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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 SEPTEMBER 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 POWER COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 88-0044418
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 10100 (6100 NEIL ROAD)
RENO, NEVADA 89520-0400 (89511)
(Address of principal executive office) (Zip Code)
(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 November 4, 1997
Common Stock, $3.75 par value 1,000 Shares
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SIERRA PACIFIC POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
Report of Independent Accountants............................................ 3
Condensed Consolidated Balance Sheets - September 30, 1997 and
December 31, 1996....................................................... 4
Condensed Consolidated Statements of Income - Three-Months and Nine-Months
Ended September 30, 1997 and 1996....................................... 5
Condensed Consolidated Statements of Cash Flows - Nine-Months
Ended September 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................................................................. 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................. 16
Signature Page.............................................................................. 17
2
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholder of
Sierra Pacific Power Company
Reno, Nevada
We have reviewed the accompanying condensed consolidated balance sheet of Sierra
Pacific Power Company and subsidiaries as of September 30, 1997, the related
condensed consolidated statement of income for the three-month and nine-month
periods then ended, and the condensed consolidated statement of cash flows for
the nine-month period ended September 30, 1997. The condensed interim financial
statements as of September 30, 1996, and for the three-month and nine-month
periods then ended were reviewed by other accountants whose report dated October
28, 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 Power Company 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
November 4, 1997
3
SIERRA PACIFIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
1997 1996
------------- -------------
(Unaudited)
ASSETS
Utility Plant at Original Cost:
Plant in service $2,037,204 $1,984,781
Less: accumulated provision for depreciation 649,117 606,406
---------- ----------
1,388,087 1,378,375
Construction work-in-progress 201,694 164,835
---------- ----------
1,589,781 1,543,210
---------- ----------
Investments in subsidiaries and other property, net 22,847 22,394
---------- ----------
Current Assets:
Cash and cash equivalents 7,635 890
Accounts receivable less provision for uncollectible accounts $1,669 at
September 30, 1997 and $2,196 at December 31, 1996 80,398 94,782
Materials, supplies and fuel, at average cost 24,248 27,586
Other 2,746 3,948
---------- ----------
115,027 127,206
---------- ----------
Deferred Charges:
Regulatory tax asset 67,528 67,667
Other regulatory assets 68,288 67,319
Other 15,292 14,832
---------- ----------
151,108 149,818
---------- ----------
$1,878,763 $1,842,628
========== ==========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholder's equity $ 627,631 $ 606,896
Preferred stock 73,115 73,115
Preferred stock subject to mandatory redemption:
Company-obligated mandatory redeemable preferred securities of the
Company's subsidiary Sierra Pacific Power Capital I, holding
solely 50,000 principal amount of 8.6% junior
subordinated debentures of the Company, due 2036 48,500 48,500
Long-term debt 606,992 607,287
---------- ----------
1,356,238 1,335,798
---------- ----------
Currant Liabilities:
Short-term borrowings 66,000 38,000
Current maturities of long-term debt and preferred stock 452 15,434
Accounts payable 45,956 53,998
Accrued interest 12,689 6,178
Dividends declared 19,365 17,365
Accrued salaries and benefits 13,681 11,300
Other current liabilities 14,159 21,560
---------- ----------
172,302 163,835
---------- ----------
Deferred Credits:
Accumulated deferred federal income taxes 166,312 162,438
Accumulated deferred investment tax credit 40,358 41,835
Regulatory tax liability 41,163 42,870
Customer advances for construction 39,093 39,429
Other 63,307 56,423
---------- ----------
350,223 342,995
---------- ----------
$1,878,763 $1,842,628
========== ==========
The accompanying notes are an integral part of the financial statements.
4
SIERRA PACIFIC POWER COMPANY
CONSOLIDATED
STATEMENTS Of INCOME
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1997 1996 1997 1996
-------- -------- --------- ---------
(Unaudited) (Unaudited)
OPERATING REVENUES:
Electric $137,611 $136,353 $402,869 $388,712
Gas 7,690 8,196 47,670 44,530
Water 14,482 14,133 35,919 34,971
-------- -------- -------- --------
159,783 158,682 486,458 468,213
-------- -------- -------- --------
OPERATING EXPENSES:
Operation:
Purchased power 32,279 29,687 93,757 89,014
Fuel for power generation 27,781 27,075 77,426 75,477
Gas purchased for resale 3,531 3,477 23,868 21,528
Other 28,946 30,178 90,619 94,825
Maintenance 4,827 4,344 16,304 13,431
Depreciation and amortization 16,746 14,664 47,572 43,014
Taxes:
Income taxes 11,795 12,580 34,706 33,282
Other than income 4,684 4,588 14,084 13,708
-------- -------- -------- --------
130,589 126,593 398,336 384,279
-------- -------- -------- --------
OPERATING INCOME 29,194 32,089 88,122 83,934
-------- -------- -------- --------
OTHER INCOME:
Allowance for other funds used during construction 1,619 1,800 4,547 3,820
Other income (expense) - net 314 (428) 876 511
-------- -------- -------- --------
1,933 1,372 5,423 4,331
-------- -------- -------- --------
Total Income 31,127 33,461 93,545 88,265
-------- -------- -------- --------
INTEREST CHARGES:
Long-term debt 9,766 9,549 29,796 27,243
Other 1,459 1,215 3,421 3,613
Allowance for borrowed funds used during construction and
capital interest (1,283) (1,492) (3,637) (2,791)
-------- -------- -------- --------
9,942 9,272 29,580 28,065
-------- -------- -------- --------
INCOME BEFORE OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES 21,185 24,189 63,965 60,200
Preferred dividend requirements of Company-obligated
mandatorily redeemable preferred securities (1,043) (707) (3,128) (707)
-------- -------- -------- --------
INCOME BEFORE PREFERRED DIVIDENDS 20,142 23,482 60,837 59,493
Preferred dividend requirements (1,365) (1,679) (4,094) (4,969)
-------- -------- -------- --------
INCOME APPLICABLE TO COMMON STOCK $ 18,777 $ 21,803 $ 56,743 $ 54,524
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
5
SIERRA PACIFIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Nine Months Ended
September 30
-----------------
1997 1996
------ ------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before preferred dividends $ 60,837 $ 59,493
Non-cash items included in income:
Depreciation and amortization 47,572 43,014
Deferred taxes and deferred investment tax credit 818 (8,660)
AFUDC and capitalized interest (8,184) (6,611)
Early retirement and severance amortization 3,497 6,628
Other non-cash (2,039) 148
Changes in certain assets and liabilities:
Accounts receivable 14,384 16,281
Materials, supplies and fuel 3,338 440
Other current assets 1,202 (1,132)
Accounts payable (8,042) (46,686)
Other current liabilities 1,491 18,610
Other - net 1,190 13,568
-------- --------
Net Cash Flows From Operating Activities 116,064 95,093
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant (111,433) (153,332)
Non-cash charges 8,063 7,497
Net customer refunds and contributions in
aid construction 17,067 9,492
-------- --------
Net Cash Used In Investing Activities (86,303) (136,343)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings 30,384 (28,468)
Proceeds from issuance of long-term debt -- 60,031
Reduction of preferred stock -- (20,400)
Reduction of long-term debt (15,306) (322)
Proceeds from Company obligated mandatorily
reedeemable preferred securities -- 48,500
Decrease in funds held in trust -- 9,175
Investment from the parent company 18,000 28,000
Dividends paid (56,094) (51,935)
-------- --------
Net Cash (Used In) Provided From Financing Activities (23,016) 44,581
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,745 3,331
Beginning balance in Cash and Cash Equivalents 890 1,373
-------- --------
Ending balance in Cash and Cash Equivalents $ 7,635 $ 4,704
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During Period For:
Interest $ 28,849 $ 23,599
Income Taxes $ 24,053 $ 28,907
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 Power Company,
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 nine-month periods
ended September 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 Capital I,
Pinon Pine Corp., and Pinon Pine Investment Co. 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
- ------------------------------------------
In February 1997, the FASB issued SFAS 129 entitled "Disclosure of
Information about Capital Structure". 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
statement 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 does
not believe this new statement will have a material impact on the Company.
7
NOTE 3. REGULATORY ACCOUNTING
- ------------------------------
The Company'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, the Company 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. As a result of this legislation the generation operations
of the Company may in the future no longer qualify for application of SFAS 71.
The total impact of the new legislation on the Company's reporting practices is
not currently determinable because only general guidelines exist. However, the
Company 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
RESULTS OF OPERATIONS
---------------------
The Company's net income for the three months ended September 30, 1997
was $18.8 million, a decrease of 13.8% from the same period of 1996. The $3.0
million decrease resulted from a rate reduction discussed below, slightly higher
energy costs, cooler weather, increased depreciation applicable to new plant,
and the recognition in the third quarter of the revenue sharing mechanism
established through the PUCN stipulation originally discussed in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996. Net income for
the nine months ended September 30, 1997 increased 4.0% ($2.2 million) over the
same period of 1996.
Total operating revenues for the three-months and nine-months ended
September 30, 1997 increased 1.0% and 3.8% ($1.1 million and $18.2 million) over
the comparable periods in 1996 due to increased sales and customer growth.
Specifically, the kWh sold for the three month period increased approximately
5%, primarily as a result of increases in lower priced industrial sales. kWh
sold in the nine month period decreased slightly in total, however sales
increased in the higher priced residential, commercial and industrial markets
while decreasing significantly in the low priced wholesale market. Listed below
are the revenues and revenue margin (in thousands) by division:
Three-Months Nine-Months
Ended Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
Operating Revenues:
Electric $137,611 $136,353 $402,869 $388,712
Gas 7,690 8,196 47,670 44,530
Water 14,482 14,133 35,919 34,971
-------- -------- -------- --------
Total Revenues $159,783 $158,682 $486,458 $468,213
-------- -------- -------- --------
Energy Costs:
Electric $ 60,060 $ 56,762 $171,183 $164,491
Gas 3,531 3,477 23,868 21,528
-------- -------- -------- --------
Total Energy Costs $ 63,591 $ 60,239 $195,051 $186,019
-------- -------- -------- --------
Revenue Margin by Division:
Electric $ 77,551 $ 79,591 $231,686 $224,221
Gas 4,159 4,719 23,802 23,002
Water 14,482 14,133 35,919 34,971
-------- -------- -------- --------
Total $ 96,192 $ 98,443 $291,407 $282,194
======== ======== ======== ========
9
Energy costs are comprised of purchased power, fuel for power generation
and gas purchased for resale. Average energy costs for the three-months and
nine-months ended September 30, 1997 and 1996 are set forth below.
Three-Months Nine-Months
Ended Ended
September 30, September 30,
--------------- ------------------
1997 1996 1997 1996
------ ------ ------ -------
Average cost per KWH of
purchased power 3.42c 3.37c 3.43c 2.99c
Average fuel cost per
KWH of generated power 2.05c 2.08c 2.10c 2.20c
Average costs per therm of
gas purchased for resale 14.59c 19.12c 25.14c 25.52c
For the three months ended September 30, 1997, megawatt-hours (MWH)
purchased increased 7.3% (64,607 MWH) over the same period in 1996. While this
reversed the downward trend established during the first two quarters of 1997,
total megawatt-hours purchased during the nine months ended September 30, 1997
remained 9.9% (301,431 MWH) lower than the comparable period of 1996. The total
cost of purchased power increased 8.7% and 5.3% ($2.6 million and $4.7 million)
for the three- and nine-months ended September 30, 1997, compared to the same
periods in 1996, reflecting not only increased customer growth and demand, but
also higher unit costs of purchased power. The cost per KWH for the three- and
nine-months ended September 30, 1997 increased 1.5% (0.05c) and 14.1% (0.44c)
compared to the same periods of 1996.
In addition to increasing its purchases of power, the Company increased
its MWH generated by 3.9% and 7.5% (50,773 MWH and 257,889 MWH) for the three-
and nine-months ended September 30, 1997, over the comparable 1996 periods.
This reflects customer growth and an incremental shift from more expensive
purchased power. The total cost of fuel for power generation during the same
periods increased 2.6% ($.7 million and $1.9 million), while the cost per KWH
generated decreased 1.5% and 4.5%(.03c and .10c) for the three- and nine-months
ended September 30, 1997 compared to the same periods in 1996.
For the three-months and nine-months ended September 30, 1997, the
Company increased the therms of gas purchased for resale 33.4% and 12.8%
(6,059,209 and 10,782,477) over the comparable periods in 1996. Following
customer growth, the total cost during the same period increased 1.6% and 10.9%
($.1 million and $2.3 million). Lower natural gas prices during the three
months ended September 30, 1997, however, contributed to reductions in per-therm
costs of 23.7% and .4% (4.53c and .38c) for the comparable three- and nine-month
periods ended September 30, 1997.
Other operations expenses decreased 4.1% ($1.2 million) for the three-
months ended September 30, 1997, compared to the same period in 1996. During
the quarter ended September 30, 1997 expenses of $1.2 million by the Company's
subsidiary operations at the Pinon Pine plant were more than offset by
reductions in other operations expenses at the Company's various operating
plants, from the same period of 1996. While the net decrease in the nine-months
ended September 30, 1997 over the same period of 1996 totaled $4.2 million
(4.4%), changes in certain specific operations accounts, both increases and
decreases, were notable. The Company's Pinon Pine subsidiary incurred $4.1
million in expense in its first nine months of operation. This was offset
primarily by pension and benefits accruals reflected in the nine month period
ended September 30, 1996 for merger related retirement and severance plans which
did not reoccur in the comparable period in 1997
10
Maintenance expenses increased 11.1% and 21.4% ($.5 million and $2.9
million) for the three- and nine-months ended September 1997 over 1996 due,
primarily, to flood-related expenses and increased labor for planned maintenance
at the Valmy Plant in 1997.
Depreciation and amortization expenses for the three-months and nine-
months ended September 30, 1997 increased 14.2% and 10.6% ($2.1 million and $4.6
million) due to increases in utility plant; most notably, the Chalk Bluff water
treatment facility and the Pinon Pine combined cycle combustion turbine
generator.
Income taxes decreased 6.2% ($.8 million) for the three-months and
increased 4.3% ($1.4 million) for the nine-months ended September 30, 1997,
following income before income taxes during the periods. While 1997 operating
income continued higher for the nine-months ended September 30, 1997, compared
to the same period in 1996, the decrease in taxes during the third quarter of
1997 resulted, primarily, from the Company's provision for the stipulation
previously established through an agreement with the PUCN. The charge,
attributed to year-to-date earnings, was recognized during the quarter. Income
taxes reflected in operating income and other income-net are summarized below,
(in thousands).
Three-Months Nine-Months
Ended Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------ ------ ------ ------
Currently payable $ 7,758 $12,354 $32,438 $40,622
Deferred taxes - net 3,820 (56) 2,295 (7,182)
Investment tax credit - net (493) (493) (1,478) (1,478)
------- ------- ------- -------
Total income taxes $11,085 $11,805 $33,255 $31,962
======= ======= ======= =======
Income taxes charged to:
Operations $11,795 $12,580 $34,706 $33,282
Other income - net (710) (775) (1,451) (1,320)
======= ======= ======= =======
Total income tax expanse $11,085 $11,805 $33,255 $31,962
======= ======= ======= =======
Income before income taxes and
preferred dividend requirements $31,228 $35,287 $94,093 $91,455
======= ======= ======= =======
Effective tax rate 35.5% 33.5% 35.3% 34.9%
======= ======= ======= =======
Allowance for funds used during construction (AFUDC) and capitalized
interest decreased 11.8% ($.4 million) for the three-months, and increased 23.8%
($1.6 million) for the nine-months ended September 30, 1997, compared to the
corresponding periods of 1996. For the year-to-date ended September 30, 1997
CWIP increased from the prior year. Most notable is the CWIP associated with
construction expenditures for the Alturas Intertie of $78.0 million at September
30, 1997 compared to $63.7 million at September 30, 1996.
Interest on long-term debt increased 9.4% ($2.5 million) for the nine-
months ended September 30, 1997, over the same period in 1996, reflecting the
effect of interest on debt issued in 1996 for the full period. Other interest
expense increased 20.1% ($.2 million) for the three-months and decreased 5.3%
($.2 million) for the nine-months ended September 30, 1997 compared to the same
periods in 1996, primarily as a result of changes in levels of short-term
borrowings.
11
Due to the issuance in the third quarter of 1996 of 8.6% trust
originated preferred securities by the Company's subsidiary, Sierra Pacific
Power Capital I, preferred dividends on mandatorily redeemable preferred
securities increased $.3 million and $2.4 million for the three-months and nine-
months ended September 30, 1997.
Preferred dividend requirements for all other preferred securities
decreased 18.7% and 17.6% ($.3 million and $.9 million) for the three-months and
nine-months ended September 30, 1997 compared to the same periods in 1996, due
to the redemption of Series G preferred stock in June 1996.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
During the first nine months of 1997, the Company earned $60.8 million
in income before preferred dividends, declared $4.1 million in dividends to
holders of its preferred stock and declared $54.0 million in common stock
dividends to its parent, Sierra Pacific Resources.
As originally discussed in the Company's 1996 Annual Report on Form
10-K, in February 1997, the PUCN approved a settlement with the Company which
resulted in a decrease of $7.1 million in the Company's annual electric rates.
Construction Expenditures and Financing
- ---------------------------------------
The Company's construction program and capital requirements for the
period 1997-2001 were originally discussed in the Company's 1996 Annual Report
on Form 10-K. Of the amount projected for 1997, as of September 30, 1997, $86.3
million (59.3%) had been spent. Of this amount, approximately 69.5% was
provided by internally generated funds.
12
ALTURAS INTERTIE
- ----------------
The Company is constructing the Alturas Intertie transmission line to
better serve existing native load, new customers and to significantly increase
the Company's access to lower cost resources.
On August 12, 1997, the PUCN issued a compliance order for the project
approving the issuance of the Utility Environmental Protection Act Permit
(UEPA). The compliance order requires the Company to fulfill certain
requirements which the Company is in the process of completing. Upon evidence
of completion of these requirements, the PUCN is expected to issue the UEPA
permit.
The California Public Utility Commission (CPUC) is currently reviewing
the adequacy of the Company's environmental mitigation and monitoring plan and
is expected to finalize approval of the plan in the upcoming months.
In July 1997, the Modoc National Forest issued a positive record of
decision for segment A, the northern most portion of the project, which would
interconnect with Bonneville Power Administration transmission system near
Alturus, California. This decision relieves the Company from pursuing the off-
forest alternative route B segment which would have required a modification to
the original order issued by the CPUC.
In September 1997, the Nevada Attorney General's Office of Advocate for
Customers of Public Utilities and an individual plaintiff filed a lawsuit
against the Company and the Federal Bureau of Land Management (BLM) in Federal
District Court requesting that a supplemental Environmental Impact Statement
(EIS) be prepared under the National Environmental Protection Act for the twelve
mile reroute of the transmission line in Washoe County. The parties agreed to
suspend the action until the BLM completed an analysis on whether there exists a
need for a supplemental EIS. The BLM completed its analysis on November 4,
1997, indicating that it found no need for a supplemental EIS. Pursuant to a
stipulation among the parties, the Plaintiffs have fifteen days from November 4
to decide whether or not to pursue this litigation.
The Company issued invitations to bid to qualified contractors on July
22, 1997, and subsequently awarded the contract to Union Power on October 16,
1997. Physical construction is expected to begin later this year or in the
first quarter of 1998 provided 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, the Company 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 capable of operating on syngas produced from coal, natural gas, and,
potentially, other solid fuels. The project consists of a coal gasification
facility, a 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
$287.4 million, which includes permitting, taxes, start-up, commissioning,
operator training, capitalized interest and AFUDC. Expected DOE funding for
construction, start-up and commissioning costs is $130.0 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 by April 1998. The Company now estimates that the gasifier portion of
the project will overrun the contract price by approximately 10.0% ($9.2
million) primarily due to costs associated with resolving start-up technical
issues and other costs due to the later than anticipated in-service date. Based
on the anticipated in-service date, contractual obligations are expected and are
currently reserved for 1997 at $2.8 million. It is possible that the Company
will incur additional contractual obligations if the plant does not meet its
operating targets. For additional information regarding the Pinon Pine Power
Project, refer to the Company's 1996 Annual Report on Form 10-K.
13
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 October 1, 1997, the Company filed supplemental testimony to its June
27, 1997 transmission plan which distinguished its position from that of other
utilities. Hearings were held October 8-10, 1997 and a decision from the CPUC
is expected late November 1997.
The Company is still reviewing the compliance requirements associated
with this law. At this time, management cannot fully predict how these
requirements will impact the Company's electric business in California which
represent approximately 6.3% of the Company's kWh retail sales. For further
discussion of regulatory actions, please refer to California Matters in the
------------------
Company's 1996 Annual Report on Form 10-K.
NEVADA MATTERS
- --------------
On September 19, 1997, the Company filed an application with the PUCN to
increase water rates by $15.2 million. The increase is required primarily to
recover the cost of facilities built to comply with the federally mandated Safe
Drinking Water Act. If approved, the increase will result in approximately a
33% increase in annual water revenues. The PUCN is expected to rule on the
application prior to March 18, 1998.
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. On August 7, 1997, the PUCN opened two dockets
under which it will determine how to implement the electric and natural gas
provisions of AB 366. Hearings and workshops are being held to address the
implementation process. The Company expects the PUCN to reach final decisions
on implementing the natural gas and electric provisions of AB 366 by the first
half of 1999.
FEDERAL ENERGY REGULATORY COMMISSION
- ------------------------------------
As a result of FERC's Omnibus Compliance Order dated September 2, 1997,
the Company filed forms of service agreements placing itself under its own open
access tariff for non-firm and short-term firm point-to-point transmission
service and for network integration transmission service.
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 October 2, 1997, the Company filed changes
to accommodate retail transmission access.
On October 15, 1997, FERC approved a settlement agreement between Paiute
Pipeline (Paiute), the Company, FERC staff and other customers. 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.
On October 31, 1997 the FERC issued an order requiring that limited
transmission capacity be allowed on a first in time basis rather than on a pro-
rata share basis as proposed by the company. The FERC also stated that the
company could allow its first in time priority to its customers on a pro-rata
share basis voluntarily, but would have to file a new tariff to do so.
The FERC also determined that the company's firm transmission usage had
priority over shippers using the first in time allocation procedure. However,
the FERC did set two factual issues for hearing:
a. Is the Sierra Pacific transmission system limited to 360 mWh?
b. Do all of the network reserves claimed by the company qualify as
network reserves?
The company expects to resolve these issues during 1998.
14
OTHER BUSINESS
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UNION CONTRACT
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The Company and the International Brotherhood of Electrical Workers (IBEW) have
reached a tentative agreement on the collective bargaining agreement. The
Company's current contract with the IBEW expires December 31, 1997. The new
agreement, subject to ratification in November 1997 by local union membership,
would be effective for the period January 1, 1998 through December 31, 2000.
ELECTRIC BUSINESS
- -----------------
The Company'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 the Company's intent to amortize the
contract more rapidly, the Company paid $3.7 million in June 1997 to Black Butte
to buy out the purchase commitment for the period July 1996 through June 1997.
Also, for each month from July through December 1997, the Company is paying
approximately $0.2 million per month to buy out the contract for that period.
The present value of SPPC's remaining purchase commitments under the contract as
of September 30, 1997 is approximately $9.3 million. For further discussion of
the Black Butte Coal buy out, refer to the company's 1996 Annual Report on Form
10-K.
The Company operates a portion of its electric system as a lessee under
agreement with the Truckee-Carson Irrigation District (TCID). Under the terms
of the lease, the Company is obligated to pay an annual lease payment of
$108,000 plus 2% of gross revenues from operations within the leasehold area.
The lease expires in July 1998 and TCID is currently exploring options with
respect to operation and maintenance of its distribution system and alternative
power suppliers. It is estimated that the Company generates approximately $2.0
million of net income from serving TCID. The Company has added approximately
$21.0 million in upgrades and other improvements to the TCID electric system.
If TCID does not renew the lease, it will be obligated to reimburse the Company
for upgrades and improvements made by the Company.
15
PART II
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ITEM 1. LEGAL PROCEEDINGS
ENVIRONMENTAL
- --------------
For a discussion of environmental issues see "Item 1. Business -
Environment" in the Company's 1996 Annual Report on Form 10-K. The Company is
assessing potential environmental issues at two additional sites. One location
is the site of a former manufactured gas facility which was owned by the
Company. The second location is a vehicle salvage yard. The Company has not
fully evaluated the cost to remediate these facilities, if required. The
Company has reserved $1.0 million for environmental remediation costs.
OTHER
- ------
Although the Company is involved in other 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 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 interim financial information of the Company.
*(27) The Financial Data Schedule containing summary financial
information extracted from the condensed consolidated
financial statements filed on Form 10-Q for the nine-month
period ended September 30, 1997, for Sierra Pacific Power
Company and is qualified in its entirety by reference to such
financial statements.
(b) Reports on Form 8-K
None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sierra Pacific Power Company
---------------------------------
(Registrant)
Date: 11/12/97 By /s/ Mark A. Ruelle
----------------------- ---------------------------------
Mark A. Ruelle
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: 11/12/97 By /s/ Mary Simmons
------------------------ ---------------------------------
Mary Simmons
Controller
(Principal Accounting Officer)
17