-----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, NxYoYrj1MMx9hz1nRo3AS6LZMS2mVW6bZX3C1udPiJO/YT9vUaAcEscDKsvvkaWt odtsjUbRc9ILwlW3U2pqVg== 0000898430-98-004025.txt : 19981116 0000898430-98-004025.hdr.sgml : 19981116 ACCESSION NUMBER: 0000898430-98-004025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIERRA PACIFIC RESOURCES CENTRAL INDEX KEY: 0000741508 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: SEC FILE NUMBER: 001-08788 FILM NUMBER: 98748996 BUSINESS ADDRESS: STREET 1: PO BOX 10100 STREET 2: 6100 NEIL RD CITY: RENO STATE: NV ZIP: 89511 BUSINESS PHONE: 7028343600 MAIL ADDRESS: STREET 1: P O BOX 30150 STREET 2: 6100 NEIL ROAD CITY: RENO STATE: NV ZIP: 89520-3150 10-Q 1 FORM 10-Q ================================================================================ 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 September 30, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File Number 1-8788 SIERRA PACIFIC RESOURCES (Exact name of registrant as specified in its charter) NEVADA 88-0198358 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 10100 (6100 Neil Road) Reno, Nevada 89520-0400 (89511) (Address of principal executive office) (Zip Code) (702) 834-4011 (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at November 11, 1998 Common Stock, $1.00 par value 30,956,181 Shares ================================================================================ 1 SIERRA PACIFIC RESOURCES QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 CONTENTS PART I - FINANCIAL INFORMATION ------------------------------
Page No. -------- ITEM 1. FINANCIAL STATEMENTS Report of Independent Accountants........................................... 3 Condensed Consolidated Balance Sheets September 30, 1998 and December 31, 1997....................................................... 4 Condensed Consolidated Statements of Income - Three Months and Nine-Months Ended September 30, 1998 and 1997....................................... 5 Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1998 and 1997....................................... 6 Notes to Condensed Consolidated Financial Statements........................ 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 9 PART II - OTHER INFORMATION --------------------------- ITEM 1. Legal Proceedings...................................................... 11 ITEM 4. Submission of Matters to a Vote of Security Holders.................... 11 ITEM 5. Other Information...................................................... 11 ITEM 6. Exhibits and Reports on Form 8-K....................................... 11 Signature Page................................................................... 12 Appendix......................................................................... 14
2 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Stockholders of Sierra Pacific Resources Reno, Nevada We have reviewed the accompanying condensed consolidated balance sheet of Sierra Pacific Resources and subsidiaries as of September 30, 1998, the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 1998 and 1997, and the related condensed consolidated statements of cash flows for the nine-month periods ended September 30, 1998 and 1997. These financial statements are the responsibility of the Corporation's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statement of capitalization of Sierra Pacific Resources and subsidiaries as of December 31, 1997, and the related consolidated statements of income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated January 30, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Reno, Nevada October 23, 1998 3 SIERRA PACIFIC RESOURCES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
September 30, December 31, 1998 1997 -------------- ------------ (Unaudited) ASSETS Utility Plant at Original Cost: Plant in service $ 2,185,769 $ 2,063,269 Less: accumulated provision for depreciation 711,645 664,490 -------------- ------------- 1,474,124 1,398,779 Construction work-in-progress 170,859 202,036 -------------- ------------- 1,644,983 1,600,815 -------------- ------------- Investments in subsidiaries and other property, net 56,882 49,614 -------------- ------------- Current Assets: Cash and cash equivalents 17,248 8,901 Accounts receivable less provision for uncollectible accounts: $1,498-1998 and $1,704-1997 95,293 103,356 Materials, supplies and fuel, at average cost 26,741 25,255 Other 3,106 2,885 -------------- ------------- 142,388 140,397 -------------- ------------- Deferred Charges: Regulatory tax asset 66,416 66,563 Other regulatory assets 62,032 63,476 Other 17,855 15,015 -------------- ------------- 146,303 145,054 -------------- ------------- $ 1,990,556 $ 1,935,880 ============== ============= CAPITALIZATION AND LIABILITIES Capitalization: Common shareholders' equity $ 662,760 $ 633,394 Preferred stock 73,115 73,115 Preferred stock subject to mandatory redemption: SPPC-obligated mandatorily redeemable preferred securities of SPPC's subsidiary Sierra Pacific Power Capital I, holding solely $50 million principal amount of 8.6% junior subordinated debentures of SPPC, due 2036 48,500 48,500 Long-term debt 611,786 627,224 -------------- ------------- 1,396,161 1,382,233 -------------- ------------- Current Liabilities: Short-term borrowings 100,000 75,000 Current maturities of long-term debt and preferred stock 10,577 10,566 Accounts payable 53,886 62,105 Accrued interest 15,294 6,910 Dividends declared 11,478 10,941 Accrued salaries and benefits 13,666 14,978 Other current liabilities 31,527 19,382 -------------- ------------- 236,428 199,882 -------------- ------------- Deferred Credits: Accumulated deferred federal income taxes 168,233 165,076 Accumulated deferred investment tax credit 38,435 39,873 Regulatory tax liability 39,100 40,767 Customer advances for construction 33,729 38,478 Accrued retirement benefits 40,928 37,456 Other 37,542 32,115 -------------- ------------- 357,967 353,765 -------------- ------------- $ 1,990,556 $ 1,935,880 ============== =============
The accompanying notes are an integral part of the financial statements. 4 SIERRA PACIFIC RESOURCES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except Per Share Amounts)
Three-Months Ended Nine-Months Ended September 30, September 30, ------------------------- ------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) OPERATING REVENUES: Electric $ 157,250 $ 137,611 $ 434,558 $ 402,869 Gas 13,394 7,690 66,872 47,670 Water 16,802 14,482 37,881 35,919 Other 1,103 1,092 5,352 4,450 ----------- ----------- ----------- ----------- 188,549 160,875 544,663 490,908 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Operation: Purchased power 44,863 32,279 118,615 93,757 Fuel for power generation 32,842 27,781 84,169 77,426 Gas purchased for resale 9,887 3,531 42,727 23,868 Other 30,783 30,558 94,263 97,197 Maintenance 5,034 4,827 15,737 16,304 Depreciation and amortization 17,098 16,746 50,692 47,572 Taxes: Income taxes 10,422 11,417 31,121 33,440 Other than income 4,914 4,703 14,819 14,149 ----------- ----------- ------------ ----------- 155,843 131,842 452,143 403,713 ----------- ----------- ------------ ----------- OPERATING INCOME 32,706 29,033 92,520 87,195 ----------- ----------- ------------ ----------- OTHER INCOME: Allowance for other funds used during construction 870 1,619 2,995 4,547 Other income - net 404 351 402 1,170 ----------- ----------- ------------ ----------- 1,274 1,970 3,397 5,717 ----------- ----------- ------------ ----------- Total Income 33,980 31,003 95,917 92,912 ----------- ----------- ------------ ----------- INTEREST CHARGES: Long-term debt 9,972 10,261 30,291 31,429 Other 1,834 1,459 5,502 3,421 Allowance for borrowed funds used during construction and capitalized interest (1,401) (1,283) (5,122) (3,637) ----------- ----------- ------------ ----------- 10,405 10,437 30,671 31,213 ----------- ----------- ------------ ----------- INCOME BEFORE OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES 23,575 20,566 65,246 61,699 Preferred dividend requirements of SPPC-obligated mandatorily redeemable preferred securities (1,043) (1,043) (3,128) (3,128) ----------- ----------- ------------ ----------- INCOME BEFORE PREFERRED DIVIDENDS 22,532 19,523 62,118 58,571 Preferred dividend requirements (1,365) (1,365) (4,094) (4,094) ----------- ----------- ------------ ----------- INCOME APPLICABLE TO COMMON STOCK $ 21,167 $ 18,158 $ 58,024 $ 54,477 =========== =========== ============ =========== Net Income Per Share - Basic $ 0.68 $ 0.59 $ 1.88 $ 1.76 Net Income Per Share - Diluted $ 0.68 $ 0.59 $ 1.87 $ 1.76 Weighted Average Shares of Comm Stock Outstanding 30,956,869 30,891,370 30,944,579 30,873,646 Dividends Paid Per Share of Common Stock $ 0.325 $ 0.310 $ 0.960 $ 0.915
The accompanying notes are an integral part of the financial statements. 5 SIERRA PACIFIC RESOURCES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
Nine-Months Ended September 30, -------------------------------------- 1998 1997 ------------- ------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Income before preferred dividends $ 62,118 $ 58,571 Non-cash items included in income: Depreciation and amortization 50,692 47,572 Deferred taxes and deferred investment tax credit 200 1,667 AFUDC and capitalized interest (8,118) (8,184) Early retirement and severance amortization 3,196 3,497 Other 2,251 (2,040) Changes in certain assets and liabilities: Accounts receivable 3,680 14,209 Materials, supplies and fuel (1,486) 3,338 Other current assets (221) 754 Accounts payable (8,219) (8,759) Other current liabilities 19,217 1,766 Other - net 1,519 3,595 ------------- ------------- Net Cash Flows From Operating Activities 124,829 115,986 ------------- ------------- CASH FLOWS USED IN INVESTING ACTIVITIES: Additions to utility plant (107,347) (102,431) Net customer refunds and contributions in aid construction 15,731 17,067 ------------- ------------- Net cash used for utility plant (91,616) (85,364) ------------- ------------- (Investments in) disposal of subsidiaries and other property - net (2,833) - ------------- ------------- Net Cash Used In Investing Activities (94,449) (85,364) ------------- ------------- CASH FLOWS USED IN FINANCING ACTIVITIES: Increase in short-term borrowings 25,637 30,384 Proceeds from issuance of long-term debt - - Reduction of long-term debt (15,455) (25,418) Sale of common stock 1,532 2,144 Dividends paid (33,747) (32,336) ------------- ------------- Net Cash Used In Financing Activities (22,033) (25,226) ------------- ------------- Net increase in Cash and Cash Equivalents 8,347 5,396 Beginning balance in Cash and Cash Equivalents 8,901 4,949 ------------- ------------- Ending balance in Cash and Cash Equivalents $ 17,248 $ 10,345 ============= ============= Supplemental Disclosures of Cash Flow Information: Cash Paid During Period For: Interest $ 29,540 $ 30,163 Income Taxes $ 24,900 $ 22,379
The accompanying notes are an integral part of the financial statements. 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- NOTE 1. MANAGEMENT'S STATEMENT - -------------------------------- In the opinion of the management of Sierra Pacific Resources, hereafter known as the Company, 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, condensed consolidated results of operations and consolidated 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 and therefore, they should be read in conjunction with the Company's audited financial statements included in the Company's Annual Report on Form 10-K and 10-K/A for the year ended December 31, 1997. Deloitte & Touche LLP, the Company's independent accountants, have performed a review of the unaudited condensed consolidated financial statements, and their report has been included in this report. The results of operations for the three-month and nine-month period ended September 30, 1998 are not necessarily indicative of the results to be expected for the full year. Principles of Consolidation --------------------------- The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Sierra Pacific Power Company (SPPC), Tuscarora Gas Pipeline Company (TGPC), Sierra Gas Holding Company (formerly Sierra Energy Company), Sierra Energy Company dba e three (e three), Sierra Pacific Energy Company (SPEC), Lands of Sierra (LOS), and Sierra Water Development Company (SWDC). All significant intercompany transactions and balances have been eliminated in consolidation. Reclassifications ----------------- Certain items previously reported for years prior to 1998 have been reclassified to conform with the current year's presentation. Net income and shareholder's equity were not affected by these reclassifications. NOTE 2. RECENT PRONOUNCEMENTS OF THE FASB - ------------------------------------------- On June 30, 1997, the FASB issued SFAS 131 entitled "Disclosure About Segments of an Enterprise and Related Information". This statement establishes additional standards for segment reporting in the financial statements and is effective for fiscal years beginning after December 15, 1997. Management has concluded that the Company will continue to define its primary operating segments as electric, gas, water and other. The Company expects to provide the additional disclosure requirements of this statement in its Annual Report on Form 10-K for the year ended December 31, 1998. In February 1998, the FASB issued SFAS 132 entitled "Employers' Disclosures about Pensions and Other Postretirement Benefits". This statement revises employers' disclosures about pension and other postretirement benefit plans for fiscal years beginning after December 15, 1997. The statement does not change the measurement or recognition of those plans. Therefore, management believes this statement will not have a material impact on the financial statements of the Company. In June 1998, the FASB issued SFAS 133, entitled "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value and is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. Management does not believe this new statement will have a material impact on the consolidated financial statements of the Company. 7 NOTE 3. EARNINGS PER SHARE - --------------------------- The Company follows SFAS No. 128, "Earnings Per Share". This pronouncement supersedes APB Opinion No. 15, "Earnings Per Share" and establishes new standards for computing and presenting EPS. Previously reported primary and fully diluted EPS are replaced with basic and diluted EPS. The difference between Basic EPS and Diluted EPS is due to common stock equivalent shares resulting from stock options, employee stock purchase plan, performance shares and a non-employee director stock plan. Common stock equivalents were determined using the treasury stock method. Prior period EPS have been restated to conform with the new statement. The following provides a reconciliation of Basic EPS and Diluted EPS.
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- -------------------------- 1998 1997 1998 1997 ------------- ------------ ------------ ------------ Basic EPS Numerator Income available to common stockholders ($000) 21,167 18,158 58,024 54,477 ------------- ------------ ------------ ------------ Denominator Weighted average number of shares outstanding 30,956,869 30,891,370 30,944,579 30,873,646 ------------- ------------ ------------ ------------ Per-Share Amount $0.68 $0.59 $1.88 $1.76 ============= ============ ============ ============ Diluted EPS Numerator Income available to common stockholders ($000) 21,167 18,158 58,024 54,477 ------------- ------------ ------------ ------------ Denominator Weighted average number of shares outstanding 30,956,869 30,891,370 30,944,579 30,873,646 before dilution Stock options 64,622 41,502 53,105 38,058 Executive long term incentive plan-performance shares 17,940 32,153 17,184 32,478 Non-Employee stock plan 8,658 5,573 7,116 4,875 Employee stock purchase plan 1,150 5,415 1,156 3,341 ------------- ------------ ------------ ------------ 31,049,239 30,976,013 31,023,140 30,952,398 ------------- ------------ ------------ ------------ Per-Share Amount $0.68 $0.59 $1.87 $1.76 ============= ============ ============ ============
NOTE 4. LONG-TERM DEBT - ------------------------ On April 1, 1998, the Company redeemed $10 million of 6.23% senior notes. SPPC, the Company's subsidiary, redeemed $5 million of 8.65% medium term notes on June 18, 1998. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS When used anywhere in this Form 10-Q, or the Form 10-Q of Sierra Pacific Power Company and in future filings by Sierra Pacific Power Company or Sierra Pacific Resources with the Securities and Exchange Commission, in Sierra Pacific Power Company or Sierra Pacific Resources' press releases and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimated", "project", or "outlook" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Sierra Pacific Resources wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Sierra Pacific Resources wishes to advise readers that various factors described in these Forms 10-Q could cause Sierra Pacific Resources' actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. Sierra Pacific Resources specifically declines any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Sierra Pacific Power Company - ---------------------------- Management Discussion and Analysis of Sierra Pacific Power Company (SPPC) is contained in its Quarterly Report on Form 10-Q for the three and nine months ended September 30, 1998, which is attached as an appendix. Tuscarora Gas Pipeline Company - ------------------------------ For the three and nine months ended September 30, 1998, Tuscarora Gas Pipeline Company, a wholly-owned subsidiary of the Company, contributed net income of $476,000 and $1,351,000 compared to $397,000 and $1,068,000 for the comparable periods in 1997. The increase in net income for 1998 is primarily due to the addition of a new customer and greater interruptible transportation revenue. On September 21, 1998, Tuscarora Gas Transmission Company, a subsidiary of Tuscarora Gas Pipeline Company, received a rate order from the Federal Energy Regulatory Commission (FERC). The FERC order found that the company had justified its existing rates and could continue charging customers based on those rates. Lands of Sierra - --------------- For the three and nine months ended September 30, 1998, Lands of Sierra incurred net income of $486,000 and $443,000 compared to ($31,000) and $91,000 net (loss)/income in 1997. The 1998 net income resulted from the reversal of a previously established environmental reserve, which is no longer appropriate, described later in the environmental section. E.Three - ------- For the three and nine months ended September 30, 1998, e.three incurred net losses of $629,000 and $1,366,000 compared to $235,000 and $715,000 in 1997. The increase in losses is due to the continuation of start-up activities, primarily comprised of additional sales staffing requirements. 9 In October 1998, e three acquired a 100% ownership interest, through the issuance of Sierra Pacific Resources common stock, in Independent Energy Consulting Incorporated (IEC). IEC is an energy consulting business that provides energy procurement management services. Sierra Pacific Energy Company - ----------------------------- Sierra Pacific Energy Company's (SPEC) primary business, which operates under the brand name Simple Choice, markets a package of products and services in the Sierra Pacific Power Company operating territory. The Simple Choice product line was obtained under a franchise from Enable Corporation, an unaffiliated entity. Simple Choice customers can pay their Simple Choice bills, along with their Sierra Pacific Power Company energy bills, on one statement. SPEC sells products and services related to home, entertainment, communications and energy. SPEC offers satellite television, long distance, appliances, cellular telephone services, carbon-monoxide detectors, appliance warranties and home security. Simple Choice began start-up operations during the third quarter of 1998. As described in the Company's 1997 Annual Report on Form 10-K, SPEC had plans to develop a major customer information system to provide advanced metering, billing and customer information services to large customers. For the three months ended September 30, 1998 SPEC incurred net losses of approximately $700,000 due to Simple Choice start-up costs and a partial impairment of a component of the customer information system. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES ---------------------------------------------------- During the first nine months of 1998, the Company earned $62.1 million in income before preferred dividends and declared $30.2 million in common stock dividends. SPPC, the Company's principal subsidiary, declared $4.1 million in preferred stock dividends. Construction Expenditures and Financing - --------------------------------------- Substantially all capital expenditures relate to SPPC. A description of construction expenditures and financing of SPPC is contained in its Quarterly Report Form 10-Q for the period ended September 30, 1998, attached as an appendix. Environmental - ------------- As described in the Company's Annual Report on Form on Form 10-K for the year ended December 31,1997, Lands of Sierra owns several parcels of commercial property at Lake Tahoe where it was determined that there was soil and groundwater contamination from underground fuel storage tanks. Lands of Sierra has successfully utilized bioremediation techniques to remediate this site. As a result, management now anticipates the remaining cost to fully remediate the site at approximately $85 thousand. The excess amount previously reserved, approximately $690 thousand, was reversed in September 1998. Merger - ------ As reported in Sierra Pacific Resources' report on Form 8-K dated July 7, 1998, the Company and Nevada Power filed a joint merger application with the Public Utilities Commission of Nevada for approval of their proposed merger. In the filing, Nevada Power and SPPC propose selling their generating plants if the merger is completed. Capital raised from the sale will be reinvested primarily in transmission and distribution facilities or used to reduce outstanding capital. 10 On October 9, 1998 the stockholders of both companies voted to approve the merger. The merger is conditioned, among other things, upon obtaining approvals from the Public Utilities Commission of Nevada, the Federal Energy Regulatory Commission and the Securities Exchange Commission. Through September 30, 1998, the Company had incurred a total of $5.3 million in costs to effect the merger. $4.7 million of the costs incurred have been capitalized and the balance expensed during the period. See the Form 8-K dated July 7, 1998, for additional details relating to the merger application filing. Year 2000 - --------- All of the major business application software and computing infrastructure are owned by SPPC. The Management Discussion and Analysis of SPPC contained in its Quarterly Report on Form 10-Q, attached as an appendix, includes a disclosure that addresses SPPC's assessment of the Year 2000 issue. PART II ------- ITEM 1. LEGAL PROCEEDINGS Although the Company is involved in ongoing litigation on a variety of matters, it is management's opinion that none individually or collectively are material to the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits filed with this Form 10-Q: (15) Letter of independent accountants acknowledging awareness regarding unaudited interim financial information of the Company. (27) The Financial Data Schedule containing summary financial information extracted from the condensed consolidated financial statements on Form 10-Q for the nine month period ended September 30, 1998, for Sierra Pacific Resources, and is qualified in its entirety by reference to such financial statements. (b) Reports on Form 8-K: Filed July 7, 1998 Item 5, Other Events, and Item 7, Financial Statements and Exhibits. Exhibit 99.1 Press release, dated July 7,1998, that announced Sierra Pacific Resources and Nevada Power Company filing of a joint merger application with the Public Utilities Commission of Nevada for approval of their proposed merger. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Sierra Pacific Resources ----------------------------- (Registrant) Date: November 13, 1998 By: /s/ Mark A. Ruelle -------------------------------- ---------------------------- Mark A. Ruelle Senior Vice President Chief Financial Officer Treasurer (Principal Financial Officer) (Principal Accounting Officer) 12 ================================================================================ 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 SEPTEMBER 30, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File Number 0-508 SIERRA PACIFIC POWER COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEVADA 88-0044418 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 10100 (6100 Neil Road) Reno, Nevada 89520-0400 (89511) (Address of principal executive office) (Zip Code) (702) 834-4011 (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at November13, 1998 Common Stock, $3.75 par value 1,000 Shares ================================================================================ 1 SIERRA PACIFIC POWER COMPANY QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 CONTENTS PART I - FINANCIAL INFORMATION ------------------------------
PAGE --------- ITEM 1. FINANCIAL STATEMENTS Report of Independent Accountants............................................... 3 Condensed Consolidated Balance Sheets - September 30, 1998 and December 31, 1997.......................................................... 4 Condensed Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 1998 and 1997.......................................... 5 Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1998 and 1997.......................................... 6 Notes to Condensed Consolidated Financial Statements............................ 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 8 PART II - OTHER INFORMATION --------------------------- ITEM 1. Legal Proceedings............................................................... 25 ITEM 5. Other Information............................................................... 25 ITEM 6. Exhibits and Reports on Form 8-K................................................ 25 Signature Page............................................................................ 26 Appendix.................................................................................. 28
2 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Stockholder of Sierra Pacific Power Company Reno, Nevada We have reviewed the accompanying condensed consolidated balance sheet of Sierra Pacific Power Company and subsidiaries as of September 30, 1998, the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 1998 and 1997, and the related condensed consolidated statements of cash flows for the nine-month periods ended September 30, 1998 and 1997. These financial statements are the responsibility of the Corporation's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet and consolidated statement of capitalization of Sierra Pacific Power Company and subsidiaries as of December 31, 1997, and the related consolidated statements of income, common shareholder's equity, and cash flows for the year then ended (not presented herein); and in our report dated January 30, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Reno, Nevada October 23, 1998 3 SIERRA PACIFIC POWER COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
September 30, December 31, 1998 1997 ---------------- ---------------- (Unaudited) ASSETS Utility Plant at Original Cost: Plant in service $ 2,185,769 $ 2,063,269 Less: accumulated provision for depreciation 711,645 664,490 ---------------- ---------------- 1,474,124 1,398,779 Construction work-in-progress 170,859 202,036 ---------------- ---------------- 1,644,983 1,600,815 ---------------- ---------------- Investments in subsidiaries and other property, net 31,381 26,791 ---------------- ---------------- Current Assets: Cash and cash equivalents 13,461 6,920 Accounts receivable less provision for uncollectible accounts: $1,498 -1998 and $1,704 -1997 95,658 104,926 Materials, supplies and fuel, at average cost 26,741 25,255 Other 2,656 2,572 ---------------- ---------------- 138,516 139,673 ---------------- ---------------- Deferred Charges: Regulatory tax asset 66,416 66,563 Other regulatory assets 62,032 63,476 Other 17,816 14,924 ---------------- ---------------- 146,264 144,963 ---------------- ---------------- $ 1,961,144 $ 1,912,242 ================ ================ CAPITALIZATION AND LIABILITIES Capitalization: Common shareholder's equity $ 653,112 $ 639,556 Preferred stock 73,115 73,115 Preferred stock subject to mandatory redemption: Company-obligated mandatorily redeemable preferred securities of the Company's subsidiary Sierra Pacific Power Capital I, holding solely $50 million principal amount of 8.6% junior subordinated debentures of the Company, due 2036 48,500 48,500 Long-term debt 601,562 606,889 ---------------- ---------------- 1,376,289 1,368,060 ---------------- ---------------- Current Liabilities: Short-term borrowings 100,000 75,000 Current maturities of long-term debt and preferred stock 466 454 Accounts payable 54,876 63,088 Accrued interest 14,620 6,394 Dividends declared 20,365 19,365 Accrued salaries and benefits 13,665 14,978 Other current liabilities 31,119 19,209 ---------------- ---------------- 235,111 198,488 ---------------- ---------------- Deferred Credits: Accumulated deferred federal income taxes 164,417 162,627 Accumulated deferred investment tax credit 38,435 39,873 Regulatory tax liability 39,100 40,767 Accrued Retirement Benefits 40,928 37,456 Customer advances for construction 33,729 38,478 Other 33,135 26,493 ---------------- ---------------- 349,744 345,694 ---------------- ---------------- $ 1,961,144 $ 1,912,242 ================ ================
The accompanying notes are an integral part of the financial statements. 4 SIERRA PACIFIC POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands)
Three-Months Ended Nine-Months Ended September 30, September 30, --------------------------------- --------------------------------- 1998 1997 1998 1997 ------------- -------------- -------------- --------------- (Unaudited) (Unaudited) OPERATING REVENUES: Electric $ 157,250 $ 137,611 $ 434,558 $ 402,869 Gas 13,394 7,690 66,872 47,670 Water 16,802 14,482 37,881 35,919 ------------- -------------- -------------- --------------- 187,446 159,783 539,311 486,458 ------------- -------------- -------------- --------------- OPERATING EXPENSES: Operation: Purchased power 44,863 32,279 118,615 93,757 Fuel for power generation 32,842 27,781 84,169 77,426 Gas purchased for resale 9,887 3,531 42,727 23,868 Other 28,111 28,946 86,031 90,619 Maintenance 5,034 4,827 15,737 16,304 Depreciation and amortization 17,098 16,746 50,692 47,572 Taxes: Income taxes 11,084 11,795 32,486 34,706 Other than income 4,901 4,684 14,782 14,084 ------------- -------------- -------------- --------------- 153,820 130,589 445,239 398,336 ------------- -------------- -------------- --------------- OPERATING INCOME 33,626 29,194 94,072 88,122 ------------- -------------- -------------- --------------- OTHER INCOME: Allowance for other funds used during construction 870 1,619 2,995 4,547 Other income - net 366 314 213 876 ------------- -------------- -------------- --------------- 1,236 1,933 3,208 5,423 ------------- -------------- -------------- --------------- Total Income 34,862 31,127 97,280 93,545 ------------- -------------- -------------- --------------- INTEREST CHARGES: Long-term debt 9,635 9,766 29,122 29,796 Other 1,834 1,459 5,502 3,421 Allowance for borrowed funds used during constructio and capitalized interest (1,401) (1,283) (5,122) (3,637) ------------- -------------- -------------- --------------- 10,068 9,942 29,502 29,580 ------------- -------------- -------------- --------------- INCOME BEFORE OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES 24,794 21,185 67,778 63,965 Preferred dividend requirements of Company-obligated mandatorily redeemable preferred securities (1,043) (1,043) (3,128) (3,128) ------------- -------------- -------------- --------------- INCOME BEFORE PREFERRED DIVIDENDS 23,751 20,142 64,650 60,837 Preferred dividend requirements (1,365) (1,365) (4,094) (4,094) ------------- -------------- -------------- --------------- INCOME APPLICABLE TO COMMON STOCK $ 22,386 $ 18,777 $ 60,556 $ 56,743 ============= ============== ============== ===============
The accompanying notes are an integral part of the financial statements. 5 SIERRA PACIFIC POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
Nine Months Ended September 30, ------------------------------------ 1998 1997 ----------- ------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Income before preferred dividends $ 64,650 $ 60,837 Non-cash items included in income: Depreciation and amortization 50,692 47,572 Deferred taxes and deferred investment tax credit (1,167) 818 AFUDC and capitalized interest (8,118) (8,184) Early retirement and severance amortization 3,196 3,497 Other 2,251 (2,039) Changes in certain assets and liabilities: Accounts receivable 4,885 14,384 Materials, supplies and fuel (1,486) 3,338 Other current assets (84) 1,202 Accounts payable (8,212) (8,042) Other current liabilities 18,823 1,491 Other - net 2,682 1,190 ----------- ------------- Net Cash Flows From Operating Activities 128,112 116,064 ----------- ------------- CASH FLOWS USED IN INVESTING ACTIVITIES: Additions to utility plant (107,347) (103,370) Net customer refunds and contributions in aid construction 15,731 17,067 ----------- ------------- Net cash used for utility plant (91,616) (86,303) ----------- ------------- (Investments in) disposal of subsidiaries and other property - net (156) - ----------- ------------- Net Cash Used In Investing Activities (91,772) (86,303) ----------- ------------- CASH FLOWS USED IN FINANCING ACTIVITIES: Increase in short-term borrowings 25,637 30,384 Reduction of long-term debt (5,342) (15,306) Investment from the parent company 10,000 18,000 Dividends paid (60,094) (56,094) ----------- ------------- Net Cash Used In Financing Activities (29,799) (23,016) ----------- ------------- Net increase in Cash and Cash Equivalents 6,541 6,745 Beginning balance in Cash and Cash Equivalents 6,920 890 ----------- ------------- Ending balance in Cash and Cash Equivalents $ 13,461 $ 7,635 =========== ============= Supplemental Disclosures of Cash Flow Information: Cash Paid During Period For: Interest $ 28,530 $ 28,849 Income Taxes $ 27,385 $ 24,053
The accompanying notes are an integral part of the financial statements. 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- NOTE 1. MANAGEMENT'S STATEMENT - --------------------------------- In the opinion of the management of Sierra Pacific Power Company, hereafter known as the Company, 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, condensed consolidated results of operations and condensed consolidated 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 and therefore, they should be read in conjunction with the Company's audited financial statements included in the Company's Annual Report on Form 10-K and 10-K/A for the year ended December 31, 1997. Deloitte & Touche LLP, the Company's independent accountants, have performed a review of the unaudited consolidated financial statements, and their report has been included in this report. The results of operations for the three and nine month periods ended September 30, 1998 are not necessarily indicative of the results to be expected for the full year. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Sierra Pacific Power Capital I, Pinon Pine Corp., and Pinon Pine Investment Co. All significant intercompany transactions and balances have been eliminated in consolidation. Reclassifications ----------------- Certain items previously reported for years prior to 1998 have been reclassified to conform with the current year's presentation. Net income and shareholder's equity were not affected by these reclassifications. NOTE 2. RECENT PRONOUNCEMENTS OF THE FASB - ------------------------------------------- On June 30, 1997, the FASB issued SFAS 131 entitled "Disclosure About Segments of an Enterprise and Related Information". This statement establishes additional standards for segment reporting in the financial statements and is effective for fiscal years beginning after December 15, 1997. Management has concluded that the Company will continue to define its primary operating segments as electric, gas and water. The Company expects to provide the additional disclosure requirements of this statement in its Annual Report on Form 10-K for the year ended December 31, 1998. In February 1998, the FASB issued SFAS 132 entitled "Employers' Disclosures about Pensions and Other Postretirement Benefits". This statement revises employers' disclosures about pension and other postretirement benefit plans for fiscal years beginning after December 15, 1997. The statement does not change the measurement or recognition of those plans. Therefore, management believes this statement will not have a material impact on the financial statements of the Company. In June 1998, the FASB issued SFAS 133, entitled "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value and is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. Management does not believe this new statement will have a material impact on the consolidated financial statements of the Company. 7 NOTE 3. LONG TERM DEBT - ------------------------ The Company redeemed $5 million of 8.65% medium term notes on June 18, 1998. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS WHEN USED ANYWHERE IN THIS FORM 10-Q, OR THE FORM 10-Q OF SIERRA PACIFIC RESOURCES AND IN FUTURE FILINGS BY SIERRA PACIFIC RESOURCES OR SIERRA PACIFIC POWER COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION, IN SIERRA PACIFIC RESOURCES OR SIERRA PACIFIC POWER COMPANY'S PRESS RELEASES AND IN ORAL STATEMENTS MADE WITH THE APPROVAL OF AN AUTHORIZED EXECUTIVE OFFICER, THE WORDS OR PHRASES "WILL LIKELY RESULT", "ARE EXPECTED TO", "WILL CONTINUE", "IS ANTICIPATED", "ESTIMATED", "PROJECT", OR "OUTLOOK" OR SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL EARNINGS AND THOSE PRESENTLY ANTICIPATED OR PROJECTED. SIERRA PACIFIC POWER COMPANY WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE. SIERRA PACIFIC POWER COMPANY WISHES TO ADVISE READERS THAT VARIOUS FACTORS DESCRIBED IN THESE FORMS 10-Q COULD CAUSE SIERRA PACIFIC POWER COMPANY'S ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY OPINIONS OR STATEMENTS EXPRESSED WITH RESPECT TO FUTURE PERIODS IN ANY CURRENT STATEMENTS. SIERRA PACIFIC POWER COMPANY SPECIFICALLY DECLINES ANY OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS. The Company's business is subject to seasonal fluctuations based upon weather patterns. Significant portions of the Company's net revenues and profits are typically realized during the first and third quarters of the Company's year, which include the peak heating and cooling periods. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. 8 RESULTS OF OPERATIONS - --------------------- ELECTRIC OPERATIONS - ------------------- The components of gross margin for electric operations were (dollars in thousands):
Three Months Ended September 30, --------------------------------- Increase Increase 1998 1997 (Decrease) (Decrease) % ---------------- --------------- ---------------- -------------- Electric Operating Revenues (dollars): Residential $ 41,760 $ 39,613 $ 2,147 5.4% Commercial 51,224 48,579 2,645 5.4% Industrial 48,020 44,260 3,760 8.5% ---------------- --------------- ---------------- -------------- Electric Revenues before Other 141,004 132,452 8,552 6.5% Other 16,246 5,159 11,087 214.9% ---------------- --------------- ---------------- -------------- Total Revenues 157,250 137,611 19,639 14.3% Electric Energy Costs: Purchased Power 44,863 32,279 12,584 39.0% Fuel for Power Generation 32,842 27,781 5,061 18.2% ---------------- --------------- ---------------- -------------- Total Energy Costs 77,705 60,060 17,645 29.4% ---------------- --------------- ---------------- -------------- Gross Electric Margin $ 79,545 $ 77,551 $ 1,994 2.6% ================ =============== ================ ============== Electric Operating Sales Megawatt-Hours (MWH): Total MWH Sales 2,615,367 2,139,582 475,785 22.2% Less: Other Sales MWH 442,340 124,219 318,121 256.1% ---------------- --------------- ---------------- -------------- Electric Sales before Other Sales MWH 2,173,027 2,015,363 157,664 7.8% ---------------- --------------- ---------------- -------------- Average Revenues per MWH $ 64.89 $ 65.72 $ (0.83) -1.3%
Residential customer revenues increased because of higher use per customer as a result of warmer weather in 1998 and an increase in customers of 2.5% over the prior year. Commercial revenues were also higher in 1998 because of higher use per customer and a 2.9% increase in total customers over the prior year. Industrial revenues increased as a result of higher use per customer (primarily in the mining segment). The Company believes that the higher use per customer by the large mines reflects increased production levels. Other revenues increased primarily because of an increase in wholesale sales due to increased focus on this business opportunity. Average revenues per MWH hour decreased because of a 10% California rate reduction for residential and commercial customers effective January 1998. Also, in August 1997, one of the company's industrial customers migrated to a different customer classification (due to higher usage) that has a lower tariff rate. 9 Purchased power energy costs in the preceding table consisted of the following total MWHs and average electric costs:
Three Months Ended September 30, ------------------------------- Increase/ Increase/ 1998 1997 (Decrease) (Decrease)% ------------- ------------- -------------- ------------- Purchased Power MWH 1,155,726 931,661 224,065 24.1% Average cost per MWH of Purchased Power $ 38.82 $ 34.65 $ 4.17 12.0%
The total cost of purchased power increased because of an increase in the volume purchased due to system load growth and additional resale sales in 1998. The increase in cost was also due to higher average prices paid per MWH for non- firm purchases during the summer of 1998. Fuel for power generation provided the total MWHs and average electric costs that follow (dollars in thousands):
Three Months Ended September 30 ------------------------------- Increase/ Increase/ 1998 1997 (Decrease) (Decrease)% ------------- ------------- -------------- ------------- Fuel for Power Generation $ 32,842 $ 27,781 $ 5,061 18.2% Power Generated MWH 1,616,631 1,352,341 264,290 19.5% Average cost per MWH of generation fuel $ 20.32 $ 20.54 $ (0.22) -1.1%
The increase in the cost of fuel for power generation in the third quarter of 1998 over the prior year was the result of higher generated volumes required to meet continued customer growth and greater use per customer. The increase was offset slightly by lower average costs per MWH of generation fuel. Lower coal prices, mostly offset by higher natural gas prices, were responsible for the lower average cost. 10 The components of gross margin for electric operations were (dollars in thousands):
Nine Months Ended September 30, -------------------------------- Increase Increase 1998 1997 (Decrease) (Decrease) % -------------- -------------- ------------- -------------- Electric Operating Revenues (dollars): Residential $ 125,403 $ 120,612 $ 4,791 4.0% Commercial 135,094 132,898 2,196 1.7% Industrial 137,771 128,546 9,225 7.2% -------------- -------------- ------------- ----------- Electric Revenues before Other 398,268 382,056 16,212 4.2% Other 36,290 20,813 15,477 74.4% -------------- -------------- ------------- ----------- Total Revenues 434,558 402,869 31,689 7.9% Electric Energy Costs: Purchased Power 118,615 93,757 24,858 26.5% Fuel for Power Generation 84,169 77,426 6,743 8.7% -------------- -------------- ------------- ----------- Total Energy Costs 202,784 171,183 31,601 18.5% -------------- -------------- ------------- ----------- Gross Electric Margin $ 231,774 $ 231,686 $ 88 0.0% ============== ============== ============= =========== Electric Operating Sales MWHs: Total MWH Sales 7,116,928 6,037,341 1,079,587 17.9% Less: Other Sales MWH 973,687 334,454 639,233 191.1% -------------- -------------- ------------- ----------- Electric Sales before Other Sales MWH 6,143,241 5,702,887 440,354 7.7% -------------- -------------- ------------- ----------- Average Revenues per MWH $ 64.83 $ 66.99 $ (2.16) -3.2%
Residential revenue increased due to an overall increase in customers of 2.8% and more extreme weather conditions in 1998. The increase in sales was partially offset by a rate reduction that went into effect in March 1997. Commercial revenues increased slightly because of an increase in customers of 2.8%. However, most of this increase was offset by both lower use per customer and a rate reduction in March 1997. Industrial revenues increased because of higher use per customer. The increase was in part offset by both an increase of $1.9 million in June 1997 revenues (the reversal of a prior year accrual) and a decrease in effective rates beginning in March 1997. Other revenues increased primarily due to an increase in wholesale sales and additional facilities surcharge revenue. Higher wholesale sales reflect an increased focus on that line of business. Facilities surcharge revenue increased as a result of improved opportunities to provide facilities to industrial customers. The average revenues per mega-watt hour decreased because of a 10% California rate reduction for residential and commercial customers effective January 1998. Also, in 1997 two of the Company's industrial customers migrated to different customer classifications (due to higher usage) that have lower tariff rates. 11 Purchased power energy costs in the preceding table consisted of the following total MWHs and average electric costs:
Nine Months Ended September 30, ------------------------------- Increase/ Increase/ 1998 1997 (Decrease) (Decrease)% ------------- ------------- -------------- ------------- Purchased Power MWH 3,512,280 2,718,103 794,177 29.2% Average cost per MWH of Purchased Power $ 33.77 $ 34.49 $ (0.72) -2.1%
Purchased power costs increased because of an increase in the volume of purchased power due mostly to additional resale sales in 1998 and to a lesser extent system load growth. The increase in the cost of purchased power was partially offset by a reduction in the cost per MWH due to an increase in the amount of non-firm energy purchases relative to firm purchases in 1998. Non- firm purchases were considerably less expensive per MWH. Fuel for power generation provided the following total MWH's and average electric costs (dollars in thousands):
Nine Months Ended September 30 ------------------------------- Increase/ Increase/ 1998 1997 (Decrease) (Decrease)% ------------- ------------- -------------- ------------- Fuel for Power Generation $ 84,169 $ 77,426 $ 6,743 8.7% Power Generated MWH 4,069,649 3,694,325 375,324 10.2% Average cost per MWH of generation fuel $ 20.68 $ 20.96 $ (0.28) -1.3%
The cost of fuel for generation for the nine month period ended September 30, 1998 was higher than the comparable period in 1997 because of increased generation requirements needed to meet continued customer growth and greater use per customer. The increase in the cost of fuel for generation was partially offset by a reduction in the cost per MWH due to the availability of less expensive spot market coal during 1998. 12 GAS OPERATIONS - -------------- The components of gross margin for gas operations were (dollars in thousands):
Three Months Ended September 30, ------------------- Increase/ Increase/ 1998 1997 (Decrease) (Decrease)% ------------ ------------ ---------- ------------ Gas Operating Revenues: Residential $ 3,506 $ 3,521 $ (15) -0.4% Commercial 2,198 2,087 111 5.3% Industrial 1,960 1,796 164 9.1% Miscellaneous 321 286 35 12.2% ------------ ------------ ---------- --------- Total retail sales 7,985 7,690 295 3.8% Wholesale sales 5,409 - 5,409 N/A ------------ ------------ ---------- --------- Total sales 13,394 7,690 5,704 74.2% ------------ ------------ ---------- --------- Gas Energy Costs for: Wholesale 5,307 - 5,307 N/A Retail 4,580 3,531 1,049 29.7% ------------ ------------ ---------- --------- Total gas purchased for resale 9,887 3,531 6,356 180.0% ------------ ------------ ---------- --------- Gross Gas Margin $ 3,507 $ 4,159 $ (652) -15.7% ============ ============ ========== =========
Gas operating revenues above consisted of the following sales in decatherms and average gas revenues:
Three Months Ended September 30, -------------------------------- Increase Increase 1998 1997 (Decrease) (Decrease)% -------------- -------------- --------------- --------------- Gas Operating Sales (Decatherms): Wholesale 3,229,436 - 3,229,436 - Retail 1,285,076 1,251,246 33,830 2.7% -------------- -------------- --------------- ------------ Total sales 4,514,512 1,251,246 3,263,266 260.8% -------------- -------------- --------------- ------------ Average Revenues per Decatherm Wholesale $ 1.67 $ - $ 1.67 - Retail $ 6.21 $ 6.15 $ 0.07 1.1%
Wholesale sales in 1998, not present in the third quarter of 1997, reflect an increased focus on this business opportunity. Commercial and industrial revenues increased over the prior year due to customer growth and higher use per customer. 13 Gas energy costs consisted of the following decatherm purchases and average gas costs:
Three Months Ended September 30, -------------------------------- Increase/ Increase/ 1998 1997 (Decrease) (Decrease)% ------------- ------------- ------------- ------------ Gas energy costs (decatherms): Wholesale 3,226,962 - 3,226,962 - Retail 1,254,356 1,219,168 35,188 2.9% ------------- ------------- ------------- ---------- Total purchased for resale 4,481,318 1,219,168 3,262,150 267.6% ------------- ------------- ------------- ---------- Average cost per Decatherm Wholesale $ 1.64 $ - $ 1.64 - Retail $ 3.65 $ 2.90 $ 0.76 26.1%
Consistent with the increase in gas sales from customer growth and greater use per customer, other gas purchases (decatherms) were higher in 1998. The average cost per decatherm was also higher because of an increase in the unit cost of firm and spot purchases. The components of gross margin for gas operations were (dollars in thousands):
Nine Months Ended September 30, ------------------- Increase/ Increase/ 1998 1997 (Decrease) (Decrease)% ------------- ------------- ------------- ------------ Gas Operating Revenues: Residential $ 28,032 $ 24,314 $ 3,718 15.3% Commercial 15,301 13,390 1,911 14.3% Industrial 8,529 8,013 516 6.4% Miscellaneous 968 769 199 25.9% ------------- ------------- ------------- --------- Total retail sales 52,830 46,486 6,344 13.6% Wholesale sales 14,042 1,184 12,858 1086.0% ------------- ------------- ------------- --------- Total sales 66,872 47,670 19,202 40.3% ------------- ------------- ------------- --------- Gas Energy Costs: Wholesale 13,438 867 12,571 1449.9% Retail 29,289 23,001 6,288 27.3% ------------- ------------- ------------- --------- Total gas purchased for resale 42,727 23,868 18,859 79.0% ------------- ------------- ------------- --------- Gross Gas Margin $ 24,145 $ 23,802 $ 343 1.4% ============= ============= ============= =========
14 Gas operating revenues above consisted of the following sales in decatherms and average gas revenues:
Nine Months Ended September 30, --------------------------------- Increase Increase 1998 1997 (Decrease) (Decrease) % --------------- -------------- --------------- --------------- Gas Operating Sales (Decatherms): Wholesale 7,811,885 511,872 7,300,013 1426.1% Retail 9,346,123 8,137,607 1,208,516 14.9% --------------- -------------- --------------- --------------- Total sales 17,158,008 8,649,479 8,508,529 98.4% --------------- -------------- --------------- --------------- Average Revenues per Decatherm Wholesale $ 1.80 $ 2.31 $ (0.51) -22.2% Retail $ 5.65 $ 5.71 $ (0.06) -1.1%
Residential, commercial and industrial revenues increased over the prior year due to a 5.0% increase in customers and colder than normal weather in 1998. Increased wholesale sales in 1998 reflect continued focus on this business opportunity. Gas energy costs consisted of the following decatherm purchases and average gas costs:
Nine Months Ended September 30, ---------------------------------- Increase/ Increase/ 1998 1997 (Decrease) (Decrease) % -------------- -------------- ------------- --------------- Gas energy costs (decatherms): Wholesale purchases 7,811,885 511,872 7,300,013 1426.1% Other gas purchases 9,383,733 8,112,335 1,271,398 15.7% -------------- -------------- ------------- --------------- Total gas purchased for resale 17,195,618 8,624,207 8,571,411 99.4% -------------- -------------- ------------- --------------- Average cost per Decatherm Wholesale purchases $ 1.72 $ 1.69 $ 0.03 1.8% Other gas purchases $ 3.12 $ 2.84 $ 0.28 9.9%
Consistent with the increase in gas sales from customer growth and colder weather in 1998, other gas purchases (decatherms) were higher in 1998. The average cost per decatherm of all purchases was also higher because of an increase in the unit cost of firm and spot purchases. WATER OPERATIONS - -----------------
Three Months Ended September 30, --------------------------------- Increase/ Increase/ 1998 1997 (Decrease) $ (Decrease) % -------------- ------------- --------------- ------------- Water Operating Revenues: Sales and gross water margin $ 16,802 $ 14,482 $ 2,320 16.0% ============== ============= =============== =============
15 Water sales were higher in the third quarter of 1998 because of the price increase effective April 2, 1998 and a 3.2% increase in total customers over the prior year. The increased sales were partially offset by higher precipitation levels in 1998 that reduced the need for irrigation.
Nine Months Ended September 30, --------------------------------- Increase/ Increase/ 1998 1997 (Decrease) $ (Decrease) % -------------- ------------- --------------- ------------- Water Operating Revenues: Sales and gross water margin $ 37,881 $ 35,919 $ 1,962 5.5% ============== ============= =============== =============
Water sales for the first nine months of 1998 were higher than the prior year. The same factors which contributed to higher sales in the third quarter of 1998, the April price increase and a 3.2% increase in customers, were also responsible for the increase in sales during the first six months. OTHER FINANCIAL INFORMATION - ---------------------------
Three Months Ended September 30, ---------------------------- Increase/ Increase/ 1998 1997 Decrease $ Decrease % ---------- ----------- ----------- ------------ Allowance for other funds used during construction $ 870 $ 1,619 $ (749) -46.3% Allowance for borrowed funds used during construction 1,401 1,283 118 9.2% ---------- ----------- ----------- ------------ $ 2,271 $ 2,902 $ (631) -21.7% ---------- ----------- ----------- ------------
Total allowance for funds used during construction (AFUDC) was lower in the third quarter of 1998 over the comparable period in 1997 because the Pinon Pine power project was completed in June 1998. Consequently, the third quarter 1998 amounts do not include AFUDC for this project.
Nine Months Ended September 30, ---------------------------- Increase/ Increase/ 1998 1997 Decrease $ Decrease % ---------- ----------- ----------- ------------ Allowance for other funds used during construction $ 2,995 $ 4,547 $ (1,552) -34.1% Allowance for borrowed funds used during construction 5,122 3,637 1,485 40.8% ---------- ----------- ----------- ------------ $ 8,117 $ 8,184 $ (67) -0.8% ---------- ----------- ----------- ------------
Total allowance for funds used during construction for the nine months ended September 30, 1998 was relatively unchanged compared to the same period in 1997. The 1998 amounts were lower due to the completion of the Pinon Pine power project in June 1998. However, the continued construction of the Alturas transmission line offset most of this reduction. 16 The following table includes other items of financial information that varied from the same items in the third quarter of 1997:
Three Months Ended September 30, --------------------------------------------------- Increase/ Increase/ 1998 1997 (Decrease) $ (Decrease) % -------------- -------------- -------------- ------------- Income Taxes $ 11,084 $ 11,795 $ (711) -6.0%
Operating income taxes decreased due to a reclassification of interest expense to operating income from non-operating income that lowered operating income before income taxes and a lower effective tax rate in the 1998 period. The following table includes other items of financial information that varied from the same items in 1997:
Nine Months Ended September 30, -------------------------------------------------- Increase/ Increase/ 1998 1997 (Decrease) $ (Decrease) % ------------- -------------- ------------- ------------- Other operating expense $ 86,031 $ 90,619 $ (4,588) -5.1% Depreciation and amortization 50,692 47,572 3,120 6.6% Income Taxes 32,486 34,706 (2,220) -6.4% Other income-net 213 876 (663) -75.7% Interest Charges-Other 5,502 3,421 2,081 60.8%
Other operating expense decreased due to higher stock compensation plan costs and post-retirement benefits experienced in 1997. Also, 1998 costs were lower because of the water rate case decision which directed the Company to capitalize certain costs of approximately $0.6 million which were previously expensed. Depreciation and amortization expense was higher because of water division additions and other customer improvements added to plant in service in late 1997. Operating income taxes decreased due to a reclassification of interest expense to operating income from non-operating income that lowered operating income before income taxes and a lower effective tax rate in the 1998 period. Other income-net decreased due to water rate case adjustments charged to expense during 1998. Interest chargesOther increased because of higher short-term debt balances in 1998 utilized to partially finance the Alturas transmission line project. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES ---------------------------------------------------- During the first nine months of 1998, the Company earned $64.7 million in income before preferred dividends, declared $4.1 million in dividends to holders of its preferred stock, and declared $57 million in common stock dividends to its parent, Sierra Pacific Resources. 17 CONSTRUCTION EXPENDITURES AND FINANCING - --------------------------------------- The Company's construction program and capital requirements for the period 1998-2002 were originally discussed in the Company's 1997 Annual Report on Form 10-K. Of the amount projected for 1998, as of September 30, 1998, $91.6 million (60.6%) had been spent. Of this amount, approximately 74.2% was provided by internally-generated funds. ALTURAS INTERTIE - ---------------- As of September 30, 1998, the Company had spent approximately $119 million on the Alturas Intertie transmission line. The current estimated total construction cost, including AFUDC, is approximately $159 million. The increase in the estimated construction cost of approximately $8.4 million over the amount previously reported in the Company's 1997 Annual Report on Form 10-K is due to higher costs associated with regulatory compliance as well as enhanced construction techniques which are expected to expedite completion of the project. Construction of the project is expected to be completed in late 1998. For further discussion of major projects, refer to the Company's 1997 Annual Report on Form 10-K. PINON PINE - ---------- On June 17, 1998, the Company completed the construction of the coal gasifier portion of the Pinon Pine Power Project. Because of the in-service date, the performance warranty requirements, as described in the Company's Annual Report on Form 10-K for 1997, will not be met by December 31, 1998. Consequently, the Company will be required to refinance General Electric Capital Corporation's investment in Pinon Pine Company LLC. It is estimated that the additional investment required will be approximately $30 million. For more information concerning the Pinon Pine Power project see the Company's Annual Report on Form 10-K for 1997. REGULATORY MATTERS - ------------------ NEVADA As a result of the rate plan referred to in the Company's Form 10-K for 1997, the Company made its first earnings sharing filing on April 29, 1998. For its electric division customers, the Company filed to refund $7.3 million based upon calendar year 1997 results. The Company also proposed a refund of $1.7 million to its gas division customers for results of the same period. On October 1, 1998, the PUCN issued an order continuing the case until a future date. The hearings have been delayed pending the outcome of negotiations in the merger case. The Company and other parties agreed at the last merger-related pre-hearing conference to delay this case. A pre-hearing conference is scheduled for December 7, 1998, to set a new schedule for this proceeding. Merger hearings should be completed by that time. As mentioned in its 1997 Form 10-K, the Company requested permission from the PUCN to continue to serve customers in the Truckee-Carson Irrigation District (TCID) leasehold area upon expiration of the leasehold agreement (June 1998. The PUCN determined that the Company was fit, willing, and able to serve the leasehold area. The PUCN also determined that TCID's application was deficient. However, the PUCN will allow TCID to reapply for a certificate sometime in the future if it satisfies numerous conditions including obtaining a judicial determination that it owns facilities in the area. On July 1, 1998, the Company filed its electric resource plan with the PUCN. The plan discusses generation and transmission alternatives that would supply Northern Nevada with electricity for the period 1998 through 2017. On October 6, 1998, hearings on the transmission system impact study were held. The stipulation reached at the hearings, requires the Company to re-file its resource plan on December 15, 1998, with an updated load forecast and more detailed analyses. As reported in Sierra Pacific Resources (SPR) report on Form 8-K filed on July 7, 1998, SPR, the parent company of Sierra Pacific Power Company, filed with the PUCN a joint application with Nevada Power Company for an order authorizing a merger. Among other issues in the PUCN merger application, the filing addresses: . Benefits of the merger to customers, employees and stockholders. . The impact of the proposed merger on competition and electricity prices. 18 . Operation of the electric transmission system to ensure competing energy suppliers have equal access to customers. A decision from the PUCN is expected within 180 days of the filing date. With regard to Nevada Assembly Bill 366 (electric and gas utility restructuring) previously discussed in the Company's 1997 Form 10-K, the PUCN opened several dockets to investigate issues relating to restructuring: Docket 97-8001 is the general electric restructuring docket, covering unbundled electric services, potentially competitive services, licensing, non-price terms and conditions for distribution service, market power, stranded costs and provider of last resort. The PUCN has issued several draft rules for comment. An independent scheduling agent (ISA) is being considered for the state to mitigate market power issues. Docket 97-11018 was opened for unbundling of the Company's costs into the eight unbundled services and to delineate transmission and distribution facilities applying FERC's seven criteria outlined in its Order 888. Docket 97-5034 establishes rules for both electric and gas utilities related to sharing of corporate services, employee transfers between affiliates, non-discriminatory treatment of affiliates and non-affiliates, audits, sharing of name and logo and penalties for violation of these rules for both electric and gas utilities. Docket 97-8002 was opened to investigate issues relating to compliance with Nevada AB 366 for natural gas issues. The docket addresses unbundling of services, potentially competitive designation of services, licensing, and alternative plans of regulation. In early 1998 the PUCN issued "OII Number Two" requesting comments on four subject areas: which services should become "potentially competitive"; guidelines for distribution open access tariffs; consumer protection; and licensing of alternative sellers. Comments have been filed and workshops have been held on these matters: Potentially Competitive Services (PCS) -------------------------------------- On June 8, 1998 the PUCN issued an order determining that billing, metering, and customer services should be declared "potentially competitive" effective December 31, 1999. Generation services were already deemed to be potentially competitive by AB 366. On August 26, 1998 the Company filed a letter explaining to the PUCN why the Company was not filing an application to declare any additional services as "potentially competitive". The Company's letter indicates that the Company does not have the information necessary to meet the statutory requirements for determining a service as potentially competitive. The company's position is that metering is a non-competitive service, that billing and customer service are components of the individual services (e.g. billing for generation is part of the service "generation"), and that there are new services for billing and customer service which consolidate all unbundled services. Potentially competitive only applies to existing services. The company also stated its continuing support of restructuring and urged the PUCN to focus on getting ready for competitive generation and aggregation. On September 23, 1998, the PUCN Staff filed its application requesting metering, billing, and customer service be declared potentially competitive for the Company's service area. The Company filed comments on the proposed filing requirements for affiliates approval to provide PCS on October 13, 1998. Distribution Open Access Tariffs -------------------------------- The Company filed its comments on the proposed distribution tariffs rule on September 3, 1998. On September 14-17, 1998, the PUCN held hearings on the proposed rule for non-price distribution tariffs. On October 5, 1998, the PUCN issued a revised proposed rule for distribution tariffs. Comments on the proposed rule are due November 2, 1998, and a hearing will be held on November 5, 1998. 19 Licensing of Alternative Sellers and Consumer Protection Requirements for ------------------------------------------------------------------------- Alternative Sellers ------------------- After soliciting comments and holding workshops, on June 26, 1998 the PUCN issued proposed rules on licensing of alternative sellers and consumer protection requirements for alternative sellers. These rules provide the licensing and reporting requirements of alternative sellers and establish the conduct required when alternative sellers provide generation or aggregation services to residential and small commercial customers. The Company filed its comments on the PUCN's proposed rules on September 3, 1998. On September 14-17, 1998, the PUCN held hearings on the proposed rules for licensing and consumer protection. On October 5, 1998, the PUCN issued revised proposed rules for licensing, and consumer protection. Comments on these proposed rules are due November 2, 1998 and a hearing will be held on November 5, 1998. Load Pockets and Market Power ----------------------------- The working group filed a consensus report on the Independent Scheduling Agent (ISA)concept on August 13, 1998. On July 15, 1998, the PUCN issued Procedural Order No. 4 which set a schedule for the filing of a report on Independent Scheduling Administrator, the submittal of a report by PUCN Staff on load pocket mitigation, and the filing of a report on a generation aggregation tariff. A consensus report on the issues related to an interim Independent System Administrator (iISA) was filed on August 13, 1998. The report outlines the functions the iISA would perform. On August 21, 1998, the PUCN Staff filed its report on its Load Pocket Market Power Mitigation Proposal. The report describes Staff's proposed calculation of "Maximum Alternative Seller Load Pocket Capacity". On September 21, 1998, the PUCN issued Procedural Order No. 5. The order directs the parties to develop a generation aggregation tariff. The order also requests legal briefs on the state commission's ability to order a utility to make a FERC filing. The tariffs and briefs are due October 12, 1998 and the hearing will be October 16, 1998. The PUCN issued an order providing guidance to the parties on the development of an interim ISA on October 12, 1998. The order provides some guiding principles and the schedule for preparation of an ISA submittal to the FERC by February 1, 1999. Also, the Company filed its legal brief on jurisdictional issues raised in Procedural Order 5. Transition Costs ---------------- The Company filed an extensive response to transition cost questions including a "white paper" which addressed many aspects of transition costs. The PUCN established a working group to resolve various issues that include mitigation standards; filing requirements; tax and accounting issues; and recovery mechanisms. Provider of Last Resort ----------------------- The Provider of Last Resort (PLR) will provide electric service to customers who do not choose and customers who are not able to find service with an alternative seller. The PUCN issued a proposed rule for the PLR on September 9, 1998. The proposed rule describes the process to be used by the PUCN to select the PLR, qualification criteria and obligations of the PLR, and terms and conditions for PLR service. Comments on the proposed rule are due October 13, 1998 and a workshop and hearing was held on October 19, 1998. October 13, 1998 the Company filed comments on the proposed rules for Provider of Last Resort. 20 Affiliate Transaction Rules --------------------------- On July 20-21, 1998, the hearing continued on the PUCN's proposed affiliate transaction rule. The PUCN asked for legal briefs on constitutional issues related to prohibiting the sharing of name and logo. The PUCN also invited the Staff of the Federal Trade Commission to comment on its proposed rule. The PUCN may also conduct a survey of relative name recognition of the incumbent utilities and potential new entrants to the Nevada market. The Company filed its response to legal questions posed by the PUCN on the use of name and logo by affiliates on August 11, 1998. On August 24, 1998, the PUCN issued a revised proposed rule on affiliate transactions. The revised proposed rule continues to prohibit the use of name and logo by affiliates, but does allow an affiliate to identify themselves as affiliates of the power company. A disclaimer similar to the California disclaimer would be required. The PUCN issued a new proposed rule on September 9, 1998 outlining the application requirements for an affiliate to request approval to provide PCS services. This rule is in addition to the Affiliate Transaction rule. Comments on this proposed rule are due October 13, 1998 and a workshop and hearing will be held on October 19, 1998. On September 23, 1998, the company filed comments on the latest proposed rule on affiliate transactions. The Company's comments focused on the name/logo issue. On September 29, 1998 the PUCN held another hearing on the proposed affiliate transaction rules. Discussion focused mainly on the proposed prohibition of an affiliate's use of the utility's name/logo. The PUCN issued a revised proposed rule for affiliate transactions on October 5, 1998. Comments on this proposed rule are due on November 2, 1998 and a hearing was held on November 5, 1998. Electric Transmission and Distribution Split -------------------------------------------- On July 30, 1998, hearings were completed on the transmission and distribution split. A settlement was not reached in the Company's case. The PUCN Staff supported the Company's proposal. The PUCN approved the Company's proposed transmission and distribution split at the August 24, 1998 agenda meeting. In addition to approving the Company's proposal, the PUCN approved certain pricing principles to provide assurances to large customers with facilities charges. On September 8, 1998, the Company filed a Petition for Reconsideration on the August 24, 1998 Order. The Company requests two modifications to the PUCN's Order. The PUCN ruled on Sierra's Petition for Reconsideration on October 6, 1998. The PUCN accepted one of the requested modifications (related to capacity and energy split of firm energy purchases) and rejected the other request. Gas Restructuring ----------------- In order to comply with Nevada AB 366 for natural gas deregulation, the PUCN is developing new natural gas rules. The PUCN is following similar processes as in electric restructuring to develop new rules. The PUCN adopted the final rule on July 24, 1998, that outline the procedure for determining whether a service is potentially competitive. 21 CALIFORNIA ---------- On August 6, 1998, the California Public Utilities Commission (CPUC) revised and clarified portions of its affiliate transaction rules. The revisions included the following: a narrow exception allowing the temporary assignment of utility employees to affiliates, an opportunity for utilities to challenge the 15% fee for employees whose positions are impacted by restructuring, clarification of corporate oversight and governance rules, modification of product service rules and a change in the timing of compliance audits for service provider information. On August 28, 1998, the Company filed a revenue cycle unbundling proposal. Revenue cycle services include meter ownership, meter services (O&M), meter reading, and billing. Under the Company's proposal, customers who select their own provider of a revenue cycle service would receive a credit on their bill. At the suggestion of the CPUC, on September 24, 1998, the Company filed a Petition for Modification of the December 16, 1997 order, requesting balancing account treatment in lieu of revenue reduction bonds. On September 29, 1998, the Company filed with the CPUC its generation market valuation proposal. As a result of the pending merger, the Company and Nevada Power plan to divest their generation assets. As a result, the market will set the value of those assets that the CPUC may use to determine the appropriate level of transition cost recovery for the Company. FEDERAL ENERGY REGULATORY COMMISSION - ------------------------------------ On October 2, 1998, the Company and Nevada Power filed an application with the Federal Energy Regulatory Commission for merger approval. In a separate, concurrent filing, the companies submitted an open access transmission tariff for the merged company. ENVIRONMENTAL - ------------- On Tuesday, July 7, 1998, a phase shifter at the Company's Fort Churchill generation plant experienced an internal failure causing a spill of approximately 10,000 gallons of oil and solvent. It is estimated that it will cost $290,000 to remediate the spill that contaminated the ground. Since insurance will cover all amounts over the deductible, a reserve of $150,000 was recognized for the deductible of $150,000. As discussed in Sierra Pacific Power Company's Annual Report on Form 10-K for 1997, a parcel formerly owned by the company was identified to have soil contamination from a gas manufacturing process. An agreement was reached with the owners of the property in July 1998 that documented the remediation to take place. The agreement provides for the removal of two feet of soil. This soil will be hauled off-site and incinerated. The current estimate for the removal and incineration is $675,000. However, it is anticipated that some additional work will be required that will bring the total cost to approximately $790,000. This amount was fully reserved as of September 30, 1998. All remediation will be completed by February 15, 1999. MERGER - ------ As reported in Sierra Pacific Resources report on Form 8-K dated July 7, 1998, the Company's parent filed a joint merger application with the PUCN for approval of a proposed merger. In the filing, Nevada Power and SPPC propose selling their generation plants if the merger is completed. Capital raised from the sale will be reinvested primarily in transmission and distribution facilities or to reduce capital outstanding. Through September 30, 1998, the Company had incurred a total of $5.3 million in costs to effect the merger. $4.7 million of the external costs incurred have been capitalized and the balance of internal costs expensed during the period. 22 YEAR 2000 - ---------- The Company uses business application software programs and relies on computing infrastructure that includes embedded systems that have a Year 2000 (Y2K) affect on the Company. In many cases, the Company's software programs and embedded systems use two-digit years that may recognize a date using '00' as the year 1900 rather than the year 2000. This could result in the computer or device shutting down, performing incorrect computations, or performing in an inconsistent manner. In 1996 the Company established its Y2K project to address the Y2K issues. The project's scope includes: (1) business application systems including, but not limited to, customer information and billing, financial systems including (time reporting, payroll, general ledger, accounts payable and purchasing, and end-user developed systems) (2) embedded systems, including equipment that operates or controls operating facilities including (power plants, transmission and distribution, water, gas, telecommunications, and information technology systems); (3) customer, vendor, and supplier relationships and (4) testing and contingency planning. To implement its Y2K strategies, the Company established a Y2K project office currently headed by the Senior Vice President, Chief Financial Officer, and Treasurer, an oversight committee representing all lines of businesses, and a "champions team" representing generation, transmission and distribution, gas, water, telecommunications, computer infrastructure, and building facilities. Also represented are internal audit, engineering, procurement, legal, and human resources. In addition, the Company has utilized the expertise of outside consultants to assist in the project management and the technical aspects of the project. Business Application Systems ----------------------------- The initial focus for the Y2K project team was on the business application systems. In the fall of 1996 the Company purchased software assessment tools and completed its inventory and code assessment for its mainframe business systems in October 1996. The inventory is comprised of over 7 million lines of COBOL code, and end-user programs. The Company developed and strictly adheres to a Y2K methodology that includes unit, system wide and Y2K date specific testing. The first major Y2K ready business system, Customer Information and Billing representing more than 2 million lines of code, was successfully implemented in June, 1997. As of this writing, the Company has successfully implemented more than 80% of its business systems and has a target completion date of March 1999 to complete all systems. The Company is on schedule to meet that date. Embedded Systems ---------------- The Company hired an outside engineering consultant, Network Systems Engineering Corporation (NSEC), to assist the Company's staff in conducting a thorough and comprehensive inventory of its embedded systems at the component level. All systems have been inventoried and assessed. This inventory identified over 2000 potentially date sensitive items. The Company and NSEC have contacted all manufacturers of those components that it has identified as critical to operations and continues to contact other manufacturers of embedded system components to determine whether their components are Y2K compliant. At this time, 13% of the embedded systems components are not compliant, 23% need further assessment, and 64% are compliant or not date sensitive. Test plans are being prepared for those items that are critical to the Company's business continuation. The Company's embedded systems plan calls for all Y2K corrective procedures to be complete by October 1999. Vendors and Suppliers --------------------- The Company has contacted in writing all vendors and suppliers of products and services that it considers critical to its operations. These contacts have included, but are not limited to, suppliers of interstate transportation capacity for coal supplies, natural gas producers, financial institutions, and telephone service. The quality of responses is not uniform or consistent. The next steps are to work with the major vendors and suppliers to assess their Y2K readiness. The Company may consider new business and procurement alternatives for products and services as necessary to the extent that alternatives are available. 23 Major Customers --------------- The Company is communicating with major customers to inform them of any potential vulnerability of the Company's ability to provide utility services come January 1, 2000. The Company has met face to face with some of its major customers to share its progress on Y2K. Also discussed at these meetings is the customer's Y2K readiness. The Company will continue to keep its major customers informed as to its progress on Y2K remediation, testing and contingency planning. Contingency Planning -------------------- The Company's Y2K strategies include contingency planning for both business and embedded systems. The planning effort includes critical Company areas such as information technology, networks, vendors and suppliers, and operations personnel. Quick action response teams and additional Company personnel are planned to be available for the century rollover. Specific contingency plans are being developed. As part of its normal business practice, the Company maintains plans to follow during emergency circumstances, some of which could arise from Y2K problems. Presently, the Company continues to develop its contingency plans for potential Y2K related problems. Potential Risks --------------- With respect to its internal operations, those over which the Company has direct control, the Company believes the most significant potential risks are: (1) its ability to use electronic devices to control and operate its generation, gas, water, transmission and distribution systems; (2) its ability to render timely bills to its customers; and (3) the ability to maintain continuous operations of its computer systems. The Company relies on suppliers of natural gas and electricity and other products and services. Should any of these critical vendors fail, the impact of any such failure could become a significant challenge to the Company's ability to meet the demands of its customers. Business continuity interruption could also have a material adverse financial impact, including but not limited to, lost sales revenues, increased operating costs, and claims from customers related to business interruptions. Based upon the information supplied to date by critical vendors and suppliers, the Company believes the probability of such failures is low. The Company's Y2K program emphasizes continued monitoring of the progress of these critical vendors and suppliers toward completion of their year 2000 programs. Financial Implications ---------------------- To complete its Y2K program, the Company expects to incur non-recurring expenses of approximately $2,800,000 to correct its business systems. These expenses will occur over a three year period ending in March 1999. As of August 31, 1998, the company has expended approximately $1,800,000 on its business systems effort. As of August 31, 1998, the Company had incurred expenses of $216,000 for the inventory and assessment phases of the embedded systems project with final inventory and assessment charges expected to be approximately $280,000. The estimated expense for the correcting, testing, contingency planning, and implementing phases for the embedded systems is approximately $6,000,000. The Company's Y2K program is progressing and the Company believes it is taking all reasonable steps necessary to be able to operate successfully through and beyond the turn of the century. 24 PART II - ------- ITEM 1. LEGAL PROCEEDINGS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits filed with this Form 10-Q. (15) Letter of independent accountants acknowledging awareness regarding interim financial information of the Company. (27) The Financial Data Schedule containing summary financial information extracted from the consolidated financial statements filed on Form 10-Q for the nine month period ended September 30, 1998, for Sierra Pacific Power Company and is qualified in its entirety by reference to such financial statements. (b) Reports on Form 8-K 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Sierra Pacific Power Company --------------------------------- (Registrant) Date: November 13, 1998 By /s/ Mark A. Ruelle ----------------------- ------------------------------ Mark A. Ruelle Senior Vice President and Chief Financial Officer Treasurer (Principal Financial Officer) Date: November 13, 1998 BY /s/ Mary O. Simmons ------------------------ ------------------------------- Mary O. Simmons Controller (Principal Accounting Officer) 26 EX-15 2 LETTER OF INDEPENDENT ACCOUNTANTS EXHIBIT 15 Sierra Pacific Resources 6100 Neil Road Reno, Nevada 89511 We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of Sierra Pacific Resources and subsidiaries for the periods ended September 30, 1998 and 1997, as indicated in our report dated October 23, 1998; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, is incorporated by reference in Registration Statement No. 333-4374 on Form S-3 Registration Statement No. 333-62895 on Form S-4, and Registration Statement Nos. 2-92454, 33-87646, and 33-48152 on Forms S-8. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP Reno, Nevada November 13, 1998 EX-27 3 FINANCIAL DATA SCHEDULE
OPUR1 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1998 SEP-30-1998 PER-BOOK 1,644,983 56,882 142,388 146,303 0 1,990,556 30,957 456,098 175,705 662,760 48,500 73,115 611,786 100,000 0 0 10,577 0 0 0 483,818 1,990,556 544,663 31,121 421,022 452,143 92,520 3,397 95,917 30,671 65,246 4,094 58,024 30,189 0 124,829 $1.88 $1.87
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