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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, 1997 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 (89511) 89520-3150
(Address of principal executive office) (Zip Code)
(702) 689-4011
(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 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 16, 1998: $1,125,472,291
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 March 16,1998:
30,940,819 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 Annual meeting of shareholders, to be held May 18, 1998, are
incorporated by reference into Part III hereof.
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2
SIERRA PACIFIC RESOURCES
1997 ANNUAL REPORT FORM 10-K
CONTENTS
PART I............................................................................................ 5
ITEM 1. BUSINESS.................................................................................. 5
SIERRA PACIFIC RESOURCES......................................................................... 5
BUSINESS OUTLOOK AND OVERVIEW.................................................................... 5
Sierra Pacific Power Company.................................................................. 5
Tuscarora Gas Pipeline Company................................................................ 6
e-three....................................................................................... 6
Lands of Sierra, Inc.......................................................................... 6
ENVIRONMENT...................................................................................... 7
General........................................................................................ 7
GENERAL - NUMBER OF EMPLOYEES.................................................................... 7
GENERAL - RESEARCH AND DEVELOPMENT............................................................... 7
ITEM 2. PROPERTIES................................................................................ 7
ITEM 3. LEGAL PROCEEDINGS......................................................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 8
EXECUTIVE OFFICERS OF THE REGISTRANT..................................................... 9
PART II........................................................................................... 11
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.................. 11
ITEM 6. SELECTED FINANCIAL DATA................................................................... 12
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 12
Sierra Pacific Power Company.................................................................. 12
Lands of Sierra............................................................................... 12
e-three....................................................................................... 12
Tuscarora Gas Pipeline Company................................................................ 13
Year 2000 Issues.............................................................................. 13
FINANCIAL CONDITION, LIQUIDITY AND CAPTAL RESOURCES.............................................. 13
Construction Expenditures and Financing......................................................... 13
Capital Structure............................................................................... 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................... 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................................................... 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES..... 47
PART III........................................................................................... 48
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................... 48
ITEM 11. EXECUTIVE COMPENSATION................................................................... 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 48
Change in Control Agreement..................................................................... 48
3
...........................................................................................
PART IV........................................................................................... 49
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................... 49
(a) Financial Statements, Financial Statement Schedules and Exhibits.............................. 49
SIGNATURES........................................................................................ 50
4
PART I
ITEM 1. BUSINESS
SIERRA PACIFIC RESOURCES (1)
----------------------------
Sierra Pacific Resources, hereafter known as SPR, was incorporated
under Nevada Law on December 12, 1983. SPR's mailing address is P.O. Box 30150
(6100 Neil Road), Reno, Nevada 89520-3150.
SPR has five primary subsidiaries: Sierra Pacific Power Company
(SPPC), Tuscarora Gas Pipeline Company (TGPC), Sierra Energy Company dba e-three
(e-three), Lands of Sierra, Inc. (LOS), and Sierra Pacific Energy Company (SPE).
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, 1997.
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. SPE is developing
a customer information system for the energy industry.
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 287,000 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, Elko and a portion of eastern California,
including the Lake Tahoe area. SPPC also provides natural gas in Nevada to
approximately 101,000 customers in Reno/Sparks and environs. SPPC supplies water
service in Nevada to about 65,000 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 SPR OR SPPC WITH THE SECURITIES AND
EXCHANGE COMMISSION, IN SPR'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. SPR WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON ANY
SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE. SPR
WISHES TO ADVISE READERS THAT VARIOUS FACTORS DESCRIBED IN THESE FORMS 10-K
COULD CAUSE SPR'S
5
ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY OPINIONS OR
STATEMENTS EXPRESSED WITH RESPECT TO FUTURE PERIODS IN ANY CURRENT
STATEMENTS. SPR 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.
During 1997, 92.0% of SPPC's revenues were from retail sales of
electricity, natural gas and water in Nevada; 6.0% from retail sales of
electricity in California and 2.0% 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, 1997, 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 to develop, construct and operate a natural gas
pipeline to serve an expanding gas market in Reno, northern Nevada, and
northeastern California. To date, SPR has an investment of approximately $15.5
million in this subsidiary. In December 1995, TGTC completed construction and
began service of its 229-mile pipeline extending from Malin, Oregon to Reno,
Nevada. TGTC interconnects with 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 access to
natural gas reserves in the Western Canadian Sedimentary basin, one of the
largest natural gas reserve basins in North America.
As an interstate pipeline, TGTC provides only transportation service. SPPC
and SPR were the two largest customers of TGTC during 1997, contributing 92.2%
and 6.3% of revenues, respectively. Malin Oregon began taking service from TGTC
during the later part of 1996. The Sierra Army Depot at Herlong, California,
began taking service from TGTC during the later part of 1997.
e-three
- -------
e-three was organized in October 1996 as an unregulated wholly-owned
subsidiary of SPR. It provides comprehensive energy and other business solutions
in commercial and industrial markets. This is accomplished by offering a variety
of energy-related products and services to increase customers' productivity and
profits and improve the quality of the indoor environment. These products and
services include: technology and efficiency improvements to lighting, heating,
ventilation and air conditioning equipment; installation or retrofit of controls
and power quality systems; energy performance contracting; end-use services;
power and transmission services and ongoing energy monitoring and verification
services.
LANDS OF SIERRA, INC.
- ---------------------
6
LOS was organized in 1964 to develop and manage SPPC non-utility property
in Nevada and California. These properties included retail, industrial, office
and residential sites, and timberland and properties in the Lake Tahoe region.
SPR has decided to focus on its core energy business. In keeping with this
strategy, LOS continues to sell its remaining properties. Properties sold in
1997 include several commercial sites in Nevada for total sales of $1.45
million. Properties remaining include only vacant land in Nevada and land leases
in the Lake Tahoe region. Management will continue to focus on selling most of
these remaining properties in 1998.
ENVIRONMENT
GENERAL
- -------
SPPC's board of directors has a comprehensive environmental policy and
board committee on environmental compliance which oversees corporate performance
and achievements related to the environment. Business activities are guided by
the corporate environmental policy, which places environmental considerations at
the forefront of the decision-making process.
A complete description of environmental activity of SPPC is contained in its
Annual Report on Form 10-K for the year ended 1997, attached as an appendix.
Lands of Sierra owns several parcels of commercial property at Lake
Tahoe where it has been determined, from preliminary testing, that there has
been soil and groundwater contamination from underground fuel storage tanks.
Liabilities of $852,000 have been accrued, which in management's opinion are
adequate.
GENERAL - NUMBER OF EMPLOYEES
SPR and its subsidiaries have 1,478 employees as of December 31, 1997, of
which 1,473 are employed by SPPC. A description of SPPC employee issues are
contained in its Annual Report on Form 10-K for the year ended December 31,
1997, attached as an appendix.
GENERAL - RESEARCH AND DEVELOPMENT
More focus is being placed on using technology to develop new products and
services which have been identified as having revenue growth opportunities. In
1996, SPR invested in Nth Power Technologies (Nth), a venture capital fund that
invests in developing technology companies. This partnership had its first full
year in 1997. Nth has made several investments to assist SPR in strengthening
its market positions and developing new products and services.
A description of Research and Development issues of SPPC is contained in
its Annual Report on Form 10-K for the year ended December 31, 1997, attached as
an appendix.
ITEM 2. PROPERTIES
The general character of SPR's principle facilities is discussed in Item
1 - Business.
7
A complete description of the properties of SPPC is contained in its
Annual Report on Form 10-K for the year ended December 31, 1997, attached as an
appendix.
ITEM 3. LEGAL PROCEEDINGS
SPR, 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.
8
Pursuant to General Instruction G, the following information is
included as an additional item in Part I, as of December 31, 1997:
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
"Election of Directors and Beneficial Ownership" of SPR's definitive proxy
statement to be filed pursuant to regulation 14A.
Walter M. Higgins, 53, former Chairman, President and Chief Executive Officer
Mr. Higgins served as Chairman, President and Chief Executive Officer
of Sierra Pacific Resources from January 1994 to January 1998. He also
served as President and Chief Executive Officer of SPPC from February 1994
to January 1998. Previously, Mr. Higgins was President and Chief Operating
Officer of SPR from November 1993 to January 1994 Before joining SPR, Mr.
Higgins served as President and Chief Operating Officer of Louisville Gas
and Electric Company from 1991 to 1993. Mr. Higgins is also a Director of
Aegis Insurance Services, Inc. and Utilix, Inc. Mr. Higgins resigned from
SPR and SPPC in January, 1998.
Malyn K. Malquist, 45, Chairman, President and Chief Executive Officer
Mr. Malquist was elected President and Chief Executive Officer of SPR
and SPPC on January 14, 1998, succeeding Mr. Higgins. On February 24,
1998, Mr. Malquist was elected to the additional position of Chairman of
SPR. Mr. Malquist was Senior Vice President - Distribution Services
Business Group and Principal Operations Officer since August of 1996.
Previously, he was Senior Vice President and Chief Financial Officer and
held that position since he joined the Company in April, 1994.
Additionally, he held the position of Treasurer from August, 1996 to May,
1997. Prior to joining the Company, he was with San Diego Gas and Electric
since 1978, where he held various financial positions, including Treasurer
in 1990 and Vice President in 1993.
William E. Peterson, 50, Senior Vice President, General Counsel and Corporate
Secretary
Mr. Peterson was elected to his present position in January 1994, and
holds the same position with SPPC. He was previously Senior Vice
President, Corporate Counsel from July 1993 to January 1994 for SPPC. Prior
to joining the Company in 1993, he served as General Counsel and Resident
Agent for SPR since 1992, as a partner in the Woodburn and Wedge law firm
since 1982.
Mark A. Ruelle, 36, Senior Vice President, Chief Financial Officer and Treasurer
Mr. Ruelle was elected to his present position March 1, 1997, and
holds the same position with SPPC. Prior to joining the Company, Mr.
Ruelle was President of Westar Energy, a subsidiary of Western Resources in
1996, and before that, served as Vice President, Corporate Development for
Western Resources in 1995. Mr. Ruelle was with
9
Western Resources since 1987 and served in numerous positions in regulatory
affairs, treasury, finance, corporate development, and strategy planning.
Victor H. Pena, 49, Vice President - Business Development
Mr. Pena was elected to his present position in August 1996. He is
also an officer of SPPC. His previous executive positions with SPR
include: Vice President - Business Development and Treasurer; and Vice
President - Business Development and Acting Treasurer. Prior to joining
the Company, he was Director of Financial Planning and Budget with
Louisville Gas and Electric Company from 1991 to May 1994.
Jeanette Y. Bennion, 45, President - e.three
Ms. Bennion was elected to her current position in January 1998. She
served as General Manager of e.three from October 1996 to January, 1998.
Previously, she was Director of Internal Audit of SPPC from November 1994
to October 1996 and Senior Internal Auditor from July 1992 to November
1994.
10
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 1997 and 1996 are as follows:
Dividends Paid Price Range
1997 Per Share High Low
--------------- ----------- -----------
First Quarter $.295 $ 29 3/4 $ 27 7/8
Second Quarter .310 32 28
Third Quarter .310 32 7/8 30 13/16
Fourth Quarter .310 37 9/16 30 1/8
1996
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
Number of Security Holders:
Title of Class Number of Holders
- --------------- -----------------
Common Stock: 1.00 Par Value (1)As of December 31, 1997: 22,083
During 1997, SPR 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, 1997, SPR's dividend payout
ratio was 51% based on 1997 consolidated earnings.
On February 24,1998, the SPR board of directors declared a quarterly
common dividend of $.325 per share. This dividend of approximately $ 10 million
will be paid on May 1, 1998.
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 consolidated financial statements.
- --------------------
(1) Should be updated at a later date to reflect a more up-to-the-minute
shareholder figure.
11
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
(dollars in thousands, except per share amounts)
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Operating Revenues $663,243 $ 627,711 $ 606,122 $ 626,312 $ 528,075
========== ========== ========== ========== ==========
Operating Income $118,627 $ 108,878 $ 104,760 $ 98,513 $ 87,893
========== ========== ========== ========== ==========
Net Income $ 74,445 $ 66,879 $ 58,039 $ 52,366 $ 44,890
========== ========== ========== ========== ==========
Net Income
Per Share-Basic $ 2.41 $ 2.19 $ 1.95 $ 1.79 $ 1.67
========== ========== ========== ========== ==========
Total Assets $1,935,880 $1,869,354 $1,756,627 $1,632,703 $1,608,946
========== ========== ========== ========== ==========
Net Income
Per Share-Diluted $ 2.40 $ 2.19 $ 1.95 $ 1.79 $ 1.67
========== ========== ========== ========== ==========
Long-Term Debt and
Redeemable Pre-
ferred Stock $ 675,724 $ 686,346 $ 587,533 $ 582,309 $ 578,211
========== ========== ========== ========== ==========
Cash Dividends Paid
Per Common Share $ 1.225 $ 1.165 $ 1.120 $ 1.120 $ 1.120
========== ========== ========== ========== ==========
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIERRA PACIFIC POWER COMPANY
- ----------------------------
A complete Management's Discussion and Analysis of SPPC is contained
in its Annual Report on Form 10-K for the year ended December 31, 1997, attached
as an appendix.
LANDS OF SIERRA
- ---------------
Lands of Sierra contributed $0.1 million to consolidated net income in
1997 due to continued land sales, compared to $1.0 million in 1996 and $1.5
million in 1995.
E-THREE
- -------
During 1997, its first full start-up year, e-three completed its
business plan. For 1997, e-three recognized revenues of $0.3 million and
incurred a net loss of $1.1 million. During 1996, e-three incurred a net loss
of $0.2 million.
12
TUSCARORA GAS PIPELINE COMPANY
- ------------------------------
Tuscarora Gas Pipeline Company had net income of $1.45 million in 1997
compared to $2.16 million in 1996. Commercial operation of TGTC's pipeline
began in December 1995. TGPC's net income is due to investments in the natural
gas pipeline.
YEAR 2000 ISSUES
- -----------------
All material systems are owned by SPPC. A complete description of
the Year 2000 issues at SPPC is contained in its Form 10-K for the year ended
December 31, 1997, attached as an appendix.
FINANCIAL CONDITION, LIQUIDITY AND CAPTAL RESOURCES
---------------------------------------------------
CONSTRUCTION EXPENDITURES AND FINANCING
Substantially all capital expenditures relate to SPPC. A complete
description of the Construction Expenditures and Financing of SPPC is contained
on its Annual Report Form 10-K for the year ended December 31, 1997, attached as
an appendix.
CAPITAL STRUCTURE
A complete description of the capital structure of SPPC is contained
in its Annual Report Form 10-K for the year ended December 31, 1998, attached as
an appendix
SPR has a $10 million revolving credit facility with Barclays Bank.
This line has been extended until April 24, 1998. There is currently no
outstanding balance. SPR's capital structure at December 31 was (dollars in
thousands):
1997 1996 1995
-------- -------- ------
Short-Term Debt (1) $ 85,566 (6%) $ 63,434 (4%) $ 73,470 (6%)
Long-Term Debt 627,224 (43%) 637,846 (45%) 573,933 (45%)
Preferred Stock 121,615 (8%) 121,615 (9%) 86,715 (7%)
Common Equity 633,394 (43%) 594,859 (42%) 544,550 (42%)
-------- -------- --------
$1,467,799 (100%) $1,417,754 (100%) $1,278,668 (100%)
========== ====== ========== ====== ========== ======
(1) Including current maturities of long-term debt and preferred stock.
SPR has $30 million of senior notes which include Series C through E due in
years 1998 through 2000. In April 1997, SPR redeemed Series C, $10 million of
the notes, and in April 1998, Series D, $10 million will mature.
13
On February 24, 1998 the SPR Board voted to increase its next quarterly
common dividend from $.310 per share to $.325 per share. This dividend of
approximately $10 million will be paid on May 1, 1998. On the same date, SPPC's
Board declared both common ($19 million) and preferred ($1.4 million) dividends,
payable May 1, and June 1, 1998, respectively.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Reports of Independent Accountants ................................... 15, 16
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996......... 17
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995................................................. 18
Consolidated Statements of Common Shareholder's Equity for the
Years Ended December 31, 1997, 1996 and 1995........................ 19
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.................................... 20
Consolidated Statements of Capitalization as of December 31, 1997
and 1996 ........................................................... 21
Notes to Consolidated Financial Statements............................ 22-44
15
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Sierra Pacific Resources
Reno, Nevada
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Sierra Pacific Resources and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income,
retained earnings, and cash flows for the years 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 audits. The consolidated financial statements of the Company for the year
ended December 31, 1995 were audited by other auditors whose report, dated
February 16, 1996, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1997 and 1996 consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Reno, Nevada
January 30, 1998
16
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 earinings 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, or 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 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
17
SIERRA PACIFIC RESOURCES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
December 31,
ASSETS 1997 1996
- ---------------------------------------- ------------ ----------
Utility Plant, at Original Cost:
Plant in service $2,063,269 $1,984,781
Less accumulated provision for 664,490 606,406
depreciation ---------- ----------
1,398,779 1,378,375
Construction work in progress 202,036 165,939
---------- ----------
1,600,815 1,544,314
---------- ----------
Investments in subsidiaries and other 49,614 43,479
property, net ---------- ----------
Current Assets:
Cash and cash equivalents 8,901 4,949
Accounts receivable less provision for
Uncollectible accounts: 1997-$1,704; 103,356 94,736
1996-$2,196
Materials, supplies and fuel, at 25,255 27,586
average cost
Other 2,885 4,472
---------- ----------
140,397 131,743
---------- ----------
Deferred Charges:
Regulatory tax asset 66,563 67,667
Other regulatory assets 63,476 67,319
Other 15,015 14,832
---------- ----------
145,054 149,818
---------- ----------
$1,935,880 $1,869,354
========== ==========
CAPITALIZATION AND LIABILITIES
- ----------------------------------------
Capitalization:
Common shareholders' equity $ 633,394 $ 594,859
Preferred stock 73,115 73,115
Preferred stock subject to mandatory
redemption:
SPPC-obligated Mandatorily Redeemable
Preferred
Securities of the Company's
Subsidiary Trust,
Sierra Pacific Power Capital I,
holding solely
$50 million principal amount of 8.6%
Junior
Subordinated Debentures of the
Company, due 2036 48,500 48,500
Long-term debt 627,224 637,846
---------- ----------
1,382,233 1,354,320
---------- ----------
Current Liabilities:
Short-term borrowings 75,000 38,000
Current maturities of long-term debt
and preferred stock 10,566 25,434
Accounts payable 62,105 53,804
Accrued interest 6,910 6,849
Dividends declared 10,941 10,452
Other current liabilities 34,360 33,078
---------- ----------
199,882 167,617
---------- ----------
Deferred Credits:
Accumulated deferred federal income taxes 165,076 164,199
Accumulated deferred investment tax credits 39,873 41,836
Regulatory tax liability 40,767 42,870
Customer advances for construction 38,478 39,429
Accrued retirement benefits 37,456 28,624
Other 32,115 30,459
---------- ----------
353,765 347,417
---------- ----------
Commitments and Contingencies (Note 16) $1,935,880 $1,869,354
========== ==========
The accompanying notes are an integral
part of the financial statements.
18
SIERRA PACIFIC RESOURCES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
1997 1996 1995
----------- ----------- -----------
Operating Revenues:
Electric $ 540,346 $ 507,004 $ 491,419
Gas 70,675 67,376 62,572
Water 46,519 45,344 43,793
Other 5,703 7,987 8,338
----------- ----------- -----------
663,243 627,711 606,122
----------- ----------- -----------
Operating Expenses:
Operation:
Purchased power 130,612 122,272 119,464
Fuel for power generation 100,861 102,601 84,878
Gas purchased for resale 38,127 33,899 35,864
Deferral of energy costs-net 8 (1,736) 9,597
Other 129,493 128,430 123,670
Maintenance 23,387 20,672 18,391
Depreciation and Amortization 64,117 58,118 55,076
Taxes:
Income taxes 38,667 35,626 36,574
Other than income 19,344 18,951 17,848
----------- ----------- -----------
544,616 518,833 501,362
----------- ----------- -----------
Operating Income 118,627 108,878 104,760
----------- ----------- -----------
Other Income:
Allowance for other funds used during 5,723 5,231 1,245
construction
Other income (expense) -net 1,261 1,289 (2,244)
----------- ----------- -----------
6,984 6,520 (999)
----------- ----------- -----------
Total Income Before Interest Charges 125,611 115,398 103,761
----------- ----------- -----------
Interest Charges:
Long-term debt 41,738 39,770 38,477
Other 4,583 4,624 2,873
Allowance for borrowed funds used during
construction and Capitalized interest (4,785) (3,924) (3,002)
----------- ----------- -----------
41,536 40,470 38,348
----------- ----------- -----------
Income Before Obligated Mandatorily
Redeemable 84,075 74,928 65,413
Preferred Securities
Preferred Dividend Requirements of
SPPC-Obligated Mandatorily Redeemable
Preferred Securities (4,171) (1,749) --
----------- ----------- -----------
Income Before Preferred Dividends 79,904 73,179 65,413
Preferred Dividend Requirements of Subsidiary (5,459) (6,300) (7,374)
----------- ----------- -----------
Net Income $ 74,445 $ 66,879 $ 58,039
=========== =========== ===========
Net Income Per Share - Basic $2.41 $2.19 $1.95
- Diluted $2.40 $2.19 $1.95
Weighted Average Shares of Common Stock 30,879,696 30,495,224 29,754,978
Outstanding
Annual Dividends Paid Per Share of Common Stock $1.225 $1.165 $1.120
The accompanying notes are an integral part of the financial statements.
19
SIERRA PACIFIC RESOURCES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
Year Ended December 31,
1997 1996 1995
--------- --------- ---------
Retained Earnings at Beginning of Year $111,741 $ 80,845 $ 58,062
Income Before Preferred Dividends 79,904 73,179 65,413
Stock Issuance Costs (7) (268) --
Dividends Declared:
Preferred stock of subsidiary (5,459) (5,879) (9,205)
Common stock (38,308) (36,136) (33,425)
-------- -------- --------
Retained Earnings at End of Year $147,871 $111,741 $ 80,845
======== ======== ========
The accompanying notes are an integral part of the financial statements.
20
SIERRA PACIFIC RESOURCES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended December 31,
1997 1996 1995
--------- --------- ---------
Cash Flows From Operating Activities:
- ------------------------------------
Income before preferred dividends $ 79,904 $ 73,179 $ 65,413
Non-cash items included in income:
Depreciation and amortization 64,117 58,118 55,076
Deferred taxes and investment tax
credits (2,083) 2,983 (1,012)
AFUDC and capitalized interest (10,508) (9,155) (4,247)
Deferred energy costs 8 (1,736) 9,597
Early Retirement and severance
Amortization 4,551 7,877 2,127
Merger Costs (50) 1,909 11,612
Other non-cash (2,110) 2,803 1,862
Changes in certain assets and
liabilities:
Accounts receivable (8,620) (2,559) (13,513)
Materials, supplies and fuel 2,331 2,869 935
Other current assets 1,587 (1,934) 1,346
Accounts payable 8,301 (38,081) 41,862
Other current liabilities 1,282 11,373 (5,958)
Other - net 8,315 2,802 (7,035)
--------- --------- ---------
Net Cash Flows From Operating Activities 147,025 110,448 158,065
--------- --------- ---------
Cash Flows Used in Investing Activities:
- ----------------------------------------
Additions to utility plant (147,801) (203,109) (144,197)
Non-cash charges to utility plant 10,814 9,474 5,059
Customer refunds for construction (951) (739) (571)
Contributions in aid of construction 26,321 15,272 6,621
--------- --------- ---------
Net cash used for utility plant (111,617) (179,102) (133,088)
Proceeds from sale of other assets - 4 1,440
Investments (disposal of) in subsidiaries
and other property - net (5,637) 1,261 (27,978)
--------- --------- ---------
Net Cash Used in Investing Activities (117,254) (177,837) (159,626)
--------- --------- ---------
Cash Flows From (Used in) Financing Activities:
- ----------------------------------------------
Increase (Decrease) in short-term borrowings 40,583 (16,059) 12,424
Proceeds from issuance of long-term debt - 80,041 -
Retirement of long-term debt (25,529) (10,539) (11,038)
Decrease in funds held in trust - 9,175 23,058
Proceeds from SPPC-obligated Mandatorily
Redeemable Preferred Securities - 48,500 -
Retirement of preferred stock - (20,400) (6,800)
Sale of common stock 2,405 19,414 13,045
Expenses of external financing - (5) (59)
Dividends paid (43,278) (42,032) (40,668)
--------- --------- ---------
Net Cash From (Used in) Financing Activities (25,819) 68,095 (10,038)
--------- --------- ---------
Net (Decrease) Increase in Cash and
Cash Equivalents 3,952 706 (11,599)
Beginning Balance in Cash and Cash Equivalents 4,949 4,243 15,842
--------- --------- ---------
Ending Balance in Cash and Cash Equivalents $ 8,901 $ 4,949 $ 4,243
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
- -------------------------------------------------
Cash Paid During Year For:
Interest $ 49,108 $ 44,106 $ 38,873
Income taxes $ 39,472 $ 39,234 $ 34,557
The accompanying notes are an integral part of the financial statements.
21
SIERRA PACIFIC RESOURCES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(DOLLARS IN THOUSANDS)
December 31,
1997 1996
------------- -----------
Common Shareholders' Equity:
- ---------------------------
Common stock, $1.00 par value,
authorized 90 million;
issued and outstanding 1997
30,915,402 shares; 1996 30,815,936 shares $ 30,915 $ 30,816
Additional paid-in capital 454,608 452,302
Retained earnings 147,871 111,741
---------- ----------
Total Common Shareholders' Equity 633,394 594,859
---------- ----------
Preferred Stock of Subsidiary:
- -----------------------------
Not subject to mandatory redemption:
$50 par value:
Series A; $2.44 dividend 4,025 4,025
Series B; $2.36 dividend 4,100 4,100
Series C; $3.90 dividend 14,990 14,990
$25 stated value:
Class A Series 1; $1.95 dividend 50,000 50,000
---------- ----------
Subtotal 73,115 73,115
SPPC-obligated Mandatorily Redeemable Preferred
Securities of the Company's Subsidiary Trust,
Sierra Pacific Power Capital I, holding solely
$50 million principal amount of 8.60%
Junior Subordinated Debentures of the Company,
due 2036 48,500 48,500
---------- ----------
Total preferred stock 121,615 121,615
---------- ----------
Long-Term Debt:
- --------------
First Mortgage Bonds:
Unamortized bond premium and discount, net (867) (906)
Debt Secured by First Mortgage Bonds:
2.00% Series Z due 2004 114 135
2.00% Series O due 2011 1 ,618 1,736
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 30,000
6.62% to 6.83% Series C MTN due 2006 50,000 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 3,275 3,335
6.70% Series II due 2032 21,200 21,200
---------- ----------
Subtotal, excluding current portion 527,257 527,456
Variable Rate Note:
Water Facilities Note maturing 2020 80,000 80,000
Senior Notes 20,000 30,000
Other, excluding current portion 834 1,296
---------- ----------
Total Long-Term Debt 627,224 637,846
---------- ----------
TOTAL CAPITALIZATION $1,382,233 $1,354,320
========== ==========
The accompanying notes are an integral part of the financial statements.
22
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), Lands of Sierra, Inc.
(LOS), Sierra Gas Holding Company (SGHC, formerly Sierra Energy Company), Sierra
Energy Company dba ethree (e-three), Sierra Pacific Energy Company (SPE) 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. It provides electricity to approximately 287,000
customers in a 50,000 square mile territory including western, central, and
northeastern 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 water and gas service in the cities of Reno and Sparks, Nevada, and
environs. In 1995, SPPC formed two subsidiaries for the specific purpose of
forming a partnership with a subsidiary of General Electric Capital Corporation
(GECC) to participate in the construction and operation of the Pinon Pine
gasifier facility. These subsidiaries are Pinon Pine Corporation and Pinon Pine
Investment Company. 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. Refer to Note 7 of SPR's consolidated financial statements
for the stock issuance and Note 5 for the Pinon Pine Power Project.
SPPC maintains its accounts for electric and gas operations 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 joint venture which developed, constructed, and
operates a natural gas pipeline serving the expanding gas market in the Reno
area and certain northeastern California markets. TGPC accounts for its interest
in Tuscarora Gas Transmission Company (TGTC) under the equity method. Organized
in October 1996, ethree provides comprehensive energy services in commercial and
industrial markets on a regional and national basis. LOS is primarily engaged
in real estate management. In 1997, SPR formed SPE, which is developing a
customer information system for the energy industry.
In November 1996, the SPR board of directors approved an investment,
as a limited partner, in an energy technology venture capital partnership to
gain access to new technologies that could affect SPR and its subsidiaries.
This partnership will invest in energy companies offering
23
technologies of strategic advantage to its partners. SPR's initial $250,000
payment on this investment was made in November 1996. An additional investment
of $750,000 was made in 1997. The remaining balance of SPR's commitment, $4
million, will be drawn as funds are needed by the partnership over the next four
years. The term of this partnership is ten years with two extensions of up to
two years each. Gains and losses will be allocated 80% to the limited partners
and 20% to the general partner. Gains and losses will be allocated among the
limited partners based on their contributions. SPR, as a limited partner, is
entitled to 9.4%. This investment is accounted for on the cost basis.
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 these 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 to
the construction of utility plant: the 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.
The original cost of plant retired or otherwise disposed of and the
cost of removal less salvage is generally 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 PUCN. AFUDC is
capitalized in the same manner as construction labor and material costs, with an
offsetting credit to "other income" for the portion representing a return on
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.
24
The AFUDC rates used during 1997, 1996 and 1995 were 8.30%, 8.91% and
8.16%, respectively. As specified by the PUCN, certain projects were assigned a
lower AFUDC rate due to specific low-interest-rate financings directly
associated with those projects.
DEPRECIATION
- ------------
Depreciation is calculated using the straight-line composite method
over the estimated remaining service lives of the related properties. The
provision, as authorized by the PUCN, for 1997, 1996 and 1995, stated as a
percentage of the original cost of depreciable property, was 3.16%, 3.18% and
3.16%, 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. Investments in commercial
paper were $1.2 million and $3.7 million for December 31, 1997 and 1996,
respectively.
SPPC engages in short-term investment activity whenever it is deemed
beneficial. As of December 31, 1997 SPPC's investment in commercial paper was
$4.7 million. SPPC had no commercial paper investments as of December 31, 1996.
REGULATORY ACCOUNTING AND OTHER REGULATORY ASSETS
- -------------------------------------------------
SPPC's rates are currently subject to the approval of the PUCN and are
designed to recover the cost of providing generation, transmission and
distribution services. 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 discontinue the application of that statement by
eliminating the effects of any actions of regulators that had been previously
recognized.
In 1997, the Emerging Issues Task Force (EITF) released Issue 97-4.
In doing so, it reached a consensus that a utility subject to a deregulation
plan for its generation business should stop applying SFAS No. 71 to the
generating portion of its business no later than the date when a plan with
sufficient detail of the effect of the plan is known. EITF 97-4 also reached a
consensus that regulatory assets and liabilities that originated in a portion of
the business which is discontinuing its application of SFAS No. 71 should be
evaluated on the basis of where (that is, the portion of the business in which)
the regulated cash flows to realize and settle them will be derived. The result
of the consensus is that there is no elimination of regulatory assets which the
deregulatory legislation or rate order specifies collection of, if they are
recoverable through a portion of the business which remains subject to SFAS No.
71.
25
In conformity with SFAS No. 71, the accounting for SPPC conforms with
generally accepted accounting principles as applied to regulated public
utilities and as prescribed by agencies and the commissions of the jurisdictions
in which it operates.
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 1997 1996 AMORTIZATION PERIODS
- ----------- -------- -------- --------------------
Early Retirement and Severance Offers $24,644 $29,195 Various through 2005
Loss on Reacquired Debt 18,354 19,113 Various through 2023
Plant Assets 8,869 9,888 Various through 2031
Conservation and Demand Side Programs 6,146 6,805 Various through 2006
Other Costs 5,463 2,318 Various
------- -------
Total $63,476 $67,319
======= =======
Currently, the electric utility industry is predominately regulated on
a basis designed to recover the cost of providing electric power to its retail
and wholesale customers. If cost-based regulation were to be discontinued in
the industry for any reason, including competitive pressure on the cost-based
prices of electricity, profits could be reduced, and utilities might be required
to reduce their asset balances to reflect a market basis less than cost.
Discontinuance of cost-based regulation would also require affected utilities to
write off their associated regulatory assets. Management cannot predict the
potential impact, if any, of these competitive forces on SPPC's future financial
position and results of operations.
DEFERRAL OF ENERGY COSTS
- ------------------------
SPPC has suspended deferred energy accounting in its Nevada (except
for liquid propane gas) and California jurisdictions. Prior to May 1995
(Nevada) and June 1996 (California), SPPC employed deferred energy accounting
procedures in its electric and 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.
FEDERAL INCOME TAXES AND INVESTMENT TAX CREDITS
- -----------------------------------------------
SPR 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 timing
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
26
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 are no longer available to SPPC. The deferred
investment tax credit 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
- ------------------
A rate plan, approved by the PUCN in February 1997 included: a one-
time refund of $13 million in electric rates, a $7 million rate reduction, a
rate freeze for electric and natural gas rates through December 1999, and
continued suspension of deferred energy accounting. In addition, the deferred
energy and purchased gas filings were withdrawn. Water prices were not affected
by the stipulated rate plan.
The rate plan also provides for a 50/50 sharing between customers and
shareholders of electric and gas utility earnings in excess of a 12 percent
return on average equity. In lieu of refunds, 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. The first
earnings sharing filing will be made no later than April 30, 1998.
In September 1997, SPPC filed an application to increase its water
prices with the PUCN. Rate changes were requested primarily because of
expenditures for the Chalk Bluff Water Treatment Plant, improvements to the
Glendale Water Treatment Plant, as well as other improvements required by the
federal Safe Drinking Water Act. The application was updated in December to
request a $13.7 million (or 30%) increase. Hearings began in January 1998, with
rates effective in April 1998.
CALIFORNIA PROCEEDINGS
- ----------------------
As a result of the termination of a 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 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.
27
NOTE 3. EARNINGS PER SHARE
SPR adopted SFAS No. 128, "Earnings Per Share" for the period ended
December 31, 1997. This pronouncement supersedes APB Opinion No. 15, "Earnings
Per Share" and establishes new standards for computing and presenting EPS.
Previously reported primary and fully diluted EPS are replaced with basic and
diluted EPS. The difference between Basic EPS and Diluted EPS is due to common
stock equivalent shares resulting from stock options, employee stock purchase
plan, performance shares and a non-employee director stock plan. Common stock
equivalents were determined using the treasury stock method. Prior period EPS
have been restated to conform with the new statement.
The following provides a reconciliation of Basic EPS and Diluted EPS.
1997 1996 1995
----------- ----------- -----------
Basic EPS
Numerator
---------
Income available to common
stockholders ($000) $ 74,445 $ 66,879 $ 58,039
----------- ----------- -----------
Denominator
-----------
Weighted average number of
shares outstanding 30,879,696 30,495,224 29,754,978
Per-Share Amount $ 2.41 $ 2.19 $ 1.95
---------------- =========== =========== ===========
Diluted EPS
Numerator
---------
Income available to common
stockholders ($000) $ 74,445 $ 66,879 $ 58,039
----------- ----------- -----------
Denominator
-----------
Weighted average number of
shares outstanding before
dilution 30,879,696 30,495,224 29,754,978
Stock options 38,058 18,245 6,461
Executive long term incentive
plan - performance shares 36,696 13,911 6,364
Non-employee stock plan 5,573 4,176 3,143
Employee stock purchase plan 3,341 2,019 2,784
----------- ----------- -----------
30,963,364 30,533,575 29,773,730
----------- ----------- -----------
Per-Share Amount $ 2.40 $ 2.19 $ 1.95
---------------- =========== =========== ===========
28
NOTE 4. OTHER PROPERTY
Other property consisted of (dollars in thousands):
December 31,
1997 1996
-------- --------
Investment in TGPC $16,737 $17,639
Investment in Pinon
Pine Gasifier 24,863 19,143
Real Estate - net 2,560 3,229
Other 5,454 3,468
------- -------
$49,614 $43,479
======= =======
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 the
jointly-owned electric utility plant at December 31, 1997 (dollars in
thousands):
Electric Accumulated Construction
MW Plant Provision For Work In
Plant Capacity In Service Depreciation Progress
-------- -------- ---------- ------------- ------------
Valmy #1 129 $127,520 $49,642 $173
Valmy #2 137 $153,917 $48,850 $592
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. These tax credits will expire on
June 30, 1998. 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.
SPPC has a funding agreement 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, 1997, the DOE has funded
$138.5 million (including O&M expenses).
29
Total capital costs for the Pinon Pine Power Project are now estimated to be
$298.7 million. The LLC capital investment is capped at $46 million, DOE capital
contributions are estimated at $131.8 million and SPPC capital investment is
estimated at $120.9 million exclusive of it's share of the LLC investment.
SPPC must satisfy certain performance requirements as part of the
construction agreement with the LLC. The initial performance warranty required
that the gasifier attain an average capacity factor of 30% during 1997,
regardless of delays in the in-service date. Since the gasifier was not in
service in 1997, the certain performance warranties required by the contract
were not met. Consequently, SPPC has reserved $2.8 million as satisfaction of
the performance obligation. If the average capacity factor falls below 70% for
1998, SPPC is required to pay to the LLC lost revenues as a result of the actual
average capacity factor achieved compared to the 70% average capacity factor
required by the contract. If contracted performance levels are not met during
1998, SPPC may be required to refinance GECC's investment in the LLC. Under the
terms of the LLC agreements, GECC would be reimbursed for capital invested plus
a return on capital. If the Company is required to buyout GECC, it is estimated
that the total payment would be approximately $30 million.
NOTE 6. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
As of December 31, 1997, 1,925,834 shares of common stock were
reserved for issuance under the Common Stock Investment Plan (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 SPR common shares to key employees of SPPC through December 30,
2003. This plan permits grants, separately or in combination: for nonqualified
and qualified stock options; stock appreciation rights; restricted stock;
performance units; performance shares and bonus stock. SPPC 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 SPR 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 SPR's
outside directors' annual retainer be paid in SPR common stock. SPR 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 SPR 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 SPR.
30
The changes in common stock and additional paid-in capital for 1997,
1996 and 1995 are as follows (dollars in thousands):
Shares Issued Amount
------------- ------------------
1997 1996 1995 1997 1996 1995
-------- ------- ------- ------- -------- --------
Public Sale 0 517,900 290,900 $ 0 $12,870 $ 6,037
CSIP/DRP 50,633 238,403 298,704 1,419 5,985 6,373
ESPP, ESOP, and Other 48,833 25,120 39,590 986 558 635
------ ------- ------- ------ ------- -------
99,466 781,423 629,194 $2,405 $19,413 $13,045
====== ======= ======= ====== ======= =======
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.
Shares Issued Amount
-------------------------- -----------------------
1997 1996 1995 1997 1996 1995
------------- --------- --------- --------- --------- --------
(dollars in thousands)
Not subject to mandatory
redemption:
Series A 80,500 80,500 80,500 $ 4,025 $ 4,025 $ 4,025
Series B 82,000 82,000 82,000 4,100 4,100 4,100
Series C 299,800 299,800 299,800 14,990 14,990 14,990
Class A Series I 2,000,000 2,000,000 2,000,000 50,000 50,000 50,000
--------- --------- --------- -------- -------- -------
Subtotal 2,462,300 2,462,300 2,462,300 73,115 73,115 73,115
Subject to mandatory
redemption:
Series G - - 408,000 - - 20,400
Preferred securities of
Sierra Pacific Power
Capital I 1,940,000 1,940,000 - 48,500 48,500 -
--------------------------------- -------------------------------
Total 4,402,300 4,402,300 2,870,300 $121,615 $121,615 $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 issuance of the Preferred Securities described below:
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
31
(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, 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 SPPC
indenture under which the first mortgage bonds are issued.
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.
In 1996, SPPC issued $80 million principal amount of collateralized
Medium-Term Notes, Series C, consisting of ten year non-callable notes, due in
2006, with interest rates ranging from 6.62% to 6.83% and three year non-
callable 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
32
proceeds to SPPC from the sales of the notes were used to reduce short-term debt
and were used to 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. As of December 31, 1997, SPPC had
not yet issued these securities.
On April 1, 1997, SPR redeemed $10 million of senior notes Series B
leaving a remaining balance of $30 million, of which $10 million has been
included in the current liability portion of the consolidated balance sheets.
These senior notes, Series C through E, are due in 1998 through 2000.
On June 30, 1997, SPPC redeemed $15 million 6.5% First Mortgage Bonds
which had been included in the current liability portion of the consolidated
balance sheets.
SPPC's aggregate annual amount of maturities for long-term debt for
the next five years is shown below (dollars in thousands):
1998 $10,600
1999 40,600
2000 10,400
2001 300
2002 200
33
NOTE 9. TAXES
The following reflects the composition of taxes on income (dollars in
thousands):
1997 1996 1995
-------- -------- --------
Federal:
Taxes estimated to be currently
Payable $38,854 $28,986 $38,469
Deferred taxes related to:
Excess of tax depreciation over
book depreciation 3,997 5,217 9,237
Deferral of energy costs
deducted currently for tax
purposes-net (3) (307) (4,112)
Contributions in aid of
construction and customer
advances (3,966) (2,917) (1,798)
Avoided interest capitalized (1,578) (3,124) (569)
Costs of abandoned merger 301 4,359 (776)
Other-net 711 3,382 (2,854)
Net amortization of investment tax
credit (1,962) (1,961) (1,942)
State (California) 801 754 688
------------------------------
Total $37,155 $34,389 $36,343
==============================
As Reflected in Statements of Income:
Federal income taxes 37,866 34,872 35,886
State income taxes 801 754 688
------------------------------
Operating Income 38,667 35,626 36,574
Other income-net (1,512) (1,237) (231)
------------------------------
Total $37,155 $34,389 $36,343
==============================
34
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):
1997 1996 1995
--------------------------------
Income before preferred dividends $ 79,904 $ 73,179 $ 65,413
Total income tax expense 37,155 34,389 36,343
--------------------------------
117,059 107,568 101,756
Statutory tax rate 35% 35% 35%
--------------------------------
Expected income tax expense 40,971 37,649 35,615
Depreciation related to difference
in cost basis for tax purposes 1,591 2,456 2,394
Allowance for funds used during
construction - equity (1,912) (1,831) (540)
Tax benefit from the disposition
of assets (569) (1,130) (1,427)
ITC amortization (1,962) (1,961) (1,942)
Other-net (964) (794) 2,243
--------------------------------
$ 37,155 $ 34,389 $ 36,343
================================
Effective tax rate 31.7% 32.0% 35.7%
================================
ACCUMULATED DEFERRED FEDERAL INCOME TAXES
- -----------------------------------------
The net accumulated deferred federal income tax liability consists of
accumulated deferred federal income tax liabilities less related accumulated
deferred federal income tax assets, as shown (dollars in thousands):
1997 1996 1995
-------- -------- --------
Accumulated Deferred Federal
Income Tax Liabilities:
AFUDC $ 7,174 $ 5,745 $ 4,459
Bond redemptions 6,423 6,690 7,184
Excess of tax depreciation over
book depreciation 154,240 142,447 136,067
Tax benefits flowed through
to customers 66,563 67,667 69,610
Other 9,380 10,120 5,731
-------------------------------
Total 243,780 232,669 223,051
-------------------------------
Accumulated Deferred Federal
Income Tax Assets:
Avoided interest capitalized 13,819 12,241 9,117
Contributions in aid of
construction and customer advances 30,697 25,980 23,102
Unamortized investment tax credit 21,471 22,527 23,583
Other 12,717 7,722 7,949
-------------------------------
Total 78,704 68,470 63,751
-------------------------------
Accumulated Deferred Federal Income Taxes $165,076 $164,199 $159,300
===============================
35
SPR's balance sheets contain a net regulatory tax asset of $25.8
million at year-end 1997 and $24.8 million at year-end 1996. The net regulatory
asset consists of future revenue to be received from customers (a regulatory tax
asset) of $66.6 million at year-end 1997 and $67.7 million at year-end 1996, due
to 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 $19.3 million at year-end 1997 and $20.3 million at
year-end 1996, due to temporary differences which arose from liberalized
depreciation at tax rates which were in excess of current tax rates, and $21.5
million at year-end 1997 and $22.5 million at year-end 1996 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.
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The December 31, 1997 carrying amount 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 SPR's consolidated long-term debt at December
31, 1997, is estimated to be $660.6 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 $649.8 million at
December 31, 1996.
NOTE 11. SHORT-TERM BORROWINGS
SPR has a $10 million revolving credit facility with Barclays Bank.
This credit facility has been extended until April 26, 1998. There is currently
no outstanding balance.
In 1995, SPPC replaced its lines-of-credit arrangements with an $80
million revolving credit facility, which expired on December 29, 1997. At that
time, SPPC replaced this line with various credit facilities totaling $100
million. As of January 29, 1998, SPPC revised its credit facilities resulting
in a $150 million credit facility for the Alturas project and a $50 million
revolving credit facility. SPPC pays the lender a facility fee on the
commitment quarterly, in arrears, based on SPPC's First Mortgage Bond rating.
Facility fees for 1997 and 1996 were approximately $101,000 for each year.
At December 31, 1997, SPPC's short-term borrowings of $75.0 million
were comprised entirely of commercial paper at an average interest rate of
6.12%. At December 31, 1996, SPPC had $38.0 million of commercial paper at an
average interest rate of 5.65%.
The other subsidiaries of SPR have no outstanding short-term
borrowings at this time.
36
NOTE 12. DIVIDEND RESTRICTIONS
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. Accordingly, SPR'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 $78.7 million of SPPC's
retained earnings were available at December 31, 1997, for the payment of cash
dividends to SPR. As of December 31, 1997, SPR had consolidated retained
earnings of approximately $147.9 million available for the payment of cash
dividends on SPR's common stock.
NOTE 13. RETIREMENT PLAN
SPPC 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.
Beginning in 1998, plan provisions applicable to employees covered by
the collective bargaining agreement were amended to recognize additional
compensation as pensionable pay and to reduce the penalty for retirement before
age 62.
SPPC'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 SPR common or SPPC preferred stock.
In April 1995, SPPC offered an early retirement plan to non-bargaining
unit employees age 50 and older with at least 15 years of credited service as of
January 1, 1996 and 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 amortizing 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.
37
The following table sets forth a reconciliation of the funded status
of the plan with amounts included in SPR's consolidated balance sheets as of
December 31, 1997 and 1996 (dollars in thousands):
1997 1996
---------- ----------
Actuarial present value of benefit
Obligations:
Vested benefit obligation $ 134,237 $ 118,383
========= =========
Accumulated benefit obligation $ 142,572 $ 125,547
========= =========
Projected benefit obligation $ 180,921 $ 157,660
Less plan assets at fair value (190,535) (167,416)
--------- ---------
Projected benefit obligation (less
than) in Excess of plan assets (9,614) (9,756)
Unrecognized net gain 35,379 26,661
Unrecognized prior service cost (9,419) (4,251)
--------- ---------
Net balance sheet liability $ 16,346 $ 12,654
========= =========
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.
Net periodic pension expense for 1997, 1996 and 1995 included the
following components (dollars in thousands):
1997 1996 1995
--------- --------- ---------
Service cost $ 5,825 $ 6,652 $ 6,320
Interest cost 11,920 11,778 10,380
Actual gain on plan assets (31,617) (19,954) (33,248)
Net amortizations and deferrals 17,564 7,736 23,518
Costs associated with 1995
early retirement plan - - 12,825
--------- --------- ---------
Net periodic pension cost as
Determined under SFAS No. 87 3,692 6,212 19,795
Amount expensed (deferred) under
SFAS No. 71 - net 2,599 3,882 (11,509)
--------- --------- ---------
Net periodic pension expense
Recognized $ 6,291 $ 10,094 $ 8,286
========= ========= =========
Amount charged to operating expense $ 4,188 $ 6,769 $ 5,416
========= ========= =========
Amount charged to utility plant
and clearing accounts $ 2,103 $ 3,325 $ 2,870
========= ========= =========
In the preceding table, 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.
38
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
PUCN 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):
1997 1996 1995
------- ------- ----------
SFAS No. 88 costs associated with
the 1995 early retirement program $ - $ - $(12,825)
Amortization of 1995 early
Retirement program 1,283 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 $2,599 $3,882 $(11,509)
====== ====== ========
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation as of December 31, 1997, 1996
and 1995 was 7.25%, 7.50% and 7.00% respectively. The assumed compensation
increase rate used for the same periods was 5.00% for all years. For purposes
of determining 1997, 1996 and 1995 pension cost, the expected long-term rate of
return on assets was 8.50%, 8.50% and 9.00% respectively. Additionally, the
projected benefit obligation as of December 31, 1997 reflects the adoption of
the 1994 Group Annuity Generational Mortality Table.
In addition to the employee retirement plan covering all employees,
SPPC has a Supplemental Executive Retirement Plan which is a non-qualified
defined benefit plan under which SPPC will pay out of general assets
supplemental pension benefits to key executives. SPPC also has a non-qualified
supplemental pension plan covering certain employees. This plan provides for
incremental pension payments from SPPC's funds so that total pension payments
equal amounts that would have been payable from SPPC'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, 1997 and 1996 was $5.2 million
and $4.9 million, respectively.
NOTE 14. POSTRETIREMENT BENEFITS
SPPC 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.
For management, professional and administrative employees 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.
39
Beginning in 1998, plan provisions applicable to employees covered by
the collective bargaining agreement were amended. Retiree contributions were
increased to a minimum of 20% plus an additional amount for each year of service
fewer than 20. Also, the plan introduced a managed care option for future
retirees.
SPPC'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 SPR common or SPPC 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, 1997 and 1996 (dollars in thousands):
1997 1996
-------- --------
Accumulated postretirement benefit obligation:
Retirees $ 32,920 $ 37,941
Fully eligible active participants 6,056 6,227
Other active plan participants 26,507 29,358
-------- --------
Total 65,483 73,526
Less plan assets at fair value (39,326) (32,944)
-------- --------
Accumulated postretirement benefit obligation
in excess of plan assets 26,157 40,582
Unrecognized prior service cost 0 (415)
Unrecognized net gain 20,837 8,562
Unrecognized transition obligation (33,818) (39,419)
-------- --------
Net balance sheet liability $ 13,176 $ 9,310
======== ========
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.
40
Net periodic postretirement benefit expense for 1997, 1996 and 1995
included the following components (dollars in thousands):
1997 1996 1995
-------- -------- -------
Service cost $ 2,440 2,587 $ 2,448
Interest cost 5,597 5,269 4,479
Actual gain on plan assets (4,996) (1,942) (3,891)
Net amortizations and deferrals 2,030 (94) 2,111
Amortization of transition
Obligation over 20 years 2,464 2,464 2,838
Costs associated with 1995 early
Retirement plan - - 8,047
-------- -------- -------
Net periodic postretirement benefit
cost determined under SFAS No. 106 7,535 8,284 16,032
Amount expensed (deferred) under
SFAS No. 71 - net 805 2,044 (7,086)
-------- -------- -------
Net periodic postretirement expense
recognized $ 8,340 $10,328 $ 8,946
======== ======== =======
Amount charged to operating expense $ 5,547 $ 6,903 $ 6,108
======== ======== =======
Amount charged to utility plant and
clearing accounts $ 2,793 $ 3,425 $ 2,838
======== ======== =======
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 No. 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.
41
The following schedule summarizes the amortization of the deferred
costs (dollars in thousands):
1997 1996 1995
-------- -------- -------
SFAS No. 106 costs deferred $ - $ - $(8,047)
Amortization of 1995 early
retirement program 805 1,610 -
Amortization of 1993 deferred costs - 434 961
-------- -------- -------
Net amount expensed (deferred) under
SFAS No. 71 $ 805 $ 2,044 $(7,086)
======== ======== =======
For measurement purposes, SPPC used a discount rate for obligations as
of December 31, 1997, 1996 and 1995 of 7.25%, 7.50% and 7.00% respectively. The
expected long-term return on assets was 8.50%, 8.50% and 9.00% for the same
periods, respectively. For 1996 and 1995 the company used a graduated medical
trend rate assumption with initial rates of 11.25% and 11.75%, respectively.
This medical trend rate declined by 0.50% over the next ten years to an ultimate
rate of 5.75% in 2007, remaining at that level thereafter. The obligation
valuation as of December 31, 1997 reflects the change to a constant medical
trend rate of 6.00% for each year as well as the adoption of the 1994 Group
Annuity Generational Mortality Table.
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, 1997 by $11.4 million and
the aggregate of the service and interest cost component of net periodic
postretirement benefit cost for the year then ended by $1.5 million.
NOTE 15. POSTEMPLOYMENT BENEFITS
During 1995, SPPC 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. SPPC began amortizing these
costs during 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, 1997 or 1996.
NOTE 16. COMMITMENTS AND CONTINGENCIES
SPPC's estimated cash construction expenditures for the year 1998 and
the five-year period 1998-2002 are $151.1 million and $571.1 million,
respectively.
42
Several of SPR's and SPPC's purchased power, gas supply and pipeline
capacity, and coal supply contracts contain minimum volume provisions, which
SPPC is either meeting or exceeding. SPR and SPPC anticipate continuing to meet
or exceed them in the future. Estimated future commitments under non-cancelable
agreements with initial terms of one year or more at December 31, 1997 were as
follows (dollars in thousands):
1998 $170,700
1999 148,900
2000 104,900
2001 83,800
2002 82,300
After 2002 to 2009 279,300
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 $5.4 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 $7.4
million in 1997, $8.2 million in 1996 and $8.0 million in 1995.
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, 1997 were as follows
(dollars in thousands):
1998 $ 8,000
1999 7,200
2000 6,800
2001 6,300
2002 5,800
After 2002 to 2018 46,000
-------
Total $80,100
=======
SPR and SPPC have no material capital lease commitments.
See Notes 1, 5, 7 and 13 of SPR's consolidated financial statements
for additional commitments and contingencies.
43
NOTE 17. SEGMENT INFORMATION
Information related to the segments of SPR's business is detailed
below (dollars in thousands):
December 31, 1997 Electric Gas Water Other Total
- -------------------------- ----------- --------- --------- ---------- -----------
Operating Revenues $ 540,346 $ 70,675 $ 46,519 $ 5,703 $ 663,243
========== ======== ======== ======== ==========
Operating Income $ 99,671 $ 10,057 $ 10,444 $ (1,545) $ 118,627
========== ======== ======== ======== ==========
Depreciation $ 52,239 $ 4,531 $ 7,347 - $ 64,117
========== ======== ======== ======== ==========
Capital Expenditures $ 105,531 $ 12,191 $ 30,079 - $ 147,801
========== ======== ======== ======== ==========
Identifiable Assets:
Net Utility Plant $1,228,872 $111,606 $260,337 - $1,600,815
Other $ 152,877 $ 15,524 $ 12,945 $ 20,496 $ 201,842
Other Utility Assets - - - $130,081 $ 130,081
Other Corporate Assets - - - $ 3,142 $ 3,142
---------- -------- -------- -------- ----------
Total Assets $1,381,749 $127,130 $273,282 $153,719 $1,935,880
========== ======== ======== ======== ==========
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 $1,183,727 $104,427 $256,160 - $1,544,314
Other $ 140,852 $ 13,270 $ 12,653 $ 24,021 $ 190,796
Other Utility Assets - - - $131,539 $ 131,539
Other Corporate Assets - - - $ 2,705 $ 2,705
---------- -------- -------- -------- ----------
Total Assets $1,324,579 $117,697 $268,813 $158,265 $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 $ 25,791 $ 191,411
Other Utility Assets - - - $151,397 $ 151,397
Other Corporate Assets - - - $ 1,018 $ 1,018
---------- -------- -------- -------- ----------
Total Assets $1,222,518 $109,872 $246,031 $178,206 $1,756,627
========== ======== ======== ======== ==========
44
NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following figures are unaudited and include all adjustments
necessary in the opinion of management for a fair presentation of the results of
interim periods (dollars in thousands except per share amounts):
Quarter Ended
-------------
Mar. 31, June 30, Sept 30, Dec. 31,
1997 1997 1997 1997
---------- -------- -------- ---------
Operating Revenues $173,313 $156,720 $160,875 $172,335
======== ======== ======== ========
Operating Income $ 30,917 $ 27,245 $ 29,033 $ 31,432
======== ======== ======== ========
Net Income $ 20,833 $ 15,484 $ 18,158 $ 19,970
======== ======== ======== ========
Net Income per share - Basic $ .68 $ .50 $ .59 $ .64
======== ======== ======== ========
- Diluted $ .68 $ .50 $ .59 $ .63
======== ======== ======== ========
Quarter Ended
-------------
Mar. 31, June 30, Sept 30, Dec. 31,
1996 1996 1996 1996 (1)
-------- -------- -------- --------
Operating Revenues $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 - Basic $ .59 $ .49 $ 72 $ .39
======== ======== ======== ========
- Diluted $ .59 $ .49 $ .72 $ .39
======== ======== ======== ========
(1) Reflects $13 million Nevada electric revenue refund.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
45
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 "Solicitation of Proxies" 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.
CHANGE IN CONTROL AGREEMENT
---------------------------
SPR has entered into severance agreements with all of the executive
officers identified in Item 11, including the individuals named in the Summary
Compensation Table, and two other senior executives of SPPC who are not
officers. These agreements provide that, upon termination of the executive's
employment within twenty-four months following a change in control of SPR (as
defined in the agreements) either (a) by SPR for reasons other than cause (as
defined in the agreements), death or disability, or (b) by the executive for
good reason (as defined by the agreement, including a diminution of
responsibilities, compensation, or benefits (unless, with respect to reduction
in salary or benefits, such reduction is applicable to all senior executives of
SPR and the acquirer), the executive will receive certain payments and benefits.
These severance payments and benefits include (i) a lump sum payment equal to
three times the sum of the executive's base salary and target bonus, (ii) a lump
sum payment equal to the present
46
value of the benefits the executive would have received had be continued to
participate in SPPC's retirement plans for an additional three years (or, in the
case of SPPC's Supplemental Executive Retirement Plan only, the greater of three
years or the period from the date of termination until the executive's early
retirement date, as defined in such plan), and (iii) continuation of life,
disability, accident and health insurance benefits for a period of thirty-six
months immediately following termination of employment. The agreements also
provide that if any compensation paid, or benefit provided, to the executive,
whether or not pursuant to the severance agreements, would be subject to the
federal excise tax on "excess parachute payments," payments and benefits
provided pursuant to the agreement will be cut back to the largest amount that
would not be subject to such excise tax, if such cutback results in a higher
after-tax payment to the executive.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
Page
----
1. Financial Statements:
Reports of Independent Accountants...................................... 15, 16
Consolidated Balance Sheets as of
December 31, 1997 and 1996............................................ 17
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995................................ 18
Consolidated Statements of Common Shareholder's Equity
for the Years Ended December 31, 1997, 1996 and 1995.................. 19
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995.......................... 20
Consolidated Statements of Capitalization as of
December 31, 1997 and 1996............................................ 21
Notes to Consolidated Financial Statements.............................. 22-44
All other schedules have been omitted because they are not
required or are not applicable, or the required information is shown in the
financial statements or notes thereto. Columns omitted from schedules have
been omitted because the information is not applicable.
3. Exhibits:
Exhibits are listed in the Exhibit Index on pages 48-49.
47
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/ Malyn K. Malquist
----------------------
Malyn K. Malquist
Chairman, President and Chief Executive Officer
March 23, 1998
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 23th day of March, 1998.
/S/ Malyn K. Malquist /S/ Mark A. Ruelle
------------------------------- ----------------------------------
Malyn K. Malquist Mark A. Ruelle
Chairman, President, and Chief Executive Senior Vice President,
Officer Chief Financial Officer and
(Principal Executive Officer and Director) Treasurer
(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
48
(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,
1997, 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, Tuscarora Gas Pipeline Company and
Sierra Water Development 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 Sierra Pacific Resources
dated October 5, 1990 (Filed with the 1993 Form 10-K)
. By-laws of SPR as amended to December 7, 1993 (Filed with the
1993 Form 10-K)
(10) . Note Purchase Agreement, dated as of April 20, 1993, with
respect to the private placement of $50 million in senior notes
(Filed with the 1993 Form 10-K)
. Sierra Pacific Resources Executive Long-Term Incentive Plan
effective as of January 1, 1994 (Filed with the 1994 Form 10-K)
*(A)
Change in Control Agreement dated February 18, 1997 by and
among Sierra Pacific Resources and the following officers
(individually): Gerald W. Canning, Jeffrey L. Ceccarelli, Randy
G. Harris, Walter M. Higgins, Malyn K. Malquist, Lynn M.
Miller, Steven C. Oldham, Victor H. Pena, William E. Peterson,
Mark A. Ruelle, Mary O. Simmons, and Mary Jane Willier (Filed
as Exhibit (10)(A) with Sierra Pacific Power Company's 1997
Form 10-K)
(12)
*(A)
Calculation of Pre-Tax Interest Coverages for the Periods 1997, 1996,
and 1995.
(21) . Sierra Pacific Power Company, a Nevada Corporation.
Lands of Sierra, Inc., a Nevada Corporation.
Sierra Energy Corporation, a Nevada Corporation.
Tuscarora Gas Pipeline Company, a Nevada Corporation.
Sierra Water Development Company, a Nevada Corporation.
49
(23)
*(A) Consent of Independent Accountants in connection with the
Company's Registration Statements Nos. 333-4374 (Common Stock
Investment Plan) on Form S-3, and Nos. 2-92454 (Employees'
Stock Ownership Plan), 33-87646 (Executive Long-Term Incentive
Plan), and 33-48152 (Non-Employee Director Stock Plan) on Forms
S-8.
(27)
*(A)
The Financial Data Schedule containing summary financial
information extracted from the consolidated financial
statements filed on Form 10-K for the twelve month period
ending December 31, 1997.
50