MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES RESOURCE DEVELOPMENT AND CONSTRUCTION PROGRAMS Every three years Nevada law requires Nevada Power Company (company) to file with the Public Service Commission of Nevada (PSC) a forecast of electricity demands for the next 20 years and the company's plans to meet those demands. In the third quarter of 1994, the company filed with the PSC its 1994 Resource Plan. The company introduced a Renewable Energy Program as part of the 1994 Resource Plan filing. This section of the plan requested approval for the company to utilize all appropriate incentives, resources and expertise to foster the development of economically competitive renewable energy systems with the intent to provide southern Nevada customers with 20 megawatts of solar-generated electricity by the year 2002. A stipulation on the Renewable Energy Program was signed by the company, PSC Staff, Office of Consumer Advocate (OCA) and the Land and Water Fund of the Rockies. The PSC subsequently approved the stipulation which includes establishing a solar test facility on company property where new solar technologies will be installed and tested. The company will also install several photovoltaic units in the Las Vegas Valley and will serve on the Technical Advisory Committee of the Solar II Project in Barstow, California. At the time of the 1994 Resource Plan filing, the company had yet to complete its long-term supply-side request for proposal (RFP) process. The PSC issued an order approving a stipulation between the company, the PSC Staff, the OCA and other intervenors allowing the company to refile its 1994 Resource Plan when it completed the RFP process. The company completed the final analysis of the RFP in December 1994. At the time of the final analysis of the RFP, there were tremendous changes anticipated in the electric utility industry. The combination of the final analysis of the RFP, the current information about the purchased power markets and the uncertainty of the changes in the electric utility industry necessarily mandated a fundamental change in the company's resource planning strategy. The company will rely on short-term power purchases rather than proceed with the RFP process to meet its forecasted increase in load. On February 15, 1995, the company filed its Refiled 1994 Resource Plan. To support the company's position in its decision to rely on short-term markets for purchased power, the company requested the following projects to be approved by the PSC: - the installation of a 230 kV transmission line on the previously approved Northwest-Arden line; - the construction of two new switchyards in the southern portion of the company's transmission system; and - funds to study the development of transmission systems, the Price and Availability Purchased Power Forecast, modifications to existing generating facilities and the stability of the company's transmission system. With the projections of future electricity costs decreasing, many of the Demand-Side Management (DSM) programs offered by the company are no longer cost-effective. Therefore, the company reevaluated its DSM programs and requested approval to phase out three of its programs: air conditioning replacement, attic insulation and energy efficient motors. In addition, the company requested approval to reduce incentives to numerous other programs and suspend the air conditioning load management program in 1995. The DSM section of the Refiled 1994 Resource Plan also includes: - DSM contracts with three energy service companies to promote conservation among certain commercial customers. The total targeted reduction in demand is equivalent to 13.8 megawatts; and - a limited residential new construction program offering education and assistance to contractors on energy efficiency measures in new homes. Hearings on the company's Refiled 1994 Resource Plan are scheduled to begin in April 1995. Budgeted construction expenditures for 1995 and 1996 are $169 million and $175 million, respectively, excluding allowance for funds used during construction. For the next five years customer growth is estimated to average 5.4 percent per year while demand for electricity is estimated to increase by an average of 4.5 percent per year. FINANCIAL STRATEGIES The company's customer growth averaged over 5.3 percent annually during the three years ended December 31, 1994. To meet the growth forecasted for the company's service territory for the mid to late 1990s, the company will continue to rely upon the financial markets to provide a substantial portion of the funds to build necessary company-owned facilities. The company is committed to maintaining shareholder value throughout this period of continuing rapid growth. To achieve this goal the company will: - pursue a balanced financing approach utilizing low cost tax-exempt financing when possible; - maintain ongoing cost containment efforts; and - seek legislative and regulatory support when necessary. 16 NEVADA POWER COMPANY 1994 Annual Report COST CONTAINMENT - The company will continue to review all planned construction and operating expenditures in an effort to reduce the level of external financing required during this period of rapid growth. Management is constantly reviewing expenditures in light of its commitment to provide shareholders with returns that deliver long-term shareholder value, deliver quality service to customers and provide a reliable supply of electricity at competitive prices. CAPITALIZATION To meet capital expenditure requirements through 1996, the company will utilize internally generated cash, the proceeds from industrial development revenue bonds (IDBs), first mortgage bonds (FMBs), preferred securities and common stock issues through public offerings and the Stock Purchase and Dividend Reinvestment Plan (SPP). NEW FINANCING CAPACITY - Under the tests required by the company's FMBs and the terms of its preferred stock issues, as of December 31, 1994, the company could issue up to $460 million of additional FMBs at an assumed interest rate of 8 1/2 percent and up to $407 million of additional preferred stock at an assumed dividend of 8 1/2 percent. In January 1995, the company received PSC approval to issue and sell up to 2,750,000 shares of common stock, up to $195 million of debt for the purpose of refinancing existing debt, up to $40 million of preferred stock for the purpose of refinancing existing stock, up to $85 million of new taxable debt and up to $35 million of new preferred stock as an alternative to an equal amount of common stock and/or new taxable debt with such authorization to expire on December 31, 1995. EARNINGS TO INTEREST AND PREFERRED DIVIDENDS COVERAGE - For the year 1994, the ratio of earnings to interest charges was 3.11 times compared to 2.90 times in 1993. The ratio of earnings to interest charges plus preferred dividends was 2.82 times in 1994 compared to 2.63 times in 1993. COMMON EQUITY - On November 9, 1994, the company sold 2,000,000 shares of common stock through a negotiated public offering. Net proceeds of $37.7 million were used primarily for construction and general corporate purposes including the repayment of any amounts incurred for those purposes that were outstanding under the company's bank revolving credit facility. The company has the option to issue new common shares or purchase shares on the open market to satisfy the needs of the SPP. During 1994, the company issued $38.2 million of common stock under the SPP. (See Note 5 of "Notes to Financial Statements.") At year end, common equity represented 49.2 percent of total capitalization. SHORT-TERM DEBT - The company has PSC approval for authority to issue short-term unsecured promissory notes not to exceed $150 million with such authorization to expire on December 31, 1997 and has a committed bank line for $125 million which expires on November 21, 1997. The short-term financing is expected to be utilized to fund some of the company's construction expenditures until long-term financing is secured. At December 31, 1994, the company had no balance outstanding on this line. LONG-TERM DEBT - On June 24, 1992, Clark County, Nevada issued $105 million 6.70% fixed rate 30-year IDBs (Nevada Power Company Project) Series 1992A. Net proceeds from the sale of the IDBs were placed on deposit with a trustee and are being used to finance the construction of certain facilities which qualify for tax-exempt financing. At December 31, 1994, $7.2 million remained on deposit with the trustee. A discussion of long-term debt maturities, including sinking fund requirements, is contained in Note 6 of "Notes to Financial Statements." REGULATION The PSC allows recovery of costs on an historical basis in setting rates charged to customers for electrical service. Environmental expenditures made by the company are currently being recovered through customer rates. Management believes environmental expenditures will increase over time and the increased costs will also be recovered as necessary utility expenses. A discussion of pending environmental matters is contained in Note 8 of "Notes to Financial Statements." CONCLUDED RATE MATTERS - On July 6, 1994, the PSC approved a stipulation between the company, PSC staff, OCA and other intervenors to settle an earnings investigation of the company and several other pending regulatory matters. The stipulation reduced nonresidential rates by $6.25 million effective October 1, 1994 and provides for no additional rate changes before July 1, 1995. The overall rate of return was reduced from 10.02 percent to 9.66 percent although the allowed return on common equity remains at 12.5 percent. The stipulation resulted in the withdrawal of the company's $38.5 million energy rate request and $1 million resource planning rate request filed with the PSC on February 28, 1994. In addition, as part of the stipulation, the company is required to use billed and unbilled sales to calculate deferred energy balances. Implementation of this methodology has resulted in a credit adjustment to deferred energy costs and an offsetting debit to unbilled customer receivables with no impact on the company's earnings. The stipulation also completely resolved the Mohave accident replacement power case. As a part of the stipulation, $11 million of the reserved $17.4 million previously collected from customers for fuel and purchased power costs and interest was transferred from other deferred credits to deferred energy costs to offset increased fuel and purchased power costs that have been deferred for collection. The balance of $6.4 million ($4.2 million net of tax) was NEVADA POWER COMPANY 1994 Annual Report 17 reflected as other income in miscellaneous, net for the second quarter of 1994. The table below summarizes the rate adjustments that have been granted to the company during the past three years. SUMMARY OF RATE ADJUSTMENTS 1992 THROUGH 1994 Effective Date Nature of Increase (Decrease) Amount (In millions) ------------------------------------------------------------------------ July 27, 1992 General rate increase $ 22.2 Energy and resource plan net rate decrease (26.4) June 28, 1993 Energy and resource plan net rate increase 42.1 February 1, 1994 Energy rate increase 23.6 October 1, 1994 General rate decrease (6.3) DEREGULATION AND COMPETITION Deregulation of the electric utility industry is accelerating with the enactment of the National Energy Policy Act of 1992 (Act). Deregulation will lead to further competition in the industry as generators of power obtain greater access to transmission facilities linking them to potential new customers. Most observers believe the electric utility beneficiaries of the Act will be twofold; those who can provide low cost generation for sale and those who have strategically located transmission highways that can transmit low cost power from one area to another. Within the region the company's residential rates are competitive. However, large industrial customer rates may require adjustment to remain competitive in the changing environment. In recognition of the changing regional competitive environment, the company is focusing on the costs of serving various classes of customers and the appropriate rates to be charged based on those costs of service. The company will seek through the PSC any rate adjustments necessary to maintain a competitive position. An opportunity exists given the company's strategic location in the center of a region of price diversity. As generators arrange for sales of electricity to customers in other areas, much of the power may need to be transmitted through the company's service territory. The company would have an opportunity to charge generators for the transmission of energy through its system. The company is studying the feasibility of constructing additional cost-effective transmission facilities to maximize the advantage of its strategic location. In November 1994, the PSC opened a docket to investigate and review the issues associated with retail wheeling in Nevada. To date, the PSC has solicited comments to some general questions regarding retail wheeling and has held one workshop in that docket. As of this time, the PSC has not established a schedule for completion of its review of these issues. RESULTS OF OPERATIONS GENERAL In 1994, earnings increased, as compared to 1993, due primarily to higher revenues resulting from an increase in kilowatthour sales and settlement of the replacement power case from the 1985 Mohave Generating Station accident. In 1993, earnings increased, as compared to 1992, due primarily to higher revenues resulting from an increase in general rates effective July 1992 and an increase in kilowatthour sales. Average shares of common stock outstanding for 1994 increased by 3.3 million shares compared to 1993, as a result of public offerings of 2 million shares in November of 1994 and 2.7 million shares in June of 1993 as well as the sale of shares through the SPP. REVENUES Revenues during 1994, 1993 and 1992 were $764 million, $652 million and $601 million, respectively. The 17.2 percent increase in 1994, as compared to 1993, was a result of a 7.1 percent increase in kilowatthour sales and an increase in energy rates effective February 1994 and June 1993. Higher revenues also resulted from recording unbilled revenues for the recovery of energy costs in the amount of $11.6 million, with an offsetting increase in the deferred energy cost adjustment and accordingly no impact on the company's earnings, as required by the stipulation approved by the PSC on July 6, 1994. The 8.5 percent increase in 1993, as compared to 1992, was a result of a 5.8 percent increase in kilowatthour sales and an increase in energy rates effective June 1993. INCREASE (DECREASE) IN REVENUE FROM PRIOR YEAR Nature of Increase (Decrease) (In millions) 1994 1993 1992 ------------------------------------------------------------------------- Kilowatthour sales $ 73.5 $28.2 $37.7 General rate changes (1.4) 12.3 20.5 Deferred energy adjustments 8.7 (13.3) (5.3) Fuel cost base rate changes 33.3 22.4 0.4 Resource plan cost changes and other (1.7) 1.3 1.2 ------------------------------------------------------------------------- Total increase $112.4 $50.9 $54.5 -----------------------------------------------========================== 18 NEVADA POWER COMPANY 1994 Annual Report FUEL AND PURCHASED POWER Fuel expense increased $7.3 million in 1994, as compared with 1993, primarily due to increased generation at the Clark Station. In 1994, as compared to 1993, and in 1993, as compared to 1992, purchased power expense increased 6.1 percent and 21.1 percent, respectively, due to increased purchases from qualifying facilities. Effective February 1, 1994 and June 28, 1993, the PSC granted the company increases of $23.6 million and $44.2 million, respectively, in the energy portion of customer rates, and effective July 27, 1992, the PSC granted the company a $28.3 million decrease in energy rates. During 1994, 1993 and 1992, the company deferred $16.8 million, $48.5 million and $39.5 million, respectively, of increased energy costs for collection in a later period and collected $44.7 million, $17 million and $26.6 million, respectively, of energy cost increases which had previously been deferred. Recovery of fuel expenses is administered under the state's deferred energy cost accounting procedures. (See Note 1 of "Notes to Financial Statements.") Under the deferred energy procedure, changes in the costs of fuel and purchased power are reflected in customer rates through annual rate adjustments and do not affect earnings. The following tables summarize kilowatthour data. 1994 1993 1992 -------------------------------------------------------------------- SOURCE OF KILOWATTHOURS SOLD Company generation 51% 49% 49% Hoover Dam hydroelectric 4 4 4 Purchased power 45 47 47 -------------------------------------------------------------------- 100% 100% 100% -------------------------------------=============================== COMPANY GENERATED KILOWATTHOURS BY FUEL SOURCE Coal 85% 93% 94% Natural Gas 15 7 5 Oil - - 1 -------------------------------------------------------------------- 100% 100% 100% -------------------------------------=============================== FUEL COSTS PER KILOWATTHOUR Coal 1.55 cents 1.61 cents 1.63 cents Natural Gas 2.01 2.98 3.83 Oil 4.89 4.21 4.74 OTHER OPERATING EXPENSES AND TAXES Other operations expense increased $14.0 million in 1994, as compared with 1993, primarily due to an increase in employee benefit costs and the provision for uncollectible accounts. Employee benefit costs were higher primarily due to increased amounts for pensions, postretirement benefits other than pensions and amortization of reorganization, early retirement and severance costs. Other operations expense increased by $5.1 million in 1993, as compared with 1992, primarily due to an increase in labor costs, computer system conversion costs and the provision for uncollectible accounts. The level of maintenance and repair expenses depends primarily upon the scheduling, magnitude and number of unit overhauls at the company's generating stations. During 1993, these expenses decreased by $2.5 million due primarily to lower maintenance costs at the Reid Gardner and Navajo Generating Stations. Depreciation expense increased $6.1 million in 1994 and $4.3 million in 1993 because of a growing electric plant asset base. General taxes increased by $2.3 million in 1993 primarily due to higher assessed property values and rates for property tax purposes. OTHER INCOME AND EXPENSES Other miscellaneous, net includes income of $4.2 million net of tax in 1994 for the resolution of the Mohave accident replacement power case. Other miscellaneous, net includes a charge of $3.2 million net of tax in 1993 for a write-off of costs related to environmental and engineering studies for the canceled coal-fired White Pine Power Project. A rate decision by the PSC on January 24, 1994, resulted in a write-off of $2 million net of tax in 1993 for previously deferred energy costs. Other miscellaneous, net includes a charge of $2.6 million net of tax in 1992 for a write-off of costs related to the property loss on a faulty cooling tower at the company's Reid Gardner Generating Station unit 4 and associated legal fees. On August 4, 1992, the PSC issued an order resulting in a write-off of $2.4 million net of tax for previously deferred energy costs. NEVADA POWER COMPANY 1994 Annual Report 19 STATEMENTS OF INCOME For the Years Ended December 31, (In thousands, except per share amounts) 1994 1993 1992 ------------------------------------------------------------------------- ELECTRIC REVENUES (Note 1) $764,158 $651,772 $600,915 ------------------------------------------------------------------------- OPERATING EXPENSES AND TAXES: Fuel 106,040 98,701 96,563 Purchased and interchanged power 257,517 242,803 200,344 Deferred energy cost adjustments, net (Note 1) 27,849 (31,490) (12,834) ------------------------------------------------------------------------- Net energy costs 391,406 310,014 284,073 Other production operations 17,128 17,715 17,594 Other operations 96,251 82,300 77,198 Maintenance and repairs 38,765 35,379 37,911 Provision for depreciation (Note 1) 50,357 44,216 39,949 General taxes (Note 2) 17,051 16,401 14,093 Federal income taxes (Notes 1 and 2) 39,403 37,278 29,975 ------------------------------------------------------------------------- 650,361 543,303 500,793 ------------------------------------------------------------------------- OPERATING INCOME 113,797 108,469 100,122 ------------------------------------------------------------------------- OTHER INCOME (EXPENSES): Allowance for other funds used during construction (Note 1) 6,771 9,880 8,251 Other miscellaneous, net 4,317 (5,496) (10,127) ------------------------------------------------------------------------- 11,088 4,384 (1,876) ------------------------------------------------------------------------- INCOME BEFORE INTEREST DEDUCTIONS 124,885 112,853 98,246 ------------------------------------------------------------------------- INTEREST DEDUCTIONS: Interest on long-term debt 44,625 43,173 43,500 Other interest 2,572 1,931 2,185 Allowance for borrowed funds used during construction (Note 1) (4,182) (5,799) (4,219) ------------------------------------------------------------------------- 43,015 39,305 41,466 ------------------------------------------------------------------------- NET INCOME 81,870 73,548 56,780 DIVIDEND REQUIREMENTS ON PREFERRED STOCK 3,976 3,986 4,262 ------------------------------------------------------------------------- EARNINGS AVAILABLE FOR COMMON STOCK $ 77,894 $ 69,562 $ 52,518 -----------------------------------------================================ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 42,784 39,482 35,652 -----------------------------------------================================ EARNINGS PER AVERAGE COMMON SHARE $ 1.82 $ 1.76 $ 1.47 -----------------------------------------================================ See Notes to Financial Statements. 20 NEVADA POWER COMPANY 1994 Annual Report STATEMENTS OF CASH FLOWS For the Years Ended December 31, (In thousands) 1994 1993 1992 ------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 81,870 $ 73,548 $ 56,780 Adjustments to reconcile net income to net cash provided - Depreciation and amortization 65,064 55,139 47,356 Deferred income taxes and investment tax credits 5,474 16,504 12,030 Allowance for other funds used during construction (6,771) (9,880) (8,251) Changes in - Receivables (21,516) (4,591) (2,635) Fuel stock and materials and supplies 2,689 5,490 5,928 Accounts payable and other current liabilities 1,485 27,290 17,296 Deferred energy costs 23,980 (37,766) (8,916) Accrued taxes and interest 3,801 1,868 (14,683) Other assets and liabilities (11,806) 3,343 2,473 ------------------------------------------------------------------------------ Net cash provided by operating activities 144,270 130,945 107,378 ------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures and gross additions (183,856) (163,257) (171,074) Investment in subsidiaries and other (303) (2,828) (4,531) Salvage net of removal cost (190) 227 405 ------------------------------------------------------------------------------ Net cash used in investing activities (184,349) (165,858) (175,200) ------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Sale of capital stock 75,818 107,329 78,066 Sale of long-term debt - 45,000 317,500 Change in funds held in trust 51,894 6,234 (21,135) Coal contract buy-out (15,440) - - Retirement of preferred stock and long-term debt (7,441) (59,405) (175,745) Decrease in short-term borrowing - - (71,000) Cash dividends (71,688) (66,883) (60,596) Other financing activities 6,914 2,623 738 ------------------------------------------------------------------------------ Net cash provided by financing activities 40,057 34,898 67,828 ------------------------------------------------------------------------------ CASH AND TEMPORARY CASH INVESTMENTS (Note 1): Net increase (decrease) during the period (22) (15) 6 Beginning of period 145 160 154 ------------------------------------------------------------------------------ End of period $ 123 $ 145 $ 160 ---------------------------------------------================================= CASH PAID DURING THE PERIOD FOR: Interest, net of amounts capitalized $ 52,074 $ 50,677 $ 55,926 ---------------------------------------------================================= Income taxes $ 32,500 $ 18,001 $ 13,793 ---------------------------------------------================================= See Notes to Financial Statements. NEVADA POWER COMPANY 1994 Annual Report 21 BALANCE SHEETS December 31, (In thousands) 1994 1993 ------------------------------------------------------------------------------ ASSETS Electrical Plant, at Original Cost (Notes 1, 8 and 10): Production $ 765,339 $ 681,527 Transmission 286,679 277,543 Distribution 678,260 594,874 General 101,122 84,616 ------------------------------------------------------------------------------ 1,831,400 1,638,560 Less accumulated depreciation 495,691 451,302 ------------------------------------------------------------------------------ Net plant in service 1,335,709 1,187,258 Construction work in progress 159,167 167,652 Property under capital leases 85,408 91,517 Plant held for future use 3,719 3,719 ------------------------------------------------------------------------------ 1,584,003 1,450,146 ------------------------------------------------------------------------------ Investments (Notes 1 and 8) 21,602 21,822 ------------------------------------------------------------------------------ Current Assets: Cash and temporary cash investments 123 145 Customer receivables - Billed 46,620 37,270 Unbilled (Note 1) 25,153 13,000 Reserve for doubtful accounts (1,395) (1,125) Other receivables 6,033 15,465 Fuel stock, at average cost 11,434 16,613 Materials and supplies, at average cost 25,223 23,714 Deferred energy costs (Note 1) 25,714 58,783 Prepayments 9,657 8,313 ------------------------------------------------------------------------------ 148,562 172,178 ------------------------------------------------------------------------------ Deferred Charges: Debt expense, being amortized 27,316 28,645 Accumulated deferred taxes on proposed refund of recovered energy costs - Mohave accident (Note 2) - 5,417 Other (Note 9) 125,906 131,129 ------------------------------------------------------------------------------ 153,222 165,191 ------------------------------------------------------------------------------ $1,907,389 $1,809,337 --------------------------------------------------------====================== See Notes to Financial Statements. 22 NEVADA POWER COMPANY 1994 Annual Report December 31, (In thousands) 1994 1993 ------------------------------------------------------------------------------ CAPITALIZATION AND LIABILITIES Capitalization (See Schedules of Capitalization and Long-Term Debt): Common shareholders' equity $ 731,749 $ 645,924 Redeemable cumulative preferred stock 38,000 38,000 Cumulative preferred stock with mandatory sinking funds 4,064 4,264 Long-term debt 712,571 716,589 ------------------------------------------------------------------------------ 1,486,384 1,404,777 ------------------------------------------------------------------------------ Current Liabilities: Notes payable - 25,000 Current maturities and sinking fund requirements (See Schedules of Capitalization and Long-Term Debt) 57,551 7,496 Accounts payable, including salaries and wages 66,467 70,098 Accrued taxes 2,493 (1,131) Accrued interest 6,239 6,212 Customers' service deposits 12,954 12,069 Accumulated deferred taxes on deferred energy costs 9,000 20,574 Other 26,405 19,372 ------------------------------------------------------------------------------ 181,109 159,690 ------------------------------------------------------------------------------ Commitments and Contingencies (Note 8) Deferred Credits and Other Liabilities: Accumulated deferred investment tax credits (Note 1) 33,924 35,384 Accumulated deferred taxes on income (Note 2) 135,152 126,133 Customers' advances for construction 34,896 28,455 Proposed refund of recovered energy costs - Mohave accident - 16,698 Other (Note 9) 35,924 38,200 ------------------------------------------------------------------------------ 239,896 244,870 ------------------------------------------------------------------------------ $1,907,389 $1,809,337 --------------------------------------------------------====================== See Notes to Financial Statements. NEVADA POWER COMPANY 1994 Annual Report 23 SCHEDULES OF CAPITALIZATION December 31, (Dollars in thousands) 1994 1993 ------------------------------------------------------------------------------ COMMON SHAREHOLDERS' EQUITY (NOTE 5): Common stock, $1 par value, authorized 70,000,000 shares; issued and outstanding 45,382,370 and 41,505,195 shares at December 31, 1994 and 1993; stated at $ 48,587 $ 44,709 Premium on capital stock 568,315 496,367 Unamortized capital stock expense (4,753) (4,511) Retained earnings 119,600 109,359 ------------------------------------------------------------------------------ Total common shareholders' equity 731,749 49.2% 645,924 46.0% ------------------------------------------------------------------------------ REDEEMABLE CUMULATIVE PREFERRED STOCK (NOTES 5 AND 7): $20 par value, authorized 4,500,000 shares for all series; Outstanding at December 31, 1994 and 1993: 9.90% Series, 1,900,000 shares 38,000 38,000 ------------------------------------------------------------------------------ Total 38,000 2.6 38,000 2.7 ------------------------------------------------------------------------------ CUMULATIVE PREFERRED STOCK WITH MANDATORY SINKING FUNDS (NOTE 5): Outstanding at December 31, 1994 and 1993: 5.40% Series, 44,669 and 46,669 shares 894 934 5.20% Series, 42,507 and 44,507 shares 850 890 4.70% Series, 126,000 and 132,000 shares 2,520 2,640 ------------------------------------------------------------------------------ 4,264 4,464 Current sinking fund requirement (200) (200) ------------------------------------------------------------------------------ Total 4,064 .3 4,264 0.3 ------------------------------------------------------------------------------ LONG-TERM DEBT (See Schedules of Long-Term Debt) 712,571 47.9 716,589 51.0 ------------------------------------------------------------------------------ Total capitalization $1,486,384 100.0% $1,404,777 100.0% -------------------------------------------=================================== 24 NEVADA POWER COMPANY 1994 Annual Report SCHEDULES OF LONG-TERM DEBT December 31, (In thousands) 1994 1993 --------------------------------------------------------------------- LONG-TERM DEBT (NOTES 6, 7 AND 8): First mortgage bonds: 7 1/8% Series I due 1998 $ 15,000 $ 15,000 7 5/8% Series L due 2002 15,000 15,000 7 1/8% Series N due 2006 13,000 13,000 6 3/4% Series O due 2007 6,700 7,100 8 3/4% Series P due 1995 402 423 7.80% Series T due 2009 15,000 15,000 6.92% Series U due 1995 50,000 50,000 6.70% Series V due 2022 105,000 105,000 6.60% Series W due 2019 39,500 39,500 7.20% Series X due 2022 78,000 78,000 6.93% Series Y due 1999 45,000 45,000 8.50% Series Z due 2023 45,000 45,000 --------------------------------------------------------------------- 427,602 428,023 Industrial development revenue bonds: 7.80% due 2020 100,000 100,000 Floating rate weekly demand - Due 2015 44,000 44,000 Due 2018 25,000 25,000 Due 2019 60,000 60,000 Less funds held in trust (7,158) (59,051) 6 3/8% pollution control revenue bonds due 2004 15,000 16,000 Obligations under capital leases 105,522 109,968 --------------------------------------------------------------------- 769,966 723,940 Debt premium and discount, being amortized (44) (55) Current maturities and sinking fund requirements (57,351) (7,296) --------------------------------------------------------------------- Total long-term debt $712,571 $716,589 ---------------------------------------------------================== NEVADA POWER COMPANY 1994 Annual Report 25 STATEMENTS OF RETAINED EARNINGS For the Years Ended December 31, (In thousands) 1994 1993 1992 -------------------------------------------------------------------------- BALANCE AT BEGINNING OF PERIOD $109,359 $102,493 $107,516 Add - Net Income 81,870 73,548 56,780 -------------------------------------------------------------------------- 191,229 176,041 164,296 -------------------------------------------------------------------------- Deduct: Dividends paid in cash: Cumulative preferred stock - 5.40%, 5.20% and 4.70% Series 214 224 233 9.90% Series (Note 5) 3,762 3,762 4,572 Common stock 67,653 62,696 56,998 -------------------------------------------------------------------------- 71,629 66,682 61,803 -------------------------------------------------------------------------- Balance at End of Period $119,600 $109,359 $102,493 --------------------------------------==================================== See Notes to Financial Statements. 26 NEVADA POWER COMPANY 1994 Annual Report NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES For ratemaking and other purposes, the company is subject to the jurisdiction of the PSC and the Federal Energy Regulatory Commission (FERC). The accounting records of the company are maintained in accordance with the uniform system of accounts prescribed by the FERC and adopted by the PSC. ELECTRIC REVENUES - The company bills its customers monthly on a cycle basis and recognizes the estimated amount of revenue applicable to kilowatthours of energy sold but not yet billed at the end of an accounting period. DEFERRED ENERGY COST ADJUSTMENTS - As permitted by state statute, the company defers differences between the current cost of fuel plus net purchased power and base energy costs as defined. Any over or under recoveries are deferred in the balance sheet as a current asset or current liability. Under regulations adopted by the PSC, deferred energy rates are revised at least every 12 months to clear the accumulated deferred balance over a future period. ELECTRIC PLANT - The costs of betterments and additions to electric plant and replacements of retirement units of property are capitalized. Such costs include labor, payroll taxes, material, transportation, an allowance for funds used during construction and, where applicable, property taxes. Maintenance is charged with the cost of repairs and minor replacements. Accumulated depreciation is charged for the cost of plant retired, less net salvage. Depreciation has been provided for financial statement purposes on a straight-line basis at rates based upon the estimated useful lives of the various classes of plant. The provisions for depreciation during 1994, 1993 and 1992 were equivalent to an annual rate of approximately 2.9 percent of the average gross investment in depreciable plant. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION - The allowance for funds used during construction (AFUDC) represents the estimated costs of borrowed and equity funds applicable to electric plant construction. The FERC has prescribed a specific computational method for determining the AFUDC rate. The PSC has authorized the AFUDC rate to be the lesser of the rate determined under the FERC computational method or the rate equivalent to the overall rate of return authorized by the PSC. Through December 31, 1992, the company used a rate of 10.02 percent to calculate AFUDC on construction work in progress as authorized by the PSC, effective July 1992. In January 1993, the company began using an AFUDC rate as calculated under the FERC computational method which averaged 9.73 percent for 1994 and 9.88 percent for 1993. FEDERAL INCOME TAXES - Effective January 1, 1993, the company adopted the provisions of FAS 109, Accounting for Income Taxes. FAS 109 requires recognition of deferred tax liabilities and assets for the future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The cumulative effect of the change in accounting for income taxes was not material to net income. In November 1991, the PSC issued an order which allows the company to recover the previously flowed through tax benefits ratably over the estimated remaining book life of the plant. Calculated at current rates, approximately $37 million of income taxes will be allowed in future rates. Investment tax credits earned have been deferred and are being amortized to income ratably over the estimated service lives of the related property. CASH FLOW INFORMATION - Cash equivalents, which generally are convertible to cash at par on short notice and mature three months or less from the date of acquisition, are reported as temporary cash investments. The company had no material noncash investing or financing transactions during 1994, 1993 or 1992. OTHER ACCOUNTING POLICIES - The company uses the equity method of accounting to report immaterial investments in subsidiaries. Certain amounts in prior periods have been reclassified to conform to the financial statement presentation for December 31, 1994. NEVADA POWER COMPANY 1994 Annual Report 27 2. FEDERAL INCOME AND OTHER TAXES The total federal income tax expense as set forth in the accompanying Statements of Income results in an effective federal income tax rate different than the statutory federal income tax rate for the following reasons: For the Years Ended December 31, (Dollars in thousands) 1994 1993 1992 ------------------------------------------------------------------------- Federal income tax at statutory rate $44,305 35.0% $39,625 35.0% $29,241 34.0% Adjustments: Investment tax credit amortization (1,460) (1.2) (1,303) (1.2) (1,618) (1.9) Other items 1,871 1.5 1,344 1.2 1,600 1.9 ------------------------------------------------------------------------- Total recorded federal income tax $44,716 35.3% $39,666 35.0% $29,223 34.0% ----------------------------============================================= Federal income taxes included in: Operating expenses $39,403 $37,278 $29,975 Other income, net 5,313 2,388 (752) ------------------------------------------------------------------------- $44,716 $39,666 $29,223 ----------------------------============================================= The current and deferred components of federal income taxes included in operating expenses are as follows: For the Years Ended December 31, (In thousands) 1994 1993 1992 ------------------------------------------------------------------------- Current federal income taxes $35,516 $20,680 $18,213 ------------------------------------------------------------------------- Deferred federal income taxes: Depreciation differences 13,134 8,899 13,823 Deferred energy costs (11,574) 11,765 (434) Contributions in aid of construction (3,028) (1,732) (1,437) Coal contract buyout (1,039) (945) (1,009) Other - net 7,854 (86) 2,437 ------------------------------------------------------------------------- 5,347 17,901 13,380 ------------------------------------------------------------------------- Investment tax credit amortization (1,460) (1,303) (1,618) ------------------------------------------------------------------------- Total $39,403 $37,278 $29,975 --------------------------------------=================================== General taxes charged to operating expenses are as follows: For the Years Ended December 31, (In thousands) 1994 1993 1992 ------------------------------------------------------------------------- Real estate and personal property $11,853 $11,338 $ 9,408 Payroll 4,968 4,748 4,285 Other 230 315 400 ------------------------------------------------------------------------- Total $17,051 $16,401 $14,093 --------------------------------------=================================== The company adopted FAS 109, Accounting for Income Taxes, effective January 1, 1993. As a result, the company's December 31, 1994 balance sheet contains a net regulatory asset of $7.9 million. (See Note 9 of "Notes to Financial Statements.") The regulatory liability for temporary differences related to liberalized depreciation will continue to be amortized using the average rate assumption method required by the Tax Reform Act of 1986. The regulatory liability for temporary differences caused by investment tax credits will be amortized ratably in the same fashion as the accumulated deferred investment credit under former Internal Revenue Code Section 46(f)(2). The net accumulated deferred federal income tax liability consists of accumulated deferred federal income tax liabilities less accumulated deferred federal income tax assets related to: December 31, (In thousands) 1994 1993 ------------------------------------------------------------------------ ACCUMULATED DEFERRED FEDERAL INCOME TAX LIABILITIES: Temporary basis differences - plant $ (26,128) $ (33,058) Investment tax credits (33,924) (35,384) Excess of tax depreciation over book depreciation (96,640) (83,309) Coal contract buyout (1,212) (2,251) Accrued taxes (1,880) (1,985) Deferred energy (9,000) (20,574) Demand-side program costs (4,301) (3,686) Other (4,991) (1,844) ------------------------------------------------------------------------ Total (178,076) (182,091) ------------------------------------------------------------------------ ACCUMULATED DEFERRED FEDERAL INCOME TAX ASSETS: Unamortized investment tax credits 18,267 19,053 Refundable customer advances 11,700 9,867 Purchased power - 5,417 Nonrefundable contributions in aid of construction 3,705 2,510 Capitalized expenses 985 1,439 Other 2,233 1,949 ------------------------------------------------------------------------ Total 36,890 40,235 ------------------------------------------------------------------------ Net accumulated deferred tax liability $(141,186) $(141,856) ----------------------------------------------========================== 28 NEVADA POWER COMPANY 1994 Annual Report 3. Employee Benefits DEFINED CONTRIBUTION RETIREMENT PLAN - The company maintains an employee investment plan (401(k) Plan) which was established January 1, 1990, under Section 401(k) of the Internal Revenue Code. Employees who are at least 21 years old and who have completed one year of eligibility service may become "participants" in the 401(k) Plan. The company matched 50 percent in 1994, 1993 and 1992 of any Management, Professional, Administrative and Technical participant's contributions to the 401(k) Plan not to exceed 3 percent of the participant's annual compensation. In the first two months of 1994 and all of 1993 and 1992, the company matched 25 percent of any union- represented participant's contributions to the 401(k) Plan not to exceed 1.5 percent of the participant's annual compensation. Effective March 1, 1994, the company matched 50 percent of any union-represented participant's contributions to the 401(k) Plan not to exceed 3 percent of the participant's annual compensation. All company contributions are invested in common stock of the company. The amounts expensed for company matching contributions to the 401(k) Plan were $1,276,000 for 1994, $921,000 for 1993 and $629,000 for 1992. DEFINED BENEFIT RETIREMENT PLAN - The company has a non-contributory defined benefit retirement plan (PLAN) designed to meet the provisions of the Employee Retirement Income Security Act of 1974. All employees age 21 and over with one year of service and at least 1,000 hours worked are covered by the PLAN. Benefits under the PLAN are dependent upon each participant's salary for the highest consecutive 60 months of service and length of service. The company also has a Supplemental Executive Retirement Plan (SERP) in addition to the regular PLAN. Participation is limited to such officers as the Board of Directors may select. Presently, 27 active or retired designated officers and employees participate in the SERP. The SERP will be funded as benefits are disbursed. The table below sets forth the funded status and amounts recognized in the company's financial statements at December 31, 1994, 1993 and 1992 for both the PLAN and SERP. The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations for both the PLAN and SERP were 8.75 percent and 4.5 percent in 1994, 7.25 percent and 4.5 percent in 1993, and 8.25 percent and 5 percent in 1992, respectively. The expected rate of return on PLAN assets was 8.5 percent in 1994, 1993 and 1992. PLAN assets are primarily invested in listed stocks, fixed income securities and federal agencies securities. RECONCILIATION OF FUNDED STATUS PLAN SERP --------------------------- ------------------------- For the Years Ended December 31, (In thousands) 1994 1993 1992 1994 1993 1992 ------------------------------------------------------------------------------ Actuarial present value of: Vested benefit obligation $ 54,713 $ 54,434 $40,592 $ 3,202 $ 3,854 $ 2,814 Nonvested benefit obligation 5,235 3,875 4,217 2,106 514 375 ------------------------------------------------------------------------------ Accumulated benefit obligation $ 59,948 $ 58,309 $44,809 $ 5,308 $ 4,368 $ 3,189 -------------------------===================================================== Projected benefit obligation $ 77,601 $ 80,575 $63,121 $ 6,253 $ 4,837 $ 3,452 Plan assets at fair value 57,966 60,236 54,575 - - - ------------------------------------------------------------------------------ Plan assets less than projected benefit obligation (19,635) (20,339) (8,546) (6,253) (4,837) (3,452) Unrecognized net transition obligation amortized over approximately nine years - - - - 129 303 Unrecognized prior service costs 7,792 5,577 6,005 692 412 166 Unrecognized net loss 3,763 8,949 2,925 1,895 1,267 209 ------------------------------------------------------------------------------ Pension asset (liability) $ (8,080) $ (5,813) $ 384 $(3,666) $(3,029) $(2,774) -------------------------===================================================== Net pension expense was comprised of the following: Service cost $ 3,928 $ 3,284 $ 3,147 $ 175 $ 67 $ 76 Interest cost on projected benefit obligation 6,576 5,243 4,900 498 297 278 Return on plan assets 183 (5,371) (1,739) - - - Net amortization and deferral (4,433) 1,021 (2,117) 409 197 331 ------------------------------------------------------------------------------ Net periodic pension cost $ 6,254 $ 4,177 $ 4,191 $ 1,082 $ 561 $ 685 -------------------------===================================================== NEVADA POWER COMPANY 1994 Annual Report 29 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - The company adopted Statement of Financial Accounting Standards No. 106 (FAS 106), Employers' Accounting for Postretirement Benefits Other Than Pensions, effective January 1, 1993. The costs of these benefits have been expensed on a pay-as-you-go basis prior to the company adopting FAS 106. In July 1992, the PSC authorized the company to continue recognizing these benefit costs on a pay-as-you-go basis after adopting FAS 106 and to record any difference in costs resulting from the implementation of FAS 106 as a deferred asset. As a result of the stipulation approved by the PSC on July 6, 1994, the company is no longer recognizing these benefit costs on a pay-as-you-go basis and began using the accrual method. The company is amortizing the FAS 106 deferred asset at March 31, 1994 over a period of eight years. The company has elected to amortize its transition obligation at January 1, 1993 over a period of 20 years. The company provides postretirement medical, dental and vision benefits to employees who have retired or will retire and are eligible for an immediate pension benefit. The postretirement health care plan is contributory, and retirees' contributions can be adjusted annually for increases in the cost of providing the benefits. Net periodic postretirement benefit cost for the years ended December 31, 1994 and 1993 included the following components: (In thousands) 1994 1993 ------------------------------------------------------------------------- Service cost benefit earned during the year $ 617 $ 614 Interest cost on projected benefit obligation 1,837 1,881 Amortization of transition obligation 1,139 1,166 ------------------------------------------------------------------------- Net periodic postretirement benefit cost $ 3,593 $ 3,661 --------------------------------------------------======================= A reconciliation of the funded status of the plan to the amounts recognized in the Balance Sheets as of December 31, 1994 and 1993 is as follows: (In thousands) 1994 1993 ------------------------------------------------------------------------- Retirees $(14,512) $(10,270) Fully eligible active employees (1,879) (8,749) Other active employees (5,642) (6,777) ------------------------------------------------------------------------- Accumulated postretirement benefit obligation (22,033) (25,796) Unrecognized transition obligation 20,983 22,149 Unrecognized (gain) loss (5,041) 542 ------------------------------------------------------------------------- Accrued postretirement benefit liability $ (6,091) $ (3,105) --------------------------------------------------======================= The medical cost trend rate assumed for 1995 was 9.5 percent, grading down to 4.75 percent in 2001 and remaining at that level thereafter. The health care cost trend rate has a significant effect on the accumulated postretirement benefit obligation and net periodic cost. A one-percentage- point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation at December 31, 1994 by $1.8 million and would increase the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for 1994 by $133,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1994 was 8.75 percent. 4. SHORT-TERM BORROWINGS The company has a $125 million bank revolving credit facility which expires on November 21, 1997, and pays commitment fees based on both the unused amount of the facility and the company's first mortgage bond ratings. Borrowing rates under the bank line are determined by both current market rates and the company's first mortgage bond ratings. There were no short- term borrowings outstanding on the bank line at December 31, 1994 and 1993. 5. Capital Stock The changes in common stock shares for 1992, 1993 and 1994 are as follows: Shares -------------------------------------------------------------------------- Outstanding, December 31, 1991 32,975,467 Issued through public offering 2,990,000 Issued under 401(k) Savings Plan 27,644 Issued under Stock Purchase and Dividend Reinvestment Plan 1,139,706 -------------------------------------------------------------------------- Outstanding, December 31, 1992 37,132,817 Issued through public offering 2,700,000 Issued under 401(k) Savings Plan 32,052 Issued under Stock Purchase and Dividend Reinvestment Plan 1,640,326 -------------------------------------------------------------------------- Outstanding, December 31, 1993 41,505,195 Issued through public offering 2,000,000 Issued under 401(k) Savings Plan 52,055 Issued under Stock Purchase and Dividend Reinvestment Plan 1,825,120 -------------------------------------------------------------------------- Outstanding, December 31, 1994 45,382,370 ----------------------------------------------------------------========== 30 NEVADA POWER COMPANY 1994 Annual Report Premium on capital stock increased $72 million, $103 million and $73.9 million during 1994, 1993 and 1992, respectively, due to issuances of common stock. Cash dividends paid per share on common stock were $1.60 each year during 1994, 1993 and 1992. On April 30, 1992, the company issued shares of Redeemable Cumulative Preferred Stock, 9.90% Series consisting of the previously issued shares of Auction Preferred Stock. The company elected to establish a 10-year dividend period for this preferred stock, with mandatory redemption April 1, 2002. This preferred stock is redeemable at the option of the company, as a whole or in part, on April 1, 1997. The dividend rate on the shares of Redeemable Cumulative Preferred Stock, 9.90% Series was determined at an auction held on April 23, 1992. Dividends on the shares are cumulative from April 30, 1992, and will be payable when, as and if declared, quarterly on January 1, April 1, July 1 and October 1 of each year commencing July 1, 1992. Under the provisions of the 4.70%, 5.20% and 5.40% series cumulative preferred stock with mandatory sinking funds, the company is obligated to use its best efforts to purchase, each year, up to an aggregate of 6,000, 2,000 and 2,000 shares, respectively, at prices not in excess of $20.00 per share. The obligations are not cumulative. The 5.20% series and 5.40% series are presently redeemable at the option of the company at $21.00 per share and the 4.70% series at $20.25 per share. In October 1990, the company adopted a Stockholder Rights Plan and issued through dividend to its common shareholders one stock purchase right for each outstanding share of common stock. The rights expire in October 2000. The rights to purchase junior preference shares, common shares or shares of a successor corporation are not exercisable unless certain events occur and are intended to assure fair shareholder treatment in any takeover of the company and to guard against abusive takeover tactics. 6. LONG-TERM DEBT None of the long-term debt is held by or for the account of the company. The amounts of long-term debt maturities, including sinking fund requirements, are $57.3 million in 1995, $8 million in 1996, $7.9 million in 1997, $22.1 million in 1998 and $52.8 million in 1999, including $5.2 million, $5.3 million, $5.2 million, $4.5 million and $4.9 million for obligations under capital leases, respectively. Generally, electric plant is subject to the first mortgage lien. It is the company's intention to meet the sinking fund requirements for its series I and L first mortgage bonds by pledging property additions in lieu of cash payments. The N, O and P series first mortgage bonds provide for annual payments sufficient to ratably retire the respective series by their final due dates. Payments on the N series do not commence until 1996. The series N, O, T, V, W and X first mortgage bonds correspond with respect to their terms to four series of collateralized pollution control revenue bonds and two series of industrial development revenue bonds issued by various municipal authorities. The indentures under which the company's first mortgage bonds were issued provide for an immaterial restriction as to distributions to shareholders at December 31, 1994. The fixed rate industrial development bonds and floating rate industrial development bonds were issued by Clark County, Nevada and are guaranteed as to payment of principal and interest by the company. The indenture for the 6 3/8% pollution control revenue bonds due 2004 provides for annual sinking fund payments of $1 million to and including March 1, 2003 and a final payment of $6 million on March 1, 2004. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS Disclosure by the company of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107 (FAS 107), Disclosures about Fair Value of Financial Instruments. At December 31, 1994 and 1993, the provisions of FAS 107 apply only to the company's long-term debt and redeemable cumulative preferred stock. In accordance with FAS 107, the company estimates the fair value of its redeemable cumulative preferred stock based on the per share closing price times the number of shares outstanding and its long-term debt based on quoted market prices for the same or similar issues or on current interest rates available to the company for debt with similar terms and maturity. The book value and estimated fair value of the redeemable cumulative preferred stock were $38 million and $40.3 million at December 31, 1994 and $38 million and $43.6 million at December 31, 1993, respectively. The book value and estimated fair value of the company's long-term debt, including current maturities and sinking fund requirements and excluding obligations under capital leases, were $664 million and $664 million at December 31, 1994, and $614 million and $665 million at December 31, 1993, respectively. The estimates presented herein are not necessarily indicative of the amounts that the company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have an effect on the estimated fair value amounts. NEVADA POWER COMPANY 1994 Annual Report 31 8. COMMITMENTS AND CONTINGENCIES RATE MATTERS - On July 11, 1991, Nevada Electric Investment Co. (NEICO), the company's unregulated subsidiary, sold a 50 percent undivided ownership interest in certain coal mining assets to the Intermountain Power Agency (IPA), and NEICO and IPA conducted the coal mining operations as joint venturers under the name of the Crandall Canyon Project. On January 11, 1995, NEICO sold its remaining 50 percent undivided ownership interest in the coal mining assets. The initial sale transaction has been inquired into by the PSC, and no gain has been recorded pending regulatory review. LEGAL MATTERS - The company is involved in litigation arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management, based upon advice of counsel, believes that the final outcome will not have a material adverse effect on the company's financial position and results of operations. ENVIRONMENTAL MATTERS - The Federal Clean Air Act Amendments of 1990 (Amendments) include provisions which will affect the company's existing steam generating facilities and all new fossil fuel fired facilities. Title IV of the Amendments provides a national cap on sulfur dioxide emissions by mandating emissions reductions for many electric steam generating facilities. The sulfur dioxide provisions of the Amendments will not adversely affect the company because the company's steam units burn low sulfur fuels or have sulfur dioxide control equipment. Title IV of the Amendments also provides for reduction of emissions of oxides of nitrogen by establishing new emission limits for coal-fired generating units. This Title will require the installation of additional pollution-control technology at some of the Reid Gardner Station generating units before 2000 at an estimated cost to the company of no more than $6 million. The United States Congress authorized the U.S. Environmental Protection Agency (EPA) to study the potential impact the Mohave Generating Station (Mohave) and other sources and areas may have on visibility in national parks and recreational areas of the Colorado Plateau. The Grand Canyon Visibility Transport Commission is required to make a recommendation to the EPA prior to November of 1995 regarding ways to improve regional haze in these areas. A variety of actions are being considered including further imposition of pollution controls or emissions limitations upon large pollution sources. Also, the Nevada Division of Environmental Protection has imposed more stringent stack opacity limits for Mohave. This will affect the company's utilization of resources, but, until more experience is gained by operating at the new opacity levels, optimal utilization cannot be determined. As a 14 percent owner of Mohave, the company will be required to fund any plant improvements that may result from the EPA study and operation at the new opacity levels. The cost of any potential improvements cannot be estimated at this time. In 1991, the EPA published an order requiring the Navajo Generating Station (Navajo) to install scrubbers to remove 90 percent of sulfur dioxide emissions beginning in 1997. As an 11.3 percent owner of Navajo, the company will be required to fund an estimated $56.5 million for installation of the scrubbers. In 1992, the company received resource planning approval from the PSC for its share of the cost of the scrubbers. LEASES - In 1984, the company sold its administrative headquarters facility, less furniture and fixtures, for $27 million and entered into a 30-year capital lease of that facility with five-year renewal options beginning in year 31. The fixed rental obligation for the first 30 years is $5.1 million per year. Future cash rental payments as of December 31, 1994, are as follows: (In thousands) -------------------------------------------------------------------------- 1995 $ 3,604 1996 3,605 1997 3,604 1998 3,605 1999 4,880 Thereafter 105,057 -------------------------------------------------------------------------- $124,355 ------------------------------------------------------------------======== The amount of imputed interest necessary to reduce the future cash rental payments to present value is $80.9 million as of December 31, 1994. Total interest expense on the lease obligation was $4.9 million and total amortization of the leased facility was $406,000 for the year ended December 31, 1994. The total accumulated amortization of the leased facility on December 31, 1994, was $9.4 million. At December 31, 1994, the company has certain long-term noncancellable operating lease agreements for which the future minimum lease payments are immaterial. FUEL AND PURCHASED POWER OBLIGATIONS - The company has nine long-term contracts for the purchase of electric energy and/or capacity. The contracts expire in years ranging from 1995 to 2016. Total payments under these contracts were $58.3 million, $55.9 million and $51.4 million in 1994, 1993 and 1992, respectively. The cost of power obtained under these contracts is included in purchased power expense in the Statements of Income. 32 NEVADA POWER COMPANY 1994 Annual Report At December 31, 1994, the estimated future payments for capacity and energy that the company is obligated to purchase under these contracts, subject in part to certain conditions, are as follows: Accounted for Accounted for as Long-term as Long-term (In thousands) Executory Contracts Capital Lease ------------------------------------------------------------------------ 1995 $ 36,110 $ 13,986 1996 35,963 13,432 1997 39,626 12,902 1998 39,378 12,373 1999 20,345 11,844 Thereafter 11,319 133,787 ------------------------------------------------------------------------ Total minimum payment $182,741 198,324 --------------------------------------======== Less amount representing estimated executory costs included in total minimum payment (95,368) ------------------------------------------------------------------------ Net minimum payments 102,956 Less amount representing interest (40,870) ------------------------------------------------------------------------ Present value of net minimum payments $ 62,086 ----------------------------------------------------------------======== Total interest expense on the purchase power obligation accounted for as a capital lease was $6.2 million and total amortization was $5.6 million in 1994. Total accumulated amortization was $20.9 million as of December 31, 1994. The company has contracted with various coal suppliers to provide coal to the Reid Gardner Generating Station. The contracts expire in years ranging from 1995 to 2007. The costs of approximately $30.1 million, $34.7 million and $23.2 million were incurred under the long-term coal contracts in 1994, 1993 and 1992, respectively. At December 31, 1994, the estimated future payments for coal that the company is obligated to purchase under these contracts are as follows: (In thousands) ------------------------------------------------------------------------ 1995 $ 15,688 1996 14,644 1997 14,937 1998 15,236 1999 15,729 Thereafter 126,486 ------------------------------------------------------------------------ $202,720 ----------------------------------------------------------------======== CONSTRUCTION - Certain commitments have been incurred at December 31, 1994, in connection with the 1995 construction budget. Construction expenditures are estimated at $169 million, excluding AFUDC, for 1995. 9. OTHER DEFERRED CHARGES AND CREDITS OTHER DEFERRED CHARGES - At December 31, 1994, as a result of the company adopting FAS 109 effective January 1, 1993, other deferred charges include a regulatory asset of $39.1 million and a deferred tax asset of $18.3 million. The regulatory asset represents future revenue to be received from customers due to the flow-through of tax benefits of temporary differences in prior years and the deferred tax asset is from temporary differences caused by investment tax credits. At December 31, 1994, organizational study, early retirement and severance costs of $6.9 million are included in other deferred charges and are being amortized over an eight-year period effective February 1994. These costs are a result of the completion of a comprehensive organizational study started in 1993. In March 1994, the company bought out the remaining obligation under a coal purchase contract with Mountain Coal Co. At December 31, 1994, $15.3 million for the company's portion of the buyout is included in other deferred charges. Management believes the cost of the buyout will be recovered through Nevada's deferred energy accounting procedures. In May 1988, after securing PSC approval, the company paid United States Fuel Company $23.5 million to terminate an existing coal supply agreement. The amount paid plus carrying charges is being amortized over eight years and the amounts included in other deferred charges and deferred energy costs as of December 31, 1994, were $3.5 million and $2.5 million, respectively. Other deferred charges as of December 31, 1994, also include $15.4 million for deferred federal income taxes on customer advances for construction and $11.5 million for conservation programs. OTHER DEFERRED CREDITS - As of December 31, 1994, a credit of $3.5 million for generating station spare parts is included in other deferred credits. Effective January 1992, this credit is being amortized over a six-year period. Other deferred credits as of December 31, 1994, also include a regulatory liability of $31.2 million representing amounts to be refunded to customers in the future as a result of the company adopting FAS 109. NEVADA POWER COMPANY 1994 Annual Report 33 10. INTERESTS IN JOINTLY OWNED ELECTRIC UTILITY FACILITIES At December 31, 1994, the company owned the following undivided interests in jointly owned electric utility facilities: Company's Share of ------------------------------------------------------------------------------- Percent Construction Owned By Plant In Accumulated Net Plant Work In (In thousands) Company Service Depreciation In Service Progress ------------------------------------------------------------------------------- FACILITY Navajo Project 11.3 $134,023 $ 63,063 $ 70,960 $10,579 Mohave Project 14.0 71,668 29,177 42,491 4,828 Reid Gardner Plant Unit No. 4 32.2 136,143 33,312 102,831 2,535 ------------------------------------------------------------------------------- Total $341,834 $125,552 $216,282 $17,942 --------------------------------=============================================== The amounts above for Navajo and Mohave include the company's share of transmission systems and general plant equipment and, in the case of Navajo, the company's share of the jointly owned railroad which delivers coal to the plant. Each participant provides its own financing for all of these jointly owned facilities. The company's share of operating expenses for these facilities is included in the corresponding operating expenses in the Statements of Income. 11. QUARTERLY FINANCIAL DATA (UNAUDITED) Earnings Earnings Available per for Average (In thousands, except Electric Operating Net Common Common per share amounts) Revenues Income Income Stock Share --------------------------------------------------------------------------- QUARTER 1994: First $144,658 $12,196 $ 4,692 $ 3,697 $0.09 Second 195,788 28,161 23,193 22,199 0.53 Third 268,359 59,697 50,472 49,479 1.16 Fourth 155,353 13,743 3,513 2,519 0.06 1993: First 132,814 16,621 8,379 7,382 0.20 Second 142,318 23,022 15,238 14,241 0.37 Third 232,263 54,957 47,113 46,117 1.13 Fourth 144,377 13,869 2,818 1,822 0.04 The business of the company is seasonal in nature and it is management's opinion that comparisons of earnings for the quarters do not give a true indication of overall trends and changes in the company's operations. The second quarter of 1994 reflects other income of $4.2 million net of tax or 10 cents per average common share from the resolution of the PSC investigation of replacement power costs resulting from a 1985 accident at the Mohave Generating Station. The fourth quarter of 1993 reflects write-offs of $5.6 million net of tax or 14 cents per average common share for certain deferred amounts including costs related to preliminary studies for the coal-fired White Pine Power Project and for deferred energy. 34 NEVADA POWER COMPANY 1994 Annual Report Independent Auditors' Report To the Board of Directors and Shareholders of Nevada Power Company: We have audited the balance sheets of Nevada Power Company as of December 31, 1994 and 1993, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the company at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Las Vegas, Nevada February 10, 1995 REPORT OF MANAGEMENT The management of Nevada Power Company is responsible for the financial statements presented in this report. Management prepared the financial statements in conformity with generally accepted accounting principles applicable to public utilities which are consistent in all material respects with the accounting prescribed by the Public Service Commission of Nevada and the Federal Energy Regulatory Commission. In preparing the financial statements, management made informed judgements and estimates relating to events and transactions being reported. The company has a system of internal accounting and financial controls and procedures in place to insure that the financial records reflect the transactions of the company and that assets are safeguarded. This system is examined by management on a continuing basis for effectiveness and efficiency and is reviewed on a regular basis by an internal audit staff that reports directly to the Audit Committee of the Board of Directors. The financial statements have been audited by Deloitte & Touche LLP, independent auditors. The auditors provide an objective, independent review as to management's discharge of its responsibilities as they relate to the fairness of reported operating results and financial condition. Their audit includes procedures which provide them reasonable assurance that the financial statements are not misleading and includes a review of the company's system of internal accounting and financial controls and a test of transactions. The Board of Directors has oversight responsibility for determining that management has fulfilled its obligation in the preparation of financial statements and the ongoing examination of the company's system of internal accounting controls. The Audit Committee, which is composed solely of outside directors, meets regularly with management, Deloitte & Touche LLP and the internal audit staff to discuss accounting, auditing and financial reporting matters. The Audit Committee reviews the program of audit work performed by the internal audit staff. To insure auditor independence, both Deloitte & Touche LLP and the internal audit staff have complete and free access to the Audit Committee. NEVADA POWER COMPANY 1994 Annual Report 35 STOCK PRICES ON NEW YORK STOCK EXCHANGE AND DIVIDENDS PER SHARE 1994 Quarters 1993 Quarters -------------------------------- -------------------------------- First Second Third Fourth First Second Third Fourth ------------------------------------------------------------------------------- Common High $24 3/8 $22 1/4 $21 1/2 $20 7/8 $25 5/8 $25 3/4 $26 3/4 $26 1/4 Low 21 1/4 17 1/8 18 7/8 19 1/8 22 5/8 24 24 5/8 22 1/2 Dividend paid .40 .40 .40 .40 .40 .40 .40 .40 High and low common stock prices shown are as reported by the Wall Street Journal as New York Stock Exchange Composite Transactions. The common stock is also listed on the Pacific Stock Exchange. Holders of common stock are entitled to dividends as are declared by the Board of Directors, subject to the rights of the cumulative preferred stock and the preference stock of the company to quarterly cumulative dividends as declared by the Board of Directors. The company has paid quarterly dividends on its common stock since August 1954. See Note 6 of "Notes to Financial Statements" for restriction on the company's ability to pay dividends. The company had 50,566 shareholders of record of common stock at December 31, 1994. 36 NEVADA POWER COMPANY 1994 Annual Report STATISTICAL SUMMARY 1994-1990 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS): Electric Revenues: Residential $ 331,671 $ 267,941 $ 245,160 $ 216,784 $ 194,911 Commercial and industrial 380,223 326,006 305,707 287,407 256,310 Other electric sales 43,732 48,504 42,011 34,459 35,057 Miscellaneous 8,532 9,321 8,037 7,761 6,043 ----------- ----------- ----------- ---------- ---------- 764,158 651,772 600,915 546,411 492,321 ----------- ----------- ----------- ---------- ---------- Net Income (a) 81,870 73,548 56,780 35,176 24,992 Dividend Requirements on Preferred Stock 3,976 3,986 4,262 2,880 2,917 Earnings Available for Common Stock(a) $ 77,894 $ 69,562 $ 52,518 $ 32,296 $ 22,075 Weighted Average Number of Common Shares Outstanding 42,784 39,482 35,652 30,855 28,330 Earnings Per Average Common Share(a) $ 1.82 $ 1.76 $ 1.47 $ 1.05 $ .78 Dividends Per Common Share $ 1.60 $ 1.60 $ 1.60 $ 1.60 $ 1.58 CAPITALIZATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS): Long-Term Debt $ 712,571 $ 716,589 $ 715,451 $ 578,540 $ 521,340 Cumulative Preferred Stock 38,000 38,000 38,000 38,000 38,000 Cumulative Preferred Stock with Mandatory Sinking Funds 4,064 4,264 4,464 4,664 4,864 Common Shareholders' Equity 731,749 645,924 532,473 460,307 406,291 Book Value Per Common Share $ 16.12 $ 15.56 $ 14.34 $ 13.96 $ 14.05 RETURN ON COMMON SHAREHOLDERS' EQUITY 10.64% 10.77% 9.86% 7.02% 5.43% ELECTRIC PLANT INVESTMENT (IN THOUSANDS): Gross $ 2,079,694 $ 1,901,448 $ 1,739,633 $1,562,921 $1,345,107 Depreciated 1,584,003 1,450,146 1,328,670 1,187,154 996,885 TOTAL ASSETS (IN THOUSANDS) $ 1,907,389 $ 1,809,337 $ 1,557,040 $1,410,022 $1,236,210 CONSTRUCTION EXPENDITURES EXCLUDING AFUDC (IN THOUSANDS) $ 179,674 $ 157,458 $ 167,233 $ 145,271 $ 152,583 OPERATING AND SALES DATA: Generating Capacity and Firm Purchases (Megawatts) 3,462 3,488 2,989 2,719 2,534 Peak Load (Megawatts) 2,920 2,681 2,501 2,373 2,248 Electric Sales (Megawatthours) 11,942,724 11,155,270 10,541,204 9,834,952 9,619,723 Number of Customers (Year-End) 428,284 403,875 383,036 366,325 347,969 Average Annual Kilowatthour Sales Per Residential Customer 13,605 13,008 13,343 13,213 13,331 NUMBER OF EMPLOYEES (YEAR-END) 1,759 1,741 1,734 1,689 1,639 (a) Amount for 1990 includes a provision for a proposed regulatory disallowance and other adjustments. Amount for 1991 includes write-offs for deferred energy and environmental study costs. Amount for 1993 includes write-offs for deferred energy costs and preliminary study costs for a cancelled coal-fired generating station project. Amount for 1994 includes other income from the resolution of a regulatory investigation of replacement power costs resulting from a 1985 generating station accident. NEVADA POWER COMPANY 1994 Annual Report 37