===============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
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 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 30150 (6100 Neil Road)
Reno, Nevada 89520-3150
(Address of principal executive office) (Zip Code)
(702) 689-3600
(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 August 9, 1996
Common Stock, $1.00 par value 30,733,816 Shares
SIERRA PACIFIC RESOURCES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
CONTENTS
Page No.
--------
PART I - Financial Information
- ------------------------------
ITEM 1. Financial Statements
Report of Independent Accountants.......................... 2
Consolidated Balance Sheets - June 30, 1996 and
December 31, 1995...................................... 3
Consolidated Statements of Income - Three and Six Months
Ended June 30, 1996 and 1995........................... 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1996 and 1995........................... 5
Notes to Consolidated Financial Statements................. 6
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................................... 9
PART II - Other Information
- ----------------------------
ITEM 1. Legal Proceedings..................................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders... 16
ITEM 5. Other Information..................................... 16
ITEM 6. Exhibits and Reports on Form 8-K...................... 16
Signature Page.................................................. 17
[LETTERHEAD OF COOPERS & LYBRAND]
To the Board of Directors and Shareholders
of Sierra Pacific Resources:
We have reviewed the condensed consolidated balance sheet of Sierra Pacific
Resources and subsidiaries as of June 30, 1996 and the related condensed
consolidated statements of income for the three- and six-month periods ended
June 30, 1996 and 1995 and statements of cash flows for the six-month periods
ended June 30, 1996 and 1995. These financial statements are the responsibility
of 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 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 the condensed financial statements referred to above 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 statement of capitalization of
Sierra Pacific Resources and subsidiaries as of December 31, 1995, and the
related statements of income, cash flows and retained earnings for the year then
ended (not presented herein); and in our report dated February 16, 1996 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, 1995 is fairly presented, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Coopers & Lybrand L.L.P.
San Francisco, California
July 26, 1996
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a
limited liability association incorporated in Switzerland.
2
SIERRA PACIFIC RESOURCES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1996 1995
------------------ -------------
(UNAUDITED)
ASSETS
------
Utility Plant, Original Cost:
Plant in service $1,844,568 $1,816,444
Less accumulated provision for depreciation 581,423 556,710
---------- ----------
1,263,145 1,259,734
Construction work in progress 206,158 153,067
---------- ----------
1,469,303 1,412,801
---------- ----------
Investment in subsidiaries and
other property, net 44,451 45,290
---------- ----------
Current Assets:
Cash and cash equivalents 3,344 4,243
Accounts receivable less provision for
uncollectible accounts: $1,629 at June 30,
1996 and $1,543 at December 31, 1995 74,435 92,177
Materials, supplies and fuel, at average cost 30,721 30,455
Other 5,257 2,538
---------- ----------
113,757 129,413
---------- ----------
Deferred Charges:
Regulatory tax asset 68,989 69,610
Other regulatory assets 70,095 82,841
Other 9,988 16,672
---------- ----------
149,072 169,123
---------- ----------
$1,776,583 $1,756,627
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common shareholder's equity $ 569,430 $ 544,550
Preferred stock 73,115 73,115
Preferred stock subject to mandatory redemption - 13,600
Long-term debt 603,049 573,933
---------- ----------
1,245,594 1,205,198
---------- ----------
Current Liabilities:
Short-term borrowings 95,000 56,112
Current maturities of long-term debt
and preferred stock 10,418 17,358
Accounts payable 45,267 91,885
Accrued interest 5,110 6,109
Dividends declared 10,331 10,195
Accrued salaries and benefits 9,884 9,265
Other current liabilities 15,964 12,440
---------- ----------
191,974 203,364
---------- ----------
Deferred Credits:
Accumulated deferred federal income taxes 153,241 159,300
Accumulated deferred investment tax credit 42,812 43,797
Regulatory tax liability 44,148 45,084
Customer advances for construction 39,216 40,168
Other 59,598 59,716
---------- ----------
339,015 348,065
---------- ----------
$1,776,583 $1,756,627
========== ===========
The accompanying notes are an integral part of the financial statements.
3
SIERRA PACIFIC RESOURCES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
------------ ------------ ------------ ----------
(UNAUDITED) (UNAUDITED)
Operating Revenues:
Electric $ 124,601 $ 114,668 $ 252,358 $ 239,974
Gas 11,267 13,557 36,334 38,354
Water 11,508 10,557 20,838 19,734
Other 2,797 3,451 4,469 4,316
----------- ----------- ----------- -----------
150,173 142,233 313,999 302,378
----------- ----------- ----------- -----------
Operating Expenses:
Operation:
Purchased power 29,853 29,835 61,022 60,596
Fuel for power generation 24,539 21,175 48,402 40,460
Gas purchased for resale 5,659 5,942 19,341 21,491
Deferral of energy costs - net (2,306) 604 (1,690) 8,674
Other 35,986 32,292 66,660 60,972
Maintenance 4,610 4,224 9,087 7,928
Depreciation and amortization 14,288 13,713 28,350 27,315
Taxes:
Income taxes 8,813 7,728 20,729 16,434
Other than income 4,562 4,400 9,172 8,937
----------- ----------- ----------- -----------
126,004 119,913 261,073 252,807
----------- ----------- ----------- -----------
Operating Income 24,169 22,320 52,926 49,571
----------- ----------- ----------- -----------
Other Income:
Allowance for other funds
used during construction 1,357 261 2,020 449
Other income - net 701 178 1,160 155
----------- ----------- ----------- -----------
2,058 439 3,180 604
----------- ----------- ----------- -----------
Total Income 26,227 22,759 56,106 50,175
----------- ----------- ----------- -----------
Interest Charges
Long-term debt 9,807 9,643 19,126 19,278
Other 1,262 859 2,398 1,884
Allowance for borrowed funds
used during construction and
capitalized interest (1,152) (517) (1,299) (934)
----------- ----------- ----------- -----------
9,917 9,985 20,225 20,228
----------- ----------- ----------- -----------
Income Before Preferred Dividends 16,310 12,774 35,881 29,947
Preferred Dividend Requirements 1,505 1,878 3,290 3,803
----------- ----------- ----------- -----------
Income Applicable to Common Stock $ 14,805 $ 10,896 $ 32,591 $ 26,144
=========== =========== =========== ===========
Weighted Average Shares 30,379,293 29,666,054 30,246,038 29,562,838
Net Income per Share 0.49 0.37 1.08 0.88
Dividends Paid Per Share of
Common Stock 0.295 0.28 0.59 0.56
The accompanying notes are an integral part of the financial statements.
4
SIERRA PACIFIC RESOURCES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-----------------------
1996 1995
-------- -----------
(UNAUDITED)
Cash Flows from Operating Activities:
- ------------------------------------
Income before preferred dividends $ 35,881 $ 29,947
Non-cash items included in income:
Depreciation and amortization 28,350 27,315
Deferred taxes and deferred investment tax credit (7,419) (2,852)
AFUDC and capitalized interest (3,319) (1,383)
Deferred energy costs (1,690) 8,674
Write-off of merger costs 5,375 2,000
Other non-cash 7,104 917
Changes in certain assets and liabilities:
Accounts receivable 17,742 16,244
Other current assets (2,392) 1,816
Accounts payable (46,618) (16,702)
Other current liabilities 2,326 (4,391)
Other - net 5,244 (1,016)
-------- --------
Net Cash Flow from Operating Activities 40,584 60,569
-------- --------
Cash Flows Used in Investing Activities:
- ---------------------------------------
Additions to utility plant (89,470) (54,557)
Non-cash charges to utility plant 3,472 1,580
Net customer refunds and
Contributions in aid of construction 4,659 2,536
-------- --------
Net cash used for utility plant (81,339) (50,441)
Proceeds from sale of real estate - 1,099
Investment in subsidiaries and other
non-utility property, net 1,396 (62)
-------- --------
Net Cash Used in Investing Activities (79,943) (49,404)
-------- --------
Cash Flows From Financing Activities:
- ------------------------------------
Increase in short-term borrowings 39,862 16,247
Proceeds from issuance of long-term debt 30,020 -
Retirement of long-term debt (10,332) (860)
Reduction of preferred stock (20,400) (6,800)
Increase in funds held in trust, net 9,175 9,235
Increase in notes receivable - (13,183)
Sale of common stock 10,056 7,663
Expenses of external financing - (59)
Dividends paid (19,921) (20,368)
-------- --------
Net Cash as a Result of Financing Activities 38,460 (8,125)
-------- --------
Net (Decrease)Increase in Cash and Cash Equivalents (899) 3,040
Beginning Balance in Cash and Cash Equivalents 4,243 15,843
-------- --------
Ending Balance in Cash and Cash Equivalents $ 3,344 $ 18,883
======== ========
Supplemental Disclosures of Cash Flow Information:
- -------------------------------------------------
Cash Paid During Period For:
Interest $ 21,418 $20,912
Income Taxes $ 21,847 $22,946
The accompanying notes are an integral part of the financial statements
5
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. MANAGEMENT'S STATEMENT
---------------------------------
In the opinion of Company management, the accompanying unaudited interim
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows for the periods shown. It is
suggested that these consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's 1995 Annual Report on Form 10-K. Coopers & Lybrand L.L.P., the
Company's independent accountants, have performed a review of the unaudited
consolidated financial statements, and their report thereon has been included on
Page 2 of this report.
The results of operations for the three and six month periods ended June 30,
1996 are not necessarily indicative of the results to be expected for the full
year.
NOTE 2. IMPAIRMENT OF LONG-LIVED ASSETS
-----------------------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of", which is effective
for fiscal years beginning after December 31, 1995. The Company adopted the
standard January 1, 1996 and has determined that under current cost based
regulation there exists no material impact on its financial statements as a
result of the adoption of the standard.
NOTE 3. PREFERRED STOCK
-------------------------
On June 3, 1996, Sierra Pacific Power Company (SPPC), the Company's
principal subsidiary, redeemed the remaining 408,000 shares of Series G, 8.24%
Preferred Stock, at par value, for $20.4 million.
On July 29, 1996, SPPC through its consolidated wholly owned subsidiary,
Sierra Pacific Power Capital I (Trust), completed a public offering of 1.94
million shares of 8.6% cumulative trust originated preferred securities (TOPrS),
with an aggregate liquidation value of $48.5 million. Concurrent with the
issuance of the TOPrS, the Trust issued to SPPC 60,000 shares of common
securities with an aggregate liquidation value of $1.5 million. The only assets
of the Trust are the junior subordinated debentures issued by SPPC with a
prinicipal amount of $50 million, an interest rate of 8.6% and a maturity date
of 2036. The SPPC guarantee of the TOPrS, considered together with the other
obligations of SPPC with respect to the Trust, constitutes a full and
unconditional guarantee by SPPC of the Trust's obligations under the TOPrS
issued by the Trust. Net proceeds from the TOPrS offering and the issuance of
the common securities were used by the Trust to purchase the junior subordinated
debentures. Proceeds to SPPC from the sale of the junior subordinated
debentures are being used to retire short-term indebtedness incurred to redeem
$20.4 million in principal amount of Series G, 8.24% Preferred Stock and to
reduce other short-term debt of SPPC.
NOTE 4. DEFERRED ENERGY
-------------------------
In March 1995, the balances of SPPC's (Nevada jurisdiction) deferred energy
receivables accounts were collected and, according to the provisions of the
stipulation approved by the Public Service Commission of Nevada in September
1994, SPPC suspended its deferred energy accounting, increased base rates by
$6.5 million, and decreased deferred fuel rates by $18.8 million.
Fluctuations in purchased gas, fuel and purchased power costs from the base
fuel rates will now flow through to earnings until January 1, 1997. SPPC and
regulators will re-evaluate the use of deferred energy accounting practices
prior to January 1, 1997.
6
In June 1996, SPPC implemented the California Stipulation Agreement which
set the Energy Cost Adjustment Clause (ECAC), California Alternate Rates for
Energy (CARE), and Electric Revenue Adjustment Mechanism (ERAM) account balances
to zero resulting in a reduction of deferred fuel costs of $2.3 million. The
Stipulation also reduced rates by $2.3 million on an annual basis.
NOTE 5. LONG-TERM DEBT
------------------------
The Company redeemed $10 million of senior notes on April 1, 1996.
On February 27, 1996, SPPC registered for issuance of up to $80 million of
collateralized debt securities which may be offered from time to time. During
March, 1996, SPPC issued $20 million of medium-term notes under the program. In
April, 1996, an additional $10 million in medium-term notes were issued. These
are ten year non-callable notes, due in 2006, with interest rates of 6.81% to
6.83%, payable in semi-annual payments. The proceeds were used to reduce short-
term debt and to fund construction projects.
On June 19, 1996, SPPC converted the interest rate on the $80 million Water
Facilities Bonds, maturing in 2020, to a daily rate from a flexible (Commercial
Paper) rate which reduces line of credit, trustee fees, and administrative
costs.
In July 1996, SPPC issued an additional $30 million principal amount of its
$80 million Medium-Term Notes, Series C. These are three year non-callable
notes, due in 1999, with interest rates of 6.83% to 6.86. The net proceeds to
SPPC from the sale of the notes was used to reduce short-term debt and to fund
construction projects. To date, including this offering, an aggregate of $60
million of Medium-Term Notes, Series C, has been issued.
NOTE 6. COMMON STOCK OFFERINGS
--------------------------------
On March 14, 1995, the Company filed a registration statement with the
Securities and Exchange Commission to offer shares of common stock pursuant to a
continuous offering program. The net proceeds of the stock offering are used
primarily to make additional equity investments in SPPC, which proposes to use
the funds for its construction program. Approximately 227,400 of the shares
remain to be issued, as of August 1, 1996.
On August 1, 1996, the Company filed a registration statement with the
Securities and Exchange Commission to offer for sale up to one million shares of
common stock. These shares will be sold to participants in the Company's Common
Stock Investment Plan. The net proceeds will be used to make additional
investments in the common equities of the Company and for other general
corporate purposes. The subsidiaries propose to use the funds received to fund
construction, to reduce certain indebtedness and for other general corporate
purposes. The Company is unable to estimate the number of shares of its common
stock will be sold pursuant to the Plan or the prices at which such shares will
be sold.
NOTE 7. MERGER TERMINATION
-----------------------------
On June 28, 1996, Sierra Pacific Resources and Sierra Pacific Power Company
received notice from The Washington Water Power Company of its election to
terminate the Agreement and Plan of Reorganization, as amended, among Sierra
Pacific Resources, Sierra Pacific Power Company and The Washington Water Power
Company. Sierra Pacific Resources filed a Report on Form 8-K on July 3, 1996,
with the Securities Exchange Commission which contains additional information
regarding the termination of the Merger Agreement.
As of June 30, 1996, SPPC had incurred $42 million in merger costs composed
of $13 million in transaction and transition costs and $29 million of early
retirement and severance program costs.
7
In accordance with the provisions of the merger stipulation with the Public
Service Commission of Nevada (PSCN), SPPC had been amortizing all costs over a
five year period which began January 1, 1995. Through June 30, 1996, $17
million of total merger costs had been expensed. However, due to the
termination of the merger in June 1996, SPPC reversed all previously expensed
amounts and applied different accounting treatment to the component costs. All
transition and transaction costs which SPPC does not expect to recover in future
rates were expensed. SPPC began to amortize early retirement and severance
costs over a ten year period beginning January 1, 1995 consistent with previous
state orders on these types of programs. Accordingly, $4 million was expensed
in June 1996, which represented eighteen months of amortization. SPPC expects
to recover the costs related to early retirement and severance in future rates.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
Nevada, the Company's primary jurisdiction, uses a marginal cost method for
setting rates by customer class. As a result of this methodology, changes in
sales mix (i.e., consumption by customer class) can result in increases or
decreases in revenues, irrespective of changes in total consumption.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
1996 1995 1996 1995
--------- --------- ---------- ----------
(Dollars in Thousands)
Operating Revenues $147,376 $138,782 $ 309,530 $ 298,062
Energy Costs (57,745) (57,556) (127,075) (131,221)
-------- --------
Revenue Margin $ 89,631 $ 81,226 $ 182,455 $ 166,841
======== ======== ========== =========
Total operating revenues for the three-months ended June 30, 1996 increased
by 6.2% over the comparable period of 1995 due to increased energy sales
resulting from overall customer growth and increased use per customer due to
warmer weather than last year. A record peak load of 1,162 MW was achieved in
June. Total operating revenues for the six-month period ended June 30, 1996
increased by 3.8% over the comparable period of 1995, due to customer growth and
warmer weather, which was partially offset by a decrease in electric rates in
Nevada in May, 1995.
Energy costs are comprised of purchased power, fuel for power generation,
gas purchased for resale, and deferred energy. Average energy costs for the
quarter and the year to date are set forth below.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
Average cost per KWH of
purchased power 2.61c 3.18c 2.83c 3.34c
Average cost per KWH of
generated power 2.22c 2.31c 2.23c 2.12c
Average cost per therm of
gas purchased for resale 26.41c 25.11c 27.33c 32.09c
While kilowatt-hours purchased increased by 20.6% and 18.6%, respectively,
for the three and six months ended June 30, 1996, over the comparable periods in
1995, the total cost of purchased power increased less than 1.0% for the six
months ended, due to the availability of low cost hydro-generated energy from
sources in the Pacific Northwest.
9
Kilowatt-hours generated increased by 16.7% and 11.7%, respectively, for the
three and six months ended June 30, 1996, over the comparable periods in 1995
due to increased customer demand and overall customer growth. The total cost of
fuel for power generation increased by 15.9% and 19.6% for the three and six
months ended June 30, 1996 over the same period of 1995, reflecting higher fuel
prices and increased generation.
The total cost of gas purchased for resale decreased 4.8% and 10.0% for the
three and six months ended June 30, 1996 from the comparable periods in 1995,
due to a decrease in therm usage of 18.6% and 1.4% and due to lower prices for
natural gas in the first six months.
Deferred energy costs - net decreased by 482% and 119% for the three and six
months ended June 30, 1996 over the comparable period of 1995 due to the
suspension of deferred energy accounting in Nevada's electric and natural gas
jurisdictions in March, 1995. In June, 1996, the California Energy Cost
Adjustment Clause, California Alternate Rates for Energy, and Electric Revenue
Adjustment Mechanism rates were set to zero which resulted in a $2.3 million
decrease in these costs. For further discussion of deferred energy matters,
refer to "Note 4. DEFERRED ENERGY" on page 6.
Other operations expenses experienced a net increase of 11.4% and 9.3%
during the three and six months ended June 30, 1996 over the same period in
1995. The increase was primarily due to SPPC's buy-out of one year of a coal
contract, merger related expenses, and a small increase in the reserve for
injuries and damages. For further discussion of merger costs, refer to "Note 7.
MERGER TERMINATION" on page 7.
In its 1995 Form 10-K, SPPC stated that it would be investigating
alternatives to mitigate an inventory build-up of coal. As of June 30, 1996,
the coal inventory balance was approximately 407,361 tons, or roughly 71 days of
consumption at 100% capacity. SPPC's policy has been to maintain an average
annual coal inventory sufficient to provide 40 days at full load. However, with
lower prices of natural gas and availability of inexpensive energy from the
Pacific Northwest, the coal inventory has grown. To mitigate further inventory
buildup, SPPC paid $2.5 million to buy out one of its coal contracts for
approximately 315,000 tons which will satisfy the minimum commitment of 300,000
tons for the period from July 1, 1996 to June 30, 1997.
Maintenance expense increased by 9.1% and 14.6% during the three and six
months ended June 30, 1996 over the same periods in 1995, primarily due to
planned maintenance of SPPC's Tracy generating plant, and maintenance on
distribution overhead lines.
Depreciation and amortization expense for the three and six months ended
June 30, 1996 increased by 4.2% and 3.8% over the comparable periods of 1995,
due to continued increases in utility plant. Refer to the "CONSTRUCTION PROGRAM
AND REGULATORY PROCEEDINGS" section beginning on page 12 for additional
discussion of construction programs.
Income taxes increased for the three and six months ended June 30, 1996 over
the comparable period in 1995, due to higher operating income before taxes. The
decrease in the effective tax rate for the three-month period ended June 30,
1996 over the comparable period in 1995 was due to the tax effects of the
terminated merger. Income taxes reflected in operating income and other income-
net are summarized on the following page. Other taxes increased due to higher
property taxes.
10
Three Months Ended Six Months Ended
June 30, June 30
-------------------- -------------------
1996 1995 1996 1995
--------- -------- ------- ---------
(Dollars in Thousands)
Currently payable $10,675 $ 8,592 $27,604 $18,681
Deferred taxes - net (1,701) (496) (6,434) (1,593)
Investment tax credit - net (492) (493) (985) (985)
------- ------- ------- -------
Total income taxes $ 8,482 $ 7,603 $20,185 $16,103
======= ======= ======= =======
Income taxes charge to:
Operations $ 8,813 $ 7,728 $20,729 $16,434
Other Income - net (331) (125) (544) (331)
------- ------- ------- -------
Total income tax expense $ 8,482 $ 7,603 $20,185 $16,103
======= ======= ======= =======
Income before income taxes $24,792 $20,377 $56,066 $46,050
======= ======= ======= =======
Effective tax rate 34.2% 37.3% 36.0% 35.0%
======= ======= ======= =======
Allowance for funds used during construction (AFUDC) and capitalized
interest increased by 222.5% and 140.0% during the three and six months ended
June 30, 1996 compared to the corresponding period in 1995, reflecting the
current period increase in construction work in progress (CWIP) and an AFUDC
rate increase from the prior year. Refer to the "CONSTRUCTION PROGRAM AND
REGULATORY PROCEEDINGS" section beginning on page 12 for additional discussion
of construction programs.
Other interest on debt increased 46.9% and 27.3% for the quarter and
six months ended June 30, 1996 due to SPPC carrying greater amounts of
commercial paper debt outstanding during 1996 which resulted in an increase in
related interest.
The Tuscarora Gas Transmission Company pipeline was completed in
December, 1996. The pipeline delivered 5.0 and 10.7 million decatherms of gas
for the three and six months ended June 30, 1996. The pipeline contributed $0.7
million of revenue for the three months ended June 30, 1996, and $1.4 million
revenue for the six months ended June 30, 1996 to Tuscarora Gas Pipeline
Company, a wholly owned subsidiary of the Company.
Lands of Sierra (LOS), a wholly owned subsidiary of SPR, was engaged
in the development and management of land and real estate in Nevada and
California. SPR continues to liquidate the properties of LOS. LOS sold land
underlying a condominium project in May, 1996 for a gain of $1.8 million.
11
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
During the first six months of 1996, the Company and SPPC declared quarterly
common and preferred stock dividends aggregating $21.1 million.
The Company redeemed $10 million of Senior Notes in April, 1996.
In March and April, 1996, SPPC issued an additional $30 million prinicipal
amount of medium-term notes. In July 1996, SPPC issued an additional $30 million
principal amount of medium-term notes of its $80 million Medium-Term Note
Program, Series C. To date, an aggregate of $60 million of Medium-Term Note
Program, Series C, has been issued.
On June 3, 1996, SPPC redeemed the remaining 408,000 shares of Series G,
8.24% Preferred Stock, at par value, for $20.4 million.
On July 29, 1996, Sierra Pacific Power Capital I, a wholly owned subsidiary
of SPPC, issued 1.94 million shares of 8.6% Trust Originated Preferred
Securities with a total liquidation value of $48.5 million. For further
discussion of Trust Originated Preferred Securities, refer to "Note 5. LONG TERM
DEBT" on page 7.
CONSTRUCTION PROGRAM AND REGULATORY PROCEEDINGS
- -----------------------------------------------
The Company's construction program and capital requirements for the period
1996-2000 were originally discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995. Estimated cash construction expenditures
for 1996 and 1997-2000 are $196.7 million and $494.8 million, respectively. As
of June 30, 1996, $81.3 million (41.3%) had been expended of the amount
projected for 1996. Of this amount, approximately 27.0% was provided by
internally-generated funds.
Alturas Intertie
- ----------------
This 345 kV line will originate at the Bonneville Power Administration
transmission line west of the northeastern California town of Alturas. It will
extend south some 165 miles to an existing Company substation in Reno. In
January 1996, the California Public Utilities Commission certified the final
Environmental Impact Report/Statement ("EIR/S") prepared for the project and
granted the Company a Certificate of Public Convenience and Necessity, which
recognizes the need for and benefit of the project.
In February 1996, the Bureau of Land Management ("BLM"), the Federal Lead
Agency, issued a positive Record of Decision for the project approving the
issuance of a right-of-way grant for approximately 70 miles of BLM land, and
confirming that the EIR/S for the project meets the requirements of the National
Environmental Protection Act. The Toiyabe National Forest issued a Record of
Decision for a "no-action" alternative for eight miles of Forest Service land in
Washoe County, Nevada. The Washington D.C. Office of the National Forest has
ordered this decision withdrawn. Sierra and the Toiyabe National Forest are
continuing to work toward a mutually agreeable solution for this project. On
April 30, 1996, the Company appeared before the Washoe County Commission and was
granted a Special Use Permit for the Alturas Project. The Company expects to
appear before the Regional Planning Commission in September, 1996.
The Public Service Commission of Nevada (PSCN) hearings were also held in
February 1996, as required under the Nevada Utility Environmental Protection Act
(UEPA). A conditional permit to construct was issued by the PSCN on June 13,
1996. The permit is conditioned upon Sierra obtaining permits from entities such
as the Forest Service and the Regional Planning Commission. This decision
affirms the need for the line and grants conditional approval under (UEPA).
Assuming all required permits are obtained the Alturas line is expected to be
operational by the winter of 1997-98, and should provide greater system
reliability and additional supplies of electricity from hydroelectric power
plants in the Pacific Northwest.
12
The current projected cost of the Alturas Intertie Project is $120 million, of
which $57 million has already been expended as of July 31, 1996.
Pinon Pine
- ----------
In August, 1992, SPPC executed a cooperative agreement with the U.S.
Department of Energy ("DOE") for the construction of a coal-gasification power
plant. The project, known as the Pinon Pine power project ("Pinon") was
selected by the DOE for funding under the fourth round of the Federal Clean Coal
Technology Program. This clean coal integrated gasification combined-cycle
power plant will be fully capable of operating on coal, natural gas, and,
potentially, other fuels. The current rating is 106 megawatts. The DOE is
providing funding for approximately half of the construction cost and half of
the operating and fuel expenses for the first four years of operation.
Currently, the DOE has committed $154 million of funding for the project. The
DOE has authority under the Clean Coal Technology Program to fund up to $168
million. Any costs over $168 million are the responsibility of SPPC. The
current construction cost of this project (including the DOE's portion) is
estimated to be approximately $220 million.
Construction began on the project in February, 1995, following resource plan
approval and the receipt of all permits and other approvals. Engineering,
procurement and construction activities are underway, with the plant scheduled
to be completed by year-end 1996.
Pinon Pine Corporation and Pinon Pine Investment Company, subsidiaries of
SPPC, own 25% and 75%, respectively, of a 38% partnership interest in Pinon Pine
Company, LLC (The LLC), with GECC holding a 62% interest. The LLC was formed to
take advantage of federal income tax credits associated with the alternative
fuel (syngas) produced by the coal gasifier and available under Section 29 of
the Internal Revenue Code. Recent Congressional legislation was passed extending
by eighteen months the required in-service date for alternative fuel (syngas)
produced by the coal gasifier to June 30, 1998 in order to be eligible for tax
credits under Section 29 of the Internal Revenue Code and is awaiting
Presidential approval.
Water Treatment Facilities Construction
- ---------------------------------------
The Safe Drinking Water Act (SDWA) amendments passed by Congress in 1986
have significantly influenced the cost of SPPC's treatment plant facilities.
SPPC was officially notified in 1991 by the Nevada state health division that,
under the requirements of the surface water treatment rule (SWTR) of the SDWA,
filtration of water at its non-filtered plants would be required. SPPC
submitted and received approval of a filtration compliance plan with the Nevada
State Health Division that provided for a three-year extension to June 1996.
In order to comply with SWTR filtration requirements and meet projected
capacity demands, SPPC has completed construction of the second phase of the
Chalk Bluff treatment plant at a total cost of $88 million for the two phases as
of June 30, 1996. The first phase was completed in Spring of 1994 with a
capacity of 27 million gallons per day (MGD) using high rate filtration as
approved by the Nevada State Health Division in 1995. The second phase of the
facility was completed in May, 1996 providing a total production capacity of 69
MGD. Improvements to SPPC's Glendale treatment plant were also completed in
June, 1996. Completion of these projects results in full compliance with the
SWTR requirements.
Hunter Creek, one of two chemical-process plants, was removed from operation
as a treatment facility in October 1995 and has been converted to a 30 million
gallon covered storage facility as of April, 1996. The other, Highland, was
removed from operation as a treatment facility in June, 1996, and will be
converted to a covered treated water storage facility by April, 1997. Combined,
Hunter Creek and Highland will provide 50 million gallons of treated water
storage for fire protection, operating storage, and emergency requirements.
SPPC uses groundwater from twenty-four supply wells. A manmade contaminant
tetrachloroethylene (PCE) has been found in five of these wells in levels
exceeding drinking water standards. Treatment equipment, costing $2.2 million,
has been
13
installed on two of the wells and they have been returned to operation. The
three other wells have been removed from operation until SPPC completes its
investigation concerning the contamination. On March 29, 1996, SPPC entered into
a Bilateral Compliance Agreement with the Nevada State Health Division which
requires these wells to be in compliance with drinking water standards by
October, 1998. SPPC will determine the economic viability of treatment
remediation as compared to other alternatives. SPPC continues its involvement in
a cooperative remediation effort with public officials to determine the source
and extent of the contaminant and develop a plan to abate on an area-wide basis.
Washoe County has the ability to create a special remediation district to help
cover the cost of this effort. The development of the remediation plan is
projected to be completed in 1997.
State Regulatory Commissions
- ----------------------------
The Company's planned merger with The Washington Water Power resulted in
SPPC entering into stipulations with the California Public Utilities Commission
in June, 1996. Among other things, SPPC agreed with California to reduce rates
by $2.3 million annually by setting all balancing accounts rates to zero and to
set all balancing account balances to zero. Additionally, SPPC was to file a
General Rate Case, including Performance Based Ratemaking Mechanism, within 60
days of the end of the month in which the merger was terminated. The rate
reduction and the setting of the balances to zero was implemented in June, 1996.
SPPC has requested an extension to January 1, 1997 of filing requirements
resulting from the termination of the merger. Commission Staff has granted this
request.
Under terms of a 1994 stipulation approved by the Public Service Commission
of Nevada, SPPC was to make Deferred Energy and Purchased Gas Adjustment Clause
filings no later than August 1, 1996 for rate adjustments effective January 1,
1997. A one month extension to September 1, has been agreed to by Nevada Staff.
The January 1 date marks the end of a three year rate freeze resulting from the
above mentioned stipulation.
Federal Energy Regulatory Commission
- ------------------------------------
On April 24, 1996, the FERC issued its final rules concerning transmission
open access and stranded cost recovery. These were finalized in FERC Orders 888
and 889. The rules require that all public utilities that own and/or control
transmission facilities must file tariffs that allow third parties to utilize
the transmission facilities on a comparable basis to the use by the transmission
owners. The transmission provider must provide tariffs that allow third parties
to purchase point-to-point transmission service or service that has multiple
points or receipt and delivery, much the same as the provider, which is called
network service. The orders also require that the transmission provider
"unbundle" the transmission rates into a transmission only rate plus ancillary
services for generation and scheduling activities performed by the provider.
The purchase of the ancillary services by the customer from the transmission
provider is largely optional.
Another requirement of the FERC open access orders is for the utilities to
establish an electronic bulletin board (OASIS) which will facilitate the
purchase and sale of transmission service. This service must be operational by
the Fall of 1996. The rules also require a distinct separation of personnel who
act as wholesale marketers and as transmission marketers. The wholesale
marketers for SPPC will no longer have exclusive access to information related
to the transmission system. The wholesale marketers will be required to place
service requests and purchases based on information provided on the OASIS in the
same manner as all other third parties.
The Order required utilities to file their initial tariffs for open access
transmission service by July 9, 1996. SPPC filed on July 9, 1996, as required.
Final acceptance and approval of the filed rates are expected to occur over the
following year, with the resulting rates, terms and conditions determined by the
FERC for each utility. The impact of the new transmission rate and the
14
provision of expanded transmission service has not been fully determined at this
time.
OTHER BUSINESS
- --------------
Merger
- ------
On June 27, 1994, the Company, SPPC, The Washington Water Power Company
(WWP), and Altus Corporation (Altus) entered into an Agreement and Plan of
Merger and Reorganization ("Merger Agreement"), in which WWP, the Company and
SPPC would be merged into Altus. Under the terms of the Merger Agreement, if
the merger was not consummated on or before June 27, 1996, any party, by
providing written notice to the other, could terminate the Merger Agreement
provided that party was not then in breach of any obligation under the Agreement
which caused or resulted in the failure of the Merger Agreement to be
consummated by that date.
On June 28, 1996, WWP provided written notice to the Company and SPPC that
it was terminating the Merger Agreement. Since that time, petitions to withdraw
merger applications have been filed by one or more parties in all jurisdictions
having approval jurisdiction over the merger.
Electric Business
- -----------------
In its 1995 Form 10-K, SPPC discussed entering into long-term contracts with
its customers. Tailored contracts and agreements are being developed to provide
revenue guarantee (minimum annual bill) and termination charge security for
capital investments made on behalf of individual customers. Contract provisions
mitigate the risk of extending service to customers, primarily large mining
customers, and are designed to recover, over the life of the agreements,
customer-specific investments in facilities. Contract provisions for minimum
bills are based on customers attaining minimum annual demand and load factors.
Contract provisions for termination charges include recovery of all costs for
customer-specific facilities and, for the first five years under the contract,
recovery of up to two years of minimum bills. To date, SPPC has negotiated four
such contracts, and the Public Service Commission of Nevada has approved these
contracts.
SPPC is negotiating with existing mining customers to enter into long term
electric service contracts which would represent an estimated 309 MW under
contract with estimated average annual sales of 2,060,445 Mwh.
Water Business
- --------------
During 1995, comprehensive legislation was adopted by the Nevada Legislature
which provides for regional planning and cooperative management of all aspects
of water in the region. The Regional Water Planning Commission was created to
develop an integrated water plan. SPPC and Washoe County signed an agreement in
July 1996 which provides methodology to determine retail service area boundaries
and establishes SPPC as the wholesale purveyor to the region. These cooperative
efforts between SPPC and local agencies will help ensure regional planning and
integrated water service. The agreement has been sent to the Nevada Public
Service Commission for approval.
15
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's 1996 Annual Meeting of Shareholders was held on
May 20, 1996.
(b) Proxies were solicited by the Company pursuant to Regulation 14
under the Securities and Exchange Act of 1934; there was no
solicitation in opposition to management's nominees as listed in
the proxy statement, and all of such nominees were elected to the
classes indicated in the proxy statement pursuant to the vote of
the shareholders.
(c) The following members of the Company's Board of Directors were
re-elected at the meeting as follows:
Krestine M. Corbin
Votes For: 24,849,431
Votes Withheld: 830,106
Harold P. Dayton, Jr.
Votes For: 24,812,097
Votes Withheld: 867,440
James R. Donnelley
Votes For: 24,860,759
Votes Withheld: 818,778
Dennis E. Wheeler
Votes For: 24,855,386
Votes Withheld: 824,151
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 regarding 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 June 30, 1996 for
Sierra Pacific Resources, and is qualified in its entirety by
reference to such financial statements.
(b) Reports on Form 8-K:
Current report on Form 8-K dated June 28, 1996 relating to the
termination of the merger agreement between Sierra Pacific
Resources, Sierra Pacific Power Company and The Washington Water
Power.
16
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: August 14, 1996 By: /s/ Malyn K. Malquist
------------------- ------------------------------
Malyn K. Malquist
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
17