-----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, PCM8S97NLwAZP/VL2UT7swIn8KtZKW3KT8/GwcUNqwc8vXbQBqpvaAG+nQRHcxW9 ItTO2QI+oTra58PS8+iEKg== 0000898430-99-002059.txt : 19990517 0000898430-99-002059.hdr.sgml : 19990517 ACCESSION NUMBER: 0000898430-99-002059 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99621215 BUSINESS ADDRESS: STREET 1: PO BOX 10100 STREET 2: 6100 NEIL RD CITY: RENO STATE: NV ZIP: 89511 BUSINESS PHONE: 7028344011 MAIL ADDRESS: STREET 1: P O BOX 30150 STREET 2: 6100 NEIL ROAD CITY: RENO STATE: NV ZIP: 89511 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 March 31, 1999 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) (775) 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 May 6, 1999 Common Stock, $1.00 par value 31,014,857 Shares ================================================================================ 1 SIERRA PACIFIC RESOURCES QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 CONTENTS PART I - FINANCIAL INFORMATION ------------------------------
Page No. ------- ITEM 1. Financial Statements Report of Independent Accountants................................ 3 Condensed Consolidated Balance Sheets - March 31, 1999 and December 31, 1998............................................ 4 Condensed Consolidated Statements of Income - Three Months Ended March 31, 1999 and 1998................................ 5 Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998................................ 6 Notes to Condensed Consolidated Financial Statements............. 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 9 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..................................................10 PART II - OTHER INFORMATION --------------------------- ITEM 1. Legal Proceedings............................................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 March 31, 1999, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 1999 and 1998. These financial statements are the responsibility of the Company'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 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 statements of capitalization of Sierra Pacific Resources and subsidiaries as of December 31, 1998, 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 29, 1999 (February 12, 1999 as to Notes 1 and 5), 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, 1998, 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 April 30, 1999 3 SIERRA PACIFIC RESOURCES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
March 31, December 31, 1999 1998 ----------- ----------- (unaudited) ASSETS Utility Plant at Original Cost: Plant in service $2,364,329 $2,348,996 Less: accumulated provision for depreciation 745,863 727,624 ----------- ----------- 1,618,466 1,621,372 Construction work-in-progress 55,255 55,670 ----------- ----------- 1,673,721 1,677,042 ----------- ----------- Investments in subsidiaries and other property, net 88,898 59,258 ----------- ----------- Current Assets: Cash and cash equivalents 20,126 17,674 Accounts receivable less provision for uncollectible accounts 1999-$4,275; 1998-$3461 108,318 114,870 Materials, supplies and fuel, at average cost 27,938 25,776 Other 5,823 3,048 ----------- ----------- 162,205 161,368 ----------- ----------- Deferred Charges: Regulatory tax asset 65,617 65,619 Other regulatory assets 63,884 61,675 Other 16,759 16,434 ----------- ----------- 146,260 143,728 ----------- ----------- $2,071,084 $2,041,396 =========== =========== CAPITALIZATION AND LIABILITIES Capitalization Common shareholder's equity $ 683,203 $ 673,432 Preferred stock 73,115 73,115 Preferred stock subject to mandatory redemption: SPPC-Obligated Mandatory Redeemable Preferred Securities of SPPC's subsidiary trust, Sierra Pacific Power Capital I, holding solely $50 million principal amount 8.6% junior subordinated debentures of SPPC, due 2036 48,500 48,500 Long-term debt 616,644 616,754 ----------- ----------- 1,421,462 1,411,801 ----------- ----------- Current Liabilities: Short-term borrowings 111,300 105,000 Current maturities of long-term debt 40,589 40,585 Accounts payable 58,561 60,128 Accrued interest 13,560 7,885 Dividends declared 11,916 11,465 Accrued salaries and benefits 9,672 12,131 Other current liabilities 42,006 28,059 ----------- ----------- 287,604 265,253 ----------- ----------- Deferred Credits: Accumulated deferred federal income taxes 170,610 168,602 Accumulated deferred investment tax credit 37,452 37,944 Regulatory tax liability 38,501 38,939 Customer advances for construction 35,552 34,961 Accrued retirement benefits 44,072 42,560 Other 35,831 41,336 ----------- ----------- 362,018 364,342 ----------- ----------- $2,071,084 $2,041,396 =========== ===========
The accompanying notes are an integral part of the financial statements. 4 SIERRA PACIFIC RESOURCES CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except Per Share Amounts)
Three Months Ended March 31, 1999 1998 -------------- ---------------- (unaudited) OPERATING REVENUES: Electric $ 144,303 $ 142,139 Gas 38,027 31,366 Water 10,281 9,217 Other 2,175 1,760 -------------- ---------------- 194,786 184,482 -------------- ---------------- OPERATING EXPENSES: Operation: Purchased Power 40,668 38,375 Fuel for power generation 26,470 23,880 Gas purchased for resale 24,717 19,331 Other 27,087 31,017 Maintenance 5,496 4,696 Depreciation and amortization 19,143 16,921 Taxes: Income taxes 11,285 12,385 Other than income 4,822 4,905 -------------- ---------------- 159,688 151,510 -------------- ---------------- OPERATING INCOME 35,098 32,972 -------------- ---------------- OTHER INCOME: Allowance for other funds used during construction - 971 Other income - net 38 240 -------------- ---------------- 38 1,211 -------------- ---------------- Total Income Before Interest Charges 35,136 34,183 -------------- ----------------- INTEREST CHARGES: Long-term debt 10,198 10,263 Other 2,603 1,908 Allowance for borrowed funds used during construction and capitalized interest (198) (1,682) -------------- ---------------- 12,603 10,489 -------------- ---------------- INCOME BEFORE OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES 22,533 23,694 Preferred dividend requirements of SPPC-obligated mandatorily redeemable preferred securities (1,043) (1,043) -------------- ---------------- INCOME BEFORE PREFERRED DIVIDENDS 21,490 22,651 Preferred Dividend requirements of Subsidiary (1,365) (1,365) -------------- ---------------- NET INCOME $ 20,125 $ 21,286 ============== ================ Net Income Per Share- Basic $ 0.65 $ 0.69 ============== ================ - Diluted $ 0.65 $ 0.69 ============== ================= Weighted Average Shares of Common Stock Outstanding - Basic 31,010,326 30,930,712 ============== ================ Dividends Paid Per Share of Common Stock $ 0.325 $ 0.310 ============== ================
The accompanying notes are an integral part of the financial statements. 5 SIERRA PACIFIC RESOURCES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
Three Months Ended March 31, 1999 1998 ----------- ----------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Income before preferred dividends: $ 21,490 $ 22,651 Non-cash items included in income: Depreciation and amortization 19,143 16,921 Deferred taxes and deferred investment tax credit 1,079 (4,742) AFUDC and capitalized interest (198) (2,653) Early retirement and severance amortization 1,047 1,054 Other non-cash 760 159 Changes in certain assets and liabilities: Accounts receivable 6,552 9,331 Materials, supplies and fuel (2,162) (2,517) Other current assets (2,775) (2,946) Accounts payable (1,567) (13,743) Other current liabilities 17,163 20,771 Other - net (8,349) (2,015) ----------- ----------- Net Cash Flows From Operating Activities 52,183 42,271 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (18,909) (24,893) Non-cash charges to utility plant 258 2,726 Net customer refunds and contributions in aid of construction 3,684 4,644 ----------- ----------- Net cash used for utility plant (14,967) (17,523) Investments in subsidiaries and other property - net (29,673) (1,140) ----------- ----------- Net Cash Used In Investing Activities (44,640) (18,663) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in short-term borrowings 6,293 10,637 Reduction of long-term debt (116) (113) Sale of common stock 174 935 Dividends paid (11,442) (10,901) ----------- ----------- Net Cash Provided (used in) From Financing Activities (5,091) 558 ----------- ----------- Net increase in Cash and Cash Equivalents 2,452 24,166 Beginning balance in Cash and Cash Equivalents 17,674 8,901 ----------- ----------- Ending balance in Cash and Cash Equivalents $ 20,126 33,067 =========== =========== Supplemental Disclosures of Cash Flow Information: Cash Paid During Period For: Interest $ 7,795 5,281 Income Taxes 500 -
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 for the year ended December 31, 1998. The results of operations for the three month period ended March 31, 1999 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 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 (SPE), 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 1999 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 - ------------------------------------------- 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. The Company is assessing the impact of SFAS 133 on its financial condition and results of operations. NOTE 3. EARNINGS PER SHARE - ---------------------------- The Company follows SFAS No. 128, "Earnings Per Share". 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. 7 The following provides a reconciliation of Basic EPS and Diluted EPS.
Three Months Ended March 31, ---------------- 1999 1998 --------------- -------------- Basic EPS Numerator --------- Income available to common stockholders ($000) $ 20,125 $ 21,286 --------------- -------------- Denominator ----------- Weighted average number of shares outstanding 31,010,326 30,930,712 --------------- -------------- Per-Share Amount $ 0.65 $ 0.69 ----------------- =============== ============== Diluted EPS Numerator --------- Income available to common stockholders ($000) $ 20,125 $ 21,286 --------------- -------------- Denominator ----------- Weighted average number of shares outstanding before dilution 31,010,326 30,930,712 Stock options 23,612 32,184 Executive long term incentive plan - performance shares 15,281 15,226 Non-employee stock plan 8,655 5,573 Employee stock purchase plan 557 1,313 --------------- -------------- 31,058,431 30,985,008 --------------- -------------- Per-Share Amount $ 0.65 $ 0.69 ---------------- =============== ==============
NOTE 4. LONG-TERM DEBT - ------- -------------- The Company redeemed $10 million of senior notes, Series D on April 1, 1999. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sierra Pacific Power Company (SPPC) - ----------------------------------- Management Discussion and Analysis of SPPC is contained in its Quarterly Report on Form 10-Q for the three months ended March 31, 1999, which is attached as an appendix. Tuscarora Gas Pipeline Company - ------------------------------ For the three months ended March 31, 1999, Tuscarora Gas Pipeline Company contributed net income of $.5 million, equaling that of the comparable period in 1998. Lands of Sierra - --------------- For the three months ended March 31, 1999, Lands of Sierra incurred a net loss of $.02 million, equaling that of the comparable period in 1998. SPR continues its orderly liquidation of this real estate business. e.three - ------- For the three months ended March 31, 1999, e.three incurred a net loss of $.7 million and $.4 million in 1998. The increase in losses are due primarily to higher labor costs over the prior year. Sierra Pacific Energy Company - ----------------------------- Sierra Pacific Energy Company (SPE) incurred a net loss of $.4 million. SPE began operations in October 1998. The net loss is due to start-up activity costs. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES ---------------------------------------------------- During the first three months of 1999, the Company earned $21.5 million in income before preferred dividends and declared a common stock dividend of approximately $10.6 million. On the same date, SPPC's Board declared both common ($19 million) and preferred ($1.4 million) dividends, payable May 1 and June 1, 1999. The Company redeemed $10 million of Senior Notes, Series D, on April 1, 1999. 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 march 31, 1999, attached as an appendix. Merger - ------ As reported in Sierra Pacific Resources (SPR) Report on Form 8-K dated April 29, 1998, SPR and Nevada Power Company entered into an Agreement and Plan of Merger, dated as of April 29, 1998, providing for a merger of equals transaction among the companies Both SPR and Nevada Power held special stockholder meetings in October 1998 during which stockholders of both companies voted to approve the proposed merger. On December 31, 1998, the Public Utilities Commission of Nevada (PUCN) approved the proposed merger subject to conditions, that included among other 9 items, filings with the PUCN of a divestiture plan for the companies' generating plants and a rate case to establish revenue requirements and unbundle costs by service. The approval also required the companies to file a generation aggregation tariff and a proposal for an independent scheduling administrator with the Federal Energy Regulatory Commission (FERC). On April 12, 1999, the PUCN issued an order to appear and show cause to determine if the companies are in compliance with the merger order conditions. The show cause hearing is scheduled for May 10, 1999. On April 1, 1999, consistent with the merger order, the SPR filed the revenue requirements and unbundling study portions of the compliance filing with the PUCN. Also, as required by the PUCN merger order, both companies submitted a joint divestiture plan to the PUCN on April 15, 1999, describing plans to sell the companies' generating units. Upon selling the generating units, the companies can determine how they will use the proceeds of the sales, up to the book value of the plants. Any after-tax gains above book value will be used to offset stranded costs, as determined by the PUCN, and any goodwill related to the generation plants. If the companies demonstrate that the divestiture "resulted in a market for generation services that produced market prices that are lower than what could have been achieved otherwise, the companies may include in the general rate case a request to recover any remaining goodwill." SPR expects that the generation sales will be completed by late-2000. On March 31, 1999, as directed by the merger order, SPR filed with the FERC generation aggregation tariffs that contain rates, terms and conditions under which the new owners of the Company's generation would operate after divestiture. The tariff permits market-based rates after the offering of capacity under a cost-based "recourse" approach. The proposed merger is also subject to regulatory approvals (or waivers) by the SEC, Department of Justice and the FERC. The Department of Justice terminated the Hart-Scott-Rodino waiting period with respect to the proposed merger on April 16, 1999. The companies received the FERC approval on April 14, 1999. The companies have not yet received approval from the SEC. The companies expect all approvals by mid-1999. Through March 31, 1999, SPR had incurred a total of $10.8 million in capitalized costs since the merger work began. See the Form 8-K dated July 7, 1998, for additional details relating to the merger application filing. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the information previously disclosed regarding quantitative and qualitative market risk in the Company's Annual Report on Form 10K. 10 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 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 period ended March 31, 1999, for Sierra Pacific Resources, and is qualified in its entirety by reference to such financial statements. (b) Reports on Form 8-K: Filed January 8, 1999 - Item 5, Other Events. Reported that the proposed merger of Sierra Pacific Resources and Nevada Power Company received unanimous approval, subject to conditions, from the Public Utilities Commission of Nevada. 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: May 14, 1999 By: /s/ Mark A. Ruelle ------------------------ --------------------------- Mark A. Ruelle Senior Vice President Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer) 12 Exhibit 15 to the March 31, 1999 Form 10-Q of Sierra Pacific Resources 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 March 31, 1999 and 1998, as indicated in our report dated April 30, 1999; 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 March 31, 1999, is incorporated by referenced in Registration Statement No. 333-4374 of Sierra Pacific Resources on Form S-3, Registration Statement No. 333-62895 on Form S-4, and Registration Statement Nos. 2-92454, 33-87646, and 33-48152 of Sierra Pacific Resources on Form 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 and accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP Reno, Nevada May 12, 1999 13 ================================================================================ 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 March 31, 1999 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) (775) 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 May 14, 1999 Common Stock, $3.75 par value 1,000 Shares ================================================================================ 1 SIERRA PACIFIC POWER COMPANY QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 CONTENTS PART I - FINANCIAL INFORMATION ------------------------------
Page ----- ITEM 1. Financial Statements Report of Independent Accountants................................ 3 Condensed Consolidated Balance Sheets - March 31, 1999 and December 31, 1998........................................... 4 Condensed Consolidated Statements of Income - Three Months Ended March 31, 1999 and 1998............................... 5 Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998............................... 6 Notes to Condensed Consolidated Financial Statements............. 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 9 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk...................................................... 19 PART II - OTHER INFORMATION --------------------------- ITEM 1. Legal Proceedings................................................ 20 ITEM 5. Other Information................................................ 20 ITEM 6. Exhibits and Reports on Form 8-K................................. 20 Signature Page............................................................. 21
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 March 31, 1999, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 1999 and 1998. These financial statements are the responsibility of the Company'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, 1998, 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 29, 1999, (February 12, 1999 as to Notes 1 and 3) 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, 1998, 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 April 30, 1999 3 SIERRA PACIFIC POWER COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
March 31, December 31, 1999 1998 ---------- ------------ Unaudited) ASSETS Utility Plant at Original Cost: Plant in service $2,364,329 $2,348,996 Less: accumulated provision for depreciation 745,863 727,624 ---------- ------------ 1,618,466 1,621,372 Construction work-in-progress 55,255 55,670 ---------- ------------ 1,673,721 1,677,042 ---------- ------------ Investments in subsidiaries and other property, net 64,108 34,022 ---------- ------------ Current Assets: Cash and cash equivalents 16,107 15,197 Accounts receivable less provision for uncollectible accounts: $4,275 -1999 and $3,461 -1998 106,634 114,380 Materials, supplies and fuel, at average cost 27,888 25,776 Other 5,461 2,692 ---------- ------------ 156,090 158,045 ---------- ------------ Deferred Charges: Regulatory tax asset 65,617 65,619 Other regulatory assets 63,884 61,675 Other 15,770 15,417 ---------- ------------ 145,271 142,711 ---------- ------------ $2,039,190 $2,011,820 ========== ============ CAPITALIZATION AND LIABILITIES Capitalization: Common shareholder's equity $ 671,473 $ 661,367 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 606,339 606,450 ---------- ------------ 1,399,427 1,389,432 ---------- ------------ Current Liabilities: Short-term borrowings 111,300 105,000 Current maturities of long-term debt and preferred stock 30,477 30,473 Accounts payable 62,689 66,032 Accrued interest 12,873 7,535 Dividends declared 20,365 20,365 Accrued salaries and benefits 9,672 12,131 Other current liabilities 41,678 27,759 ---------- ------------ 289,054 269,295 ---------- ------------ Deferred Credits: Accumulated deferred federal income taxes 163,608 161,697 Accumulated deferred investment tax credit 37,452 37,944 Regulatory tax liability 38,501 38,939 Accrued Retirement Benefits 44,072 42,560 Customer advances for construction 35,552 34,961 Other 31,524 36,992 ---------- ------------ 350,709 353,093 ---------- ------------ $2,039,190 $2,011,820 ========== ============
The accompanying notes are an integral part of the financial statements. 4 SIERRA PACIFIC POWER COMPANY CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands)
Three Months Ended March 31, ------------------------------ 1999 1998 ------------ --------- (Unaudited) OPERATING REVENUES: Electric $144,303 $142,139 Gas 38,027 31,366 Water 10,281 9,217 ------------ --------- 192,611 182,722 ------------ --------- OPERATING EXPENSES: Operation: Purchased power 40,668 38,375 Fuel for power generation 26,470 23,880 Gas purchased for resale 24,717 19,331 Other 23,782 28,828 Maintenance 5,496 4,696 Depreciation and amortization 19,094 16,921 Taxes: Income taxes 11,812 12,660 Other than income 4,799 4,893 ------------ --------- 156,838 149,584 ------------ --------- OPERATING INCOME 35,773 33,138 ------------ --------- Other Income: Allowance for other funds used during construction - 971 Other income - net 7 122 ------------ --------- 7 1,093 ------------ --------- Total Income Before Interest Changes 35,780 34,231 ------------ --------- INTEREST CHARGES: Long-term debt 9,861 9,768 Other 2,603 1,908 Alllowance for borrowed funds used during construction and capitalized interest (198) (1,682) ------------ --------- 12,266 9,994 ------------ --------- INCOME BEFORE OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES 23,514 24,237 Preferred dividend requirements of Company-obligated mandatorily redeemable preferred securities (1,043) (1,043) ------------ ----------- INCOME BEFORE PREFERRED DIVIDENDS 22,471 23,194 Preferred dividend requirements (1,365) (1,365) ------------ ----------- INCOME APPLICABLE TO COMMON STOCK $21,106 $21,829 ============ ===========
The accompanying notes are an integral part of the financial statements. 5 SIERRA PACIFIC POWER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
Three Months Ended March 31, ------------------------ 1999 1998 --------- --------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Income before preferred dividends $22,471 $23,194 Non-cash items included in income: Depreciation and amortization 19,094 16,921 Deferred taxes and deferred investment tax credit 983 (5,333) AFUDC and capitalized interest (198) (2,653) Early retirement and severance amortization 1,047 1,054 Other non-cash 760 156 Changes in certain assets and liabilities: Accounts receivable 7,746 10,330 Materials, supplies and fuel (2,112) (2,517) Other current assets (2,769) (2,743) Accounts payable (3,343) (13,421) Other current liabilities 16,798 20,010 Other - net (8,344) (1,429) --------- --------- Net Cash Flows From Operating Activities 52,133 43,569 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (18,909) (24,894) Non-cash charges to utility plant 258 2,724 Net customer refunds and contributions in aid construction 3,684 4,644 --------- --------- Net cash used for utility plant (14,967) (17,526) Investments in subsidiaries and other property - net (30,068) (497) --------- --------- Net Cash Used in Investing Activities (45,035) (18,023) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in short-term borrowings 6,293 10,637 Reduction of long-term debt (116) (113) Additional investment by parent company 8,000 - Dividends paid (20,365) (19,365) --------- --------- Net Cash Used In Financing Activities (6,188) (8,841) --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 910 16,705 Beginning balance in Cash and Cash Equivalents 15,197 6,920 --------- --------- Ending Balance in Cash and Cash Equivalents $16,107 $23,625 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid During Period For: Interest $7,793 $5,281 Income Taxes $1,716 -
6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- NOTE 1. MANAGEMENT'S STATEMENT - --------- ---------------------- In the opinion of the management of Sierra Pacific Power Company, hereafter referred to 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 for the year ended December 31, 1998. The results of operations for the three-month period ended March 31, 1999 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. The Company accounts for its ownership of GPSF-B, a Delaware corporation acquired in February 1999, using the equity method because the Company intends to own the entity temporarily. All significant intercompany transactions and balances have been eliminated in consolidation. Reclassifications ----------------- Certain items previously reported for years prior to 1999 have been reclassified to conform to the current year's presentation. Net income and shareholder's equity were not affected by these reclassifications. NOTE 2. RECENT PRONOUNCEMENTS OF THE FASB - ------- --------------------------------- In June 1998, the Financial Accounting Standards Board 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 an entity to recognize all derivatives as either assets or liabilities in the statement of financial position, and measure those instruments at fair value. It is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. The Company is still assessing the impact of SFAS 133 on its financial condition and results of operations. NOTE 3. SEGMENT INFORMATION - ------- ------------------- The Company operates three business segments providing regulated electric, natural gas and water service. Electric service is provided to northern Nevada and the Lake Tahoe area of California. Natural gas and water services are provided in the Reno-Sparks area of Nevada. Information as to the operations of the different business segments is set forth below based on the nature of products and services offered. The Company evaluates performance based on several factors, of which the primary financial measure is business segment operating income. Intersegment revenues are not material. 7 Financial data for business segments is as follows (in thousands).
March-31-1999 Electric Gas Water Consolidated - ------------------ ------------- -------------- ----------- ------------- Operating Revenues $144,303 $38,027 $10,281 $192,611 ============ ============= ========== ============ Operating income $26,685 $6,289 $2,799 $35,773 ============ ============= ========== ============ March-31-1998 Electric Gas Water Consolidated - ------------------ ------------- -------------- ----------- ------------- Operating revenues $142,139 $31,366 $9,217 $182,722 ============ ============= ========== ============ Operating income $26,417 $5,162 $1,559 $33,138 ============ ============= ========== ============
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS --------------------- The components of gross margin are set forth below (dollars in thousands):
Three Months Ended March 31, --------------- Change from Change from 1999 1998 Prior Year $ Prior Year % ----------------- ----------------- ------------------- -------------- Operating Revenues: Electric $144,303 $142,139 $ 2,164 1.5% Gas 38,027 31,366 6,661 21.2% Water 10,281 9,217 1,064 11.5% ----------------- ----------------- ------------------- -------------- Total Revenues 192,611 182,722 9,889 5.4% Energy Costs: Electric 67,138 62,255 4,883 7.8% Gas 24,717 19,331 5,386 27.9% ----------------- ----------------- ------------------- -------------- Total Energy Costs 91,855 81,586 10,269 12.6% ----------------- ----------------- ------------------- -------------- Gross Margin $100,756 $101,136 $ (380) -0.4% ================= ================= =================== ============== Gross Margin by Segment: Electric $ 77,165 $ 79,884 $(2,719) -3.4% Gas 13,310 12,035 1,275 10.6% Water 10,281 9,217 1,064 11.5% ----------------- ----------------- ------------------- -------------- Total $100,756 $101,136 $ (380) -0.4% ================= ================= =================== ==============
The causes for significant changes in specific lines comprising the results of operations are as follows (dollars in thousands):
Three Months Ended March 31, --------------- Change from Change from 1999 1998 Prior Year $ Prior Year % ---------------- ----------------- ------------------- ------------- Electric Operating Reveunes: Residential $ 47,525 $ 46,526 $ 999 2.1% Commercial 43,405 41,802 1,603 3.8% Industrial 45,367 43,992 1,375 3.1% ---------------- ----------------- ------------------- ------------- Retail revenues 136,297 132,320 3,977 3.0% Other 8,006 9,819 (1,813) -18.5% ---------------- ----------------- ------------------- ------------- Total Revenues $ 144,303 $ 142,139 $ 2,164 1.5% ================ ================= =================== ============= Total retail sales megawatt-hours (MWH) 2,093,767 2,024,515 69,252 3.4% ---------------- ----------------- ------------------- ------------- Average retail revenue per MWH $ 65.10 $ 65.36 $ (0.26) -0.4%
Residential revenues increased due to a 2.4% increase in total customers over the prior period. Commercial revenues increased primarily due to a 3.3% increase in customers over the prior period. Industrial revenues increased due to a 5.8% increase in customers and higher use per customer. The increase in use per customer was the result of two large mining customers that increased production over the prior period. The 9 increased revenues were partially offset by other non-volumetric customer charges that were $.3 million lower than the prior period. Other revenues were lower in 1999, due primarily to a reclassification to revenues of $4.3 million from operating expense in order to reflect a refund resulting from the 1997 earnings sharing decision by the Public Utilities Commission of Nevada (PUCN). This reduction in revenues was partially offset by increased wholesale electric revenues ($2.0 million over 1998) and increased miscellaneous electric revenues of $.5 million over the prior year.
Three Months Ended March 31, --------------- Change from Change from 1999 1998 Prior Year $ Prior Year % --------------- ---------------- -------------- ------------ Gas Operating Revenues: Residential $ 16,943 $ 16,070 $ 873 5.4% Commercial 8,838 8,644 194 2.2% Industrial 3,727 3,848 (121) -3.1% Miscellaneous 531 335 196 58.5% --------------- ---------------- -------------- ------------ Total retail revenue 30,039 28,897 1,142 4.0% Wholesale revenue 7,988 2,469 5,519 223.5% --------------- ---------------- -------------- ------------ Total Revenues $ 38,027 $ 31,366 $ 6,661 21.2% =============== ================ ============== ============ Sales (Decatherms): Retail 5,399,835 5,250,070 149,765 2.9% Wholesale 3,750,936 1,247,526 2,503,410 200.7% --------------- ---------------- -------------- ------------ Total 9,150,771 6,497,596 2,653,175 40.8% --------------- ---------------- -------------- ------------ Average revenues per decatherm Retail $ 5.56 $ 5.50 $ 0.06 1.1% Wholesale $ 2.13 $ 1.98 $ 0.15 7.6%
Residential and commercial revenues were higher because of 4.1% and 3.7% increases in customers, respectively. Industrial revenues were lower because of warmer weather during 1999 that contributed to lower use per customer. Wholesale revenues were considerably higher in 1999, due primarily to the addition of three large wholesale gas contracts.
Three Months Ended March 31, --------------- Change from Change from 1999 1998 Prior Year $ Prior Year % --------------- --------------- ----------------- ----------------- Water Operating Reveunes $10,281 $9,217 $1,064 11.5% =============== =============== ================= =================
Water revenues were higher due to a price increase effective April 2, 1998 ($.6 million) and the combined effect of a 3.3% increase in customers, higher use per customer as a result of lower precipitation and higher miscellaneous water revenues ($.5 million). 10
Three Months Ended March 31, --------------- Change from Change from 1999 1998 Prior Year $ Prior Year % ----------------- ------------------ ---------------------- ---------------- Purchased Power $ 40,668 $ 38,375 $ 2,293 6.0% Purchased Power MWH 1,319,795 1,188,202 131,593 11.1% Average cost per MWH of Purchased Power $ 30.81 $ 32.30 $ (1.49) -4.6%
Purchased power costs were higher because of purchases associated with higher wholesale electric sales as discussed previously. Also, the Company increased purchased power and decreased generation because of the availability of less expensive hydroelectric power from the Pacific Northwest during 1999.
Three Months Ended March 31, --------------- Change from Change from 1999 1998 Prior Year $ Prior Year % ---------------- ----------------- ----------------- ------------- Fuel for Power Generation $ 26,470 $ 23,880 $ 2,590 10.8% MWHs generated 1,172,367 1,229,753 (57,386) -4.7% Average cost per MWH of Generated Power $ 22.58 $ 19.42 $ 3.16 16.3%
Fuel for generation costs were higher because of increased gas unit prices and the absence of Department of Energy co-funding of fuel costs at the Pinon Pine project. Both items increased fuel costs over the prior year by approximately $4.2 million. However, the increase in fuel for generation costs was partially offset by lower coal prices and reduced generation due to both a temporary planned plant outage and greater purchased power as discussed previously.
Three Months Ended March 31, --------------- Change from Change from 1999 1998 Prior Year $ Prior Year % ----------------- ---------------- ------------------ --------------- Gas Purchased for Resale Retail $ 17,561 $ 16,901 $ 660 3.9% Wholesale 7,156 2,430 4,726 194.5% ----------------- ---------------- ------------------ --------------- Total $ 24,717 $ 19,331 $ 5,386 27.9% ================= ================ ================== =============== Gas Purchased for Resale (decatherms) Retail 5,403,541 5,248,235 155,306 3.0% Wholesale 3,750,936 1,247,526 2,503,410 200.7% ----------------- ---------------- ------------------ --------------- Total 9,154,477 6,495,761 2,658,716 40.9% ================= ================ ================== =============== Average cost per decatherm Retail $ 3.25 $ 3.22 $ 0.03 0.9% Wholesale $ 1.91 $ 1.95 $ (0.04) -2.1%
Consistent with the increase in residential and commercial gas revenues from customer growth, retail gas purchases were also higher. Also, wholesale gas purchases were considerably higher than in the prior year due to the increase in wholesale revenues as previously discussed. 11
Three Months Ended March 31, --------------- Change from Change from 1999 1998 Prior Year $ Prior Year % -------------- -------------- --------------- --------------- Allowance for other funds used during construction $ - $ 971 $ (971) -100.0% Allowance for borrowed funds used during construction 198 1,682 (1,484) -88.2% -------------- -------------- --------------- --------------- $ 198 $2,653 $(2,455) -92.5% ============== ============== =============== ===============
Total allowance for funds used during construction (AFUDC) is lower because of construction completed in June and December 1998 for the Pinon and Alturas projects, respectively. The current AFUDC rate calculation results in the entire amount being reflected as borrowed funds in 1999.
Three Months Ended March 31, --------------- Change from Change from 1999 1998 Prior Year $ Prior Year % --------------- --------------- ----------------- ----------------- Other operating expense $23,782 $28,828 $(5,046) -17.5% Maintenance expense 5,496 4,696 800 17.0% Depreciation and amortization 19,094 16,921 2,173 12.8% Income taxes 11,812 12,660 (848) -6.7% Interest charges-other 2,603 1,908 695 36.4%
Other operating expense decreased due to the reclassification of $4.3 million to a contra-revenue account (See the change in electric-other revenues discussed previously). Also, operating expense was lower because of consulting work performed during 1998 of approximately $.5 million. Other immaterial items combined for the balance of the change from the prior period. Maintenance expense increased over the prior year due to planned maintenance performed at two of the Company's electric generating facilities during 1999. Depreciation and amortization expense increased due to the completion of the Alturas intertie in December 1998 (approximately $.8 million) and Pinon post- gasification facilities closed to plant in June 1998 (approximately $.5 million). The balance of the increase resulted from other electric, gas and water additions. Operating income taxes were lower due to lower pre-tax income and a lower effective tax rate during the current year. Interest charges-other were higher because of the Public Utilities Commission of Nevada's decision to assess partial interest to amounts payable in the 1997 earnings sharing case. See the Regulatory Matters section for more information. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES ---------------------------------------------------- During the first three months of 1999, the Company earned $22.5 million in income before preferred dividends. It declared $1.4 million in dividends to holders of its preferred stock and declared $19 million in common stock dividends to its parent, Sierra Pacific Resources. 12 The overall increase in cash flows during the first three months of 1999 was less than 1998 due to more cash used for both investing and financing activities which was partially offset by more cash provided from operating activities. The increase in cash provided from operating activities was primarily due to a greater reduction in accounts payable during the prior year. The increase in cash used for investing activities was due to the Company's acquisition of General Electric Capital Corporation's interest in Pinon Pine Company L.L.C. GPSF-B. Financing activities utilized less cash because of a contribution from the Company's parent corporation. Construction Expenditures and Financing - --------------------------------------- The Company's construction program and capital requirements for the period 1999-2003 were originally discussed in the Company's 1998 Annual Report on Form 10-K. Of the amount projected for 1999 ($112.7 million), 15.0 million (13.3%) had been spent as of March 31, 1999. Internally-generated funds exceeded all construction expenditures. Environmental - ------------- As part of the generation divestiture process, discussed in the following Merger section, the Company has completed Phase 1 Environmental Site Assessments on all its generation assets. These assessments represent conclusions of an independent environmental auditor as to the potential environmental concerns at these facilities. Additionally, Phase 2 Environmental Site Assessments, consisting of extensive soil and groundwater investigations, were conducted at the Fort Churchill, North Valmy and Tracy Power Stations. These studies, also conducted by a independent environmental auditor, have been submitted to the Nevada Division of Environmental Protection (NDEP) for their review. The results of NDEP's review are expected no latter than May 1999. Based on a preliminary review of both studies, the Company's management believes that a material adjustment to the environmental contingency will not be required. Prior to conducting the Phase 2 Site Assessments the Company entered into an Environmental Audit Agreement with the NDEP that protects the Company from all administrative or civil penalties for environmental discoveries as a result of the investigations. This agreement is assignable to successor owners of the Company's generation assets provided the new owners agree upon all items and conditions. Merger - ------ As reported in Sierra Pacific Resources' (SPR's), Report on Form 8-K dated April 29, 1998, SPR and Nevada Power Company (Nevada Power) entered into an Agreement and Plan of Merger, dated as of April 29, 1998, providing for a merger of equals transaction between the companies. Both SPR and Nevada Power held special stockholder meetings in October 1998 during which stockholders of both companies voted to approve the proposed merger. On December 31, 1998, the Public Utilities Commission of Nevada (PUCN) approved the proposed merger subject to conditions, that included among other items, filings with the PUCN of a divestiture plan for the companies' generating plants and a rate case to establish revenue requirements and unbundle costs by service. The approval also required the companies to file a generation aggregation tariff and a proposal for an independent scheduling administrator with the Federal Energy Regulatory Commission (FERC). On April 12, 1999, the PUCN issued an order to appear and show cause to determine if the companies are in compliance with the merger order conditions. The show cause hearing is scheduled for May 10, 1999. On April 1, 1999, consistent with the merger order, the Company filed the revenue requirements and unbundling study portions of the compliance filing with the PUCN (see Nevada Matters--Compliance Plan). Also, as required by the PUCN merger order, both companies submitted a joint divestiture plan to the PUCN on April 15, 1999, describing plans to sell the companies' generating units. Upon selling the generating units, the companies can determine how they will use the proceeds of the sales, up to the book value of the plants. Any after-tax gains above book value will be used to offset stranded costs, as determined by the PUCN, and any goodwill related to the generation plants. If the companies demonstrate that the divestiture "resulted in a market for generation services that produced market prices that are lower than what could have been achieved otherwise, the companies may include 13 in the general rate case a request to recover any remaining goodwill." The Company expects that the generation sales will be completed by late-2000. On March 31, 1999, as directed by the merger order, the Company filed with the FERC generation aggregation tariffs that contain rates, terms and conditions under which the new owners of the Company's generation would operate after divestiture. The tariff permits market-based rates after the offering of capacity under a cost-based "recourse" approach. The proposed merger is also subject to regulatory approvals (or waivers) by the SEC, Department of Justice and the FERC. The Department of Justice terminated the Hart-Scott-Rodino waiting period with respect to the proposed merger on April 16, 1999. The companies received the FERC approval on April 14, 1999. The companies have not yet received approval from the SEC. The companies expect all approvals by mid-1999. Through March 31, 1999, the Company had incurred a total of $10.8 million in capitalized costs since the merger work began. See the SPR Form 8-K dated July 7, 1998, for additional details relating to the merger application filing. Regulatory Matters - ------------------ Nevada Matters -------------- Earnings Sharing In February 1997, the PUCN approved a rate plan that provided for a 50/50 sharing between customers and Company shareholders of electric and gas utility earnings in excess of a 12 percent return on average equity. In lieu of refunds, the Company has an opportunity, subject to certain conditions, to apply excess earnings toward buying out of long-term fuel and purchased power contracts. The earnings sharing agreement applies to each of the three years ending December 31, 1999, 1998 and 1997. On April 21, the PUCN approved refunds of $8.0 million in electric and $1.5 in gas, plus interest, for the 1997 earnings sharing case. The gas refund reflects the PUCN's acceptance of the Company's recommendation to apply $ 0.4 million of the refund to offset the variable interest receivable balance. The PUCN deferred its decision on several issues which could result in an additional $ 1.5 million of refunds in the 1997 earnings sharing case. The Company had originally requested to refund $ 7.3 million for electric and $ 1.7 million for gas. All amounts are provided for in the financial statements. On April 30, 1999, the Company filed an earnings sharing request, based on 1998 earnings, of $7.0 million for electric customers and $1.9 million for gas customers. These refund obligations have been recognized. Affiliate Transaction Rules and Affiliate Applications to Provide Potentially Competitive Services The Company and Nevada Power filed a joint motion to set aside or modify the affiliate transaction rules adopted by the PUCN on January 14, 1999. The companies requested the PUCN to modify the rules related to name/logo, sharing services, sharing officers and directors, and transfer pricing. To date the PUCN has not acted on this motion. On March 30, 1999 the Company and Nevada Power filed with the District Court a "Complaint and Petition for Declaratory and Injunctive Relief and for Judicial Review" relating to the Affiliate Transaction Rules. The companies asked that the court find that the rules "violate plaintiff's federal and state constitutional guarantees, are unlawful and invalid because they were enacted in violation of the procedural and substantive provisions of the Administrative Procedures Act, and are unlawful and invalid because they exceed the authority of the PUCN and are unsupported by the evidence." The companies asked that the court order the PUCN "to cease and desist from enforcing the regulations." Electric Restructuring Activities In July 1997, the Governor of Nevada signed into law Assembly Bill 366 (AB366) which provides for competition to be implemented in the electric utility industry in the state no later than December 31, 1999. However, in early February 1999, the PUCN recommended to the state legislature that the start date for competition be delayed to allow more time for consideration of issues as a result of restructuring. On April 19, 1999, the Nevada Senate passed SB438, which is an amendment to AB366. SB438 contains several changes to AB366 including changing the start date 14 of competition to March 1, 2000 for all customers. The bill allows the utility to retain its name and logo for affiliated businesses. The bill does not allow the PUCN to assign to a provider of last resort customers who do not choose a supplier of electricity. SB438 now moves to the Nevada Assembly. The Company cannot predict whether this, or other measures related to industry restructuring, will be adopted into law. See the Company's Annual Report Form 10K for more information regarding the issues being considered as a result of restructuring of the electric industry in Nevada. The following are highlights of recent restructuring activity: Compliance Plan - --------------- On April 1, 1999, the Company filed Phase I, the revenue requirements and unbundling study portions, of the Restructuring Compliance Filing with the PUCN. The filing includes the development of electric revenue requirements for the test period 1998. In the unbundling study, the revenue requirements were assigned and allocated to a number of service components including generation, aggregation, transmission, distribution, metering, billing, and customer services. On April 30, 1999, the Company filed Phase II which included the proposed bundled rate design. Phase III will be filed 15 days following a PUCN decision on Phases I and II and will include full proposed tariffs for distribution service and all other noncompetitive services. Distribution Open Access Tariffs - -------------------------------- On January 7, 1999, the PUCN issued an order adopting a final rule for distribution tariffs (adopted as a temporary regulation). On February 1, 1999 the Company filed proposed language for distribution tariffs and filed testimony in support of its distribution tariffs filing on March 9, 1999. On April 9, 1999 a stipulation resolving most issues and agreeing to further filings on unresolved issues was filed with the PUCN. Past Costs - ---------- Past costs, which are commonly referred to as stranded costs in other jurisdictions, will continue to be addressed in 1999. AB366 permits the recovery of generation costs pursuant to specified legal criteria. The PUCN has conducted several workshops on past costs in which various topics were discussed, including the characteristics that define recoverable past costs, criteria for evaluating the effectiveness of mitigation efforts, options for cost recovery mechanisms and applicable tax and accounting issues. On April 8, 1999, the PUCN issued a revised proposed rule that specifies the information a utility must include in its request for recovery of past costs. This version of the proposed rule may be changed again before being adopted as final based on comments from the parties and additional hearings. The final rule is expected to include the date for the submission of filings to recover past costs, which will likely be 45 days after the order from the compliance plan filing is issued. The Company has not completed an estimate of its past costs, since such a calculation is dependent on a variety of issues related to restructuring which are not resolved at this time. Provider of Last Resort - ------------------------ The provider of last resort (PLR) will provide electric service to customers who do not select an electricity provider and to customers who are not able to obtain service from an alternative seller after the date competition begins. On March 16, 1999 the PUCN issued a revised proposed rule for PLR. A hearing was held April 26th. A new procedural final order was issued regarding those matters. Gas Restructuring 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. 15 Gas Licensing - ------------- On January 7, 1998, the PUCN issued an order adopting a final rule for licensing which was adopted as a temporary regulation. On February 9, 1999, the PUCN issued a proposed rule for gas licensing fees. On March 23, 1999 the PUCN held a workshop on the proposed rule for licensing fees for alternative sellers. The hearing, also scheduled for this day, was postponed. The PUCN will re-issue the proposed rule and hold hearings at a later date. California Matters ------------------ Rate Reduction Bonds California's electricity restructuring statute (Assembly Bill 1890, Chapter 854, California Statutes of 1996, as amended), permits California investor-owned utilities, including the Company, to finance the recovery of a reduction in electricity rates for residential and small commercial customers through the issuance of rate reduction certificates. Transition costs consist of the costs of generation-related assets and obligations that may become uneconomic as a result of a competitive generation market, together with certain other costs associated therewith. In order for the Company to recover transition and associated costs, the California Public Utilities Commission (CPUC) authorized the establishment of nonbypassable, usage-based, per kilowatt hour charges ("FTA Charges") to be included in the regular utility bills of residential and small commercial consumers located in the historical service territory of the Company in California. The right to receive payments made in respect of the FTA Charges is referred to as Transition Property. On April 9, 1999, The Company sold the Transition Property to SPPC Funding LLC, a Delaware special purpose limited liability company whose sole member is the Company, in exchange for the proceeds of the SPPC Funding LLC Notes, Series 1999-1 (the "Underlying Notes"). SPPC Funding LLC then issued and sold the Underlying Notes to the California Infrastructure and Economic Development Bank Special Purpose Trust SPPC-1 (the "Trust") in exchange for the proceeds of the sale of the Trust's $24.0 million 6.4% Rate Reduction Certificates, Series 1999- 1 (the "Certificates"). The Trust, which had been established by the California Infrastructure and Economic Development Bank, issued and sold the Certificates in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended. The Certificates are one of a series of rate reduction certificates that may be issued from time to time by the Trust and sold to investors upon terms determined at the time of sale. Revenue Cycle Unbundling On February 18, 1999, the CPUC approved the Company's proposed Revenue Cycle Services Credits (RCSC) application filed February 2, 1998. The RCSC addresses meter ownership, meter services, meter reading, and billing and applies to customers who select their own provider of a revenue cycle service. On April 9, 1999, the Company made a compliance tariff filing which reflects the approved credits. Direct Access Tariffs On April 5, 1999, the CPUC approved the Company's compliance filing, effective back to March 18, 1998, which proposed tariff changes to implement direct access. Rate Unbundling On April 5, 1999, the CPUC approved the Company's proposed unbundled rates effective back to June 1, 1998. 16 FERC Matters ------------ Merger On April 14, 1999, the FERC voted to approve the merger of SPR, the Company and Nevada Power, as proposed. In approving the merger the FERC required the companies to divest of their generation facilities (as proposed by the companies) and required Nevada Power to file for an update its transmission rates (also proposed by the companies). Transmission Rate Case On March 30, 1999, the Company filed with the FERC to increase its open access transmission rates. The Company requested an increase of $16 million in the annual revenue requirement for network service. The point-to-point rate would increase from $ 2.80 /kW-mo. to $ 3.21 /kW-mo. This filing incorporates the Alturas intertie, completed in December 1998, and the reclassification of transmission and distribution facilities approved by the PUCN last summer. Generation Tariffs On March 31, 1999, the Company filed Docket No. ER99-2332 with the FERC for approval of generation tariffs that contain the rates, terms and conditions under which the new owners of the Company's generation would operate after divestiture. The tariffs permit market-based rates after the offering of capacity under a cost-based recourse approach. Alturas Intertie On February 26, 1999, the FERC set for hearing the Alturas Intertie operating and scheduling agreement filed on December 22, 1998. The FERC also initiated a Section 206 investigation into the previously approved interconnection and operations and maintenance agreements. In the same order, the FERC established settlement judge procedures to attempt to resolve issues related to these agreements and avoid formal hearings. The parties have held several meetings in an attempt to negotiate an acceptable settlement. The matter will move to hearing, currently scheduled for the fall of 1999, if an agreement cannot be reached. Year 2000 Issues - ---------------- To the maximum extent permitted by applicable law, the following information is being designated as a "Year 2000 Readiness Disclosure" pursuant to the "Year 2000 Information and Readiness Disclosure Act" which was signed into law on October 19, 1998. 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 Y2K issues. The project's scope includes: (1) business application systems (including, but not limited to, customer information and billing) and 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 such as power plants, electric 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 Chief Financial Officer. This office includes an oversight committee representing all lines of business, and a "champions team" representing electric generation, transmission and distribution, gas distribution, water production and distribution, telecommunications, systems control, 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. 17 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. 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. As of this date, the Company has successfully completed testing remediation with respect to 100% of its mainframe business systems and has a few peripheral support systems remaining that have a target completion date of July 1999. 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 2,500 potentially date sensitive items. The Company and NSEC have contacted all manufacturers of those components that they have identified as critical to operations and continues to contact other manufacturers of embedded system components to determine if their components are Y2K ready. As of March 31, 1999, over 70% of the Company's mission critical embedded systems are Y2K ready and the Company expects that all systems will be Y2K ready by June 30, 1999. The Company's Y2K readiness activities are tracked and reported monthly to the North American Electric Reliability Council (NERC), an association comprised of all segments of the electric industry. NERC expects utilities to have all Y2K testing and remediation complete by June 30, 1999. The Company is trying to minimize outages to its customers by scheduling some Y2K testing and remediation around planned plant maintenance that will occur during non-peak generating periods in the spring of 1999. The Company's embedded systems remediation plans call for all Y2K corrective procedures to be complete by June 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 were not limited to, suppliers of interstate transportation capacity for coal supplies, natural gas producers, financial institutions, and telephone service providers. The Company has met one on one with several of its critical vendors and suppliers to assess their Y2K readiness. From these meetings, the Company feels that these vendors and suppliers have a viable Y2K program and that they will meet their commitments to the Company. If it becomes necessary, the Company may consider new business and procurement alternatives for products and services as necessary to the extent that alternatives are available. Major Customers - --------------- The Company has met face to face with many 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 in final draft form and the Company expects all plans to be complete by the end of the 2nd quarter of 1999. 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 and refine its contingency plans for potential Y2K related problems. 18 Potential Risks - --------------- With respect to its internal operations, those over which the Company has direct control, the Company believes the most significant potential risks from Y2K problems are: (1) its ability to use electronic devices to control and operate its generation, gas, water, telecommunication, 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 depends upon external parties, including customers, suppliers, business partners, gas and electric system operators, government agencies, and financial institutions to reliably deliver their products and services. The Company feels that its most likely worst case scenario is that one of these parties experiences Y2K problems in their system. 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 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 our critical vendors and suppliers, the Company believes the probability of such failures is low. The Company is monitoring the progress of these critical entities and contingency plans are being developed to address the potential failure of an external party to be Y2K ready. Financial Implications - ---------------------- With more than 70% of mission critical components tested through March 31, 1999, findings in the field continue to indicate that the transition through critical Y2K dates is expected to have minimal impact on the Company's Electric, Gas, and Water operations. These results are reflected in the reduced costs below. The Company currently estimates that its total incremental expenditures for the Y2K effort, since it began identification of Y2K cost, will be approximately $6.3 million. This estimate has been reduced from amounts previously reported based on updated assessments of the project costs. Y2K costs include assessment, remediation, testing and contingency planning activities. Of the total project costs, about $2.7 million has been incurred through March 31, 1999. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the information previously disclosed regarding quantitative and qualitative market risk in the Company's Annual Report on Form 10K. 19 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. (27) The Financial Data Schedule containing summary financial information extracted from the condensed consolidated financial statements filed on Form 10-Q for the three month period ended March 31, 1999, for Sierra Pacific Power Company and is qualified in its entirety by reference to such financial statements. (b) Reports on Form 8-K None 20 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: May 14, 1999 By /s/ Mark A. Ruelle -------------------------- -------------------------- Mark A. Ruelle Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: May 14, 1999 By /s/ Mary O. Simmons -------------------------- -------------------------- Mary O. Simmons Controller (Principal Accounting Officer) 21 EX-27 2 FINANCIAL DATA SCHEDULE
UT 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. 3-MOS DEC-31-1999 MAR-31-1999 PER-BOOK $1,673,721 88,898 162,205 146,260 0 2,071,084 31,015 457,684 194,504 683,203 48,500 73,115 616,644 111,300 0 0 40,589 0 0 0 497,733 2,071,084 194,786 11,285 148,403 159,688 35,098 38 35,136 12,603 22,533 2,408 20,125 10,550 0 52,183 .65 .65
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