================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A2
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 89520-3150 (89511)
(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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The undersigned registrant hereby amends its Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 by revising Part II Item 8 with the
following two changes. The section has been revised to include a signed audit
report. Also, the Consolidated Statements of Cash Flows have been revised to
delete the item "Non cash charges to utility plant".
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIERRA PACIFIC RESOURCES
By: /s/ Mark A. Ruelle
------------------------------
Mark A. Ruelle
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
Date: August 25, 1998
2
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
14
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.
DELOITTE & TOUCHE
Reno, Nevada
January 30, 1998
15
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
16
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 depreciation 664,490 606,406
---------- ----------
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 property, net 49,614 43,479
---------- ----------
Current Assets:
Cash and cash equivalents 8,901 4,949
Accounts receivable less provision for
Uncollectible accounts: 1997-$1,704; 1996-$2,196 103,356 94,736
Materials, supplies and fuel, at average cost 25,255 27,586
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.
17
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 construction 5,723 5,231 1,245
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
Preferred Securities 84,075 74,928 65,413
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 Outstanding 30,879,696 30,495,224 29,754,978
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.
18
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.
19
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 (136,987) (193,635) (139,138)
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.
20
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.
21
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
22
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.
23
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.
24
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
25
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.
26
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
---------------- ==================== ==================== ====================
27
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). Total capital costs for the Pinon Pine Power
Project are now estimated to be $298.7 million. The
28
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.
29
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 (the Trust
Securities) represent undivided beneficial ownership interests in the assets of
the
30
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 proceeds to SPPC
from the sales of the notes were used to reduce short-term debt and were used to
fund construction projects.
31
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
32
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
=========================================================
33
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
=======================================================
34
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.
35
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.
36
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.
37
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.
38
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.
39
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 2,464 2,464 2,838
Obligation over 20 years
Costs associated with 1995 early - - 8,047
Retirement plan
------------------- ------------------- ---------------
Net periodic postretirement benefit 7,535 8,284 16,032
cost determined under SFAS No. 106
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.
40
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.
41
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.
42
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
========== ======== ======== ======== ==========
43
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.
44