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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996 Commission File Number 1-8788
SIERRA PACIFIC RESOURCES
(Exact name of registrant as specified in its charter)
NEVADA 88-0198358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 30150 (6100 NEIL ROAD)
RENO, NEVADA 89520-3150 (89511)
(Address of principal executive offices) (Zip Code)
(702) 689-5400
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE
COMMON STOCK, PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
State the aggregate market value of the voting stock held by non-affiliates. As
of March 20, 1997: $899,107,710
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 20, 1996: 30,870,651 Shares
Common Stock, $1.00 par value
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed in
connection with the 1996 Annual meeting of shareholders, to be held May 16,
1997, are incorporated by reference into Part III hereof.
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SIERRA PACIFIC RESOURCES
1996 ANNUAL REPORT FORM 10-K
CONTENTS
PAGE
----
PART I.
- -------
ITEM 1. BUSINESS
THE COMPANY......................................... 2
BUSINESS OUTLOOK AND OVERVIEW....................... 2
GENERAL ELECTRIC INDUSTRY TRENDS.................... 4
MERGER TERMINATION.................................. 5
GENERAL............................................. 5
ITEM 2. PROPERTIES............................................... 6
ITEM 3. LEGAL PROCEEDINGS........................................ 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...... 6
PART II.
- ---------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS........................ 9
ITEM 6. SELECTED FINANCIAL DATA.................................. 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............. 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................. 52
PART III.
- ---------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....... 53
ITEM 11. EXECUTIVE COMPENSATION................................... 53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT....................... 53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........... 53
PART IV.
- --------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K................................ 54
APPENDIX........................................................... 59
APPENDIX E......................................................... 60
PART II
ITEM 1. BUSINESS
THE COMPANY
-----------
Sierra Pacific Resources hereafter known as the Company or SPR,
was incorporated under Nevada Law on December 12, 1983. The Company's mailing
address is P.O. Box 30150 (6100 Neil Road), Reno, NV 89520-3150.
The Company has four primary subsidiaries: Sierra Pacific Power
Company (SPPC), Tuscarora Gas Pipeline Company (TGPC), Sierra Energy
Company dba e.three (e.three) and Lands of Sierra, Inc. (LOS). SPPC provides
electric service to northern Nevada and northeastern California, and natural
gas and water service in the Reno/Sparks area of Nevada. The assets of SPPC
represented 99% of the consolidated assets of SPR at December 31, 1996. TGPC,
in partnership with a subsidiary of TransCanada PipeLines, USA Limited, of
Calgary, Alberta, Canada (TransCanada) operates a 229-mile pipeline, placed in
service in December 1995. Organized in October, 1996, e.three provides
comprehensive energy services in commercial and industrial markets on a
regional and national basis. LOS is a real estate management company.
BUSINESS OUTLOOK AND OVERVIEW (1)
-----------------------------
SIERRA PACIFIC POWER COMPANY
- ----------------------------
SPPC is a public utility primarily engaged in the generation, purchase,
transmission, distribution and sale of electric energy. It provides electricity
to approximately 278,000 customers in a 50,000 square mile service area
including western, central and northeastern parts of Nevada, including the
cities of Reno, Sparks, Carson City, and Elko and a portion of eastern
California, including the Lake Tahoe area. SPPC also provides natural gas
service in Nevada to approximately 95,000 customers in an area of about 600
square miles in Reno/Sparks and environs. SPPC supplies water service in Nevada
to about 63,000 customers in the Reno/Sparks metropolitan area.
(1) WHEN USED ANYWHERE IN THIS FORM 10-K, OR THE FORM 10-K OF SPPC, ATTACHED AS
THE APPENDIX, AND IN FUTURE FILINGS BY THE COMPANY OR SPPC WITH THE
SECURITIES AND EXCHANGE COMMISSION, IN THE COMPANY'S PRESS RELEASES AND IN
ORAL STATEMENTS MADE WITH THE APPROVAL OF AN AUTHORIZED EXECUTIVE OFFICER,
THE WORDS OR PHRASES "WILL LIKELY RESULT", "ARE EXPECTED TO", "WILL
CONTINUE", "IS ANTICIPATED", "ESTIMATED", "PROJECT", OR "OUTLOOK" OR
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL EARNINGS AND
THOSE PRESENTLY ANTICIPATED OR PROJECTED. THE COMPANY WISHES TO CAUTION
READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS,
WHICH SPEAK ONLY AS OF THE DATE MADE. THE COMPANY WISHES TO ADVISE READERS
THAT VARIOUS FACTORS DESCRIBED IN THESE FORMS 10-K COULD CAUSE THE
COMPANY'S ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY
OPINIONS OR STATEMENTS EXPRESSED WITH RESPECT TO FUTURE PERIODS IN ANY
CURRENT STATEMENTS. THE COMPANY SPECIFICALLY DECLINES ANY OBLIGATION TO
PUBLICLY RELEASE THE RESULT OF ANY REVISIONS WHICH MAY BE MADE TO ANY
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE
DATE OF SUCH STATEMENTS OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR
UNANTICIPATED EVENTS.
2
During 1996 90.6% of the Company's revenues were from retail sales of
electricity, natural gas and water in Nevada; 6.8% from retail sales of
electricity in California and 2.6% from wholesale sales of electricity in Nevada
and California.
A complete description of SPPC is contained in its Annual Report on Form
10-K for the year ended December 31, 1996, attached hereto as an Appendix.
TUSCARORA GAS PIPELINE COMPANY
- ------------------------------
TGPC was formed as a wholly-owned subsidiary in 1993, for the purpose of
entering into a partnership (Tuscarora Gas Transmission Company or TGTC) with a
subsidiary of TransCanada PipeLines, USA Limited of Calgary, Alberta, Canada
(TransCanada) to develop, construct and operate a new natural gas pipeline
that serves an expanding gas market in Reno, northern Nevada and
northeastern California. To date, the Company has invested approximately $18
million in this subsidiary. In December 1995, TGTC completed construction and
began service through a 229-mile pipeline extending from Malin, Oregon
southeast to Reno. TGTC interconnects with the Pacific Gas Transmission
Company (PGT) at Malin, Oregon. PGT is a major interstate natural gas
pipeline extending from Oregon to the U.S./Canadian border. The PGT system
provides TGTC customers direct access to natural gas reserves in the Western
Canadian Sedimentary basin, one of the largest proven reserves basin in North
America.
As an interstate pipeline, TGTC provides only transportation service.
SPPC and SPR were the only customers of TGTC during most of 1996, contributing
99.5% and .5% of revenues, respectively. The cities of Susanville and
Alturas, California, and the Sierra Army Depot at Herlong may take service from
TGTC in 1997. These areas of northeastern California have access to natural
gas service for the first time as a result of the TGTC construction. Malin,
Oregon recently began taking service from TGTC.
E.THREE
- -------
Organized in October 1996, e.three is a wholly-owned subsidiary of Sierra
Pacific Resources. It provides comprehensive energy services in commercial and
industrial markets. Its principal focus is providing energy-related solutions
to increase customers' productivity and profits, including: efficiency
improvements to lighting, heating, ventilation and air conditioning equipment;
installation or improvement of controls and power quality systems; energy
procurement; and energy performance contracting. Through December 31, 1996,
e.three incurred expenses of $230,324 plus an additional $65,445 capitalized as
organizational costs to be amortized over five years. The Company anticipates
investing in e.three, through debt or equity, $1.4 million in 1997.
LANDS OF SIERRA, INC.
- ---------------------
LOS was organized in 1964 to develop SPPC non-utility property. LOS is
engaged in the development and management of land and real estate properties in
Nevada and California. These properties include retail, industrial, office and
residential sites, and timberland and properties in the Lake Tahoe region. SPR
has decided to focus on its core energy
3
businesses and, in keeping with this business strategy, LOS continues to sell
its remaining properties. Properties sold in 1996 include an industrial site in
Nevada and several Lake Tahoe area properties for a total sales volume of
approximately $3.4 million. Properties remaining include only vacant land in
Nevada and land leases in the Tahoe region. Management continues to focus on
selling most of these remaining properties in 1997.
GENERAL ELECTRIC INDUSTRY TRENDS
--------------------------------
There are many different views concerning the electric utility industry and
the changes it is experiencing now and will face in the future. Some changes
will be regulatory and others may be legislative.
To meet the challenges such changes may bring to the industry, SPPC has
down-sized and reorganized to cut costs, better serve its customers and prepare
for competition. SPPC has also negotiated long-term contracts with six of its
largest mining customers.
Nevada electric prices were last increased in 1993; and were subsequently
reduced in March 1995, following suspension of deferred energy accounting rules.
Natural gas prices were last increased in April 1994, and the last increase in
water prices occurred in September 1994. SPPC currently has frozen its Nevada
electric and natural gas rates until December 31, 1999 and electric rates in
California until December 31, 2000.
A recent rate plan in Nevada also provides a 50/50 sharing between
customers and shareholders of electric and natural gas earnings in excess of a
12 percent return on equity. The plan also provides the opportunity for SPPC,
subject to certain conditions, to apply such excess to buying down, or buying
out of, higher cost long-term fuel and purchased power contracts. This should
reduce future costs in what SPPC expects will be a more competitive environment.
SPPC continues to be the sole provider in its certificated service
territories, however, the Company will continue to closely monitor the changes,
both locally and nationally, to prepare for competition.
SPR's investment in the transmission pipeline business will continue to
provide competitive alternatives and greater reliability to new and expanding
markets along its routes in Northern California and Nevada. It also provides
competitive alternatives for delivery of natural gas used as fuel for power
generation.
Like most companies in the world, SPPC is facing the year 2000 problem.
The Company plans to have its problem resolved by December 31, 1998.
For information regarding regulatory changes affecting SPPC, see Item 7,
Nevada Matters, California Matters, FERC Matters and Note 2 of the Company's
- -------------- ------------------ ------------
consolidated financial statements.
4
MERGER TERMINATION
------------------
In June 1994, the Company, SPPC, and The Washington Water Power Company
(WWP) entered into an agreement (Merger Agreement) which provided for the
merger of the parties into an entity named Resources West Energy Corporation.
(That name was later changed to Altus Corporation). Under the terms of the
Merger Agreement, if the merger was not consummated on or before June 27, 1996,
either 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.
As a result of the termination of the merger, the Company plans to continue
to operate SPPC as a separate utility and expand the TGPC and e.three
businesses.
As a result of the termination of the merger certain filings were made in
various regulatory jurisdictions by SPPC. See Note 2 to the Company's
consolidated financial statements.
GENERAL
-------
NUMBER OF EMPLOYEES
- -------------------
The aggregate number of employees for SPR and its subsidiaries at December
31, 1996, was 1,491. Of that number, 21 were considered part-time. In
addition, the Company had 44 temporary employees. SPPC's current contract with
the International Brotherhood of Electrical Workers, which represents 61% of
the workforce, is in effect until December 31, 1997. The three-year contract
provides for a 2.5% general wage increase for all bargaining unit employees
beginning January 1, 1995, with 3% increases in both 1996 and 1997.
Negotiations on the renewal of the contract will begin in 1997. Nevada is a
"right-to-work" state.
RESEARCH, DEVELOPMENT AND DEMONSTRATION
- ---------------------------------------
SPR is a holding company which operates through its subsidiaries.
Disclosure with respect to funds expended on research and development and the
effect of pollution control regulation, seasonality, competition and estimated
capital expenditures in connection therewith is contained in the SPPC Annual
Report on Form 10-K for the year ended December 31, 1996, attached hereto as
an Appendix.
5
ITEM 2. PROPERTIES
The information required by this item is included in Item 1 hereof. A
complete description of SPPC's property is included in SPPC's Annual Report on
Form 10-K for the year ended December 31, 1996, attached hereto as an Appendix.
ITEM 3. LEGAL PROCEEDINGS
The Company, through the course of its normal business operations, is
currently involved in a number of legal actions, none of which has had or, in
the opinion of management, is expected to have a significant impact on its
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
Pursuant to General Instruction G, the following information is included
as an additional item in Part I, as of December 31, 1996:
EXECUTIVE OFFICERS OF THE REGISTRANT
Walter M. Higgins, 52, Chairman, President and Chief Executive Officer
Mr. Higgins continues to serve as Chairman, President and Chief
Executive Officer of Sierra Pacific Resources since January 1994.
He has been President and Chief Executive Officer of Sierra Pacific Power
Company since February 1994. Prior to assuming his current duties, Mr.
Higgins was President and Chief Operating Officer of the Company from
November 1993 to January 1994. He served as President and Chief Operating
Officer of Louisville Gas and Electric Company from 1991 to November 1993.
Mr. Higgins held various executive positions with Portland General
Electric from 1977 to 1991. Mr. Higgins is also a director of Aegis
Insurance Services, Inc.
William E. Peterson, 49, Senior Vice President, General Counsel and Corporate
Secretary
Mr. Peterson was elected to his present position in January 1994. Mr.
Peterson holds the same position with Sierra Pacific Power Company. He was
previously Senior Vice President, Corporate Counsel from July 1993 to
January 1994. Prior to joining the Company in 1993, he served as general
counsel and resident agent for Sierra Pacific Resources since 1992. Mr.
Peterson was a partner in the Woodburn and Wedge Law Firm from 1982 to
1993.
Malyn K. Malquist, 44, Senior Vice President - Distribution Services Business
Group; Principal Operations Officer; Acting Chief Financial
Officer and Treasurer
Mr. Malquist was elected to his present position in August 1996 and
holds the same position with Sierra Pacific Power Company. Mr. Malquist
was Senior Vice President and Acting Chief Financial Officer and Treasurer
for the Company and Sierra Pacific Power Company from August 1996 to
February 1997. Mr. Malquist was elected Senior Vice President and Chief
Financial Officer of the Company and SPPC when he joined the Company in
April 1994. He was previously with San Diego Gas and Electric Company,
where since 1978, he held various financial positions, including Treasurer
in 1990 and Vice President in 1993.
7
Mark A. Ruelle, 35, Senior Vice President, Chief Financial Officer
and Treasurer
Mr. Ruelle was elected to his present position effective March 1, 1997
and holds the same position with Sierra Pacific Power Company. Prior to
joining the Company, Mr. Ruelle was with Western Resources, Inc., where he
held the positions of President, Westar Energy in 1996; Vice President,
Corporate Development in 1995; and numerous positions in finance, treasury,
strategic planning, and regulatory affairs. Mr. Ruelle had been with
Western Resources, Inc., since 1986.
Victor H. Pena, 48, Vice President - Business Development
Mr. Pena was elected to his current position with the Company in
December 1995. Since February 1995, he has served as President of Lands of
Sierra, Inc. He holds the title Vice President Technology, Information
Services and Business Development with Sierra Pacific Power Company. Prior
to joining the Company, he was Director of Financial Planning and Budget
with Louisville Gas and Electric Company from April 1991 to May 1994. From
early 1990 to mid 1991, Mr. Pena was President and owner of his own
business, and from 1986 to 1990, was the Director of Planning and Analysis
of Kentucky Fried Chicken, a division of Pepsico.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
SPR's Common Stock is traded on the New York Stock Exchange (symbol SRP).
The dividends paid per share and the high and low sale prices of the Common
Stock in the consolidated transaction reporting system as reported in "The Dow
Jones News Retrieval Service" for 1996 and 1995 are as follows:
Dividends Paid Price Range
1996 Per Share High Low
--------- ---- ---
First Quarter .280 25 1/8 22 5/8
Second Quarter .295 25 3/4 23 3/8
Third Quarter .295 26 3/4 24 3/8
Fourth Quarter .295 29 1/8 25 3/4
1995
First Quarter .280 20 1/8 18 1/8
Second Quarter .280 20 7/8 18 1/2
Third Quarter .280 21 5/8 20 1/8
Fourth Quarter .280 23 5/8 21 1/8
Number of Security Holders:
Title of Class Number of Holders
-------------- -----------------
Common Stock: $1.00 Par Value As of March 20, 1997: 23,119
During 1996, SPR has continued the dividend policy of its predecessor
company which has paid cash dividends on its Common Stock each year since 1916
and quarterly dividends every year since 1946. Future dividends are subject to
factors that ordinarily affect dividend policy, such as future earnings and the
financial condition of SPR. As of December 31, 1996, SPR's dividend payout
ratio was 54% based on 1996 consolidated earnings.
On February 18, 1997, the SPR Board of Directors voted to increase its
next quarterly common dividend from $.295 per share to $.31 per share. This
dividend of approximately $9.6 million will be paid on May 1, 1997.
SPR's primary source of funds for the payment of dividends to its
stockholders is dividends paid by SPPC on its Common Stock, all of which is
owned by SPR. See Note 12 to the Company's consolidated financial statements.
9
ITEM 6. SELECTED FINANCIAL DATA (in thousands of dollars,)
Year Ended December 31,
(dollars in thousands, except per share amounts)
----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Operating Revenues $ 627,711 $ 606,122 $ 626,312 $ 528,075 $ 481,810
========== ========== ========== ========== ===========
Operating Income $ 108,878 $ 104,760 $ 98,513 $ 87,893 $ 69,844
========== ========== ========== ========== ===========
Net Income $ 66,879 $ 58,039 $ 52,366 $ 44,890 $ 28,149 (1)
========== ========== ========== ===========
Net Income Per Share $ 2.19 $ 1.95 $ 1.79 $ 1.67 $ 1.09 (1)
========== ========== ========== ========== ===========
Total Assets $1,869,354 $1,756,627 $1,632,703 $1,608,946 $ 1,437,592
========== ========== ========== ========== ===========
Long-Term Debt and
Redeemable Preferred
Stock $ 686,346 $ 587,533 $ 582,309 $ 578,211 $ 595,545
========== ========== ========== ========== ===========
Cash Dividends Paid
Per Common Share $ 1.165 $ 1.120 $ 1.120 $ 1.120 $ 1.480
========== ========== ========== ========== ===========
(1) Includes after-tax write-downs of assets of $11,549.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPR's net income in 1996 was $66.9 million, an increase of $8.9 million
compared to 1995. Earnings were driven by strong customer growth, weather-
related increases in electricity and natural gas sales for the principal
subsidiary, SPPC, and profitable performances by SPR's other principal
subsidiaries.
RESULTS OF OPERATIONS
---------------------
SPPC
- ----
Net income before preferred dividends in 1996 was $73.7 million, an
increase of $7.7 million compared to 1995. SPPC's most recent three-year
average return on year-end common equity was 10.5%. For 1996, SPPC was
authorized to earn a return on equity of 12% in its Nevada electric department,
and 11.5% and 11.75%, respectively, in its Nevada gas and water departments. In
November 1995, the California Commission changed the electric authorized return
on common equity from 11.3% to 11.6%, effective January 1, 1996.
On February 6, 1997, the Nevada Commission approved a new rate plan. As
part of the new rate plan SPPC will refund $13 million to electric customers.
SPPC recorded this refund in 1996 as a reduction in revenues. See Note 2 of the
Company's consolidated financial statements.
Nevada, SPPC's primary jurisdiction, uses a marginal cost method for
setting electric and gas rates by customer class. As a result, changes in sales
mix (i.e., consumption by customer class) can result in increases or decreases
in revenues, regardless of changes in total consumption.
The components of revenue margin are set forth below (dollars in
thousands):
1996 1995 1994
-------- -------- --------
Operating Revenues:
Electric $507,004 $491,419 $498,680
Gas 67,376 62,572 65,174
Water 45,344 43,793 39,339
-------- -------- --------
Total Revenues 619,724 597,784 603,193
-------- -------- --------
Energy Costs:
Electric 223,177 212,473 244,404
Gas 32,479 37,330 41,296
-------- -------- --------
Total Energy Costs 255,656 249,803 285,700
-------- -------- --------
Revenue Margin $364,068 $347,981 $317,493
======== ======== ========
Revenue Margin by Division:
Electric $283,827 $278,946 $254,276
Gas 34,897 25,242 23,878
Water 45,344 43,793 39,339
-------- -------- --------
Total $364,068 $347,981 $317,493
======== ======== ========
Energy costs are comprised of purchased power, fuel for power generation,
gas purchased for resale and deferred energy. Average energy costs are set
forth below:
11
1996 1995 1994
------ ------ ------
Average cost per KWH
of purchased power 3.15c 3.35c 3.64c
Average cost per KWH
of generated power 2.20c 2.02c 2.31c
Average cost per therm of
gas purchased for resale 27.48c 32.74c 29.12c
The $15.6 million, 3.2%, increase in electric operating revenues during
1996 generally followed the regional increase in customers. The $7.3 million,
1.5%, decrease in 1995 electric operating revenues, compared to 1994, was due
primarily to the $18.8 million fuel rate decrease granted by the Nevada
Commission on May 1, 1995. This decrease was offset by a simultaneous $6.5
million general base rate increase and continued customer and MWH sales growth.
Gas operating revenues for 1996 increased $4.8 million, 7.7%, over 1995,
due to increased sales and continued customer growth. 1995 gas operating
revenues were down $2.6 million, 4.2%, compared to 1994, primarily due to warmer
weather in the fourth quarter of 1995. This decrease was partially offset by
continued customer and gas sales growth throughout the year.
Water department revenues increased $1.6 million, 3.5%, during 1996,
primarily as a result of customer growth. Water revenues increased $4.5
million, 11.3%, during 1995 over 1994, reflecting a full year of a $6 million
rate increase and customer growth.
During 1996, SPPC increased both its levels of electric generation and
power purchases in order to keep pace with the increasing demand for
electricity. Kilowatt hours generated in 1996 increased 11.3% from 1995 levels,
and kilowatt hours purchased increased 8.7% during the same period. The total
cost of electric generation per kilowatt hour increased 8.9% from 1995 to 1996,
driven by a 20.9% increase in the cost of fuel between years. This increase in
fuel costs is due primarily to an increase in the cost of natural gas over the
lower levels of 1995. Despite this increase, natural gas remained the fuel of
choice for 1996, rather than oil or coal. The total cost of purchased power
increased only $2.8 million, 2.1%, from 1995 to 1996. The increase in volume of
power purchases and the reduced cost per KWH are due to increased availability
of inexpensive hydro-electric power from the Northwest, as a result of wet
winter weather in that region. In 1995 and 1994, purchased power and fuel costs
for power generation decreased by $6.7 million, 5.3%, and $5.1 million, 5.6%,
respectively. During the same period, SPPC increased generation by 7.7% and
purchased power 1.3%, however, the combined cost of both declined from 1994 due
to lower unit costs of purchased power and natural gas.
For 1996, while SPPC increased total therms of natural gas purchased for
resale by 8.0%, the total cost of acquiring those therms decreased by $3.3
million, 9.3%, due to a 16.1% decrease in per-therm cost, from 1995. Purchased
gas in 1995 was up $2.1 million, 6.3%, from the prior year due to a 12.4%
increase in unit costs, offset by a 2.6% reduction in weather-related sales.
Deferral of energy costs-net decreased following the suspension of deferred
energy accounting in SPPC's California jurisdiction. The 1996 income represents
the write-off of the over-collected balance at the time of the suspension.
Deferral of energy costs-net decreased from 1994 to 1995, following the Nevada
Commission authorized change in deferred energy
12
accounting. In March 1995, the remaining balances in SPPC's (Nevada
jurisdiction, only) deferred energy receivables accounts were collected and SPPC
suspended use of the deferred energy accounting methodology. Fluctuations in
purchased gas, fuel and purchased power expenses from the base fuel rates are
now reflected in earnings. Refer to Note 2 of the Company's consolidated
financial statements for discussion of deferred energy accounting.
Other operating expenses including labor, services and materials were up
$1.6 million, 1.3%, from 1995, excluding the cost of a coal contract buy-out.
Including the cost of the $4 million coal contract buy-out, these 1996 operating
expenses were up 4.7% over 1995. The 1995 expenses were $10.3 million, 9.6%,
higher than for 1994 due primarily to $11.6 million of merger expense. 1995 and
1996 increases in wages for bargaining unit employees, and additional water
treatment expenses were offset by staff reductions.
SPPC's gas and water departments experienced negligible increases in
maintenance expense in 1996. Electric department maintenance expense was up
$1.8 million, 11.4%, in 1996, due primarily to maintenance on the Valmy power
plant boiler $506,145, transmission stations $625,841, and overhead lines
$333,591. Total maintenance costs were up $2.2 million, 13.3%, in 1995 over
1994, due primarily to the overhaul of two turbine generators at the Tracy plant
and maintenance of overhead distribution lines.
Continued additions to utility plant contributed to an increase in
depreciation expense of $3.1 million, 5.5%, over the prior year for both 1996
and 1995.
Operating income taxes declined $1.1 million, 3.0%, in 1996, due to the
deductibility of merger expenses following the termination of the merger.
Operating income taxes for 1995 increased by $8.3 million, 28.4%, over 1994 due
to increased pre-tax income and the tax impact of merger costs, a portion of
which were not expected to be deductible for tax purposes.
Increases in property, franchise, and other non-income taxes accounted for
the $1.1 million, 6.4%, increase in this category for both 1996 and 1995 over
the prior years. These increases are consistent with the increase in revenues
and utility plant.
Allowance for funds used during construction (AFUDC) is calculated using
rates commensurate with the cost of debt and equity financing. For 1996, the
AFUDC rate was higher than in 1995; and combined with higher construction-work-
in-progress (CWIP) balances for the Alturas Intertie project, the Chalk Bluff
water plant, and plant associated with the Pinon project throughout 1996, caused
a doubling in AFUDC. The increase in AFUDC from 1995 was due to higher CWIP
balances, especially in electric and water departments, offset slightly by lower
rates.
For 1996, other income(expense)-net was significantly higher ($.9 million
income vs. $3.4 million expense) than in 1995. The 1995 data included among
other items: non-recurring expense adjustments for transition interest and
customer shared savings program; a change in tax regulations related to water
department trust fund interest in 1994; lower carrying charge income; and a
potential overcharge related to facilities. The 1995 amount was lower than in
1994 due to a reduction in carrying charge income, a reduction in income from
the variable rate note trust; and a reduction in non-operating income tax.
13
Other interest expense increased $2.8 million in 1996, due primarily to the
absence of 1995 adjustments that reduced interest expense that year. Other
interest expense for 1995 was $4.1 million, 69.5%, lower than 1994 due primarily
to reversal of interest accruals related to IRS audit matters.
TGPC
- ----
Tuscarora Gas Pipeline Company had net income of $2.16 million in 1996
compared with $0.66 million in 1995. Commercial operation of TGTC's pipeline
began in December 1995. TGPC's 1996 net income was due to investments in the
natural gas pipeline. Income in 1995 was due primarily to TGPC's 50% share of
AFUDC incurred during the construction period. The Company anticipates TGPC to
be self-sustaining in 1997 and, therefore, plans no further capital
contributions to TGPC.
LOS
- ---
Lands of Sierra contributed $0.96 million to consolidated net income in
1996, due to continuing land sales. LOS reported a decrease of $17.5 million in
revenues for 1995 compared to 1994. This decrease was due to a large number of
property sales in 1994. Cost of sales also decreased in this period, resulting
in a net decrease of $3.9 million in net income. These property sales are part
of SPR's strategy of focusing on its utility businesses.
OTHER SUBSIDIARIES AND E.THREE
- ------------------------------
Combined, these entities contributed a net loss for the year ended December
31, 1996 of approximately $370,000 compared to net income of $607,000 and
$290,000 in 1995 and 1994.
14
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
CONSTRUCTION EXPENDITURES AND FINANCING
- ---------------------------------------
The table below shows cash construction expenditures and net internally
generated cash for 1994 - 1996 (dollars in thousands):
1996 1995 1994 Total
--------- --------- --------- ---------
Cash Construction Expenditures $179,102 $133,088 $108,822 $421,012
======== ======== ======== ========
Net Cash Flow from Operating
Activities $110,448 $158,065 $139,034 $407,547
Less: Cash Dividends Paid 42,032 40,668 40,636 123,336
-------- -------- -------- --------
Net Internally Generated
Cash $ 68,416 $117,397 $ 98,398 $284,211
======== ======== ======== ========
Net Internally Generated Cash
as a Percentage of Cash
Construction Expenditures 38% 88% 90% 67%
======== ======== ======== ========
The Company estimates that 61% of its 1997 cash construction requirements
will be provided by internally generated funds. The remaining 39% will be
provided by a variety of other sources including issuance of long-term and
short-term debt.
Estimated construction expenditures for 1997 and the period 1998-2001 are
as follows (dollars in thousands):
Total
1997 1998-2001 5-Year
---------- ----------- ----------
Electric Facilities $111,091 $398,631 $509,722
Water Facilities 21,240 45,202 66,442
Gas Facilities 9,565 35,051 44,616
Common Plant 4,579 11,516 16,095
-------- -------- --------
Total Construction
Expenditures 146,475 490,400 636,875
AFUDC (8,456) (9,651) (18,107)
Salvage, Net of Cost of
Removal 1,089 3,648 4,737
Net Customer Advances and
Contributions in Aid of
Construction (3,634) (14,491) (18,125)
-------- -------- --------
Total Cash Requirements $135,474 $469,906 $605,380
======== ======== ========
NOTE: These construction expenditures do not include investments in TGPC or
e.three.
15
CAPITAL STRUCTURE
- -----------------
On January 3, 1995, SPPC replaced its lines-of-credit arrangements with an
$80 million revolving credit facility, thus assuring itself a committed facility
to support its commercial paper borrowings. At December 31, 1996, SPPC had
$38.0 million of short-term borrowings outstanding, all of which were in
commercial paper. SPPC's commercial paper is rated P2, A2 and D1- by Moody's,
Standard & Poor's and Duff & Phelps, respectively.
The Company has a $10 million revolving credit facility with Barclay's
Bank, PLC. This line has been extended until April 26, 1997. There is
currently no outstanding balance, and the Company does not expect to draw on the
facility in 1997.
The Company's actual capital structure at December 31, 1996, 1995 and 1994
was as follows (dollars in thousands):
1996 1995 1994
------------------ ------------------ -----------------
Short-Term Debt (1) $ 63,434 (4%) $ 73,470 (6%) $ 59,143 (5%)
Long-Term Debt 637,846 (45%) 573,933 (45%) 561,909 (46%)
Preferred Stock 121,615 (9%) 86,715 (7%) 93,515 (8%)
Common Equity 594,859 (42%) 544,550 (42%) 508,722 (41%)
---------------- ---------------- ---------------
$1,417,754 (100%) $1,278,668 (100%) $1,223,289 (100%)
================ ================ ===============
(1) Including current maturities of long-term debt and preferred stock.
The Company has $40 million of senior notes which include Series B through
E due in years 1997 through 2000. In April 1996, the Company redeemed $10
million of the notes, and in April 1997, another $10 million will mature.
The indenture under which SPPC's first mortgage bonds are issued prescribes
certain coverage ratios that must be met before additional bonds may be issued.
At December 31, 1996, these coverage provisions would allow for the issuance of
approximately $477 million in additional first mortgage bonds at an assumed
interest rate of 8%. SPPC's long-term debt is rated A3, A- and A- by Moody's,
Standard & Poor's and Duff & Phelps, respectively. SPPC's pre-tax interest
coverages for 1996, 1995, and 1994 were 3.50, 3.78, and 3.21, respectively.
On November 13, 1996, the Company's Board of Directors declared a common
dividend of $9.1 million that was paid on February 1, 1997. On February 18,
1997, the SPR Board voted to increase its next quarterly common dividend from
$.295 per share to $.310 per share. This dividend of approximately $9.6 million
will be paid on May 1, 1997. On the same date, SPPC's Board declared both
common ($18.0 million) and preferred ($1.4 million) dividends, payable May 1,
and June 1, 1997, respectively.
16
In December 1996, SPPC registered $35 million of collateralized debt
securities. See Note 8 of the Company's consolidated financial statements.
On June 3, 1996, SPPC redeemed the remaining 408,0000 shares of Series G,
8.24% Preferred Stock, at par value for $20.4 million. On July 29, 1996, Sierra
Pacific Capital I, (the Trust), a wholly-owned subsidiary of SPPC, issued $48.5
million (1,940,000 shares) 8.60% Trust Originated Preferred Securities (the
Preferred Securities). See Note 7 of the Company's consolidated financial
statements.
NEVADA MATTERS
- --------------
Under Nevada law, general rate increases must be based upon 12 months
experienced (historic) costs. A 12-month historic test year may be updated an
additional 90 days for certified expenditures and revenues. The Nevada
Commission is obligated to issue its final decision within 180 days after the
filing.
As provided by statute, SPPC is allowed to use deferred energy accounting
procedures in its retail electric and gas operations. The intent of these
procedures is to capture fluctuations in the cost of purchased gas, fuel and
power. Deferred energy accounting allows a utility to defer the difference
between actual monthly expense and the rates it is allowed to recover from its
customers. The procedures also allow for an annual updating of fuel and
purchased power costs and the amortization of deferred balances over a 12
month period. An optional mid-year filing can occur if the increase or decrease
in total revenues exceeds 5%. The Company has suspended deferred energy
accounting in its Nevada and California jurisdictions. See Note 2 of the
Company's consolidated financial statements.
As a result of the termination of the merger certain filings were made.
See Note 2 of the Company's consolidated financial statements.
Nevada has begun investigating various proposals which could result in a
restructuring of the electric industry and increase competition among power
providers. On June 28, 1996, the Nevada Commission issued an order in its
electric restructuring investigation which approved forwarding to a Legislative
Subcommittee a report entitled "The Structure of Nevada's Electric Industry:
Promoting the Public Interest". That report concluded that the Nevada
Commission should continue to acquire information relating to past costs,
uneconomic bypass, unbundling, and the potential for anticompetitive practices.
Workshops are continuing to be scheduled to investigate these and other issues
related to Nevada's electric industry. The subcommittee issued a report to the
Legislature for consideration during the 1997 legislative session. The Company
cannot predict the outcome of these investigations or the effect that the
adoption of any such proposals would have on SPPC or its future earnings.
17
CALIFORNIA MATTERS
- ------------------
SPPC utilizes an Energy Cost Adjustment Clause (ECAC) which provides for
electric deferred energy accounting procedures similar to those described under
"Nevada Matters" above. In addition, the California Commission permits the use
of the following adjustment mechanisms: Attrition Rate Adjustment (ARA), a
procedure used to adjust rates between tri-annual general rate filings and
Electric Revenue Adjustment Mechanism (ERAM), a procedure used to adjust
revenues for fluctuations in sales from those levels adopted in a general rate
case decision.
During the merger time frame SPPC reached agreements with the California
Commission concerning these mechanisms. As a result of the termination of the
merger certain filings were made. See Note 2 of the Company's consolidated
financial statements.
On September 24, 1996, the Governor of California signed into law a bill
restructuring California's electric services industry and reforming regulation.
That bill provided for the restructuring of the electric industry beginning
January 1, 1998. The law included creation of an Independent System Operator
(ISO) to efficiently operate the State's transmission system and ensure
comparable access for power suppliers. It will also create a Power Exchange (PX)
to function as a spot market for electricity, and over time, to provide
customers direct access to alternative suppliers. Utility provisions of
performance-based ratemaking will be applied to remaining monopoly distribution
services. Stranded costs will be recovered through a separate competitive
transition charge on customers' bills.
On March 4, 1997, the California Senate Committee on Energy, Utilities and
Communications met to discuss how provisions of the restructuring bill apply to
small and multi-jurisdictional utilities such as SPPC. The committee reviewed
the relevant provisions of the legislation and clarified that utilities have the
option to request recovery of stranded costs. Utilities requesting recovery of
stranded costs are required to freeze rates at June 10, 1996 levels and provide
a 10% rate reduction for residential and small commercial customers. The
committee also clarified that if utilities do not request recovery of stranded
costs they are not required to participate in the ISO and PX. All utilities,
including SPPC, are required to make direct customer access available (based
upon a yet unreleased CPUC phase-in plan) beginning January 1, 1998, so long as
transmission facilities linking the utility to the ISO grid exist.
FERC MATTERS
- ------------
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 of 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.
18
The purchase of the ancillary services by the customer from the transmission
provider is largely optional.
SPPC filed its initial tariffs for open access transmission service by July
9, 1996 as required by FERC Order 888 (the Order). 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 provision of expanded
transmission service have not been fully determined at this time.
On July 12, 1996, SPPC and six other northwest electric companies signed a
memorandum of understanding to study the feasibility of creating an independent
transmission grid operator (INDEGO) to insure non-discriminatory, open access to
electric transmission facilities in compliance with the FERC rulings. Since
that date, 12 other utilities have joined the group bringing the current number
of participants to 19. The group plans to file the INDEGO proposal with FERC by
the summer of 1997, and anticipates that limited operation would commence in
early 1999.
Another requirement of the order is for utilities to establish an
electronic bulletin board (OASIS) to facilitate the purchase and sale of
transmission service. SPPC has contracted with Salt River Project to meet this
requirement and is part of the Southwest OASIS (SWOASIS). The SWOASIS became
operational January 3, 1997 in accordance with FERC requirements, and can be
found on the internet (http://www.swoasis.com).
The Order also requires a distinct separation of personnel who act as
wholesale marketers and as transmission marketers. SPPC accomplished this
requirement through restructuring into business units that separate these
functions under different officers. The wholesale marketers for SPPC no longer
have exclusive access to information related to the transmission system. The
wholesale marketers are required to place service requests and purchases based
on information provided on the OASIS in the same manner as all other third
parties.
OTHER
- -----
Inflation affects the prices SPR and its subsidiaries must pay for labor,
materials, equipment and supplies used in operations, maintenance and
construction. Changes in fuel, purchased power and purchased gas costs, as a
result of inflation or otherwise, were recovered through balancing account
mechanisms in years prior to 1995. Beginning in April 1995, changes in these
costs, like all other costs, are recovered through general rate requests.
Regulatory principles generally provide for recovery of the original cost of
plant investment. To the extent that SPPC experiences regulatory lag, the
effects of inflation included therein are unrecovered.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
REPORTS OF INDEPENDENT ACCOUNTANTS......................................... 21
FINANCIAL STATEMENTS:
Consolidated Balance Sheets
As of December 31, 1996 and 1995.................................... 23
Consolidated Statements of Income
Years Ended December 31, 1996, 1995 and 1994........................ 24
Consolidated Statements of Retained Earnings
Years Ended December 31, 1996, 1995 and 1994........................ 25
Consolidated Statements of Capitalization
As of December 31, 1996 and 1995.................................... 26
Consolidated Statements of Cash Flows
Years Ended December 31, 1996 and 1995.............................. 27
Notes to Consolidated Financial Statements............................. 28
20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Sierra Pacific Resources
Reno, Nevada
We have audited the accompanying consolidated balance sheet and consolidated
statement of capitalization of Sierra Pacific Resources and subsidiaries as of
December 31, 1996, and the related consolidated statements of income, retained
earnings, and cash flows for the year then ended. 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 audit. The consolidated
financial statements of the Company for the years ended December 31, 1995 and
1994 were audited by other auditors whose report, dated February 16, 1996,
expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such 1996 consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Reno, Nevada
February 14, 1997
21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Sierra Pacific Resources
We have audited the accompanying consolidated balance sheet and consolidated
statement of capitalization of Sierra Pacific Resources and subsidiaries as of
December 31, 1995, and the related consolidated statements of income, cash
flows, and retained earnings for the years ended December 31, 1995 and 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sierra Pacific
Resources and subsidiaries at December 31, 1995, and the consolidated results of
its operations and its cash flows for each of the two years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
February 16, 1996
22
SIERRA PACIFIC RESOURCES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
December 31,
ASSETS 1996 1995
------ ------------- -------------
Utility Plant, at Original Cost:
Plant in service $ 1,984,781 $ 1,816,444
Less accumulated provision for
depreciation 606,406 556,710
------------- ------------
1,378,375 1,259,734
Construction work in progress 164,835 153,067
------------- ------------
1,543,210 1,412,801
------------- ------------
Investments in subsidiaries and other
property, net 44,583 45,290
------------- ------------
Current Assets:
Cash and cash equivalents 4,949 4,243
Accounts receivable less provision
for uncollectible accounts: 1996 -
$2,196, 1995 - $1,543 94,736 92,177
Materials, supplies and fuel, at average
cost 27,586 30,455
Other 4,472 2,538
------------- ------------
131,743 129,413
------------- ------------
Deferred Charges:
Regulatory tax asset 67,667 69,610
Other regulatory assets 67,319 82,841
Other 14,832 16,672
------------- ------------
149,818 169,123
------------- ------------
$ 1,869,354 $ 1,756,627
============= ============
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common shareholders' equity $ 594,859 $ 544,550
Preferred stock 73,115 73,115
Preferred stock subject to mandatory
redemption: - 13,600
Series G
SPPC-obligated Mandatorily Redeemable
Preferred Securities of SPPC's
Subsidiary Trust, Sierra Pacific
Power Capital I, holding solely $50
million principal amount of 8.60%
Junior Subordinated Debentures of SPPC,
due 2036 48,500 -
Long-term debt 637,846 573,933
------------- ------------
1,354,320 1,205,198
------------- ------------
Current Liabilities:
Short-term borrowings 38,000 56,112
Current maturities of long-term debt and
preferred stock 25,434 17,358
Accounts payable 53,804 91,885
Accrued interest 6,849 6,109
Other current liabilities 43,530 31,900
------------- ------------
167,617 203,364
------------- ------------
Deferred Credits:
Accumulated deferred federal income taxes 164,199 159,300
Accumulated deferred investment tax credits 41,836 43,797
Regulatory tax liability 42,870 45,084
Customer advances for construction 39,429 40,168
Other 59,083 59,716
------------- ------------
347,417 348,065
------------- ------------
Commitments and Contingencies (Note 16) $ 1,869,354 $ 1,756,627
============= ============
The accompanying notes are an integral part of the financial statements.
23
SIERRA PACIFIC RESOURCES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
---------------------------------------------
1996 1995 1994
----------- ----------- -----------
Operating Revenues:
Electric $ 507,004 $ 491,419 $ 498,680
Gas 67,376 62,572 65,174
Water 45,344 43,793 39,339
Other 7,987 8,338 23,119
----------- ----------- -----------
627,711 606,122 626,312
----------- ----------- -----------
Other Expenses:
Operation:
Purchased power 122,272 119,464 126,190
Fuel for power generation 102,601 84,878 89,937
Gas purchased for resale 32,519 35,864 33,739
Deferral of energy costs-net (1,736) 9,597 35,834
Other 129,810 123,670 127,404
Maintenance 20,672 18,391 16,235
Depreciation and Amortization 58,118 55,076 52,570
Taxes:
Income taxes 35,626 36,574 28,939
Other than income 18,951 17,848 16,951
----------- ----------- -----------
518,833 501,362 527,799
----------- ----------- -----------
Operating Income 108,878 104,760 98,513
----------- ----------- -----------
Other Income:
Allowance for other funds used
during construction 5,231 1,245 2,042
Other income (expense) - net 1,289 (2,244) 2,808
----------- ----------- -----------
6,520 (999) 4,850
----------- ----------- -----------
Total Income Before Interest Charges 115,398 103,761 103,363
----------- ----------- -----------
Interest Charges:
Long-term debt 39,770 38,477 38,731
Other 4,624 2,873 5,834
Allowance for borrowed funds used during
construction and Capitalized Interest (3,924) (3,002) (1,502)
----------- ----------- -----------
40,470 38,348 43,063
----------- ----------- -----------
Income Before Obligated Mandatorily
Redeemable Preferred Securities 74,928 65,413 60,300
Preferred Dividend Requirements of
SPPC-Obligated Mandatorily Redeemable
Preferred Securities (1,749) - -
----------- ----------- -----------
Income Before Preferred Dividends 73,179 65,413 60,300
Preferred Dividend Requirements of
Subsidiary (6,300) (7,374) (7,934)
----------- ----------- -----------
Net Income $ 66,879 $ 58,039 $ 52,366
=========== =========== ===========
Net Income Per Share $ 2.19 $ 1.95 $ 1.79
=========== =========== ===========
Weighted Average Shares of
Common Stock Outstanding 30,495,224 29,754,978 29,219,078
=========== =========== ===========
Annual Dividends Paid Per Share of
Common Stock $ 1.165 $ 1.120 $ 1.120
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
24
SIERRA PACIFIC RESOURCES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
Year Ended December 31,
1996 1995 1994
--------- --------- --------
Retained Earnings at Begining of $ 80,845 $ 58,062 $ 46,631
Year
Income Before Preferred Dividends 73,179 65,413 60,300
-------- -------- --------
154,024 123,475 106,931
Other (268) - -
Dividends Declared:
Preferred stock of subsidiary (5,879) (9,205) (7,981)
Common stock (36,136) (33,425) (40,888)
-------- -------- --------
Retained Earnings at End of Year $111,741 $ 80,845 $ 58,062
======== ======== ========
The accompanying notes are an integral part of the financial statements.
25
SIERRA PACIFIC RESOURCES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(DOLLARS IN THOUSANDS)
December 31,
1996 1995
--------------- ---------------
Common Shareholders' Equity:
- ---------------------------
Common stock $1.00 par value,
authorized 90,000,000 shares, issued and
outstanding 1996, 30,815,936 shares;
1995, 30,034,513 shares $ 30,816 $ 30,035
Additional paid-in capital 452,302 433,670
Retained earnings 111,741 80,845
---------- ----------
Total common shareholders' equity 594,859 544,550
---------- ----------
Preferred Stock of Subsidiary:
- -----------------------------
Cumulative preferred stock:
Not subject to mandatory redemption:
$50 par value:
Series: A, $2.44 dividend 4,025 4,025
B, $2.36 dividend 4,100 4,100
C, $3.90 dividend 14,990 14,990
$25 stated value:
Class A Series I, $1.95 dividend 50,000 50,000
---------- ----------
Subtotal 73,115 73,115
Subject to mandatory redemption:
$50 par value:
Series: G, $4.12 dividend - 13,600
$25 stated value:
SPPC-obligated Mandatorily Redeemable
Preferred Securities of SPPC's Subsidiary Trust,
Sierra Pacific Power Capital I, holding solely $50
million principal amount of 8.60% Junior
Subordinated Debentures of SPPC, due 2036 48,500 -
---------- ----------
Total preferred stock 121,615 86,715
---------- ----------
Long-Term Debt:
- ---------------
First Mortgage Bonds:
6.50% Series K due 1997 - 15,000
Unamortized bond premium and
discount, net (906) (947)
---------- ----------
Subtotal, excluding current portion (906) 14,053
---------- ----------
Debt Secured by First Mortgage Bonds:
- ------------------------------------
2.00% Series Z due 2004 135 155
2.00% Series O due 2011 1,736 1,852
6.35% Series FF due 2012 1,000 1,000
6.55% Series AA due 2013 39,500 39,500
6.30% Series DD due 2014 45,000 45,000
6.65% Series HH due 2017 75,000 75,000
6.65% Series BB due 2017 17,500 17,500
6.55% Series GG due 2020 20,000 20,000
6.30% Series EE due 2022 10,250 10,250
6.95% to 8.65% Series A MTN due 2022 115,000 115,000
7.10% and 7.14% Series B MTN due 2023 58,000 58,000
6.83% and 6.86% Series C MTN due 1999 30,000 -
6.62% to 6.83% Series C MTN due 2006 50,000 -
5.90% Series JJ due 2023 9,800 9,800
5.90% Series KK due 2023 30,000 30,000
5.00% Series Y due 2024 3,335 3,395
6.70% Series II due 2032 21,200 21,200
---------- ----------
Subtotal, excluding current portion 527,456 447,652
---------- ----------
Variable Rate Notes:
- -------------------
Water facilities note maturing 2020 80,000 80,000
Total Funds Held in Trust - (9,175)
---------- ----------
Subtotal 80,000 70,825
---------- ----------
Senior Notes 30,000 40,000
---------- ----------
Other, excluding current portion 1,296 1,403
---------- ----------
Total long-term debt 637,846 573,933
---------- ----------
TOTAL CAPITALIZATION $1,354,320 $1,205,198
========== ==========
The accompanying notes are an integral part of the financial statements.
26
SIERRA PACIFIC RESOURCES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended December 31,
1996 1995 1994
--------- --------- ---------
Cash Flows From Operating Activities:
- ----------------------------------------
Income before preferred dividends $ 73,179 $ 65,413 $ 60,300
Non-cash items included in income:
Depreciation and amortization 58,118 55,076 52,570
Deferred taxes and investment tax credits 2,983 (1,012) (8,030)
AFUDC and capitalized interest (9,155) (4,247) (3,544)
Deferred energy costs (1,736) 9,597 35,834
Deferred Interest on Variable Rate Debt (602) (708) (67)
Early Retirement and Severance Amortization 7,877 2,127 1,488
Merger Costs 1,909 11,612 -
Other non-cash 3,405 2,570 (127)
Changes in certain assets and liabilities:
Accounts Receivable (2,559) (13,513) (21,075)
Materials, supplies and fuel 2,869 935 (196)
Other current assets (1,934) 1,346 205
Accounts payable (38,081) 41,862 2,484
Other current liabilities 11,373 (5,958) 10,070
Other-net 2,802 (7,035) (10,854)
Proceeds from sales of operating properties - - 19,976
--------- --------- ---------
Net Cash Flows From Operating Activities 110,448 158,065 139,034
--------- --------- ---------
Cash Flows Used In Investing Activities:
- ---------------------------------------
Additions to utility plant (203,109) (144,197) (125,478)
Non-cash charges to utility plant 9,474 5,059 3,980
Customer (refunds) advances for construction (739) (571) 1,070
Contributions in aid of construction 15,272 6,621 11,606
--------- --------- ---------
Net cash used for utility plant (179,102) (133,088) (108,822)
Proceeds from sale of other assets 4 1,440 1,818
Investments in (disposal of) subsidiaries and
other property - net 1,261 (27,978) (7,178)
--------- --------- ---------
Net Cash Used In Investing Activities (177,837) (159,626) (114,182)
--------- --------- ---------
Cash Flows From (Used In) Financing Activities:
- ----------------------------------------------
(Decrease) Increase in short-term borrowings (16,059) 12,424 (10,668)
Proceeds from issuance of long-term debt 80,041 - -
Retirement of long-term debt (10,539) (11,038) (8,261)
Decrease in funds held in trust 9,175 23,058 22,203
Proceeds from SPPC-obligated Mandatorily
Redeemable Preferred Securities 48,500 - -
Retirement of preferred stock (20,400) (6,800) (6,800)
Sale of common stock 19,414 13,045 7,479
Expenses of external financing (5) (59) (309)
Dividends paid (42,032) (40,668) (40,636)
Decrease in notes receiveable - - (115)
--------- --------- ---------
Net Cash From (Used In) Financing Activities 68,095 (10,038) (37,107)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 706 (11,599) (12,255)
Beginning Balance in Cash and Cash Equivalents 4,243 15,842 28,097
--------- --------- ---------
Ending Balance in Cash and Cash Equivalents $ 4,949 $ 4,243 $ 15,842
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
- ------------------------------------------------
Cash Paid During Year for:
Interest $ 44,106 $ 38,873 $ 39,966
Income Taxes $ 39,234 $ 34,557 $ 35,187
The accompanying notes are an integral part of the financial statements.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ---------------------------------------------------
The significant accounting policies for both utility and non-utility
operations are as follows:
General
-------
The consolidated financial statements include the accounts of Sierra
Pacific Resources (SPR) and its wholly-owned subsidiaries, Sierra Pacific Power
Company (SPPC), Tuscarora Gas Pipeline Company (TGPC), Sierra Gas Holding
Company (formerly Sierra Energy Company), Sierra Energy Company dba e.three
(e.three), Lands of Sierra, Inc. (LOS), and Sierra Water Development Company
(SWDC). All significant intercompany balances and intercompany transactions
have been eliminated in consolidation.
SPPC, SPR's principal subsidiary, is a regulated public utility engaged
principally in the generation, purchase, transmission, distribution, and sale of
electric energy in Reno, west, central, and northern Nevada and the Lake Tahoe
area of California. SPPC also provides water and natural gas service in the
cities of Reno and Sparks, Nevada, and environs. In 1995, SPPC formed two
subsidiaries for the specific purpose of investing with a subsidiary of General
Electric Capital Corporation (GECC) in the Pinon Pine gasifier facility. These
subsidiaries are Pinon Pine Corp. and Pinon Pine Investment Co. They are
consolidated into the financial statements of SPPC, with all significant
intercompany transactions eliminated. On July 29, 1996, SPPC formed a wholly-
owned subsidiary, Sierra Pacific Power Capital I (Trust), for the purpose of
completing a public offering of trust originated preferred securities. See Note
7 for the stock issuance, and Note 5 for the Pinon Pine Power Project of the
Company's consolidated financial statements.
SPPC maintains its accounts for electric and natural gas in accordance with
the uniform system of accounts prescribed by the Federal Energy Regulatory
Commission (FERC) and for water operations in accordance with the uniform system
of accounts prescribed by the National Association of Regulatory Utility
Commissioners.
TGPC is a partner in a general partnership which developed, constructed,
and operates a natural gas pipeline serving expanding gas markets in the Reno
area and certain limited northeastern California markets. TGPC accounts for its
interest in Tuscarora Gas Transmission Company (TGTC) under the equity method.
Organized in October 1996, e.three provides comprehensive energy services in
commercial and industrial markets on a regional and national basis. LOS is
primarily engaged in real estate management and is currently in the process of
disposing of its properties.
In November 1996, the Board of Directors of the Company approved an
investment, as a limited partner, in an energy technology venture capital
partnership to gain access to new technologies that could benefit the Company.
This partnership will invest in energy companies offering technologies of
strategic advantage to its partners. The Company's initial $250,000 payment on
this investment was made in November 1996. The remaining balance of the
Company's commitment, $4.75 million, will be drawn on as funds are needed by the
partnership over the next five years. The term of this partnership is ten years
with two extensions of up to an additional two years each. Gains and losses
will be
28
allocated among the limited partners based on their contributions. At present,
the Company, as a limited partner, would be entitled to 26 percent.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of certain assets and
liabilities. These estimates and assumptions also affect the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of certain revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Certain reclassifications have been made for comparative purposes but have
not affected previously reported net income or common shareholders' equity.
SPPC Utility Plant
------------------
In addition to direct labor and material costs, SPPC also charges the
following costs to the construction of utility plant: cost of time spent by
administrative employees in planning and directing construction work; property
taxes; employee benefits (including such costs as pensions, postretirement and
postemployment benefits, vacations and payroll taxes); and an allowance for
funds used during construction, which is calculated monthly on the total funds
expended.
The original cost of plant retired or otherwise disposed of and the cost of
removal less salvage are charged to the accumulated provision for depreciation.
The cost of current repairs and minor replacements is charged to operating
expenses when incurred. The cost of renewals and betterments is capitalized.
Allowance For Funds Used During Construction and Capitalized Interest
---------------------------------------------------------------------
SPPC capitalizes, as part of construction costs on utility plant, an
allowance for funds used during construction (AFUDC). AFUDC represents the cost
of borrowed funds and a reasonable return on other funds used for construction
purposes in accordance with rules prescribed by the FERC and the Nevada
Commission. AFUDC is capitalized in the same manner as construction labor and
material costs, with an offsetting credit to "other income" for the portion
representing other funds and as a reduction of interest charges for the portion
representing borrowed funds. Recognition of this item as a cost of utility
plant is in accordance with established regulatory ratemaking practices. Such
practices permit the utility to earn a fair return on, and recover in rates
charged for utility services, all capital costs. This is accomplished by
including such costs in rate base and in the provision for depreciation.
The AFUDC rates used during 1996, 1995 and 1994 were 8.91%, 8.16% and
8.59%, respectively. As specified by the Nevada Commission, certain projects
were assigned a lower AFUDC rate due to specific low-interest-rate financings
directly associated with those projects.
Depreciation
------------
29
Depreciation is calculated using the straight-line method over the
estimated remaining service lives of the related properties. The provision, as
authorized by the Nevada Commission, for 1996, 1995, and 1994, stated as a
percentage of the original cost of depreciable property, was 3.18%, 3.16%, and
3.15%, respectively.
Cash And Cash Equivalents
-------------------------
Cash is comprised of cash on hand and working funds. Cash equivalents
consist of high quality investments in commercial paper of other corporations
with original maturities of three months or less. The Company's investments in
commercial paper were $3.7 million and $2.6 million for December 31, 1996 and
1995, respectively.
SPPC also engages in short-term investment activity whenever it is deemed
beneficial. As of December 31, 1996 and 1995, SPPC had no commercial paper
investments (cash equivalents).
Other Regulatory Assets
-----------------------
Accounting for the utility business conforms with generally accepted
accounting principles as applied to regulated public utilities and as prescribed
by agencies and the commissions of the various locations in which the utility
businesses operate.
In accordance with these principles, certain costs that would otherwise be
charged to expense or capitalized as plant costs are deferred as regulatory
assets based on expected recovery from customers in future rates. Management's
expected recovery of deferred costs is based upon specific ratemaking decisions
or precedent for each item. The following other regulatory assets were included
in the consolidated balance sheets as of December 31 (dollars in thousands):
DESCRIPTION 1996 1995 AMORTIZATION PERIODS
- ---------------------------------------- -------- -------- --------------------
Early retirement and severance offers $29,195 $43,269 Various through 2005
Loss on reacquired debt 19,113 19,872 Various through 2023
Plant assets 9,888 7,462 Various through 2031
Conservation and demand side programs 6,805 9,069 Various through 2006
Other costs 2,318 3,169 Various
------- -------
Total $67,319 $82,841
======= =======
30
Deferral Of Energy Costs
------------------------
SPPC has suspended deferred energy accounting in its Nevada and California
jurisdictions. Prior to May 1995 (Nevada) and June 1996 (California), SPPC
employed deferred energy accounting procedures in its electric and natural gas
operations, as provided by statutes. The intent of these procedures was to
capture fluctuations in the cost of purchased gas, fuel and purchased power.
Deferred energy accounting required SPPC to record the difference between actual
fuel expense and fuel revenues as deferred energy costs. Refer to Note 2 of the
Company's consolidated financial statements.
Federal Income Taxes And Investment Tax Credits
-----------------------------------------------
The Company and its subsidiaries file a consolidated federal income tax
return. Current income taxes are allocated based on the parent and each
subsidiary's respective taxable income or loss and investment tax credits as if
each subsidiary filed a separate return. Deferred taxes are provided on
temporary differences at the statutory income tax rate in effect as of the most
recent balance sheet date.
For regulatory purposes, SPPC is authorized to provide for deferred taxes
on the difference between straight-line and accelerated tax depreciation on
post-1969 utility plant expansion property, deferred energy, and certain other
differences between financial reporting and taxable income, including those
added by the Tax Reform Act of 1986 (TRA). In 1981, SPPC began providing for
deferred taxes on the benefits of using the Accelerated Cost Recovery System for
all post-1980 property. In 1987 the TRA required SPPC to begin providing
deferred taxes on the benefits derived from using the Modified Accelerated Cost
Recovery System.
Investment tax credits (ITC) are no longer available to SPPC. The deferred
ITC balance is being amortized over the estimated service lives of the related
properties.
Revenues
--------
SPPC accrues unbilled utility revenues earned from the dates customers were
last billed to the end of the accounting period. These amounts are included in
accounts receivable.
NOTE 2. REGULATORY ACTIONS:
- ---------------------------
Nevada Proceedings
------------------
In September 1994, the Nevada Commission approved a stipulation to settle
the pending general rate case. The stipulation specified that the pre-1987
methodology be used to calculate fuel recoveries in deferred energy accounting.
The original transition balance that arose when the methodology was changed in
1987 was offset by this change. Interest of $4.8 million on the transition
balance was moved to a regulatory asset account. Amortization of this
regulatory asset was completed in December 1996. While the suspension of
deferred energy accounting continues, fluctuations in gas purchased for resale,
fuel and purchased power costs from the base fuel rates will flow through
earnings.
31
The September 1994 stipulation also allowed for the deferred electric and
natural gas energy rates to remain intact until the full deferred energy
balances were recovered. In March 1995, the balances in SPPC's (Nevada
jurisdiction) deferred energy accounts were collected and SPPC suspended use of
the deferred energy accounting methodology, increased base rates by $6.5 million
and decreased deferred fuel rates by $18.8 million.
As a result of the termination of the merger and as required by the
September 1994 stipulation, SPPC filed with the Nevada Commission an application
to decrease deferred energy rates $8.2 million and increase purchased gas rates
$1.3 million effective January 1, 1997. SPPC also filed an application pursuant
to the provisions of General Order 43 cost recovery mechanism to decrease its
general rates by $1.4 million plus amortization of a balance of $3.6 million.
The filings were accompanied by a motion to adopt the rate plan previously
approved by the Nevada Commission in the proceeding related to the merger.
Hearings concerning the motion were held, and additional discussions were
conducted which resulted in a stipulated rate plan. The rate plan, approved by
the Nevada Commission on February 6, 1997, includes: a one-time refund of $13
million to Nevada electric customers, a decrease of $7.1 million in electric
rates, a rate freeze for electric and natural gas rates through December 31,
1999, and continued suspension of deferred energy accounting. In addition, the
deferred energy and purchased gas filings were withdrawn and the General Order
43 cost recovery filing was resolved by an additional $2.4 million decrease in
electric rates. The $13 million refund is included in current liabilities in
the accompanying consolidated balance sheets.
The Nevada rate plan also provides for a 50/50 sharing between customers
and shareholders of electric and natural gas earnings in excess of a 12 percent
return on equity. SPPC has an opportunity, subject to certain conditions, to
apply such excess to buying down or buying out of long-term fuel and purchased
power contracts currently in place.
California Proceedings
----------------------
As a result of the termination of the merger, certain filings were made in
SPPC's California jurisdiction. In a previous decision, which conditionally
approved the merger, SPPC was required to file various rate applications for
test year 1997 in the event the merger was not consummated by March 31, 1996.
In a second decision, the California Commission extended this deadline and
suspended deferred energy accounting, which reduced SPPC's rates by $2.3 million
effective June 1, 1996. With the termination of the merger, another decision
was issued which ordered a rate freeze through December 31, 2000 and continued
the suspension of deferred energy accounting.
32
NOTE 3. UTILITY PLANT:
- -----------------------
Utility Plant in service consisted of (dollars in thousands of dollars):
December 31,
1996 1995
----------- -----------
Electric $1,545,045 $1,445,478
Water 300,431 241,015
Gas 139,305 129,951
---------- ----------
$1,984,781 $1,816,444
========== ==========
NOTE 4. OTHER PROPERTY:
- -----------------------
Other property consisted of (dollars in thousands):
December 31,
1996 1995
-------- --------
Investment in TGPC $17,639 $18,054
Investment in Pinon
Pine Gasifier 20,247 20,372
Real Estate - net 3,229 4,094
Other 3,468 2,770
------- -------
$44,583 $45,290
======= =======
NOTE 5. JOINTLY-OWNED FACILITIES:
- ---------------------------------
VALMY
- -----
SPPC and Idaho Power Company each own an undivided 50% interest in the
Valmy generating station, with each company being responsible for financing its
share of capital and operating costs. SPPC is the operator of the plant for
both parties.
SPPC's share of direct operation and maintenance expenses for Valmy is
included in the accompanying consolidated statements of income.
The following schedule reflects SPPC's 50% ownership interest in jointly-
owned electric utility plant at December 31, 1996 (dollars in thousands):
Electric Accumulated
MW Plant Provision For Construction
Plant Capacity In Service Depreciation Work In Progress
- ----------- -------- ---------- ------------- ----------------
Valmy #1 129 $127,252 $46,070 $385
Valmy #2 137 $153,580 $44,593 $284
PINON PINE
- ----------
Pinon Pine Corp. and Pinon Pine Investment Co., subsidiaries of SPPC, own
25% and 75%, respectively of a 38% interest in Pinon Pine Co., LLC (The LLC),
with a subsidiary of General Electric Capital Corporation (GECC) owning the
remaining 62%. The LLC was formed to take advantage of federal income tax
credits available under IRC (S)29 from the production and sale of an alternative
fuel (syngas) produced by the coal gasifier. The entire project, which includes
an LLC-owned gasifier and an SPPC-owned power island and post-gasification
facilities to partially cool and clean the syngas, is referred to collectively
as the Pinon Pine Power Project.
33
SPPC has signed several contracts with The LLC. These contracts include a
fixed-price turn-key construction agreement, site and space leases, an operation
and maintenance agreement, a working capital loan agreement and a syngas
purchase agreement. In addition, SPPC has a funding arrangement with the DOE.
Under the agreement, the DOE will provide funding towards the construction of
the project, and towards the operating and maintenance costs of the facility.
The total DOE contribution is capped at $168 million, and through December 31,
1996 the DOE has funded $115.6 million.
The fixed-price construction contract provides that The LLC will pay SPPC
$92.0 million for the gasifier. SPPC's obligations under the contract include
construction and start-up of the gasifier, and integration of the gasifier
facility into the operation of SPPC's post-gasification equipment and power
island. One-half of the $92.0 million cost will be funded by the DOE. The
remainder of the cost will be paid by The LLC. The LLC will fund this
construction commitment through a $20.4 million contribution of construction-
work-in-progress by SPPC at the time The LLC was created, and additional capital
contributions by GECC of $32.6 million. The LLC will not pay more than $46.0
million of the $92.0 million construction price.
Costs incurred above the $92.0 million contract price will be absorbed by
SPPC and the DOE without reimbursement from The LLC. Foster Wheeler, USA Corp.
the architect, engineer and construction manager on the project has estimated
that construction costs of The LLC-owned gasifier will overrun the contract
price by $2.7 to $3.3 million, after the DOE funding. SPPC and Foster Wheeler,
USA Corp. are currently investigating the reasons for, the exact nature and
extent of, and responsibility for cost increases on the entire Pinon project.
Total costs are now estimated to be $272.4 million.
The original in-service date was expected to be December 31, 1996 as
required to take advantage of the (S)29 credits. However, Congress extended the
deadline relative to the credits to June 30, 1998 and the gasifier is now
expected to be completed and in-service by mid-1997.
SPPC must satisfy certain performance requirements as part of the
construction agreement. The initial performance warranty requires that the
gasifier attain an average capacity factor of 30% during 1997, regardless of
delays in the in-service date. If the gasifier does not achieve the 30% factor
required in 1997, the Company is required to pay liquidated damages to GECC
ranging from $93,000 to $2.8 million depending on the performance levels
achieved. The targeted capacity factor for 1998 is 70%. The liquidated damages
required to be paid by SPPC to The LLC if the 70% target is not met in 1998 are
shown in the table below:
Certified Average Capacity Factor Liquidated Damages Owed by SPPC
- ------------------------------------ -------------------------------
68% $ 1.5 million
66% $ 3.0 million
64% $ 4.5 million
62% $ 6.0 million
If the capacity factor falls below 62% in 1998, an initial total
performance failure is triggered with appropriate liquidated damages to be paid
by SPPC (up to a maximum of $33.0 million) and acquisition of the gasifier
facility by SPPC.
Under the continuing performance warranty, the average capacity factor is
recalculated for the five-year period ending December 31, 2003. If the
34
five-year average factor falls between 62% and 70%, liquidated damages will be
assessed with a maximum exposure for SPPC of $10 million. If the five-year
average capacity factor or the average capacity factor for 2003 falls below 62%,
or if the factor is less than 50% in any of the years 1999-2002, SPPC is
required to purchase the facility and pay GECC an after-tax yield of 9.5% on its
investment.
Under the terms of the syngas purchase agreement, SPPC is required to
purchase from The LLC, at an already determined price, all syngas produced by
the facility, up to a 70% average capacity. The syngas contract runs from 1997
to 2012, with a right of early termination if the price is determined to be
uneconomic.
SPPC believes the gasifier technology will achieve the required capacity
factors. If, however, the gasifier does not achieve the required capacity
factor and SPPC must acquire the facility, SPPC will benefit from the partial
funding by the DOE. SPPC will have acquired a combined-cycle combustion turbine
power plant that can use natural gas or conventional fuels, with minor
modifications, as approved in the Nevada Resource Plan.
NOTE 6. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:
- ---------------------------------------------------
As of December 31, 1996, 2,025,300 shares of common stock were reserved for
issuance under the CSIP, Employees' Stock Purchase Plan (ESPP), Non-Employee
Director Stock Plan and Executive Long-term Incentive Plan (ELTIP). The ELTIP
for key management employees allows for the issuance of Company common shares to
key employees through December 30, 2003. This Plan permits the following types
of grants, separately or in combination: nonqualified and qualified stock
options; stock appreciation rights; restricted stock; performance units;
performance shares and bonus stock. The Company also provides an ESPP to all of
its employees meeting minimum service requirements. Employees can choose twice
each year to have up to 15% of their base earnings withheld to purchase Company
common stock. The purchase price of the stock is 90% of the market value on the
offering date or 100% of the market price on the execution date, if less. The
Non-employee Director Stock Plan provides that a portion of the Company's
outside directors' annual retainer be paid in Company common stock. The Company
records the costs of these plans in accordance with Accounting Principles Board
Opinion Number 25. There would be no material impact on net income or earnings
per share if the fair value provisions of SFAS 123 were to be adopted.
A Stock Rights Plan was placed into effect by declaring a dividend
distribution of one right for each outstanding share of common stock of SPR, par
value $1.00 per share, to stockholders of record at the close of business on
October 31, 1989, and by authorizing the issuance of one right for each share of
common stock issued between the October 31, 1989, record date and the earliest
of the distribution date, the redemption date and the October 31, 1999
expiration date. With certain exceptions and under certain conditions, each
right, when exercisable under the terms of the plan, entitles the registered
holder (except acquiring persons as defined by the plan) to purchase common
stock of an acquiring or surviving corporation (including Company stock if any
remains after the transaction) having a value of $140 for $70, subject to
adjustment. The purpose of the plan is to help ensure that SPR's shareholders
receive fair and equal treatment in the event of any proposed hostile takeover
of the Company.
35
The changes in common stock and additional paid-in capital for 1996, 1995,
and 1994 are as follows (dollars in thousands):
Shares Issued Amount
--------------------------- -----------------------------
1996 1995 1994 1996 1995 1994
------- ------- ------- -------- -------- -------
Public Sale 517,900 290,900 - $12,315 $ 6,037 $ -
CSIP/DRP 238,403 298,704 348,674 5,783 6,373 6,729
ESPP, ESOP,
and Other 25,120 39,590 42,458 533 635 749
------- ------- ------- ------- ------- ------
781,423 629,194 391,132 $18,631 $13,045 $7,478
======= ======= ======= ======= ======= ======
NOTE 7. PREFERRED STOCK:
- -----------------------
All issues of preferred stock are superior to SPR's common stock with
respect to dividend payments (which are cumulative) and liquidation rights.
SPPC's Restated Articles of Incorporation, as amended on August 19, 1992,
authorize an aggregate total of 11,780,500 shares of preferred stock at any
given time.
The following table indicates the number of shares outstanding and the
dollar amount thereof at December 31 of each year. The difference between total
shares authorized and the amount outstanding represents undesignated shares
authorized but not issued.
1996 1995
--------------------- --------------------
(dollars in thousands) Shares Amount Shares Amount
--------- --------- --------- --------
Not Subject to
Mandatory Redemption:
Series A 80,500 $ 4,025 80,500 $ 4,025
Series B 82,000 4,100 82,000 4,100
Series C 299,800 14,990 299,800 14,990
Class A Series 1 2,000,000 50,000 2,000,000 50,000
--------- -------- --------- -------
Subtotal 2,462,300 73,115 2,462,300 73,115
Subject to Mandatory
Redemption:
Series G - - 408,000 20,400
Preferred Securities
of Sierra Pacific Power
Capital I 1,940,000 48,500 - -
--------- -------- --------- -------
Total 4,402,300 $121,615 2,870,300 $93,515
========= ======== ========= =======
SPPC's Series G Preferred Stock was redeemable at any time at a redemption
price of $50 plus accrued dividends. SPPC was required to redeem 136,000 shares
at par value plus accrued dividends annually starting June 1, 1994. 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 using the proceeds from the following
issuance of Preferred Securities. As of December 31, 1995, 272,000 Series G
shares had been redeemed.
On July 29, 1996, Sierra Pacific Power Capital I (the Trust), a wholly-
owned subsidiary of SPPC, issued $48.5 million (1,940,000 shares) 8.60% Trust
Originated Preferred Securities (the Preferred Securities). SPPC owns all the
Common Securities of the Trust, 60,000 shares totaling $1.5 million (Common
Securities). The Preferred Securities and the Common Securities (the Trust
Securities) represent undivided beneficial ownership interests in the assets of
the Trust. The existence of the Trust is for the sole purpose of issuing the
Trust Securities and using the proceeds thereof to purchase from SPPC its 8.60%
Junior Subordinated Debentures due July 30,
36
2036, in a principal amount of $50 million. The sole asset of the Trust is
SPPC's Junior Subordinated Debentures. SPPC's obligations under the Guarantee
Agreement entered into in connection with the Preferred Securities, when taken
together with SPPC's obligation to make interest and other payments on the
Junior Subordinated Debentures issued to the Trust, and SPPC's obligations under
its Indenture pursuant to which the Junior Subordinated Debentures are issued
and its obligations under the Declaration, including its liabilities to pay
costs, expenses, debts and liabilities of the Trust, provides a full and
unconditional guarantee by SPPC of the Trust's obligations under the Preferred
Securities. In addition to retiring the Series G Preferred Stock, proceeds were
used to reduce short-term borrowings.
The preferred securities of Sierra Pacific Power Capital I are redeemable
only in conjunction with the redemption of the related 8.60% Junior Subordinated
Debentures. The Junior Subordinated Debentures will mature on July 30, 2036,
and may be redeemed, in whole or in part, at any time on or after July 30, 2001,
or at any time in certain circumstances upon the occurrence of a Tax Event. A
Tax Event occurs if an opinion has been received from Tax Counsel that there is
more than an insubstantial risk that: the trust is, or will be subject to
United States federal income tax with respect to interest accrued or received on
the Junior Subordinated Debentures; the Trust is, or will be subject to more
than a de minimis amount of other taxes, duties or other governmental charges;
interest payable by SPPC to the Trust on the Junior Subordinated Debentures is
not, or will not be, deductible, in whole or in part by SPPC for federal income
tax purposes.
Upon the redemption of the Junior Subordinated Debentures, payment will
simultaneously be applied to redeem Preferred Securities having an aggregate
liquidation amount equal to the aggregate principal amount of the Junior
Subordinated Debentures. The Preferred Securities are redeemable at $25 per
preferred security plus accrued dividends.
NOTE 8. LONG-TERM DEBT:
- -----------------------
Substantially all utility plant is subject to the lien of the indenture
under which the first mortgage bonds are issued. The indenture contains sinking
and improvement fund provisions which require SPPC to make annual cash deposits
with the trustee equivalent to 1.75% of the greatest aggregate principal amount
of bonds of the respective series outstanding prior to a date one and one-half
months preceding the next sinking fund payment date, with certain deductions
allowable with respect to all bonds. SPPC has satisfied these requirements in
past years by relinquishing the right to use a net amount of additional property
for bond issue, and expects to continue this practice in the future.
A financing agreement in connection with SPPC's $80 million Water
Facilities Bonds, maturing in 2020, requires SPPC to maintain a bank letter of
credit agreement. On July 19, 1996, SPPC converted the interest rate on the
bonds to a daily rate which reduced the letter of credit, trustee fees, and
administrative costs. The fees are included in long-term debt interest charges
on the consolidated statements of income.
SPPC issued $80 million of collateralized debt securities, Medium-Term
Notes, Series C. SPPC issued $30 million principal amount of Medium-Term Notes,
Series C. These are ten year non-callable notes, due in 2006, with interest
rates ranging from 6.62% to 6.83% and three year non-callable
37
notes, due in 1999, with interest rates ranging from 6.83% to 6.86%. For all
notes, interest is payable in semi-annual payments. The net proceeds to SPPC
from the sales of the notes were used to reduce short-term debt and fund
construction projects.
In December 1996, SPPC registered an additional $35 million of
collateralized debt securities. The net proceeds to SPPC from the sale of these
notes will be used for general corporate purposes including, but not limited to:
the acquisition of property; the construction, completion, extension or
improvement of facilities; or the refinancing or discharge or refunding of
obligations, including short-term borrowings.
On April 1, 1996, the Company redeemed $10 million of senior notes Series A
leaving a remaining balance of $40 million, of which $10 million has been
included in the current liability portion of the consolidated balance sheets.
These senior notes, Series B through E, are due in 1997 through 2000.
The Company's aggregate annual amount of maturities for long-term debt for
the next five years is shown below: (dollars in millions):
1997 25.5
1998 10.6
1999 40.6
2000 10.4
2001 .3
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
- --------------------------------------------
The December 31, 1996 and 1995 carrying amounts for cash, cash equivalents,
current assets, accounts payable, current liabilities, and construction trust
funds approximates fair value due to the short-term nature of these instruments.
The total fair value of the Company's long-term debt at December 31, 1996,
is estimated to be $649.8 million (excluding current portion) based on quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. The total fair value
(excluding current portion) was estimated to be $612.8 million at December 31,
1995.
38
NOTE 10. SHORT-TERM BORROWINGS:
- -------------------------------
The Company has a $10 million revolving credit facility with Barclay's
Bank, PLC. This credit facility has been extended until April 26, 1997. There
is currently no outstanding balance.
In 1995, SPPC replaced its lines-of-credit arrangements with an $80 million
revolving credit facility, which will expire on December 29, 1997. SPPC pays
the lender a facility fee on the commitment quarterly, in arrears, based on
SPPC's First Mortgage Bond rating. Facility fees for 1996 and 1995 were
approximately $101,000 for each year.
At December 31, 1996, SPPC's short-term borrowings of $38.0 million were
comprised entirely of commercial paper at an average interest rate of 5.65%. At
December 31, 1995, SPPC had $56.0 million of commercial paper at an average
interest rate of 6.20%.
The other subsidiaries of the Company have no outstanding short-term
borrowings at this time.
39
NOTE 11. TAXES:
- ----------------
The following reflects the composition of taxes on income (dollars in
thousands):
1996 1995 1994
---------- --------- ----------
Federal:
Taxes estimated to be currently
payable $28,986 $38,469 $ 38,891
Deferred taxes related to:
Excess of tax depreciation over
book depreciation 5,217 9,237 10,693
Deferral of energy costs
deducted currently for tax
purposes - net (307) (4,112) (12,022)
Contributions in aid of
construction and customer
advances (2,917) (1,798) (4,835)
Avoided interest capitalized (3,124) (569) (1,744)
Costs of terminated merger 4,359 (776) -
Other - net 3,382 (2,854) 390
Net amortization of investment
tax credit (1,961) (1,942) (1,946)
State (California): 754 688 262
------- ------- --------
Total $34,389 $36,343 $ 29,689
======= ======= ========
As reflected in Statement of
Income:
Federal Income Taxes $34,872 $35,886 $ 28,677
State Income Taxes 754 688 262
------- ------- --------
Operating Income 35,626 36,574 28,939
Other (expense) income - net (1,237) (231) 750
------- ------- --------
Total $34,389 $36,343 $ 29,689
======= ======= ========
40
The total income tax provisions differ from amounts computed by applying
the federal statutory tax rate to income before income taxes for the following
reasons (dollars in thousands of dollars):
1996 1995 1994
------------- --------- ---------
Income before preferred dividends $ 73,179 $ 65,413 $60,300
Total income tax expense 34,389 36,343 29,689
------------ -------- -------
107,568 101,756 89,989
Statutory tax rate 35% 35% 35%
------------ -------- -------
Expected income tax expense 37,649 35,615 31,496
Depreciation related to
difference in cost basis for
tax purposes 471 2,394 2,805
Allowance for funds used during
construction - equity (1,831) (540) (715)
Tax benefit from the disposition
of assets (1,130) (1,427) (1,937)
ITC amortization (1,961) (1,942) (1,946)
Other - net 1,191 2,243 (14)
------------ -------- -------
$ 34,389 $ 36,343 $29,689
============ ======== =======
Effective tax rate 32.0% 35.7% 33.0%
============ ======== =======
41
Accumulated Deferred Federal Income Taxes:
- -----------------------------------------
The net accumulated deferred tax liability consists of accumulated deferred
federal income tax liabilities less related accumulated deferred federal income
tax assets, as shown (dollars in thousands):
December 31,
---------------------
1996 1995
--------- ---------
Accumulated Deferred Federal
Income Tax Liabilities:
AFUDC $ 5,745 $ 4,459
Bond redemptions 6,690 7,184
Excess of tax depreciation over book 142,447 136,067
depreciation
Tax benefits flowed through to
customers 67,667 69,610
Other 10,120 5,731
-------- --------
Total 232,669 223,051
-------- --------
Accumulated Deferred Federal
Income Tax Assets:
Avoided interest capitalized 12,241 9,117
Contributions in aid of construction
and customer advances 25,980 23,102
Unamortized investment tax credit 22,527 23,583
Other 7,722 7,949
-------- --------
Total 68,470 63,751
-------- --------
Accumulated Deferred Federal Income
Liability $164,199 $159,300
======== ========
The Company's consolidated balance sheets contain a net regulatory asset of
$24.8 million at year-end 1996 and $24.5 million at year-end 1995. The net
regulatory asset consists of future revenue to be received from customers (a
regulatory tax asset) of $67.7 million at year-end 1996 and $69.6 million at
year-end 1995, due to the flow-through of the tax benefits of temporary
differences. Offset against these amounts are future revenues to be refunded to
customers (a regulatory tax liability) consisting of $20.4 million at year-end
1996 and $21.5 million at year-end 1995, due to temporary differences for
liberalized depreciation at rates in excess of current tax rates, and $22.5
million at year-end 1996 and $23.6 million at year-end 1995 due to temporary
differences caused by the investment tax credit. The regulatory tax 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 tax liability for temporary differences caused by
the investment tax credit will be amortized ratably in the same fashion as the
accumulated deferred investment credit.
42
NOTE 12. DIVIDEND RESTRICTIONS:
- -------------------------------
The Company's primary source of funds for the payment of dividends to its
stockholders is dividends paid by SPPC on its common stock, all of which is
owned by the Company. Accordingly, the Company's ability to pay dividends is
dependent upon the ability of SPPC to pay dividends on its common stock. The
Restated Articles of Incorporation of SPPC and the indentures relating to the
various series of its First Mortgage Bonds contain restrictions as to the
payment of dividends on its common stock and as to the purchase or retirement of
its capital stock. Under the most restrictive of these provisions,
approximately $72.5 million of SPPC's retained earnings was available at
December 31, 1996, for the payment of cash dividends to the Company. As of
December 31, 1996, the Company had consolidated retained earnings of
approximately $111.7 million.
SPR's outstanding Senior Notes also contains provisions which restrict
SPR's ability to pay dividends and make certain other payments to its
stockholders. These provisions would not have restricted the payment of
dividends declared by SPR in recent periods, and SPR does not believe that they
will limit its ability to pay dividends in the future.
43
NOTE 13. RETIREMENT PLAN:
- -------------------------
The Company sponsors a noncontributory defined benefit retirement plan
covering all employees who satisfy the service requirement.
The plan provides benefits based on each covered employee's years of
service, highest five-year average compensation, and a step rate benefit formula
indirectly integrating the plan with Social Security.
The Company's funding policy is to contribute an annual amount to an
irrevocable trust that is not less than the minimum funding requirement under
the Employee Retirement Income Security Act of 1974, and not in excess of the
amount that can be deducted for federal income tax purposes. The plan's assets
are invested primarily in common stocks, marketable bonds and other fixed-income
securities. The remainder is held in cash and cash equivalents. None of the
plan assets are invested in Company common or preferred stock.
In April of 1995, SPPC offered an early retirement plan to non-
bargaining unit employees whose age and credited years of service equaled at
least 70. The present value of termination costs relating to the 112 employees
who accepted the offering was originally recorded in 1995 at $16.8 million, but
was revalued at $12.8 million during 1996 due to a revision in the measurement
date. These termination costs were fully deferred, as a regulatory asset, as of
December 31, 1995. During 1996, SPPC began amortization of the termination costs
by recognizing expense for both 1995 and 1996. SPPC is using a ten-year
amortization period for these costs which is consistent with the treatment of
previous early retirement programs.
The following table sets forth a reconciliation of the funded status of the
plan with amounts included in the accompanying consolidated balance sheets as of
December 31, 1996 and 1995 (dollars in thousands):
1996 1995
---------- ----------
Actuarial present value of benefit
obligations:
Vested benefit obligation $ 118,383 $ 119,495
========= =========
Accumulated benefit obligation $ 125,547 $ 127,276
========= =========
Projected benefit obligation $ 157,660 $ 165,877
Less plan assets at fair value (167,416) (148,436)
--------- ---------
Projected benefit obligation (less
than) in excess of excess of plan assets (9,756) 17,441
Unrecognized net gain 26,661 5,715
Unrecognized prior service cost (4,251) (4,624)
--------- ---------
Net balance sheet liability $ 12,654 $ 18,532
========= =========
In the preceding table, unrecognized net gain represents the net gain
attributable to changes in actuarial assumptions and differences between actual
experience and actuarial assumptions.
44
Net periodic pension expense for 1996, 1995 and 1994 included the following
components (dollars in thousands):
1996 1995 1994
-------- -------- --------
Service cost $ 6,652 $ 6,320 $ 5,989
Interest cost 11,778 10,380 9,512
Actual (gain) loss on plan assets (19,954) (33,248) 5,126
Net amortizations and deferrals 7,736 23,518 (15,175)
Costs associated with 1995
early retirement plan - 12,825 -
-------- -------- --------
Net periodic pension cost as
determined under SFAS No. 87 6,212 19,795 5,452
Amount expensed (deferred) under
SFAS No. 71 - net 3,882 (11,509) 1,316
-------- -------- --------
Net periodic pension expense
recognized $ 10,094 $ 8,286 $ 6,768
======== ======== ========
Amount charged to operating expense $ 6,769 $ 5,416 $ 4,699
======== ======== ========
Amount charged to utility plant
and clearing accounts $ 3,325 $ 2,870 $ 2,069
======== ======== ========
In the table above, service cost represents the benefits earned during the
year while interest cost represents the increase in the accumulated benefit
obligation due to the passage of time.
The amount deferred under SFAS No. 71 represents the SFAS No. 88 costs
arising from the 1989, 1992 and 1995 early retirement programs. Pursuant to
Nevada Commission directive and prior precedent, costs for the 1989, 1992 and
1995 programs are being amortized over 10 years and are summarized as follows
(dollars in thousands):
1996 1995 1994
------ -------- ------
SFAS No. 88 costs associated with
the 1995 early retirement program $ - $(12,825) $ -
Amortization of 1995 early
retirement program 2,566
Amortization of 1992 early
retirement program 574 574 574
Amortization of 1989 early
retirement program 742 742 742
------ -------- ------
Net amount expensed (deferred)
under SFAS No. 71 $3,882 $(11,509) $1,316
====== ======== ======
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation as of December 31, 1996, 1995
and 1994 was 7.50%, 7.00% and 8.00%, respectively. For purposes of determining
1996, 1995 and 1994 pension cost, the expected long-term rate of return on
assets was 8.50%, 9.00% and 9.00%, respectively.
In addition to the employee retirement plan covering all employees, the
Company has a Supplemental Executive Retirement Plan which is a non-qualified
45
defined benefit plan under which the Company will pay out of general assets
supplemental pension benefits to key executives. The Company also has a non-
qualified supplemental pension plan covering certain employees. This plan
provides for incremental pension payments from the Company's funds so that total
pension payments equal amounts that would have been payable from the Company's
principal pension plan if it were not for limitations imposed by income tax
regulations. The unfunded liability under these plans as of December 31, 1996
and 1995 was $4.9 million and $4.8 million, respectively.
NOTE 14. POSTRETIREMENT BENEFITS:
- ---------------------------------
The Company currently sponsors a defined benefit postretirement plan that
covers administrative employees and those covered under collective bargaining
agreements. The plan provides medical, dental and life insurance benefits for
retirees. The plan is contributory for individuals retiring after January 1,
1993, with retiree contributions tied to each retiree's length of service.
Additionally, the plan requires employees retiring after January 1, 1993 to
participate in Medicare Part "B". Life insurance benefits remain noncontributory
for retirees. However, the amount of life insurance provided for retirees is
significantly less than that provided to active employees. Also, dental coverage
is discontinued for all employees at age 65.
The Company's funding policy for its postretirement benefit obligation
takes advantage of federal income tax deductions. Contributions are being made
to two voluntary employee's beneficiary associations and an IRC (S)401(h)
account. Plan assets are invested primarily in common stocks, marketable bonds
and other fixed income securities. The remainder is held in cash and cash
equivalents. None of the plan assets are invested in Company common or preferred
stock. Postretirement health care costs for key executives continue to be paid
from SPPC's general assets.
The following table sets forth a reconciliation of the funded status of the
plan with amounts included in the accompanying consolidated balance sheets as of
December 31, 1996 and 1995 (dollars in thousands):
1996 1995
-------- --------
Accumulated postretirement benefit
obligation:
Retirees $ 37,941 $ 39,712
Fully eligible active participants 6,227 4,915
Other active plan participants 29,358 29,194
-------- --------
Total 73,526 73,821
Less plan assets at fair value (32,944) (25,076)
-------- --------
Accumulated postretirement benefit
obligation in excess of plan assets 40,582 48,745
Unrecognized prior service cost (415) -
Unrecognized net gain 8,562 3,340
Unrecognized transition obligation (39,419) (41,883)
-------- --------
Net balance sheet liability $ 9,310 $ 10,202
======== ========
In the preceding table, unrecognized net gain represents the net change
attributed to changes in actuarial assumptions and differences between actual
experience and actuarial assumptions.
46
Net periodic postretirement benefit expense for 1996, 1995 and 1994
included the following components (dollars in thousands):
1996 1995 1994
--------- -------- ---------
Service cost $ 2,587 $ 2,448 $ 2,810
Interest cost 5,269 4,479 4,759
Actual (gain) loss on plan assets (1,942) (3,891) 319
Net amortizations and deferrals (94) 2,111 (980)
Amortization of transition
obligation over 20 years 2,464 2,838 2,838
Costs associated with 1995 early - 8,047 -
retirement plan ------- ------- -------
Net periodic postretirement benefit
cost determined under SFAS No. 106 8,284 16,032 9,746
Amount expensed (deferred) under
SFAS No. 71 - net 2,044 (7,086) 1,043
------- ------- -------
Net periodic postretirement expense
recognized $10,328 $ 8,946 $10,789
======= ======= =======
Amount charged to operating expense $ 6,903 $ 6,108 $ 7,285
======= ======= =======
Amount charged to utility plant and
clearing accounts $ 3,425 $ 2,838 $ 3,504
======= ======= =======
In the table above service cost represents the benefits earned during the
year while interest cost represents the increase in the accumulated benefit
obligation due to the passage of time.
The amount deferred under SFAS No. 71 for 1995 represents the present value
of termination benefits and curtailment losses resulting from the early
retirement and severance plans offered during that year. The present value of
these costs was originally recorded at $8.3 million during 1995, but was
revalued to $8.0 million during 1996 because of a revision in the measurement
date. These termination costs were fully deferred, as a regulatory asset, as of
December 31, 1995. Beginning in 1996, SPPC began amortization of the
termination costs by recognizing expense for both 1995 and 1996. SPPC is
using a ten-year amortization period for these costs which is consistent with
the treatment of previous early retirement programs.
The amortization of 1993 deferred costs represents the annual amounts
expensed from charges initially deferred pending the decision of the general
rate case filed in December 1992. These costs were deferred as a result of a
regulatory phase-in plan which did not allow immediate recognition of these
costs when SPPC adopted SFAS 106 in January 1993. As a result of the decision,
issued in June 1993, SPPC began to amortize these costs over a thirty-six
month period beginning July 1993. The following schedule summarizes the
amortization of the deferred costs (dollars in thousands):
47
1996 1995 1994
------ -------- ------
SFAS No. 106 costs deferred $ - $(8,047) $ -
Amortization of 1995 early
retirement program 1,610
Amortization of 1993 deferred costs 434 961 1,043
------ ------- ------
Net amount expensed (deferred) under
SFAS No. 71 $2,044 $(7,086) $1,043
====== ======= ======
For measurement purposes, the Company used a discount rate for
obligations as of December 31, 1996, 1995 and 1994 of 7.50%, 7.00% and 8.00%,
respectively. The expected long-term return on assets was 8.50%, 9.00% and
9.00% for the same periods, respectively. The graduated medical trend rates for
1996, 1995 and 1994 was 11.25%, 11.75% and 12.25%, respectively. This medical
trend rate declines by 0.50% over the next ten years to an ultimate rate of
5.75% in 2007, remaining at that level thereafter. The health care cost trend
rate has a significant effect on the amounts reported. For example, an increase
in the health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1996 by $12.6 million and the aggregate of the service and interest cost
component of net periodic postretirement benefit cost for the year then ended by
$1.7 million.
NOTE 15. POSTEMPLOYMENT BENEFITS:
- ---------------------------------
During 1995, the Company offered a severance program to non-bargaining-unit
employees which provided both severance pay and medical benefits continuation
totaling $7.0 million and $0.5 million, respectively. These costs were deferred,
as a regulatory asset, as of December 31, 1995. Amortization of these costs
began in 1996 over a ten-year period consistent with the period used for pension
and postretirement benefits. There was no remaining liability for unpaid
severance and benefits at December 31, 1996. The remaining liability was $3.0
million at December 31, 1995.
48
NOTE 16. COMMITMENTS AND CONTINGENCIES:
- ---------------------------------------
The Company's estimated cash construction expenditures for the year 1997
and the five-year period 1997-2001 are $135.5 million and $605.4 million,
respectively.
Several of SPPC's purchased power, gas supply and pipeline capacity, and
coal supply contracts contain minimum volume provisions, which SPPC is either
meeting, exceeding or buying out of. SPPC anticipates continuing to meet,
exceed or buy out of them in the future.
SPPC has an operating lease for its corporate headquarters building, a
334,000 square foot, five-floor, multi-purpose building located in southeast
Reno, Nevada. The primary term of the lease is 25 years, ending in 2010. The
current annual rental is $5.2 million, which amount remains constant until the
end of the primary term. The lease has renewal options for an additional 50
years.
The total rental expense under all leases was approximately $8.2 million in
1996, $8.0 million in 1995 and $7.4 million in 1994.
Estimated future minimum lease commitments (including the corporate
headquarters building described above) under non-cancelable operating leases
with initial terms of one year or more at December 31, 1996 were as follows
(dollars in millions):
1997 $ 7.4
1998 7.2
1999 6.9
2000 6.4
2001 6.4
After 2001 to 2018 53.2
-----
Total $87.5
=====
See Notes 1, 5, 7 and 13 of the Company's consolidated financial statements
for additional commitments and contingencies.
49
NOTE 17. SEGMENT INFORMATION:
- -----------------------------
Information related to the segments of the Company's business is detailed
below (dollars in thousands):
December 31, 1996 Electric Gas Water Other Total
- -------------------------- ---------- --------- --------- --------- ----------
Operating Revenues $ 507,004 $ 67,376 $ 45,344 $ 7,987 $ 627,711
========== ======== ======== ======== ==========
Operating Income $ 86,428 $ 11,035 $ 9,545 $ 1,870 $ 108,878
========== ======== ======== ======== ==========
Depreciation $ 47,797 $ 4,223 $ 6,098 - $ 58,118
========== ======== ======== ======== ==========
Capital Expenditures $ 158,482 $ 10,798 $ 33,829 - $ 203,109
========== ======== ======== ======== ==========
Identifiable Assets:
Net Utility Plant $1,182,623 $104,427 $256,160 - $1,543,210
Other $ 141,956 $ 13,270 $ 12,653 $ 5,253 $ 173,132
Other Utility Assets - - - $131,539 $ 131,539
Other Corporate Assets - - - $ 21,473 $ 21,473
----------
Total Assets $1,869,354
==========
December 31, 1995 Electric Gas Water Other Total
- -------------------------- ---------- --------- --------- --------- ----------
Operating Revenues $ 491,419 $ 62,572 $ 43,793 $ 8,338 $ 606,122
========== ======== ======== ======== ==========
Operating Income $ 87,825 $ 5,041 $ 8,945 $ 2,949 $ 104,760
========== ======== ======== ======== ==========
Depreciation $ 45,361 $ 4,019 $ 5,685 $ 11 $ 55,076
========== ======== ======== ======== ==========
Capital Expenditures $ 99,537 $ 13,318 $ 31,342 $ 28,475 $ 172,672
========== ======== ======== ======== ==========
Identifiable Assets:
Net Utility Plant $1,076,126 $ 98,367 $238,308 $ - $1,412,801
Other $ 146,392 $ 11,505 $ 7,723 $ 7,121 172,741
Other Utility Assets - - - 151,397 151,397
Other Corporate Assets - - - 19,688 19,688
----------
Total Assets $1,756,627
==========
December 31, 1994 Electric Gas Water Other Total
- -------------------------- ---------- --------- --------- --------- ----------
Operating Revenues $ 498,680 $ 65,174 $ 39,339 $ 23,119 $ 626,312
========== ======== ======== ======== ==========
Operating Income $ 81,641 $ 5,806 $ 8,536 $ 2,530 $ 98,513
========== ======== ======== ======== ==========
Depreciation $ 43,137 $ 3,769 $ 5,270 $ 394 $ 52,570
========== ======== ======== ======== ==========
Capital Expenditures $ 91,483 $ 8,614 $ 25,381 $ 6,923 $ 132,401
========== ======== ======== ======== ==========
Identifiable Assets:
Net Utility Plant $1,026,602 $ 89,201 $215,675 $ - $1,331,478
Other $ 117,888 $ 17,750 $ 7,573 $ 12,011 155,222
Other Utility Assets - - - 131,021 131,021
Other Corporate Assets - - - 14,982 14,982
----------
Total Assets $1,632,703
==========
50
NOTE 18. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED):
- ----------------------------------------------------------
The following figures are unaudited and include all adjustments necessary
in the opinion of the Company's management for a fair presentation of the
results of interim periods (dollars in thousands except per share amounts).
Quarter Ended
----------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996
--------- --------- --------- ----------
(1)
Operating Revenue $163,826 $150,173 $160,812 $152,900
Operating Income $ 28,757 $ 24,169 $ 32,750 $ 23,202
Net Income $ 17,786 $ 14,805 $ 21,978 $ 12,310
Net Income Per Share $ .59 $ .49 $ .72 $ .39
Quarter Ended
----------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1995 1995 1995 1995
--------- --------- --------- ----------
Operating Revenue $160,146 $142,233 $151,220 $152,523
Operating Income $ 27,251 $ 22,320 $ 27,496 $ 27,693
Net Income $ 15,247 $ 10,896 $ 16,459 $ 15,437
Net Income Per Share $ .52 $ .37 $ .55 $ .51
(1) Reflects $13 million Nevada electric revenue refund.
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to SPR's directors called for by Item 10 of
Part III is hereby incorporated by reference from the section titled "Security
Ownership of Certain Beneficial Owners and Management" of SPR's definitive proxy
statement to be filed pursuant to regulation 14A.
Information with respect to SPR's executive officers is set forth in Part I
hereof following Item 4.
ITEM 11. EXECUTIVE COMPENSATION
The information with respect to officers and directors called for by Item
11 of Part III is hereby incorporated by reference from the sections titled
"Directors Compensation", "Summary Compensation Table" and "Severance
Arrangements" of SPR's definitive proxy statement to be filed pursuant to
regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information with respect to security ownership of certain beneficial
owners and management called for by Item 12 of Part III is hereby incorporated
by reference from the sections titled "Certain Business Relationships",
"Indebtedness of Management" and "Election of Directors" of SPR's definitive
proxy statement to be filed pursuant to regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information with respect to Certain Relationships and Related
Transactions called for by Item 13 of Part III is hereby incorporated by
reference from the section titled "Transactions With Management" of SPR's
definitive proxy statement to be filed pursuant to regulation 14A.
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
Filed on November 20, 1996 - Item 4, Changes in Registrant's
Certifying Accountant
. Based upon the recommendation if its audit committee, the Board of
Directors of the Company, voted to appoint Deloitte & Touche LLP as
the Company's independent accountants. Coopers & Lybrand L.L.P. had
previously served as the Company's independent accountants. During
the two most recent fiscal years, ending December 31, 1995, the
reports on financial statements by Coopers & Lybrand L.L.P. did not
contain any adverse opinion or disclaimer of opinion, nor were the
reports modified or qualified in any manner. Additionally, there
were no disagreements with Coopers & Lybrand L.L.P. on any matter
of accounting principle or practice, financial statement disclosure
or auditing scope or procedure for the abovementioned period nor
were there any "reportable events" as defined in Item 304 (a) (1)
(v) of Regulation S-K.
Reports on Form 8-K/A
Filed on November 22, 1996 - Amendment of Form 8-K filed on November 20,
1996
. To include as an exhibit a letter from Coopers & Lybrand L.L.P.
dated November 21, 1996 regarding the change in certifying
accountants.
54
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) 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
By /s/ Walter M. Higgins
-------------------------------
Walter M. Higgins
Chairman, President and
Chief Executive Officer
March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 21st day of March, 1997.
/s/ Walter M. Higgins /s/ Mark A. Ruelle
- --------------------------------- -----------------------
Walter M. Higgins Mark A. Ruelle
Chairman, President, and Chief Senior Vice President and
Executive Officer (Principal Chief Financial Officer
Executive Officer) and Director (Principal Financial Officer)
(Principal Accounting Officer)
/s/ Edward P. Bliss /s/ Richard N. Fulstone
- --------------------------------- --------------------------------
Edward P. Bliss Richard N. Fulstone
Director Director
/s/ Krestine M. Corbin /s/ James L. Murphy
- --------------------------------- -------------------------------
Krestine M. Corbin James L. Murphy
Director Director
/s/ Theodore J. Day /s/ Dennis E. Wheeler
- ------------------------ -------------------------
Theodore J. Day Dennis E. Wheeler
Director Director
/s/ Harold P. Dayton, Jr. /s/ Robert B. Whittington
- ---------------------------- ----------------------------
Harold P. Dayton, Jr. Robert B. Whittington
Director Director
/S/ James R. Donnelley
- --------------------------
James R. Donnelley
Director
55
(a) Exhibits Index*
Exhibits with respect to SPR's principal subsidiary, SPPC, are listed in
the exhibit index of its Annual Report on Form 10-K for the year ended December
31, 1996, and are attached hereto as the Appendix.
Certain of the following exhibits with respect to SPR and its
subsidiaries, Lands of Sierra, Inc., Sierra Energy Company dba e.three,
Tuscarora Gas Pipeline Company, Sierra Water Development Company and Sierra Gas
Holding Company (formerly Sierra Energy Company) are filed herewith. Certain
other of such exhibits have heretofore been filed with the Commission and are
incorporated herein by reference.
(* Filed herewith)
(3)
. Restated Articles of Incorporation of SPR filed October 5, 1990.
(Exhibit 3 to Form 10-Q for the quarter ended September 30, 1990).
*(A)
By-laws of the Company, in its entirety as amended dated November
13, 1996.
(4)
. Rights Agreement dated as of October 13, 1989 between SPR and
Bank of America N.T. & S.A., including form of Rights
Certificate. (Exhibit 1 to Form 8-K dated October 30, 1989).
(1O)
*(A)
Change in Control Agreements between the Company and the
Executives.
. Note Purchase Agreement, dated as of April 20, 1993, with respect
to the private placement of $50 million in senior notes. (Exhibit
10 to Form 10-Q for the quarter ended March 31, 1993).
. Employment Agreement dated June 27, 1994 by and among Sierra
Pacific Resources, Sierra Pacific Power Company and William E.
Peterson. (Exhibit to Form 10-K filed December 31, 1994).
. Employment Agreement dated June 27, 1994 by and among Sierra
Pacific Resources, Sierra Pacific Power Company and Malyn K.
Malquist. (Exhibit to Form 10-K filed December 31, 1994).
Sierra Pacific Resources Executive Long-Term Incentive Plan
effective as of January 1, 1994. (Exhibit 99.1 to Form S-8 dated
November 30, 1994 Registration No. 33-87646).
*(B) The Amended and Restated Nonqualified Deferred Compensation Plan
in which any director or any executive officer of the Company may
participate. The Plan was amended and restated January 1, 1996.
(13)
*(A)
Pursuant to Rule 15d-21 under the Securities Exchange Act of
1934, the financial statements for the periods ended 1996 and
1995
56
required by Form 11-K with respect to Sierra Pacific Resources
Employee's Stock Ownership Plan are filed herewith.
(16)
. Letter from Coopers & Lybrand L.L.P. dated November 21, 1996
regarding the change in certifying accountants. (Exhibit filed
with Form 8-K/A dated November 22, 1996)
(21) Subsidiaries of the Registrant:
Sierra Pacific Power Company, a Nevada Corporation.
Lands of Sierra, Inc., a Nevada Corporation.
Sierra Energy Corporation dba e.three, a Nevada Corporation.
Tuscarora Gas Pipeline Company, a Nevada Corporation.
Sierra Water Development Company, a Nevada Corporation.
Sierra Gas Holdings Company (Formerly Sierra Energy Company),
a Nevada Corporation.
(23)
*(A)
Consent of Independent Accountants, Deloitte & Touche, LLP, in
connection with Form S-3 of Sierra Pacific Resources for its
2,000,000 shares of continuously offered stock plan (File No. 33-
90284), and its Common Stock Investment Plan (File No. 333-4374)
in the registration statements on Form S-8 of SPR for the
Employees' Stock Purchase Plan and Employees' Stock Ownership
Plan (File No. 2-92454), Executive Long-Term Incentive Plan (File
No. 33-87646), and the Non-Employee Director Stock Plan (File No.
33-48152).
Consent of Independent Accountants, Deloitte and Touche, LLP, in
connection with Form 11-K with respect to the Company's Employee
Stock Ownership Plan for the periods ended 1995 and 1996.
*(B)
Consent of Independent Accountants, Coopers and Lybrand, L.L.P.,
in connection with Form S-3 of Sierra Pacific Resources for its
2,000,000 shares of continuously offered stock plan (File No. 33-
90284), and its Common Stock Investment Plan (File No. 333-4374)
in the registration statements on Form S-8 of SPR for the
Employees' Stock Purchase Plan and Employees' Stock Ownership
Plan (File No. 2-92454), Executive Long-Term Incentive Plan (File
No. 33-87646), and the Non-Employee Director Stock Plan (File No.
33-48152).
Consent of Independent Accountants, Coopers and Lybrand, L.L.P.,
in connection with Form 11-K with respect to the Company's
Employee Stock Ownership Plan for the periods ended 1995 and
1996.
57
(27)
. The Financial Data Schedule containing summary financial
information extracted from the consolidated financial statements
of the Company used in connection with the Form 10-Q for the six-
month period ending June 30, 1996. (Exhibit filed with the Form
10-Q dated August 14, 1996).
. The Financial Data Schedule containing summary financial
information extracted from the consolidated financial statements
of the Company used in connection with the Form 10-Q for the
nine-month period ended September 30, 1996. (Exhibit filed with
the Form 10-Q dated November 7, 1996).
*(A)
The Financial Data Schedule containing summary financial
information extracted from the consolidated financial statements
of the Company used in connection with the Form 10-K for the
twelve month period ending December 31, 1996. (Exhibit filed with
the Form 10-K dated March 14, 1997.)
(99)
. Press Release from the Company dated June 28, 1996 announcing
receipt of notification from its merger partners, Spokane-based
Washington Water Power Company (WWP), that WWP no longer intends
to pursue the merger of the two companies. (Exhibit C of Form 8-K
dated July 3, 1996).
58