Mohave's operations are extended past 2005. NPC is currently evaluating and analyzing all of its options with regard to the Mohave project. In July, NPC filed an Integrated Resource Plan with the PUCN, which assumes that the Plant will be unavailable after December 31, 2005. In May 1997, the Nevada Division of Environmental Protection (NDEP) ordered NPC to submit a plan to eliminate the discharge of Reid Gardner Station wastewater to groundwater. The NDEP order also required a hydrological assessment of groundwater impacts in the area. In June 1999, NDEP determined that wastewater ponds had degraded groundwater quality. In August 1999, NDEP issued a discharge permit to Reid Gardner Station and an order that requires all wastewater ponds to be closed or lined with impermeable liners over the next 10 years. This order also required NPC to submit a Site Characterization Plan to NDEP to ascertain impacts. This plan has been approved by NDEP. NDEP is expected to identify remediation requirements of contaminated groundwater resulting from these evaporation ponds by September 2003. New pond construction and lining costs are estimated to cost approximately $25 million, of which, $17 million is expected to be spent by the end of 2003. At the Reid Gardner Station, the NDEP has determined that there is additional groundwater contamination that resulted from oil spills at the facility. NDEP has required NPC to submit a corrective action plan. The extent of contamination has been determined and remediation is occurring at a modest rate. A hydro-geologic evaluation of the current remediation was completed, and a dual phase extraction remediation system, which has been approved by NDEP, with construction expected to begin in August 2003 at an estimated cost of $150,000. In July 2000, NPC received a request from the EPA for information to determine the compliance of certain generation facilities at NPC's Clark Station with the applicable State Implementation Plan. In November 2000, NPC and Clark County Health District entered into a Corrective Action Order requiring, among other steps, capital expenditures at the Clark Station totaling approximately $3 million. In March 2001, the EPA issued an additional request for information that could result in remediation beyond that specified in the November 2000 Corrective Action Order. If the EPA requires remediation, capital expenditures and temporary outages of four of Clark Station's generation units could be required. Additionally, depending on the time of year that the compliance activity and corresponding generation outage would occur, the incremental cost to purchase replacement energy could be substantial. To date, EPA has not issued additional requests for further information. NEICO, a wholly owned subsidiary of NPC, owns property in Wellington, Utah, which was the site of a coal washing and load out facility. The site now has a reclamation estimate supported by a bond of $4.8 million with the Utah Division of Oil and Gas Mining. The property was under contract for sale and the contract required the purchaser to provide $1.3 million in escrow towards reclamation. However, the sales contract was terminated and NEICO took title to the escrow funds. The property is currently leased with the intention to reclaim coal fines with subsequent revenues and reduction to the reclamation bond. However, due to lack of financial performance the current lessee has been notified of NEICO's intent to terminate the lease. Sierra Pacific Power Company In September 1994, Region VII of the EPA notified SPPC that it was being named as a potentially responsible party (PRP) regarding the past improper handling of Polychlorinated Biphenyls (PCB's) by PCB Treatment, Inc., in two buildings, one located in Kansas City, Kansas and the other in Kansas City, Missouri (the Sites). Prior to 1994, SPPC sent PCB contaminated material to PCB Treatment, Inc. for 33 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) disposal. Certificates of disposal were issued to SPPC by PCB Treatment, Inc.; however, the contaminated material was not disposed of, but remained on-site. A number of the largest PRP's formed a steering committee, which is chaired by SPPC. The steering committee has completed its site investigations and the EPA has determined that the Sites should be remediated by removing the buildings to the appropriate landfills. The EPA has issued an administrative order on consent requiring the steering committee to oversee the performance of the work. SPPC has recorded a preliminary liability for the Sites of $650,000 of which approximately $136,000 has been spent through June 30, 2003. The steering committee is obtaining cost estimates for removal of the buildings. Once these costs have been determined, SPPC will be in a better position to estimate and revise, if necessary, its recorded liability for the Sites. Lands of Sierra LOS, a wholly owned subsidiary of SPR, owns property in North Lake Tahoe, California, which is leased to independent condominium owners. The property has both soil and groundwater petroleum contamination resulting from an underground fuel tank that has been removed from the property. Additional contamination from a third party fuel tank on the property has also been identified and is undergoing remediation. On February 3, 2003, the Lahontan Regional Water Quality Control Board re-opened closure of this property. By October 1, 2003, SPR expects to have completed the evaluation of alternative remediation technologies and their effectiveness in reducing contamination at this site. An application for closure will be re-submitted at that time. Additional remediation costs are expected to be approximately $100,000. LITIGATION CONTINGENCIES Nevada Power Company and Sierra Pacific Power Company Enron Power Marketing (Enron) filed a complaint with the United States Bankruptcy Court for the Southern District of New York seeking to recover approximately $216 million and $93 million against NPC and SPPC, respectively, for liquidated damages for power supply contracts terminated by Enron in May 2002 and for power previously delivered to the Utilities. The Utilities have denied liability on numerous grounds, including deceit and misrepresentation in the inducement (including, but not limited to, misrepresentation as to Enron's ability to perform) and fraud, unfair trade practices and market manipulation. The Utilities filed motions to dismiss for lack of jurisdiction and/or for a stay of all proceedings pending the actions of the Utilities' proceedings under Section 206 of the Federal Power Act at the FERC. The Utilities have also filed proofs of claims and counterclaims against Enron, for the full amount of the approximately $300 million claimed to be owed and additional damages, as well as for unspecified damages to be determined during the case as a result of acts and omissions of Enron in manipulating the power markets, wrongful termination of its transactions with the Utilities, and fraudulent inducement to enter into transactions with Enron, among other issues. On December 19, 2002, the bankruptcy judge granted Enron's motion for partial summary judgment on Enron's claim for $17.7 million and $6.7 million, respectively, for energy delivered by Enron in April 2002, for which NPC and SPPC did not pay. The court ordered this money to be deposited into an escrow account not subject to claims of Enron's creditors and subject to refund depending on the outcome of the Utilities' FERC cases on the merits. The Utilities made the deposit as required. The bankruptcy court denied the Utilities' motion to stay the proceeding pending the outcome of the Utilities' Section 206 case at the FERC and denied the Utilities' motion to dismiss for lack of jurisdiction as to Enron's claims for power previously delivered to the Utilities. The court stated that it would rule in due course on Enron's motion for partial summary judgment to require NPC and SPPC to post $200 million and $87 million, respectively, pending the outcome of the case on the merits, and for judgment on the merits on Enron's liquidated damage claim (contract price less market price on the date of termination) relating to power it did not deliver under contracts terminated by Enron in May 2002. The court took under advisement the Utilities' motion to stay or dismiss Enron's claim for liquidated damages relating to the undelivered power. 34 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On April 3, 2003, the court heard arguments regarding Enron's motion to dismiss the Utilities' counterclaims against Enron for unspecified damages to be determined during the case, but did not rule on this matter nor did it indicate when a decision on this matter can be expected. On June 26, 2003, FERC issued three orders of consequence to this litigation. First, FERC denied the Utilities' request to modify the contract rates, for contracts entered into with Enron and certain other power suppliers during the western U.S. utility crisis, to a level reflecting a just and reasonable price in a competitive market. In doing so, however, FERC denied Enron's request that its order in this case be deemed final and conclusive as to any and all other challenges to the enforceability of the contracts or to the lawful contract rate based on Enron's fraud and manipulation of the markets. FERC indicated that it would reserve judgment on any such challenge until it heard the evidence on the challenge. Second, FERC issued an order immediately revoking Enron's market based rate authority based on fraud and manipulation of the markets. Third, FERC issued an order to show cause Concerning Gaming and/or Anomalous Market Behavior on the part of Enron and others and directing submission of information indicating why Enron and others should not be required to disgorge profits from January 1, 2000, forward. Based on these orders, the Utilities filed a motion in July 2003 to amend their first amended complaint and counterclaim to allege facts consistent with the FERC orders that Enron was not entitled to relief on its claims against the companies but rather should be required to pay damages against the companies for losses sustained throughout the western energy crisis for which Enron was in part responsible. The Utilities also filed a supplement to their opposition to Enron's motion for summary judgment including all of the facts of fraud and manipulation of the markets as found by FERC in its June 26, 2003, orders as well as the criminal indictments and complaints against Enron's former chief financial officer and others engaged in trading operations for Enron. Enron filed oppositions to the motions to amend the amended complaint and counterclaims and an opposition to supplement the Utilities' opposition to Enron's motion for summary judgment. On August 7, 2003, the Bankruptcy Court heard oral arguments from the parties on the motions. The bankruptcy judge has not indicated when a decision may be expected. The Utilities are unable to predict the outcome of these motions. The United States District Court for the Southern District of New York has also denied the Utilities' motion to withdraw reference of the matter to the bankruptcy court without prejudice. The Bankruptcy Court currently has under submission (1) Enron's motion to dismiss the Utilities' counterclaims, (2) Enron's motion for partial summary judgment regarding the amounts alleged to be due for undelivered power and the posting of collateral for undelivered power, (3) the Utilities' motion to dismiss or stay proceeding on Enron's claims relating to delivered power and (4) the Utilities' motion to amend their first amended complaint and counterclaim to allege facts consistent with the FERC orders that Enron was not entitled to relief on its claims against the companies. A decision adverse to the Utilities on Enron's motion for partial summary judgment, or an adverse decision in the lawsuit with respect to liability as to Enron's claims on the merits for undelivered power, would have a material adverse effect on SPR's and the Utilities' financial condition and liquidity, and could make it difficult for one or more of SPR, NPC or SPPC to continue to operate outside of bankruptcy. Nevada Power Company In June 2003, El Paso Merchant Energy demanded mediation of its claim for a termination payment arising out of El Paso's September 25, 2002 termination of all executory purchase power contracts between NPC and El Paso. El Paso claims that under the terms of the contracts, NPC owes El Paso approximately $39 million representing the difference between the contract price and the market price for power to be delivered under all the terminated contracts and the amount remaining unpaid under the contracts for power delivered between May 2002 and October 2002. NPC claims that El Paso owes NPC an amount up to approximately $162 million for undelivered power representing the difference between the replacement price or market price for power to be delivered under all the executory contracts and the contract price for that power. The mediation was unsuccessful, and on July 25, 2003, NPC commenced an action against El 35 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Paso Merchant Energy and several of its affiliates in the Federal District Court for the District of Nevada for damages resulting from breach of these purchase power contracts. On May 3, 2002 and July 3, 2002, respectively, Reliant Resources (Reliant) and IDACORP Energy, L.P. (Idaho) terminated their power deliveries to NPC. On May 20, 2002 and July 30, 2002, Reliant and Idaho asserted claims for $25.6 million and $8.9 million, respectively, under the Western System Power Pool Agreement (WSPP) for liquidated damages under energy contracts that each company terminated before the delivery dates of the power. Such claims are subject to mandatory mediation and, in some cases, arbitration under the contracts. Disputes between Idaho and Reliant were both mediated to conclusion without reaching a settlement. In May 2003, Idaho filed suit against NPC in Idaho state court claiming damages in the approximate amount of $8.9 million dollars. NPC has moved to dismiss the complaint on jurisdictional grounds and filed its own action in Nevada for declaratory relief claiming that it does not owe Idaho any money under the terminated contracts. The actions are currently in the pleading stage. NPC continues to have discussions with Reliant on a broad range of issues including whether any money is owed Reliant under the purchased power contracts. Neither party has filed any action arising out of this dispute. On September 5, 2002, Morgan Stanley Capital Group (MSCG) initiated an arbitration pursuant to the arbitration provisions in various power supply contracts terminated by MSCG in April 2002. In the arbitration, MSCG requested that the arbitrator compel NPC to pay MSCG $25 million pending the outcome of any dispute regarding the amount owed under the contracts. NPC claimed that nothing is owed under the contracts on various grounds, including breach by MSCG in terminating the contracts, and further, that the arbitrator does not have jurisdiction over NPC's contract claims and defenses. In March 2003, the arbitrator overseeing the arbitration proceedings dismissed MSCG's demand for arbitration and agreed that the issues raised by MSCG were not calculation issues subject to arbitration and that NPC's contract defenses were likewise not arbitrable. NPC has since filed a complaint for declaratory relief in the U.S. District Court for the District of Nevada asking the Court to declare that NPC is not liable for any damages as a result of MSCG's termination of its power supply contracts. On April 17, 2003, MSCG answered the complaint and filed a counterclaim against NPC at the FERC alleging non-payment of the termination payment in the amount of $25 million. NPC filed a motion to intervene in the FERC action commenced by MSCG. NPC is unable to predict the outcome of these proceedings. In connection with claims by their terminated energy suppliers, the Utilities have established reserves, included in their Condensed Consolidated Balance Sheets in "Contract termination reserves," of approximately $235 million and $87 as of June 30, 2003, for NPC and SPPC, respectively. Also, pursuant to the deferred energy accounting provisions of AB 369, NPC and SPPC added approximately $238 million and $82 million, respectively, to their deferred energy balances for recovery in rates in future periods associated with terminated supplier claims. NOTE 12. SUBSEQUENT EVENTS See Notes 1, 3, and 8 for discussion of events occurring after June 30, 2003. 36 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS AND RISK FACTORS The information in this Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to anticipated financial performance, management's plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions and other matters. Words such as "anticipate," "believe," "estimate," "expect," "intend," "plan" and "objective" and other similar expressions identify those statements that are forward-looking. These statements are based on management's beliefs and assumptions and on information currently available to management. Actual results could differ materially from those contemplated by the forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such statements, factors that could cause the actual results of Sierra Pacific Resources (SPR), Nevada Power Company (NPC), or Sierra Pacific Power Company (SPPC) to differ materially from those contemplated in any forward-looking statement include, among others, the following: (1) unfavorable rulings in rate cases to be filed by NPC and SPPC (the Utilities) with the Public Utilities Commission of Nevada (PUCN), including the periodic applications to recover costs for fuel and purchased power that have been recorded by the Utilities in their deferred energy accounts, and deferred natural gas recorded by SPPC for its gas distribution business; (2) the ability of SPR, NPC, and SPPC to access the capital markets to support their requirements for working capital, including amounts necessary to finance deferred energy costs, construction costs, and the repayment of maturing debt, particularly in the event of additional unfavorable rulings by the PUCN, a further downgrade of the current debt ratings of SPR, NPC, or SPPC, and/or adverse developments with respect to NPC's or SPPC's power and fuel suppliers; (3) whether NPC's ability to pay SPR dividends will be restored in the near future, and whether SPPC will be able to continue to pay SPR dividends under the terms of SPPC's financing agreements and/or restated articles of incorporation; (4) whether suppliers, such as Enron, which have terminated their power supply contracts with NPC and/or SPPC will be successful in pursuing their claims against the Utilities for liquidated damages under their power supply contracts, and whether Enron will be successful in its lawsuit against NPC and SPPC; (5) whether the PUCN will issue favorable orders in a timely manner to permit the Utilities to borrow money and issue additional securities to finance the Utilities' operations and to purchase power and fuel necessary to serve their respective customers and to repay maturing debt; (6) whether SPR, NPC, and SPPC will be able to maintain sufficient stability with respect to their liquidity and relationships with suppliers to be able to continue to operate outside of bankruptcy; (7) whether current suppliers of purchased power, natural gas, or fuel to NPC or SPPC will continue to do business with NPC or SPPC or will terminate their contracts and whether NPC or SPPC will have sufficient liquidity to pay its respective power requirements if their current suppliers continue to require the Utilities to make pre-payments or more frequent payments on their power purchases; (8) whether the Utilities will need to purchase additional power on the spot market to meet unanticipated power demands (for example, due to unseasonably hot weather) and whether suppliers will be willing to sell such power to the Utilities in light of their weakened financial condition; (9) whether SPPC will be successful in obtaining PUCN approval to recover the costs of the gasifier facility at the Pinon Pine Power Project in a future general rate case; 37 (10) whether NPC and SPPC will be successful in obtaining PUCN approval to recover goodwill and other merger costs recorded in connection with the 1999 merger between SPR and NPC in a future general rate case; (11) wholesale market conditions, including availability of power on the spot market, which affect the prices the Utilities have to pay for power as well as the prices at which the Utilities can sell any excess power; (12) the final outcome of NPC's pending lawsuit in Nevada state court seeking to reverse portions of the PUCN's 2002 order denying the recovery of NPC's deferred energy costs; (13) whether the Utilities will be able, either through Federal Energy Regulatory Commission (FERC) proceedings or negotiation, to obtain lower prices on the long-term purchased power contracts that they entered into during 2000 and 2001 that are priced above current market prices for electricity; (14) the effect that any future terrorist attacks, wars, threats of war, or epidemics may have on the tourism and gaming industries in Nevada, particularly in Las Vegas, as well as on the economy in general; (15) unseasonable weather and other natural phenomena which, in addition to impacting the Utilities' customers' demand for power, can have potentially serious impacts on the Utilities' ability to procure adequate supplies of fuel or purchased power to serve their respective customers and on the cost of procuring such supplies; (16) industrial, commercial, and residential growth in the service territories of the Utilities; (17) the loss of any significant customers; (18) the effect of existing or future Nevada, California, or federal legislation or regulations affecting electric industry restructuring, including laws or regulations which could allow additional customers to choose new electricity suppliers or change the conditions under which they may do so; (19) changes in the business or power demands of the Utilities' major customers, including those engaged in gold mining or gaming, which may result in changes in the demand for services of the Utilities, including the effect on the Nevada gaming industry of the opening of additional Indian gaming establishments in California and other states; (20) changes in environmental regulations, tax, or accounting matters or other laws and regulations to which the Utilities are subject; (21) future economic conditions, including inflation or deflation rates and monetary policy; (22) financial market conditions, including changes in availability of capital or interest rate fluctuations; (23) unusual or unanticipated changes in normal business operations, including unusual maintenance or repairs; and (24) employee workforce factors, including changes in collective bargaining unit agreements, strikes, or work stoppages. Other factors and assumptions not identified above may also have been involved in deriving these forward-looking statements, and the failure of those other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected. SPR, NPC and SPPC assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements. 38 CRITICAL ACCOUNTING POLICIES The following items represent critical accounting policies that under different conditions or using different assumptions could have a material effect on the financial position and results of operations of SPR and the Utilities: REGULATORY ACCOUNTING The Utilities' rates are currently subject to the approval of the PUCN and, in the case of SPPC, they are also subject to the approval of California Public Utility Commission (CPUC) and are designed to recover the cost of providing generation, transmission and distribution services. As a result, the Utilities qualify for the application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," issued by the Financial Accounting Standards Board (FASB). This statement recognizes that the rate actions of a regulator can provide reasonable assurance of the existence of an asset and requires the capitalization of incurred costs that would otherwise be charged to expense where it is probable that future revenue will be provided to recover these costs. SFAS No. 71 prescribes the method to be used to record the financial transactions of a regulated entity. The criteria for applying SFAS No. 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, and (iii) rates that are set at levels that will recover costs can be charged to and collected from customers. Regulatory assets represent incurred costs that have been deferred because it is probable they will be recovered through future rates collected from customers. Regulatory liabilities generally represent obligations to make refunds to customers for previous collections for costs that are not likely to be incurred. Management regularly assesses whether the regulatory assets are probable of future recovery by considering factors such as applicable regulatory environment changes and the status of any pending or potential deregulation legislation. Although current rates do not include the recovery of all existing regulatory assets as discussed further below and in Note 1 in Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, management believes the existing regulatory assets are probable of recovery. This determination reflects the current political and regulatory climate in the state, and is subject to change in the future. If future recovery of costs ceases to be probable, the write-off of regulatory assets would be required to be recognized as a charge or expensed in current period earnings. Regulatory Accounting affects other Critical Accounting Policies, including Deferred Energy Accounting, Accounting for Goodwill and Merger Costs, Accounting for Generation Divestiture Costs, Impairment of Long-Lived Assets, and Accounting for Derivatives and Hedging Activities, all of which are discussed immediately below. DEFERRED ENERGY ACCOUNTING On April 18, 2001, the Governor of Nevada signed into law Assembly Bill 369 (AB 369). The provisions of AB 369 include, among others, a reinstatement of deferred energy accounting for fuel and purchased power costs incurred by electric utilities. In accordance with the provisions of SFAS No. 71, the Utilities implemented deferred energy accounting on March 1, 2001, for their respective electric operations. Under deferred energy accounting, to the extent actual fuel and purchased power costs exceed fuel and purchased power costs recoverable through current rates, that excess is not recorded as a current expense on the statement of operations but rather is deferred and recorded as an asset on the balance sheet. Conversely, a liability is recorded to the extent fuel and purchased power costs recoverable through current rates exceed actual fuel and purchased power costs. These excess amounts are reflected in adjustments to rates and recorded as revenue or expense in future time periods, subject to PUCN review. AB 369 provides that the PUCN may not allow the recovery of any costs for purchased fuel or purchased power "that were the result of any practice or transaction that was undertaken, managed or performed imprudently by the electric utility." In reference to deferred energy accounting, AB 369 specifies that fuel and purchased power costs include all costs incurred to purchase fuel, to purchase capacity, and to 39 purchase energy. The Utilities also record, and are eligible under the statute to recover, a carrying charge on such deferred balances. The Utilities are exposed to commodity price risk primarily related to changes in the market price of electricity as well as changes in fuel costs incurred to generate electricity. See Energy Supply in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, for a discussion of the Utilities' purchased power procurement strategies, and Commodity Price Risk in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in SPR's, NPC's, and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002, for a discussion of the Utilities' commodity risk management program. As discussed above, deferred energy accounting facilitates the recovery of costs incurred to procure fuel and purchased power for SPPC and NPC. As described in more detail under Regulation and Rate Proceedings, Nevada Matters, Nevada Power Company 2001 Deferred Energy Case, in SPR's, NPC's, and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002, on November 30, 2001, NPC filed an application with the PUCN seeking to establish a Deferred Energy Accounting Adjustment (DEAA) rate to clear deferred balances for purchased fuel and power costs accumulated between March 1, 2001 and September 30, 2001. The application sought to establish a rate to clear accumulated purchased fuel and power costs of $922 million and spread the cost recovery over a period of not more than three years. On March 29, 2002, the PUCN issued its decision on the deferred energy application, disallowing $434 million of deferred purchased fuel and power costs, and allowing NPC to collect the remaining $478 million over three years beginning April 1, 2002. As a result of this disallowance, NPC wrote off $465 million of deferred energy costs and related carrying charges, the two major national rating agencies immediately downgraded the credit rating on SPR's, NPC's and SPPC's debt securities (followed by further downgrades late in April 2002), and the market price of SPR's common stock fell substantially. On November 14, 2002, NPC filed an application with the PUCN seeking to clear deferred balances of $195.7 million for purchased fuel and power costs accumulated between October 1, 2001, and September 30, 2002, and to spread the recovery of the deferred costs, together with a carrying charge, over a period of not more than three years. On May 12, 2003, the PUCN issued its decision on NPC's deferred energy application, disallowing $48.1 million of deferred purchased fuel and power and related carrying costs, and allowing NPC to collect the remaining $147.6 million over three years beginning May 19, 2003. As a result of this decision, NPC wrote off $48.1 million of disallowed deferred energy costs and related carrying charges in May 2003. As described in more detail under Regulation and Rate Proceedings, Nevada Matters, Sierra Pacific Power Company 2002 Deferred Energy Case, in SPR's, NPC's, and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002, SPPC filed an application with the PUCN seeking to establish a DEAA rate to clear its deferred balances for purchased fuel and power costs accumulated between March 1, 2001 and November 30, 2001. The application sought to establish a rate to clear accumulated purchased fuel and power costs of $205 million and spread the cost recovery over a period of not more than three years. On May 28, 2002, the PUCN issued its decision on SPPC's deferred energy application, disallowing $53 million of deferred purchased fuel and power costs, and allowing SPPC to collect the remaining $150 million over three years beginning June 1, 2002. As a result of this decision, SPPC wrote off $58 million of disallowed deferred energy costs and related carrying charges in the second quarter of 2002. On January 14, 2003, SPPC filed an application with the PUCN that sought to clear deferred balances of $15.4 million for purchased fuel and power costs accumulated between December 1, 2001, and November 30, 2002. The application sought to establish a DEAA rate to repay accumulated purchased fuel and power costs of $15.4 million and spread the cost recovery over a period of not more than three years. On May 19, 2003, the PUCN approved a stipulated agreement between SPPC and the staff of the PUCN and others that resulted in a rate decrease of $9.9 million beginning June 1, 2003, and a rate decrease of $19.7 million beginning June 1, 2004. As a result of the agreement, SPPC reduced its deferred energy balance by $45 million, from a balance of approximately $15.4 million collectible from customers to 40 a balance of approximately $29.6 million payable to customers. This resulted in a write off of $45 million in May 2003. Both Utilities have continued to be entitled under AB 369 to utilize deferred energy accounting for their electric operations. Because of contracts entered into during the Western energy crisis in 2001 to assure adequate supplies of electricity for their customers, the Utilities incurred fuel and purchased power costs in excess of amounts they were permitted to recover in current rates. As a result, during 2002, both Utilities continued to accumulate amounts in their deferral of energy costs accounts. If not for deferred energy accounting during 2003 and 2002, SPR's, NPC's and SPPC's results of operations, financial condition, liquidity and capital resources would have been significantly different. For example, without the deferred energy accounting provisions of AB 369, the reported purchased power and fuel costs of SPR, NPC, and SPPC for the three months ended June 30, 2003, would have decreased (net of income tax) by approximately $12.1 million, $7.4 million and $4.7 million, respectively, and for the six months ended June 30, 2003, purchased power and fuel costs would have decreased by $66.9 million, $54.8 million, and $12.1 respectively. Without deferred energy accounting the reported interest accrued on deferred energy for the three months ended June 30, 2003, by SPR, NPC, and SPPC, would have decreased (net of income tax) by approximately $4.3 million, $3.4 million, and $0.9 million, respectively, and would have decreased by $9.2 million, $7.1 million and $2.1 million, respectively, for the six months ended June 30, 2003. Similarly, without the deferred energy accounting provisions of AB 369, the reported purchased power and fuel costs of SPR, NPC, and SPPC for the three ended June 30, 2002, would have increased (net of income tax) by approximately $164.8 million, $120.4 million, $44.4 million, respectively, and would have increased for the six months ended June 30, 2002 by $174.0 million, $126.6 million, and $47.4 million, respectively. Reported interest accrued on deferred energy costs of SPR, NPC, and SPPC would have decreased/(increased) for the three months ended June, 30, 2002 (net of income tax) by approximately $23.6 million, $25.3 million and $(1.7) million, respectively, and interest accrued on deferred energy costs for the six months ended June 30, 2002, would have increased by $20.1 million, $18.1 million, and $2.1 million, respectively. The effects of AB 369 on 2003 and 2002 purchased power and fuel costs and interest accrued on deferred energy costs discussed above exclude the write-offs during both years pursuant to PUCN decisions discussed earlier. ACCOUNTING FOR GOODWILL AND MERGER COSTS The order issued by the PUCN in December 1998 approving the merger of SPR and NPC directed both NPC and SPPC to defer three categories of merger costs to be reviewed for recovery through future rates. That order specifically directed both Utilities to defer merger transaction costs, transition costs and goodwill costs for a three-year period. The deferral of these costs was intended to allow adequate time for the anticipated savings from the merger to develop. At the end of the three-year period, the order instructs the Utilities to propose an amortization period for the merger costs and allows the Utilities to recover the costs to the extent they are offset by merger savings. Costs deferred as a result of the PUCN order were $331.2 million of goodwill and $63.0 million in other merger costs as of June 30, 2003. The deferred other merger costs consist of $41.1 million of transaction and transition costs and $21.9 million of employee separation costs. Employee separation costs were comprised of $17.4 million of employee severance, relocation and related costs, and $4.5 million of pension and post-retirement benefits net of plan curtailment gains. The extent to which goodwill and merger costs will be recovered in future revenues and the timing of those recoveries is expected to be determined in general rate cases that will be filed in the third and fourth quarters of 2003 by NPC and SPPC, respectively. To the extent that the Utilities are not permitted to recover any portion of goodwill in future rates, the amount not recoverable will be reviewed for impairment and accounted for under the provisions of Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets". A significant disallowance of goodwill or merger costs by the PUCN would have a material adverse effect on the future financial position, results of operations and cash flows of SPR, NPC, and SPPC. 41 ACCOUNTING FOR GENERATION DIVESTITURE COSTS As a condition to its approval of the merger between SPR and NPC, the Utilities filed, and in February 2000 the PUCN approved, a revised Divestiture Plan stipulation for the sale of the Utilities' generation assets. In May 2000, an agreement was announced for the sale of NPC's 14% undivided interest in the Mohave Generating Station (Mohave). In the fourth quarter of 2000, the Utilities announced agreements to sell six additional bundles of generation assets described in the approved Divestiture Plan. The sales were subject to approval and review by various regulatory agencies. AB 369, which was signed into law on April 18, 2001, prohibits until July 2003 the sale of generation assets and directs the PUCN to vacate any of its orders that had previously approved generation divestiture transactions. In January 2001, California enacted a law that prohibits until 2006 any further divestiture of generation properties by California utilities, including SPPC, and could also affect any sale of NPC's interest in Mohave after July 2003 since the majority owner of that project is Southern California Edison. SPPC's request for an exemption from the requirements of a separate California law requiring approval of the CPUC to divest its plants was denied. In September 2002, the California Legislature approved an exemption to AB 6, which had prevented private utilities from selling any power plants that provide energy to California customers until 2006. The exemption allows SPPC to complete the sale of the hydroelectric units to TMWA subject to review and approval of the sale by the CPUC. The sales agreements for the six bundles provided that they would terminate eighteen months after their execution, and all of the agreements have now terminated in accordance with their respective provisions. As of June 30, 2003, NPC and SPPC had incurred costs, including carrying charges, of approximately $21.0 million and $12.7 million, respectively, in order to prepare for the sale of generation assets. In the fourth quarter of 2001, each Utility requested recovery of its respective costs in its application for a general rate increase filed with the PUCN. In 2002, the PUCN delayed recovery of divestiture costs to future rate case requests but did grant a carrying charge on the costs until such time as recovery is allowed. To the extent that the Utilities are not permitted to recover any portion of these costs in future rates, the disallowed costs and related carrying charges would be required to be written off in current period earnings. DISPOSAL OF AND IMPAIRMENT OF LONG-LIVED ASSETS SPR and the Utilities evaluate their Utility Plant and definite-lived tangible assets for impairment whenever indicators of impairment exist. Accounting standards require that if the sum of the undiscounted expected future cash flows from a company's asset (without interest charges that will be recognized as expenses when incurred) is less than the carrying value of the asset, an asset impairment must be recognized in the financial statements. The amount of impairment recognized is calculated by subtracting the fair value of the asset from the carrying value of the asset. SIERRA PACIFIC COMMUNICATIONS As discussed in Note 8 -- Disposal and Impairment of Long-Lived Assets, Sierra Pacific Communication (SPC) operates its telecommunication business in two segments, Metropolitan Area Network and Long Haul Fiber Network. SPC evaluated the assets of its business as of June 30, 2003 as a result of market conditions created by the bankruptcy of Touch America. This event substantially deteriorated the telecommunications market in the areas where SPC operates it long haul fiber assets and SPC anticipates the market for fiber optic cable and conduits will likely become significantly over-supplied and has caused Sierra Pacific Communications to test for and as result recognize an impairment charge. Estimates underlying the asset impairment are significant in determining the impairment charge. The assumptions underlying the calculation of the undiscounted future cash flows used to evaluate the impairment, including projected revenues and expenses and the discount rate used to present value future cash flows materially effect the amount of the impairment charge. In estimating undiscounted future cash flows for its long haul fiber assets SPC used prices for similar assets sales adjusted for the markets factors that resulted from the Touch America bankruptcy discussed above. To estimate the undiscounted cash 42 flows from the metropolitan area network assets, SPC used revenues from current and projected sales contracts and continued operating expenses over the approximate 18-year remaining life of the assets. Any difference from the assumptions used could materially change the results of the asset impairment charge as recognized in the current period. PINON PINE As discussed in more detail in Note 21, Pinon Pine, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002, SPPC owns a combined cycle generation facility, a post-gasification facility, and, through its wholly owned subsidiaries, owns a gasifier that are collectively referred to as the Pinon Pine Power Project (Pinon Pine). Construction of Pinon Pine was completed in June 1998. Included in the Condensed Consolidated Balance Sheets of SPR and SPPC is the net book value of the gasifier and related assets, which is approximately $98 million as of June 30, 2003. To date, SPPC has not been successful in obtaining sustained operation of the gasifier. In 2001 SPPC retained an independent engineering consulting firm to complete a comprehensive study of the Pinon Pine gasification plant. After evaluating the options presented in the draft report, SPPC decided not to pursue modifications intended to make the facility operational and intends to seek recovery, net of salvage, through regulated rates in its next general rate case based, in part, on the PUCN's approval of Pinon Pine as a demonstration project in an earlier resource plan. However, if SPPC is unsuccessful in obtaining recovery, there could be a material adverse effect on SPPC's and SPR's financial position, results of operations and cash flows. MOHAVE As discussed in more detail in Note 11, Commitments and Contingencies, Environmental, NPC owns a 14% interest in the Mohave Generating Station located in Laughlin, Nevada. Included in the Condensed Consolidated Balance Sheets of SPR and NPC is the net book value of NPC's share of the Mohave facility, which is approximately $36.1 million as of June 30, 2003. Due to a lack of progress in negotiations with the parties to resolve several coal and water supply issues, Southern California Edison's (SCE), the operating partner, filed an application with the California Public Utility Commission (CPUC) to determine whether it is in the public interest to continue operation of the Mohave facility beyond 2005. Also, SCE and the other Mohave co-owners have been prevented from commencing the installation of extensive pollution control equipment that must be put in place if Mohave's operations are extended past 2005 due to the uncertainty over the coal supply and water issues. NPC is currently evaluating and analyzing all of its options with regard to the Mohave coal and water supply issues and the compliance with the environmental consent decree approved in November 1999. NPC intends to seek recovery, net of salvage, through regulated rates in its next general rate case. However, if NPC is unsuccessful in obtaining recovery, there could be an adverse effect on NPC's and SPR's financial position, results of operations and cash flows. E-THREE AND E-THREE CUSTOM ENERGY SOLUTIONS SPR's subsidiary, e-three, was organized in October 1996 to provide energy and other business solutions in commercial and industrial markets. SPR's subsidiary, e-three Custom Energy Solutions, LLC (CES), was formed in October 1998 for the purpose of selling and implementing energy-related performance contracts and the construction and operation of a chilled water cooling plant in the downtown area of Las Vegas supplying indoor air-cooling requirements for a number of businesses in its immediate vicinity. In keeping with management's strategy to focus on its core utility businesses, SPR began negotiations in the second quarter of 2003 to sell e-three and CES. Management is currently negotiating with a single buyer who is expected to purchase both companies for approximately $2.2 million. The sale is expected to 43 be completed during the third quarter of 2003. Accordingly, as of June 30, 2003, e-three and CES are reported as discontinued operations and the consolidated financial statements for all periods presented in this report have been reclassified to report separately the assets, liabilities and operating results of the companies. Based on the expected selling price, a pre-tax loss on the disposal of $8.9 million was recognized as of June 30, 2003. To the extent the final sales price differs from $2.2 million, the loss on disposal will be adjusted accordingly. ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES SPR, SPPC, and NPC apply SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. SFAS No. 133 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. FUEL AND PURCHASED POWER CONTRACTS In order to manage loads, resources and energy price risk, the Utilities buy fuel and power under forward contracts. In addition to forward fuel and power purchase contracts, the Utilities also use options and swaps to manage price risk. All of these instruments are considered to be derivatives under SFAS No. 133. The risk management assets and liabilities recorded in the balance sheets of the Utilities and SPR are primarily comprised of the fair value of these forward fuel and power purchase contracts and other energy related derivative instruments. Fuel and purchased power costs are subject to deferred energy accounting. Accordingly, the energy related risk management assets and liabilities and the corresponding unrealized gains and losses (changes in fair value) are offset with a regulatory asset or liability rather than recognized in the statements of operations and comprehensive income. Upon settlement of a derivative instrument, actual fuel and purchased power costs are recognized if they are currently recoverable or deferred if they are recoverable or payable through future rates. The fair values of the forward contracts and swaps are determined based on quotes obtained from independent brokers and exchanges. The fair values of options are determined using a pricing model that incorporates assumptions such as the underlying commodity's forward price curve, time to expiration, strike price, interest rates, and volatility. The use of different assumptions and variables in the model could have a significant impact on the valuation of the instruments. DEBT CONVERSION OPTION In connection with SPR's issuance of its Convertible Notes (see Note 4, Long-Term Debt), the conversion option, which is treated as a cash-settled written call option, was separated from the debt and accounted for separately as a derivative instrument. Until SPR has obtained shareholder approval to permit the Convertible Notes to be fully convertible into shares of common stock, holders of the Convertible Notes will be entitled to receive 76.7073 shares of common stock and a remaining portion in cash, based on the average closing price of SPR's common stock over five consecutive trading days, for each $1,000 principal amount of notes surrendered for conversion. Because the conversion of the option presently cannot be entirely settled with shares of common stock, the fair market value of the derivative is recorded as a liability with changes in the fair value of the derivative reported in earnings in the period of the change. SPR has scheduled a special meeting of the stockholders to be held on August 11, 2003. In the event SPR obtains shareholder approval to permit the Convertible Notes to be fully converted into shares of common stock, Issue No. 00-19 of the Emerging Issues Task Force of the FASB (EITF), "Accounting for Derivative Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" provides for the recording of the fair value of the derivative in equity, if all of the other applicable provisions of EITF Issue No. 00-19 are met. Management believes that all such applicable provisions will be met. Accordingly, the fair value of the derivative on the date of the shareholder vote would be 44 reclassified to equity. In addition, EITF Issue No. 00-19 indicates that subsequent changes in fair value should not be recognized as long as the derivative remains classified in equity and SPR would no longer mark this instrument to market. This would result in no unrealized gains or losses being recorded in earnings. The previous changes in fair value of the derivative instrument recorded in earnings would not be reversed. In the event SPR does not obtain shareholder approval to permit the Convertible Notes to be fully converted into shares of its common stock, the derivative will continue to be marked to market with the resulting unrealized gains or losses recorded in earnings in accordance with SFAS No. 133. The fair value of the conversion option derivative is determined using a pricing model that incorporates information and assumptions such as SPR's stock price, time to expiration, strike price, interest rates, and volatility. The use of different assumptions and variables in the model could have a significant impact on the valuation of the derivative. Based on the closing price of SPR's common stock at June 30, 2003 of $5.94, the fair value of the conversion option was determined to be approximately $180 million at June 30, 2003 and as a result, SPR recorded unrealized losses in earnings of approximately $123.5 million and $107.5 million for three and six month periods ended June 30, 2003, respectively. Assuming no change in the other variables, a $1.00 change in the closing price of SPR's stock to $4.94 or $6.94 would have resulted in a fair value of approximately $128 million and $234 million, respectively, and unrealized losses for the three months ended June 30, 2003 of approximately $72 million and $178 million, respectively, and unrealized losses for the six months ended June 30, 2003 of approximately $56 million and $161 million, respectively. Similarly, changes in the market price of SPR's common stock can have a significant impact on the amount of cash payable upon conversion of the Convertible Notes. At an assumed five-day average closing price of $5.94 per share (based on the last reported sale price of SPR's common stock on July 30, 2003), the total amount of the cash payable on conversion of the Convertible Notes would be approximately $254 million. The amount of cash payable on conversion of the Convertible Notes would increase or decrease approximately $43 million to $297 million and $211 million, respectively based on a $1.00 change in the average closing price of SPR's common stock. OTHER DERIVATIVES SPR and the Utilities have other non-energy related derivative instruments. The changes in fair values of these non-energy related derivatives are reported in Other comprehensive income until the related transactions are settled or terminate, at which time the amounts are reclassified into earnings. ENVIRONMENTAL CONTINGENCIES SPR and its subsidiaries are subject to federal, state and local regulations governing air and water quality, hazardous and solid waste, land use and other environmental considerations. Nevada's Utility Environmental Protection Act requires approval of the PUCN prior to construction of major utility, generation or transmission facilities. The United States Environmental Protection Agency (EPA), Nevada Division of Environmental Protection (NDEP), and Clark County Health District (CCHD) administer regulations involving air and water quality, solid, hazardous and toxic waste. SPR and its subsidiaries are subject to rising costs that result from a steady increase in the number of federal, state and local laws and regulations designed to protect the environment. These laws and regulations can result in increased capital, operating, and other costs as a result of compliance, remediation, containment and monitoring obligations, particularly with laws relating to power plant emissions. In addition, SPR or its subsidiaries may be a responsible party for environmental clean up at a site identified by a regulatory body. The management of SPR and its subsidiaries cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean up costs and compliance and the possibility that changes will be made to the current environmental laws and regulations. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties. SPR and its 45 subsidiaries accrue for environmental costs only when they can conclude that it is probable that they have an obligation for such costs and can reasonably determine the amount of such costs. Note 11, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements discusses the environmental matters of SPR and its subsidiaries that have been identified, and the estimated financial effect of those matters. To the extent that (1) actual results differ from the estimated financial effects, (2) there are environmental matters not yet identified for which SPR or its subsidiaries are determined to be responsible, or (3) the Utilities are unable to recover through future rates the costs to remediate such environmental matters, there could be a material adverse effect on the financial condition and future liquidity and results of operations of SPR and its subsidiaries. LITIGATION CONTINGENCIES Note 11, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements discusses the significant legal matters of SPR and its subsidiaries. As described in Note 11, NPC and SPPC established reserves, included in their Condensed Consolidated Balance Sheets as "Contract termination reserves," for amounts claimed for liquidated damages for terminated power supply contracts and for power previously delivered to the Utilities by Enron and other suppliers. Correspondingly, pursuant to the deferred energy accounting provisions of AB 369, NPC and SPPC added as of June 30, 2003, approximately $238 million and $82 million, respectively, to their deferred energy balances for recovery in rates in future periods associated with these terminated supplier claims. If NPC and SPPC receive unfavorable rulings with respect to the terminated supplier claims and as a result are required to pay part or all of the amounts reserved, the Utilities will pursue recovery of the amounts through future deferred energy filings. To the extent that the Utilities are not permitted to recover any portion of these costs through a deferred energy filing, the amounts not permitted would be charged as a current operating expense. A significant disallowance of these costs by the PUCN could have a material adverse effect on the future financial position, results of operations and cash flows of SPR, NPC, and SPPC. SPR and its subsidiaries, through the course of their normal business operations, are currently involved in a number of other legal actions, none of which has had or, in the opinion of management, is expected to have, a significant impact on its financial position or results of operations. DEFINED BENEFIT PLANS AND OTHER POSTRETIREMENT PLANS As further explained in Note 14, Retirement Plan and Post-Retirement Benefits, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002, SPR maintains a pension plan as well as other postretirement benefit plans that provide health and life insurance for retired employees. All employees are eligible for these benefits if they reach retirement age while still working for SPR or its subsidiaries. These costs are determined in accordance with the provisions of SFAS No. 87, "Employers' Accounting for Pensions," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and ultimately collected in rates billed to customers. The amounts funded are then used to meet benefit payments to plan participants. In the first six months of 2003, SPR has contributed approximately $25.6 million and $0.1 million to the pension and other postretirement plans, respectively. For the year ended December 31, 2002, SPR contributed $41.1 million to its pension plan, and $0.2 million to the other postretirement benefits plan. Due to the sharp decline in United States equity markets since the third quarter of 2000, the value of a significant portion of the assets held in the plans' trusts to satisfy the obligations of the plans decreased significantly. As a result, additional contributions were required and may be required in the future to meet the requirements of the plan to pay benefits to plan participants. PENSION PLANS SPR's reported costs of providing non-contributory defined pension benefits (described in Note 14, Retirement Plan and Post-Retirement Benefits, of Notes to Financial Statements in SPR's, NPC's, and 46 SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002) are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience. For example, pension costs are impacted by actual employee demographics (including age and employment periods), the level of contributions SPR makes to the plan, and earnings on plan assets. Changes made to the provisions of the plan may also impact current and future pension costs. Pension costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and pension costs. SPR has made no changes to pension plan provisions in 2002 or 2003 that have had any significant impact on recorded pension amounts. SPR reduced the discount rate used in determining pension expense for the calendar year 2003 from 7.5% to 6.75%. This change will not have a significant impact on reported pension costs for 2003. SPR's pension plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns as well as changes in general interest rates may result in increased or decreased pension costs in future periods. Likewise, changes in assumptions regarding current discount rates and expected rates of return on plan assets could also increase or decrease recorded pension costs. In selecting an assumed rate of return on plan assets, SPR considers past performance and economic forecasts for the types of investments held by the plan. The market value of SPR's plan assets has been affected by sharp declines in equity markets since the third quarter of 2000. Pension cost and cash funding requirements could increase in future years without a substantial recovery in the equity markets. OTHER POSTRETIREMENT BENEFITS SPR's reported costs of providing other postretirement benefits (described in Note 14, Retirement Plan and Post-Retirement Benefits, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002) are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience. For example, other postretirement benefit costs are impacted by actual employee demographics (including age and employment periods), the level of contributions made to the plan, earnings on plan assets, and health care cost trends. Changes made to the provisions of the plan may also impact current and future other postretirement benefit costs. Other postretirement benefit costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the postretirement benefit obligation and postretirement costs. SPR has made no changes to other postretirement benefit plan provisions in 2002 or 2003 that have had any significant impact on recorded benefit plan amounts. SPR reduced the discount rate used in determining other postretirement expense for the calendar year 2003 from 7.5% to 6.75%. This change will not have a significant impact on reported other postretirement benefit costs for 2003. However, in determining the other postretirement benefit obligation and related cost, these assumptions can change from period to period, and such changes could result in material changes to such amounts. SPR's other postretirement benefit plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns as well as changes in general interest rates may result in increased or decreased other postretirement benefit costs in future periods. Likewise, changes in assumptions regarding current discount rates and expected rates of return on plan assets could also increase or decrease recorded other postretirement benefit costs. In selecting an assumed rate of return on plan assets, SPR considers past performance and economic forecasts for the types of investments held by the plan. The market value of the SPR's plan assets has been affected by sharp declines in equity markets since the third quarter of 2000. Also, other 47 postretirement benefit cost and cash funding requirements could increase in future years without a substantial recovery in the equity markets. COST CAPITALIZATION POLICIES The Utilities continue to devote substantial resources in 2003 on the Centennial Transmission project at NPC and the Falcon to Gonder Transmission project at SPPC. In addition, certain operating units of the Utilities are charged with maintaining, repairing and replacing components of generation, transmission and distribution systems both on a scheduled basis and on an as-needed basis. As described in Note 1, Summary of Significant Accounting Policies, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002, the cost of additions, including betterments and replacements of units of property, is charged to utility plant. When units of property are replaced, renewed or retired, their cost, plus removal or disposal costs less salvage, is charged to accumulated depreciation. Certain direct and indirect costs are capitalized, including the cost of debt and equity capital associated with construction and retirement activity as prescribed by Generally Accepted Accounting Principles (GAAP) and the FERC's Uniform System of Accounts. The indirect construction overhead costs capitalized are based upon the following cost components: the cost of time spent by administrative employees in planning and directing construction; property taxes; employee benefits including such costs as pensions, postretirement and post employment benefits, vacations and payroll taxes; and an allowance for funds used during construction (AFUDC). The level of indirect construction overhead costs capitalized by the Utilities is based upon real-time construction activity. Accordingly, payroll and other costs capitalized will fluctuate based upon seasonal construction activities and the deployment of resources to those efforts. During periods of higher maintenance levels, these payroll and other costs will not be capitalized. As such, operating income could be impacted by the manner in which payroll and related costs are deployed. However, the total cash flow of the Utilities is not impacted by the allocation of these costs to various construction or maintenance activities. During the three and six months ended June 30, 2003, NPC and SPPC capitalized approximately $1.0 million, $1.2 million, $3.2 million and $2.5 million, respectively, of AFUDC as a result of construction activity. Similarly, during the three and six months ended June 30, 2002, NPC and SPPC capitalized approximately $1.0 million, $146,000, $2.5 million and $773,000, respectively, of AFUDC. These amounts are non-cash components reflected in the Consolidated Statements of Operations. Recognition of AFUDC as a cost of utility plant is in accordance with established regulatory ratemaking practices. Such practices permit the Utility to earn a return on, and recover in rates, all capital costs charged for Utility services. DEPRECIATION EXPENSE The Utilities have a significant investment in electric plant. SPPC also has an investment in gas distribution plant. Depreciable assets of generation, transmission and distribution operations represent approximately 93% of the Utilities' investment in utility plant. As described in Note 1, Summary of Significant Accounting Policies, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, the Utilities depreciate these assets utilizing a composite rate, which currently includes a component for net negative salvage. These assets are depreciated on a straight-line basis over the remaining useful life of the related assets, which approximates the anticipated physical lives of these assets in most cases. The Nevada Administrative Code requires the Utilities to provide a depreciation study every four years in order to substantiate the remaining physical lives of their investment in utility plant. Adjustments to the estimated depreciable lives of the Utilities' plant are recorded on a prospective basis, as prescribed by Generally Accepted Accounting Principals (GAAP) and the Federal Energy Regulatory Commission's (FERC) Uniform System of Accounts. Substantially all of the Utilities' plant is subject to the ratemaking jurisdiction of the PUCN or the FERC and, in the case of SPPC's California operations, the CPUC, which also approves any changes SPPC may make to depreciation rates utilized for this property. Because the Utilities' periodic 48 depreciation expense is included as a component of the revenue requirement utilized in the development of the Utilities' tariff rates, revenue reflects collection of the recognized depreciation expense. Accordingly, the impact of depreciation on net income is not significant. However, operating cash flows are positively affected by the amount of depreciation collected in rates, since depreciation expense is not a current cash outlay for the Utilities. ASSET RETIREMENT OBLIGATIONS In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 provides accounting requirements for the recognition and measurement of liabilities associated with the retirement of tangible long-lived assets. Under the standard, these liabilities will be recognized at fair value as incurred and capitalized as part of the cost of the related tangible long-lived assets. Accretion of the liabilities due to the passage of time will be an operating expense. Retirement obligations associated with long-lived assets included within the scope of SFAS No. 143 are those for which a legal obligation exists under enacted laws, statutes written or oral contracts, including obligations arising under the doctrine of promissory estoppel. The Utilities adopted SFAS No. 143 on January 1, 2003. Prior to adopting SFAS 143, costs for removal of most utility assets were accrued as an additional component of depreciation expense. Under SFAS 143, only the costs to remove an asset with legally binding retirement obligations will be accrued over time through accretion of the asset retirement obligation and depreciation of the capitalized asset retirement cost. Management's methodology to assess its legal obligation included an inventory of assets by system and components, and a review of right of ways and easements, regulatory orders, leases and federal, state, and local environmental laws. Management assumed in determining its Asset Retirement Obligations that transmission, distribution and communications systems will be operated in perpetuity and would continue to be used or sold without land remediation; and mass asset properties that are replaced or retired frequently would be considered normal maintenance. Management has identified a legal obligation to retire generation plant assets specified in land leases for NPC's jointly-owned Navajo generating station. The land on which the Navajo generating station resides is leased from the Navajo Nation. The provisions of the leases require the lessees to remove the facilities upon request of the Navajo Nation at the expiration of the leases. Although the related retirement obligation and corresponding charges recognized were immaterial to the financial statements of NPC, those amounts were based on certain estimates and assumptions. The estimated liability is based on two levels of decommissioning, minimal and full, and two possible retirement dates. The liability is escalated using average historical Consumer Price Index inflation factors equal to the estimated retirement dates. The liability is discounted using credit-adjusted risk-free rates of return for the respective retirement dates. Changes to future statements of financial position and results of operations will occur to the extent that actual results differ from the estimates and assumptions used, including changes in decommissioning costs, timing or changes in NPC's credit rating. SPPC has no significant asset retirement obligations. The Utilities have various transmission and distribution lines as well as substations that operate under various rights of way that contain end dates and restorative clauses. Management operates the transmission and distribution system as though they will be operated in perpetuity and will continue to be used or sold without land remediation. As a result, the Utilities have not recorded any costs associated with the removal of the transmission and distribution systems. STOCK COMPENSATION PLANS In December 2002, the FASB released SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," as an amendment to SFAS No. 123, "Accounting for Stock-Based Compensation." SPR has previously adopted the disclosure-only provisions of SFAS No. 123, and as of December 31, 2002 has adopted the updated disclosure requirements set forth in SFAS No. 148. Pursuant to those updated disclosure requirements, SPR has included the following discussion on the stock 49 compensation plans. For additional information on SPR's stock compensation plans, see Note 1, Summary of Significant Accounting Policies, and Note 15, Stock Compensation Plans, of Notes to Financial Statements in SPR's, NPC's, and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002. At June 30, 2003, SPR had several stock-based compensation plans. SPR applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for nonqualified stock options and the employee stock purchase plan. SPR has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock Based Compensation, and its related amendment(s). UNBILLED RECEIVABLES Revenues related to the sale of energy are recorded based on meter reads, which occur on a systematic basis throughout a month, rather than when the service is rendered or energy is delivered. At the end of each month, the energy delivered to the customers from the date of their last meter read to the end of the month is estimated and the corresponding unbilled revenues are calculated. These estimates of unbilled sales and revenues are based on the ratio of billable days versus unbilled days, amount of energy procured and generated during that month, historical customer class usage patterns and the Utilities' current tariffs. Customer accounts receivable as of June 30, 2003, include unbilled receivables of $89 million and $51 million for NPC and SPPC, respectively. Customer accounts receivable as of June 30, 2002, include unbilled receivables of $101 million and $43 million for NPC and SPPC, respectively. PROVISION FOR UNCOLLECTIBLE ACCOUNTS The Utilities reserve for doubtful accounts based on past experience writing off uncollectible customer accounts. The adequacy of these reserves will vary to the extent that future collections differ from past experience. FINANCIAL CONDITION AND MATERIAL CHANGES IN RESULTS OF OPERATIONS SIERRA PACIFIC RESOURCES The operating results of SPR primarily reflect those of NPC and SPPC, discussed later. During the three months ended June 30, 2003, SPR incurred a net loss of $172.4 million compared to a $40.9 million net loss for the same period during 2002. Operating results for the three months ended June 30, 2003, were negatively affected by the following items (before income taxes): - an unrealized loss of $123.5 million on the derivative instrument associated with the issuance of $300 million of convertible debt (see Critical Accounting Policies -- Accounting for Derivatives and Hedging Activities -- Debt Conversion Option above). This unrealized loss has no effect on cash flows; - the write-off of disallowed deferred energy costs (excluding carrying charges) of approximately $46 million and $45 million by NPC and SPPC, respectively; - losses by SPR subsidiaries due to the recognition of asset impairments and business disposals of $32.9 million and $8.9 million by SPC and e-three, respectively; and - higher interest costs at SPR, NPC and SPPC. SPR operating results during the same three-month period in 2002 were negatively affected by a write-off of $53.1 million of SPPC's disallowed deferred energy costs. During the first six months of 2003, SPR incurred a net loss of $188.0 million compared to a $345.4 million net loss for the same period during 2002. Similar to the items affecting the three-month 50 operating results, SPR operating results for the six months ended June 30, 2003, were negatively affected by the following items (before income taxes): - an unrealized loss of $107.6 million on the derivative instrument associated with the issuance of $300 million of convertible debt. This unrealized loss has no effect on cash flows; - the write-off of disallowed deferred energy costs (excluding carrying charges) of approximately $46 million and $45 million by NPC and SPPC, respectively; - losses by SPR subsidiaries due to the recognition of asset impairments and business disposals of $32.9 million and $8.9 million by SPC and e-three, respectively; and - higher interest costs at SPR, NPC and SPPC. SPR operating results for the same six-month period during 2002 were negatively affected by write-offs of $434.1 million and $53.1 million of disallowed deferred energy costs by NPC and SPPC, respectively. SPR did not pay or declare a common dividend in the first six months of 2003, nor did NPC and SPPC declare or pay common stock dividends to their parent, SPR, during the same period. SPPC paid $1.95 million in dividends to holders of its preferred stock during the first six months of 2003. LIQUIDITY AND CAPITAL RESOURCES (SPR CONSOLIDATED) SPR, on a stand-alone basis, had cash and cash equivalents of approximately $19.1 million at June 30, 2003. At July 31, 2003, SPR had cash balances of approximately $19.5 million. SPR's future liquidity and its ability to pay the principal of and interest on its indebtedness depend on SPPC's ability to continue to pay dividends to SPR, on NPC's financial stability and the restoration of its ability to pay dividends to SPR, and on SPR's ability to access the capital markets or otherwise refinance maturing and/or convertible debt. Further adverse developments at NPC or SPPC, including a material disallowance of deferred energy costs in future rate cases or an adverse decision in the pending lawsuit by Enron, could make it difficult for SPR to operate outside of bankruptcy. DIVIDENDS FROM SUBSIDIARIES Since SPR is a holding company, substantially all of its cash flow is provided by dividends paid to SPR by NPC and SPPC on their common stock, all of which is owned by SPR. Since NPC and SPPC are public utilities, they are subject to regulation by state utility commissions, which may impose limits on investment returns or otherwise impact the amount of dividends that the Utilities may declare and pay, and to federal statutory limitation on the payment of dividends. In addition, certain agreements entered into by the Utilities set restrictions on the amount of dividends they may declare and pay and restrict the circumstances under which such dividends may be declared and paid. The specific restrictions on dividends contained in agreements to which NPC and SPPC are party, as well as specific regulatory limitations on dividends, are summarized below. - NPC's first mortgage indenture limits the cumulative amount of dividends and other distributions that NPC may pay on its capital stock to the cumulative net earnings of NPC since 1953, subject to adjustments for the net proceeds of sales of capital stock since 1953. At the present time, this restriction precludes NPC from making further payments of dividends on NPC's common stock and will continue to bar dividends until NPC, over time, generates sufficient earnings to eliminate the deficit under this provision (which was approximately $279.3 million as of June 30, 2003), unless the restriction is earlier waived, amended, or removed by the consent of the first mortgage bondholders, or the first mortgage bonds are redeemed or defeased. Management is currently in the process of seeking consent for the modification of this restriction. There can be no assurance that any such consent can be obtained or that any non-consenting first mortgage bonds could be redeemed or defeased prior to their stated maturity. Under this provision, NPC continues to have 51 capacity to repurchase or redeem shares of its capital stock, although other restrictions set forth below would limit the amount of any such repurchases or redemptions. - NPC's 10 7/8% General and Refunding Mortgage Notes, Series E, due 2009, which were issued on October 29, 2002, limit the amount of payments in respect of common stock that NPC may pay to SPR. However, that limitation does not apply to payments by NPC to enable SPR to pay its reasonable fees and expenses (including, but not limited to, interest on SPR's indebtedness and payment obligations on account of SPR's Premium Income Equity Securities (PIES)) provided that: - those payments do not exceed $60 million for any one calendar year, - those payments comply with any regulatory restrictions then applicable to NPC, and - the ratio of consolidated cash flow to fixed charges for NPC's most recently ended four full fiscal quarters immediately preceding the date of payment is at least 1.75 to 1. The terms of the Series E Notes also permit NPC to make payments to SPR in an aggregate amount not to exceed $15 million from the date of the issuance of the Series E Notes. In addition, NPC may make payments to SPR in excess of the amounts described above so long as, at the time of payment and after giving effect to the payment: - there are no defaults or events of default with respect to the Series E Notes, - NPC has a ratio of consolidated cash flow to fixed charges for NPC's most recently ended four full fiscal quarters immediately preceding the payment date of at least 2.0 to 1, and - the total amount of such dividends is less than: - the sum of 50% of NPC's consolidated net income measured on a quarterly basis cumulative of all quarters from the date of issuance of the Series E Notes, plus - 100% of NPC's aggregate net cash proceeds from contributions to its common equity capital or the issuance or sale of certain equity or convertible debt securities of NPC, plus - the lesser of cash return of capital or the initial amount of certain restricted investments, plus - the fair market value of NPC's investment in certain subsidiaries. If NPC's Series E Notes are upgraded to investment grade by both Moody's Investors Service, Inc. (Moody's) and Standard & Poor's Rating Group, Inc. (S&P), these restrictions will be suspended and will no longer be in effect so long as the Series E Notes remain investment grade. - On October 29, 2002, NPC established an accounts receivables purchase facility, which expires on October 28, 2003. The agreements relating to the receivables purchase facility contain various covenants, including a limitation on payments in respect of common stock by NPC to SPR that is identical to the limitation contained in NPC's General and Refunding Mortgage Notes, Series E, described above. - NPC's $60 million Credit Agreement dated June 30, 2003, which expires no later than September 8, 2003, prohibits payments to SPR in respect of NPC's common stock. - The PUCN issued a Compliance Order, Docket No. 02-4037, on June 19, 2002, relating to NPC's request for authority to issue long-term debt. The PUCN order requires that, until such time as the order's authorization expires (December 31, 2003), NPC must either receive the prior approval of the PUCN or reach an equity ratio of 42% before paying any dividends to SPR. If NPC achieves a 42% equity ratio prior to December 31, 2003, the dividend restriction ceases to have effect. As of June 30, 2003, NPC's equity ratio was 35.3%. Prior to the expiration date of the Compliance Order, management may seek PUCN approval for a payment of dividends by NPC or may seek a waiver from the PUCN of the dividend restriction. 52 - The terms of NPC's preferred trust securities provide that no dividends may be paid on NPC's common stock if NPC has elected to defer payments on the junior subordinated debentures issued in conjunction with the preferred trust securities. At this time, NPC has not elected to defer payments on the junior subordinated debentures. - SPPC's Term Loan Agreement dated October 30, 2002, as amended, which expires October 31, 2005, limits the amount of payments that SPPC may pay to SPR. However, that limitation does not apply to payments by SPPC to enable SPR to pay its reasonable fees and expenses (including, but not limited to, interest on SPR's indebtedness and payment obligations on account of SPR's PIES) provided that those payments do not exceed $90 million, $80 million and $60 million in the aggregate for the twelve month periods ending on October 30, 2003, 2004 and 2005, respectively. The Term Loan Agreement also permits SPPC to make payments to SPR in an aggregate amount not to exceed $10 million during the term of the Term Loan Agreement. In addition, SPPC may make payments to SPR in excess of the amounts described above so long as, at the time of the payment and after giving effect to the payment, there are no defaults or events of default under the Term Loan Agreement, and such amounts, when aggregated with the amount of payments to SPR by SPPC since the date of execution of the Term Loan Agreement, do not exceed the sum of: - 50% of SPPC's Consolidated Net Income for the period commencing January 1, 2003 and ending with last day of fiscal quarter most recently completed prior to the date of the contemplated dividend payment, plus - the aggregate amount of cash received by SPPC from SPR as equity contributions on its common stock during such period. - On October 29, 2002, SPPC established an accounts receivables purchase facility, which expires on October 28, 2003. The agreements relating to the receivables purchase facility contain various covenants, including a limitation on the payment of dividends by SPPC to SPR that is identical to the limitation contained in SPPC's Term Loan Agreement, described above. - SPPC's Articles of Incorporation contain restrictions on the payment of dividends on SPPC's common stock in the event of a default in the payment of dividends on SPPC's preferred stock. SPPC's Articles also prohibit SPPC from declaring or paying any dividends on any shares of common stock (other than dividends payable in shares of common stock), or making any other distribution on any shares of common stock or any expenditures for the purchase, redemption or other retirement for a consideration of shares of common stock (other than in exchange for or from the proceeds of the sale of common stock) except from the net income of SPPC, and its predecessor, available for dividends on common stock accumulated subsequent to December 31, 1955, less preferred stock dividends, plus the sum of $500,000. At the present time, SPPC believes that these restrictions do not materially limit its ability to pay dividends and/or to purchase or redeem shares of its common stock. - The Utilities are subject to the provision of the Federal Power Act that states that dividends cannot be paid out of funds that are properly included in capital accounts. Although the meaning of this provision is unclear, it could be interpreted to impose an additional material limitation on a utility's ability to pay dividends in the absence of retained earnings. EFFECTS OF 2002 RATE CASE DECISIONS On March 29 and April 1, 2002, S&P and Moody's lowered the unsecured debt ratings of SPR, NPC and SPPC to below investment grade in response to the decision of the PUCN with respect to NPC's rate cases. On April 23 and 24, 2002, the unsecured debt ratings of SPR and the Utilities were further downgraded by both rating agencies, and the Utilities' secured debt ratings were downgraded to below investment grade. The downgrades affected SPR's, NPC's and SPPC's liquidity primarily in two principal areas: (1) their respective financing arrangements, and (2) NPC's and SPPC's contracts for fuel, for purchase and sale of electricity and for transportation of natural gas. 53 For more detailed discussion of these effects, please see SPR's, NPC's and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002. ACCOUNTS RECEIVABLE FACILITIES On October 29, 2002, NPC and SPPC established accounts receivable purchase facilities of up to $125 million and $75 million, respectively, which expire on October 28, 2003. Currently, NPC and SPPC intend to negotiate extensions of their respective receivables purchase facilities. If NPC and/or SPPC elect to activate their receivables purchase facilities, they will sell all of their accounts receivable generated from the sale of electricity and natural gas to customers to their newly created bankruptcy-remote special purpose subsidiaries. The receivables sales will be without recourse except for breaches of customary representations and warranties made at the time of sale. The subsidiaries will, in turn, sell these receivables to a bankruptcy-remote subsidiary of SPR. SPR's subsidiary will issue variable rate revolving notes backed by the purchased receivables. The agreements relating to the receivables purchase facilities contain various conditions to purchase, covenants and trigger events, and other provisions customary in receivables transactions. In addition to customary termination and mandatory repurchase events, each Utilities' receivables purchase facility may terminate in the event that the Utility or SPR defaults (i) on the payment of indebtedness, or (ii) on the payment of amounts due under a swap agreement, and such defaults aggregate to greater than $10 million and $5 million for the Utility and SPR, respectively. Under the terms of the agreements relating to the receivables purchase facility, each Utility's facility may not be activated or, if activated, will be terminated in the event of a material adverse change in the condition, operations or business prospects of the Utility. SPR has agreed to guaranty the performance by NPC and SPPC of certain obligations as sellers and servicers under the receivables purchase facilities. NPC and SPPC intend to use their accounts receivables purchase facilities as back-up liquidity facilities and do not plan to activate these facilities in the foreseeable future. CROSS DEFAULT PROVISIONS Certain financing agreements of SPR and the Utilities contain cross-default provisions that would result in an event of default under such financing agreements if there is a failure under other financing agreements of SPR and the Utilities to meet payment terms or to observe other covenants that would result in an acceleration of payments due. Most of these default provisions (other than ones relating to a failure to pay other indebtedness) provide for a cure period of 30-60 days from the occurrence of a specified event, during which time SPR or the Utilities may rectify or correct the situation before it becomes an event of default. The primary cross-default provisions in SPR's and the Utilities' various financing agreements are briefly summarized below: - The indenture pursuant to which SPR issued its 7.25% Convertible Notes due 2010 provides for an event of default if SPR or any of its significant subsidiaries (NPC and SPPC) fails to pay indebtedness in excess of $10 million or has any indebtedness of $10 million or more accelerated and declared due and payable; - NPC's General and Refunding Mortgage Indenture, under which NPC has $930 million of securities outstanding as of June 30, 2003, provides for an event of default if a matured event of default under NPC's First Mortgage Indenture occurs; - The terms of NPC's Series E Notes provide that a default with respect to the payment of principal, interest or premium beyond the applicable grace period under any mortgage, indenture or other security instrument, by NPC or any of its restricted subsidiaries, relating to debt in excess of $15 million, triggers a right of the holders of the Series E Notes to require NPC to redeem the Series E Notes at a price equal to 100% of the aggregate principal amount plus accrued and unpaid interest and liquidated damages, if any, upon notice given by at least 25% of the outstanding Series E Notes holders; 54 - NPC's receivables purchase facility may terminate in the event that either NPC or SPR defaults (i) in the payment of indebtedness, or (ii) in the payment of amounts due under hedge agreements, and such defaults aggregate to greater than $10 million and $5 million for NPC and SPR, respectively; - NPC's $60 million Credit Agreement provides for an event of default if (i) NPC or any of its subsidiaries default (a) in the payment of indebtedness, or (b) in the payment of amounts due under hedge agreements, and such defaults aggregate to greater than $20 million, or (ii) NPC's General and Refunding Mortgage Indenture ceases to be enforceable; - SPPC's General and Refunding Mortgage Indenture, under which SPPC has $499.5 million of securities outstanding as of June 30, 2003, provides for an event of default if a matured event of default under SPPC's First Mortgage Indenture occurs; - SPPC's Term Loan Agreement provides for an event of default if (a) SPPC or any of its subsidiaries default (i) in the payment of indebtedness, or (ii) in the payment of amounts due under hedge agreements, and such defaults aggregate to greater than $10 million, or (b) SPPC's General and Refunding Mortgage Indenture ceases to be enforceable; and - SPPC's receivables purchase facility may terminate in the event that either SPPC or SPR defaults (i) in the payment of indebtedness, or (ii) in the payment of amounts due under hedge agreements, and such defaults aggregate to greater than $10 million and $5 million for SPPC and SPR, respectively. FINANCING TRANSACTIONS In January 2003, SPR acquired $8.75 million aggregate principal amount of its Floating Rate Notes due April 20, 2003 in exchange for approximately 1.3 million shares of its common stock, in two privately-negotiated transactions exempt from the registration requirements of the Securities Act of 1933. On February 5, 2003, SPR issued approximately 13.66 million shares of common stock in exchange for a total of 2.1 million of its PIES in five privately-negotiated transactions exempt from the registration requirements of the Securities Act of 1933. On February 14, 2003, SPR issued and sold $300 million of its 7.25% Convertible Notes due 2010. Approximately $53.4 million of the net proceeds from the sale of the notes were used to purchase U.S. government securities that were pledged to the trustee for the first five interest payments on the notes payable during the first two and one-half years. A portion of the remaining net proceeds of the notes were used to repurchase approximately $58.5 million of SPR's Floating Rate Notes due April 20, 2003. Of the remaining net proceeds, approximately $133 million were used to repay SPR's Floating Rate Notes due April 20, 2003, and the remaining proceeds are available for general corporate purposes. The Convertible Notes were issued with registration rights. The Convertible Notes will not be convertible prior to August 14, 2003. At any time on or after August 14, 2003 through the close of business February 14, 2010, holders of the Convertible Notes may convert their notes into shares of SPR's common stock. Until SPR has obtained shareholder approval to permit the Convertible Notes to be fully convertible into shares of common stock, holders of the Convertible Notes will be entitled to receive 76.7073 shares of common stock and an amount of cash equal to the market value of 142.4564 shares of common stock at the time of conversion, based on the average closing price of SPR's common stock over five consecutive trading days, for each $1,000 principal amount of notes surrendered for conversion. At an assumed five-day average closing price of $5.00 per share (based on the last reported sale price of SPR's common stock on August 1, 2003), the total amount of the cash payable on conversion of the Convertible Notes would be approximately $214 million. If SPR does not obtain shareholder approval, SPR will be required to pay the cash portion of any Convertible Notes as to which the holders request conversion on or after August 14, 2003. The amount of cash payable on conversion of the Convertible Notes will increase as the average closing price of SPR's common stock increases. Although management does not believe it is likely that a significant amount of the Convertible 55 Notes will be converted in the foreseeable future, in the event that SPR does not have available funds to pay the cash portion of the Convertible Notes upon the requested conversion, SPR may have to issue additional debt or equity to raise the necessary funds. There can be no assurance that SPR will be able to access the capital markets to issue such additional debt and/or equity or that it will be able to do so on terms favorable to SPR. If SPR does obtain shareholder approval, it may elect to satisfy the cash payment component of the conversion price of the Convertible Notes solely with shares of common stock. SPR has agreed to use reasonable efforts to obtain shareholder approval, not later than 180 days after the date of issuance of the Convertible Notes, to issue and deliver shares of SPR's common stock in lieu of the cash payment component of the conversion price of the Convertible Notes. SPR has called a special shareholder meeting for August 11, 2003 to comply with the terms of the Convertible Notes. For further information regarding the terms of the Convertible Notes, see Note 4, Long-Term Debt. The indenture under which the Convertible Notes were issued does not contain any financial covenants or any restrictions on the payment of dividends, the repurchase of SPR's securities or the incurrence of indebtedness. The indenture does allow the holders of the Convertible Notes to require SPR to repurchase all or a portion of the holders' Convertible Notes upon a change of control. The indenture also provides for an event of default if SPR or any of its significant subsidiaries, including NPC and SPPC, fails to pay any indebtedness in excess of $10 million or has any indebtedness of $10 million or more accelerated and declared due and payable. EFFECT OF HOLDING COMPANY STRUCTURE Currently, SPR (on a stand-alone basis) has a substantial amount of outstanding debt and other obligations including, but not limited to: $300 million of its unsecured 8 3/4% Senior Notes due 2005; $240 million of its unsecured 7.93% Senior Notes due 2007; and $300 million of its 7.25% Convertible Notes due 2010. Due to the holding company structure, SPR's right as a common shareholder to receive assets of any of its direct or indirect subsidiaries upon a subsidiary's liquidation or reorganization is junior to the claims against the assets of such subsidiary by its creditors and preferred stockholders. Therefore, SPR's debt obligations are effectively subordinated to all existing and future claims of its subsidiaries' creditors, particularly those of NPC and SPPC, including trade creditors, debt holders, secured creditors, taxing authorities, guarantee holders, NPC's preferred trust security holders and SPPC's preferred stockholders. As of June 30, 2003, NPC, SPPC and their subsidiaries had approximately $2.89 billion of debt and other obligations outstanding and approximately $238.9 million of outstanding preferred securities. Although the Utilities are parties to agreements that limit the amount of additional indebtedness they may incur, the Utilities retain the ability to incur substantial additional indebtedness and other liabilities. NEVADA POWER COMPANY During the three and six months ended June 30, 2003, NPC incurred net losses of $22.2 million and $37.4 million, respectively, and did not pay or declare a common stock dividend to its parent, SPR. Operating results during both periods were negatively affected by the write-off of $46 million in May 2003 56 of disallowed deferred energy costs, described below. The causes for significant changes in specific lines comprising the results of operations for NPC are as follows: ELECTRIC OPERATING REVENUE
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------------- ---------------------------------- CHANGE FROM CHANGE FROM 2003 2002 PRIOR YEAR % 2003 2002 PRIOR YEAR % -------- -------- ------------ -------- -------- ------------ ELECTRIC OPERATING REVENUES ($000) Residential.............. $167,223 $166,825 0.2% $288,929 $297,931 (3.0)% Commercial............... 86,306 90,367 (4.5)% 161,222 160,058 0.7% Industrial............... 128,188 135,402 (5.3)% 220,576 224,162 (1.6)% -------- -------- -------- -------- Retail revenues.......... 381,717 392,594 (2.8)% 670,727 682,151 (1.7)% Other.................... 43,795 84,465 (48.2)% 86,437 151,180 (42.8)% -------- -------- -------- -------- TOTAL REVENUES........ $425,512 $477,059 (10.8)% $757,164 $833,331 (9.1)% ======== ======== ======== ======== Retail sales in thousands of megawatt-hours (MWH)................. 4,488 4,315 4.0% 7,888 7,885 0.0% Average retail revenue per MWH............... $ 85.05 $ 90.98 (6.5)% $ 85.03 $ 86.51 (1.7)%
NPC retail electric revenues for the three and six months ended June 30, 2003, were slightly lower than the same periods in 2002 primarily due to lower average retail rates in 2003. The lower rates in 2003 were due to a rate decrease effective May 19, 2003, which was the result of NPC's Deferred Energy Case (see Regulatory Matters -- Nevada Power Company 2002 Deferred Energy Case, later) and higher revenues recognized in June 2002 from a one-time rate increase of $.01 per kilowatt-hour, which allowed NPC to accelerate the recovery of its deferred energy balance. This decrease in revenues was partially offset by an increase in revenues due to an increase in the number of residential, commercial and industrial customers of 7.9%, 8.6% and 10.3%, respectively. NPC's Electric Operating Revenues - Other decreased for the three and six months ended June 30, 2003, compared to the same periods in 2002, due to a decrease in the volumes of wholesale electric power sold to other utilities. See NPC's Annual Report on Form 10-K for the year ended December 31, 2002, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation -- Energy Supply, for a discussion of NPC's purchased power procurement strategies. PURCHASED POWER
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------------- ---------------------------------- CHANGE FROM CHANGE FROM 2003 2002 PRIOR YEAR % 2003 2002 PRIOR YEAR % -------- -------- ------------ -------- -------- ------------ PURCHASED POWER ($000)..... $199,772 $485,926 (58.9)% $319,029 $661,992 (51.8)% Purchased Power in thousands of MWHs........ 3,258 3,594 (9.3)% 5,529 5,782 (4.4)% Average cost per MWH of Purchased Power (1)...... $ 61.32 $ 71.49 (14.2)% $ 57.70 $ 74.89 (23.0)%
- --------------- (1) 2002 average costs do not include contract termination costs, discussed below Purchased power costs were lower for the three months and six months ended June 30, 2003, than the same period in the prior year primarily as a result of a $229 million provision recorded in the second quarter of 2002 for terminated purchased power contracts. See Part II, Item I -- Legal Proceedings in this 57 report and SPR's, NPC's and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2003 for a discussion of the terminated purchased power contracts. Additionally, the decrease resulted from lower volumes purchased and a decrease in the price of Short-Term Firm energy purchases. Finally, purchases associated with risk management activities, which are included in Short-Term Firm energy, decreased in 2003. Risk management activities include transactions entered into to minimize purchased power costs. See SPR's, NPC's and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation -- Energy Supply, for a discussion of NPC's purchased power procurement. FUEL FOR POWER GENERATION
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------ -------------------------------- CHANGE CHANGE FROM PRIOR FROM PRIOR 2003 2002 YEAR % 2003 2002 YEAR % ------- ------- ---------- -------- -------- ---------- Fuel for Power Generation ($000)........................ $73,267 $73,474 (0.3)% $119,804 $157,196 (23.8)% Thousands of MWHs generated..... 2,044 2,415 (15.4)% 3,919 4,656 (15.8)% Average cost per MWH of Generated Power............... $ 35.84 $ 30.42 17.8% $ 30.57 $ 33.76 (9.4)%
Fuel for generation costs for the three months ended June 30, 2003 were comparable with the same period in 2002 as decreases in the volumes generated were substantially offset by increases in the price of coal and gas during the second quarter of 2003. Fuel for generation costs for the six months ended June 30, 2003, were lower than the prior year due to a decrease in volumes generated and lower fuel prices during 2003. Also, during the second quarter of 2003, Reid Gardner generating units were down for scheduled maintenance, and Clark Stations and Sunrise generating units were not utilized at all times because it was more economical to purchase power than generate. DEFERRED ENERGY COSTS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, -------------------------------- -------------------------------- CHANGE CHANGE FROM PRIOR FROM PRIOR 2003 2002 YEAR % 2003 2002 YEAR % ------- --------- ---------- ------- --------- ---------- Deferred energy costs disallowed ($000)........... 45,964 -- N/A 45,964 434,123 (89.4)% Deferred energy costs -- net ($000)...................... $11,442 $(185,199) N/A $84,227 $(194,835) N/A
Deferred energy costs disallowed for the three and six months ended June 30, 2003, reflects the PUCN disallowance of approximately $46 million in May 2003, of deferred energy costs incurred during the twelve months ended November 2002. Deferred energy costs disallowed for the six months ended June 30, 2002, reflects the write-off of $434 million of deferred energy costs incurred during the seven months ended September 30, 2001, that were disallowed by the PUCN in NPC's 2001 deferred energy rate case. Deferred energy costs -- net increased for the three and six months ended June 30, 2003, as a result of the amortization of prior deferred costs, pursuant to the PUCN decisions in NPC's 2001 and 2002 deferred energy rate cases that both resulted in increased rates. The increase for the six months ended June 30, 2003, also reflects deferrals, to the extent fuel and purchased power costs recovered through current rates exceeded actual fuel and purchased power costs. However, during the three months ended June 30, 2003, the increase due to amortization of prior costs was partially offset by deferrals due to fuel and purchase power costs exceeding the recovery of those costs through current rates. Deferred energy costs -- net for the three and six months ended June 30, 2002, reflect the deferral in the second quarter of 2002 of approximately $229 million for contract termination costs and additional deferrals of electric energy costs, both partially offset by the amortization of prior deferred energy costs resulting from an increase in rates in April 2002. 58 ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------- ------------------------------ CHANGE FROM CHANGE FROM 2003 2002 PRIOR YEAR % 2003 2002 PRIOR YEAR % ------ ---- ------------ ------ ------ ------------ Allowance for other funds used during construction ($000)........ $ 483 $ 80 503.8% $1,641 $ 501 227.5% Allowance for borrowed funds used during construction ($000)........ $ 520 $849 (38.8)% $1,576 $1,961 (19.6)% ------ ---- ------ ------ $1,003 $929 8.0% $3,217 $2,462 30.7% ====== ==== ====== ======
NPC's total allowance for funds used during construction was higher for the three-month and six-month periods ended June 30, 2003 than the comparable periods in 2002, as a result of an increase in construction work in progress including capital expenditures for the Centennial Project and an increase in the AFUDC equity rate. This increase was offset in part by a decrease in the AFUDC debt rate. OTHER (INCOME) AND EXPENSES
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------------- ----------------------------------- CHANGE FROM CHANGE FROM ($000) 2003 2002 PRIOR YEAR % 2003 2002 PRIOR YEAR % - ------ -------- ------- ------------ -------- --------- ------------ Other operating expense.... $ 51,675 $37,284 38.6% $ 92,215 $ 77,270 19.3% Maintenance expense........ $ 15,650 $11,876 31.8% $ 29,187 $ 23,526 24.1% Depreciation and amortization............. $ 26,714 $17,140 55.9% $ 52,621 $ 47,949 9.7% Income taxes............... $(16,274) $ (57) 28450.9% $(26,822) $(156,480) (82.9)% Taxes other than income taxes.................... $ 6,818 $ 6,453 5.7% $ 13,042 $ 13,187 (1.1)% Interest charges on long-term debt........... $ 28,927 $22,876 26.5% $ 59,029 $ 46,954 25.7% Interest charges -- other......... $ 5,914 $ 4,352 35.9% $ 11,994 $ 6,882 74.3% Interest accrued on deferred energy.......... $ (5,234) $(8,056) (35.0)% $(10,944) $ 3,095 (453.6)% Other income............... $ (4,018) $(1,195) 236.2% $ (7,356) $ (1,341) 448.5% Other expense.............. $ 1,618 $ 564 186.9% $ 3,050 $ 6,561 (53.5)% Income taxes -- other income and expense....... $ 2,679 $ 3,102 (13.6)% $ 5,193 $ (2,543) N/A
Other operating expense for the three and six month periods ending June 30, 2003, was greater than the same periods during the prior year, due primarily to increased reserves for uncollectible accounts, costs associated with increased billing and collection efforts, higher operating costs at the Navajo and Mohave generating facilities and the reversal of $2.7 million in costs for NPC's short-term incentive plan in June 2002. Maintenance costs for the three- and six-month periods ending June 30, 2003, were higher than the same periods last year due to the timing of scheduled plant maintenance. Depreciation and amortization was higher for the three-month period ended June 30, 2003, compared to the same period in 2002 as a result of both an adjustment that reduced depreciation in May 2002 and depreciation on software placed in service in 2003. Depreciation and amortization was higher for the six- month period ended June 30, 2003 compared to the same period in 2002 as a result of an increase in depreciable assets, including the Centennial Project, and the addition of new software in 2003. NPC's income tax benefit for the three months ended June 30, 2003, increased compared to the same period in 2002, due to a corresponding increase in second quarter 2003 pre-tax losses. Pre-taxes losses 59 increased in the second quarter of 2003 over the same period in 2002 significantly as a result of higher operating, maintenance, depreciation and interest expense. NPC's income tax benefit for the six months ended June 30, 2003 decreased compared to the same period in 2002 due to a corresponding decrease in 2003 pre-tax losses. Pre-tax losses in 2003 decreased largely as a result of the write-off of disallowed deferred energy costs recognized in 2002. The decrease in 2003 pre-tax losses was partially offset by the recognition of lower revenues and higher operating, maintenance, depreciation and interest expense. NPC's taxes other than income taxes for the three and six months ended June 30, 2003 were comparable to amounts the same periods during 2002. Interest charges on long-term debt for the three and six-month periods ending June 30, 2003, increased over the same period in 2002 due primarily to the issuance in October 2002 of $250 million additional debt at an interest rate of 10.875%. The redemption, in October 2002, of $15 million of debt slightly offset the increase in interest during 2003 over 2002. Interest charges -- other for the three and six-month periods ending June 30, 2003, increased over the prior year due to interest on delayed/terminated contracts, charges related to fees associated with NPC's credit facilities and receivables conduit and to the amortization of increased debt discount charges related to the issuance in October 2002 of $250 million of additional debt. Interest accrued on deferred energy costs decreased during the three months ended June 30, 2003, compared to the same period in 2002, following lower deferred fuel and purchased power balances during 2003. For the six months ended June 30, 2003, the increase over the same period in 2002 compared favorably due to the first quarter 2002 write-off of approximately $20.1 million of carrying charges, net of taxes, on deferred energy costs that were disallowed by the PUCN in its March 29, 2002 decision on NPC's deferred energy rate case. The 2002 write-off was partially offset by the recording of carrying charges on deferred energy costs incurred. Other income for the three months ended June 30, 2003, increased over the same period in 2002 due, primarily, to an increase in gains from the disposition of non-utility property during 2003 and income generated as a result of the relocation of electricity lines for Clark County. Additionally, Other Income increased for the six months ended June 30, 2003, compared to the same period in 2002, due to the recognition of income from the disposition of SO2 allowances in 2003, an increase in gains from the disposition of non-utility property in 2003 and the recognition of carrying charges related to divestiture costs, ordered by the PUCN. Other expense increased during the three months ended June 30, 2003, compared to the same period in 2002 as a result of increased expenditures related to low-income energy assistance programs, lobbying and ballot initiative charges, and charges related to depreciation on non-utility property. Other expense decreased during the six months ended June 30, 2003, compared to the same period in 2002 due, primarily to the 2002 write-off of $5.0 million relating to the disposition of SO2 allowances as ordered by the PUCN. The decrease in expense relating to the SO2 allowances was offset partially by increases in charges related to low-income energy assistance programs, lobbying and ballot initiative charges, and depreciation on non-utility property. NPC's income taxes -- other income and expense for the three months ended June 30, 2003, decreased compared to the same period in 2002, due to a corresponding decrease in second quarter pre-tax losses on other income. NPC's income taxes -- other income and expense changed from a tax benefit for the six months ended June 30, 2002, to a tax expense for the same period in 2003. This change was primarily a result of the write-off of disallowed interest charges on deferred energy costs in 2002. 60 ANALYSIS OF CASH FLOWS NPC's cash flows were less during the six-months ended June 30, 2003, compared to the same period in 2002, resulting primarily from decreases in cash flows from operating and financing activities. The decrease in cash from operating activities was substantially as a result of the prepayment of fuel and power purchases during 2003 and the receipt of an income tax refund in 2002 both, partially offset, by the collection in 2003 of previously deferred energy costs as a result of a rate increase that began April 1, 2002. The decrease operating cash flow was partially offset by the collection of previously deferred energy costs due to the PUCN decision in NPC's 2001 deferred energy rate case, that resulted in increased rates beginning April 1, 2002. Cash flows from financing activities were lower in 2003 because of cash provided by short-term borrowings during 2002. NPC also utilized additional cash for financing activities in 2003 for the Centennial Plan and other construction projects. LIQUIDITY AND CAPITAL RESOURCES NPC had cash and cash equivalents of approximately $21.1 million at June 30, 2003. At July 31, 2003, NPC had cash balances of approximately $35.7 million. Due to NPC's weakened financial condition and, in certain instances, the weakened financial condition of NPC's power suppliers, NPC has been required to pre-pay its power purchases or make more frequent payments on its power deliveries. As a result of unseasonably cool weather during the spring of 2003 and its prepayment and more frequent payment obligations for its summer 2003 power requirements, NPC's liquidity was significantly constrained during the early summer months of 2003. If NPC does not have sufficient liquidity to meet its power requirements, particularly at the onset of future summer seasons, NPC may be required to issue or incur additional indebtedness. If NPC is unable to issue or incur such indebtedness, whether due to lack of access to the capital markets, lack of regulatory authority to issue or incur such debt, or restrictive covenants in certain of its financing agreements (see below), its ability to provide power and its financial condition will be adversely affected. NPC's liquidity would be significantly affected by an adverse decision in the lawsuit by Enron, or by unfavorable rulings by the PUCN in future NPC rate cases. S&P and Moody's have NPC's credit ratings on "negative outlook" and "stable," respectively. Future downgrades by either S&P or Moody's could preclude or reduce NPC's access to the capital markets, and could adversely affect NPC's ability to continue to purchase power and fuel. Adverse developments with respect to any one or a combination of the foregoing could have a material adverse effect on NPC's financial condition and liquidity, and could make it difficult for NPC to continue to operate outside of bankruptcy. EFFECT OF 2002 RATE CASE DECISIONS On March 29 and April 1, 2002, following the decision by the PUCN in NPC's deferred energy rate case, S&P and Moody's lowered NPC's unsecured debt ratings to below investment grade. On April 23 and 24, 2002, NPC's unsecured debt ratings were further downgraded and its secured debt ratings were downgraded to below investment grade. As a result of these downgrades, NPC's ability to access the capital markets to raise funds was severely limited. Since SPR's credit ratings were similarly downgraded, SPR's ability to make capital contributions to NPC also became severely limited. For more detailed discussion of these effects, please see SPR's, NPC's and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002. CREDIT FACILITY On June 30, 2003, NPC entered into a $60 million revolving Credit Agreement to provide additional liquidity to NPC for its summer 2003 power purchases. As of July 31, 2003, NPC had borrowed $20 million under the credit facility. NPC's Credit Agreement prohibits payments to SPR in respect of NPC's common stock and provides that NPC's ratio of consolidated total debt to consolidated total capitalization may not exceed .65 to 1.00. 61 The Credit Facility, which is secured by NPC's $60 million Series F General and Refunding Mortgage Bond, will expire no later than September 8, 2003. ACCOUNTS RECEIVABLE FACILITY On October 29, 2002, NPC established an accounts receivable purchase facility of up to $125 million. The receivables purchase facility expires on October 28, 2003. Currently, NPC intends to negotiate an extension of this facility. If NPC elects to activate the receivables purchase facility, NPC will sell all of its accounts receivable generated from the sale of electricity to customers to its newly created bankruptcy remote special purpose subsidiary. The receivables sales will be without recourse except for breaches of customary representations and warranties made at the time of sale. The subsidiary will, in turn, sell these receivables to a bankruptcy-remote subsidiary of SPR. SPR's subsidiary will issue variable rate revolving notes backed by the purchased receivables. The agreements relating to the receivables purchase facility contain various conditions to purchase, covenants and trigger events, and other provisions customary in receivables transactions. In addition to customary termination and mandatory repurchase events, the receivables purchase facility may terminate in the event that either NPC or SPR defaults (i) in the payment of indebtedness, or (ii) in the payment of amounts due under a swap agreement, and such defaults aggregate to greater than $10 million and $5 million for NPC and SPR, respectively. Under the terms of the agreements relating to the receivables purchase facility, NPC's facility may not be activated or, if activated, will be terminated in the event of a material adverse change in the condition, operations or business prospects of NPC. In addition, the agreements contain a limitation on the payment of dividends by NPC to SPR that is identical to the limitation contained in NPC's General and Refunding Mortgage Notes, Series E, described below. SPR has agreed to guaranty NPC's performance of certain obligations as a seller and servicer under the receivables purchase facility. NPC has agreed to issue $125 million principal amount of its General and Refunding Mortgage Bonds upon activation of the receivables purchase facility. The full principal amount of the bond would secure certain of NPC's obligations as seller and servicer, plus certain interest, fees and expenses thereon to the extent not paid when due, regardless of the actual amounts owing with respect to the secured obligations. As a result, in the event of an NPC bankruptcy or liquidation, the holder of the bond securing the receivables purchase facility may recover more on a pro rata basis than the holders of other General and Refunding Mortgage securities, who could recover less on a pro rata basis than they otherwise would recover. However, in no event will the holder of the bond recover more than the amount of obligations secured by the bond. NPC intends to use the accounts receivable purchase facility as a back-up liquidity facility and does not plan to activate this facility in the foreseeable future. NPC may activate the facility within five days upon the delivery of certain customary funding documentation and the delivery of the $125 million General and Refunding Mortgage Bond. MORTGAGE INDENTURES NPC's first mortgage indenture creates a first priority lien on substantially all of NPC's properties. As of June 30, 2003, $372.5 million of NPC's first mortgage bonds were outstanding. NPC agreed in connection with its Series E Notes that it would not issue any more first mortgage bonds. NPC's General and Refunding Mortgage Indenture creates a lien on substantially all of NPC's properties in Nevada that is junior to the lien of the first mortgage indenture. As of June 30, 2003, $930 million of NPC's General and Refunding Mortgage securities were outstanding. Additional securities may be issued under the General and Refunding Mortgage Indenture on the basis of (i) 70% of net utility property additions, (ii) the principal amount of retired General and Refunding Mortgage Bonds, and/or (iii) the principal amount of first mortgage bonds retired after October 19, 2001. On the basis of (i), (ii) and (iii) above, as of June 30, 2003, NPC had the capacity to issue approximately $1.017 billion of additional General and Refunding Mortgage securities. Although NPC has substantial capacity to issue 62 additional General and Refunding securities on the basis of property additions and retired securities, the financial covenants contained in the Series E Notes, Receivables Purchase Facility Agreements and NPC's $60 million Credit Agreement limit the amount of additional indebtedness that NPC may issue and the reasons for which such indebtedness may be issued. NPC has reserved $125 million of General and Refunding Mortgage bonds for issuance upon the initial funding of NPC's receivables facility. NPC also has the ability to release property from the liens of the two mortgage indentures on the basis of net property additions, cash and/or retired bonds. To the extent NPC releases property from the lien of its General and Refunding Mortgage Indenture, it will reduce the amount of bonds issuable under that indenture. CROSS DEFAULT PROVISIONS Certain financing agreements of NPC contain cross-default provisions that would result in an event of default under such financing agreements if there is a failure under other financing agreements of NPC and SPR to meet payment terms or to observe other covenants that would result in an acceleration of payments due. Most of these default provisions (other than ones relating to a failure to pay other indebtedness) provide for a cure period of 30-60 days from the occurrence of a specified event during which time, NPC or SPR may rectify or correct the situation before it becomes an event of default. The primary cross-default provisions in NPC's various financing agreements are briefly summarized below: - NPC's General and Refunding Mortgage Indenture, under which NPC has $930 million of securities outstanding as of June 30, 2003, provides for an event of default if a matured event of default under NPC's First Mortgage Indenture occurs; - The terms of NPC's Series E Notes provide that a default with respect to the payment of principal, interest or premium beyond the applicable grace period under any mortgage, indenture or other security instrument, by NPC or any of its restricted subsidiaries, relating to debt in excess of $15 million, triggers a right of the holders of the Series E Notes to require NPC to redeem the Series E Notes at a price equal to 100% of the aggregate principal amount plus accrued and unpaid interest and liquidated damages, if any, upon notice given by at least 25% of the outstanding Series E Notes holders; - NPC's receivables purchase facility may terminate in the event that either NPC or SPR defaults (i) in the payment of indebtedness, or (ii) in the payment of amounts due under hedge agreements, and such defaults aggregate to greater than $10 million and $5 million for NPC and SPR, respectively; and - NPC's $60 million Credit Agreement provides for an event of default if (i) NPC or any of its subsidiaries default (a) in the payment of indebtedness, or (b) in the payment of amounts due under hedge agreements, and such defaults aggregate to greater than $20 million, or (ii) NPC's General and Refunding Mortgage Indenture ceases to be enforceable. LIMITATIONS ON INDEBTEDNESS The terms of NPC's Series E Notes, which mature in 2009, restrict NPC from incurring any additional indebtedness unless (i) at the time the debt is incurred, the ratio of consolidated cash flow to fixed charges for NPC's most recently ended four quarter period on a pro forma basis is at least 2 to 1, or (ii) the debt incurred is specifically permitted, which includes limited amounts of debt with respect to certain credit facility or letter of credit indebtedness, obligations incurred to finance property construction or improvement, indebtedness incurred to refinance existing indebtedness (including, but not limited to, NPC's $210 million unsecured 6% Notes due September 15, 2003 and $140 million General and Refunding Mortgage Notes, Floating Rate, due October 15, 2003), certain intercompany indebtedness, hedging obligations, indebtedness incurred to support bid, performance or surety bonds, and certain letters of credit issued to support NPC's obligations with respect to energy suppliers. At June 30, 2003, NPC met the fixed charge ratio test set forth in (i) above. If NPC's Series E Notes are upgraded to investment 63 grade by both Moody's and S&P, certain restrictions on indebtedness applicable to the Series E Notes will be suspended and will no longer be in effect so long as the Series E Notes remain investment grade. The terms of NPC's $60 million Credit Facility, which expires no later than September 8, 2003, restrict NPC from issuing additional indebtedness unless the debt issued is specifically permitted, which includes limited amounts of debt with respect to certain letter of credit indebtedness, indebtedness incurred to refinance existing indebtedness (including NPC's $210 million unsecured 6% Notes due September 15, 2003 and $140 million General and Refunding Mortgage Notes, Floating Rate, due October 15, 2003), certain intercompany indebtedness and certain letters of credit issued to support NPC's obligations with respect to energy suppliers. If NPC is unable to access the capital markets to issue additional indebtedness to support its operations, including the purchase of fuel and power, and to refinance its existing indebtedness, whether due to lack of access to the capital markets, lack of regulatory authority, or restrictive covenants in its financing agreements, its ability to provide power and its financial condition will be adversely affected. In addition, if NPC's proposed 2003 Resource Plan is approved by the PUCN, NPC may need to expend up to approximately $500 million prior to the summer of 2007 for the construction and/or acquisition of generation facilities. If NPC is unable to provide this amount with internally generated funds, it may need to access the capital markets to do so. There can be no assurances that NPC could access the capital markets to issue additional indebtedness to finance the construction and/or acquisition of generation facilities or that NPC will have capacity under the debt covenants of its financing agreements to issue such additional indebtedness. SIERRA PACIFIC POWER COMPANY During the three months and six months ended June 30, 2003, SPPC incurred net losses of $28.9 million and $25.9 million, respectively. Operating results during both periods were negatively affected by a write-off of $45 million in June 2003 of disallowed deferred energy costs (see later discussion). During the same period, SPPC paid $1.95 million in dividends to holders of its preferred stock, but did not declare nor pay dividends on its common stock, all of which is held by its parent, SPR. The components of SPPC's gross margin are set forth below (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------------- ---------------------------------- CHANGE FROM CHANGE FROM 2003 2002 PRIOR YEAR % 2003 2002 PRIOR YEAR % -------- -------- ------------ -------- -------- ------------ Operating Revenues: Electric................. $205,026 $197,085 4.0% $410,480 $421,838 (2.7)% Gas...................... 35,873 25,583 40.2% 100,490 80,666 24.6% -------- -------- -------- -------- Total Revenues........ $240,899 $222,668 8.2% $510,970 $502,504 1.7% ======== ======== ======== ======== Energy Costs: Electric................. $175,474 $190,234 (7.8)% $307,730 $338,097 (9.0)% Gas...................... 28,885 15,283 89.0% 82,022 62,069 32.1% -------- -------- -------- -------- Total Energy Costs.... 204,359 205,517 (0.6)% 389,752 400,166 (2.6)% ======== ======== ======== ======== Gross Margin by Segment: Electric................. $ 29,552 $ 6,851 331.4% $102,750 $ 83,741 22.7% Gas...................... 6,988 10,300 (32.2)% 18,468 18,597 (0.7)% -------- -------- -------- -------- Total................. $ 36,540 $ 17,151 113.0% $121,218 $102,338 18.4% ======== ======== ======== ========
64 The causes for significant changes in specific lines comprising the results of operations for SPPC are as follows: ELECTRIC OPERATING REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------------- ---------------------------------- CHANGE FROM CHANGE FROM 2003 2002 PRIOR YEAR % 2003 2002 PRIOR YEAR % -------- -------- ------------ -------- -------- ------------ ELECTRIC OPERATING REVENUES ($000) Residential.............. $ 52,391 $ 45,050 16.3% $112,260 $105,453 6.5% Commercial............... 68,737 58,639 17.2% 131,865 121,355 8.7% Industrial............... 68,750 59,994 14.6% 134,928 123,126 9.6% -------- -------- -------- -------- Retail revenues.......... 189,878 163,683 16.0% 379,053 349,934 8.3% Other.................... 15,148 33,402 (54.6)% 31,427 71,904 (56.3)% -------- -------- -------- -------- TOTAL REVENUES........ $205,026 $197,085 4.0% $410,480 $421,838 (2.7)% ======== ======== ======== ======== Retail sales in thousands of MWH................ 2,166 2,144 1.0% 4,300 4,280 0.5% Average retail revenue per MWH............... $ 87.66 $ 76.34 14.8% $ 88.15 $ 81.76 7.8%
SPPC's retail electric revenues for the three- and six-month periods ended June 30, 2003, were higher than the same periods in the prior year. This increase was primarily due to a rate increase effective June 1, 2002. Other electric operating revenues decreased for the three- and six-month periods ended June 30, 2003, compared to the same periods in 2002 due to a decrease in wholesale sales to other utilities. See SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, Energy Supply, for a discussion of SPPC's purchased power procurement strategies. GAS OPERATING REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------- --------------------------------- CHANGE FROM CHANGE FROM 2003 2002 PRIOR YEAR % 2003 2002 PRIOR YEAR % ------- ------- ------------ -------- ------- ------------ GAS OPERATING REVENUES ($000) Residential................. $14,280 $13,636 4.7% $ 42,905 $43,108 (0.5)% Commercial.................. 7,451 5,081 46.6% 21,725 22,085 (1.6)% Industrial.................. 3,192 3,896 (18.1)% 8,032 11,560 (30.5)% ------- ------- -------- ------- Retail revenue.............. 24,923 22,613 10.2% 72,662 76,753 (5.3)% Wholesale revenue........... 10,217 1,958 421.8% 26,593 2,505 961.6% Miscellaneous............... 733 1,012 (27.6)% 1,235 1,408 (12.3)% ------- ------- -------- ------- TOTAL REVENUES.............. $35,873 $25,583 40.2% $100,490 $80,666 24.6% ======= ======= ======== ======= Retail sales in thousands of decatherms............... 2,531 2,233 13.3% 7,561 8,239 (8.2)% Average retail revenues per decatherm................ $ 9.85 $ 10.13 (2.8)% $ 9.61 $ 9.32 3.1%
65 Residential gas revenues for the three-months and six-months ended June 30, 2003 were slightly higher and approximately the same, respectively, when compared to the same periods in 2002, due to cooler than normal weather in April 2003 than in April 2002. Revenues during both the three- and six-months ended June 30, 2003, were also affected by a rate decrease effective December 26, 2002, which was the result of the outcome of the Company's purchased gas adjustment clause case. Commercial gas revenues for the three-months ended June 30, 2003, were higher than the same period in 2002 because the 2002 revenues reflect a timing difference associated with the revenues billed in the first quarter of 2002. Industrial revenues for both the three and six-months ended June 30, 2003, were lower than the same periods in 2002 because some of SPPC's industrial customers switched to SPPC's gas transportation tariff which gave those customers the ability to procure their gas commodity from a source other than SPPC. Wholesale revenues for both periods in 2003 were higher than the same periods in 2002 primarily due to the utilization of idle gas transportation capacity to move gas from Canada to California for resale. PURCHASED POWER
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------------- ---------------------------------- CHANGE FROM CHANGE FROM 2003 2002 PRIOR YEAR % 2003 2002 PRIOR YEAR % ------- -------- ------------ -------- -------- ------------ PURCHASED POWER ($000)...... $75,674 $174,302 (56.6)% $162,852 $279,719 (41.8)% Purchased Power in thousands of MWHs................... 1,624 1,621 0.2% 3,216 3,324 (3.2)% Average cost per MWH of Purchased Power(1)........ $ 46.60 $ 53.99 (13.7)% $ 50.64 $ 58.04 (12.7)%
- --------------- (1) 2002 average cost does not include contract termination costs, discussed below Purchased power costs were lower for the three months and six-months ended June 30, 2003, than the prior year primarily as a result of an $86.8 million provision recorded in the second quarter of 2002 for terminated purchased power contracts. See Part II, Item I -- Legal Proceedings in this report and SPR's, NPC's and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2003 for a discussion of the terminated purchased power contracts. In addition, the majority of SPPC's total energy requirements were satisfied by Short-Term Firm power purchases for which costs have decreased as compared to a year ago. In addition, volumes of and prices for SPPC's risk management activities have decreased. Risk management activities include transactions entered into to minimize purchased power costs. See SPPC's Annual Report on Form 10-K for the year ended December 31, 2002, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, Energy Supply, for a discussion of SPPC's purchased power procurement strategies. FUEL FOR POWER GENERATION
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------- -------------------------------- CHANGE FROM CHANGE FROM 2003 2002 PRIOR YEAR % 2003 2002 PRIOR YEAR % ------- ------- ------------ ------- ------- ------------ FUEL FOR POWER GENERATION ($000)....................... $47,559 $31,169 52.6% $81,235 $78,220 3.9% Thousands of MWHs generated.... 937 1,129 (17.0)% 1,900 2,341 (18.8)% Average fuel cost per MWH of Generated Power.............. $ 50.76 $ 27.61 83.8% $ 42.76 $ 33.41 28.0%
Fuel for power generation costs for the three and six month periods ended June 30, 2003 were higher than the same periods in the prior year as natural gas prices increased significantly. Partially offsetting this increase was a reduction in volume. The volume reductions are primarily attributed to the Valmy 66 Generating Units being down due to both scheduled and unscheduled maintenances in 2003, which necessitated additional power purchases. GAS PURCHASED FOR RESALE
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------- -------------------------------- CHANGE FROM CHANGE FROM 2003 2002 PRIOR YEAR % 2003 2002 PRIOR YEAR % ------- ------- ------------ ------- ------- ------------ GAS PURCHASED FOR RESALE ($000)....................... $27,865 $13,107 112.6% $70,199 $51,701 35.8% Gas Purchased for Resale (thousands of decatherms).... 4,954 2,542 94.9% 12,575 8,502 47.9% Average cost per decatherm..... $ 5.62 $ 5.16 8.9% $ 5.58 $ 6.08 (8.2)%
Gas purchased for resale increased significantly for the three and six month periods ended June 30, 2003, due to an increase in wholesale activity, which more than offset decreases in gas prices experienced during the six months ended June 30, 2003. Gas price decreases for the six months ended June 30, 2003, were primarily as a result of credits received on terminated gas contracts during the first quarter of 2003. DEFERRED ENERGY COSTS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------------- --------------------------------- CHANGE FROM CHANGE FROM ($000) 2003 2002 PRIOR YEAR % 2003 2002 PRIOR YEAR % - ------ ------- -------- ------------ ------- -------- ------------ Deferred energy costs disallowed................. $45,000 $ 53,101 (15.3)% $45,000 $ 53,101 (15.3)% Deferred energy costs -- electric -- net............ $ 7,241 $(68,338) N/A $18,643 $(72,943) N/A Deferred energy costs -- gas -- net........ $ 1,020 $ 2,176 (53.1)% $11,823 $ 10,368 14.0%
Deferred energy costs disallowed for the three and six months ended June 30, 2003, reflects a disallowance, effective June 1, 2003, of $45 million pursuant to a stipulation approved by the PUCN. Deferral of energy costs -- net for the three- and six-month periods ended June 30, 2002, reflects the write-off of $53 million of electric deferred energy costs incurred in the nine months ended November 30, 2001, and were disallowed by the PUCN in their May 28, 2002, decision. The increase in Deferred energy costs -- electric -- net for the three and six month periods ended June 30, 2003, reflects the amortization of prior deferred costs pursuant to the PUCN decisions in SPPC's 2001 deferred energy rate case, which resulted in increased rates beginning June 1, 2002. The increase for both the three and six month periods, is offset partially by current year deferrals of electric energy costs, to the extent fuel and purchased power costs exceeded the recovery of those costs through current rates during those periods. Deferral of energy costs -- net for the three- and six-month periods ended June 30, 2002, reflected the deferral in the second quarter of 2002 of approximately $82 million for contract termination costs. For the three months ended June 30, 2002, this deferral of contract termination costs was offset, in part, by the recording of additional energy expense. Pursuant to the PUCN's decision on SPPC's deferred energy rate case, rates were increased beginning June 1, 2002, resulting in the amortization of prior deferred costs. For the six months ended June 30, 2002, SPPC recorded deferrals of electric energy costs, reflecting the extent to which actual fuel and purchased power costs exceeded the fuel and purchased power costs recovered through current rates. SPPC's Deferred energy costs -- gas -- net, for the three and six months ended June 30, 2003, reflects the amortization of prior deferred costs due to the PUCN authorized recovery of those costs. The increase in 2003 for the six months also includes additional expense to the extent natural gas costs recovered through current rates exceeded actual natural gas costs. 67 ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- CHANGE FROM CHANGE FROM 2003 2002 PRIOR YEAR % 2003 2002 PRIOR YEAR % ------ ---- ------------ ------ ---- ------------ Allowance for other funds used during construction ($000)................. $ 601 $(83) N/A $1,203 $153 686.3% Allowance for borrowed funds used during construction ($000).......... 611 229 166.8% 1,311 620 111.5% ------ ---- ------ ---- $1,212 $146 730.1% $2,514 $773 225.2% ====== ==== ====== ====
Total allowance for funds used during construction increased for the three-month and six-month periods ended June 30, 2003, compared to the same periods in the prior year due to increases in construction work in progress and an increase in the AFUDC Rate. OTHER (INCOME) AND EXPENSES
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------------- ---------------------------------- CHANGE FROM CHANGE FROM ($000) 2003 2002 PRIOR YEAR % 2003 2002 PRIOR YEAR % - ------ -------- -------- ------------ -------- -------- ------------ Other operating expense.... $ 31,625 $ 22,893 38.1% $ 60,838 $ 50,655 20.1% Maintenance expense........ $ 6,453 $ 5,139 25.6% $ 11,640 $ 10,396 12.0% Depreciation and amortization............. $ 19,961 $ 20,595 (3.1)% $ 39,667 $ 38,152 4.0% Income taxes............... $(18,298) $(21,539) (15.0)% $(16,208) $(16,638) (2.6)% Taxes other than income taxes.................... $ 4,849 $ 4,881 (0.7)% $ 9,511 $ 9,657 (1.5)% Interest charges on long-term debt........... $ 18,959 $ 16,020 18.3% $ 37,740 $ 32,465 16.2% Interest charges -- other......... $ 2,604 $ 2,966 (12.2)% $ 5,729 $ 4,108 39.5% Interest accrued on deferred energy.......... $ (1,589) $ 1,000 (258.9)% $ (3,514) $ (4,026) (12.7)% Other income............... $ (1,035) $ (1,733) (40.3)% $ (2,100) $ (3,570) (41.2)% Other expense.............. $ 1,702 $ 1,347 26.4% $ 3,607 $ 3,809 (5.3)% Income taxes -- other income and expense....... $ 476 $ (321) N/A $ 779 $ 1,110 (29.8)%
Other operating expense for the three and six month periods ending June 30, 2003, were greater than the prior year periods due to the absence in 2003 of credits associated with the discontinuation of billing services for Truckee Meadows Water Authority, costs associated with increased billing and collection efforts, higher employee labor overhead costs and the reversal of a $2.6 million accrual for SPPC's short-term incentive plan in June 2002. Maintenance costs for the three- and six-month periods ending June 30, 2003 were higher than the same period last year due to additional maintenance costs at Valmy generating facilities. Depreciation and amortization decreased for the three-month period ended June 30, 2003, compared to the same period in 2002 as a result of a PUCN order in 2002 that increased depreciation rates through May 2002. This decrease was offset, in part, by an increase in depreciable assets in 2003. Depreciation and amortization increased for the six-month period ended June 30, 2003, compared to the same period in 2002 as a result of an increase in depreciable assets in 2003. SPPC's income tax benefit for the three and six months ended June 30, 2003 were comparable to the amounts recognized during the same periods in 2002. The changes result from changes in pretax book losses. 68 Taxes other than income taxes for the three and six months ended June 30, 2003, were comparable to the amounts recognized during the same periods in 2002. Interest charges on long-term debt for the three and six-month periods ending June 30, 2003, increased over the comparable periods in 2002 due, primarily, to the issuance in October 2002 of $100 million of additional debt at an interest rate of 10.5%. Interest charges -- other for the three months ended June 30, 2003 decreased, compared to the same period, 2002, due to the absence of associated short-term debt during the current period, compared to the same period, 2002. During the six-month period ending June 30, 2003, other interest charges increased over the prior year period due to interest on delayed/terminated contracts, charges related to fees associated with SPPC's credit facilities and receivables conduit, and to the increase of amortization resulting from increased debt discount charges related to the issuance, in October 2002 of $100 million of additional debt. Interest accrued on deferred energy costs increased for the three-month period ending June 30, 2003, compared to the same period, 2002, due to the write-off, during the comparable period in 2002, of approximately $2 million of carrying charges, net of taxes, that were disallowed by the PUCN in its May 28, 2002 decision on SPPC's deferred energy rate case. For the six months ended June 30, 2003, compared to the same period, 2002, the decrease in these charges resulted from lower deferred fuel and purchased power balances during 2003. Other income for the three and six months ended June 30, 2003, decreased compared to the same periods in the prior year due primarily to a decrease in interest income and subsidiary earnings, partially offset by increases in lease revenues and miscellaneous non-operating income. Other expense for the three and six months ended June 30, 2003, decreased compared to the prior year periods due primarily to the recognition in 2002 of miscellaneous charges related to SPPC's sale of its water division. The decrease in 2003 was partially offset by higher charges related to corporate advertising during 2003. Income taxes -- other income and expense changed from an income tax benefit in the second quarter of 2002 to an income tax expense in the second quarter of 2003. This change is due to SPPC's pretax loss on other income for the quarter ended June 30, 2002 and pretax income on other income for the quarter ended June 30, 2003. Income taxes -- other income and expense for the six months ended June 30, 2003 decreased over the prior year proportionate to the decrease experienced in the pretax other income. ANALYSIS OF CASH FLOWS SPPC's cash flows were less during the six-months ended June 30, 2003, compared to the same period in 2002, resulting primarily from decreases in cash flows from financing and investing activities, minimally offset by a slight increase in cash flows from operating activities. Cash flows from financing activities were lower primarily as a result of the cash provided in 2002 from short-term borrowings, offset partially by no common dividend payments to SPR during 2003. Cash flows from investing activities decreased in 2003 because of additional cash requirements for construction activity during 2003. Cash flows from operating activities increased slightly over 2002 as the collection of previously deferred energy costs during 2003 that was substantially offset by the prepayment of fuel and energy purchases during 2003 and the receipt of an income tax refund in 2002. LIQUIDITY AND CAPITAL RESOURCES SPPC had cash and cash equivalents of approximately $86.5 million at June 30, 2003. At July 31, 2003, SPPC had cash balances of approximately $75.6 million. Due to SPPC's weakened financial condition and, in certain instances, the weakened financial condition of SPPC's power suppliers, SPPC has been required to pre-pay its power purchases or make more frequent payments on its power deliveries. If SPPC does not have sufficient liquidity to meet its 69 power requirements, SPPC may be required to issue additional indebtedness. If SPPC is unable to issue such indebtedness, whether due to lack of access to the capital markets, lack of regulatory authority to issue such debt, or restrictive covenants in its Term Loan Agreement (see below), its ability to provide power and its financial condition will be adversely affected. SPPC's future liquidity could be significantly affected by unfavorable rulings by the PUCN in future SPPC or NPC rate cases. S&P and Moody's have SPPC's credit ratings on "negative outlook" and "stable", respectively. Future downgrades by either S&P or Moody's could preclude or reduce SPPC's access to the capital markets and could adversely affect SPPC's ability to continue purchasing power and fuel. Adverse developments with respect to any one or a combination of the factors and contingencies set forth above could have a material adverse effect on SPPC's financial condition and liquidity, and could make it difficult to continue to operate outside of bankruptcy. EFFECT OF 2002 RATE CASE DECISIONS On March 29 and April 1, 2002, following the decision by the PUCN in NPC's deferred energy rate case, S&P and Moody's lowered SPPC's unsecured debt ratings to below investment grade. On April 23 and 24, 2002, SPPC's unsecured debt ratings were further downgraded and its secured debt ratings were downgraded to below investment grade. The decision of the PUCN on May 29, 2002, on SPPC's deferred energy application to disallow $53 million of deferred purchased fuel and power costs accumulated between March 1, 2001 and November 30, 2001, did not result in any further downgrades of SPPC's securities. As a result of the downgrades, SPPC's ability to access the capital markets to raise funds is severely limited. Since SPR's credit ratings were similarly downgraded, SPR's ability to make capital contributions to SPPC also became severely limited. For more detailed discussion of these effects please see SPR's, NPC's and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002. ACCOUNTS RECEIVABLE FACILITY On October 29, 2002, SPPC established an accounts receivable purchase facility of up to $75 million. The receivables purchase facility expires on October 28, 2003. Currently, SPPC intends to negotiate an extension of this facility. If SPPC elects to activate the receivables purchase facility, SPPC will sell all of its accounts receivable generated from the sale of electricity and natural gas to customers to its newly created bankruptcy remote special purpose subsidiary. The receivables sales will be without recourse except for breaches of customary representations and warranties made at the time of sale. The subsidiary will, in turn, sell these receivables to a bankruptcy-remote subsidiary of SPR. SPR's subsidiary will issue variable rate revolving notes backed by the purchased receivables. The agreements relating to the receivables purchase facility contain various conditions to purchase, covenants and trigger events, and other provisions customary in receivables transactions. In additional to customary termination and mandatory repurchase events, the receivables purchase facility may terminate in the event that either SPPC or SPR defaults (1) on the payment of indebtedness, or (2) on the payment of amounts due under a swap agreement, and such defaults aggregate to greater than $10 million and $5 million for SPPC and SPR, respectively. Under the terms of the agreements relating to the receivables purchase facility, SPPC's facility may not be activated or, if activated, will be terminated in the event of a material adverse change in the condition, operations or business prospects of SPPC. In addition, the agreements contain a limitation on the payment of dividends by SPPC to SPR that is identical to the limitation contained in SPPC's Term Loan Agreement, described below. SPR has agreed to guaranty SPPC's performance of certain obligations as a seller and servicer under the receivables purchase facility. SPPC has agreed to issue $75 million principal amount of its General and Refunding Mortgage Bonds upon activation of the receivables purchase facility. The full principal amount of the bond would secure certain of SPPC's obligations as seller and servicer, plus certain interest, fees and expenses thereon to the extent not paid when due, regardless of the actual amounts owing with respect to the secured obligations. 70 As a result, in the event of a SPPC bankruptcy or liquidation, the holder of the bond securing the receivables purchase facility may recover more on a pro rata basis than the holders of other General and Refunding Mortgage securities, who could recover less on a pro rata basis than they otherwise would recover. However, in no event will the holder of the bond recover more than the amount of obligations secured by the bond. SPPC intends to use the accounts receivable purchase facility as a back-up liquidity facility and does not plan to activate this facility in the foreseeable future. SPPC may activate the facility within five days upon the delivery of certain customary funding documentation and the delivery of the $75 million General and Refunding Mortgage Bond. MORTGAGE INDENTURES SPPC's First Mortgage Indenture creates a first priority lien on substantially all of SPPC's properties in Nevada and California. As of June 30, 2003, $505.3 million of SPPC's first mortgage bonds were outstanding. SPPC agreed in its General and Refunding Mortgage Indenture that it would not issue any additional first mortgage bonds. SPPC's General and Refunding Mortgage Indenture creates a lien on substantially all of SPPC's properties in Nevada that is junior to the lien of the first mortgage indenture. As of June 30, 2003, $499.5 million of SPPC's General and Refunding Mortgage bonds were outstanding. Additional securities may be issued under the General and Refunding Mortgage Indenture on the basis of (i) 70% of net utility property additions, (ii) the principal amount of retired General and Refunding Mortgage bonds, and/or (iii) the principal amount of first mortgage bonds retired after April 8, 2002. On the basis of (i), (ii) and (iii) above, as of June 30, 2003, SPPC had the capacity to issue approximately $364.9 million of additional General and Refunding Mortgage securities. Although SPPC has substantial capacity to issue additional General and Refunding Mortgage securities on the basis of property additions and retired securities, the financial covenants contained in SPPC's Term Loan Agreement and Receivable Purchase Facility Agreements limit the amount of additional indebtedness that SPPC may issue and the reasons for which such indebtedness may be issued. SPPC has reserved $75 million of General and Refunding Mortgage Bonds for issuance upon the initial funding of its receivables purchase facility. SPPC also has the ability to release property from the liens of the two mortgage indentures on the basis of net property additions, cash and/or retired bonds. To the extent SPPC releases property from the lien of its General and Refunding Mortgage Indenture, it will reduce the amount of bonds issuable under that indenture. FINANCING TRANSACTIONS AND COVENANTS On May 1, 2003, SPPC's $80 million Washoe County, Nevada, Water Facilities Refunding Revenue Bonds, Series 2001, were successfully remarketed. The interest rate on the bonds was adjusted from their prior two-year 5.75% term rate to a 7.50% term rate for the period of May 1, 2003 to and including May 3, 2004. The bonds will be subject to remarketing on May 3, 2004. In the event that the bonds cannot be successfully remarketed on that date, SPPC will be required to purchase the outstanding bonds at a price of 100% of principal amount, plus accrued interest. From May 1, 2003 to and including May 3, 2004, SPPC's payment and purchase obligations in respect of the bonds are secured by SPPC's $80 million General and Refunding Mortgage Note, Series D, due 2004. SPPC's $100 million Term Loan Agreement, entered into on October 30, 2002, as amended on June 27, 2003, contains two financial maintenance covenants. The first requires that SPPC maintain a ratio of consolidated total debt to consolidated total capitalization at all times during each of the following quarters in an amount not to exceed (i) .650 to 1.0 for the fiscal quarters ended December 31, 2002 through December 31, 2003, (ii) .625 to 1.0 for the fiscal quarters ended March 31, 2004 through December 31, 2004, and (iii) .600 to 1.0 for the fiscal quarter ended March 31, 2005 and for each fiscal quarter thereafter. The second covenant requires that SPPC maintain a consolidated interest coverage ratio for the four consecutive fiscal quarters ending with each of the following fiscal quarters of not less than 71 (i) 1.75 to 1.00 for the fiscal quarters ended December 31, 2002, March 31, 2003 and June 30, 2003, (ii) 1.85 to 1.0 for the fiscal quarter ended September 30, 2003, (iii) 2.00 to 1.0 for the fiscal quarter ended December 30, 2003, (iv) 2.25 to 1.0 for the fiscal quarter ended March 31, 2004, (v) 2.40 to 1.0 for the fiscal quarter ended June 30, 2004, (vi) 2.70 to 1.0 for the fiscal quarter ended September 30, 2004, and (vii) 3.00 to 1.0 for the fiscal quarter ended December 31, 2004 and for each fiscal quarter thereafter. As of June 30, 2003, SPPC was in compliance with these financial covenants. The Term Loan Facility, which is secured by SPPC's $100 million Series C General and Refunding Mortgage Bond, will expire October 31, 2005. CROSS DEFAULT PROVISIONS Certain financing agreements of SPPC contain cross-default provisions that would result in an event of default under such financing agreements if there is a failure under other financing agreements of SPPC and SPR to meet payment terms or to observe other covenants that would result in an acceleration of payments due. Most of these default provisions (other than ones relating to a failure to pay other indebtedness) provide for a cure period of 30-60 days from the occurrence of a specified event during which time, SPPC or SPR may rectify or correct the situation before it becomes an event of default. The primary cross-default provisions in SPPC's various financing agreements are briefly summarized below: - SPPC's General and Refunding Mortgage Indenture, under which SPPC has $499.5 million of securities outstanding as of June 30, 2003, provides for an event of default if a matured event of default under SPPC's First Mortgage Indenture occurs; - SPPC's Term Loan Agreement provides for an event of default if (a) SPPC or any of its subsidiaries default (i) in the payment of indebtedness, or (ii) in the payment of amounts due under hedge agreements, and such defaults aggregate to greater than $10 million, or (b) SPPC's General and Refunding Mortgage Indenture ceases to be enforceable; and - SPPC's receivables purchase facility may terminate in the event that either SPPC or SPR defaults (i) in the payment of indebtedness, or (ii) in the payment of amounts due under hedge agreements, and such defaults aggregate to greater than $10 million and $5 million for SPPC and SPR, respectively. LIMITATIONS ON INDEBTEDNESS The terms of SPPC's $100 million Credit Facility, which expires October 2005, restrict SPPC from issuing additional indebtedness unless the debt issued is specifically permitted, which includes certain letter of credit indebtedness, certain capital lease obligations, indebtedness incurred to refinance existing indebtedness, certain intercompany indebtedness, certain letters of credit issued to support SPPC's obligations with respect to energy suppliers and a limited amount of general indebtedness. If SPPC is unable to access the capital markets to issue additional indebtedness to support its operations, including the purchase of fuel and power, and to refinance its existing indebtedness, whether due to lack of access to the capital markets, lack of regulatory authority, or restrictive covenants in its Term Loan Agreement, its ability to provide power and its financial condition will be adversely affected. SIERRA PACIFIC RESOURCES (HOLDING COMPANY) The Condensed Consolidated Statements of Operations of SPR for the six-months ended June 30, 2003, include the operating results of the holding company. The holding company recognized an unrealized loss of $107.6 million on the derivative instrument associated with the issuance of $300 million of convertible notes and higher interest costs, $40.1 million in 2003 compared to $36.7 million in 2002, also due to the issuance of $300 million of convertible notes in February 2003. 72 TUSCARORA GAS PIPELINE COMPANY The Condensed Consolidated Statements of Income of Sierra Pacific Resources include the operating results of Tuscarora Gas Pipeline Company (TGPC), a wholly owned subsidiary of SPR. For the three-and six-month periods ended June 30, 2003, TGPC contributed $0.9 million and $1.8 million, respectively, in net income. For the three-and six-month periods ended June 30, 2002, TGPC contributed $0.7 million and $1.6 million, respectively, in net income. E-THREE SPR began negotiations in the second quarter of 2003 to sell two of its subsidiaries, e-three and e-three Customer Energy Solutions, LLC (CES). Management is currently negotiating with a single buyer who is expected to purchase both companies for approximately $2.2 million. Accordingly, as of June 30, 2003, e-three and CES are reported as discontinued operations and the consolidated financial statements for all periods presented in this report have been reclassified to report separately the assets, liabilities and operating results of the companies. See Note 8 of Notes to Condensed Consolidated Financial Statements for additional information. SIERRA PACIFIC COMMUNICATIONS The Condensed Consolidated Statements of Income of Sierra Pacific Resources include the operating results of Sierra Pacific Communications (SPC), a wholly owned subsidiary of SPR. For the three- and six-month periods ended June 30, 2003, SPC incurred net losses of $22.2 million and $23.1 million, respectively. SPC incurred net losses of $0.6 million and $.1.3 million, respectively, for the three- and six-month periods ended June 30, 2002. Included in 2003 net losses for the three- and six-month periods is a pre-tax asset impairment charge of $32.9 million. See Note 8 of the Notes to Consolidated Financial Statements for discussion of the asset impairment charge. REGULATORY MATTERS The Utilities are subject to the jurisdiction of the PUCN and, in the case of SPPC, the California Public Utility Commission (CPUC) with respect to rates, standards of service, siting of and necessity for, generation and certain transmission facilities, accounting, issuance of securities and other matters with respect to electric distribution and transmission operations. NPC and SPPC submit integrated resource plans to the PUCN for approval. Under federal law, the Utilities and Tuscarora Gas Pipeline Company (TGPC) are subject to certain jurisdictional regulation, primarily by the FERC. The FERC has jurisdiction under the Federal Power Act with respect to rates, service, interconnection, accounting, and other matters in connection with the Utilities' sale of electricity for resale and interstate transmission. The FERC also has jurisdiction over the natural gas pipeline companies from which the Utilities take service. As a result of regulation, many of the fundamental business decisions of the Utilities, as well as the rate of return they are permitted to earn on their utility assets, are subject to the approval of governmental agencies. NEVADA MATTERS NEVADA POWER COMPANY 2001 DEFERRED ENERGY CASE On November 30, 2001, NPC filed an application with the PUCN seeking repayment for purchased fuel and power costs accumulated between March 1, 2001, and September 30, 2001, as required by law. The application sought to establish a rate to repay accumulated purchased fuel and power costs of $922 million and spread the recovery of the deferred costs, together with a carrying charge, over a period of not more than three years. 73 On March 29, 2002, the PUCN issued its decision on the deferred energy application, allowing NPC to recover $478 million over a three-year period, but disallowing $434 million of deferred purchased fuel and power costs and $30.9 million in carrying charges consisting of $10.1 million in carrying charges accrued through September 2001 and $20.8 million in carrying charges accrued from October 2001 through February 2002. The order stated that the disallowance was based on alleged imprudence in incurring the disallowed costs. On April 11, 2002, NPC filed a lawsuit in the First District Court of Nevada seeking to reverse portions of the PUCN's decision. NPC's lawsuit requested that the District Court reverse portions of the PUCN's order and remand the matter to the PUCN with direction that the PUCN authorize NPC to immediately establish rates that would allow NPC to recover its entire deferred energy balance of $922 million, with a carrying charge, over three years. The Bureau of Consumer Protection (BCP) of the Nevada Attorney General's Office filed a petition in the case seeking additional disallowances. Various interveners in NPC's deferred energy case before the PUCN filed petitions with the PUCN for reconsideration of the PUCN's order, seeking additional disallowances of between $12.8 million and $488 million. On May 24, 2002, the PUCN issued an order denying any further disallowances and granted NPC the authority to increase the deferred energy cost recovery charge for the month of June 2002 by one cent per kilowatt-hour. This increase accelerated the recovery of the deferred balance by approximately $16 million for the month of June 2002 only. On April 28, 2003, the District Court issued its decision denying NPC's and BCP's requests and affirming the PUCN's order and also denied the BCP's petition. The BCP and NPC have both appealed the Nevada Supreme Court to overturn the District Court's decision. The Nevada Supreme Court has ordered the parties to submit to a settlement conference. A typical Supreme Court appeal takes 18 to 24 months. NEVADA POWER COMPANY 2002 DEFERRED ENERGY CASE On November 14, 2002, NPC filed an application with the PUCN seeking repayment for purchased fuel and power costs accumulated between October 1, 2001, and September 30, 2002, as required by law. The application sought to establish a rate to collect accumulated purchased fuel and power costs of $195.7 million, together with a carrying charge, over a period of not more than three years. The application also requested a reduction to the going-forward rate for energy, reflecting reduced wholesale energy costs. The combined effect of these two adjustments resulted in a request for an overall rate reduction of 6.3%. The decision on this case was issued May 13, 2003 and authorized the following: - recovery of $147.6 million, with a carrying charge, and a $48.1 million disallowance; - a three-year amortization of the balance commencing on May 19, 2003; - a reduction in the Base Tariff Energy Rate (BTER) to an effective non-residential rate of $0.04322 per kWh, and an effective residential rate of $0.04186 per kWh. The new rates went into effect on May 19, 2003. NEVADA POWER COMPANY DEMAND REDUCTION PROGRAMS On November 14, 2002, NPC filed an application with the PUCN seeking recovery of expenses incurred in the implementation and operation of programs for energy conservation and load management. In the filing, NPC requested a one-year recovery of approximately $1.9 million. This would result in an average 0.12% increase in NPC's present rates. NPC asked for this increase to become effective simultaneously with the rate change to be ordered in its 2002 deferred energy case discussed above. The parties to the case subsequently negotiated a settlement agreement, which approved NPC's request for cost recovery with the exception of a nominal disallowance. The stipulation was approved at the agenda 74 meeting held April 4, 2003. The rate change went into effect on May 19, 2003, coincident with the deferred energy rate change discussed above. NEVADA POWER COMPANY 2003 RESOURCE PLAN On July 1, 2003, NPC filed its 2003 Resource Plan with the PUCN. The Resource Plan was prepared in compliance with Nevada laws and regulations. The Resource Plan was prepared for the 20-year period from 2003 through 2022. The three-year action plan covers calendar years 2004, 2005, and 2006. The 2003 Resource Plan develops a comprehensive, integrated plan that considers customer energy requirements and proposes the resources to meet that requirement in a manner that is consistent with prevailing market fundamentals. The ultimate goal of the plan is to balance the objectives of minimizing costs and reducing volatility while reliably meeting the electric needs of NPC's customers. The 2003 Resource Plan is consistent with Governor Guinn's 2001 Nevada Energy Protection Plan calling for the increased development of internal power generation to reduce dependence on volatile energy sources outside Nevada. The plan begins the process of taking control of energy supply and demand and reducing the dependence on others in order to provide price stability and electric reliability for customers. As a step towards achieving this objective, NPC proposed building an 80 mega-watt (MW) combustion turbine at the Harry Allen power plant site with an in-service date prior to the 2006 summer peak and a 520 MW combined cycle generating turbine, also at the Harry Allen power plant site, with a 2007 in-service date. Delivery of the energy from this new generation to NPC's customers will require a reservation on the Harry Allen-to-Mead 500 kilovolt (kV) transmission line. The construction of this transmission project is required to fulfill existing wholesale transmission contractual obligations to Independent Power Producers located within NPC's control area. The three-year Action Plan describes the actions, specific projects, and budgets that NPC is proposing to implement during calendar years 2004, 2005 and 2006. NPC is seeking approval by the PUCN for the demand and supply side projects described in the plan. This three-year strategy is based on analyses of prevailing market dynamics and supply and demand fundamentals within the energy sector. NPC is therefore seeking PUCN approval of a number of action items, including the following: - Approval of NPC's electric load forecast as being a fair representation of expected loads during the 20-year period spanning 2003 through 2022. - Approval of NPC's fuels price forecasts as being a fair representation of expected range of prices during the same 2003 through 2022 period. - Approval of NPC's plan to reserve up to 650 MW of additional native load transmission rights on the Centennial Transmission Project following the construction of the Harry Allen-to-Mead 500 kV transmission line, the third phase of the project. - Approval for re-conductoring the 230 kV Mead system that would increase system import by 450 MW at an estimated cost of $24 million. - Approval to construct a combustion turbine generating plant at the Harry Allen power plant site prior to the summer peak of 2006 at an estimated cost of $44.1 million, - Approval to construct a combined cycle generating plant including duct burners rated at 520 MW. The unit is planned for the Harry Allen power plant site with an in-service date prior to the 2007 summer peak, at a cost of $414.7 million - NPC will submit long-term transmission service requests to other transmission owners for capacity from the Palo Verde region to Mead. Long-term transmission capacity has been unavailable from the Palo Verde region to Mead. These requests will likely result in system impact and facility studies by these transmission owners. NPC is requesting PUCN approval of the estimated $100,000 for the aforementioned studies. 75 - Approval to spend $9.2 million, $9.3 million, and $9.3 million for calendar years 2004, 2005, and 2006 respectively, devoted to demand-side programs. The programs were developed in a collaborative effort, based upon input from various interested parties. - Approval of the recommended natural gas hedging strategy for 2004. - Exemption from the avoided cost filing requirements set forth in Nevada Administrative Code section 704.8783 based upon the use of a competitive bidding process to fill mega-watts available to Qualifying Facilities as a result of the renewable energy request for proposal (RFP) and long-term purchase obligation RFP for up to 2,500 MW. - Approval for a plant life assessment of NPC's existing power plants, at a cost of $500,000 per each year of the Three-Year Action Plan. In addition, the Action Plan includes the following action items: - Issue an RFP for long-term purchase power contracts to fill a substantial portion of remaining capacity requirements expected for 2004-2006. The results of the RFP and any executed contracts will be filed with the PUCN for approval. - Issue an RFP to meet the Renewable Energy Portfolio Standard through 2007 as adopted and passed into law by the Nevada State Legislature. NPC proposes to execute the agreements and bring the signed agreements to the PUCN for approval as a compliance item to this plan. The PUCN is expected to begin hearings on NPC's Resource Plan October 14, 2003, and issue a decision on November 13, 2003. If NPC's proposed 2003 Resource Plan is approved by the PUCN, NPC may need to expend up to approximately $500 million prior to the summer of 2007 for the construction and/or acquisition of generation facilities. If NPC is unable to provide this amount with internally generated funds, it may need to access the capital markets to do so. There can be no assurances that NPC will be able to issue such indebtedness. See NPC's Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources for a discussion of NPC's financial condition and limitations on NPC's ability to issue additional indebtedness. SIERRA PACIFIC POWER COMPANY 2003 DEFERRED ENERGY CASE On January 14, 2003, SPPC filed an application with the PUCN, as required by law, seeking to clear deferred balances for purchased fuel and power costs accumulated between December 1, 2001 and November 30, 2002. The application sought to establish a rate to clear accumulated purchased fuel and power costs of $15.4 million and spread the cost recovery over a period of not more than three years. It also sought to recalculate the rate to reflect anticipated ongoing purchased fuel and power costs. The total rate increase request amounted to 0.01%. The interveners' testimony was received April 25, 2003, and included proposed disallowances from $34 million to $76 million. Prior to the hearing that was scheduled to begin on May 12, 2003, the parties negotiated a settlement agreement. The agreement included the following provisions: - A reduction in the current deferred energy balance of $45 million leaving a balance payable to customers of approximately $29.6 million. - A two-year amortization of the amount payable returning one third of the balance in the first year (approximately $9.9 million), and two thirds of the balance the second year (approximately $19.7 million). - Discontinue carrying charges on deferred energy balances that SPPC is already collecting from customers and on the $29.6 million amount payable as a result of the agreement. - Maintain the currently effective Base Tariff Energy Rate. - SPPC maintains the rights to claim the cost of terminated energy contracts in future deferred filings. 76 - Parties agreed that with the $45 million reduction the remaining costs for purchasing fuel and power during the test year were prudently incurred and are just and reasonable. - SPPC and the Bureau of Consumer Protection agreed to file a motion to dismiss the civil lawsuits filed in relation to the 2001 SPPC deferred energy case. The agreement was approved by the PUCN at the agenda meeting held on May 19, 2003 and the new rates went into effect on June 1, 2003. SIERRA PACIFIC POWER COMPANY DEMAND REDUCTION PROGRAMS On January 14, 2003, SPPC filed an application with the PUCN seeking recovery of expenses incurred in the implementation and operation of programs for energy conservation and load management. In the filing, SPPC requested a one-year recovery of approximately $0.9 million, which would result in an average 0.12% increase in SPPC's rates. The parties to the case subsequently negotiated a settlement agreement that is expected to be approved by the PUCN coincident with its 2003 deferred energy ruling. The agreement called for complete recovery of the $0.9 million balance. The agreement, allowing recovery of the entire balance, was signed by all parties and approved at the PUCN's May 19, 2003 agenda meeting. Rates went into effect June 1, 2003, coincident with the deferred energy rate change discussed above. CUSTOMERS FILE TO BE SERVED BY NEW PROVIDERS UNDER NRS 704B (AB 661) AB 661, passed by the Nevada legislature in 2001 and incorporated into Nevada Revised Statutes as NRS 704B, allows commercial and governmental customers with an average demand greater than 1 MW to select new energy suppliers. The Utilities would continue to provide transmission, distribution, metering and billing services to such customers. NRS 704B requires customers wishing to choose a new supplier to receive the approval of the PUCN and meet public interest standards. In particular, departing customers must secure new energy resources that are not under contract to the Utilities, the departure must not burden the Utilities with increased costs or cause any remaining customers to pay increased costs, and the departing customers must pay their portion of any deferred energy balances. Management believes that those customers securing from new energy suppliers may help alleviate the Utilities' need to access energy from potentially volatile wholesale energy markets. The PUCN adopted regulations prescribing the criteria that will be used to determine if there will be negative impacts to remaining customers or the Utility. Customers wishing to choose a new supplier must provide 180-day notice to the Utilities. Thirteen NPC customers have filed applications for departure. These applications total approximately 350 MW of peak load. In twelve of these applications, stipulations have been reached that addressed all issues except treatment of Base Tariff General Rate (BTGR) revenue impacts arising from departure. The PUCN has issued a compliance order for these twelve applications that will allow the customers to depart upon completion of items in the compliance order. The remaining application is pending with a decision anticipated in fourth quarter of 2003. NPC continues to pursue resolution of the BTGR revenue impact issue. The most recent departure orders allow NPC to establish a regulatory asset to recover the BTGR revenue impact. According to the PUCN's order, the BTGR revenue impact will be offset by load growth from new customers. NPC will present its load growth calculation and request recovery of the regulatory asset in a subsequent general rate case. Currently, four customers have made their required compliance filings and are requesting departure in the fourth quarter of 2003. Seven customers elected not to make compliance filings and will remain full requirements customers of NPC; these applications will lapse. However, many of these customers have filed notice of their intent to file new applications. The compliance date for the remaining approved application has not yet occurred. The four customers who are proceeding with departure applications total 175 MW or approximately 4% of NPC's peak load. These customers are also proceeding with the implementation of metering and 77 communications equipment. Until the customers receive a final order accepting their compliance items from the PUCN, none of the customers will provide formal written notice of their intent to proceed with departure from NPC. NPC is obligated to plan for and secure energy supplies for these customers until official departure notice is received. The written departure notice must provide a minimum of 60 days notice. CALIFORNIA MATTERS (SPPC) RATE STABILIZATION PLAN SPPC serves approximately 44,500 customers in California. On June 29, 2001, SPPC filed with the California Public Utilities Commission (CPUC) a Rate Stabilization Plan, which included two phases. Phase One, which was also filed June 29, 2001, was an emergency electric rate increase of $10.2 million annually or 26%. The increase was applicable to all customers except those eligible for low-income and medical-needs rates and went into effect July 18, 2002. Phase Two of the Rate Stabilization Plan was filed with the CPUC on April 1, 2002, and includes a general rate case and requests the CPUC to reinstate the Energy Cost Adjustment Clause, which would allow SPPC to file for periodic rate adjustments to reflect its actual costs for wholesale energy supplies. Phase Two also includes a proposal to terminate the 10% rate reduction mandated by AB 1890, but does not include a performance-based rate-making proposal. This request was for an additional overall increase in revenues of 17.1%, or $8.9 million annually. On December 19, 2002, SPPC filed an amendment to the Phase Two application reducing the requested increase by $4.1 million to $4.8 million or 9.2% annually. SPPC agreed to make certain changes to the application and file the amendment following discussions with the CPUC Office of Ratepayer Advocates. In February 2003, the Office of the Ratepayer Advocates (ORA) filed testimony on cost of service proposing to reduce SPPC's request by $3.2 million resulting in a $1.6 million increase or 3.3%. On March 14, 2003, SPPC filed rebuttal testimony. On March 10, 2003, the ORA filed testimony on revenue allocation and rate design and on April 2, 2003, SPPC and the California Ski Areas Association filed rebuttal testimony. Hearings were held on April 9, 2003. Opening and reply briefs were filed on May 21, 2003 and June 6, 2003, respectively. Also on June 6, 2003, a settlement agreement was filed resolving all issues except rate design, reflecting an increase of $3.02 million or 5.8%. A decision by the CPUC regarding the Energy Cost Adjustment Clause is expected in September 2003 and a decision on the settlement and rate design is expected in late 2003. CALIFORNIA ASSEMBLY BILL 1235 On September 24, 2002, the Governor of California signed into law Assembly Bill 1235 (AB 1235), which allows the transfer of hydroelectric plants along the Truckee River from SPPC to the Truckee Meadows Water Authority (TMWA). AB 1235 effectively amends previous California legislation (AB 6) that prevented private utilities from selling any power plants that provide energy to California customers until 2006. AB 1235 provides an exemption for the four "run-of-the-river" hydroelectric plants that SPPC sold to TMWA as part of the sale of its water business in June 2001. On November 9, 2002, SPPC filed an application with the CPUC for authority to sell the four hydroelectric plants. On January 13, 2003, the CPUC issued a ruling that the California Environmental Quality Act applies to this proceeding and SPPC must supplement the application with a certified environmental document. SPPC has begun informal discussions with the CPUC on the environmental issues and cannot yet predict the outcome of this proceeding. On April 17, 2003, the CPUC issued a ruling dismissing the application without prejudice. The decision allows SPPC to re-file the application including an environmental assessment. SPPC plans to file a new application by the end of 2003. 78 FERC MATTERS (SPPC, NPC) In December 2001, the Utilities filed ten wholesale-purchased power complaints with the FERC under Section 206 of the Federal Power Act seeking to reduce prices of certain forward power purchase contracts that the Utilities entered into prior to the price caps established by the FERC during the western United States utility crisis. The Utilities believe the prices under these purchased power contracts are unjust and unreasonable. The Utilities negotiated a settlement with Duke Energy Trading and Marketing, but were unable to reach agreement in bilateral settlement discussions with other respondents. The Utilities have already paid the full contact price for all power actually delivered by these suppliers, but are contesting claims made for terminated power suppliers, including those terminated by Enron. The Administrative Law Judge (ALJ) overseeing the Utilities' complaints and proceedings under Section 206 of the Federal Power Act issued an initial decision on December 19, 2002 which stated that the Utilities' complaints did not meet the public interest standard of proof, which the ALJ believed applied to the reformation of their contracts. NPC, SPPC and other parties to these proceedings filed Briefs on Exceptions to the ALJ's initial order with the FERC. On June 26, 2003, FERC dismissed the Utilities' Section 206 complaints on a two-to-one vote essentially finding that the strict public interest standard applied to the case and that the company had failed to satisfy the burden of proof required by that standard. In that order, FERC also determined that it would not deem the order final and conclusive as to any of the Utilities' liability to Enron for purchase power contracts terminated by Enron. FERC indicated that any challenges to those contracts on the basis of market manipulation or fraud would be based on the evidence presented in that proceeding. On July 28, 2003, the Utilities filed a petition for rehearing at the FERC requesting that the FERC either reconsider or rehear the case. The petition cited several grounds for rehearing, including that the public interest standard did not apply but that the Utilities had satisfied it as well as the less onerous just and reasonable standard which does apply to the case. The Utilities cannot predict the outcome of the petition but intend to pursue it vigorously as well as take all available appeals. Also, on June 26, 2003, FERC issued two other orders of interest to the company. First, FERC revoked Enron's market based authority. Second, FERC ordered Enron and several other power marketers with whom the Utilities had power contracts subject to the 206 proceeding to show cause why they should not be found to have manipulated the power markets through certain anomalous market behaviors and to disgorge any profits from January 2000 to June 2001. The Utilities intend to intervene in these cases to protect their rights as well as initiate a new Section 206 case against Enron based on the market fraud and manipulation identified by FERC in its June 26, 2003, orders. Additionally, the Staff recommended that certain market participants identified in the Cal ISO Report released January 6, 2003, including SPPC, be directed to show cause why their behavior did not constitute gaming in violation of the Cal ISO and Cal PX tariffs. In its report, the Cal ISO indicated that it was unclear as to the reason SPPC received certain revenues in the amount of approximately $6 thousand. The total revenues for all companies for which the Staff recommended show cause orders are approximately $2.8 million. SPPC was one of the over 30 market participants included in the Staff's recommendation. On April 7, 2003, SPR submitted documentation to the FERC demonstrating that SPPC did not engage in gaming in violation of the Cal ISO or Cal PX tariffs, nor in the manipulation of the Western energy market. The Cal ISO revised its report, removing SPPC's name altogether, but other California parties' testimony included SPPC's name for the same transactions. On June 25, 2003, the FERC issued a show cause order allowing SPPC to justify its actions on these same transactions. SPPC is actively pursuing the issue to clear its name in this proceeding. For more information regarding the Section 206 proceedings, please see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations -- Regulation and Rate Proceedings -- FERC Matters -- FERC 206 Complaints in SPR's, NPC's and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002. 79 OPEN ACCESS TRANSMISSION TARIFF On September 27, 2002, the Utilities filed with the FERC a revised Open Access Transmission Tariff. The purpose of the filing was to implement changes that are required to implement retail open access in Nevada. The Utilities requested the changes to become effective November 1, 2002; the date retail access was scheduled to commence in Nevada in accordance with provisions of AB 661, passed in the 2001 session of the Nevada Legislature. On October 11, 2002, the Utilities filed with the FERC, revised rates, terms, and conditions for ancillary services offered in the OATT designated Docket No. ER03-37-000. On November 25, 2002, the FERC suspended the rates in Docket No. ER03-37-000 for a nominal period and made them effective subject to refund on January 1, 2003, as requested by the Utilities. On November 21, 2002, the FERC suspended the revised OATT in Docket No. ER02-2607-000 for a nominal period, made it effective subject to refund, set certain issues for hearing, and directed the Utilities to make a compliance filing. The compliance filing was submitted on December 23, 2002. This order additionally established hearing procedures and consolidated the two dockets for hearing. On March 11, 2003, all parties to these dockets reached a settlement in principle regarding all issues. A settlement agreement was filed with the FERC on May 12, 2003 and was certified to the PUCN on May 22, 2003. The settlement was adopted by letter order issued on July 1, 2003. On May 1, 2003, the Utilities filed with the FERC a revision to the Open Access Transmission Tariff that established the distribution loss factors to be applied to settlements for retail open access service. The filing designated Docket No. ER03-806-000 was accepted by letter order issued July 1, 2003. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, and commodity prices. Our primary exposures to market risk are interest rate risk associated with long-term debt, commodity price risk associated with fuel and purchased power contracts, forwards and options held by the Utilities, the credit risk associated with energy and financial service company counterparties from which the Utilities procure fuel and purchase power, and equity price risk associated with SPR's Convertible Notes. INTEREST RATE RISK SPR has evaluated its risk related to financial instruments whose values are subject to market sensitivity, such as fixed and variable rate debt and preferred trust securities obligations. As shown in SPR's Form 10-K for the year ended December 31, 2002, the fair market value of SPR's consolidated long-term debt and preferred trust securities was $3.372 billion, as of December 31, 2002. As of June 30, 2003, the fair market value of SPR's market-sensitive financial instruments had increased approximately 7.7% to $3.632 billion. Fair market value is determined using quoted market price for the same or similar issues or on the current rates offered for debt or preferred obligations of the same remaining maturities. 80 Long-term debt as of June 30, 2003 (dollars in thousands):
JUNE 30, 2003 ------------------------------------------------------------------------------------ WEIGHTED AVG EXPECTED MATURITIES AMOUNTS INT RATE FAIR MARKET VALUE ------------------------------------------------- ------------ ----------------- EXPECTED MATURITY DATE NPC SPPC SPR(2) CONSOLIDATED CONSOLIDATED CONSOLIDATED - ---------------------- ---------- ---------- -------- ------------ ------------ ----------------- Fixed Rate 2003.................. $ 210,007 $ 19,853 $162,495 $ 392,355 6.54% 2004.................. 130,013 83,400 -- 213,413 6.23% 2005.................. 15 100,400 300,000 400,415 9.16% 2006.................. 15 52,400 -- 52,415 6.71% 2007.................. 17 2,400 240,218 242,635 7.91% Thereafter.............. 1,188,848 759,913 88,314 2,037,075 7.63% ---------- ---------- -------- ---------- ---------- Total Fixed Rate........ $1,528,915 $1,018,366 $791,027 $3,338,308 $3,199,854 ---------- ---------- -------- ---------- ---------- Variable Rate 2003.................. $ 140,000 $ -- $ -- $ 140,000 3.59%(1) 2004.................. -- -- -- -- 2005.................. -- -- -- -- 2006.................. -- -- -- -- 2007.................. -- -- -- -- Thereafter.............. 115,000 -- -- 115,000 1.74%(1) ---------- ---------- -------- ---------- ---------- $ 255,000 $ -- $ -- $ 255,000 $ 255,000 ---------- ---------- -------- ---------- ---------- Preferred securities (fixed rate) After 2006............ $ 188,872 $ -- $ -- $ 188,872 8.03% ---------- ---------- -------- ---------- ---------- $ 188,872 $ -- $ -- $ 188,872 $ 177,539 ---------- ---------- -------- ---------- ---------- Total................... $1,972,787 $1,018,366 $791,027 $3,782,180 $3,632,393 ========== ========== ======== ========== ==========
- --------------- (1) Weighted average daily rate for month ended June 30, 2003. (2) The 2003 SPR Fixed Rate amount of $162,495 includes $142,180 of SPR's convertible debt current in 2003. EQUITY PRICE RISK In connection with SPR's issuance of its Convertible Notes, the conversion option, which is treated as a cash-settled written call option, was separated from the debt and accounted for separately as a derivative instrument in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. The fair market value of the derivative is recorded as a liability in SPR's financial statements with changes in the fair value of the derivative reported in earnings in the period of the change. The fair value of the conversion option derivative is determined using a pricing model that incorporates information and assumptions such as SPR's stock price, time to expiration, strike price, interest rates, and volatility. The use of different assumptions and variables in the model could have a significant impact on the valuation of the derivative. Based on the closing price of SPR's common stock at June 30, 2003 of $5.94, the fair value of the conversion option was determined to be approximately $180 million at June 30, 2003, and as a result, SPR recorded unrealized losses of approximately $123.5 million and $107.5 million for three and six month periods ended June 30, 2003, respectively. Assuming no change in the other variables, a $1.00 change in the closing price of SPR's stock to $4.94 or $6.94 would have resulted in a fair value of approximately $128 million and $234 million, respectively, and unrealized losses for the three months ended June 30, 81 2003 of approximately $72 million and $178 million, respectively, and unrealized losses for the six months ended June 30, 2003 of approximately $56 million and $161 million, respectively. Similarly, changes in the market price of SPR's common stock could have a significant impact on the amount of cash payable upon conversion of the Convertible Notes. At an assumed five-day average closing price of $5.94 per share (based on the last reported sale price of SPR's common stock July 30, 2003), the total amount of the cash payable on conversion of the Convertible Notes would be approximately $254 million. Based on a $1.00 change in the average closing price of SPR's common stock, the amount of cash payable on conversion of the Convertible Notes would increase or decrease by approximately $43 million to $297 million if the stock price increases or to $211 million if the stock price decreases. COMMODITY PRICE RISK See the Annual Reports on Form 10-K of SPR, NPC, and SPPC for the year ended December 31, 2002, Item 7A, Quantitative And Qualitative Disclosures About Market Risk, Commodity Price Risk for a discussion of Commodity Price Risk. CREDIT RISK The Utilities monitor and manage credit risk with their trading counterparties. As of June 30, 2003, the Utilities had outstanding transactions with over 40 energy and financial services companies. The Utilities' credit risk associated with these transactions was approximately $16.7 million as of June 30, 2003. This credit risk represents the difference between the contract price of energy that the Utilities have secured with energy and financial services companies and the higher market prices as of June 30, 2003. In the event that the energy providers were unable to deliver under the contracts, it would be necessary for the Utilities to purchase alternative energy at the higher market price. ITEM 4. CONTROLS AND PROCEDURES SPR, NPC, and SPPC maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), designed to ensure that they are able to collect the information required to be disclosed in the reports they file with the Securities and Exchange Commission (SEC), and to process, summarize and disclose this information accurately and within the time periods specified in the rules of the SEC. The chief executive officer and chief financial officer of each of SPR, NPC, and SPPC have reviewed and evaluated SPR's, NPC's and SPPC's disclosure controls and procedures as of June 30, 2003 (the Evaluation Date). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the disclosure controls and procedures of SPR, NPC, and SPPC are effective in bringing to their attention on a timely basis material information relating to SPR, NPC, and SPPC required to be included in periodic filings under the Exchange Act. There have not been any significant changes in the internal controls over financial reporting of SPR, NPC, and SPPC that occurred during the quarter ended June 30, 2003 that materially affected, or were reasonably likely to materially affect SPR's, NPC's and SPPC's internal controls over financial reporting. 82 PART II ITEM 1. LEGAL PROCEEDINGS Refer to Item 3 of SPR's, NPC's and SPPC's Annual Reports on Form 10-K for the year ended December 31, 2002, and Note 18 to SPR's consolidated financial statements contained in that report and Note 11 to SPR's condensed consolidated financial statements contained in this report for a description of pending legal proceedings. Except as set forth below, there are no additional material legal proceedings or material developments with respect to previously reported proceedings involving SPR, NPC or SPPC. SIERRA PACIFIC RESOURCES AND NEVADA POWER COMPANY LAWSUIT AGAINST MERRILL LYNCH AND ALLEGHENY ENERGY, INC. On April 2, 2003, SPR and NPC filed a complaint in the U.S. District Court for the District of Nevada against Merrill Lynch & Co., Inc. and Merrill Lynch Capital Services, Inc. (collectively, Merrill Lynch) and Allegheny Energy, Inc., and Allegheny Energy Supply Company, LLC (collectively, Allegheny) seeking actual and punitive damages in excess of $850 million and demanding a jury trial for all claims triable by jury. The complaint alleges that the Merrill Lynch defendants engaged in misrepresentation, suppression and concealment, breach of fiduciary duty, wrongful hiring and supervision of Daniel Gordon, and breach of contract and alleges that both Merrill Lynch and Allegheny engaged in intentional interference with contractual and prospective advantage, conspiracy and racketeering (in violation of Nevada Revised Statutes Section 207.470). The complaint also alleges that the improper behavior of Merrill Lynch and Allegheny was the direct and proximate cause of the March 2002 decision by the PUCN to disallow $180 million of rate adjustments in NPC's 2001 deferred energy accounting adjustment rate application. LAWSUIT AGAINST NATURAL GAS PROVIDERS On April 21, 2003, SPR and NPC filed a complaint in the U.S. District Court for the District of Nevada against natural gas providers El Paso Corporation, El Paso Natural Gas Company, El Paso Merchant Energy Company, El Paso Tennessee Pipeline Company, El Paso Merchant Energy-Gas Company, Sempra Energy, Southern California Gas Company, San Diego Gas and Electric Company, Dynegy Holdings, Inc., Dynegy Energy Services, Inc., and Does 1-100, seeking $600 million in total damages. The complaint alleges, among other things, that as a result of the defendants' conspiracies and fraudulent behavior, SPR and NPC were forced to enter into natural gas purchase contracts "at artificially high, supracompetitive prices." The complaint further states that between 1996 and 2001, certain of the defendants and their subsidiaries conspired, in secret meetings, to decrease competition by restricting the amount of pipeline capacity and fuel available to NPC while other defendants decreased natural gas supplies and drove up prices by illegally withholding pipeline capacity, maintained control over output and prices by manipulating natural gas price indexes, and harmed market competition and the plaintiffs by driving up prices and increasing the volatility of natural gas supplies. SPR and NPC assert that the defendants conspired to prevent the construction of new gas transportation capacity to deliver gas to the southern Nevada area by preventing the planned expansion of the Kern River Pipeline upon which NPC relies for its primary supply of natural gas for its generation facilities. The complaint also alleges that certain of the defendants "systematically misrepresented the price and volume of their trades" to key trade publications, creating the appearance of supply volatility and escalating prices starting in 2000 and continuing through the beginning of 2002. SPR and NPC assert claims for fraud, violation of Nevada's RICO Act and conspiracy to violate Nevada's RICO Act, compensatory damages, treble damages, punitive damages, legal fees, interest and other such relief deemed just and proper by the court. DISPUTES WITH PURCHASED POWER PROVIDERS In June 2003, El Paso Merchant Energy demanded mediation of its claim for a termination payment arising out of El Paso's September 25, 2002 termination of all executory purchase power contracts 83 between NPC and El Paso. El Paso claims that under the terms of the contracts, NPC owes El Paso approximately $39 million representing the difference between the contract price and the market price for power to be delivered under all the terminated contracts and the amount remaining unpaid under the contracts for power delivered between May 2002 and October 2002. NPC claims that El Paso owes NPC an amount up to approximately $162 million for undelivered power representing the difference between the replacement price or market price for power to be delivered under all the executory contracts and the contract price for that power. The mediation was unsuccessful, and on July 25, 2003, NPC commenced an action against El Paso Merchant Energy and several of its affiliates in the Federal District Court for the District of Nevada for damages resulting from breach of these purchase power contracts. In June 2003, Reliant Energy submitted a comprehensive settlement proposal to NPC proposing a settlement of NPC's termination payment obligation arising out of Reliant's May 2002 termination of its purchase power contracts with NPC. NPC denies that it owes Reliant any money under these contracts. Mediation of this claim occurred in 2002 and was not successful. Neither party has requested arbitration nor commenced litigation over this dispute, and the parties are continuing discussions. See Note 11 to SPR's condensed consolidated financial statements contained in this report for additional information regarding Reliant's claims. NEVADA POWER COMPANY AND SIERRA PACIFIC POWER COMPANY ENRON LITIGATION Enron Power Marketing (Enron) filed a complaint with the United States Bankruptcy Court for the Southern District of New York seeking to recover approximately $216 million and $93 million against NPC and SPPC, respectively, for liquidated damages for power supply contracts terminated by Enron in May 2002 and for power previously delivered to the Utilities. The Utilities have denied liability on numerous grounds, including deceit and misrepresentation in the inducement (including, but not limited to, misrepresentation as to Enron's ability to perform) and fraud, unfair trade practices and market manipulation. The Utilities filed motions to dismiss for lack of jurisdiction and/or for a stay of all proceedings pending the actions of the Utilities' proceedings under Section 206 of the Federal Power Act at the FERC. The Utilities have also filed proofs of claims and counterclaims against Enron, for the full amount of the approximately $300 million claimed to be owed and additional damages, as well as for unspecified damages to be determined during the case as a result of acts and omissions of Enron in manipulating the power markets, wrongful termination of its transactions with the Utilities, and fraudulent inducement to enter into transactions with Enron, among other issues. On December 19, 2002, the bankruptcy judge granted Enron's motion for partial summary judgment on Enron's claim for $17.7 million and $6.7 million, respectively, for energy delivered by Enron in April 2002, for which NPC and SPPC did not pay. The court ordered this money to be deposited into an escrow account not subject to claims of Enron's creditors and subject to refund depending on the outcome of the Utilities' FERC cases on the merits. The Utilities made the deposit as required. The bankruptcy court denied the Utilities' motion to stay the proceeding pending the outcome of the Utilities' Section 206 case at the FERC and denied the Utilities' motion to dismiss for lack of jurisdiction as to Enron's claims for power previously delivered to the Utilities. The court stated that it would rule in due course on Enron's motion for partial summary judgment to require NPC and SPPC to post $200 million and $87 million, respectively, pending the outcome of the case on the merits, and for judgment on the merits on Enron's liquidated damage claim (contract price less market price on the date of termination) relating to power it did not deliver under contracts terminated by Enron in May 2002. The court took under advisement the Utilities' motion to stay or dismiss Enron's claim for liquidated damages relating to the undelivered power. On April 3, 2003, the court heard arguments regarding Enron's motion to dismiss the Utilities' counterclaims against Enron for unspecified damages to be determined during the case, but did not rule on this matter nor did it indicate when a decision on this matter can be expected. On June 26, 2003, FERC issued three orders of consequence to this litigation. First, FERC denied the Utilities' request to modify the contract rates, for contracts entered into with Enron and certain other 84 power suppliers during the western U.S. utility crisis, to a level reflecting a just and reasonable price in a competitive market. In doing so, however, FERC denied Enron's request that its order in this case be deemed final and conclusive as to any and all other challenges to the enforceability of the contracts or to the lawful contract rate based on Enron's fraud and manipulation of the markets. FERC indicated that it would reserve judgment on any such challenge until it heard the evidence on the challenge. Second, FERC issued an order immediately revoking Enron's market based rate authority based on fraud and manipulation of the markets. Third, FERC issued an order to show cause Concerning Gaming and/or Anomalous Market Behavior on the part of Enron and others and directing submission of information indicating why Enron and others should not be required to disgorge profits from January 1, 2000, forward. Based on these orders, the Utilities filed a motion in July 2003 to amend their first amended complaint and counterclaim to allege facts consistent with the FERC orders that Enron was not entitled to relief on its claims against the companies but rather should be required to pay damages against the companies for losses sustained throughout the western energy crisis for which Enron was in part responsible. The Utilities also filed a supplement to their opposition to Enron's motion for summary judgment including all of the facts of fraud and manipulation of the markets as found by FERC in its June 26, 2003, orders as well as the criminal indictments and complaints against Enron's former chief financial officer and others engaged in trading operations for Enron. Enron filed oppositions to the motions to amend the amended complaint and counterclaims and an opposition to supplement the Utilities' opposition to Enron's motion for summary judgment. On August 7, 2003, the Bankruptcy Court heard oral arguments from the parties on the motions. The bankruptcy judge has not indicated when a decision may be expected. The Utilities are unable to predict the outcome of these motions. The United States District Court for the Southern District of New York has also denied the Utilities' motion to withdraw reference of the matter to the bankruptcy court without prejudice. The Bankruptcy Court currently has under submission (1) Enron's motion to dismiss the Utilities' counterclaims, (2) Enron's motion for partial summary judgment regarding the amounts alleged to be due for undelivered power and the posting of collateral for undelivered power, (3) the Utilities' motion to dismiss or stay proceeding on Enron's claims relating to delivered power and (4) the Utilities' motion to amend their first amended complaint and counterclaim to allege facts consistent with the FERC orders that Enron was not entitled to relief on its claims against the companies. A decision adverse to the Utilities on Enron's motion for partial summary judgment, or an adverse decision in the lawsuit with respect to liability as to Enron's claims on the merits for undelivered power, would have a material adverse effect on SPR's and the Utilities' financial condition and liquidity, and could make it difficult for one or more of SPR, NPC or SPPC to continue to operate outside of bankruptcy. NEVADA POWER COMPANY MORGAN STANLEY PROCEEDINGS In March 2003, the arbitrator overseeing the arbitration proceedings initiated by Morgan Stanley Capital Group (MSCG) regarding various power supply contracts terminated by MSCG in April 2002 dismissed MSCG's demand for arbitration and agreed that the issues raised by MSCG were not calculation issues subject to arbitration and that NPC's contract defenses were likewise not arbitrable. For more information regarding the MSCG arbitration proceedings, please see Note 11 to SPR's condensed consolidated financial statements contained in this report and Item 3 -- Legal Proceedings in SPR's and NPC's Annual Reports on Form 10-K for the year ended December 31, 2002. NPC has since filed a complaint for declaratory relief in the U.S. District Court for the District of Nevada asking the Court to declare that NPC is not liable for any damages as a result of MSCG's termination of its power supply contracts. On April 17, 2003, MSCG answered the complaint and filed a counterclaim against NPC at the FERC alleging non-payment of the termination payment in the amount of $25 million. NPC filed a motion to intervene in the FERC action commenced by MSCG. To date, FERC has not placed the matter on its agenda for adjudication or for hearing. NPC is unable to predict the outcome of these proceedings. 85 OTHER LITIGATION On October 21, 2002, Bonneville Square and Union Plaza filed a complaint seeking class certification in the Eighth Judicial District Court for Clark County, Nevada, against NPC for fraud and misrepresentation for allegedly overcharging a certain class of customers for energy delivered over the past several years. Plaintiffs allege that NPC fraudulently placed its meters and measured energy delivered at a point prior to passing through transformers during which process a certain amount of energy is dissipated as heat, instead of placing the meters after they pass through the transformer. NPC denies that the placement of the meters was fraudulent and alleges that placement of the meters was mandated by either or both customers request or applicable tariff. NPC's motion to dismiss on jurisdictional grounds was denied. NPC filed a writ of prohibition with the state supreme court alleging that the district court did not have jurisdiction over this dispute and that the PUCN had exclusive jurisdiction over the matter. The state supreme court granted an alternative writ and ordered the district court through the plaintiff real party in interest to show cause why the action should not be dismissed on jurisdictional grounds. The PUCN intervened in the matter and is supporting the NPC's position. The court has established a briefing schedule and it is anticipated that a decision will be issued in the third quarter of 2003. Although management cannot predict the outcome of this lawsuit, management does not believe that it will result in a material liability for NPC. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 2003 Annual Meeting of the Stockholders of Sierra Pacific Resources was held at 10:00 a.m., Pacific Daylight Time, on Monday, May 12, 2003, at the Orleans Hotel and Casino, 4500 West Tropicana Avenue, Las Vegas, Nevada. The meeting involved the election of three members of the Board of Directors to serve until the Annual Meeting in 2006, or until their successors are elected, and the approval of the 2003 Non-Employee Director Stock Plan. The directors elected at the Annual Meeting were Mary Lee Coleman, T.J. Day, and Jerry E. Herbst. The voting are shown below:
FOR WITHHELD(1) ---------- ----------- Mary Lee Coleman............................................ 62,924,647 32,809,547 T.J. Day.................................................... 62,839,504 32,894,689 Jerry E. Herbst............................................. 62,808,095 32,926,099
FOR AGAINST ABSTAIN ---------- ---------- --------- Non-Employee Director Plan approval............... 76,271,336 17,806,560 1,656,297
- --------------- (1) 6,378,439 shares that were originally voted for election of each of the nominees for director (and were so included in the preliminary voting results announced at the Annual Meeting) were changed to withhold authority for all nominees. Although the Inspector of Election did not receive notification of this change of vote until after the Annual Meeting concluded, he determined that all action necessary to change the vote with respect to these shares had been taken prior to the Annual Meeting. Accordingly, those (which did not alter the Directors' ultimate re-election) shares are reflected above as having voted to withhold authority for each of the nominees. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits filed with this Form 10-Q: 86 NEVADA POWER COMPANY Exhibit 10.1 $60,000,000 Credit Agreement among Nevada Power Company, the several lenders from time to time parties to the Agreement, and Merrill Lynch Capital Corporation, as administrative agent. SIERRA PACIFIC POWER COMPANY Exhibit 10.2 First Amendment, dated as of June 27, 2003, to the Term Loan Agreement, dated as of October 30, 2002. SIERRA PACIFIC RESOURCES, NEVADA POWER COMPANY AND SIERRA PACIFIC POWER COMPANY Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: FORM 8-K DATED APRIL 2, 2003, FILED BY SPR, NPC -- ITEM 5, OTHER EVENTS Disclosed, and included as an exhibit, the Complaint and Jury Demand by SPR and NPC in the United States District Court for the District of Nevada against Merrill Lynch & Co., Merrill Lynch Capital Services, Inc., Allegheny Energy, Inc., and Allegheny Energy Supply Company, LLC for actions that caused the Public Utilities Commission of Nevada to disallow $180,000,000 of rate adjustment in Nevada Power's deferred energy account adjustment rate application. FORM 8-K DATED APRIL 21, 2003, FILED BY SPR, NPC -- ITEM 5, OTHER EVENTS Disclosed, and included as an exhibit, SPR's press release, dated April 21, 2003, announcing NPC's filed suit in federal court against El Paso Corp., Sempra Energy, Dynegy Holdings and others for alleged restraint of trade, fraud, violation of Nevada's RICO Act and civil conspiracy. Also included as an exhibit the Complaint and Jury Demand in support of the allegations. FORM 8-K, DATED APRIL 28, 2003, FILED BY SPR, NPC AND SPPC -- ITEM 5, OTHER EVENTS Disclosed the First District Court of Nevada (Court) decision on Nevada Power Company's appeal of the March 29, 2002 decision of the PUCN denying recovery of $437 million of deferred energy costs incurred by NPC. In its decision, the Court denied the requests and affirmed the PUCN's order. FORM 8-K DATED MAY 12, 2003, FILED BY SPR, SPPC -- ITEM 5, OTHER EVENTS Disclosed, and included as an exhibit, SPR's press release dated May 12, 2003, announcing that electric ratepayers served by the Company in northern Nevada would realize a rate decrease of $9.8 million beginning June 1, 2003 and a rate decrease of $19.8 million beginning June 1, 2004, subject to PUCN approval. FORM 8-K DATED MAY 12, 2003, FILED BY SPR, NPC, SPPC -- ITEM 5, OTHER EVENTS Disclosed, and included as an exhibit, SPR's press release dated May 13, 2003, announcing that the PUCN finalized an order allowing the Company to recover $148 million of $195 million in deferred energy costs incurred by the Company. The order established a reduction to the base tariff energy rate of 6.3% for a typical electric residential customer. The new rate became effective on May 19, 2003. In addition, the Company disclosed the filed Motion to Reconsider, Alter or Amend (Motion) the Order of the First Judicial District Court of Nevada (Court), denying the Company's appeal of the 87 March 29, 2002 decision of the PUCN disallowing the recovery of $437 million of deferred energy costs. The Motion requests the Court reconsider its Order with respect to the Merrill Lynch disallowances. FORM 8-K DATED MAY 19, 2003, FILED BY SPR, SPPC -- ITEM 5, OTHER EVENTS Disclosed, and included as an exhibit, SPR's press release dated May 19, 2003, announcing PUCN approval of the stipulated agreement relating to the filed deferred energy costs incurred by SPPC. The stipulation gives northern Nevada electric ratepayers a rate decrease of $9.8 million, beginning June 1, 2003. 88 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. SIERRA PACIFIC RESOURCES (Registrant) Date: August 8, 2003 By: /s/ RICHARD K. ATKINSON --------------------------------------------- Richard K. Atkinson Vice President Chief Financial Officer (Principal Financial Officer) Date: August 8, 2003 By: /s/ JOHN E. BROWN --------------------------------------------- John E. Brown Vice President Controller (Principal Accounting Officer)
NEVADA POWER COMPANY (Registrant) Date: August 8, 2003 By: /s/ RICHARD K. ATKINSON --------------------------------------------- Richard K. Atkinson Vice President Chief Financial Officer (Principal Financial Officer) Date: August 8, 2003 By: /s/ JOHN E. BROWN --------------------------------------------- John E. Brown Vice President Controller (Principal Accounting Officer)
89 SIERRA PACIFIC POWER COMPANY (Registrant) Date: August 8, 2003 By: /s/ RICHARD K. ATKINSON --------------------------------------------- Richard K. Atkinson Vice President Chief Financial Officer (Principal Financial Officer) Date: August 8, 2003 By: /s/ JOHN E. BROWN --------------------------------------------- John E. Brown Vice President Controller (Principal Accounting Officer)
90 EX-10.1 3 b47188spexv10w1.txt $60,000 CREDIT AGREEMENT Exhibit 10.1 ================================================================================ $60,000,000 CREDIT AGREEMENT AMONG NEVADA POWER COMPANY, AS BORROWER, THE SEVERAL LENDERS FROM TIME TO TIME PARTIES HERETO, AND MERRILL LYNCH CAPITAL CORPORATION, AS ADMINISTRATIVE AGENT Dated as of June 30, 2003 ================================================================================ MERRILL LYNCH & CO., MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED AS SOLE LEAD ARRANGER AND SOLE BOOKRUNNER TABLE OF CONTENTS
Page SECTION 1. DEFINITIONS........................................................................................... 1 1.1 Defined Terms.................................................................................. 1 1.2 Other Definitional Provisions.................................................................. 14 SECTION 2. AMOUNT AND TERMS OF COMMITMENTS....................................................................... 14 2.1 Revolving Credit Commitments................................................................... 14 2.2 Procedure for Revolving Loan Borrowing......................................................... 14 2.3 Fees, etc...................................................................................... 15 2.4 Termination or Reduction of Commitments........................................................ 15 2.5 Repayment of Loans; Evidence of Debt........................................................... 15 2.6 Optional Prepayments........................................................................... 16 2.7 Mandatory Prepayments.......................................................................... 16 2.8 Conversion and Continuation Options............................................................ 17 2.9 Minimum Amounts and Maximum Number of Eurodollar Tranches...................................... 17 2.10 Interest Rates and Payment Dates............................................................... 18 2.11 Computation of Interest and Fees............................................................... 18 2.12 Inability to Determine Interest Rate........................................................... 18 2.13 Pro Rata Treatment and Payments................................................................ 19 2.14 Requirements of Law............................................................................ 20 2.15 Taxes.......................................................................................... 21 2.16 Indemnity...................................................................................... 23 2.17 Illegality..................................................................................... 23 2.18 Change of Lending Office....................................................................... 23 2.19 Replacement of Lenders under Certain Circumstances............................................. 24 SECTION 3. REPRESENTATIONS AND WARRANTIES........................................................................ 24 3.1 Financial Condition............................................................................ 24 3.2 No Change...................................................................................... 25 3.3 Corporate Existence; Compliance with Law....................................................... 25 3.4 Corporate Power; Authorization; Enforceable Obligations........................................ 25 3.5 No Legal Bar................................................................................... 25 3.6 No Material Litigation......................................................................... 26 3.7 No Default..................................................................................... 26 3.8 Ownership of Property; Liens................................................................... 26 3.9 Intellectual Property.......................................................................... 26 3.10 Taxes.......................................................................................... 26 3.11 Federal Regulations............................................................................ 26 3.12 Government Approval and Filings................................................................ 26 3.13 Labor Matters.................................................................................. 27 3.14 ERISA.......................................................................................... 27 3.15 Investment Company Act; Other Regulations...................................................... 27 3.16 Subsidiaries................................................................................... 27 3.17 Use of Proceeds................................................................................ 28 3.18 Environmental Matters.......................................................................... 28 3.19 Accuracy of Information, etc................................................................... 29
3.20 Bond Delivery Agreement; G&R Series F Mortgage Bond............................................ 29 3.21 Solvency....................................................................................... 30 SECTION 4. CONDITIONS PRECEDENT.................................................................................. 30 4.1 Conditions to Initial Loans.................................................................... 30 4.2 Conditions to Each Loan........................................................................ 31 SECTION 5. AFFIRMATIVE COVENANTS................................................................................. 31 5.1 Financial Statements........................................................................... 31 5.2 Certificates; Other Information................................................................ 32 5.3 Payment of Obligations......................................................................... 32 5.4 Conduct of Business and Maintenance of Existence, etc.......................................... 33 5.5 Maintenance of Property; Insurance............................................................. 33 5.6 Inspection of Property; Books and Records; Discussions......................................... 33 5.7 Notices........................................................................................ 33 5.8 Environmental Laws............................................................................. 34 5.9 Refinancing Securities......................................................................... 34 SECTION 6. NEGATIVE COVENANTS.................................................................................... 34 6.1 Consolidated Total Debt Ratio.................................................................. 34 6.2 Limitation on Indebtedness..................................................................... 35 6.3 Limitation on Liens............................................................................ 35 6.4 Limitation on Fundamental Changes.............................................................. 37 6.5 Limitation on Disposition of Property.......................................................... 37 6.6 Limitation on Restricted Payments.............................................................. 37 6.7 Limitation on Investments...................................................................... 38 6.8 Modifications of Instruments, etc.............................................................. 38 6.9 Limitation on Transactions with Affiliates..................................................... 38 6.10 Limitation on Sales and Leasebacks............................................................. 38 6.11 Limitation on Changes in Fiscal Periods........................................................ 38 6.12 Limitation on Negative Pledge Clauses.......................................................... 39 6.13 Limitation on Restrictions on Subsidiary Distributions......................................... 39 6.14 Limitation on Prepayments of and Modifications to Subordinated Debt............................ 39 6.15 Limitation on Lines of Business................................................................ 39 6.16 Limitation on Amendments to Other Documents.................................................... 39 6.17 Limitation on Hedge Agreements................................................................. 39 6.18 Limitations on Release from Liens.............................................................. 40 SECTION 7. EVENTS OF DEFAULT..................................................................................... 40 SECTION 8. THE ADMINISTRATIVE AGENT.............................................................................. 42 8.1 Appointment.................................................................................... 42 8.2 Delegation of Duties........................................................................... 42 8.3 Exculpatory Provisions......................................................................... 43 8.4 Reliance by the Administrative Agent........................................................... 43 8.5 Notice of Default.............................................................................. 43 8.6 Non-Reliance on Administrative Agent and Other Lenders......................................... 44 8.7 Indemnification................................................................................ 44 8.8 Agent in Its Individual Capacity............................................................... 45 8.9 Successor Administrative Agent................................................................. 45 8.10 The Arranger................................................................................... 45
SECTION 9. MISCELLANEOUS......................................................................................... 45 9.1 Amendments and Waivers......................................................................... 45 9.2 Notices........................................................................................ 46 9.3 No Waiver; Cumulative Remedies................................................................. 47 9.4 Survival of Representations and Warranties..................................................... 47 9.5 Payment of Expenses............................................................................ 47 9.6 Successors and Assigns; Participations and Assignments......................................... 48 9.7 Adjustments; Set-off........................................................................... 51 9.8 Counterparts................................................................................... 52 9.9 Severability................................................................................... 52 9.10 Integration.................................................................................... 52 9.11 GOVERNING LAW.................................................................................. 52 9.12 Submission To Jurisdiction; Waivers............................................................ 52 9.13 Acknowledgments................................................................................ 53 9.14 Confidentiality................................................................................ 53 9.15 Accounting Changes............................................................................. 54 9.16 WAIVERS OF JURY TRIAL.......................................................................... 54
SCHEDULES: 2.1 Commitments 3.2 Disclosed Matters 3.4 Consents, Authorizations, Filings and Notices 3.6 Material Litigation 3.7 Contractual Obligations 3.16 Subsidiaries 6.2(d) Existing Indebtedness 6.3(f) Existing Liens 6.5 Scheduled Asset Sales 7(e)(ii) Certain Hedge Agreements EXHIBITS: A Form of Bond Delivery Agreement B Form of Compliance Certificate C Form of Closing Certificate D Form of Assignment and Acceptance E-1 Form of Legal Opinion of Choate, Hall & Stewart E-2 Form of Legal Opinion of Woodburn and Wedge F Form of Revolving Credit Note G Form of Exemption Certificate H Form of Borrowing Notice CREDIT AGREEMENT, dated as of June 30, 2003, among NEVADA POWER COMPANY, a Nevada corporation (the "Borrower"), the several banks and other financial institutions or entities from time to time parties to this Agreement (the "Lenders"), MERRILL LYNCH & CO., MERRILL LYNCH, PIERCE FENNER & SMITH, as sole lead arranger and sole bookrunner (in such capacity, the "Arranger"), and MERRILL LYNCH CAPITAL CORPORATION, as administrative agent (in such capacity, the "Administrative Agent"). W I T N E S S E T H: WHEREAS, the Borrower has requested that the Lenders make available to the Borrower a revolving credit facility on the terms set forth herein; and WHEREAS, the Lenders are willing to make such credit facility available upon and subject to the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the agreements hereinafter set forth, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the terms listed in this Section 1.1 shall have the respective meanings set forth in this Section 1.1. "Administrative Agent": as defined in the preamble hereto. "Affiliate": as to any Person, any other Person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Aggregate Exposure": with respect to any Lender at any time, an amount equal to (a) until the Closing Date, the aggregate amount of such Lender's Commitments at such time and (b) thereafter, the amount of such Lender's Commitment then in effect or, if the Revolving Commitments have been terminated, the amount of such Lender's Loans then outstanding. "Aggregate Exposure Percentage": with respect to any Lender at any time, the ratio (expressed as a percentage) of such Lender's Aggregate Exposure at such time to the sum of the Aggregate Exposures of all Lenders at such time. "Agreement": this Credit Agreement, as amended, supplemented or otherwise modified from time to time. "Applicable Margin": (a) with respect to Base Rate Loans, 1.50%, and (b) with respect to Eurodollar Loans, 2.50%. "Arranger": as defined in the preamble hereto. 2 "Asset Sale": any Disposition of Property or series of related Dispositions of Property (excluding any such Disposition permitted by clause (a), (b), (c), (d) or (e) of Section 6.5) which yields gross proceeds to the Borrower or any of its Subsidiaries (valued at the initial principal amount thereof in the case of non-cash proceeds consisting of notes or other debt securities and valued at fair market value in the case of other non-cash proceeds) in excess of $1,000,000. "Assignee": as defined in Section 9.6(c). "Assignor": as defined in Section 9.6(c). "Available Revolving Commitment": as to any Lender at any time, an amount equal to the excess, if any, of (a) such Lender's Commitment then in effect over (b) such Lender's Loans then outstanding. "Base Rate": for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof: "Prime Rate" shall mean the prime lending rate as set forth on the British Banking Association Telerate Page 5 (or such other comparable page as may, in the opinion of the Administrative Agent, replace such page for the purpose of displaying such rate), as in effect from time to time. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Base Rate Loans": Loans for which the applicable rate of interest is based upon the Base Rate. "Benefitted Lender": as defined in Section 9.7. "Board": the Board of Governors of the Federal Reserve System of the United States (or any successor). "Bond Delivery Agreement": the Bond Delivery Agreement, dated as of the Closing Date, between the Borrower and the Administrative Agent, substantially in the form of Exhibit A. "Borrower": as defined in the preamble hereto. "Borrowing Notice": a notice from the Borrower, substantially in the form of, and containing the information prescribed by, Exhibit I, delivered to the Administrative Agent. "Business Day": (a) for all purposes other than as covered by clause (b) below, a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close and (b) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (a) and which is also a day for trading by and between banks in Dollar deposits in the interbank eurodollar market. 3 "Capital Lease Obligations": with respect to any Person, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP; and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. "Capital Stock": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing. "Cash Equivalents": (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition; (b) certificates of deposit, time deposits, eurodollar time deposits or overnight bank deposits having maturities of six months or less from the date of acquisition issued by any Lender or by any commercial bank organized under the laws of the United States of America or any state thereof having combined capital and surplus of not less than $500,000,000; (c) commercial paper of an issuer rated at least A-2 by Standard & Poor's Ratings Services ("S&P") or P-2 by Moody's Investors Service, Inc. ("Moody's"), or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies cease publishing ratings of commercial paper issuers generally, and maturing within six months from the date of acquisition; (d) repurchase obligations of any Lender or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than 30 days with respect to securities issued or fully guaranteed or insured by the United States government; (e) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A by Moody's; (f) securities with maturities of six months or less from the date of acquisition backed by standby letters of credit issued by any Lender or any commercial bank satisfying the requirements of clause (b) of this definition; and (g) shares of money market mutual or similar funds which invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition. "Change of Control": the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) shall become, or obtain rights (whether by means or warrants, options or otherwise) to become, the "beneficial owner" (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of more than 20% of the outstanding common stock of Resources; (b) Resources shall cease to own and control, of record and beneficially, directly, 100% of each class of outstanding Capital Stock of the Borrower free and clear of all Liens or (c) for any period of 12 consecutive calendar months, a majority of the Board of Directors of Resources shall no longer be composed of individuals (i) who were members of said Board on the first day of such period, (ii) whose election or 4 nomination to said Board was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of said Board or (iii) whose election or nomination to said Board was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of said Board. "Closing Date": the date on which the conditions precedent set forth in Section 4.1 shall have been satisfied, which date shall be not later than June 30, 2003. "Code": the Internal Revenue Code of 1986, as amended from time to time. "Commitment": as to any Lender, the obligation of such Lender to make Loans to the Borrower pursuant to Section 2.1 in an aggregate principal amount at any one time outstanding not to exceed the amount set forth under the heading "Commitment" opposite such Lender's name on Schedule 2.1. The original aggregate amount of the Commitments is $60,000,000. "Commonly Controlled Entity": an entity, whether or not incorporated, that is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group that includes the Borrower and that is treated as a single employer under Section 414 of the Code. "Compliance Certificate": a certificate duly executed by a Responsible Officer, substantially in the form of Exhibit B. "Consolidated Total Capitalization": at any date, the sum of (a) Consolidated Total Debt at such date, plus (b) all amounts that would, in conformity with GAAP, be included on a consolidated balance sheet of the Borrower and its Subsidiaries under stockholders' equity at such date (including all preferred Capital Stock issued by the Borrower). "Consolidated Total Debt": at any date, the aggregate principal amount of all Indebtedness of the Borrower and its Subsidiaries at such date, determined on a consolidated basis in accordance with GAAP. "Consolidated Total Debt Ratio": at any date, the ratio of (a) Consolidated Total Debt at such date to (b) Consolidated Total Capitalization at such date. "Contractual Obligation": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its Property is bound. "Control Investment Affiliate": as to any Person, any other Person that (a) directly or indirectly, is in control of, is controlled by, or is under common control with, such Person and (b) is organized by such Person primarily for the purpose of making equity or debt investments in one or more companies. For purposes of this definition, "control" of a Person means the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Default": any of the events specified in Section 7, whether or not any 5 requirement for the giving of notice, the lapse of time, or both, has been satisfied. "Disposition": with respect to any Property, any sale, lease, sale and leaseback, assignment, conveyance, transfer or other disposition thereof; and the terms "Dispose" and "Disposed of" shall have correlative meanings. "Dollars" and "$": lawful currency of the United States of America. "Domestic Subsidiary": any Subsidiary of the Borrower organized under the laws of any jurisdiction within the United States of America. "Environmental Laws": any and all laws, rules, orders, regulations, statutes, ordinances, guidelines, codes, decrees, or other legally enforceable requirements (including, without limitation, common law) of any international authority, foreign government, the United States, or any state, local, municipal or other governmental authority, regulating, relating to or imposing liability or standards of conduct concerning protection of the environment or of human health, or employee health and safety, as has been, is now, or may at any time hereafter be, in effect. "Environmental Permits": any and all permits, licenses, approvals, registrations, notifications, exemptions and other authorizations required under any Environmental Law. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurocurrency Reserve Requirements": for any day, the aggregate (without duplication) of the maximum rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves) under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board) maintained by a member bank of the Federal Reserve System. "Eurodollar Base Rate": with respect to each day during each Interest Period, the rate per annum determined on the basis of the rate for deposits in Dollars for a period equal to such Interest Period commencing on the first day of such Interest Period appearing on Page 3750 of the Telerate screen as of 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period. In the event that such rate does not appear on Page 3750 of the Telerate screen (or otherwise on such screen), the "Eurodollar Base Rate" for purposes of this definition shall be determined by reference to such other comparable publicly available service for displaying eurodollar rates as may be selected by the Administrative Agent. "Eurodollar Loans": Loans for which the applicable rate of interest is based upon the Eurodollar Rate. "Eurodollar Rate": with respect to each day during each Interest Period, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): 6 Eurodollar Base Rate ------------------------------------- 1.00 - Eurocurrency Reserve Requirements "Eurodollar Tranche": the collective reference to Eurodollar Loans the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day). "Event of Default": any of the events specified in Section 7, provided that any requirement for the giving of notice, the lapse of time, or both, has been satisfied. "Federal Funds Effective Rate": for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. "First Mortgage Bonds": obligations issued from time to time under, and secured by, the First Mortgage Indenture. "First Mortgage Indenture": the Indenture of Mortgage dated as of October 1, 1953, from the Borrower to Deutsche Bank Trust Company Americas, as trustee, as modified, amended or supplemented at any time or from time to time by supplemental indentures. "Funding Office": the office specified from time to time by the Administrative Agent as its funding office by notice to the Borrower and the Lenders. "GAAP": generally accepted accounting principles in the United States of America as in effect from time to time. "G&R Series F Mortgage Bond": the Borrower's General and Refunding Mortgage Bond, Series F, due the Revolving Credit Termination Date, issued to the Administrative Agent under the General and Refunding Mortgage Indenture, in the principal amount of $60,000,000. "General and Refunding Mortgage Indenture": the General and Refunding Mortgage Indenture, dated as of May 1, 2001, between the Borrower and The Bank of New York, as trustee, as the same may be amended, modified or supplemented from time to time. "Governmental Authority": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Granting Lender": as defined in Section 9.6(g). "Guarantee Obligation": as to any Person (the "guaranteeing person"), any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit), if to induce the creation of such obligation of such other 7 Person the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "primary obligations") of any other third Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any Property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase Property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "Hedge Agreements": all interest rate or currency swaps, caps or collar agreements, foreign exchange agreements, commodity contracts or similar arrangements entered into by the Borrower or its Subsidiaries providing for protection against fluctuations in interest rates, currency exchange rates, commodity prices or the exchange of nominal interest obligations, either generally or under specific contingencies. The term "Hedge Agreements" shall in any event include any forward energy purchase or sale contracts or similar arrangements entered into by the Borrower or its Subsidiaries. "Indebtedness": of any Person at any date, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of Property or services (other than trade payables incurred in the ordinary course of such Person's business), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to Property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such Property), (e) all Capital Lease Obligations of such Person, (f) all obligations of such Person, contingent or otherwise, as an account party or applicant under acceptance, letter of credit or similar facilities, (g) all obligations of such Person, contingent or otherwise, to purchase, redeem, retire or otherwise acquire for value any Capital Stock of such Person, (h) all Guarantee Obligations of such Person in respect of obligations of the kind referred to in clauses (a) through (g) above; and (i) all obligations of the kind referred to in clauses (a) through (h) above secured by (or for which the holder of such obligation has an existing right, contingent or otherwise, to be secured by) any Lien on Property (including, without limitation, accounts and contract rights) owned by such 8 Person, whether or not such Person has assumed or become liable for the payment of such obligation. "Indemnified Liabilities": as defined in Section 9.5. "Indemnitee": as defined in Section 9.5. "Insolvency": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent": pertaining to a condition of Insolvency. "Intellectual Property": the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, copyrights, copyright licenses, patents, patent licenses, trademarks, trademark licenses, technology, know-how and processes, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom. "Interest Payment Date": (a) as to any Base Rate Loan, the last day of July 2003 and August 2003 to occur while such Loan is outstanding and the final maturity date of such Loan, (b) as to any Eurodollar Loan, the last day of each Interest Period applicable thereto and (c) as to any Loan, the date of any repayment or prepayment made in respect thereof. "Interest Period": as to any Eurodollar Loan, (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two or three months thereafter, as selected by the Borrower in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two or three months thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that, all of the foregoing provisions relating to Interest Periods are subject to the following: (1)if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (2) any Interest Period that would otherwise extend beyond the date final payment is due on the Loans shall end on such due date; and (3) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period. 9 "Investments": as defined in Section 6.7. "Lenders": as defined in the preamble hereto. "Lien": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any capital lease having substantially the same economic effect as any of the foregoing). "Loan": as defined in Section 2.1. "Loan Documents": this Agreement, the Bond Delivery Agreement and the Revolving Credit Notes and any amendment, waiver, supplement or other modification to any of the foregoing. "Material Adverse Effect": a material adverse effect on (a) the business, assets, property, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole or (b) the validity or enforceability of this Agreement or any of the other Loan Documents or the rights or remedies of the Administrative Agent or the Lenders hereunder or thereunder. "Material Environmental Amount": an amount or amounts payable by the Borrower and/or any of its Subsidiaries, in the aggregate in excess of $5,000,000, for: costs to comply with any Environmental Law; costs of any investigation, and any remediation, of any Material of Environmental Concern; and compensatory damages (including, without limitation damages to natural resources), punitive damages, fines, and penalties pursuant to any Environmental Law. "Materials of Environmental Concern": any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products, polychlorinated biphenyls, urea-formaldehyde insulation, asbestos, pollutants, contaminants, radioactivity, and any other substances or forces of any kind, whether or not any such substance or force is defined as hazardous or toxic under any Environmental Law, that is regulated pursuant to or could give rise to liability under any Environmental Law. "Merrill Lynch Entity": any of Merrill Lynch Capital Corporation or any of its Affiliates. "Multiemployer Plan": a Plan that is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Cash Proceeds": (a) in connection with any Asset Sale or any Recovery Event, the proceeds thereof in the form of cash and Cash Equivalents (including any such proceeds received by way of deferred payment of principal pursuant to a note or installment receivable or purchase price adjustment receivable or otherwise, but only as and when received) of such Asset Sale or Recovery Event, net of attorneys' fees, accountants' fees, investment banking fees, amounts required to be applied to the repayment of Indebtedness secured by a Lien 10 expressly permitted hereunder on any asset which is the subject of such Asset Sale or Recovery Event (other than any Lien pursuant to a Security Document) and other customary fees and expenses actually incurred in connection therewith and net of taxes paid or reasonably estimated to be payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements) and (b) in connection with the issuance of any Capital Stock or instruments or the incurrence of loans, the cash proceeds received from such issuance or incurrence, net of attorneys' fees, investment banking fees, accountants' fees, underwriting discounts and commissions and other customary fees and expenses actually incurred in connection therewith. "Non-Excluded Taxes": as defined in Section 2.15(a). "Non-U.S. Lender": as defined in Section 2.15(d). "Obligations": the unpaid principal of and interest on (including, without limitation, interest accruing after the maturity of the Loans and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans and all other obligations and liabilities of the Borrower to the Administrative Agent or to any Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Loan Document, or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees, charges and disbursements of counsel to the Administrative Agent or to any Lender that are required to be paid by the Borrower pursuant hereto) or otherwise. "Offering": as defined in Section 5.9. "Other Taxes": any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document. "Participant": as defined in Section 9.6(b). "Payment Amounts": as defined in Section 7(e). "Payment Office": the office specified from time to time by the Administrative Agent as its payment office by notice to the Borrower and the Lenders. "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA (or any successor). "Person": an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. 11 "Plan": at a particular time, any employee benefit plan that is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Property": any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible, including, without limitation, Capital Stock. "Receivables Sale Documentation": collectively, (i) the Receivables Purchase Agreement, dated as of October 29, 2002, among Nevada Power Company, as Seller, and Nevada Power Receivables Finance Corporation, (ii) the Sale and Servicing Agreement, dated as of October 29, 2002, among SRP Receivables Finance Corporation, as Issuer, Nevada Power Receivables Finance Corporation, as Seller, and Nevada Power Company, as Servicer, (iii) the Base Indenture, dated as of October 29, 2002, among SRP Receivables Finance Corporation, as Issuer, and Deutsche Bank Trust Company Americas, as Indenture Trustee, (iv) the Series 2002-1 Indenture Supplement, dated as of October 29, 2002, among SRP Receivables Finance Corporation, as Issuer, Sierra Pacific Resources, as Administrator, certain conduit purchasers, certain committed purchasers, certain program managers, Lehman Commercial Paper Inc., as Master Administrator, and Deutsche Bank Trust Company Americas, as Indenture Trustee, (v) the Administration Agreement, between SRP Receivables Finance Corporation and Sierra Pacific Resources, as Administrator, (vi) the Performance Guaranty, dated as of October 29, 2002, made by Sierra Pacific Resources in favor of the Indenture Trustee, (vii) the Collection Account Control Agreement, dated as of October 29, 2002, between the SRP Receivables Finance Corporation, Deutsche Bank Trust Company Americas, as Indenture Trustee and Deutsche Bank Trust Company Americas, as Collection Account Securities Intermediary, (viii) the Lock-Box Agreement, dated as of October 29, 2002, among Nevada Power Company, SRP Receivables Finance Corporation, Deutsche Bank Trust Company Americas, as Indenture Trustee, Deutsche Bank Trust Company Americas, as Lock-Box Bank and EDS Information Services L.L.C., as Lock-Box Processor, (ix) the Lock-Box Agreement, dated as of October 29, 2002, among Sierra Pacific Power Company, SRP Receivables Finance Corporation, Deutsche Bank Trust Company Americas, as Indenture Trustee, Deutsche Bank Trust Company Americas, as Lock-Box Bank and EDS Information Services L.L.C., as Lock-Box Processor, (x) the Remittance Account Agreement, dated at or about October 30, 2002, among the Bank, SRP Receivables Finance Corporation, as Issuer, Nevada Power Company, as Servicer and Deutsche Bank Trust Company Americas, as Indenture Trustee and (xi) the Remittance Account Agreement, dated at or about October 30, 2002, among the Bank, SRP Receivables Finance Corporation, as Issuer, Sierra Pacific Power Company, as Servicer and Deutsche Bank Trust Company Americas, as Indenture Trustee. "Receivables Sale Transaction": the transactions contemplated by the Receivables Sale Documentation. "Recovery Event": any settlement of or payment in respect of any property or casualty insurance claim or any condemnation proceeding relating to any asset of the Borrower or any of its Subsidiaries. 12 "Refinancing Securities": as defined in Section 5.9. "Register": as defined in Section 9.6(d). "Regulation H": Regulation H of the Board as in effect from time to time. "Regulation U": Regulation U of the Board as in effect from time to time. "Related Fund": with respect to any Lender, any fund that (x) invests in commercial loans and (y) is managed or advised by the same investment advisor as such Lender or an affiliate of such investment advisor, by such Lender or an Affiliate of such Lender. "Reorganization": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Reportable Event": any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under subsections .27, .28, .29, .30, .31, .32, .34 or .35 of PBGC Reg.Section 4043. "Required Lenders": at any time, the holders of more than 50% of the Total Commitments then in effect or, if the Commitments have been terminated, the Total Loans then outstanding. "Requirement of Law": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its Property or to which such Person or any of its Property is subject. "Resources": Sierra Pacific Resources, a Nevada corporation. "Responsible Officer": the chief executive officer, president, senior vice-president, vice-president, chief financial officer, treasurer or assistant treasurer of the Borrower, but in any event, with respect to financial matters, the chief financial officer or the treasurer of the Borrower. "Restricted Payments": as defined in Section 6.6. "Revolving Commitment Period": the period from and including the Closing Date to the Revolving Credit Termination Date. "Revolving Credit Note": as defined in Section 2.5(e). "Revolving Credit Termination Date": the earlier of (a) September 8, 2003 and (b) two Business Days after the date on which the Borrower issues the Refinancing Securities. "Revolving Percentage": as to any Lender at any time, the percentage which such Lender's Commitment then constitutes of the Total Commitments or, at any time after the 13 Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's Loans then outstanding constitutes of the Total Loans then outstanding. "SEC": the Securities and Exchange Commission (or successors thereto or an analogous Governmental Authority). "Security Documents": the collective reference to the Bond Delivery Agreement and all other security documents hereafter delivered to the Administrative Agent granting a Lien on any Property of any Person to secure the obligations and liabilities of the Borrower under any Loan Document. "Single Employer Plan": any Plan that is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "Solvent": with respect to any Person, as of any date of determination, (a) the amount of the "present fair saleable value" of the assets of such Person will, as of such date, exceed the amount of all "liabilities of such Person, contingent or otherwise", as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For purposes of this definition, (i) "debt" means liability on a "claim", and (ii) "claim" means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured. "SPC": as defined in Section 9.6(g). "Subsidiary": as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "Subordinated Debt": as defined in Section 6.14. "Transferee": as defined in Section 9.14. "Total Commitments": at any time, the aggregate amount of the Commitments then in effect. 14 "Total Loans": at any time, the aggregate principal amount of the Loans outstanding at such time. "Type": as to any Loan, its nature as a Base Rate Loan or a Eurodollar Loan. "Wholly Owned Subsidiary": as to any Person, any other Person all of the Capital Stock of which (other than directors' qualifying shares required by law) is owned by such Person directly and/or through other Wholly Owned Subsidiaries. 1.2 Other Definitional Provisions. (a)Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the other Loan Documents or any certificate or other document made or delivered pursuant hereto or thereto. (b) As used herein and in the other Loan Documents, and any certificate or other document made or delivered pursuant hereto or thereto, accounting terms relating to the Borrower and its Subsidiaries not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. (e) All calculations of financial ratios set forth in Section 6.1 shall be calculated to the same number of decimal places as the relevant ratios are expressed in and shall be rounded upward if the number in the decimal place immediately following the last calculated decimal place is five or greater. For example, if the relevant ratio is to be calculated to the hundredth decimal place and the calculation of the ratio is 5.126, the ratio will be rounded up to 5.13. SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 2.1 Revolving Credit Commitments. Subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans ("Loans") to the Borrower from time to time during the Revolving Commitment Period in an aggregate principal amount at any one time outstanding which does not exceed the amount of such Lender's Commitment. During the Revolving Commitment Period the Borrower may use the Commitments by borrowing, prepaying the Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. The Loans may from time to time be Eurodollar Loans or Base Rate Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.2 and 2.8. 2.2 Procedure for Revolving Loan Borrowing(a) . The Borrower may borrow under the Commitments during the Revolving Commitment Period on any Business Day, 15 provided that the Borrower shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 10:00 A.M., New York City time, (a) two Business Days prior to the requested Borrowing Date, in the case of Eurodollar Loans, or (b) one Business Day prior to the requested Borrowing Date, in the case of Base Rate Loans), specifying (i) the amount and Type of Loans to be borrowed, (ii) the requested Borrowing Date and (iii) in the case of Eurodollar Loans, the respective amounts of each such Type of Loan and the respective lengths of the initial Interest Period therefor. Each borrowing under the Commitments shall be in an amount equal to (x) in the case of Base Rate Loans, $1,000,000 or a whole multiple thereof (or, if the then aggregate Available Commitments are less than $1,000,000, such lesser amount) and (y) in the case of Eurodollar Loans, $5,000,000 or a whole multiple of $1,000,000 in excess thereof. Upon receipt of any such notice from the Borrower, the Administrative Agent shall promptly notify each Lender thereof. Each Lender will make the amount of its pro rata share of each borrowing available to the Administrative Agent for the account of the Borrower at the Funding Office prior to 12:00 Noon, New York City time, on the Borrowing Date requested by the Borrower in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent crediting the account of the Borrower on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent. 2.3 Fees, etc. (a) The Borrower agrees to pay to the Arranger on the Revolving Credit Termination Date a fee in an amount equal to 0.50% of each Lender's average daily Commitment, regardless of usage, in effect on such date. (b) The Borrower agrees to pay to the Administrative Agent on August 29, 2003 a fee in an amount equal to 0.50% of the greater of the Total Loans outstanding on such date and the Total Commitments in effect on such date. 2.4 Termination or Reduction of Commitments. The Borrower shall have the right, upon not less than two Business Days' notice to the Administrative Agent, to terminate the Commitments or, from time to time, to reduce the amount of the Commitments; provided that no such termination or reduction of Commitments shall be permitted if, after giving effect thereto and to any prepayments of the Loans made on the effective date thereof, the Total Loans would exceed the Total Commitments. Any such reduction shall be in an amount equal to $1,000,000, or a whole multiple thereof, and shall reduce permanently the Commitments then in effect. 2.5 Repayment of Loans; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender the principal amount of each Loan of such Lender as may be outstanding on the Revolving Credit Termination Date (or such earlier date on which the Loans become due and payable pursuant to Section 7). The Borrower hereby further agrees to pay interest on the unpaid principal amount of the Loans from time to time outstanding from the date hereof until payment in full thereof at the rates per annum, and on the dates, set forth in Section 2.10. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Borrower to such Lender resulting from the Loan of such Lender from time to time, including the amounts of principal and interest payable and paid 16 to such Lender from time to time under this Agreement. (c) The Administrative Agent, on behalf of the Borrower, shall maintain the Register pursuant to Section 9.6(d), and a subaccount therein for each Lender, in which shall be recorded (i) the amount of each Loan made hereunder and any Revolving Credit Note evidencing such Loan, the Type of such Loan and each Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) both the amount of any sum received by the Administrative Agent hereunder from the Borrower and each Lender's share thereof. (d) The entries made in the Register and the accounts of each Lender maintained pursuant to Section 2.5(c) shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations of the Borrower therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain the Register or any such account, or any error therein, shall not in any manner affect the obligation of the Borrower to repay (with applicable interest) the Loans made to the Borrower by such Lender in accordance with the terms of this Agreement. (e) The Borrower agrees that, upon the request to the Administrative Agent by any Lender, the Borrower will execute and deliver to such Lender (i) a promissory note of the Borrower evidencing the Revolving Credit Loans of such Lender, substantially in the form of Exhibit F attached hereto with appropriate insertions as to date and principal amount (a "Revolving Credit Note"). 2.6 Optional Prepayments. The Borrower may at any time and from time to time prepay the Loans, in whole or in part, without premium or penalty except as otherwise provided herein, upon irrevocable notice delivered to the Administrative Agent at least three Business Days prior thereto in the case of Eurodollar Loans and at least one Business Day prior thereto in the case of Base Rate Loans, which notice shall specify the date and amount of such prepayment, and whether such prepayment is of Eurodollar Loans or Base Rate Loans; provided, that if a Eurodollar Loan is prepaid on any day other than the last day of the Interest Period applicable thereto, the Borrower shall also pay any amounts owing pursuant to Section 2.16. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to such date on the amount prepaid. Partial prepayments of Loans shall be in an aggregate principal amount of $1,000,000 or a whole multiple thereof. 2.7 Mandatory Prepayments. (a) If any Indebtedness shall be incurred by the Borrower or any of its Subsidiaries (excluding any Indebtedness incurred in accordance with Section 6.2 as in effect on the date of this Agreement), then, on the date of such incurrence, the Commitments shall be reduced by an amount equal to the amount of the Net Cash Proceeds of such incurrence, and the Loans shall be prepaid to the extent, if any, that the aggregate then outstanding principle amount thereof exceeds the Commitments as so reduced. The provisions of the paragraph do not constitute a consent to the incurrence of any Indebtedness not permitted by Section 6.2. (b) If any Capital Stock shall be issued by the Borrower (excluding any 17 Capital Stock issued to Resources and any capital contributions received by the Borrower from Resources), then, on the date of such issuance, the Commitments shall be reduced by an amount equal to 50% of the amount of the Net Cash Proceeds of such issuance, and the Loans shall be prepaid to the extent, if any, that the aggregate then outstanding principle amount thereof exceeds the Commitments as so reduced. The provisions of the paragraph do not constitute a consent to any Change of Control. (c) The application of any prepayment pursuant to this Section 2.7 shall be made, first, to Base Rate Loans and, second, to Eurodollar Loans. Each prepayment of the Loans under this Section 2.7 shall be accompanied by accrued interest to the date of such prepayment on the amount prepaid. 2.8 Conversion and Continuation Options. (a) The Borrower may elect from time to time to convert Eurodollar Loans to Base Rate Loans by giving the Administrative Agent at least two Business Days' prior irrevocable notice of such election, provided that any such conversion of Eurodollar Loans may be made only on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert Base Rate Loans to Eurodollar Loans by giving the Administrative Agent at least two Business Days' prior irrevocable notice of such election (which notice shall specify the length of the initial Interest Period therefor), provided that no Base Rate Loan may be converted into a Eurodollar Loan (i) when any Event of Default has occurred and is continuing and the Administrative Agent has, or the Required Lenders have, determined in its or their sole discretion not to permit such conversions or (ii) after the date that is one month prior to the final scheduled maturity date of the Loans. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof. (b) The Borrower may elect to continue any Eurodollar Loan as such upon the expiration of the then current Interest Period with respect thereto by giving irrevocable notice to the Administrative Agent, in accordance with the applicable provisions of the term "Interest Period" set forth in Section 1.1, of the length of the next Interest Period to be applicable to such Loans, provided that no Eurodollar Loan may be continued as such (i) when any Event of Default has occurred and is continuing and the Administrative Agent has, or the Required Lenders have, determined in its or their sole discretion not to permit such continuations or (ii) after the date that is one month prior to the final scheduled maturity date of the Loans, and provided, further, that if the Borrower shall fail to give any required notice as described above in this paragraph or if such continuation is not permitted pursuant to the preceding proviso, such Loans shall be converted automatically to Base Rate Loans on the last day of such then expiring Interest Period. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof. 2.9 Minimum Amounts and Maximum Number of Eurodollar Tranches. Notwithstanding anything to the contrary in this Agreement, all borrowings, conversions, continuations and optional prepayments of Eurodollar Loans and all selections of Interest Periods shall be in such amounts and be made pursuant to such elections so that, (a) after giving effect thereto, the aggregate principal amount of the Eurodollar Loans comprising each Eurodollar Tranche shall be equal to $5,000,000 or a whole multiple of $1,000,000 in excess thereof and (b) no more than ten Eurodollar Tranches shall be outstanding at any one time. 18 2.10 Interest Rates and Payment Dates. (a) Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin. (b) Each Base Rate Loan shall bear interest for each day on which it is outstanding at a rate per annum equal to the Base Rate in effect for such day plus the Applicable Margin. (c) (i) If all or a portion of the principal amount of any Loan shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), all outstanding Loans (whether or not overdue) shall bear interest (to the extent legally permitted) at a rate per annum that is equal to the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this Section plus 2% and (ii) if all or a portion of any interest payable on any Loan or any fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to the rate then applicable to Base Rate Loans plus 2%, in each case, with respect to clauses (i) and (ii) above, from the date of such non-payment until such amount is paid in full (after as well as before judgment). (d) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (c) of this Section shall be payable from time to time on demand. 2.11 Computation of Interest and Fees. (a) Interest and fees payable pursuant hereto shall be calculated on the basis of a 360-day year for the actual days elapsed, except that, with respect to Base Rate Loans on which interest is calculated on the basis of the Prime Rate, the interest thereon shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrower and the relevant Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the Base Rate or the Eurocurrency Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon as practicable notify the Borrower and the relevant Lenders of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to Section 2.10(a). 2.12 Inability to Determine Interest Rate. If prior to the first day of any Interest Period: (a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar 19 Rate for such Interest Period, or (b) the Administrative Agent shall have received notice from the Required Lenders that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the relevant Lenders as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as Base Rate Loans, (y) any Loans that were to have been converted on the first day of such Interest Period to Eurodollar Loans shall be continued as Base Rate Loans and (z) any outstanding Eurodollar Loans shall be converted, on the last day of the then current Interest Period with respect thereto, to Base Rate Loans. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans shall be made or continued as such, nor shall the Borrower have the right to convert Loans to Eurodollar Loans. 2.13 Pro Rata Treatment and Payments. (a) Each borrowing by the Borrower from the Lenders hereunder and any reduction of the Commitments of the Lenders shall be made pro rata according to the respective Loan Percentages of the Lenders. (b) Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Loans shall be made pro rata according to the respective outstanding principal amounts of the Loans then held by the Lenders. (c) All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without setoff or counterclaim and shall be made prior to 12:00 Noon, New York City time, on the due date thereof to the Administrative Agent, for the account of the relevant Lenders, at the Payment Office, in Dollars and in immediately available funds. Any payment made by the Borrower after 12:00 Noon, New York City time, on any Business Day shall be deemed to have been on the next following Business Day. The Administrative Agent shall distribute such payments to the Lenders promptly upon receipt in like funds as received. If any payment hereunder (other than payments on the Eurodollar Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. In the case of any extension of any payment of principal pursuant to the preceding two sentences, interest thereon shall be payable at the then applicable rate during such extension. (d) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its share of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a 20 corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate equal to the daily average Federal Funds Effective Rate for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this paragraph shall be conclusive in the absence of manifest error. If such Lender's share of such borrowing is not made available to the Administrative Agent by such Lender within three Business Days after such Borrowing Date, the Administrative Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to Base Rate Loans, on demand, from the Borrower. (e) Unless the Administrative Agent shall have been notified in writing by the Borrower prior to the date of any payment due to be made by the Borrower hereunder that the Borrower will not make such payment to the Administrative Agent, the Administrative Agent may assume that the Borrower is making such payment, and the Administrative Agent may, but shall not be required to, in reliance upon such assumption, make available to the Lenders their respective pro rata shares of a corresponding amount. If such payment is not made to the Administrative Agent by the Borrower within three Business Days after such due date, the Administrative Agent shall be entitled to recover, on demand, from each Lender to which any amount which was made available pursuant to the preceding sentence, such amount with interest thereon at the rate per annum equal to the daily average Federal Funds Effective Rate. Nothing herein shall be deemed to limit the rights of the Administrative Agent or any Lender against the Borrower. 2.14 Requirements of Law. (a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by Section 2.15 and changes in the rate of tax on the overall net income of such Lender); (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender that is not otherwise included in the determination of the Eurodollar Rate hereunder; or (iii) shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender reasonably deems to be material, of making, converting into, continuing or 21 maintaining Eurodollar Loans, or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable. If any Lender becomes entitled to claim any additional amounts pursuant to this Section, it shall promptly notify the Borrower (with a copy to the Administrative Agent) of the event by reason of which it has become so entitled. (b) If any Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount reasonably deemed by such Lender to be material, then from time to time, after submission by such Lender to the Borrower (with a copy to the Administrative Agent) of a written request therefor, the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such corporation for such reduction. (c) A certificate as to any additional amounts payable pursuant to this Section submitted by any Lender to the Borrower (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. The obligations of the Borrower pursuant to this Section shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.15 Taxes. (a) All payments made by the Borrower under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Administrative Agent or any Lender as a result of a present or former connection between the Administrative Agent or such Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Administrative Agent's or such Lender's having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any other Loan Document). If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings ("Non-Excluded Taxes") or any Other Taxes are required to be withheld from any amounts payable to the Administrative Agent or any Lender hereunder, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes and Other Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement; provided, however, that the Borrower shall not be required to increase any such amounts payable to any Lender with respect to any Non-Excluded Taxes (i) that are attributable to such Lender's failure to comply with the requirements of paragraph (d) or (e) of this Section or (ii) that are United 22 States withholding taxes imposed on amounts payable to such Lender at the time such Lender becomes a party to this Agreement, except to the extent that such Lender's assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such Non-Excluded Taxes pursuant to this paragraph (a). (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) Whenever any Non-Excluded Taxes or Other Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Administrative Agent for the account of the relevant Agent or Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure. The agreements in this Section shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. (d) Each Lender (or Transferee) that is not a citizen or resident of the United States of America, a corporation, partnership or other entity created or organized in or under the laws of the United States of America (or any jurisdiction thereof), or any estate or trust that is subject to federal income taxation regardless of the source of its income (a "Non-U.S. Lender") shall deliver to the Borrower and the Administrative Agent (or, in the case of a Participant, to the Lender from which the related participation shall have been purchased) two copies of either U.S. Internal Revenue Service Form W-8BEN or Form W-8ECI, or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest" a statement substantially in the form of Exhibit G and a Form W-8BEN, or any subsequent versions thereof or successors thereto properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S. federal withholding tax on all payments by the Borrower under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of any Participant, on or before the date such Participant purchases the related participation). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify the Borrower at any time it determines that it is no longer in a position to provide any previously delivered certificate to the Borrower (or any other form of certification adopted by the U.S. taxing authorities for such purpose). Notwithstanding any other provision of this paragraph, a Non-U.S. Lender shall not be required to deliver any form pursuant to this paragraph that such Non-U.S. Lender is not legally able to deliver. (e) A Lender that is entitled to an exemption from or reduction of non-U.S. withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by 23 applicable law or reasonably requested by the Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate, provided that such Lender is legally entitled to complete, execute and deliver such documentation and in such Lender's reasonable judgment such completion, execution or submission would not materially prejudice the legal position of such Lender. 2.16 Indemnity. The Borrower agrees to indemnify each Lender for, and to hold each Lender harmless from, any loss or expense that such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment or conversion of Eurodollar Loans on a day that is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest that would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender) that would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank Eurodollar market. A certificate as to any amounts payable pursuant to this Section submitted to the Borrower by any Lender shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.17 Illegality. Notwithstanding any other provision herein, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain Eurodollar Loans as contemplated by this Agreement, (a) the commitment of such Lender hereunder to make Eurodollar Loans, continue Eurodollar Loans as such and convert Base Rate Loans to Eurodollar Loans shall forthwith be canceled and (b) such Lender's Loans then outstanding as Eurodollar Loans, if any, shall be converted automatically to Base Rate Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a Eurodollar Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to Section 2.16. 2.18 Change of Lending Office. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 2.14, 2.15(a) or 2.17 with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans affected by such event with the object of avoiding the consequences of such event; provided, that such designation is made on terms that, in the sole judgment of such Lender, cause such Lender and 24 its lending office(s) to suffer no economic, legal or regulatory disadvantage, and provided, further, that nothing in this Section shall affect or postpone any of the obligations of any Borrower or the rights of any Lender pursuant to Section 2.14, 2.15(a) or 2.17. 2.19 Replacement of Lenders under Certain Circumstances. The Borrower shall be permitted to replace any Lender that (a) requests reimbursement for amounts owing pursuant to Section 2.14 or 2.15 or gives a notice of illegality pursuant to Section 2.17 or (b) defaults in its obligation to make Loans hereunder, with a replacement financial institution; provided that (i) such replacement does not conflict with any Requirement of Law, (ii) no Event of Default shall have occurred and be continuing at the time of such replacement, (iii) prior to any such replacement, such Lender shall have taken no action under Section 2.18 so as to eliminate the continued need for payment of amounts owing pursuant to Section 2.14 or 2.15 or to eliminate the illegality referred to in such notice of illegality given pursuant to Section 2.17, (iv) the replacement financial institution shall purchase, at par, all Loans and other amounts owing to such replaced Lender on or prior to the date of replacement, (v) the Borrower shall be liable to such replaced Lender under Section 2.16 (as though Section 2.16 were applicable) if any Eurodollar Loan owing to such replaced Lender shall be purchased other than on the last day of the Interest Period relating thereto, (vi) the replacement financial institution, if not already a Lender, shall be reasonably satisfactory to the Administrative Agent, (vii) the replaced Lender shall be obligated to make such replacement in accordance with the provisions of Section 9.6 (provided that the Borrower shall be obligated to pay the registration and processing fee referred to therein), (viii) the Borrower shall pay all additional amounts (if any) required pursuant to Section 2.14 or 2.15, as the case may be, in respect of any period prior to the date on which such replacement shall be consummated, and (ix) any such replacement shall not be deemed to be a waiver of any rights that the Borrower, the Administrative Agent or any other Lender shall have against the replaced Lender. SECTION 3. REPRESENTATIONS AND WARRANTIES To induce the Administrative Agent and the Lenders to enter into this Agreement and to make the Loans, the Borrower hereby represents and warrants to the Administrative Agent and each Lender that: 3.1 Financial Condition. (a) The audited consolidated balance sheets of the Borrower as at December 31, 2001 and December 31, 2002 and the related consolidated statements of income and of cash flows for the fiscal years ended on such dates, reported on by and accompanied by an unqualified report from Deloitte & Touche LLP, present fairly the consolidated financial condition of the Borrower as at such dates, and the consolidated results of its operations and its consolidated cash flows for the respective fiscal years then ended. The unaudited consolidated balance sheet of the Borrower as at March 31, 2003, and the related unaudited consolidated statements of income and cash flows for the 3-month period ended on such date, present fairly the consolidated financial condition of the Borrower as at such date, and the consolidated results of its operations and its consolidated cash flows for the 3-month period then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). The Borrower and its Subsidiaries do not have any 25 material Guarantee Obligations, contingent liabilities and liabilities for taxes, or any long-term leases or unusual forward or long-term commitments, including, without limitation, any interest rate or foreign currency swap or exchange transaction or other obligation in respect of derivatives, that are not reflected in the most recent financial statements referred to in this paragraph. During the period from December 31, 2002 to and including the date hereof there has been no Disposition by the Borrower or any of its Subsidiaries of any material part of its business or Property. 3.2 No Change. Since December 31, 2002, there has been no development or event that has had or could reasonably be expected to have a Material Adverse Effect, except as set forth on Schedule 3.2. 3.3 Corporate Existence; Compliance with Law. Each of the Borrower and its Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its Property, to lease the Property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of Property or the conduct of its business requires such qualification and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 3.4 Corporate Power; Authorization; Enforceable Obligations. The Borrower has the corporate power and authority, and the legal right, to make, deliver and perform the Loan Documents and to borrow hereunder. The Borrower has taken all necessary corporate action to authorize the execution, delivery and performance of the Loan Documents and to authorize the borrowings on the terms and conditions of this Agreement. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the borrowings hereunder or the execution, delivery, performance, validity or enforceability of this Agreement or any of the other Loan Documents, except consents, authorizations, filings and notices described in Schedule 3.4, which consents, authorizations, filings and notices have been obtained or made and are in full force and effect. Each Loan Document has been duly executed and delivered on behalf of the Borrower. This Agreement constitutes, and each other Loan Document upon execution will constitute, a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 3.5 No Legal Bar. The execution, delivery and performance of this Agreement and the other Loan Documents, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or any Contractual Obligation of the Borrower or any of its Subsidiaries and will not result in, or require, the creation or imposition of any Lien on any of their respective properties or revenues pursuant to any Requirement of Law or any such Contractual Obligation (other than the Liens created by the Security Documents). No Requirement of Law or Contractual Obligation applicable to the Borrower or any of its 26 Subsidiaries could reasonably be expected to have a Material Adverse Effect. 3.6 No Material Litigation. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against the Borrower or any of its Subsidiaries or against any of their respective properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby, or (b) that could reasonably be expected to have a Material Adverse Effect, except as set forth on Schedule 3.6. 3.7 No Default. Neither the Borrower nor any of its Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect that could reasonably be expected to have a Material Adverse Effect, except as set forth on Schedule 3.7. No Default or Event of Default has occurred and is continuing. 3.8 Ownership of Property; Liens. Each of the Borrower and its Subsidiaries has title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other Property, and none of such Property is subject to any Lien except as permitted by Section 6.3. 3.9 Intellectual Property. The Borrower and each of its Subsidiaries owns, or is licensed to use, all Intellectual Property necessary for the conduct of its business as currently conducted. No material claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property or the validity or effectiveness of any Intellectual Property, nor does the Borrower know of any valid basis for any such claim. The use of Intellectual Property by the Borrower and its Subsidiaries does not infringe on the rights of any Person in any material respect. 3.10 Taxes. Each of the Borrower and each of its Subsidiaries has filed or caused to be filed all Federal, state and other material tax returns that are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its Property and all other taxes, fees or other charges imposed on it or any of its Property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower or its Subsidiaries, as the case may be); and no tax Lien has been filed, and, to the knowledge of the Borrower, no claim is being asserted, with respect to any such tax, fee or other charge. 3.11 Federal Regulations. No part of the proceeds of any Loans will be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U as now and from time to time hereafter in effect or for any purpose that violates the provisions of the Regulations of the Board. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1 referred to in Regulation U. 3.12 Government Approval and Filings. The Public Utilities Commission of Nevada has duly and validly issued an order authorizing the Borrower to enter into this 27 Agreement and the other Loan Documents and to take all actions contemplated hereby or thereby or in connection herewith or therewith, and such order remains in full force and effect in the form issued. No other authorization, approval, order, decree, ruling or other action by, or notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by the Borrower of this Agreement or any of the other Loan Documents. 3.13 Labor Matters. There are no strikes or other labor disputes against the Borrower or any of its Subsidiaries pending or, to the knowledge of the Borrower, threatened that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect. Hours worked by and payment made to employees of the Borrower and its Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable Requirement of Law dealing with such matters that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect. All payments due from the Borrower or any of its Subsidiaries on account of employee health and welfare insurance that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect if not paid have been paid or accrued as a liability on the books of the Borrower or the relevant Subsidiary. 3.14 ERISA. Neither a Reportable Event nor an "accumulated funding deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by a material amount. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan that has resulted or could reasonably be expected to result in a material liability under ERISA, and neither the Borrower nor any Commonly Controlled Entity would become subject to any material liability under ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent. 3.15 Investment Company Act; Other Regulations. The Borrower is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. The Borrower is not subject to regulation under any Requirement of Law (other than Regulation X of the Board) which limits its ability to incur Indebtedness (other than public utility laws and regulations of Nevada administered by the Public Utilities Commission of Nevada. 3.16 Subsidiaries. (a) The Subsidiaries listed on Schedule 3.16 constitute all the Subsidiaries of the Borrower at the date hereof. Schedule 3.16 sets forth as of the Closing Date the name and jurisdiction of incorporation of each Subsidiary and, as to each Subsidiary, the percentage of each class of Capital Stock owned by the Borrower. 28 (b) There are no outstanding subscriptions, options, warrants, calls, rights or other agreements or commitments of any nature relating to any Capital Stock of the Borrower or any Subsidiary. 3.17 Use of Proceeds. The proceeds of the Loans shall be used for general corporate purposes. 3.18 Environmental Matters. Other than exceptions to any of the following that could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect: (a) The Borrower and its Subsidiaries: (i) are, and within the period of all applicable statutes of limitation have been, in compliance with all applicable Environmental Laws; (ii) hold all Environmental Permits (each of which is in full force and effect) required for any of their current or intended operations or for any property owned, leased, or otherwise operated by any of them; (iii) are, and within the period of all applicable statutes of limitation have been, in compliance with all of their Environmental Permits; and (iv) reasonably believe that: each of their Environmental Permits will be timely renewed and complied with, without material expense; any additional Environmental Permits that may be required of any of them will be timely obtained and complied with, without material expense; and compliance with any Environmental Law that is or is expected to become applicable to any of them will be timely attained and maintained, without material expense. (b) Materials of Environmental Concern are present at, on, under, in, or about any real property now or formerly owned, leased or operated by the Borrower or any of its Subsidiaries, or at any other location (including, without limitation, any location to which Materials of Environmental Concern have been sent for re-use or recycling or for treatment, storage, or disposal) which could not reasonably be expected, individually or in the aggregate, to (i) give rise to liability of the Borrower or any of its Subsidiaries under any applicable Environmental Law or otherwise result in costs to the Borrower or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect, or (ii) interfere with the Borrower's or any of its Subsidiaries' continued operations, or (iii) materially adversely affect the fair saleable value of any real property owned or leased by the Borrower or any of its Subsidiaries. (c) There is no judicial, administrative, or arbitral proceeding (including any notice of violation or alleged violation) under or relating to any Environmental Law to which the Borrower or any of its Subsidiaries is, or to the knowledge of the Borrower or any of its Subsidiaries will be, named as a party that is pending or, to the knowledge of the Borrower or any of its Subsidiaries, threatened. (d) Neither the Borrower nor any of its Subsidiaries has received any written request for information, or been notified that it is a potentially responsible party under or relating to the federal Comprehensive Environmental Response, Compensation, and Liability Act or any similar Environmental Law, or with respect to any Materials of Environmental Concern. (e) Neither the Borrower nor any of its Subsidiaries has entered into or agreed 29 to any consent decree, order, or settlement or other agreement, or is subject to any judgment, decree, or order or other agreement, in any judicial, administrative, arbitral, or other forum for dispute resolution, relating to compliance with or liability under any Environmental Law. (f) Neither the Borrower nor any of its Subsidiaries has assumed or retained, by contract or operation of law, any liabilities of any kind, fixed or contingent, known or unknown, under any Environmental Law or with respect to any Material of Environmental Concern. 3.19 Accuracy of Information, etc. No statement or information contained in this Agreement, any other Loan Document or any other document, certificate or statement furnished to the Administrative Agent or the Lenders or any of them, by or on behalf of the Borrower for use in connection with the transactions contemplated by this Agreement or the other Loan Documents, contained as of the date such statement, information, document or certificate was so furnished, any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements contained herein or therein not misleading. The projections and pro forma financial information contained in the materials referenced above are based upon good faith estimates and assumptions believed by management of the Borrower to be reasonable at the time made, it being recognized by the Lenders that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. There is no fact known to the Borrower that could reasonably be expected to have a Material Adverse Effect that has not been expressly disclosed herein, in the other Loan Documents or in any other documents, certificates and statements furnished to the Administrative Agent and the Lenders for use in connection with the transactions contemplated hereby and by the other Loan Documents. 3.20 Bond Delivery Agreement; G&R Series F Mortgage Bond. (a) The Bond Delivery Agreement is effective to create in favor of the Administrative Agent, for the benefit of the Lenders, a legal, valid and enforceable security interest in any right, title and interest of the Borrower in the G&R Series F Mortgage Bond and proceeds thereof, and, when perfected by delivery of the G&R Series F Mortgage Bond to the Administrative Agent for the benefit of the Lenders, the Lien granted pursuant to the Bond Delivery Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest, if any, of the Borrower in such G&R Series F Mortgage Bond and the proceeds thereof, as security for the Obligations, in each case prior and superior in right to any other Person. (b) The G&R Series F Mortgage Bond has been duly and validly issued and is entitled to the security and benefits of the General and Refunding Mortgage Indenture; is secured equally and ratably with, and only with, all other securities issued and outstanding under the General and Refunding Mortgage Indenture; is secured by direct and valid, duly perfected Liens on and security interests in the Mortgaged Property (as defined in the General and Refunding Mortgage Indenture), subject only to the prior Lien of the First Mortgage Indenture and to Permitted Liens (as such term is defined in the General and Refunding Mortgage Indenture); and constitutes collateral security for the obligations of the Borrower as purported to be provided in 30 the General and Refunding Mortgage Indenture and herein. 3.21 Solvency. The Borrower is, and after giving effect to the incurrence of all Indebtedness and obligations being incurred in connection herewith and therewith will be and will continue to be, Solvent. SECTION 4. CONDITIONS PRECEDENT 4.1 Conditions to Initial Loans. The agreement of each Lender to make the initial Loan requested to be made by it hereunder is subject to the satisfaction, prior to or concurrently with the making of such Loan on the Closing Date, of the following conditions precedent: (a) Loan Documents. The Administrative Agent shall have received (i) this Agreement, executed and delivered by a duly authorized officer of the Borrower and each Person on Schedule 2.1 and (ii) the Bond Delivery Agreement, executed and delivered by a duly authorized officer of the Borrower. (b) Approvals. All governmental and third party approvals (including, without limitation, any required approvals of the Public Utilities Commission of Nevada and any relevant Federal regulatory bodies) necessary in connection with the transactions contemplated herein, the issuance and pledging of the G&R Series F Mortgage Bond and the continuing operations of the Borrower and its Subsidiaries shall have been obtained and be in full force and effect; and the Administrative Agent shall have received evidence satisfactory to it that the foregoing have been accomplished. (c) Related Agreements. The Administrative Agent shall have received (in a form reasonably satisfactory to the Administrative Agent), true and correct copies, certified as to authenticity by the Borrower, such documents or instruments as may be reasonably requested by the Administrative Agent, including, without limitation, a copy of any debt instrument, security agreement or other material contract to which the Borrower may be a party. (d) Fees. The Lenders, the Administrative Agent and the Arranger shall have received all fees required to be paid, and all expenses for which invoices have been presented (including reasonable fees, disbursements and other charges of counsel to the Administrative Agent), on or before the Closing Date. All such amounts will be paid with proceeds of Loans made on the Closing Date and will be reflected in the funding instructions given by the Borrower to the Administrative Agent on or before the Closing Date. (e) Closing Certificate. The Administrative Agent shall have received a certificate of the Borrower, dated the Closing Date, substantially in the form of Exhibit C, with appropriate insertions and attachments. (f) Legal Opinions. The Administrative Agent shall have received the following executed legal opinions: (i) the legal opinion of Choate, Hall & Stewart, special counsel to the Borrower and its Subsidiaries, substantially in the form of Exhibit 31 E-1; and (ii) the legal opinion of Woodburn and Wedge, Nevada counsel to the Borrower and its Subsidiaries, substantially in the form of Exhibit E-2; Each such legal opinion shall cover such other matters incident to the transactions contemplated by this Agreement as the Administrative Agent may reasonably require. (g) G&R Series F Mortgage Bond Documents. The Administrative Agent shall have received copies of the following documents (all as defined in the General and Refunding Mortgage Indenture): either a supplemental indenture or an "Officer's Certificate" setting forth the terms of the G&R Series F Mortgage Bond; a "Company Order" requesting authentication of the G&R Series F Mortgage Bond by the trustee under the General and Refunding Mortgage Indenture; and all legal opinions provided in connection with the issuance of the G&R Series F Mortgage Bond. The G&R Series F Mortgage Bond shall have been duly issued and delivered to the Administrative Agent. 4.2 Conditions to Each Loan. The agreement of each Lender to make any Loan requested to be made by it on any date (including, without limitation, the initial Loan) is subject to the satisfaction of the following conditions precedent: (a) Representations and Warranties. Each of the representations and warranties made by the Borrower in or pursuant to the Loan Documents shall be true and correct on and as of the date of such Loans as if made on such date. (b) No Default. No Default or Event of Default shall have occurred and be continuing on the date of such Loans or after giving effect to the Loans requested to be made on such date. Each borrowing by the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date of such extension of credit that the conditions contained in Section 4.2(a) and (b) have been satisfied. SECTION 5. AFFIRMATIVE COVENANTS The Borrower hereby agrees that, so long as any Commitment is in effect or any Loan or other amount is owing to any Lender or the Administrative Agent hereunder, the Borrower shall and shall cause each of its Subsidiaries to: 5.1 Financial Statements. Furnish to the Administrative Agent as soon as available, but in any event not later than 45 days after the end of the quarter ending June 30, 2003, the unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and of cash flows for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures as of the end of and for the corresponding period in the previous year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments) (it being understood 32 that the delivery of the Form 10-Q for the relevant quarter shall satisfy the delivery requirement with respect to the financial statements in this Section 5.1); all such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). 5.2 Certificates; Other Information. Furnish to the Administrative Agent and each Lender, or, in the case of clause (e), to the relevant Lender: (a) concurrently with the delivery of any financial statements pursuant to Section 5.1, (i) a certificate of a Responsible Officer stating that, to the best of such Responsible Officer's knowledge, the Borrower and each of its Subsidiaries during such period has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Agreement and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate and (ii) a Compliance Certificate containing all information and calculations necessary for determining compliance by the Borrower and its Subsidiaries with the provisions of this Agreement referred to therein as of the last day of the applicable fiscal quarter of the Borrower; (b) within 45 days after the end of the quarter ending June 30, 2003, a narrative discussion and analysis of the financial condition and results of operations of the Borrower and its Subsidiaries for such fiscal quarter and for the period from the beginning of the then current fiscal year to the end of such fiscal quarter, as compared to the portion of the projections covering such periods and to the comparable periods of the previous year (it being understood that the delivery of the management's discussion and analysis sections of the Form 10-Q containing the financial statements delivered pursuant to Section 5.1 shall satisfy the requirement in this Section 5.2(b)); (c) within five days after the same are sent, copies of all financial statements and reports that the Borrower sends to the holders of any class of its debt securities or public equity securities and, within five days after the same are filed, copies of all financial statements and reports that the Borrower may make to, or file with, the SEC; (d) promptly after obtaining knowledge thereof: (i) any development, event, or condition that, individually or in the aggregate with other developments, events or conditions, could reasonably be expected to result in the payment by the Borrower and its Subsidiaries, in the aggregate, of a Material Environmental Amount; and (ii) any notice that any governmental authority may deny any application for an Environmental Permit sought by, or revoke or refuse to renew any Environmental Permit held by, the Borrower, which could reasonably be expected to have a Material Adverse Effect; and (e) promptly, such additional financial and other information as any Lender may from time to time reasonably request. 5.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or before 33 maturity or before they become delinquent, as the case may be, all its material obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or its Subsidiaries, as the case may be. 5.4 Conduct of Business and Maintenance of Existence, etc. (a) (i) Preserve, renew and keep in full force and effect its corporate existence and (ii) take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business, except, in each case, as otherwise permitted by Section 6.4 and except, in the case of clause (ii) above, to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; and (b) comply with all Contractual Obligations and Requirements of Law, except (x) to the extent that failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect and (y) as described on Schedule 3.7. 5.5 Maintenance of Property; Insurance. (a) Keep all Property and systems useful and necessary in its business in good working order and condition, ordinary wear and tear excepted and (b) maintain with financially sound and reputable insurance companies insurance on all its Property in at least such amounts and against at least such risks (but including in any event public liability, product liability and business interruption) as are usually insured against in the same general area by companies engaged in the same or a similar business. 5.6 Inspection of Property; Books and Records; Discussions. (a) Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities and (b) permit representatives of any Lender (at such Lender's expenses, except during the continuation of an Event of Default) to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Subsidiaries with officers and employees of the Borrower and its Subsidiaries and with its independent certified public accountants. 5.7 Notices. Promptly give notice to the Administrative Agent and each Lender of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of the Borrower or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between the Borrower or any of its Subsidiaries and any Governmental Authority, that in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding affecting the Borrower or any of its Subsidiaries in which the amount involved is $5,000,000 or more and not covered by insurance or in which injunctive or similar relief is sought; (d) the following events, as soon as possible and in any event within 30 days after the Borrower knows or has reason to know thereof: (i) the occurrence of any Reportable 34 Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the termination, Reorganization or Insolvency of, any Plan; and (e) any development or event that has had or could reasonably be expected to have a Material Adverse Effect. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Borrower or the relevant Subsidiary proposes to take with respect thereto. 5.8 Environmental Laws. (a) Comply in all material respects with, and ensure compliance in all material respects by all tenants and subtenants, if any, with, all applicable Environmental Laws, and obtain and comply in all material respects with and maintain, and ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws. 5.9 Refinancing Securities. (a) Prepare as soon as practicable a registration statement under the Securities Act of 1933, as amended or an offering memorandum covering debt instruments of the Borrower (the "Refinancing Securities") to be issued in a public offering or private placement (the "Offering") and (b) consummate such Offering in an amount at least equal to the Total Commitments then in effect and on such terms and conditions (including interest rate, yield, redemption prices and dates) as the Arranger, after consultation and good faith negotiation with the Borrower, may in its commercially reasonable judgment determine to be reasonable for the Borrower in light of prevailing circumstances and market conditions and the financial condition and prospects of the Borrower. The indenture, board resolution, officer's certificate or other document or instrument establishing the Refinancing Securities shall be in a form containing terms and conditions customary and appropriate for securities of the same type as the Refinancing Securities, modified as appropriate to reflect the financial condition and prospects of the Borrower and its Subsidiaries, and in form and substance reasonably satisfactory to the Borrower and the Arranger. SECTION 6. NEGATIVE COVENANTS The Borrower hereby agrees that, so long as any Commitment is in effect or any Loan or other amount is owing to any Lender or the Administrative Agent hereunder, the Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly: 6.1 Consolidated Total Debt Ratio. Permit the Consolidated Total Debt Ratio 35 on any date to exceed .65 to 1.00. 6.2 Limitation on Indebtedness. Create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness of the Borrower pursuant to any Loan Document or pursuant to the G&R Series F Mortgage Bond; (b) Indebtedness of the Borrower (i) to any Subsidiary or (ii) to its Affiliates; provided, however, that in the case of clause (ii), the aggregate principal amount of such Indebtedness shall not exceed $10,000,000 at any one time outstanding; (c) Indebtedness (including, without limitation, Capital Lease Obligations) secured by Liens permitted by Section 6.3(g) in an aggregate principal amount not to exceed $10,000,000 at any one time outstanding; (d) Indebtedness outstanding on the date hereof and listed on Schedule 6.2(d) and any refinancings, refundings, renewals or extensions thereof (without any increase in the principal amount thereof or any shortening of the maturity of any principal amount thereof); (e) Guarantee Obligations made in the ordinary course of business by the Borrower or any of its Subsidiaries of obligations of the Borrower; (f) Indebtedness consisting of letters of credit issued for the Borrower's account for purposes of supporting the Borrower's obligations now or hereafter owing to gas, electric power or other energy suppliers in an aggregate principal amount not to exceed $20,000,000 at any one time outstanding; (g) Indebtedness consisting of securities issued pursuant to the General and Refunding Mortgage Indenture that are pledged to secure (i) claims against the Borrower relating to the Borrower's obligations existing on the Closing Date pursuant to terminated agreements with gas, electric power and other energy suppliers (such securities issued pursuant to this clause (i) to be in an aggregate principal amount not to exceed $200,000,000 at any one time outstanding), (ii) the Borrower's obligations in respect of letters of credit permitted pursuant to Section 6.2(f) (such securities issued pursuant to this clause (ii) to be in an aggregate principal amount not to exceed $20,000,000 at any time outstanding) and (iii) obligations of the Borrower and its Subsidiaries in connection with the Receivables Sale Transaction (such securities issued pursuant to this clause (iii) to be in an aggregate principal amount not exceeding $125,000,000); and (h) Subordinated notes issued by a Subsidiary to the Borrower in connection with the Receivables Sale Transaction. 6.3 Limitation on Liens. Create, incur, assume or suffer to exist any Lien upon any of its Property, whether now owned or hereafter acquired, except for: (a) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on 36 the books of the Borrower or its Subsidiaries, as the case may be, in conformity with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or that are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business that, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the Property subject thereto or materially interfere with the ordinary conduct of the business of the Borrower or any of its Subsidiaries; (f) Liens in existence on the date hereof listed on Schedule 6.3(f), securing Indebtedness permitted by Section 6.2(d), provided that no such Lien is spread to cover any additional Property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; (g) Liens securing Indebtedness of the Borrower or any other Subsidiary incurred pursuant to Section 6.2(c) to finance the acquisition of fixed or capital assets, provided that (i) such Liens shall be created substantially simultaneously with the acquisition of such fixed or capital assets, (ii) such Liens do not at any time encumber any Property other than the Property financed by such Indebtedness, (iii) the amount of Indebtedness secured thereby is not increased; (h) Liens created pursuant to the Security Documents; (i) any interest or title of a lessor under any lease entered into by the Borrower or any other Subsidiary in the ordinary course of its business and covering only the assets so leased; (j) Liens of (i) the First Mortgage Indenture securing Indebtedness outstanding on the Closing Date and (ii) the General and Refunding Mortgage Indenture; (k) Liens on First Mortgage Bonds issued as collateral for pollution control or gas or water facility revenue bonds issued for the benefit of the Borrower or its Subsidiaries (and related rights and interests) to secure obligations of the Borrower or such Subsidiaries for the benefit of the holders of such bonds, provided that such bonds are not secured by any other assets or Properties of the Borrower or its Subsidiaries; (l) Liens on securities issued under the General and Refunding Mortgage Indenture and permitted by Section 6.2(g) securing the obligations described in Section 6.2(g); 37 (m) Liens created pursuant to the Receivables Sale Documentation; or (n) Liens not otherwise permitted by this Section 6.3 so long as neither (i) the aggregate outstanding principal amount of the obligations secured thereby nor (ii) the aggregate fair market value (determined, in the case of each such Lien, as of the date such Lien is incurred) of the assets subject thereto exceeds (as to the Borrower and all Subsidiaries) $10,000,000 at any one time. 6.4 Limitation on Fundamental Changes. Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or Dispose of all or substantially all of its Property or business, except that: (a) any Subsidiary of the Borrower may be merged or consolidated with or into the Borrower (provided that the Borrower shall be the continuing or surviving corporation); and (b) any Subsidiary of the Borrower may Dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Borrower. 6.5 Limitation on Disposition of Property. Dispose of any of its Property (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, or, in the case of any Subsidiary, issue or sell any shares of such Subsidiary's Capital Stock to any Person, except: (a) the Disposition of obsolete or worn out property in the ordinary course of business; (b) the sale of inventory in the ordinary course of business; (c) the sale or issuance of any Subsidiary's Capital Stock to the Borrower; (d) the Disposition of assets pursuant to the Receivables Sale Transaction; (e) the Disposition of other assets having a fair market value not to exceed $1,000,000 in the aggregate for any fiscal year of the Borrower; and (f) the Disposition of certain parcels of land listed on Schedule 6.5. 6.6 Limitation on Restricted Payments. Declare or pay any dividend on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any Capital Stock of Resources, the Borrower or any Subsidiary, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower or any Subsidiary (collectively, "Restricted Payments"), except that: (a) any Subsidiary may make Restricted Payments to the Borrower; and (b) the Borrower may make payments in respect of trust preferred securities 38 of the Borrower's Subsidiaries in existence on the Closing Date. 6.7 Limitation on Investments. Make any advance, loan, extension of credit (by way of guaranty or otherwise) or capital contribution to, or purchase any Capital Stock, bonds, notes, debentures or other debt securities of, or any assets constituting an ongoing business from, or make any other investment in, any other Person (all of the foregoing, "Investments"), except: (a) extensions of trade credit in the ordinary course of business; (b) investments in Cash Equivalents; (c) Investments arising in connection with the incurrence of Indebtedness permitted by Section 6.2(b) and (e); (d) loans and advances to employees of the Borrower or any Subsidiaries of the Borrower in the ordinary course of business (including, without limitation, for travel, entertainment and relocation expenses) in an aggregate amount the Borrower and Subsidiaries of the Borrower not to exceed $1,000,000 at any one time outstanding; and (e) Investments by the Borrower in its Subsidiaries in an aggregate amount (valued at cost) not to exceed $5,000,000 during the term of this Agreement. 6.8 Modifications of Instruments, etc. Amend or modify (a) its certificate of incorporation or (b) the General and Refunding Mortgage Indenture or (c) the First Mortgage Indenture, in each case in any manner determined by the Administrative Agent to be adverse to the Lenders. 6.9 Limitation on Transactions with Affiliates. Except as provided in the last sentence of this Section, enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of Property, the rendering of any service or the payment of any management, advisory or similar fees, with any Affiliate (other than the Borrower) unless such transaction is (a) otherwise permitted under this Agreement, (b) in the ordinary course of business of the Borrower or such Subsidiary, as the case may be, and (c) upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person that is not an Affiliate. This Section 6.10 shall not apply to transactions between the Borrower and its Subsidiaries in connection with the Receivables Sale Transaction. 6.10 Limitation on Sales and Leasebacks. Enter into any arrangement with any Person providing for the leasing by the Borrower or any Subsidiary of real or personal property which has been or is to be sold or transferred by the Borrower or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Borrower or such Subsidiary. 6.11 Limitation on Changes in Fiscal Periods. Permit the fiscal year of the Borrower to end on a day other than December 31 or change the Borrower's method of determining fiscal quarters. 39 6.12 Limitation on Negative Pledge Clauses. Enter into or suffer to exist or become effective any agreement that (a) prohibits or limits the ability of the Borrower or any of its Subsidiaries (other than the Receivables Sale Transaction) to create, incur, assume or suffer to exist any Lien upon any of its Property or revenues, whether now owned or hereafter acquired, to secure the Obligations, other than (i) this Agreement and the other Loan Documents, (ii) any agreements governing any purchase money Liens or Capital Lease Obligations otherwise permitted hereby (in which case, any prohibition or limitation shall only be effective against the assets financed thereby) and (iii) any restriction in effect on the date hereof or (b) contains covenants more restrictive than the covenants in this Section 6, unless the Borrower offers to amend this Agreement, concurrently with the effectiveness of such other agreement, to provide covenants under this Agreement equivalent to the more restrictive covenants under such other agreement. 6.13 Limitation on Restrictions on Subsidiary Distributions. Other than the Receivables Sale Transaction, enter into or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary to (a) make Restricted Payments in respect of any Capital Stock of such Subsidiary held by, or pay any Indebtedness owed to, the Borrower or any other Subsidiary, (b) make Investments in the Borrower or any other Subsidiary or (c) transfer any of its assets to the Borrower or any other Subsidiary, except for such encumbrances or restrictions existing under or by reason of (i) any restrictions existing under the Loan Documents and (ii) any restrictions with respect to a Subsidiary imposed pursuant to an agreement that has been entered into in connection with the Disposition of all or substantially all of the Capital Stock or assets of such Subsidiary. 6.14 Limitation on Prepayments of and Modifications to Subordinated Debt. (a) Optionally prepay, optionally retire, optionally redeem, optionally purchase, optionally defease, optionally exchange, or make any mandatory prepayment or any mandatory repurchase of any debt subordinated to the prior payment of the Loans and the other obligations under the Loan Documents ("Subordinated Debt") or (b) amend, supplement or otherwise modify any documentation governing any Subordinated Debt (other than (i) amendments to such Subordinated Debt which reduce the interest rate or extend the maturity thereof and (ii) waivers of compliance by the Borrower with any of the terms or conditions of such Subordinated Debt (except those terms or conditions which by their terms are for the benefit of the Lenders)). 6.15 Limitation on Lines of Business. Enter into any business, either directly or through any Subsidiary, except for those businesses in which the Borrower and its Subsidiaries are engaged on the date of this Agreement or that are reasonably related thereto. 6.16 Limitation on Amendments to Other Documents. Amend, supplement or otherwise modify (pursuant to a waiver or otherwise) the terms and conditions of the Receivables Sale Documentation in any manner that could reasonably be expected to have a Material Adverse Effect. 6.17 Limitation on Hedge Agreements. Enter into any Hedge Agreement other than Hedge Agreements entered into in the ordinary course of business, and not for speculative purposes, to protect against changes in interest rates, commodity prices (including energy prices) or foreign exchange rates. 40 6.18 Limitations on Release from Liens. Cause the Liens of the General and Refunding Mortgage Indenture and related security documents, upon any assets, to be released, except in connection with the Disposition of such assets; provided that within 180 days after any such release, the Borrower will either (a) Dispose of such assets or (b) subject such assets again to the Lien of the General and Refunding Mortgage Indenture. SECTION 7. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Loan when due in accordance with the terms hereof; or the Borrower shall fail to pay any interest on any Loan, or any other amount payable hereunder or under any other Loan Document, within five days after any such interest or other amount becomes due in accordance with the terms hereof or thereof; or (b) Any representation or warranty made or deemed made by the Borrower herein or in any other Loan Document or that is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this Agreement or any such other Loan Document shall prove to have been inaccurate in any material respect on or as of the date made or deemed made or furnished; or (c) The Borrower shall default in the observance or performance of any agreement contained in clause (i) or (ii) of Section 5.4(a), Section 5.7(a), Section 5.9 or Section 6; or (d) The Borrower shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days; or (e) (i) The Borrower or any of its Subsidiaries shall (A) default in making any payment of any principal of any Indebtedness (including, without limitation, any Guarantee Obligation, but excluding the Loans) on the scheduled or original due date with respect thereto; or (B) default in making any payment of any interest on any such Indebtedness beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created; or (C) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or beneficiary of such Indebtedness (or a trustee or agent on behalf of such holder or beneficiary) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or to become subject to a mandatory offer to purchase by the obligor thereunder or (in the case of any such Indebtedness constituting a Guarantee Obligation) to become payable; or (ii) the Borrower or any of its Subsidiaries shall, other than in respect of those Hedge Agreements listed on Schedule 7(e)(ii) (A) default in making any payment of any amount owing to a counterparty under any Hedge Agreement beyond the period of grace, if any, provided in such Hedge Agreement; or (B) default in the observance or performance of any other agreement or condition 41 relating to any such Hedge Agreement or contained in such Hedge Agreement or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the counterparty under such Hedge Agreement to cause, with the giving of notice if required, the Borrower or such Subsidiary to make a termination payment, payment of liquidated damages or similar payment under such Hedge Agreement (collectively, "Payment Amounts"); provided, that a default, event or condition described in clause (i) or (ii) of this paragraph (e) shall not at any time constitute an Event of Default unless, at such time, one or more defaults, events or conditions of the type described in clauses (i) and (ii) of this paragraph (e) shall have occurred and be continuing with respect to Indebtedness and/ or Payment Amounts the outstanding principal amount of which exceeds in the aggregate $20,000,000; or (f) (i) The Borrower or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or the Borrower or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above that (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets that results in the entry of an order for any such relief that shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, or any Lien in favor of the PBGC or a Plan shall arise on the assets of the Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders shall be likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such 42 event or condition, together with all other such events or conditions, if any, could, in the sole judgment of the Required Lenders, reasonably be expected to have a Material Adverse Effect; or (h) One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving for the Borrower and its Subsidiaries taken as a whole a liability (not paid or fully covered by insurance as to which the relevant insurance company has acknowledged coverage) of $10,000,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof; or (i) Any of the Security Documents or the General and Refunding Mortgage Indenture (or any security documents executed in connection therewith) shall cease, for any reason to be in full force and effect, or the Borrower or any Affiliate of the Borrower shall so assert, or any Lien created by any of the Security Documents or the General and Refunding Mortgage Indenture (or any security documents executed in connection therewith) shall cease to be enforceable and of the same effect and priority purported to be created thereby; or (j) Any Change of Control shall occur; then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) above with respect to the Borrower, automatically the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents shall immediately become due and payable, and (B) if such event is any other Event of Default, with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable. SECTION 8. THE ADMINISTRATIVE AGENT 8.1 Appointment. Each Lender hereby irrevocably designates and appoints the Administrative Agent as the agent of such Lender under this Agreement and the other Loan Documents, and each Lender irrevocably authorizes the Administrative Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent. 8.2 Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to 43 such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 8.3 Exculpatory Provisions. Neither any Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except to the extent that any of the foregoing are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of the Borrower to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower. 8.4 Reliance by the Administrative Agent. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any instrument, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Revolving Credit Note as the owner thereof for all purposes unless such Revolving Credit Note shall have been transferred in accordance with Section 9.6 and all actions required by such Section in connection with such transfer shall have been taken. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders (or, if so specified by this Agreement, all Lenders or any other instructing group of Lenders specified by this Agreement) as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Each Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders (or, if so specified by this Agreement, all Lenders or any other instructing group of Lenders specified by this Agreement), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans. 8.5 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent shall have received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent shall receive such a notice, the 44 Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders (or, if so specified by this Agreement, all Lenders or any other instructing group of Lenders specified by this Agreement); provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 8.6 Non-Reliance on Administrative Agent and Other Lenders. Each Lender expressly acknowledges that neither any of the Administrative Agent nor any of their respective officers, directors, employees, agents, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by any Agent hereafter taken, including any review of the affairs of the Borrower or any affiliate of the Borrower, shall be deemed to constitute any representation or warranty by any Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon any Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and its affiliates and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon any Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower and its affiliates. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, no Agent shall have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower or any affiliate of the Borrower that may come into the possession of such Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 8.7 Indemnification. The Lenders agree to indemnify each Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Aggregate Exposure Percentages in effect on the date on which indemnification is sought under this Section (or, if indemnification is sought after the date upon which the Commitments shall have terminated and the Loans shall have been paid in full, ratably in accordance with such Aggregate Exposure Percentages immediately prior to such date), for, and to save each Agent harmless from and against, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever that may at any time (including, without limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against such Agent in any way relating to or arising out of, the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by such Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that are found by a final 45 and nonappealable decision of a court of competent jurisdiction to have resulted from such Agent's gross negligence or willful misconduct. The agreements in this Section shall survive the payment of the Loans and all other amounts payable hereunder. 8.8 Agent in Its Individual Capacity. Each Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower as though such Agent were not an Agent. With respect to its Loans made or renewed by it and with respect to any Letter of Credit issued or participated in by it, each Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not an Agent, and the terms "Lender" and "Lenders" shall include each Agent in its individual capacity. 8.9 Successor Administrative Agent. The Administrative Agent may resign as Administrative Agent upon 10 days' notice to the Lenders and the Borrower. If the Administrative Agent shall resign as Administrative Agent under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall (unless an Event of Default under Section 8(a) or Section 8(f) with respect to the Borrower shall have occurred and be continuing) be subject to approval by the Borrower (which approval shall not be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term "Administrative Agent" shall mean such successor agent effective upon such appointment and approval, and the former Administrative Agent's rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Loans. If no successor agent has accepted appointment as Administrative Agent by the date that is 10 days following a retiring Administrative Agent's notice of resignation, the retiring Administrative Agent's resignation shall nevertheless thereupon become effective, and the Lenders shall assume and perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above. After any retiring Agent's resignation as Agent, the provisions of this Section 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Loan Documents. 8.10 The Arranger. The Arranger, in its capacity as such, shall not have any duties or responsibilities, and shall incur no liability, under this Agreement and the other Loan Documents. SECTION 9. MISCELLANEOUS 9.1 Amendments and Waivers. Neither this Agreement or any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 9.1. The Required Lenders and the Borrower may, or (with the written consent of the Required Lenders) the Administrative Agent and the Borrower may, from time to time, (a) enter into written amendments, supplements or modifications hereto and to the other Loan Documents (including amendments and restatements hereof or thereof) for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Borrower hereunder or 46 thereunder or (b) waive, on such terms and conditions as may be specified in the instrument of waiver, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall: (i) forgive the principal amount or extend the final scheduled date of maturity of any Loan, extend the scheduled date of any amortization payment in respect of any Loan, reduce the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof, or increase the amount or extend the expiration date of any Commitment of any Lender, in each case without the consent of each Lender directly affected thereby; (ii) amend, modify or waive any provision of this Section or reduce any percentage specified in the definition of Required Lenders, consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Loan Documents or release the G&R Series F Mortgage Bond, in whole or in part, each case without the consent of all Lenders; (iii) amend, modify or waive any provision of Section 8 or any other provision affecting the rights of any Agent without the consent of any Agent directly affected thereby; or (iv) amend, modify or waive any provision of Section 2.13 without the consent of each Lender directly affected thereby. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Borrower, the Lenders, the Administrative Agent and all future holders of the Loans. In the case of any waiver, the Borrower, the Lenders and the Administrative Agent shall be restored to their former position and rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. Any such waiver, amendment, supplement or modification shall be effected by a written instrument signed by the parties required to sign pursuant to the foregoing provisions of this Section; provided, that delivery of an executed signature page of any such instrument by facsimile transmission shall be effective as delivery of a manually executed counterpart thereof. The Administrative Agent, as holder of the G&R Series F Mortgage Bond, will not consent to any amendment or other modification of the General and Refunding Mortgage Indenture that requires the consent of holders of all securities issued thereunder, without the consent of each Lender. 9.2 Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or three Business Days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received, addressed (a) in the case of the Borrower and the Administrative Agent, 47 as follows and (b) in the case of the Lenders, to its address as set forth in the Register or, in the case of a Lender which becomes a party to this Agreement pursuant to an Assignment and Acceptance, in such Assignment and Acceptance or (c) in the case of any party, to such other address as such party may hereafter notify to the other parties hereto: The Borrower: Nevada Power Company 6226 W. Sahara Avenue Las Vegas, Nevada 89146 Attention: Richard K. Atkinson Telecopy: (702) 367-5869 Telephone: (702) 367-5630 The Administrative Agent: Merrill Lynch Capital Corporation 4 World Financial Center New York, New York 10080 Attention: Telecopy: Telephone: provided that any notice, request or demand to or upon the any Agent or any Lender shall not be effective until received. 9.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of any Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 9.4 Survival of Representations and Warranties. All representations and warranties made herein, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans hereunder. 9.5 Payment of Expenses. The Borrower agrees (a) to pay or reimburse the Administrative Agent for all their reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement, the G&R Series F Mortgage Bond, and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements and other charges of counsel to the Administrative Agent, (b) to pay or reimburse each Lender and the Administrative Agent for all their costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the G&R Series F Mortgage Bond, the other Loan Documents and any other documents prepared in connection herewith or therewith, including, without limitation, the fees and disbursements of counsel (including the allocated fees and disbursements 48 and other charges of in-house counsel) to each Lender and of counsel to the Administrative Agent, (c) to pay, indemnify, or reimburse each Lender and the Administrative Agent for, and hold each Lender and the Administrative Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, the G&R Series F Mortgage Bond, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the G&R Series F Mortgage Bond, the other Loan Documents and any such other documents, and (d) to pay, indemnify or reimburse each Lender, each Agent, their respective affiliates, and their respective officers, directors, trustees, employees, advisors, agents and controlling persons (each, an "Indemnitee") for, and hold each Indemnitee harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the G&R Series F Mortgage Bond, the other Loan Documents and any such other documents, including, without limitation, any of the foregoing relating to the use of proceeds of the Loans or the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Borrower any of its Subsidiaries or any of the Properties and the fees and disbursements and other charges of legal counsel in connection with claims, actions or proceedings by any Indemnitee against the Borrower hereunder (all the foregoing in this clause (d), collectively, the "Indemnified Liabilities"), provided, that the Borrower shall have no obligation hereunder to any Indemnitee with respect to Indemnified Liabilities to the extent such Indemnified Liabilities are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnitee. No Indemnitee shall be liable for any damages arising from the use by unauthorized persons of Information or other materials sent through electronic, telecommunications or other information transmission systems that are intercepted by such persons or for any special, indirect, consequential or punitive damages in connection with this Agreement. Without limiting the foregoing, and to the extent permitted by applicable law, the Borrower agrees not to assert and to cause its Subsidiaries not to assert, and hereby waives and agrees to cause its Subsidiaries so to waive, all rights for contribution or any other rights of recovery with respect to all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature, under or related to Environmental Laws, that any of them might have by statute or otherwise against any Indemnitee. All amounts due under this Section shall be payable not later than 30 days after written demand therefor. Statements payable by the Borrower pursuant to this Section shall be submitted to Kelly Langley (Telephone No. 775-834-5643) (Fax No. 775-834-5462), at the address of the Borrower set forth in Section 9.2, or to such other Person or address as may be hereafter designated by the Borrower in a notice to the Administrative Agent. The agreements in this Section shall survive repayment of the Loans and all other amounts payable hereunder. 9.6 Successors and Assigns; Participations and Assignments. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Administrative Agent, all future holders of the Loans and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Administrative Agent and each Lender. 49 (b) Any Lender may, without the consent of the Borrower, in accordance with applicable law, at any time sell to one or more banks, financial institutions or other entities (each, a "Participant") participating interests in any Loan owing to such Lender, any Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan for all purposes under this Agreement and the other Loan Documents, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. In no event shall any Participant under any such participation have any right to approve any amendment or waiver of any provision of any Loan Document, or any consent to any departure by the Borrower therefrom, except to the extent that such amendment, waiver or consent would require the consent of all Lenders pursuant to Section 9.1. The Borrower agrees that if amounts outstanding under this Agreement and the Loans are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement, provided that, in purchasing such participating interest, such Participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in Section 9.7(a) as fully as if such Participant were a Lender hereunder. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 2.14, 2.15 and 2.16 with respect to its participation in the Commitments and the Loans outstanding from time to time as if such Participant were a Lender; provided that, in the case of Section 2.15, such Participant shall have complied with the requirements of said Section, and provided, further, that no Participant shall be entitled to receive any greater amount pursuant to any such Section than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Any Lender (an "Assignor") may, in accordance with applicable law and upon written notice to the Administrative Agent, at any time and from time to time assign to any Lender or any affiliate, Related Fund or Control Investment Affiliate thereof or, with the consent of the Administrative Agent (which, in each case, shall not be unreasonably withheld or delayed), to an additional bank, financial institution or other entity (an "Assignee") all or any part of its rights and obligations under this Agreement pursuant to an Assignment and Acceptance, substantially in the form of Exhibit D, executed by such Assignee and such Assignor (and, where the consent of the Administrative Agent is required pursuant to the foregoing provisions, by the Administrative Agent) and delivered to the Administrative Agent for its acceptance and recording in the Register; provided that no such assignment to an Assignee (other than any Lender or any affiliate thereof or any Related Fund) shall be in an aggregate principal amount of less than $1,000,000 (other than in the case of an assignment of all of a Lender's interests under this Agreement), unless otherwise agreed by the Borrower and the Administrative Agent. Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and 50 Acceptance, have the rights and obligations of a Lender hereunder with Commitments and/or Loans as set forth therein, and (y) the Assignor thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of an Assignor's rights and obligations under this Agreement, such Assignor shall cease to be a party hereto, except as to Section 2.14, 2.15 and 9.5 in respect of the period prior to such effective date). For purposes of the minimum assignment amounts set forth in this paragraph, multiple assignments by two or more Related Funds shall be aggregated. (d) The Administrative Agent shall, on behalf of the Borrower, maintain at its address referred to in Section 9.2 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, each Agent and the Lenders shall treat each Person whose name is recorded in the Register as the owner of the Loans and any Revolving Credit Notes evidencing such Loans recorded therein for all purposes of this Agreement. Any assignment of any Loan, whether or not evidenced by a Revolving Credit Note, shall be effective only upon appropriate entries with respect thereto being made in the Register (and each Revolving Credit Note shall expressly so provide). Any assignment or transfer of all or part of a Loan evidenced by a Revolving Credit Note shall be registered on the Register only upon surrender for registration of assignment or transfer of the Revolving Credit Note evidencing such Loan, accompanied by a duly executed Assignment and Acceptance; thereupon one or more new Revolving Credit Notes in the same aggregate principal amount shall be issued to the designated Assignee, and the old Revolving Credit Notes shall be returned by the Administrative Agent to the Borrower marked "canceled". The Register shall be available for inspection by the Borrower or any Lender (with respect to any entry relating to such Lender's Loans) at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an Assignor and an Assignee (and, in any case where the consent of any other Person is required by Section 9.6(c), by each such other Person) together with payment to the Administrative Agent of a registration and processing fee of $3,500 (payable by the Assignor or Assignee, as agreed between such parties) (treating multiple, simultaneous assignments by two or more Related Funds as a single assignment) (except that no such registration and processing fee shall be payable (y) in connection with an assignment by or to a Merrill Lynch Entity or (z) in the case of an Assignee which is already a Lender or is an affiliate or Related Fund of a Lender or a Person under common management with a Lender), the Administrative Agent shall (i) promptly accept such Assignment and Acceptance and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to the Borrower. On or prior to such effective date, the Borrower, at its own expense, upon request, shall execute and deliver to the Administrative Agent (in exchange for the applicable Revolving Credit Notes, of the assigning Lender) a new applicable Revolving Credit Note to the order of such Assignee in an amount equal to the applicable Loans, assumed or acquired by it pursuant to such Assignment and Acceptance and, if the Assignor has retained a Loan, as the case may be, upon request, a new Revolving Credit Note, to the order of the Assignor in an amount equal to the applicable Loan, as the case may be, retained by it hereunder. 51 Such new Revolving Credit Note or Revolving Credit Notes shall be dated the Closing Date and shall otherwise be in the form of the Revolving Credit Note or Revolving Credit Notes replaced thereby. (f) For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this Section concerning assignments of Loans and Revolving Credit Notes relate only to absolute assignments and that such provisions do not prohibit assignments creating security interests in Loans and Revolving Credit Notes, including, without limitation, any pledge or assignment by a Lender of any Loan or Revolving Credit Note to any Federal Reserve Bank in accordance with applicable law. (g) Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Lender") may grant to a special purpose funding vehicle (an "SPC"), identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrower, the option to provide to the Borrower all or any part of any Loan that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to make any Loan and (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Lender). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any state thereof. In addition, notwithstanding anything to the contrary in this Section 9.6(g), any SPC may (A) with notice to, but without the prior written consent of, the Borrower and the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to the Granting Lender, or with the prior written consent of the Borrower and the Administrative Agent (which consent shall not be unreasonably withheld) to any financial institutions providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of Loans, and (B) disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC; provided that non-public information with respect to the Borrower may be disclosed only with the Borrower's consent which will not be unreasonably withheld. This paragraph (g) may not be amended without the written consent of any SPC with Loans outstanding at the time of such proposed amendment. 9.7 Adjustments; Set-off. (a) If any Lender (a "Benefitted Lender") shall at any time receive any payment of all or part of the Obligations owing to it, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 7(f), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other 52 Lender's Obligations, such Benefitted Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Obligations, or shall provide such other Lenders with the benefits of any such collateral, as shall be necessary to cause such Benefitted Lender to share the excess payment or benefits of such collateral ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. (b) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to or the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise), to set off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of the Borrower. Each Lender agrees promptly to notify the Borrower and the Administrative Agent after any such setoff and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such setoff and application. 9.8 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent. 9.9 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9.10 Integration. This Agreement and the other Loan Documents represent the entire agreement of the Borrower, the Administrative Agent, the Arranger and the Lenders with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Arranger, any Agent or any Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 9.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 9.12 Submission To Jurisdiction; Waivers. The Borrower hereby irrevocably and unconditionally: 53 (a) submits for itself and its Property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in Section 9.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages. 9.13 Acknowledgments. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) neither the Arranger, any Agent nor any Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Arranger, the Administrative Agent and the Lenders, on one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Arranger, the Administrative Agent and the Lenders or among the Borrower and the Lenders. 9.14 Confidentiality. Each of the Administrative Agent and the Lenders agrees to keep confidential all non-public information provided to it by the Borrower pursuant to this Agreement that is designated by the Borrower as confidential; provided that nothing herein shall prevent any Agent or any Lender from disclosing any such information (a) to the Arranger, any Agent, any other Lender or any affiliate of any thereof, (b) to any Participant or Assignee (each, a "Transferee") or prospective Transferee that agrees to comply with the provisions of this Section or substantially equivalent provisions, (c) to any of its employees, directors, Administrative Agent, attorneys, accountants and other professional advisors, (d) to any financial institution that is a direct or indirect contractual counterparty in swap agreements or such contractual counterparty's professional advisor (so long as such contractual counterparty or 54 professional advisor to such contractual counterparty agrees to be bound by the provisions of this Section), (e) upon the request or demand of any Governmental Authority having jurisdiction over it, (f) in response to any order of any court or other Governmental Authority or as may otherwise be required pursuant to any Requirement of Law, (g) in connection with any litigation or similar proceeding, (h) that has been publicly disclosed other than in breach of this Section, (i) to the National Association of Insurance Commissioners or any similar organization or any nationally recognized rating agency that requires access to information about a Lender's investment portfolio in connection with ratings issued with respect to such Lender or (j) in connection with the exercise of any remedy hereunder or under any other Loan Document. Notwithstanding anything herein to the contrary, any party to this Agreement (and any employee, representative, or other agent of any party to this Agreement) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transactions contemplated by this Agreement and all materials of any kind (including opinions or other tax analyses) that are provided to it relating to such tax treatment and tax structure. However, any such information relating to the tax treatment or tax structure is required to be kept confidential to the extent necessary to comply with any applicable federal or state securities laws. 9.15 Accounting Changes. In the event that any "Accounting Change" (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, standards or terms in this Agreement, then the Borrower and the Administrative Agent agree to enter into negotiations in order to amend such provisions of this Agreement so as to equitably reflect such Accounting Change with the desired result that the criteria for evaluating the Borrower's financial condition shall be the same after such Accounting Change as if such Accounting Change had not been made. Until such time as such an amendment shall have been executed and delivered by the Borrower, the Administrative Agent and the Required Lenders, all financial covenants, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Change had not occurred. "Accounting Change" refers to any change in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC. 9.16 WAIVERS OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. NEVADA POWER COMPANY By: --------------------------------- Name: Title: MERRILL LYNCH CAPITAL CORPORATION By: --------------------------------- Name: Title: SCHEDULE 2.1 COMMITMENTS
Lender Commitment - ---------------------------------- ----------- Merrill Lynch Capital Corporation $60,000,000 ----------- ----------- TOTAL $60,000,000 ===========
EX-10.2 4 b47188spexv10w2.txt FIRST AMENDMENT TO TERM LOAN AGREEMENT Exhibit 10.2 FIRST AMENDMENT TO TERM LOAN AGREEMENT FIRST AMENDMENT, dated as of June 27, 2003 (this "Amendment"), to the TERM LOAN AGREEMENT, dated as of October 30, 2002, (as amended, supplemented or otherwise modified from time to time, the "Term Loan Agreement"), among SIERRA PACIFIC POWER COMPANY, a Nevada corporation (the "Borrower"), the several banks and other financial institutions or entities from time to time parties thereto (the "Lenders"), LEHMAN BROTHERS INC., as advisor, sole lead arranger and sole bookrunner (in such capacity, the "Arranger"), and LEHMAN COMMERCIAL PAPER INC., as syndication agent (in such capacity, the "Syndication Agent") and as administrative agent (in such capacity, the "Administrative Agent"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrower has requested that certain provisions of the Term Loan Agreement be amended upon the terms and subject to the conditions set forth herein; and WHEREAS, the Lenders have agreed to such amendments upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and in the Term Loan Agreement, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, terms used herein and defined in the Term Loan Agreement are used herein as therein defined. 2. Amendment to Section 1.1 (Defined Terms). (a) The defined term "Consolidated EBITDA" set forth in Section 1.1 of the Term Loan Agreement is hereby amended by adding at the end thereto the following: "Notwithstanding the foregoing, when determining Consolidated EBITDA for fiscal quarter ended (i) June 30, 2002, up to $53,100,000 of Disallowed Deferred Energy Expenses will be added to Consolidated Net Income and (ii) June 30, 2003, up to $45,000,000 of Disallowed Deferred Energy Expenses will be added to Consolidated Net Income." 3. Amendment to Section 6.1 (Financial Condition Covenants). Section 6.1 of the Term Loan Agreement is hereby amended by deleting paragraph (b) of such Section in its entirety and inserting in its place the following: "(b) Consolidated Interest Coverage Ratio. Permit the Consolidated Interest Coverage Ratio for any period of four consecutive fiscal quarters of the Borrower ending with any fiscal quarter set forth below to be less than the ratio set forth below opposite such fiscal quarter:
Consolidated Interest Period Coverage Ratio
2 FQ4 2002; FQ1 2003 1.75 to 1.0 FQ2 2003 1.75 to 1.0 FQ3 2003 1.85 to 1.0 FQ4 2003 2.00 to 1.0 FQ1 2004 2.25 to 1.0 FQ2 2004 2.40 to 1.0 FQ3 2004 2.70 to 1.0 FQ4 2004 and each 3.00 to 1.0" fiscal quarter thereafter
4. Conditions to Effectiveness. This Amendment shall become effective on the date on which the Administrative Agent shall have received: (a) an executed counterpart of this Amendment duly executed and delivered by the Borrower; (b) executed Consent Letters in the form attached hereto as Exhibit A from the Required Lenders consenting to the execution of this Amendment by the Administrative Agent; and (c) the Administrative Agent shall have received, for the account of each Lender executing and delivering this Amendment by June 27, 2003, an amendment fee equal to .10% of the aggregate principal amount of Loans held by such Lender under the Term Loan Agreement. 5. Payment of Expenses. The Borrower agrees to pay or reimburse the Administrative Agent for all of its out-of-pocket costs and expenses incurred in connection with this Amendment, any other documents prepared in connection herewith and the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. 6. Continuing Effect. Except as expressly provided hereby, all of the terms and provisions of the Term Loan Agreement and the other Loan Documents are and shall remain in full force and effect. The amendments, waivers and acknowledgement contained herein shall not be construed to as an amendment or waiver of any other provision of the Term Loan Agreement or the other Loan Documents or for any purpose except as expressly set forth herein or a consent to any further or future action on the part of the Borrower that would require the waiver or consent of the Administrative Agent or the Lenders. 7. Counterparts. This Amendment may be executed by one or more of the parties hereto in any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Any executed counterpart delivered by facsimile transmission shall be effective as for all purposes hereof. 8. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND 3 CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. SIERRA PACIFIC POWER COMPANY By: -------------------------------- Name: Title: LEHMAN BROTHERS, INC., as Arranger By: -------------------------------- Name: Title: LEHMAN COMMERCIAL PAPER INC., as Syndication Agent By: -------------------------------- Name: Title: LEHMAN COMMERCIAL PAPER INC., as Administrative Agent By: -------------------------------- Name: Title: EXHIBIT A LENDER CONSENT LETTER FIRST AMENDMENT TO TERM LOAN AGREEMENT DATED AS OF JUNE 27, 2003 To: Lehman Commercial Paper Inc., as Administrative Agent c/o Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 Re. First Amendment to Term Loan Agreement Ladies and Gentlemen: Reference is made to the Term Loan Agreement, dated as of October 30, 2002 (as amended, supplemented or otherwise modified from time to time, the "Term Loan Agreement"), among SIERRA PACIFIC POWER COMPANY, a Nevada corporation (the "Borrower"), the several banks and other financial institutions or entities from time to time parties thereto (the "Lenders"), LEHMAN BROTHERS INC., as advisor, sole lead arranger and sole bookrunner (in such capacity, the "Arranger"), and LEHMAN COMMERCIAL PAPER INC., as syndication agent (in such capacity, the "Syndication Agent") and as administrative agent (in such capacity, the "Administrative Agent"). Unless otherwise defined herein, capitalized terms used herein and defined in the Term Loan Agreement are used herein as therein defined. The Borrower has requested that the Lenders amend certain provisions of the Term Loan Agreement on the terms described in the First Amendment to which this Lender Consent Letter is attached (the "Amendment"). Pursuant to Section 9.1 of the Term Loan Agreement, the undersigned Lender hereby consents to the execution by the Administrative Agent of the Amendment. Very truly yours, ------------------------------------------ (NAME OF LENDER) By: --------------------------------------- Name: Title: Dated as of June __, 2003 EX-31.1 5 b47188spexv31w1.txt CERTIFICATION OF WALTER M. HIGGINS III Exhibit 31.1 QUARTERLY CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER REQUIRED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Walter M. Higgins III, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the period ending June 30, 2003 of Sierra Pacific Resources, Nevada Power Company and Sierra Pacific Power Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this report; 4. The registrants' other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrants and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrants' disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrants' internal control over financial reporting that occurred during the registrants' most recent fiscal quarter (the registrants' fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to affect, the registrants' internal control over financial reporting; and 5. The registrants' other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants' auditors and the audit committee of the registrants' board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants' ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants' internal control over financial reporting. August 8, 2003 /s/ Walter M. Higgins III -------------------------- Walter M. Higgins III Chief Executive Officer EX-31.2 6 b47188spexv31w2.txt CERTIFICATION OF RICHARD ATKINS Exhibit 31.2 QUARTERLY CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER REQUIRED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard K. Atkinson, certify that: 6. I have reviewed this quarterly report on Form 10-Q for the period ending June 30, 2003 of Sierra Pacific Resources, Nevada Power Company and Sierra Pacific Power Company; 7. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 8. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this report; 9. The registrants' other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrants and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrants' disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrants' internal control over financial reporting that occurred during the registrants' most recent fiscal quarter (the registrants' fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to affect, the registrants' internal control over financial reporting; and 10. The registrants' other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants' auditors and the audit committee of the registrants' board of directors (or persons performing the equivalent functions): c) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants' ability to record, process, summarize and report financial information; and d) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants' internal control over financial reporting. August 8, 2003 /s/ Richard K. Atkinson ----------------------- Richard K. Atkinson Chief Financial Officer EX-32.1 7 b47188spexv32w1.txt 906 CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the combined Quarterly Report of Sierra Pacific Resources, Nevada Power Company and Sierra Pacific Power Company (the "Companies") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Walter M. Higgins, III, Chief Executive Officer, and Richard K. Atkinson, Chief Financial Officer, of the Companies, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Companies. August 8, 2003 /s/ Walter M. Higgins, III - -------------------------- Walter M. Higgins, III Chief Executive Officer /s/ Richard K. Atkinson - -------------------------- Richard K. Atkinson Chief Financial Officer This Certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Companies and will be retained by the Companies and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----