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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number 0-508
SIERRA PACIFIC RESOURCES
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 88-0198358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 30150 (6100 NEIL ROAD)
RENO, NEVADA 89520-0400 (89511)
(Address of principal executive office) (Zip Code)
(702) 689-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at August 12, 1997
Common Stock, $1.00 par value 30,891,108 Shares
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SIERRA PACIFIC RESOURCES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
CONTENTS
PART I - FINANCIAL INFORMATION
------------------------------
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Report of Independent Accountants........................................... 3
Condensed Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996...................................................... 4
Condensed Consolidated Statements of Income - Three-Months and Six-Months
Ended June 30, 1997 and 1996........................................... 5
Condensed Consolidated Statements of Cash Flows - Six-Months
Ended June 30, 1997 and 1996........................................... 6
Notes to Condensed Consolidated Financial Statements........................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................... 9
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS........................................................... 17
ITEM 5. OTHER INFORMATION........................................................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................ 17
Signature Page........................................................................ 18
2
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Sierra Pacific Resources
Reno, Nevada
We have reviewed the accompanying condensed consolidated balance sheet of Sierra
Pacific Resources and subsidiaries as of June 30, 1997, and the related
condensed consolidated statements of income and cash flows for the three-month
and six-month periods then ended. The condensed interim financial statements as
of June 30, 1996, and for the three-month and six-month periods then ended were
reviewed by other accountants whose report dated July 26, 1996, stated that they
were not aware of any material modifications that should be made to those
statements in order for them to be in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and consolidated statement of
capitalization of Sierra Pacific 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 (not presented herein); and in our report
dated February 14, 1997, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1996,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Reno, Nevada
August 7, 1997
3
SIERRA PACIFIC RESOURCES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
ASSETS
Utility Plant at Original Cost:
Plant in service $ 2,006,619 $ 1,984,781
Less: accumulated provision for depreciation 635,418 606,406
------------ ------------
1,371,201 1,378,375
Construction work-in-progress 204,070 164,835
------------ ------------
1,575,271 1,543,210
------------ ------------
Investments in subsidiaries and other property, net 44,351 44,583
Current Assets:
Cash and cash equivalents 1,326 4,949
Accounts receivable less provision for uncollectible accounts $1,729 at
June 30, 1997 and $2,196 at December 31, 1996 81,126 94,736
Materials, supplies and fuel, at average cost 25,035 27,586
Other 5,180 4,472
------------ ------------
112,667 131,743
------------ ------------
Deferred Charges:
Regulatory tax asset 67,625 67,667
Other regulatory assets 65,070 67,319
Other 19,025 14,832
------------ ------------
151,720 149,818
------------ ------------
$ 1,884,009 $ 1,869,354
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholder's equity $ 614,132 $ 594,859
Preferred stock 73,115 73,115
Preferred stock subject to mandatory redemption:
SPPC-obligated mandatorily redeemable preferred securities of
SPPC's subsidiary Sierra Pacific Power Capital I, holding
solely $50 million principal amount of 8.6% junior
subordinated debentures of SPPC, due 2036 48,500 48,500
Long-term debt 627,527 637,846
------------ ------------
1,363,274 1,354,320
------------ ------------
Current Liabilities:
Short-term borrowings 71,000 38,000
Current maturities of long-term debt and preferred stock 10,446 25,434
Accounts payable 39,783 53,804
Accrued interest 7,001 6,849
Dividends declared 10,938 10,452
Other current liabilities 33,340 33,078
------------ ------------
172,508 167,617
------------ ------------
Deferred Credits:
Accumulated deferred federal income taxes 163,928 164,199
Accumulated deferred investment tax credit 40,850 41,836
Regulatory tax liability 41,750 42,870
Customer advances for construction 38,375 39,429
Other 63,324 59,083
------------ ------------
348,227 347,417
------------ ------------
$ 1,884,009 $ 1,869,354
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
SIERRA PACIFIC RESOURCES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
1997 1996 1997 1996
-------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
OPERATING REVENUES:
Electric $ 130,603 $ 124,601 $ 265,258 $ 252,358
Gas 11,803 11,267 39,980 36,334
Water 12,411 11,508 21,437 20,838
Other 1,903 2,797 3,358 4,469
-------------- ------------- ------------- -------------
156,720 150,173 330,033 313,999
-------------- ------------- ------------- -------------
OPERATING EXPENSES:
Operation:
Purchased power 29,599 29,853 61,478 61,022
Fuel for power generation 26,839 24,539 49,645 48,402
Gas purchased for resale 6,405 5,091 20,337 18,045
Other 31,291 34,248 66,639 66,266
Maintenance 5,428 4,610 11,477 9,087
Depreciation and amortization 15,448 14,288 30,825 28,350
Taxes:
Income taxes 9,734 8,813 22,023 20,729
Other than income 4,731 4,562 9,446 9,172
-------------- ------------- ------------- -------------
129,475 126,004 271,870 261,073
-------------- ------------- ------------- -------------
OPERATING INCOME 27,245 24,169 58,163 52,926
-------------- ------------- ------------- -------------
OTHER INCOME:
Allowance for other funds used during construction 1,494 1,357 2,928 2,020
Other income - net (292) 701 787 1,160
-------------- ------------- ------------- -------------
1,202 2,058 3,715 3,180
-------------- ------------- ------------- -------------
Total Income 28,447 26,227 61,878 56,106
-------------- ------------- ------------- -------------
INTEREST CHARGES:
Long-term debt 10,580 9,807 21,168 19,126
Other 1,161 1,262 1,930 2,398
Allowance for borrowed funds used during construction and
capitalized interest (1,186) (1,152) (2,354) (1,299)
-------------- ------------- ------------- -------------
10,555 9,917 20,744 20,225
-------------- ------------- ------------- -------------
INCOME BEFORE OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES 17,892 16,310 41,134 35,881
Preferred dividend requirements of SPPC-obligated
mandatorily redeemable preferred securities (1,043) -- (2,086) --
-------------- ------------- ------------- -------------
INCOME BEFORE PREFERRED DIVIDENDS 16,849 16,310 39,048 35,881
Preferred dividend requirements (1,365) (1,505) (2,730) (3,290)
-------------- ------------- ------------- -------------
INCOME APPLICABLE TO COMMON STOCK $ 15,484 $ 14,805 $ 36,318 $ 32,591
============== ============= ============= =============
Net Income Per Share $ 0.501 $ 0.490 $ 1.177 $ 1.080
Weighted Average Shares of Common Stock Outstanding 30,881,770 30,379,293 30,864,638 30,246,038
Dividends Paid Per Share of Common Stock $ 0.310 $ 0.295 $ 0.605 $ 0.575
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
SIERRA PACIFIC RESOURCES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX-MONTHS ENDED
JUNE 30,
------------------------------
1997 1996
----------- ----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before preferred dividends $ 39,048 $ 35,881
Non-cash items included in income:
Depreciation and amortization 30,825 28,350
Deferred taxes and deferred investment tax credit (2,076) (7,419)
AFUDC and capitalized interest (5,282) (3,319)
Early retirement and severance amortization 2,446 1,059
Other non-cash (1,706) 9,730
Changes in certain assets and liabilities:
Accounts receivable 13,610 17,742
Materials, supplies and fuel 2,551 (267)
Other current assets (708) (2,125)
Accounts payable (14,021) (46,618)
Other current liabilities (144) 2,326
Other - net (1,015) 5,264
----------- ----------
Net Cash Flows From Operating Activities 63,528 40,604
----------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant (72,916) (89,470)
Non-cash charges 5,055 4,868
Net customer refunds and contributions in aid construction 9,889 4,659
----------- ----------
Net Cash Used In Investing Activities (57,972) (79,943)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 34,349 39,862
Proceeds from issuance of long-term debt 1,081 30,000
Reduction of preferred stock -- (20,400)
Reduction of long-term debt (25,327) (10,332)
Decrease in funds held in trust -- 9,175
Sale of common stock 2,111 10,056
Dividends paid (21,393) (19,921)
----------- ----------
Net Cash (Used In) Provided From Financing Activities (9,179) 38,440
----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,623) (899)
Beginning balance in Cash and Cash Equivalents 4,949 4,243
----------- ----------
Ending balance in Cash and Cash Equivalents $ 1,326 $ 3,344
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During Period For:
Interest $ 24,433 $ 21,418
Income Taxes $ 51,779 $ 21,847
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
NOTE 1. MANAGEMENT'S STATEMENT
- ---------------------------------
In the opinion of the management of Sierra Pacific Resources, hereafter
known as the Company, the accompanying unaudited interim condensed consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the condensed consolidated
financial position, condensed consolidated results of operations and condensed
consolidated cash flows for the periods shown. These condensed consolidated
financial statements do not contain the complete detail or footnote disclosure
concerning accounting policies and other matters which are included in full year
financial statements and therefore, they should be read in conjunction with the
Company's audited financial statements included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996. Deloitte & Touche LLP, the
Company's independent accountants, have performed a review of the unaudited
condensed consolidated financial statements and their report has been included
in this report.
The results of operations for the three-month and six-month periods ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the full year.
Principles of Consolidation
---------------------------
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Sierra Pacific Power Company (SPPC),
Tuscarora Gas Pipeline Company (TGPC), Sierra Gas Holding Company (formerly
Sierra Energy Company), Sierra Energy Company dba e.three (e.three), Lands of
Sierra (LOS), and Sierra Water Development Company (SWDC). All significant
intercompany transactions and balances have been eliminated in consolidation.
Reclassifications
-----------------
Certain items previously reported for years prior to 1997 have been
reclassified to conform with the current year's presentation. Net income and
shareholder's equity were not affected by these reclassifications.
NOTE 2. RECENT PRONOUNCEMENTS OF THE FASB
- ------------------------------------------
The Financial Accounting Standards Board (FASB) recently issued SFAS No. 128
entitled "Earnings Per Share". This statement establishes standards for
computing and presenting earnings per share and is effective for financial
statements issued for periods ending after December 15, 1997. Earlier
application of this statement is not permitted and upon adoption requires
restatement (as applicable) of all prior-period earnings per share data
presented.
In addition, the FASB issued SFAS 129 entitled "Disclosure of Information
about Capital Structure" in February 1997. This statement establishes standards
for disclosing information about an entity's capital structure. The Company
already complies with SFAS 129 and foresees no material impact on the financial
statements in adopting the statement for periods ending after December 15, 1997.
On June 30, 1997, the FASB issued SFAS 130 entitled "Reporting Comprehensive
Income". This statement requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position, and is effective for financial statements issued for fiscal
years beginning after December 15, 1997. Management does not believe this new
FASB will have a material impact on the financial statements of the Company.
On June 30, 1997, the FASB issued SFAS 131 entitled "Disclosure About
Segments of an Enterprise and Related Information". This statement establishes
additional standards for segment reporting in the financial statements and is
effective for fiscal years beginning after December 15, 1997. Management has
not determined the effect of this statement on its financial statement
disclosure.
7
NOTE 3. LONG-TERM DEBT
- -----------------------
The Company redeemed $10 million of senior notes, Series B on April 1, 1997.
SPPC, the Company's subsidiary, redeemed $15 million 6.5% First Mortgage Bonds
on June 30, 1997.
NOTE 4. REGULATORY ACCOUNTING
- ------------------------------
SPPC's rates are currently subject to the approval of the Public Utilities
Commission of Nevada (PUCN) and are designed to recover the cost of providing
generation, transmission and distribution services to its customers. As a
result, SPPC qualifies for the application of SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation". This statement recognizes that the
rate actions of a regulator can provide reasonable assurance of the existence of
an asset and requires the capitalization of incurred costs that would otherwise
be charged to expense where it is probable that future revenue will be provided
to recover these costs. SFAS No. 101, "Regulated Enterprises-Accounting for the
Discontinuation of Application of FASB Statement No. 71" requires that an
enterprise whose operations cease to meet the qualifying criteria of SFAS 71
should discontinue the application of that statement by eliminating the effects
of any actions of regulators that had been previously recognized.
As discussed under Regulatory Proceedings, legislation has been passed in
California and Nevada which will effectively define electric generation as a
competitive service to be provided by any qualified generator or marketer. As a
result of this legislation the generation operations of SPPC may in the future
no longer qualify for application of SFAS 71. The total impact of the new
legislation on SPPC's reporting practices is not currently determinable, since
only general guidelines currently exist. However, SPPC believes that it
continues to qualify for application of SFAS 71.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's net income for the three-month and six-month periods ended
June 30, 1997 was $15.5 million and $36.3 million, an increase of 4.6% and 11.4%
over comparable periods in 1996. Earnings were driven by overall customer
growth, increased sales and lower fuel costs for electric and gas utility
operations of the Company's principal subsidiary, SPPC.
RESULTS OF OPERATIONS
---------------------
Total condensed consolidated operating revenues for the three-months and
six-months ended June 30, 1997 increased by 4.4% and 5.1% ($6.5 million and
$16.0 million) over the comparable periods in 1996 due to increased energy and
gas sales resulting from overall customer growth and the previously accrued
refund provision. Listed below are the revenues and revenue margin by division
for SPPC which is the primary contributor of condensed consolidated operating
revenues: (dollars in thousands)
THREE-MONTHS SIX-MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------------------------------------------
1997 1996 1997 1996
------------------------ -----------------------
Operating Revenues:
Electric $ 130,603 $ 124,601 $ 265,258 $ 252,358
Gas 11,803 11,267 39,980 36,334
Water 12,411 11,508 21,437 20,838
------------------------- -----------------------
Total Revenues $ 154,817 $ 147,376 $ 326,675 $ 309,530
------------------------- -----------------------
Energy Costs:
Electric $ 56,438 $ 54,392 $ 111,123 $ 109,424
Gas 6,405 5,091 20,337 18,045
------------------------- ----------------------
Total Energy Costs $ 62,843 $ 59,483 $ 131,460 $ 127,469
------------------------- ----------------------
Revenue Margin $ 91,974 $ 87,893 $ 195,215 $ 182,061
========================= ======================
Revenue Margin by Division:
Electric $ 74,165 $ 70,209 $ 154,135 $ 142,934
Gas 5,398 6,176 19,643 18,289
Water 12,411 11,508 21,437 20,838
------------------------- ----------------------
Total $ 91,974 $ 87,893 $ 195,215 $ 182,061
========================= ======================
Energy costs are comprised of purchased power, fuel for power generation and
gas purchased for resale. Average energy costs for the three-months and
six-months ended June 30, 1997 and 1996 are set forth below.
9
THREE-MONTHS SIX-MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------------- ----------------
1997 1996 1997 1996
----------------- ----------------
Average cost per KWH of 3.46c 2.61c 3.44c 2.83c
purchased power
Average cost per KWH of 2.18c 2.30c 2.12c 2.23c
generated power
Average costs per therm of 30.08c 26.41c 28.75c 27.33c
gas purchased for resale
Megawatt-hours (MWH) purchased decreased by 25.3% and 17.0% (289,631 MWH and
366,038 MWH) for the three-month and six-month periods ended June 30, 1997
compared to the same periods in 1996. The total cost of purchased power
decreased by .8% and increased by .7% ($.2 million and .5 million) for the
three-months and six-months ended June 30, 1997, compared to the same periods in
1996. The decrease for the three-month period is due to increased internal
generation as a result of higher prices for purchased power. The increase for
the six-month period is due to the lack of available lower priced hydro-
generated energy in the Pacific Northwest.
Megawatt-hours (MWH) generated increased by 15.2% and 9.7% (162,859 MWH and
207,116 MWH) for the three-months and six-months ended June 30, 1997, over the
comparable 1996 periods due to cheaper fuel costs for generation coupled with
increased customer demand due to customer growth and the lack of available
hydropower. The total cost of fuel for power generation increased by 9.4% and
2.6% ($2.3 million and $1.2 million) reflecting increased generation. The cost
per KWH generated decreased by 5.2% and 4.9%(.12c and .11c) for the three-months
and six-months ended June 30, 1997 compared to the same periods in 1996.
For the three-months and six-months ended June 30, 1997, SPPC increased the
therms of gas purchased for resale by 10.5% and 7.2% (2,024,313 and 4,723,258
therms) over the comparable periods in 1996. The total cost during the same
period increased 25.8% and 12.7% ($1.3 million and $2.3 million) due to per-
therm cost increases of 13.8% and 5.2% (.4c and .1c) and customer growth.
Other operations expenses decreased 8.6% and increased .6% ($3.0 million and
$.4 million) for the three-months and six-months ended June 30, 1997, compared
to the same periods in 1996. This was primarily due to the expensing of
remaining merger costs in 1996 as a result of the termination of a proposed
merger. The increase for the six-month period ended June 30, 1997 is
attributable to increases associated with the January 1997 flood and expenses
associated with a stock plan provided by the Company.
Maintenance expenses increased 17.7% and 26.3% ($.8 million and $2.4
million) for the three-month and six-month periods ended 1997 over 1996 due to
flood-related expenses for overhead and underground lines, mains and existing
structures and increased labor for planned maintenance outages at the Valmy
Plant in 1997.
10
Depreciation and amortization expenses for the three-months and six-months
ended June 30, 1997 increased 8.1% and 8.7% ($1.2 million and $2.5 million) due
to increases in SPPC's utility plant. The most notable increases were
attributable to the Chalk Bluff water treatment facility and the Pinon Pine
combined cycle combustion turbine generator.
Income taxes increased for the three-months and six-months ended June 30,
1997, over the comparable 1996 periods primarily due to higher operating income
before income taxes. The increase in the effective tax rate for the three-month
period ended June 30, 1997 over the comparable period in 1996 was as a result of
the effects of a proposed merger termination in June 1996. Income taxes
reflected in operating income and other income-net are summarized below (dollars
in thousands):
THREE-MONTHS SIX-MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------------------------- -------------------------------------
1997 1996 1997 1996
------------------------------------- -------------------------------------
Currently payable $ 11,000 $ 10,675 $ 23,358 $ 27,604
Deferred taxes - net (1,148) (1,701) (1,090) (6,434)
Investment tax credit - net (492) (492) (985) (985)
------------------------------------- -------------------------------------
Total income taxes $ 9,360 $ 8,482 $ 21,283 $ 20,185
===================================== =====================================
Income taxes charged to:
Operations $ 9,734 $ 8,813 $ 22,023 $ 20,729
Other income - net (374) (331) (740) (544)
------------------------------------- -------------------------------------
Total income tax expense $ 9,360 $ 8,482 $ 21,283 $ 20,185
===================================== =====================================
Income before income taxes and
preferred dividend requirements $ 26,209 $ 24,792 $ 60,331 $ 56,066
===================================== =====================================
Effective tax rate 35.7% 34.2% 35.3% 36.0%
===================================== =====================================
Allowance for funds used during construction (AFUDC) and capitalized
interest increased by 6.8% and 59.1% ($.2 million and $2.0 million) for the
three-months and six-months ended June 30, 1997, compared to the corresponding
period in 1996. This is due to an increase in construction work-in-progress
(CWIP) from the prior year and an increase in the capitalization rates used.
Most notable is the CWIP associated with the Alturas Intertie of $75.0 million
at June 30, 1997 compared to $46.1 million at June 30, 1996. In 1996, the CWIP
balance had a larger percentage of water projects that used a lower AFUDC rate
than electric projects.
Other income (expense) - net decreased 142% and 32% for the three-months
and six-months ended June 30, 1997 ($1.0 million and $.4 million) compared to
comparable periods in 1996. The reduction resulted from the sale of land owned
by SPPC in 1996 ($.4 million) and recording of a provision for asset devaluation
on equipment owned by SPPC in 1997 ($.3 million).
Interest on long-term debt increased 7.9% and 10.7% ($.8 million and $2.0
million) for the three-months and six-months ended June 30, 1997, due to
interest expenses associated with the issuance of $80.0 million medium-term
notes, Series C, in 1996. Other interest expense decreased 8% and 20% ($.1
million and $.5 million) for the three-months and six-months ended June 30, 1997
compared to 1996. The reduction is due primarily to a reversal of previously
accrued interest on a refund provision in 1997 compared to 1996.
11
Due to the issuance in the third quarter of 1996 of 8.6% trust originated
preferred securities by SPPC's subsidiary trust, Sierra Pacific Power Capital I,
the preferred dividends on mandatorily redeemable preferred securities increased
$1.0 million and $2.1 million for the three-months and six-months ended June 30,
1997. No such securities were outstanding for the same period in 1996.
Preferred dividend requirements for all other preferred securities
decreased 9.3% and 17.0% ($.1 million and $.6 million) for the three-months and
six-months ended June 30, 1997 compared to the comparable periods in 1996, due
to the redemption of Series G preferred stock in June 1996, by SPPC.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
During the first six months of 1997, the Company earned $39.0 million in
income before preferred dividends and declared $19.1 million in common stock
dividends. SPPC, the Company's principal subsidiary, declared $2.7 million in
preferred stock dividends.
In February 1997, the Public Utilities Commission of Nevada (PUCN) approved
a decrease of $7.1 million in SPPC's annual electric rates. For further
discussion of the regulatory action, refer to the Company's 1996 Annual Report
on Form 10-K.
The Company redeemed $10 million of Senior Notes, Series B, in April 1997.
SPPC redeemed $15 million 6.5% First Mortgage Bonds on June 30, 1997.
CONSTRUCTION EXPENDITURES AND FINANCING
- ---------------------------------------
SPPC's construction program and capital requirements for the period 1997-
2001 were originally discussed in SPPC's 1996 Annual Report on Form 10-K. Of
the amount projected for 1997, as of June 30, 1997, $58.0 million (42.8%) had
been spent. Of this amount, approximately 72.7% was provided by internally-
generated funds.
ALTURAS INTERTIE
- ----------------
SPPC is currently developing the Alturas Intertie transmission line in
order to better serve existing load and new customers and to significantly
increase SPPC's access to lower cost resources. On May 14, 1997 SPPC received
approval from the Truckee Meadows Regional Planning Commission that the Alturas
Project is in conformance with the Truckee Meadows Regional Plan. This was the
final approval needed from the local agencies in Reno and Washoe County.
The discovery phase for acquiring the Utility Environmental Protection Act
Permit from the PUCN is ongoing and the procedural schedule has been set. The
hearings will commence on August 12, 1997. A decision from the Commission is
expected in September 1997.
In a letter to SPPC dated July 3, 1997, the Modoc National Forest gave
clear direction to pursue route segment B for the northern most portion of the
project which would interconnect with the Bonneville Power Administration
transmission system near Alturas, California. This off-forest alternative which
involves private lands was addressed as an alternative in the Environmental
Impact Report/Statement and will require a modification to the Order issued by
the California Public Utilities Commission (CPUC). SPPC filed a Petition for
Modification to the Order with the CPUC on July 14, 1997. A decision is
expected from the CPUC in September 1997.
12
SPPC issued invitations to bid to the qualified contractors on July 22,
1997. Construction could begin in October or November 1997 provided the
approvals are received on schedule, with project completion anticipated in late
1998. For further discussion, refer to the Company's 1996 Annual Report on Form
10-K.
PINON PINE POWER PROJECT
- ------------------------
In August 1992, SPPC executed a cooperative agreement with the U.S.
Department of Energy (DOE) for the construction of a coal gasification power
plant. This clean coal integrated gasification combined-cycle power plant will
be fully capable of operating on syngas produced from coal, natural gas, and,
potentially, other solid fuels. The project consists of a coal gasification
facility and an SPPC-owned power island and post-gasification facilities to
clean and partially cool the syngas produced by the gasifier. Estimated
construction, start-up and commissioning costs for Pinon, including the DOE
portion are approximately $283.0 million, which includes permitting, taxes,
start-up, commissioning, operator training, capitalized interest and AFUDC.
Cost increases are primarily attributable to resolving start-up technical issues
and to costs incurred due to the later than originally anticipated in-service
date for the gasification island and post-gasification facilities. Expected DOE
funding for construction, start-up and commissioning costs is $129.4 million.
Construction began on the project in February 1995 with the natural gas fired
portion (combined cycle combustion turbine) completed and placed in service
December 1996. The balance of the plant is expected to be placed in service
late Fall 1997. Based on the currently anticipated in-service date, liquidated
damages based on reduced capacity as discussed in the Company's 1996 Annual
Report on Form 10-K are expected and are currently estimated and reserved at
$1.8 million. For additional information regarding the Pinon Pine Power
Project, refer to the Company's 1996 Annual Report on Form 10-K.
REGULATORY PROCEEDINGS
----------------------
CALIFORNIA MATTERS
- ------------------
On May 6, 1997, the California Public Utilities Commission (CPUC) issued
an order implementing portions of the California restructuring bill signed into
law in September 1996. Beginning January 1, 1998, all investor-owned utilities,
including SPPC, must offer all customers direct access. Under the order,
customers may choose to continue to take service from their incumbent utility at
tariffed rates, purchase energy from marketers or contract directly with a
generator.
On June 27, 1997, SPPC filed with the CPUC its transition plan which
addresses SPPC's cost recovery and rate unbundling proposal during the
transition period (1998-2001) and contains a description of its transmission
system and constraints. The CPUC has ordered SPPC to supplement its plan by
providing information which would conform SPPC's transition plans to the plans
filed by Pacific Gas and Electric, Southern California Edison and San Diego Gas
and Electric (Major Utilities).
SPPC also filed an implementation plan with the CPUC on July 1, 1997, which
describes procedures SPPC will use to offer energy to its direct access
customers. The plan is modeled after one developed by the Major Utilities. The
plan provides a framework for: the direct access service election process;
access to customer information; billing; credit and collections; metering; load
profiling; customer service; and procedures for aggregation and transmission
service.
SPPC's Customer Education Program (CEP) and budget were approved on August
1, 1997. A separate CEP was requested on May 30, 1997 because of differences
between the Major Utilities and SPPC's implementation of direct access. For
further discussion of regulatory actions, please refer to California Matters in
------------------
SPPC's 1996 Annual Report on Form 10-K.
SPPC is still reviewing the compliance requirements associated with this
bill. At this time, management cannot fully predict how these requirements will
impact approximately 15.2% of SPPC's electric customers in California.
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NEVADA MATTERS
- --------------
The Nevada Legislature passed Assembly Bill 366 during the 1997 legislative
session. This law provides for restructuring the electric utility industry in
the State of Nevada. Listed below are the key issues addressed by the new law:
. Shareholders must be compensated fully for all costs determined by the PUCN
to be recoverable costs.
. Customers may begin obtaining generation, aggregation and any other
potentially competitive services from an alternative seller no later than
December 31, 1999.
. All "potentially competitive services" (i.e., a component of electric
service which the PUCN determines to be suitable for purchase from
alternative sellers) are deemed to be competitive on October 1, 2001.
. The vertically integrated electric utility shall be designated, through an
affiliate, to provide electric service to customers unable or unwilling to
select an alternative seller.
. Effective December 31, 1999, a vertically integrated electric utility may
not provide "potentially competitive services" except through an affiliate.
. Rates charged for residential service by the vertically integrated electric
utility must not exceed the rate charged for that service on July 1, 1997,
effective until two years after the date upon which the regulations for the
pricing method for that service are repealed (though adjustments are
permitted for just and reasonable cause).
. All alternative sellers must obtain a license.
Following the enactment of this comprehensive electricity restructuring
law, SPPC is evaluating alternatives for providing generation, transmission and
distribution services to its customers. Because many of the provisions in the
new law provide only general guidance, it is not possible at this time to
predict the full ramifications of this legislation to SPPC. However, because
the new law defines (to the extent that the PUCN determines) SPPC's electric
generation as a "potentially competitive service", effective December 31, 1999
SPPC can no longer generate and sell electricity directly to its distribution
customers but instead will be required to provide such service through an
affiliate of SPPC. This, in turn, could likely require the transfer of SPPC's
electric generation assets to an affiliate. SPPC is currently exploring the
feasibility of releasing this property from the first mortgage indenture and
transferring the assets to an affiliate. No decision has been made to date
regarding the feasibility or desirability of such a transfer.
FEDERAL ENERGY REGULATORY COMMISSION
- ------------------------------------
On July 8, 1996 SPPC filed its Open Access Transmission Tariff as required
by the Federal Energy Regulatory Commission (FERC) Order 888. The FERC
accepted the rates contained in the filing, subject to refund and a hearing on
the reasonableness of the rates. On May 28, 1997, SPPC received approval from
the FERC on a settlement between SPPC, the Truckee-Donner Public Utility
District (TDPUD) and FERC staff on rates for open access transmission and
ancillary services. On June 25, 1997, to comply with Order 888-A, SPPC filed
revised open access transmission tarriffs with FERC.
On July 18, 1997, SPPC filed changes to its Open Access tariffs with FERC
clarifying how its limited import capacity should be allocated among network
transmission customers.
On July 1, 1997, SPPC filed with FERC a settlement agreement between Paiute
Pipeline (Paiute), SPPC, FERC staff and other customers. This settlement
resolves the rate case filed by Paiute on July 1, 1996. In that general rate
case, Paiute requested a 34.3% increase in firm transportation rates and a 12.9%
increase in liquid natural gas storage rates. These rates were placed into
effect January 1, 1997, subject to refund. The settlement agreement provides
for a 16.7% increase in transportation rates and a 5.6% increase in storage
rates. The
14
settlement also provides for a rate freeze through mid-2000 and includes a
maximum interruptible transportation rate of 10c/Decatherm. On July 22, 1997,
Paiute filed to place the settlement rates into effect on August 1, 1997 and on
July 28, 1997 the Administrative Law Judge certified the settlement to the
Commission. A refund of approximately $1.0 million for January through July 1997
is forthcoming upon acceptance of the settlement by the Commission.
On July 22, 1997, a settlement between Northwest Pipeline, FERC staff and
its customers was filed with FERC. The settlement resolves the rate case filed
by Northwest on September 1, 1996. On March 1, 1997, in anticipation of
settlement, rates lower than those filed were placed into effect, subject to
refund. The settlement provides for a rate freeze through mid-2000. SPPC
anticipates a refund in excess of $1.0 million.
For further discussion on FERC regulatory matters, refer to the Company's
1996 Annual Report on Form 10-K.
OTHER BUSINESS
--------------
ELECTRIC BUSINESS
- -----------------
SPPC's contract with Black Butte Coal Company for coal shipments from the
Black Butte Mine in Wyoming to the Valmy Power Station, is in effect until June
30, 2007 or until all commitments required by the contract are delivered or
canceled. In keeping with SPPC's intent to amortize the contract more rapidly,
SPPC paid $3.7 million in June 1997 to buy out coal from the Black Butte Mine.
SPPC had accrued a liability of $1.5 million as of December 31, 1996 and
incurred $2.2 million in additional expenses in 1997. For further discussion of
the Black Butte Coal buy out, refer to The Company's 1996 Annual Report on Form
10-K.
SPPC currently has two long-term firm purchased power agreements from
utility suppliers for which it has exercised its termination option.
Termination notice was given to Pacific Corp on April 29, 1997 regarding its
PacifiCorp/Utah agreement for the purchase of 75 Megawatts (MW). The
termination notice provides for termination of the agreement effective April 20,
2000. Additionally, termination notice was given to Tri-State on May 23, 1997
regarding the Tri-State agreement for the purchase of 25 MW. The termination
notice provides for termination of the agreement effective June 1, 1999.
WATER BUSINESS
- --------------
As required by NAC 703.2207, SPPC filed a written "Notice of Intent to File
Application for Adjustment in Rates" on July 10, 1997, sixty days prior to the
anticipated filing date. The adjustments to rates are expected to include
additions to rate base, changes in the cost of capital, revised depreciation
rates, changes in the cost of service, changes in rate design and changes in the
levels of administrative and general costs. The filing date is expected in the
third quarter of 1997.
TUSCARORA GAS PIPELINE COMPANY
- ------------------------------
For the three-months and six-months ended June 30, 1997, Tuscarora Gas
Pipeline Company, a wholly-owned subsidiary of the Company, contributed revenues
of $.4 million and $.7 million compared to $.6 million and $1.0 million for the
comparable periods in 1996. The 1997 reduction in revenues is attributable to
the pipeline not being fully operational until June 1996 when all funding
reimbursements ceased as compared to 1997.
LANDS OF SIERRA
- ---------------
Lands of Sierra (LOS), a wholly-owned subsidiary of the Company, develops
and manages real estate in Nevada and California. In keeping with the Company's
intent to liquidate the properties of LOS,
15
LOS sold commercial property in the first quarter of 1997 for $.7 million. In
addition, LOS received preliminary information that the costs of environmental
remediation for commercial property owned at Lake Tahoe could be higher than
previously anticipated. In the first quarter of 1997, the Company recorded an
additional $.5 million for these costs. Lands of Sierra contributed income for
the three-month and six-month periods ending June 30, 1997 of $.01 million and
$.1 million.
OTHER SUBSIDIARIES
- ------------------
Combined, these entities contributed a net loss of $.2 million and $.5
million for the three-months and six-months ended June 30, 1997 compared to net
income of $.6 million and $.9 million in 1996. All of the increase in the loss
for 1997 is attributed to start up costs associated with the newly formed
subsidiary, e.three.
16
PART II
-------
ITEM 1. LEGAL PROCEEDINGS
Although the Company is involved in ongoing litigation on a variety of
matters, it is management's opinion that none individually or collectively is
deemed material to the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Company held its 1997 Annual Meeting of Shareholders on May 16,
1997.
b) The Company solicited proxies pursuant to Regulation 14 under the
Securities and Exchange Act of 1934; there was no solicitation in
opposition to nominees listed in the proxy statement, and all such
nominees were elected to the classes indicated in the proxy
statement pursuant to the vote of shareholders.
c) Re-elected to the Company's Board of Directors were:
Edward M. Bliss
Votes For: 26,141,039
Votes Withheld: 626,680
Theodore J. Day
Votes For: 26,120,539
Votes Withheld: 647,180
Walter M. Higgins
Votes For: 26,095,845
Votes Withheld: 671,874
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this Form 10-Q are denoted with an asterisk (*). The
other listed exhibits have been filed with the Securities and Exchange
Commission during the period covered by this report and are incorporated herein
by reference.
*(15) Letter of independent accountants acknowledging awareness
regarding unaudited interim financial information of the Company.
*(27) The Financial Data Schedule containing summary financial
information extracted from the condensed condensed consolidated
financial statements on Form 10-Q for the period ended June 30,
1997, for Sierra Pacific Resources, and is qualified in its
entirety by reference to such financial statements.
(b) Reports on Form 8-K:
None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sierra Pacific Resources
-----------------------------
(Registrant)
Date: August 12, 1997 By: /s/ Mark A. Ruelle
----------------- ----------------------------------------
Mark A. Ruelle
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
(Principal Accounting Officer)
18