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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Registrant, State of Incorporation, Address of
Commission File Principal Executive Offices and Telephone I.R.S. employer
Number Number Identification Number
1-8788 SIERRA PACIFIC RESOURCES 88-0198358
P.O. Box 10100
(6100 Neil Road)
Reno, Nevada 89520-0400 (89511)
(775) 834-4011
1-4698 NEVADA POWER COMPANY 88-0045330
6226 West Sahara Avenue
Las Vegas, Nevada 89146
(702) 367-5000
0-508 SIERRA PACIFIC POWER COMPANY 88-0044418
P.O. Box 10100
(6100 Neil Road)
Reno, Nevada 89520-0400 (89511)
(775) 834-4011
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
Class Outstanding at May 9, 2002
Common Stock, $1.00 par value 102,110,536 Shares
of Sierra Pacific Resources
Sierra Pacific Resources is the sole holder of the 1,000 shares of outstanding
Common Stock, $1.00 stated value, of Nevada Power Company.
Sierra Pacific Resources is the sole holder of the 1,000 shares of outstanding
Common Stock, $3.75 stated value, of Sierra Pacific Power Company.
This combined Quarterly Report on Form 10-Q is separately filed by Sierra
Pacific Resources, Nevada Power Company and Sierra Pacific Power Company.
Information contained in this document relating to Nevada Power Company is filed
by Sierra Pacific Resources and separately by Nevada Power Company on its own
behalf. Nevada Power Company makes no representation as to information relating
to Sierra Pacific Resources or its subsidiaries, except as it may relate to
Nevada Power Company. Information contained in this document relating to Sierra
Pacific Power Company is filed by Sierra Pacific Resources and separately by
Sierra Pacific Power Company on its own behalf. Sierra Pacific Power Company
makes no representation as to information relating to Sierra Pacific Resources
or its subsidiaries, except as it may relate to Sierra Pacific Power Company.
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SIERRA PACIFIC RESOURCES
NEVADA POWER COMPANY
SIERRA PACIFIC POWER COMPANY
QUARTERLY REPORTS ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2002
CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIERRA PACIFIC RESOURCES -
Condensed Consolidated Balance Sheets - March 31, 2002 and December 31, 2001............................... 3
Condensed Consolidated Statements of Operations - Three Months
Ended March 31, 2002 and 2001......................................................................... 4
Condensed Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2002 and 2001.......................................................................... 5
NEVADA POWER COMPANY -
Condensed Balance Sheets - March 31, 2002 and December 31, 2001.............................................. 6
Condensed Statements of Operations - Three Months Ended March 31, 2002 and 2001.............................. 7
Condensed Statements of Cash Flows - Three Months Ended March 31, 2002 and 2001.............................. 8
SIERRA PACIFIC POWER COMPANY -
Condensed Consolidated Balance Sheets - March 31, 2002 and December 31, 2001................................. 9
Condensed Consolidated Statements of Operations - Three Months
Ended March 31, 2002 and 2001.......................................................................... 10
Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2002 and 2001................. 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS................................................................. 12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 24
Sierra Pacific Resources Results of Operations......................................................... 28
Nevada Power Company Results of Operations............................................................. 31
Sierra Pacific Power Company Results of Operations..................................................... 36
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk................................................... 44
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings............................................................................................ 45
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................................... 45
ITEM 5. Other Information............................................................................................ 45
ITEM 6. Exhibits and Reports on Form 8-K............................................................................. 45
Signature Page.............................................................................................................. 46
2
SIERRA PACIFIC RESOURCES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) (UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
ASSETS
Utility Plant at Original Cost:
Plant in service $ 5,732,135 $ 5,683,296
Less: accumulated provision for depreciation 1,823,469 1,777,517
----------- -----------
3,908,666 3,905,779
Construction work-in-progress 224,465 203,456
----------- -----------
4,133,131 4,109,235
----------- -----------
Investments in subsidiaries and other property, net 129,708 128,892
----------- -----------
Current Assets:
Cash and cash equivalents 198,821 99,109
Accounts receivable less provision for uncollectible accounts:
2002-$41,432; 2001-$39,335 339,285 394,489
Deferred energy costs - electric 171,637 333,062
Deferred energy costs - gas 19,805 19,805
Income tax receivable 103,558 18,590
Materials, supplies and fuel, at average cost 95,329 94,167
Risk management assets (Note 10) 262,673 286,509
Other 16,328 14,071
----------- -----------
1,207,436 1,259,802
----------- -----------
Deferred Charges:
Goodwill 312,145 312,145
Deferred energy costs - electric 589,489 854,778
Deferred energy costs - gas 15,863 23,248
Income tax receivable 304,013 355,659
Regulatory tax asset 168,275 169,738
Other regulatory assets 106,586 102,959
Risk management assets (Note 10) 31,551 61,058
Risk management regulatory assets - net (Note 10) 516,722 664,383
Other 136,184 139,417
----------- -----------
2,180,828 2,683,385
----------- -----------
$ 7,651,103 $ 8,181,314
=========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholders' equity $ 1,377,650 $ 1,702,322
Accumulated other comprehensive loss (Note 10) (5,807) (6,986)
Preferred stock 50,000 50,000
SPPC/ NPC obligated mandatorily redeemable preferred trust securities 188,872 188,872
Long-term debt 3,372,758 3,376,105
----------- -----------
4,983,473 5,310,313
----------- -----------
Current Liabilities:
Short-term borrowings 246,672 177,000
Current maturities of long-term debt 121,895 122,010
Accounts payable 208,891 265,250
Accrued interest 73,067 37,565
Dividends declared 1,057 1,045
Accrued salaries and benefits 20,712 30,145
Deferred taxes on deferred energy costs 66,880 123,503
Risk management liabilities (Note 10) 690,813 855,301
Other current liabilities 20,721 15,678
----------- -----------
1,450,708 1,627,497
----------- -----------
Commitments & Contingencies (Note 11)
Deferred Credits:
Deferred federal income taxes 515,421 412,658
Deferred investment tax credit 51,084 51,947
Deferred taxes on deferred energy costs 212,246 307,309
Regulatory tax liability 51,480 46,702
Customer advances for construction 107,604 108,179
Accrued retirement benefits 88,488 82,624
Risk management liabilities (Note 10) 123,017 163,636
Other 67,582 70,449
----------- -----------
1,216,922 1,243,504
----------- -----------
$ 7,651,103 $ 8,181,314
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
SIERRA PACIFIC RESOURCES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three months ended
March 31,
-----------------------------------
2002 2001
------------- -------------
OPERATING REVENUES:
Electric $ 580,569 $ 639,450
Gas 55,083 64,165
Other 2,755 2,630
------------- -------------
638,407 706,245
------------- -------------
OPERATING EXPENSES:
Operation:
Purchased power 281,483 352,808
Fuel for power generation 130,773 186,225
Gas purchased for resale 38,594 70,543
Deferred energy costs disallowed 434,123 --
Deferral of energy costs - electric - net (14,241) 18,329
Deferral of energy costs - gas - net 8,192 (18,144)
Other 72,030 104,299
Maintenance 16,907 18,304
Depreciation and amortization 48,199 39,033
Taxes:
Income taxes (158,617) (45,276)
Other than income 11,715 10,611
------------- -------------
869,158 736,732
------------- -------------
OPERATING LOSS (230,751) (30,487)
------------- -------------
OTHER INCOME:
Allowance for other funds used during construction 657 (536)
Other income (expense) - net (7,127) 1,269
------------- -------------
(6,470) 733
------------- -------------
Total Loss Before Interest Charges (237,221) (29,754)
------------- -------------
INTEREST CHARGES:
Long-term debt 58,800 40,222
Other 4,630 7,882
Allowance for borrowed funds used during construction and
capitalized interest (1,503) 398
------------- -------------
61,927 48,502
------------- -------------
LOSS BEFORE SPPC/NPC OBLIGATED MANDATORILY
REDEEMABLE PREFERRED TRUST SECURITIES (299,148) (78,256)
Preferred dividend requirements of SPPC/NPC obligated
mandatorily redeemable preferred trust securities 3,793 4,729
------------- -------------
LOSS BEFORE PREFERRED STOCK DIVIDENDS (302,941) (82,985)
Preferred stock dividend requirements of subsidiary 975 875
------------- -------------
LOSS FROM CONTINUING OPERATIONS (303,916) (83,860)
------------- -------------
DISCONTINUED OPERATIONS:
Income from operations of water business disposed of (net of income taxes of
$0 and $478 in 2002 and 2001, respectively) -- 381
------------- -------------
NET LOSS $ (303,916) $ (83,479)
============= =============
Loss per share - Basic and Diluted
Loss from continuing operations $ (2.98) $ (1.07)
Income from discontinued operations -- 0.01
------------- -------------
Net loss $ (2.98) $ (1.06)
============= =============
Weighted Average Shares of Common Stock Outstanding 102,110,536 78,475,217
============= =============
Dividends Paid Per Share of Common Stock $ 0.20 $ 0.25
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
SIERRA PACIFIC RESOURCES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) (Unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations before preferred dividends $ (302,941) $ (82,985)
Income from discontinued operations before preferred dividends -- 481
Non-cash items included in income:
Depreciation and amortization 48,199 40,984
Deferred taxes and deferred investment tax credit (4,713) 4,097
AFUDC and capitalized interest 537 974
Amortization of deferred energy costs 6,404 --
Write-off of deferred energy costs (net of taxes) 282,181 --
Early retirement and severance amortization 752 863
Other non-cash (3,976) 6,251
Changes in certain assets and liabilities:
Accounts receivable 55,204 (61,627)
Deferral of energy costs - electric (7,410) 18,257
Deferral of energy costs - gas 1,437 (18,311)
Materials, supplies and fuel (1,162) (15,017)
Other current assets (2,257) (30,455)
Accounts payable (56,359) 12,870
Refund of income taxes 79,333 --
Other current liabilities 31,112 2,390
Other - net 72 3,160
---------- ----------
Net Cash Flows from Operating Activities 126,413 (118,068)
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant (85,543) (62,813)
AFUDC and other charges to utility plant (537) (974)
Customer refunds for construction (575) (2,623)
Contributions in aid of construction 16,148 6,768
---------- ----------
Net cash used for utility plant (70,507) (59,642)
Investments in subsidiaries and other property (861) (2,855)
---------- ----------
Net Cash Used in Investing Activities (71,368) (62,497)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 69,672 232,821
Retirement of long-term debt (3,463) (3,116)
Dividends paid (21,542) (20,813)
---------- ----------
Net Cash Provided by Financing Activities 44,667 208,892
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 99,712 28,327
Beginning balance in Cash and Cash Equivalents 99,109 51,503
---------- ----------
Ending balance in Cash and Cash Equivalents $ 198,821 $ 79,830
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during period for:
Interest $ 39,629 $ 31,086
Income taxes $ (79,333) $ (33,842)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
5
NEVADA POWER COMPANY
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS) (UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
ASSETS
Utility Plant at Original Cost:
Plant in service $ 3,394,559 $ 3,356,584
Less: accumulated provision for depreciation 957,309 928,939
----------- -----------
2,437,250 2,427,645
Construction work-in-progress 148,812 134,706
----------- -----------
2,586,062 2,562,351
----------- -----------
Investment in Sierra Pacific Resources (Note 2) 285,571 309,259
Investments in subsidiaries and other property, net 13,626 12,721
----------- -----------
299,197 321,980
----------- -----------
Current Assets:
Cash and cash equivalents 115,403 8,505
Accounts receivable less provision for uncollectible accounts:
2002-$31,814; 2001-$30,861 163,862 210,333
Deferred energy costs - electric 120,130 281,555
Income tax receivable 19,523 18,590
Materials, supplies and fuel, at average cost 47,163 48,511
Risk management assets (Note 10) 187,478 200,829
Other 8,885 6,698
----------- -----------
662,444 775,021
----------- -----------
Deferred Charges:
Deferred energy costs - electric 423,590 698,510
Income tax receivable 286,298 295,818
Regulatory tax asset 108,911 109,859
Other regulatory assets 33,105 31,588
Risk management assets (Note 10) 23,850 49,493
Risk management regulatory assets - net (Note 10) 285,794 351,264
Other 26,142 29,485
----------- -----------
1,187,690 1,566,017
----------- -----------
$ 4,735,393 $ 5,225,369
=========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholder's equity including $285,571 and $309,259
of equity in Sierra Pacific Resources in 2002 and 2001 (Note 2) $ 1,377,650 $ 1,702,322
Accumulated other comprehensive income 248 520
NPC obligated mandatorily redeemable preferred trust securities 188,872 188,872
Long-term debt 1,605,419 1,607,967
----------- -----------
3,172,189 3,499,681
----------- -----------
Current Liabilities:
Short-term borrowings 198,929 130,500
Current maturities of long-term debt 19,265 19,380
Accounts payable 151,057 202,555
Accrued interest 33,732 19,310
Dividends declared 77 71
Accrued salaries and benefits 7,344 12,450
Deferred taxes on deferred energy costs 41,921 98,544
Risk management liabilities (Note 10) 432,300 522,508
Other current liabilities 19,940 17,710
----------- -----------
904,565 1,023,028
----------- -----------
Commitments & Contingencies (Note 11)
Deferred Credits:
Deferred federal income taxes 284,342 223,641
Deferred investment tax credit 23,125 23,533
Deferred taxes on deferred energy costs 148,629 244,479
Regulatory tax liability 24,053 18,604
Customer advances for construction 60,985 61,454
Accrued retirement benefits 30,646 28,104
Risk management liabilities (Note 10) 61,813 78,558
Other 25,046 24,287
----------- -----------
658,639 702,660
----------- -----------
$ 4,735,393 $ 5,225,369
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
6
NEVADA POWER COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED
March 31,
-------------------------------
2002 2001
---------- ----------
OPERATING REVENUES:
Electric $ 356,272 $ 359,012
OPERATING EXPENSES:
Operation:
Purchased power 176,066 201,822
Fuel for power generation 83,722 115,352
Deferred energy costs disallowed 434,123 --
Deferral of energy costs-net (9,636) 11,308
Other 39,986 50,772
Maintenance 11,650 12,980
Depreciation and amortization 30,809 21,876
Taxes:
Income taxes (156,423) (30,464)
Other than income 6,734 6,050
---------- ----------
617,031 389,696
---------- ----------
OPERATING LOSS (260,759) (30,684)
---------- ----------
OTHER INCOME (EXPENSE):
Equity in losses of Sierra Pacific Resources (Note 2) (2,932) (28,137)
Allowance for other funds used during construction 421 (351)
Other income (expense) - net (11,357) 421
---------- ----------
(13,868) (28,067)
---------- ----------
Total Loss Before Interest Charges (274,627) (58,751)
---------- ----------
INTEREST CHARGES:
Long-term debt 24,078 16,620
Other 2,530 3,963
Allowance for borrowed funds used during construction and
capitalized interest (1,112) 352
---------- ----------
25,496 20,935
---------- ----------
LOSS BEFORE NPC OBLIGATED MANDATORILY
REDEEMABLE PREFERRED TRUST SECURITIES (300,123) (79,686)
Preferred dividend requirements of NPC obligated
mandatorily redeemable preferred trust securities 3,793 3,793
---------- ----------
NET LOSS $ (303,916) $ (83,479)
========== ==========
Net Loss Per Share - Basic (Note 2) $ (2.98) $ (1.06)
========== ==========
- Diluted (Note 2) $ (2.98) $ (1.06)
========== ==========
Weighted Average Shares of Common
Stock Outstanding (000's) (Note 2) 102,111 78,475
========== ==========
Dividends Paid Per Share of Common Stock (Note 2) $ 0.20 $ 0.25
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
NEVADA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss before preferred dividends $(303,916) $ (83,479)
Non-cash items included in income:
Depreciation and amortization 30,809 21,876
Deferred taxes and deferred investment tax credit (4,586) (6,602)
AFUDC and capitalized interest 692 704
Write-off of deferred energy costs (net of taxes) 282,181 --
Other non-cash (555) (6,317)
Equity in losses of SPR (Note 2) 2,932 28,137
Changes in certain assets and liabilities:
Accounts receivable 46,471 (73,318)
Deferral of energy costs 2,221 11,403
Materials, supplies and fuel 1,348 (3,945)
Other current assets (2,187) (18,984)
Accounts payable (51,497) 42,819
Refund of income taxes 79,333 --
Other current liabilities 11,545 462
Other - net 540 2,053
--------- ---------
Net Cash Flows from Operating Activities 95,331 (85,191)
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant (65,685) (42,718)
AFUDC and other charges to utility plant (692) (703)
Customer refunds for construction (469) (1,243)
Contributions in aid of construction 13,592 1,309
--------- ---------
Net cash used for utility plant (53,254) (43,355)
Investments in subsidiaries and other property (950) --
--------- ---------
Net Cash Used in Investing Activities (54,204) (43,355)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 68,429 96,163
Retirement of long-term debt (2,663) (2,380)
Investment of SPR 10,000 --
Dividends paid (9,995) --
--------- ---------
Net Cash Provided by Financing Activities 65,771 93,783
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 106,898 (34,763)
Beginning balance in Cash and Cash Equivalents 8,505 43,858
--------- ---------
Ending balance in Cash and Cash Equivalents $ 115,403 $ 9,095
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during period for:
Interest $ 14,104 $ 15,508
Income taxes $ (79,333) $ (10,015)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
8
SIERRA PACIFIC POWER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) (UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
---------- -----------
ASSETS
Utility Plant at Original Cost:
Plant in service $2,337,576 $2,326,712
Less: accumulated provision for depreciation 866,160 848,578
---------- ----------
1,471,416 1,478,134
Construction work-in-progress 75,653 68,750
---------- ----------
1,547,069 1,546,884
---------- ----------
Investments in subsidiaries and other property, net 56,161 57,185
---------- ----------
Current Assets:
Cash and cash equivalents 29,186 11,772
Accounts receivable less provision for uncollectible accounts:
2002 - $9,618; 2001 - $8,474 190,739 194,698
Deferred energy costs - electric 51,507 51,507
Deferred energy costs - gas 19,805 19,805
Income tax receivable 64,036 --
Materials, supplies and fuel, at average cost 44,689 42,290
Risk management assets (Note 10) 75,195 85,680
Other 6,207 5,935
---------- ----------
481,364 411,687
---------- ----------
Deferred Charges:
Deferred energy costs - electric 165,898 156,268
Deferred energy costs - gas 15,863 23,248
Income tax receivable 12,008 41,040
Regulatory tax asset 59,364 59,879
Other regulatory assets 52,647 51,146
Risk management assets (Note 10) 7,701 11,565
Risk management regulatory assets - net (Note 10) 230,928 313,119
Other 12,785 13,886
---------- ----------
557,194 670,151
---------- ----------
$2,641,788 $2,685,907
========== ==========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholder's equity $ 702,623 $ 692,654
Accumulated other comprehensive income 118 247
Preferred stock 50,000 50,000
Long-term debt 922,270 923,070
---------- ----------
1,675,011 1,665,971
---------- ----------
Current Liabilities:
Short-term borrowings 47,743 46,500
Current maturities of long-term debt 2,630 2,630
Accounts payable 84,127 95,555
Accrued interest 22,585 8,408
Dividends declared 980 974
Accrued salaries and benefits 11,117 15,466
Deferred taxes on deferred energy costs 24,959 24,959
Risk management liabilities (Note 10) 258,513 332,793
Other current liabilities 3,767 3,387
---------- ----------
456,421 530,672
---------- ----------
Commitments & Contingencies (Note 11)
Deferred Credits:
Deferred federal income taxes 220,735 178,533
Deferred investment tax credit 27,959 28,414
Deferred taxes on deferred energy costs 63,617 62,831
Regulatory tax liability 27,427 28,098
Customer advances for construction 46,619 46,725
Accrued retirement benefits 45,442 43,028
Risk management liabilities (Note 10) 55,032 77,324
Other 23,525 24,311
---------- ----------
510,356 489,264
---------- ----------
$2,641,788 $2,685,907
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
9
SIERRA PACIFIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2002 2001
---------- ----------
OPERATING REVENUES:
Electric $ 224,297 $ 280,438
Gas 55,083 64,165
---------- ----------
279,380 344,603
---------- ----------
OPERATING EXPENSES:
Operation:
Purchased power 105,417 150,987
Fuel for power generation 47,051 70,872
Gas purchased for resale 38,594 70,543
Deferral of energy costs - electric - net (4,605) 7,021
Deferral of energy costs - gas - net 8,192 (18,144)
Other 27,747 27,694
Maintenance 5,257 5,324
Depreciation and amortization 17,116 16,849
Taxes:
Income taxes 4,901 (2,121)
Other than income 4,776 4,394
---------- ----------
254,446 333,419
---------- ----------
OPERATING INCOME 24,934 11,184
---------- ----------
OTHER INCOME (EXPENSE):
Allowance for other funds used during construction 236 (184)
Other income (expense) - net 2,970 (486)
---------- ----------
3,206 (670)
---------- ----------
Total Income 28,140 10,514
---------- ----------
INTEREST CHARGES:
Long-term debt 16,445 10,571
Other 1,142 2,960
Allowance for borrowed funds used during construction and
capitalized interest (391) 46
---------- ----------
17,196 13,577
---------- ----------
INCOME (LOSS) BEFORE SPPC OBLIGATED MANDATORILY
REDEEMABLE PREFERRED TRUST SECURITIES 10,944 (3,063)
Preferred dividend requirements of SPPC obligated
mandatorily redeemable preferred trust securities -- 936
---------- ----------
INCOME (LOSS) BEFORE PREFERRED DIVIDENDS 10,944 (3,999)
Preferred dividend requirements 975 875
---------- ----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 9,969 (4,874)
---------- ----------
DISCONTINUED OPERATIONS:
Income from operations of water business disposed of (net of income taxes of
$0 and $478 in 2002 and 2001, respectively) -- 381
---------- ----------
NET INCOME (LOSS) $ 9,969 $ (4,493)
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
10
SIERRA PACIFIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations before preferred dividends $ 10,944 $ (3,999)
Income from discontinued operations before preferred dividends -- 481
Non-cash items included in income:
Depreciation and amortization 17,116 18,800
Deferred taxes and investment tax credits 6,918 10,697
AFUDC and capitalized interest (155) 271
Amortization of deferred energy costs 6,404 --
Early retirement and severance amortization 752 863
Other non-cash (1,152) (73)
Changes in certain assets and liabilities:
Accounts receivable 3,959 (38,859)
Deferral of energy costs - electric (9,631) 6,855
Deferral of energy costs - gas 1,437 (18,311)
Materials, supplies and fuel (2,399) (11,289)
Other current assets (272) (11,522)
Accounts payable (11,428) (26,241)
Other current liabilities 10,208 2,225
Other-net 1,467 1,906
--------- ---------
Net Cash Flows from Operating Activities 34,168 (68,196)
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant (19,858) (20,095)
AFUDC and other charges to utility plant 155 (271)
Customer refunds for construction (106) (1,380)
Contributions in aid of construction 2,556 5,459
--------- ---------
Net cash used for utility plant (17,253) (16,287)
Disposal of subsidiaries and other property - net 1,025 997
--------- ---------
Net Cash Used in Investing Activities (16,228) (15,290)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 1,243 90,658
Retirement of long-term debt (800) (736)
Investment by parent company 10,000 --
Dividends paid (10,969) (975)
--------- ---------
Net Cash (Used in) Provided by Financing Activities (526) 88,947
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,414 5,461
Beginning Balance in Cash and Cash Equivalents 11,772 5,348
--------- ---------
Ending Balance in Cash and Cash Equivalents $ 29,186 $ 10,809
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during year for:
Interest $ 3,019 $ 9,139
Income taxes -- (18,071)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. MANAGEMENT'S STATEMENT (SPR, NPC, SPPC)
In the opinion of the management of Sierra Pacific Resources (SPR),
Nevada Power Company (NPC), and Sierra Pacific Power Company (SPPC), the
accompanying unaudited interim condensed consolidated financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the condensed consolidated financial position,
condensed consolidated results of operations and condensed consolidated cash
flows for the periods shown. These condensed consolidated financial statements
do not contain the complete detail or footnote disclosure concerning accounting
policies and other matters which are included in full year financial statements
and therefore, they should be read in conjunction with the audited financial
statements included in SPR's, NPC's, and SPPC's Combined Annual Report on Form
10-K for the year ended December 31, 2001.
The results of operations for the three months ended March 31, 2002 are
not necessarily indicative of the results to be expected for the full year.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements of SPR include the
accounts of SPR and its wholly owned subsidiaries, Nevada Power Company, Sierra
Pacific Power Company, (collectively, the "Utilities"), Tuscarora Gas Pipeline
Company (TGPC), Sierra Gas Holding Company (SGHC), Sierra Energy Company dba eo
three (eo three), Sierra Pacific Energy Company (SPE), Lands of Sierra (LOS),
Sierra Pacific Communications (SPC), Nevada Electric Investment Company (NEICO),
and Sierra Water Development Company (SWDC). All significant intercompany
transactions and balances have been eliminated in consolidation.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The decision of the Public Utilities Commission of Nevada (PUCN) on
NPC's deferred energy application to disallow $434 million of purchased fuel and
power costs accumulated between March 1, 2001 and September 30, 2001 had a
significant negative impact on the results of operations of SPR and NPC for the
quarter ended March 31, 2002. Although that decision is being challenged by NPC
in a lawsuit filed in Nevada state court, which is discussed in Note 9,
Regulatory Events, the decision caused the two major national rating agencies to
issue an immediate downgrade of the credit ratings on SPR's, NPC's and SPPC's
debt securities (followed by further downgrades late in April), the market price
of SPR's Common Stock fell substantially, NPC and SPPC were obliged within 5
business days of the downgrades to issue general and refunding mortgage bonds to
secure their bank lines of credit, NPC was obliged to obtain a waiver and
amendment from its credit facility banks before it was permitted to draw down on
the facility, NPC and SPPC were no longer able to issue commercial paper, a
number of NPC's power suppliers contacted NPC regarding its ability to pay the
purchase price of outstanding contracts, an affiliate of Enron Corp. terminated
its power supply agreements with the Utilities, and Morgan Stanley Capital Group
Inc. terminated its power supply agreements with NPC. Several of the intervenors
from NPC's deferred energy rate case have filed petitions with the PUCN for
reconsideration of its decision, seeking additional disallowances ranging from
$12.8 million to $488 million. An adverse decision on the petition for
rehearing, or the approval of a significant disallowance in the pending deferred
energy rate case of SPPC or in future cases filed by either Utility could
further weaken the financial condition, liquidity, and capital resources of SPR,
NPC, and SPPC. In particular, such a decision or decisions could cause further
downgrades of debt securities by the rating agencies, could make it
impracticable to access the capital markets, and could cause power suppliers to
terminate purchased power contracts and seek liquidated damages. Under such
circumstances, there can be no assurance that SPR, NPC, or SPPC will be able to
remain solvent or continue operations without seeking protection under the
bankruptcy laws.
In response to the decisions by the PUCN in NPC's recent rate cases,
SPR has implemented certain measures that will positively impact cash flow by
$125 million in 2002. Two major transmission construction projects, discussed in
the Form 10-K for the year ended December 31, 2001, have been delayed for a
total capital preservation impact of $80.8 million. The delay in NPC's
Centennial Plan has an impact of $46.4 million and delaying SPPC's Falcon to
Gonder Project represents $34.4 million. An additional $28.9 million was reduced
from the Utilities' capital budgets by curtailing or delaying other projects.
The balance of the $125 million cash savings will be the result of various land
sales. Additional cost-cutting actions by SPR may be necessary if SPR is unable
to access the capital markets to raise funds and/or if SPPC receives an
unfavorable decision in either its general or deferred energy rate cases.
With respect to NPC's and SPPC's contracts for purchased power, NPC and
SPPC purchase and sell electricity with their counterparties under the Western
Systems Power Pool ("WSPP") agreement, which is an industry standard contract.
The WSPP contract is posted on the WSPP website. These contracts provide that a
material adverse change may give rise to a right to request collateral, which,
if not provided within 3 business days, could cause a default. A request for
collateral must be
12
exercised within 30 days of the event becoming known. A default will result in a
termination payment equal to the present value of the net gains and losses for
the entire remaining term of the contract aggregated to a single liquidated
amount due within 3 business days following the date the notice of termination
is received. The mark to market value can be used to roughly approximate the
termination payment at any point in time. The mark to market value for the
Utilities as of May 9, 2002, was approximately $726 million.
Several power suppliers have requested collateral from NPC and SPPC. On
April 4, 2002, the Utilities sent a letter to their suppliers advising them
that, assuming the Utilities could access the capital markets for secured debt
and no other significant negative developments occurred, the Utilities expected
to be able to honor their obligations under the power supply contracts. However,
the Utilities noted that a simultaneous call for 100 percent mark-to-market
collateral in the short-term would likely not be met. On April 24, 2002, the
Utilities met with representatives of various suppliers to discuss SPR's and the
Utilities' financial situation and plans, and indicated that they intended to
propose extended payment terms for the above-market portions of existing power
contracts. Such extended payment terms were proposed to NPC's suppliers in a
letter dated May 2, 2002.
SPR's future liquidity depends, in part, on SPPC's ability to pay
dividends to SPR and on a restoration of NPC to financial stability. Further
adverse developments at NPC or SPPC, including a material disallowance of
deferred energy costs in SPPC's pending rate case or unsuccessful negotiations
for extended payment terms with the Utilities' power suppliers, could render
SPR's ability to continue to operate outside of bankruptcy uncertain.
NPC's short-term liquidity depends significantly on the willingness of
NPC's power suppliers to agree to defer payments for a portion of the amounts
owed by NPC on purchased power contracts through the summer months of 2002.
NPC's liquidity could also be significantly affected by any further
disallowances of deferred energy costs upon any rehearing of the deferred energy
rate case, by unfavorable rulings by the PUCN in future NPC rate cases, or by an
unfavorable regulatory decision by the PUCN in SPPC's pending rate cases. Both
S&P and Moody's have NPC's credit ratings on "negative watch", and any further
downgrades could shut off NPC's access to the capital markets. Adverse
developments with respect to any combination of the foregoing could cause NPC to
become insolvent and would render NPC's ability to continue to operate outside
of bankruptcy uncertain.
SPPC's future liquidity depends, to a very large degree, on the outcome
of its pending rate cases before the PUCN. In particular, a significant
disallowance by the PUCN in the deferred energy rate case could result in
further downgrades in SPPC's credit ratings, could adversely affect SPPC's
ability to continue purchasing power and fuel, and could render SPPC's ability
to continue to operate outside of bankruptcy uncertain.
The accompanying financial statements do not include any adjustments
that might result from the outcome of the uncertainties discussed above.
Also see Note 5, Dividend Restrictions, and Note 9, Regulatory Events.
RECLASSIFICATIONS
Certain items previously reported for years prior to 2002 have been
reclassified to conform to the current year's presentation. Net income and
shareholders' equity were not affected by these reclassifications.
RECENT PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
three new pronouncements, Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations," SFAS No. 142, "Goodwill and Other Intangible
Assets," and SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001.
SFAS No. 142, adopted January 1, 2002, changed the accounting for
goodwill from an amortization method to one requiring at least an annual review
for impairment. Accordingly, upon adoption, SPR ceased amortization of goodwill.
This change did not have a material effect on SPR's financial statements. SPR's
Consolidated Balance Sheets include approximately $325.6 million of goodwill
that is eligible for future recovery in rates charged to customers of SPR's
regulated utility subsidiaries, NPC and SPPC. The amount and timing of the
recovery of this goodwill will be determined by the outcome of general rate
cases filed and to be filed by the Utilities with the PUCN. SPR's Consolidated
Balance Sheets also include approximately $6.2 million of goodwill related to
unregulated operations. SPR anticipates completing the impairment analysis
related to this goodwill during the second quarter of 2002, at which time
Management believes that this goodwill may be determined to be impaired. To the
extent that the $6.2 million of goodwill is impaired, the impairment will be
reported in the June 2002 financial statements as a cumulative effective change
in accounting principle.
13
SFAS No. 143, effective for fiscal years beginning after June 15, 2002,
requires an entity to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. Management does not
expect the adoption of SFAS No. 143 to have a material effect on the financial
position or results of operations of SPR, NPC, and SPPC.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This standard provides guidance on
the impairment of long-lived assets and for long-lived assets to be disposed of.
The standard supersedes the current authoritative literature on impairments as
well as disposal of a segment of a business and was adopted January 1, 2002.
NOTE 2. FINANCIAL STATEMENTS OF NEVADA POWER COMPANY (NPC)
In accordance with Generally Accepted Accounting Principles, the 1999
merger between SPR and NPC was accounted for as a reverse purchase, with NPC
deemed to be the acquirer of SPR as reflected in the SPR Consolidated Financial
Statements. However, after the merger with SPR and as a result of the structure
of the transactions, NPC is a separate legal entity, which is a wholly owned
subsidiary of SPR. As a legal matter, NPC does not own any equity interest in
SPR. The audited NPC Financial Statements accommodate the presentation of
financial information of NPC on a stand-alone basis by summarizing all non-NPC
financial information into a few items on each of the Financial Statements.
These summarized items are repeated below (in 000's):
Non-NPC Financial Items on the NPC Financial Statements
NPC Balance Sheets: March 31, 2002 December 31, 2001
- ------------------- -------------- -----------------
Investment in Sierra Pacific Resources $285,571 $309,259
Equity in Sierra Pacific Resources $285,571 $309,259
The Investment in Sierra Pacific Resources reflects the net assets,
after deducting for all liabilities and preferred stock of Sierra Pacific
Resources not related to NPC. The Equity in Sierra Pacific Resources reflects
the sum of paid-in-capital and retained earnings of SPR, without the benefit of
NPC.
These line items do not represent any asset to which holders of NPC's
securities may look for recovery of their investment. These items must be
disregarded for determining the ability of NPC to satisfy its obligations or to
pay dividends (preferred or common), for calculating NPC's ratios of earnings to
fixed charges and preferred stock dividends and for all of NPC's financial
covenants and earnings tests including those under its charter and mortgage.
NPC Statements of Operations: Three Months Ended Three Months Ended
- ----------------------------- ------------------ ------------------
March 31, 2002 March 31, 2001
------------------ ------------------
Equity in Losses of Sierra Pacific Resources $(2,932) $(28,137)
This line does not represent any item of revenue or income to which
holders of NPC's securities may look for recovery of their investment. This item
must be disregarded for determining the ability of NPC to satisfy its
obligations or its ability to pay dividends (preferred or common), for
calculating NPC's ratios of earnings to fixed charges and preferred dividends
and for all of NPC's financial covenants and earnings tests including those
under its charter and mortgage.
NPC Statements of Cash Flow: Three Months Ended Three Months Ended
- ---------------------------- ------------------ ------------------
March 31, 2002 March 31, 2001
------------------ ------------------
Equity in Losses of Sierra Pacific Resources $2,932 $28,137
As in the statement of operations, the Equity in Losses of Sierra
Pacific Resources reflects the three months of SPR net losses, after SPPC
preferred stock dividends.
This line item does not represent any item of cash flow to which
holders of NPC's securities may look for recovery of their investment. This item
must be disregarded for determining the ability of NPC to satisfy its
obligations or its ability to pay dividends (preferred or common), for
calculating NPC's ratios of earnings to fixed charges and preferred dividends
and for all of NPC's financial covenants and earnings tests including those
under its charter and mortgage.
14
NOTE 3. SHORT-TERM BORROWINGS (SPR, NPC, SPPC)
SIERRA PACIFIC RESOURCES
On April 3, 2002, SPR terminated its $75 million unsecured revolving
credit facility in connection with the amendment of NPC's $200 million unsecured
revolving credit facility, discussed below.
NEVADA POWER COMPANY
On November 29, 2001, NPC put into place a $200 million unsecured
revolving credit facility for working capital and general corporate purposes,
including commercial paper backup. As a result of NPC's rate case decisions
(discussed in Note 9 - Regulatory Events) and the credit downgrades by Standard
& Poors (S&P) and Moody's, which occurred on March 29 and April 1, 2002,
respectively, the Banks participating in NPC's credit facility determined that a
material adverse change had occurred with respect to NPC, thereby precluding NPC
from borrowing funds under its credit facility. The Banks agreed to waive the
consequences of the material adverse change in a waiver letter and amendment
that was executed on April 4, 2002. As required under the waiver letter and
amendment, NPC issued and delivered its General and Refunding Mortgage Bond,
Series C, due November 28, 2002, in the principal amount of $200 million, to the
Administrative Agent for the credit facility.
The waiver letter and amendment also provides that (i) NPC may not
create or incur any liens on its properties to secure obligations to its power
and/or commodity trading counterparties or power suppliers, (ii) in the event
that NPC issues more than $250 million of its General and Refunding Mortgage
Bonds, other than to secure NPC's 6.20% Senior Unsecured Notes, Series B due
April 15, 2004, the principal amounts of such issuances will be applied as
mandatory prepayments of the loans outstanding under the credit facility and the
commitments under the facility will correspondingly be reduced, and (iii) the
SPR credit facility be terminated.
As of May 2, 2002, NPC had borrowed the entire $200 million of funds
available under its credit facility to pay off maturing commercial paper. NPC's
credit facility expires November 28, 2002.
On March 31, 2002, NPC had a commercial paper balance outstanding of
$198.9 million with a weighted average interest rate of 2.52%. In connection
with the credit rating downgrades referenced above, NPC lost its A2/P2
commercial paper ratings and can no longer issue commercial paper. As discussed
above, NPC paid off its maturing commercial paper with the proceeds of
borrowings under its credit facility.
SIERRA PACIFIC POWER COMPANY
On November 29, 2001, SPPC put into place a $150 million unsecured
revolving credit facility for working capital and general corporate purposes,
including commercial paper backup. Under this credit facility, SPPC was
required, in the event of a ratings downgrade of its senior unsecured debt, to
secure the facility with General and Refunding Mortgage Bonds. In satisfaction
of its obligation to secure the credit facility, on April 8, 2002, SPPC issued
and delivered its General and Refunding Mortgage Bond, Series B, due November
28, 2002, in the principal amount of $150 million, to the Administrative Agent
for the credit facility. As of May 10, 2002, SPPC had borrowed the entire $150
million of funds available under its credit facility to, in part, pay off
maturing commercial paper, maintaining a cash balance at SPPC. SPPC's credit
facility expires on November 28, 2002.
On March 31, 2002, SPPC had a commercial paper balance outstanding of
$47.7 million with a weighted average interest rate of 2.49%. In connection with
the credit ratings downgrades referenced above, SPPC lost its A2/P2 commercial
paper ratings and can no longer issue commercial paper. As discussed above, SPPC
paid off its maturing commercial paper with the proceeds of borrowings under its
credit facility.
NOTE 4. LONG-TERM DEBT (SPR, NPC, SPPC)
NPC's, SPPC's and SPR's aggregate annual amount of maturities for
long-term debt for the next five years is shown below (in thousands of dollars):
15
SPR Holding Co. SPR
NPC SPPC and Other Subs. Consolidated
---------------- --------------- ---------------- --------------
2002 $ 19,380 $ 2,630 $ 100,000(1) $ 122,010
2003 350,000 20,632 200,000 570,632
2004 130,000 2,621 - 132,621
2005 - 2,622 300,000 302,622
2006 - 52,629 - 52,629
---------------- --------------- ---------------- --------------
Subtotal 499,380 81,134 600,000 1,180,514
Thereafter 1,127,967 844,566 345,068 2,317,601
---------------- --------------- ---------------- --------------
Total $1,627,347 $ 925,700 $ 945,068 $3,498,115
================ =============== ================ ==============
(1) On April 20, 2002, $100 million of SPR's floating rate notes matured and
were paid in full. The floating rate notes were issued on April 20, 2000, and
the net proceeds of the $100 million issue were used to make a capital
contribution to NPC.
NEVADA POWER COMPANY
On May 13, 2002, NPC issued a General and Refunding Mortgage Bond,
Series D, due April 15, 2004, in the principal amount of $130 million, for the
benefit of the holders of NPC's 6.20% Senior Unsecured Notes, Series B, due
April 15, 2004. The Senior Unsecured Notes Indenture required that in the event
that NPC issued debt secured by liens on NPC's operating property, in excess of
15% of its Net Tangible Assets or Capitalization (as both terms are defined in
the Senior Unsecured Notes Indenture), NPC would equally and ratably secure the
Senior Unsecured Notes. NPC triggered this negative pledge covenant on April 23,
2002 when it borrowed certain amounts under its recently secured credit
facility.
NOTE 5. DIVIDEND RESTRICTIONS (SPR, NPC, SPPC)
Since SPR is a holding company, substantially all of its cash flow is
provided by dividends paid to SPR by NPC and SPPC on their common stock, all of
which is owned by SPR. Since these two subsidiaries are public utilities, they
are subject to regulation by state utility commissions which may impose limits
on investment returns or otherwise impact the amount of dividends which may be
paid by those companies. In addition, the terms of certain outstanding series of
first mortgage bonds of NPC limit the cumulative amount of dividends that may be
paid on its capital stock to the cumulative net earnings of NPC since 1953. At
the present time, this restriction precludes NPC from making further payments of
dividends on NPC's common stock and will continue to bar such payments until NPC
has returned to profitability. The terms of certain of SPPC's first mortgage
bonds contain a similar provision restricting the cumulative amount of dividends
payable on SPPC's common stock to the cumulative net earnings available for
dividends since 1977. This restriction currently exists for the benefit of three
series of SPPC's first mortgage bonds, with an aggregate principal balance of
$4.3 million as of April 30, 2002. SPPC expects to defease these bonds in the
near future, thereby eliminating the SPPC first mortgage bond dividend
restriction. In addition, the Credit Agreements of NPC and SPPC prohibit the
payment of dividends on each Utility's common stock if that Utility is in
default under the terms of its respective credit facility. Similarly, the
Articles of Incorporation of SPPC contain restrictions on the payment of
dividends on SPPC's common stock in the event of a default in the payment of
dividends on SPPC's preferred stock and prohibit SPPC from declaring or paying
any dividends on any shares of common stock except from the net income of SPPC,
and its predecessor, available for dividends on common stock accumulated
subsequent to December 31, 1955, less preferred stock dividends plus the sum of
$500,000. Finally, the terms of NPC's trust preferred securities provide that no
dividends may be paid on NPC's common stock if NPC has elected to defer payments
on the junior subordinated debentures issued in conjunction with the trust
preferred securities. Any of these provisions which restrict dividends payable
by NPC or SPPC could adversely affect the liquidity of SPR.
16
NOTE 6. EARNINGS PER SHARE (SPR)
SPR follows SFAS No. 128, "Earnings Per Share". The difference, if any,
between Basic EPS and Diluted EPS would be due to common stock equivalent shares
resulting from stock options, employee stock purchase plan, performance shares
and a non-employee director stock plan. However, due to net losses for the
three-month periods ended March 31, 2002 and 2001, these items are
anti-dilutive. Common stock equivalents were determined using the treasury stock
method.
Three Months Ended
March 31,
2002 2001
------------- ------------
BASIC EPS
Numerator
Loss from continuing operations ($000) $ (303,916) $ (83,860)
Income from discontinued operations ($000) -- 381
------------- ------------
Net loss ($000) $ (303,916) $ (83,479)
============= ============
Denominator
Weighted average number of shares outstanding 102,110,536 78,475,217
------------- ------------
Per-Share Amounts:
Loss from continuing operations $ (2.98) $ (1.07)
Income from discontinued operations -- 0.01
------------- ------------
Net loss $ (2.98) $ (1.06)
============= ============
DILUTED EPS
Numerator
Loss from continuing operations ($000) $ (303,916) $ (83,860)
Income from discontinued operations ($000) -- 381
------------- ------------
Net loss ($000) $ (303,916) $ (83,479)
============= ============
Denominator
Weighted average number of shares outstanding
before dilution 102,110,536 78,475,217
Stock options(1) 31,612 1,050
Executive long term incentive plan- performance shares(1) 24,694 35,363
Non-Employee Director stock plan(1) 9,355 5,885
Employee stock purchase plan(1) 2,660 2,433
------------- ------------
102,178,857 78,519,948
------------- ------------
Per-Share Amounts(1):
Loss from continuing operations $ (2.98) $ (1.07)
Income from discontinued operations -- 0.01
------------- ------------
Net loss $ (2.98) $ (1.06)
============= ============
(1) Because of net losses for the three-month periods ended March
31, 2002 and 2001, stock equivalents would be anti-dilutive.
Accordingly, Diluted EPS for those periods are computed using
the weighted average number of shares outstanding before
dilution.
17
NOTE 7. SEGMENT INFORMATION (SPR)
SPR operates three business segments providing regulated electric and
natural gas services. NPC provides electric service to Las Vegas and surrounding
Clark County. SPPC provides electric service in northern Nevada and the Lake
Tahoe area of California. SPPC also provides natural gas service in the
Reno-Sparks area of Nevada. Other segment information includes segments below
the quantitative threshold for separate disclosure. On June 11, 2001, SPPC sold
its water utility business. Accordingly, the water business is not included in
the segment information below.
Information as to the operations of the different business segments is
set forth below based on the nature of products and services offered. SPR
evaluates performance based on several factors, of which the primary financial
measure is business segment operating income. Intersegment revenues are not
material.
Financial data for business segments is as follows (in thousands):
Three Months Ended NPC SPPC Total
March 31, 2002 Electric Electric Electric Gas Other Consolidated
- ------------------ ---------- --------- ---------- ------- -------- ------------
Operating Revenues $ 356,272 $ 224,297 $ 580,569 $55,083 $ 2,755 $ 638,407
========== ========= ========== ======= ======== ============
Operating Income $ (260,759) $ 23,401 $ (237,358) $ 1,533 $ 5,074 $ (230,751)
========== ========= ========== ======= ======== ============
Three Months Ended NPC SPPC Total
March 31, 2001 Electric Electric Electric Gas Other Consolidated
- ------------------ ---------- --------- ---------- ------- -------- ------------
Operating Revenues $ 359,012 $ 280,438 $ 639,450 $64,165 $ 2,630 $ 706,245
========== ========= ========== ======= ======== ============
Operating Income $ (30,684) $ 6,089 $ (24,595) $ 5,095 $(10,987) $ (30,487)
========== ========= ========== ======= ======== ============
NOTE 8. DISCONTINUED OPERATIONS (SPR, SPPC)
As previously reported, SPPC closed the sale of its water business to
the Truckee Meadows Water Authority on June 11, 2001. Accordingly, the water
business is reported as a discontinued operation.
Revenues from operations of the water business were $0 and $11.5
million for the three-month periods ended March 31, 2002, and March 31, 2001,
respectively. The net income from operations of the water business, as shown in
the Condensed Consolidated Statements of Operations of SPR and SPPC, includes
preferred dividends of $0 and approximately $100,000 for the three-month periods
ended March 31, 2002 and 2001, respectively. These amounts are not included in
the revenues and income (loss) from continuing operations shown in the
accompanying income statements.
NOTE 9. REGULATORY EVENTS (SPR, NPC, SPPC)
NEVADA MATTERS (NPC, SPPC)
NEVADA POWER COMPANY GENERAL RATE CASE (NPC)
On October 1, 2001, NPC filed an application with the PUCN seeking an
electric general rate increase. This application was mandated by Assembly Bill
(AB) 369, which was enacted by the Nevada legislature in April 2001. On December
21, 2001, NPC filed a Certification to its general rate filing updating costs
and revenues pursuant to Nevada regulations. In the certification filing, NPC
requested an increase in its general rates charged to all classes of electric
customers designed to produce an increase in annual electric revenues of $22.7
million, which is an overall 1.7% rate increase. The application also sought a
return on common equity ("ROE") for Nevada Power's total electric operations of
12.25% and an overall rate of return ("ROR") of 9.30%.
On March 27, 2002, the PUCN issued its decision on the general rate
application, ordering a $43 million revenue decrease with an ROE of 10.1% and
ROR of 8.37%. The effective date for the decision was April 1, 2002. For the
period ended March 31, 2002, the decision also resulted in the recognition of
additional depreciation expense aggregating $7.9 million, and the reversal of
approximately $5 million of previously recorded revenues related to SO2
Allowances. On April 15, 2002, NPC filed a petition for reconsideration with the
PUCN. In the petition, NPC raised six issues for reconsideration: the treatment
of revenues related to SO2 Allowances, in particular the calculation of the
annual amortization amount, which appears to be in error; the adjustment for
"excess" capital investment related to common facilities at the Harry Allen
generating station; the rejection of adjustments to accumulated depreciation
reserves related to the establishment of revised depreciation rates for
transmission, distribution and common facilities; the delay in allowing NPC to
recover its merger
18
costs without the benefit of carrying charges; the finding that NPC has no need
for and is entitled to zero funds cash working capital; and the establishment of
a 10.1% ROE. At this time, NPC is not able to predict the outcome or the timing
of a decision in this matter.
NEVADA POWER COMPANY DEFERRED ENERGY CASE (NPC)
On November 30, 2001, NPC filed an application with the PUCN seeking to
clear deferred balances for purchased fuel and power costs accumulated between
March 1, 2001 through September 30, 2001. This application was mandated by AB
369. The application sought to establish a Deferred Energy Accounting Adjustment
("DEAA") rate to clear accumulated purchased fuel and power costs of $922
million and spread the cost recovery over a period of not more than three years.
On March 29, 2002, the PUCN issued its decision on the deferred energy
application, allowing NPC three years to collect $488 million but disallowing
$434 million of purchased fuel and power costs. On April 11, 2002, NPC filed a
lawsuit in First District Court of Nevada seeking to reverse portions of the
decision of the PUCN denying the recovery of deferred energy costs incurred by
NPC on behalf of its customers in 2001. NPC asserts that, as a result of the
PUCN's decision, NPC's credit rating was reduced to below investment grade, SPR
suffered a reduction in its equity market capitalization by approximately 41%,
and the disallowed costs are effectively imposed upon SPR's shareholders.
In its lawsuit, NPC alleges that the order of the PUCN is: in violation
of constitutional and statutory provisions; made upon unlawful procedure;
affected by other errors of law; clearly erroneous in view of the reliable,
probative and substantial evidence on the whole record; arbitrary and capricious
and characterized by abuse of discretion. NPC's lawsuit requests that the
District Court reverse portions of the order of the PUCN and remand the matter
to the PUCN with direction that the PUCN authorize NPC to immediately establish
rates that would allow NPC to recover its entire deferred energy balance of $922
million, with a carrying charge, over three years. At this time, NPC is not able
to predict the outcome or the timing of a decision in this matter.
Various intervenors in NPC's deferred energy case before the PUCN have
filed petitions with the PUCN for reconsideration of the order, seeking
additional disallowances of between $12.8 million and $488 million. NPC cannot
predict the outcome or timing of a decision regarding these petitions.
SIERRA PACIFIC POWER COMPANY GENERAL RATE CASE (SPPC)
On November 30, 2001, SPPC filed an application with the PUCN seeking
an electric general rate increase. This application was mandated by AB 369. On
February 28, 2002, SPPC filed a certification to its general rate filing,
updating costs and revenues pursuant to Nevada regulations. In the certification
filing, SPPC requested an increase in its general rates charged to all classes
of electric customers, which were designed to produce an increase in annual
electric revenues of $15.9 million representing an overall 2.4% rate increase.
The application also seeks an ROE for SPPC's total electric operations of 12.25%
and an overall ROR of 9.42%. Public hearings for SPPC's general rate case began
on April 8, 2002, and concluded on April 18. Various parties intervened in
SPPC's general rate case including the Staff of the PUCN, the Bureau of Consumer
Protection from the Nevada Attorney General's office, and Barrick Goldstrike
Mines ("Barrick"), among others. The reduction of SPPC's revenue requirements
proposed by the intervenors ranged from $8.0 million to $33.1 million. A
decision is expected on or before June 1, 2002.
SIERRA PACIFIC POWER COMPANY DEFERRED ENERGY (SPPC)
On February 1, 2002, SPPC filed an application with the PUCN seeking to
clear deferred balances for purchased fuel and power costs accumulated between
March 1, 2001 and November 30, 2001. This application was mandated by AB 369.
The application seeks to establish a DEAA rate to clear accumulated purchased
fuel and power costs of $205 million and spread the cost recovery over a period
of not more than three years. It also seeks to recalculate the Base Tariff
Energy Rate to reflect anticipated ongoing purchased fuel and power costs. The
total rate increase resulting from the DEAA would amount to 9.8%. Public
hearings began on April 29, 2002. Various parties have intervened in SPPC's
deferred energy rate case including the Staff of the PUCN, the Bureau of
Consumer Protection from the Nevada Attorney General's office, and Barrick,
among others. Intervenors have proposed disallowances ranging from $40.4 million
to $361 million. A decision is expected on or before June 1, 2002.
CUSTOMERS FILE UNDER AB661 (NPC, SPPC)
AB 661, passed by the Nevada legislature in 2001, allows commercial and
governmental customers with an average demand greater than 1 MW to select new
energy suppliers. The Utilities would continue to provide transmission,
distribution, metering and billing services to such customers. AB 661 requires
customers wishing to choose a new supplier to receive the approval of the PUCN
and meet public interest standards. In particular, departing customers must
secure new energy resources that are not under contract to the Utilities,
remaining customers or the Utility cannot be negatively impacted by the
departure,
19
and the departing customers must pay any deferred energy balances. The PUCN
adopted regulations prescribing the criteria that will be used to determine if
there will be negative impacts to remaining customers or the Utility. Certain
limits are placed upon the departure of NPC customers until 2003; most
significantly, the amount of load departing is limited to approximately 1100 MW
in peak conditions. Customers must provide 180-day notice to the Utilities. AB
661 permitted customers to file applications with the PUCN beginning in the
fourth quarter of 2001, and customers could begin to receive service from new
suppliers by mid-2002.
On January 10, 2002, Barrick, an approximately 130 MW SPPC customer,
filed an application with the PUCN to exit the system of SPPC and to purchase
energy, capacity and ancillary services from a provider other than SPPC. A
stipulation filed on March 8, 2002 by SPPC and Barrick was rejected by the PUCN
on March 29, 2002. The PUCN indicated a desire for more information regarding
transmission access, the definition of a new electric resource, and the
computation of exit fees. Subsequently, a second application was filed and later
withdrawn by Barrick. At this point it is not known whether Barrick intends to
refile its application.
During May 2002, Rouse Fashion Show Management LLC, Coast Hotels and
Casinos Inc., Station Casinos, Inc., Gordon Gaming Corporation, and MGM Mirage
filed separate applications with the PUCN to exit the system of NPC and to
purchase energy, capacity and ancillary services from a provider other than NPC.
The loads of these customers aggregate 185 MW on peak. Hearings on these
applications are scheduled for June and decisions anticipated in July. These
customers are requesting to receive energy services from their new supplier in
fall 2002. Another customer, approximately 70 MW of peak load, has filed a
notice of intent to leave the system with an anticipated departure date of late
2002; their application can be filed in mid May.
CALIFORNIA MATTERS (SPPC)
RATE STABILIZATION PLAN
SPPC serves approximately 44,500 customers in California. On June 29,
2001, SPPC filed with the CPUC a Rate Stabilization Plan, which includes two
phases. Phase One, which was also filed June 29, 2001, is an emergency electric
rate increase of $10.2 million annually or 26%. If granted, the typical
residential monthly electric bill for a customer using 650 kilowatt-hours would
increase from approximately $47.12 to $60.12. On August 14, 2001, a pre-hearing
conference was held, and a procedural order was established. On September 27,
the Administrative Law Judge issued an order stating that no interim or
emergency relief could be granted until the end of the "rate freeze" period
mandated by the California restructuring law for recovery of stranded costs. In
accordance with the judge's request, on October 26, 2001, SPPC filed an
amendment to its application declaring the rate freeze period to be over. On
December 5 and 11, 2001, hearings were held and on January 11, 2002 and January
25, 2002 opening briefs and reply briefs were filed. A draft decision is
expected by the end of the second quarter of 2002.
Phase Two of the Rate Stabilization Plan was filed with the CPUC on
April 1, 2002, and includes a general rate case and requests the CPUC to
reinstate the Energy Cost Adjustment Clause, which would allow SPPC to file for
periodic rate adjustments to reflect its actual costs for wholesale energy
supplies. Phase Two also includes a proposal to terminate the 10% rate reduction
mandated by AB 1890, but does not include a performance -based rate-making
proposal. This request was for an overall increase in revenues of 17.1%, or $8.9
million annually.
FERC MATTERS (SPPC, NPC)
PRICE MITIGATION PLAN
On June 19, 2001, the FERC adopted a price mitigation plan applicable
to spot market wholesale power sales in California and throughout the western
United States during the period June 20, 2001 through September 30, 2002. The
price mitigation plan establishes a mechanism with which to determine the
maximum amount that may be charged for power sold during this period. The intent
of the mitigation plan is to simulate the price that might be charged for
electricity sold under competitive market conditions. Sellers that do not wish
to establish rates on the basis of this price mitigation plan may propose
cost-of-service rates covering all of their generating units in the WSCC for the
duration of the mitigation plan. Management believes that, under certain market
conditions, the FERC plan adversely affects the availability of spot market
power to the Utilities and reduces the price at which the Utilities can sell
power on the wholesale market. Another potential result from these price
mitigation measures could be the delay and/or cancellation of proposed power
plants throughout the western United States. If these results occur, the
long-term supply of energy could be reduced. Numerous parties, including NPC and
several northwest utilities, appealed the June 19 and July 25, 2001 orders from
the FERC to the District of Columbia Court of Appeals on the basis that the
price caps are unfair to electric customers who reside outside of California. In
a report to Congress on January 31, 2002, the FERC said the price mitigation
plan had little if any influence on prices at which Western utilities were able
to resell power. SPR is not persuaded by the FERC's report and continues to
pursue its appeal. Hearings began on May 1, 2002, with a decision expected in
May 2003. At this time, NPC is not able to predict the outcome or the timing of
a decision in this matter.
20
NOTE 10. DERIVATIVES AND HEDGING ACTIVITIES (SPR, NPC, SPPC)
Effective January 1, 2001, SPR, SPPC, and NPC adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138, both issued by
the Financial Accounting Standards Board. As amended, SFAS No. 133 requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position, measure those instruments at fair value, and
recognize changes in the fair value of the derivative instruments in earnings in
the period of change unless the derivative qualifies as an effective hedge.
SPR's and the Utilities' objective in using derivatives is to reduce
exposure to energy price risk and interest rate risk. Energy price risks result
from activities that include the generation, procurement and marketing of power
and the procurement and marketing of natural gas. Derivative instruments used to
manage energy price risk include forwards, options, and swaps. These contracts
allow the Utilities to reduce the risks associated with volatile electricity and
natural gas markets.
Derivatives used to manage interest rate risk include interest rate
swaps designed to moderate exposure to interest-rate changes and lower the
overall cost of borrowing. At March 31, 2002, SPR had one interest rate swap
related to $200 million of SPR floating rate notes maturing April 20, 2003. This
interest rate swap is considered a completely effective cash flow hedge. On
April 1, 2002, SPR paid $9.5 million to terminate this agreement.
At March 31, 2002, the fair value of the derivatives resulted in the
recording of $294 million, $211 million and $83 million in risk management
assets and $814 million, $494 million and $314 million in risk management
liabilities in the Consolidated Balance Sheets of SPR, NPC and SPPC,
respectively. Due to deferred energy accounting under which the Utilities
operate, regulatory assets and liabilities are established to the extent that
electricity and natural gas derivative gains and losses are recoverable or
payable through future rates. Accordingly, at March 31, 2002, $517 million, $286
million and $231 million in net risk management regulatory assets were recorded
in the Consolidated Balance Sheets of SPR, NPC, and SPPC, respectively. In
addition, for the three months ended March 31, 2002, the unrealized gains and
losses resulting from the change in the fair value of derivatives designated and
qualifying as cash flow hedges for SPR, NPC, and SPPC were recorded in Other
Comprehensive Income. Such amounts will be reclassified into earnings when the
related transactions are settled or terminate. No amounts were reclassified into
earnings during the three months ended March 31, 2002.
The effects of the adoption of SFAS No. 133 on comprehensive income and
the components thereof at March 31, 2002, and 2001, are as follows (in
thousands):
SPR NPC SPPC
--------- --------- -------
Net (Loss) Income for the three months ended March 31, 2002 $(303,916) $(300,984)(1) $ 9,969
Change in market value of risk management assets and
liabilities as of March 31, 2002, net of taxes (3,884) (196) (94)
--------- --------- -------
Total Comprehensive Income for the
three months ended March 31, 2002 $(307,800) $(301,180) $ 9,875
========= ========= =======
Net Loss for the three months ended March 31, 2001 $ (83,479) $ (55,342)(2) $(4,493)
Cumulative effect upon adoption of change in
accounting principle, January 1, 2001, net of taxes (1,923) 444 212
Change in market value of risk management assets and
liabilities as of March 31, 2001, net of taxes (3,233) (444) (212)
--------- --------- -------
Total Comprehensive Income for the
three months ended March 31, 2001 $ (88,635) $ (55,342) $(4,493)
========= ========= =======
(1) Does not include NPC's equity in SPR's losses of $(2,932).
(2) Does not include NPC's equity in SPR's losses of $(28,137).
21
NOTE 11. COMMITMENTS AND CONTINGENCIES (SPR, NPC, SPPC)
NEVADA POWER COMPANY
The Grand Canyon Trust and Sierra Club filed a lawsuit in the U.S.
District Court, District of Nevada, in February 1998, against the owners
(including NPC) of the Mohave Generation Station ("Mohave"), alleging violations
of the Clean Air Act regarding emissions of sulfur dioxide and particulates. An
additional plaintiff, National Parks and Conservation Association, later joined
the suit. The plant owners and plaintiffs have had numerous settlement
discussions and filed a proposed settlement with the court in October 1999. The
consent decree, approved by the court in November 1999, established emission
limits for sulfur dioxide and opacity and required installation of air pollution
controls for sulfur dioxide, nitrogen oxides and particulate matter. The new
emission limits must be met by January 1, 2006 and April 1, 2006 for the first
and second units respectively. However, if the owners sell their entire
ownership interest with a closing date prior to December 30, 2002, the new
emission limits become effective 36 months and 39 months from the date of last
closing for the two respective units. The estimated cost of new controls is $395
million. As a 14% owner in the Mohave Station, NPC's cost could be $55 million.
In May 1997, the Nevada Division of Environmental Protection (NDEP)
ordered NPC to submit a plan to eliminate the discharge of Reid Gardner Station
wastewater to groundwater. The NDEP order also required a hydrological
assessment of groundwater impacts in the area. In June 1999, NDEP determined
that wastewater ponds had degraded groundwater quality. In August 1999, NDEP
issued a discharge permit to Reid Gardner Station and an order that requires all
wastewater ponds to be closed or lined with impermeable liners over the next 10
years. This order also required NPC to submit a Site Characterization Plan to
NDEP to ascertain impacts. This plan is under review by NDEP. After approval, an
estimate of remediation costs will be determined by NPC. New pond construction
and lining costs are estimated at $15 million.
At the Reid Gardner Station, the NDEP has determined that there is
additional groundwater contamination that resulted from oil spills at the
facility. NDEP has required submitting a corrective action plan. The extent of
contamination has been determined and remediation is occurring at a modest rate.
A hydro-geologic evaluation of the current remediation technology will occur in
2002 to verify efficiency and to expedite remediation. Remediation modifications
are not expected to materially affect the financial position of SPR or NPC.
In May 1999, NDEP issued an order to eliminate the discharge of NPC's
Clark Station wastewater to groundwater. The order also required a hydrological
assessment of groundwater impacts in the area. This assessment, submitted to
NDEP in February 2001, warranted a Corrective Action Plan which was submitted to
NDEP in November and is pending review. Remediation costs are expected to be
approximately $100,000. In addition to remediation, NPC will spend $789,000 to
line existing ponds. After review and approval of the Corrective Action Plan by
NDEP, NPC will implement remediation.
In July 2000, NPC received a request from the EPA for information to
determine the compliance of certain generation facilities at the Clark Station
with the applicable State Implementation Plan. In November 2000, NPC and the
Clark County Health District entered into a Corrective Action Order requiring,
among other steps, capital expenditures at the Clark Station totaling
approximately $3 million. In March 2001, the EPA issued an additional request
for information that could result in remediation beyond that specified in the
November 2000 Corrective Action Order. If the EPA prevails, capital expenditures
and temporary outages of four of Clark Station's generation units could be
required. Additionally, depending on the time of year that the compliance
activity and corresponding generation outage would occur, the incremental cost
to purchase replacement energy could be substantial.
On May 9, 2002, Morgan Stanley Capital Group Inc. (MSCG) notified NPC
that it would end power deliveries to the Utility effective May 9. MSCG also
indicated that it had exercised what it believes to be its contractual right to
end deliveries because of NPC's inability to provide adequate assurances of its
ability to perform all of its outstanding material obligations. The MSCG
contracts covered approximately 1% of purchased power supplies for NPC for the
remainder of 2002. MSCG has stated that it will assert claims for any and all
amounts due and payable.
SIERRA PACIFIC POWER COMPANY
In September 1994, Region VII of EPA notified SPPC that it was being
named as a potentially responsible party (PRP) regarding the past improper
handling of Polychlorinated Biphenyls (PCBs) by PCB Treatment, Inc., located in
Kansas City, Kansas, and Kansas City, Missouri (the Sites). The EPA is
requesting that SPPC voluntarily pay an undefined, pro rata share of the
ultimate clean-up costs at the Sites. A number of the largest PRP's formed a
steering committee, which is chaired by SPPC. The responsibility of the
Committee is to direct clean-up activities, determine appropriate cost
allocation, and pursue actions against recalcitrant parties, if necessary. The
EPA issued an administrative order on consent requiring signatories to perform
certain investigative work at the Sites. The steering committee retained a
consultant to prepare an analysis regarding the Sites. The Site evaluations have
been completed. EPA is developing an allocation formula to allocate the
remediation costs. SPPC has recorded a preliminary liability for the Sites of
$650,000 of which approximately $136,000 has been
22
spent through March 31, 2002. Once evaluations are completed, SPPC will be in a
better position to estimate and record the ultimate liabilities for the Sites.
NEVADA POWER COMPANY AND SIERRA PACIFIC POWER COMPANY
On May 1, 2002, Enron Power Marketing Inc. notified NPC and SPPC that
it would end power deliveries to the Utilities effective May 7. Enron advised
the Utilities that it was taking this action in line with its recently announced
new business configuration that does not include arrangements such as its
existing contracts with the Utilities. Enron also indicated that it had
exercised what it believes to be its contractual right to end deliveries because
of the recent downgrade in the credit ratings of the Utilities and their failure
to provide mark-to-market collateral. The Enron contracts covered approximately
10% of purchased power supplies for the combined Utilities for the remainder of
2002. Enron has asserted claims for liquidated damages of approximately $199.7
million and $87.1 million against NPC and SPPC, respectively; however, that
amount is subject to the Utilities' pending complaint proceeding at the FERC
challenging the contract prices, and to other defenses that the Utilities intend
to pursue.
OTHER SUBSIDIARIES OF SPR
LOS, a wholly owned subsidiary of SPR, owns property in North Lake
Tahoe, California, which is leased to independent condominium owners. The
property has both soil and groundwater petroleum contaminate resulting from an
underground fuel tank that has been removed from the property. Additional
contaminate from a third party fuel tank on the property has also been
identified and is undergoing remediation. A closure request is pending Lahontan
Regional Water Quality Control Board approval. Estimated future remediation
costs are not expected to be significant.
NEICO, a wholly owned subsidiary of SPR, owns property in Wellington,
Utah, which was the site of a coal washing and load out facility. The site now
has a reclamation estimate supported by a bond of $4 million with the Utah
Division of Oil and Gas Mining. The property was under contract for sale and the
contract required the purchaser to provide $1.3 million in escrow towards
reclamation. However, the sales contract was terminated and NEICO took title to
the escrow funds. In September 2000, NEICO leased the property together with an
option to purchase. This lease was terminated in September 2001. It is NEICO's
intention to either lease or sell the property.
NOTE 12. SUBSEQUENT EVENT(SPR)
On April 23, 2002, SPR's Board of Directors announced that SPR would
not be paying a common stock dividend during the quarter ended June 30, 2002.
Payment of future dividends will be determined by SPR's Board of Directors and
will be subject to factors that ordinarily affect dividend policy, such as
earnings, cash flow, estimates of future earnings and cash flow, business
conditions, regulatory factors, financial condition and other matters.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
THE INFORMATION IN THIS FORM 10-Q INCLUDES FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS RELATE TO ANTICIPATED FINANCIAL PERFORMANCE,
MANAGEMENT'S PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, BUSINESS PROSPECTS,
OUTCOME OF REGULATORY PROCEEDINGS, MARKET CONDITIONS AND OTHER MATTERS. WORDS
SUCH AS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTEND," "PLAN" AND
"OBJECTIVE" AND OTHER SIMILAR EXPRESSIONS IDENTIFY THOSE STATEMENTS THAT ARE
FORWARD-LOOKING. THESE STATEMENTS ARE BASED ON MANAGEMENT'S BELIEFS AND
ASSUMPTIONS AND ON INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD-LOOKING
STATEMENTS. IN ADDITION TO ANY ASSUMPTIONS AND OTHER FACTORS REFERRED TO
SPECIFICALLY IN CONNECTION WITH SUCH STATEMENTS, FACTORS THAT COULD CAUSE THE
ACTUAL RESULTS OF SIERRA PACIFIC RESOURCES (SPR), NEVADA POWER COMPANY (NPC), OR
SIERRA PACIFIC POWER COMPANY (SPPC) TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED
IN ANY FORWARD-LOOKING STATEMENT INCLUDE, AMONG OTHERS, THE FOLLOWING:
(1) FURTHER UNFAVORABLE RULINGS IN RATE CASES PREVIOUSLY FILED AND
TO BE FILED BY NPC AND SPPC (THE "UTILITIES") WITH THE PUBLIC
UTILITIES COMMISSION OF NEVADA (PUCN), INCLUDING THE PERIODIC
APPLICATIONS TO RECOVER COSTS FOR FUEL AND PURCHASED POWER
THAT HAVE BEEN RECORDED BY THE UTILITIES IN THEIR DEFERRED
ENERGY ACCOUNTS AND DEFERRED NATURAL GAS RECORDED BY SPPC FOR
ITS GAS DISTRIBUTION BUSINESS;
(2) THE ABILITY OF SPR, NPC AND SPPC TO ACCESS THE CAPITAL MARKETS
TO SUPPORT THEIR REQUIREMENTS FOR WORKING CAPITAL, INCLUDING
AMOUNTS NECESSARY TO FINANCE DEFERRED ENERGY COSTS,
CONSTRUCTION COSTS AND THE REPAYMENT OF MATURING DEBT,
PARTICULARLY IN THE EVENT OF ADDITIONAL UNFAVORABLE RULINGS BY
THE PUCN AND/OR A FURTHER DOWNGRADE OF THE CURRENT DEBT
RATINGS OF SPR, NPC OR SPPC;
(3) WHETHER SUPPLIERS OF PURCHASED POWER, NATURAL GAS OR FUEL TO
NPC OR SPPC WILL EXERCISE CONTRACTUAL RIGHTS TO REQUEST
COLLATERAL AND, IF SUCH COLLATERAL CANNOT BE PROVIDED BY THE
UTILITY, WHETHER SUCH SUPPLIERS WILL CONTINUE TO DO BUSINESS
WITH NPC OR SPPC OR WILL EXERCISE THEIR RIGHT TO TERMINATE
THEIR CONTRACTS AND SEEK LIQUIDATED DAMAGES FROM THE
RESPECTIVE UTILITY;
(4) WHETHER SUPPLIERS OF PURCHASED POWER TO NPC WILL AGREE TO
NPC'S PROPOSAL TO DELAY PAYMENT OF A PORTION OF THE PURCHASE
PRICE UNDER CURRENT CONTRACTS DURING THE PERIOD FROM MAY 1
THROUGH SEPTEMBER 15, 2002;
(5) WHETHER SPR, NPC AND SPPC WILL BE ABLE TO ACHIEVE SUFFICIENT
STABILITY WITH RESPECT TO THEIR LIQUIDITY AND RELATIONSHIPS
WITH SUPPLIERS TO BE ABLE TO CONTINUE TO OPERATE OUTSIDE OF
BANKRUPTCY;
(6) WHETHER NPC AND SPPC WILL BE ABLE, EITHER THROUGH FEDERAL
ENERGY REGULATORY COMMISSION ("FERC") PROCEEDINGS OR
NEGOTIATION, TO OBTAIN LOWER PRICES ON THEIR LONGER-TERM
PURCHASED POWER CONTRACTS WHICH ARE PRICED ABOVE CURRENT
MARKET PRICES FOR ELECTRICITY;
(7) WHETHER THE PUCN WILL ISSUE FAVORABLE ORDERS IN A TIMELY
MANNER TO PERMIT THE UTILITIES TO BORROW MONEY AND ISSUE
ADDITIONAL SECURITIES TO FINANCE THE UTILITIES' OPERATIONS AND
TO PURCHASE POWER AND FUEL NECESSARY TO SERVE THEIR RESPECTIVE
CUSTOMERS, PARTICULARLY IN THE EVENT THAT INTERVENING PARTIES
IN SUCH PROCEEDINGS OPPOSE THE UTILITIES' FINANCING
APPLICATIONS;
(8) WHETHER THE UTILITIES WILL NEED TO PURCHASE ADDITIONAL POWER
ON THE SPOT MARKET TO MEET UNANTICIPATED POWER DEMANDS (FOR
EXAMPLE, DUE TO UNSEASONABLY HOT WEATHER) AND WHETHER
SUPPLIERS WILL BE WILLING TO SELL SUCH POWER TO THE UTILITIES
IN LIGHT OF THEIR WEAKENED FINANCIAL CONDITION;
(9) THE EFFECT OF PRICE CONTROLS PROMULGATED IN JUNE 2001 BY THE
FERC ON THE PRICE AT WHICH THE UTILITIES CAN SELL EXCESS POWER
IN THE WHOLESALE MARKETS AND ON THE OVERALL AVAILABILITY OF
PURCHASED POWER ON THE SPOT MARKET;
(10) THE EFFECT THAT ANY FUTURE TERRORIST ATTACKS MAY HAVE ON THE
TOURISM AND GAMING INDUSTRIES IN NEVADA, PARTICULARLY IN LAS
VEGAS, AS WELL AS ON THE ECONOMY IN GENERAL;
(11) THE EFFECT OF EXISTING OR FUTURE NEVADA, CALIFORNIA OR FEDERAL
LEGISLATION OR REGULATIONS AFFECTING ELECTRIC INDUSTRY
RESTRUCTURING, INCLUDING LAWS OR REGULATIONS WHICH COULD ALLOW
ADDITIONAL CUSTOMERS TO CHOOSE NEW ELECTRICITY SUPPLIERS OR
CHANGE THE CONDITIONS UNDER WHICH THEY MAY DO SO;
24
(12) UNSEASONABLE WEATHER AND OTHER NATURAL PHENOMENA, WHICH CAN
HAVE POTENTIALLY SERIOUS IMPACTS ON THE UTILITIES' ABILITY TO
PROCURE ADEQUATE SUPPLIES OF FUEL OR PURCHASED POWER TO SERVE
THEIR RESPECTIVE CUSTOMERS AND ON THE COST OF PROCURING SUCH
SUPPLIES;
(13) INDUSTRIAL, COMMERCIAL AND RESIDENTIAL GROWTH IN THE SERVICE
TERRITORIES OF THE UTILITIES;
(14) THE LOSS OF ANY SIGNIFICANT CUSTOMERS;
(15) CHANGES IN THE BUSINESS OF MAJOR CUSTOMERS, INCLUDING THOSE
ENGAGED IN GOLD MINING OR GAMING, WHICH MAY RESULT IN CHANGES
IN THE DEMAND FOR SERVICES OF THE UTILITIES;
(16) CHANGES IN ENVIRONMENTAL REGULATIONS, TAX OR ACCOUNTING
MATTERS OR OTHER LAWS AND REGULATIONS TO WHICH THE UTILITIES
ARE SUBJECT;
(17) FUTURE ECONOMIC CONDITIONS, INCLUDING INFLATION RATES AND
MONETARY POLICY;
(18) FINANCIAL MARKET CONDITIONS, INCLUDING CHANGES IN AVAILABILITY
OF CAPITAL OR INTEREST RATE FLUCTUATIONS;
(19) UNUSUAL OR UNANTICIPATED CHANGES IN NORMAL BUSINESS
OPERATIONS, INCLUDING UNUSUAL MAINTENANCE OR REPAIRS; AND
(20) EMPLOYEE WORKFORCE FACTORS, INCLUDING CHANGES IN COLLECTIVE
BARGAINING UNIT AGREEMENTS, STRIKES OR WORK STOPPAGES.
OTHER FACTORS AND ASSUMPTIONS NOT IDENTIFIED ABOVE MAY ALSO HAVE BEEN
INVOLVED IN DERIVING THESE FORWARD-LOOKING STATEMENTS, AND THE FAILURE
OF THOSE OTHER ASSUMPTIONS TO BE REALIZED, AS WELL AS OTHER FACTORS,
MAY ALSO CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED. SPR, NPC AND SPPC ASSUME NO OBLIGATION TO UPDATE
FORWARD-LOOKING STATEMENTS TO REFLECT ACTUAL RESULTS, CHANGES IN
ASSUMPTIONS OR CHANGES IN OTHER FACTORS AFFECTING FORWARD-LOOKING
STATEMENTS.
CRITICAL ACCOUNTING POLICIES
The following items represent critical accounting policies that under
different conditions or using different assumptions could have a material effect
on the financial condition, liquidity and capital resources of SPR and the
Utilities.
Regulatory Accounting
The Utilities' 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, the Utilities qualify for the application of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation", issued by the Financial Accounting
Standards Board (FASB). 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. 71 prescribes the method to be used to record the
financial transactions of a regulated entity. The criteria for applying SFAS No.
71 include the following: (i) rates are set by an independent third party
regulator, (ii) approved rates are intended to recover the specific costs of the
regulated products or services, and (iii) rates that are set at levels that will
recover costs can be charged to and collected from customers.
Deferred Energy Accounting
On April 18, 2001, the Governor of Nevada signed into law Assembly Bill
(AB) 369. The provisions of AB 369, which are described in greater detail in
"Regulation and Rate Proceedings," later, include, among others, a reinstatement
of deferred energy accounting for fuel and purchased power costs incurred by
electric utilities. In accordance with the provisions of SFAS No. 71, the
Utilities implemented deferred energy accounting on March 1, 2001, for their
respective electric operations. Under deferred energy accounting, to the extent
actual fuel and purchased power costs exceed fuel and purchased power costs
recoverable through current rates, that excess is not recorded as a current
expense on the income statement but rather is deferred and recorded as an asset
on the balance sheet. Conversely, a liability is recorded to the extent fuel and
purchased power costs recoverable through current rates exceed actual fuel and
purchased power costs. These excess amounts are reflected in adjustments to
rates and recorded as revenue or expense in future time periods, subject to PUCN
review. AB 369 provides that the PUCN may not allow the recovery of any costs
for purchased fuel or purchased power "that were the result of any practice or
transaction that was undertaken, managed or performed imprudently by the
electric utility." In
25
reference to deferred energy accounting, AB 369 specifies that fuel and
purchased power costs include all costs incurred to purchase fuel, to purchase
capacity, and to purchase energy. The Utilities also record, and are eligible
under the statute to recover, a carrying charge on such deferred balances.
As described in more detail under "Regulatory Matters - Nevada Matters
- - Nevada Power Company Deferred Energy Case" below, on November 30, 2001, NPC
filed an application with the PUCN seeking to clear deferred balances for
purchased fuel and power costs accumulated between March 1, 2001 and September
30, 2001. The application sought to establish a rate to clear accumulated
purchased fuel and power costs of $922 million and spread the cost recovery over
a period of not more than three years. On March 29, 2002, the PUCN issued its
decision on the deferred energy application, disallowing $434 million of
purchased fuel and power costs and allowing NPC to collect the remaining $488
million over three years. As a result of this disallowance, NPC wrote off $434
million of deferred energy costs, the two major national rating agencies
immediately downgraded the credit rating on SPR's, NPC's and SPPC's debt
securities (followed by further downgrades late in April), and the market price
of SPR's Common Stock fell substantially.
SPPC has also filed an application with the PUCN seeking to clear its
deferred balances of $205 million of purchased fuel and power costs accumulated
between March 1, 2001 and November 30, 2001. Public hearings began on April 29,
2002. As was the case with the hearings on NPC's deferred energy rate case,
various parties have intervened in SPPC's and have proposed disallowances
ranging from $40.4 million to $361 million. A decision is expected on or before
June 1, 2002, and no assurance can be given as to the outcome of this
proceeding. For more a more detailed discussion of this case, see "Regulatory
Matters - Nevada Matters - Sierra Power Company Deferred Energy Case" below.
In the meantime, both NPC and SPPC have continued to be entitled under
AB369 to utilize deferred energy accounting for their electric operations.
Because of contracts entered into during the Western energy crisis in 2001 to
assure adequate supplies of electricity for their customers, NPC and SPPC are
continuing to pay fuel and purchased power costs in excess of amounts they are
permitted to recover in current rates. As a result, during the quarter ended
March 31, 2002, both Utilities continued to record additional amounts in their
deferral of energy costs accounts. If not for deferred energy accounting during
the first quarter of 2002, SPR's, NPC's and SPPC's results of operations,
financial condition, liquidity and capital resources would have been adversely
affected. For example, without the deferred energy accounting provisions of AB
369, the reported net income of SPPC for the quarter ended March 31, 2002 of
$10 million would have been (net of income tax) reported as net income of $7
million, and the net losses of SPR and NPC for the quarter ended March 31, 2002
of ($303.9) million and ($301) million (1) would have been (net of income tax)
reported as net losses of ($313.2) million and ($307.2) million (1),
respectively. As demonstrated with respect to NPC's recent deferred energy
case, a significant disallowance by the PUCN of costs currently deferred could
have an adverse affect on the future results of operations of SPR, NPC and
SPPC. See the Form 10-K for the year ended December 31, 2001 for a more
detailed discussion of deferred energy accounting.
Derivatives and Hedging Activities
Effective January 1, 2001, SPR, SPPC, and NPC adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138. As amended, SFAS No. 133 requires that an entity recognize all
derivative instruments as either assets or liabilities in the statement of
financial position and measure the instruments at fair value.
In order to manage loads, resources and energy price risk, the
Utilities buy fuel and power under forward contracts. In addition to forward
fuel and power purchase contracts, the Utilities also use options and swaps to
manage price risk. All of these instruments are considered to be derivatives
under SFAS No. 133. The risk management assets and liabilities recorded in the
balance sheets of the Utilities and SPR are primarily comprised of the fair
value of these forward fuel and power purchase contracts and other energy
related derivative instruments.
Fuel and purchased power costs are subject to deferred energy
accounting. Accordingly, the energy related risk management assets and
liabilities and the corresponding unrealized gains and losses (changes in fair
value) are offset with a regulatory asset or liability rather than recognized in
the statements of income and comprehensive income. Upon settlement of a
derivative instrument, actual fuel and purchased power costs are recognized if
they are currently recoverable or deferred if they are recoverable or payable
through future rates.
The fair values of the forward contracts and swaps are determined based
on quotes obtained from independent brokers and exchanges. The fair values of
options are determined using a pricing model which incorporates assumptions such
as the underlying commodity's forward price curve, time to expiration, strike
price, interest rates, and volatility. The use of different assumptions and
variables in the model could have a significant impact on the valuation of the
instruments.
- --------------------------
(1) Excludes equity in losses of SPR
26
SPR and the Utilities have other non-energy related derivative
instruments such as interest rate swaps. The transition adjustment resulting
from the adoption of SFAS No. 133 related to these types of derivative
instruments was reported as the cumulative effect of a change in accounting
principle in Other Comprehensive Income. Additionally, the changes in fair
values of these non-energy related derivatives are also reported in the
statements of comprehensive income until the related transactions are settled or
terminate, at which time the amounts will be reclassified into earnings. No
amounts were reclassified into earnings during the three-month periods ended
March 31, 2002 and 2001.
See Note 22 of "Notes to Financial Statements" in the Form 10-K for the
year ended December 31, 2001, and "Item 3 - Quantitative and Qualitative
Disclosures about Market Risk" in this Report for additional information
regarding derivatives and hedging activities.
Provision for Uncollectible Accounts
The Utilities reserve for doubtful accounts based on past experience
writing off uncollectible customer accounts. The collapse of the energy markets
in California, and the subsequent bankruptcy of the California Power Exchange
and the financial difficulties of the Independent System Operator, resulted in
the Utilities reserving for outstanding receivables for power purchases by these
two entities of $19.9 million and $1.5 million (before taxes) for NPC and SPPC,
respectively. The weakening economy and the disruption to the leisure travel
industry after September 11th also impacted the Utilities' customer
delinquencies in 2001. As of December 31, 2001, additional amounts of $14.8
million and $6.1 million were reserved for delinquent retail customer accounts
of NPC and SPPC, respectively. The adequacy of these reserves will vary to the
extent that future collections differ from past experience. Uncollectible retail
customer accounts amounting to $.9 million and $28,000, respectively, for NPC
and SPPC, were written off against this provision during the quarter ended March
31, 2002. Significant collection efforts are underway to recover portions of the
rest of the delinquent accounts.
MAJOR FACTORS AFFECTING RESULTS OF OPERATIONS
As discussed in the results of operations sections that follow,
operating results for the quarter ended March 31, 2002 were severely affected by
the PUCN's March 29, 2002 decision in NPC's deferred energy rate case to
disallow $434 million of purchased fuel and power costs. As a result of this
disallowance, NPC wrote off $465 million of deferred energy costs and related
carrying charges during the quarter. The discussion below provides the context
in which to evaluate the significance of this decision.
In an effort to mitigate the effects of higher fuel and purchased power
costs that developed in the Western United States in 2000,the Utilities entered
into the Global Settlement with the PUCN in July 2000, which established a
mechanism that initiated incremental rate increases for each Utility. Cumulative
electric rate increases under the Global Settlement were $127 million and $65
million per year, respectively, for the Utilities.
However, because the rate adjustment mechanism of the Global Settlement
was subject to certain caps and could not keep pace with the continued
escalation of fuel and purchased power prices, on January 29, 2001, the
Utilities filed a Comprehensive Energy Plan (CEP) with the PUCN. The CEP
included a request for emergency rate increases (CEP Riders). On March 1, 2001,
the PUCN permitted the requested CEP Riders to go into effect subject to later
review. The CEP Riders provided further rate increases of $210 million and $104
million per year, respectively, for NPC and SPPC.
Notwithstanding the increases under the Global Settlement and the CEP
Riders, the Utilities' revenues for fuel and purchased power recovery continued
to be less than the related expenses. Accordingly, the Utilities sought
additional relief pursuant to legislation.
On April 18, 2001, the Governor of Nevada signed into law AB 369. The
provisions of AB 369 include a moratorium on the sale of generation assets by
electric utilities until 2003, the repeal of electric industry restructuring,
and, beginning March 1, 2001, a reinstatement of deferred energy accounting for
fuel and purchased power costs incurred by electric utilities. The stated
purposes of this emergency legislation included, among others, to control
volatility in the price of electricity in the retail market in Nevada and to
ensure that the Utilities have the necessary financial resources to provide
adequate and reliable electric service under present market conditions.
As discussed above in "Critical Accounting Policies," deferred energy
accounting allows the Utilities an opportunity to recover in future periods that
portion of their costs for fuel and purchased power not covered by current rates
and defers to future periods the expense associated with the amounts by which
fuel and purchased power costs exceed the costs to be recovered in current
rates. Recovery is subject to PUCN review as to prudency and other matters.
AB 369 requires each Utility to file general rate applications and
deferred energy applications with the PUCN by specific dates. NPC's deferred
energy application, filed on November 30, 2001, sought to establish a Deferred
Energy Accounting Adjustment ("DEAA") rate, effective on April 1, 2002, to clear
accumulated purchased fuel and power costs of
27
$922 million and spread the cost recovery over a period of not more than three
years, resulting in an average net increase of 21%. SPPC's deferred energy
application, filed on February 1, 2002, seeks to establish a DEAA rate to clear
accumulated purchased fuel and power costs of $205 million and spread the cost
recovery over a period of not more than three years, resulting in an average net
increase of 9.8%. The PUCN decision on SPPC's deferred energy application is to
take effect on June 1, 2002. See "Regulatory Matters," later, for a discussion
of the Utilities' general rate case filings.
The decision of the PUCN on NPC's deferred energy application to
disallow $434 million of purchased fuel and power costs accumulated between
March 1, 2001 and September 30, 2001 had a significant negative impact on the
results of operations of SPR and NPC for the quarter ended March 31, 2002.
Although that decision is being challenged by NPC in a lawsuit filed in Nevada
state court, which is discussed below under "Regulatory Matters", the decision
caused the two major national rating agencies to issue an immediate downgrade of
the credit ratings on SPR's, NPC's and SPPC's debt securities (followed by
further downgrades late in April), the market price of SPR's Common Stock fell
substantially, NPC and SPPC were obliged within 5 business days of the
downgrades to issue general and refunding mortgage bonds to secure their bank
lines of credit, NPC was obliged to obtain a waiver and amendment from its
credit facility banks before it was permitted to draw down on the facility, NPC
and SPPC were no longer able to issue commercial paper, a number of NPC's power
suppliers contacted NPC regarding its ability to pay the purchase price of
outstanding contracts, an affiliate of Enron Corp. terminated its power supply
agreements with the Utilities, and Morgan Stanley Capital Group Inc. terminated
its power supply agreements with NPC. Several of the intervenors from NPC's
deferred energy rate case have filed petitions with the PUCN for reconsideration
of its decision, seeking additional disallowances ranging from $12.8 million to
$488 million. An adverse decision on the petition for rehearing, or the approval
of a significant disallowance in the pending deferred energy rate case of SPPC
or in future cases filed by either Utility could further weaken the financial
condition, liquidity, and capital resources of SPR, NPC, and SPPC. In
particular, such a decision or decisions could cause further downgrades of debt
securities by the rating agencies, could make it impracticable to access the
capital markets, and could cause power suppliers to terminate purchased power
contracts and seek liquidated damages. Under such circumstances, there can be no
assurance that SPR, NPC, or SPPC will be able to remain solvent or continue
operations without seeking protection under the bankruptcy laws.
SIERRA PACIFIC RESOURCES
During the first three months of 2002, SPR incurred a loss of $302.9
million before preferred stock dividend requirements. During the first quarter
of 2002, SPR paid $20.6 million in common stock dividends. NPC and SPPC, SPR's
principal subsidiaries, each paid common stock dividends of $10 million to their
parent, SPR. SPPC also paid $975,000 in dividends to holders of its preferred
stock. During the first quarter, NPC and SPPC each received a capital
contribution of $10 million from SPR.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Since SPR is a holding company, substantially all of its cash flow is
provided by dividends paid to SPR by NPC and SPPC on their common stock, all of
which is owned by SPR. Since these two subsidiaries are public utilities, they
are subject to regulation by state utility commissions which may impose limits
on investment returns or otherwise impact the amount of dividends which may be
paid by those companies. In addition, the terms of certain outstanding series of
first mortgage bonds of NPC limit the cumulative amount of dividends that may be
paid on its capital stock to the cumulative net earnings of NPC since 1953. At
the present time, this restriction precludes NPC from making further payments of
dividends on NPC's common stock and will continue to bar such payments until NPC
has returned to profitability. The terms of certain of SPPC's first mortgage
bonds contain a similar provision restricting the cumulative amount of dividends
payable on SPPC's common stock to the cumulative net earnings available for
dividends since 1977. This restriction currently exists for the benefit of three
series of SPPC's first mortgage bonds, with an aggregate principal balance of
$4.3 million as of April 30, 2002. SPPC expects to defease these bonds in the
near future, thereby eliminating the SPPC first mortgage bond dividend
restriction. In addition, the Credit Agreements of NPC and SPPC prohibit the
payment of dividends on each Utility's common stock if that Utility is in
default under the terms of its respective credit facility. Similarly, the
Articles of Incorporation of SPPC contain restrictions on the payment of
dividends on SPPC's common stock in the event of a default in the payment of
dividends on SPPC's preferred stock and prohibit SPPC from declaring or paying
any dividends on any shares of common stock except from the net income of SPPC,
and its predecessor, available for dividends on common stock accumulated
subsequent to December 31, 1955, less preferred stock dividends plus the sum of
$500,000. Finally, the terms of NPC's trust preferred securities provide that no
dividends may be paid on NPC's common stock if NPC has elected to defer payments
on the junior subordinated debentures issued in conjunction with the trust
preferred securities. Any of these provisions which restrict dividends payable
by NPC or SPPC could adversely affect the liquidity of SPR.
On March 29 and April 1, 2002, S&P and Moody's lowered the unsecured
debt ratings of SPR, NPC and SPPC to below investment grade in response to the
decision of the PUCN with respect to NPC's rate cases. On April 23 and 24, 2002,
the unsecured debt ratings of SPR and the Utilities were further downgraded by
both rating agencies and the Utilities' secured debt ratings were downgraded to
below investment grade. The downgrades have affected SPR's, NPC's and SPPC's
liquidity
28
primarily in two principal areas: (1) their respective financing
arrangements and (2) NPC's and SPPC's contracts for fuel, for purchase and sale
of electricity and for transportation of natural gas.
As a result of the ratings downgrades, SPR's ability to access the
capital markets to raise funds is severely limited. On April 3, 2002, SPR
terminated its $75 million unsecured revolving credit facility as a condition to
the banks agreeing to an amendment of NPC's $200 million unsecured revolving
credit facility that would permit NPC to draw down funds under that facility.
See "Nevada Power Company - Financial Condition, Liquidity and Capital
Resources" for more information.
At April 30, 2002, SPR had estimated cash reserves of approximately $41
million.
In response to the decisions by the PUCN in NPC's recent rate cases,
SPR has implemented certain measures that will positively impact cash flow by
$125 million in 2002. Two major transmission construction projects, discussed in
the Form 10-K for the year ended December 31, 2001, have been delayed for a
total capital preservation impact of $80.8 million. The delay in NPC's
Centennial Plan has an impact of $46.4 million and delaying SPPC's Falcon to
Gonder Project represents $34.4 million. An additional $28.9 million was reduced
from the Utilities' capital budgets by curtailing or delaying other projects.
The balance of the $125 million cash savings will be the result of various land
sales. Additional cost-cutting actions by SPR may be necessary if SPR is unable
to access the capital markets to raise funds and/or if SPPC receives an
unfavorable decision in either its general or deferred energy rate cases.
With respect to NPC's and SPPC's contracts for purchased power, NPC and
SPPC purchase and sell electricity with their counterparties under the Western
Systems Power Pool ("WSPP") agreement, which is an industry standard contract.
The WSPP contract is posted on the WSPP website. These contracts provide that a
material adverse change may give rise to a right to request collateral, which,
if not provided within 3 business days, could cause a default. A request for
collateral must be exercised within 30 days of the event becoming known. A
default will result in a termination payment equal to the present value of the
net gains and losses for the entire remaining term of the contract aggregated to
a single liquidated amount due within 3 business days following the date the
notice of termination is received. The mark to market value can be used to
roughly approximate the termination payment at any point in time. The mark to
market value for the Utilities as of May 9, 2002, was approximately $726
million.
Several power suppliers have requested collateral from NPC and SPPC. On
April 4, 2002, the Utilities sent a letter to their suppliers advising them
that, assuming the Utilities could access the capital markets for secured debt
and no other significant negative developments occurred, the Utilities expected
to be able to honor their obligations under the power supply contracts. However,
the Utilities noted that a simultaneous call for 100 percent mark-to-market
collateral in the short-term would likely not be met. On April 24, 2002, the
Utilities met with representatives of various suppliers to discuss SPR's and the
Utilities' financial situation and plans, and indicated that they intended to
propose extended payment terms for the above-market portions of existing power
contracts. Such extended payment terms were proposed to NPC's suppliers in a
letter dated May 2, 2002.
On May 1, 2002, Enron Power Marketing Inc. notified NPC and SPPC that
it would end power deliveries to the Utilities effective May 7. Enron advised
the Utilities that it was taking this action in line with its recently announced
new business configuration that does not include arrangements such as its
existing contracts with the Utilities. Enron also indicated that it had
exercised what it believes to be its contractual right to end deliveries because
of the recent downgrade in the credit ratings of the Utilities and their failure
to provide mark-to-market collateral. The Enron contracts covered approximately
10% of purchased power supplies for the combined Utilities for the remainder of
2002. Enron has asserted claims for liquidated damages of approximately $199.7
million and $87.1 million against NPC and SPPC, respectively; however, that
amount is subject to the Utilities' pending complaint proceeding at the FERC
challenging the contract prices, and to other defenses that the Utilities intend
to pursue.
On May 9, 2002, Morgan Stanley Capital Group Inc. (MSCG) notified NPC
that it would end power deliveries to the Utility effective May 9. MSCG also
indicated that it had exercised what it believes to be its contractual right to
end deliveries because of NPC's inability to provide adequate assurances of its
ability to perform all of its outstanding material obligations. The MSCG
contracts covered approximately 1% of purchased power supplies for NPC for the
remainder of 2002. MSCG has stated that it will assert claims for any and all
amounts due and payable.
With respect to the purchase and sale of natural gas, NPC and SPPC use
several types of contracts. Standard industry sponsored agreements include: (1)
the Gas Industry Standards Board ("GISB") agreement which is used for physical
gas transactions, (2) the GasEDI Base Contract for Short Term Sale and Purchase
of Natural Gas which is also used for physical gas transactions, or (3) the
International Swap Dealers Association (ISDA) agreement which is used for
financial gas transactions. Alternatively, the gas transactions might be
governed by a non-standard bilateral master agreement negotiated between the
parties, or by the confirmation associated with the transaction. The natural gas
contract terms and conditions are more varied than the electric contracts.
Consequently, some of the contracts contain language similar to that found in
the WSPP agreement and other agreements have unique provisions dealing with
material adverse changes.
29
Gas transmission services are provided under the FERC Gas Tariff or a
custom agreement. These contracts require the entities to establish and maintain
creditworthiness to obtain service. These contracts are subject to FERC approved
tariffs which, under certain circumstances, require the Utilities to provide
collateral to continue receiving service. To date, a letter of credit has been
provided to one of SPPC's gas suppliers.
In March 2002, NPC received a federal income tax refund of $79.3
million. Additionally, SPR and the Utilities received $100.7 million in April
2002. These refunds were the result of income tax losses generated in 2001.
Federal legislation passed in March 2002 changed the allowed carry-back of
these losses from two years to five years. This change permitted SPR and the
Utilities to accelerate the receipt of a portion of their income tax
receivables sooner than expected. The remaining receivable of $300.5 million
will be utilized in future periods to reduce taxes payable when SPR and the
Utilities recognize taxable income.
SPR's future liquidity depends, in part, on SPPC's ability to pay
dividends to SPR and on a restoration of NPC to financial stability. Further
adverse developments at NPC or SPPC, including a material disallowance of
deferred energy costs in SPPC's pending rate case or unsuccessful negotiations
for extended payment terms with the Utilities' power suppliers, could render
SPR's ability to continue to operate outside of bankruptcy uncertain.
30
NEVADA POWER COMPANY
The causes for significant changes in specific lines comprising the
results of operations for NPC are as follows:
THREE MONTHS
ENDED MARCH 31,
------------------------------------------
Change from
2002 2001 Prior Year %
-------- -------- ------------
ELECTRIC OPERATING REVENUES ($000):
Residential $131,106 $103,179 27.1%
Commercial 69,691 55,556 25.4%
Industrial 88,760 72,222 22.9%
-------- --------
Retail revenues 289,557 230,957 25.4%
Other 66,715 128,055 -47.9%
-------- --------
TOTAL REVENUES $356,272 $359,012 -0.8%
======== ========
Retail sales in thousands
of megawatt-hours (MWH) 3,570 3,316 7.7%
Average retail revenue per MWH $ 81.11 $ 69.65 16.5%
Residential, commercial, and industrial electric revenues increased for
the three months ended March 31, 2002, over the same period in 2001 due to
increases in both electric rates and the number of customers. Higher rates
resulted from cumulative monthly rate increases pursuant to the 2000 Global
Settlement and an increase in rates effective March 1, 2001, pursuant to the
Comprehensive Energy Plan (CEP). See NPC's Annual Report on Form 10-K for the
year ended December 31, 2001 for a discussion of the Global Settlement and the
CEP. Voluntary energy curtailment by residential customers resulted in lower
sales per residential customer. The opening of several new schools and
businesses contributed to the increases in commercial and industrial revenues,
partially offsetting the effect of voluntary energy curtailment practices among
these customer classes.
The decrease in electric revenues - other for the three month period
ended March 31, 2002, over the same period in 2001 was due to the decrease in
prices and sales volume of wholesale electric power to other utilities, as a
result of changing market conditions. See NPC's Annual Report on Form 10-K for
the year ended December 31, 2001, Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operation, Purchased Power Procurement,
for a discussion of NPC's purchased power procurement strategies.
THREE MONTHS
ENDED MARCH 31,
------------------------------------------
Change from
2002 2001 Prior Year %
-------- -------- -------------
PURCHASED POWER ($000) $176,066 $201,822 -12.8%
Purchased Power in thousands
of MWHs 2,188 2,468 -11.3%
Average cost per MWH of
Purchased Power $ 80.47 $ 81.78 -1.6%
NPC's purchased power costs and volume were lower for the three months
ended March 31, 2002 than for the same period of the prior year. These decreases
were the result of a lower volume of Short-Term Firm energy purchased and a
substantial decrease in the price of Non-Firm energy. Purchases associated with
risk management activities, which are included in Short-Term Firm energy,
decreased in 2002. Risk management activities include transactions entered into
for hedging purposes and to minimize purchased power costs. See NPC's Annual
Report on Form 10-K for the year ended December 31, 2001, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operation,
Purchased Power Procurement, for a discussion of NPC's purchased power
procurement strategies.
31
THREE MONTHS
ENDED MARCH 31,
------------------------------------------
CHANGE FROM
2002 2001 Prior Year %
------- -------- ---------------
FUEL FOR POWER GENERATION ($000) $83,722 $115,352 -27.4%
Thousands of MWHs generated 2,241 2,501 -10.4%
Average cost per MWH of
Generated Power $ 37.36 $ 46.12 -19.0%
Fuel for generation costs for the three months ended March 31, 2002,
were significantly lower than the same period in the prior year due to
substantial decreases in the volume and price of natural gas.
THREE MONTHS
ENDED MARCH 31,
------------------------------------------
Change
from Prior
DEFERRAL OF ENERGY COSTS-NET ($000) 2002 2001 Year %
------------- ------------- ------------
Deferred energy costs $ (9,636) $11,308 -185.2%
Deferred energy costs disallowed 434,123 - N/A
------------- -------------
$ 424,487 $11,308 3653.9%
============= =============
Deferral of energy costs-net for the three months ended March 31, 2002,
reflects the write-off of $434 million of deferred energy costs for the seven
months ended September 30, 2001, that were disallowed by the PUCN in their March
29, 2002 decision on NPC's deferred energy rate case. The write-off was offset
in part by the deferral of approximately $9.6 million in the first three months
of 2002. Incurred costs are deferred to the extent that actual fuel and
purchased power costs exceeded the fuel and purchased power costs recovered
through current rates.
THREE MONTHS
ENDED MARCH 31,
---------------------------------------------
Change
from Prior
2002 2001 Year %
------------- ------------- ----------------
ALLOWANCE FOR OTHER FUNDS
USED DURING CONSTRUCTION ($000) $ 421 $ (351) N/A
ALLOWANCE FOR BORROWED FUNDS
USED DURING CONSTRUCTION ($000) $ 1,112 $ (352) N/A
------------- -------------
$ 1,533 $ (703) N/A
============= =============
Total allowance for funds used during construction (AFUDC) for the
three months ended March 31, 2002, increased over the same period in the prior
year because AFUDC in 2001 reflects an adjustment to refine amounts assigned to
specific components of facilities that were completed in different periods. The
year-to-year change was offset, in part, by a decrease in the AFUDC rate in
2002.
32
THREE MONTHS
ENDED MARCH 31,
-------------------------------------------
Change
from Prior
($000) 2002 2001 Year %
--------- -------- -----------
OTHER OPERATING EXPENSE $ 39,986 $ 50,772 -21.2%
MAINTENANCE EXPENSE $ 11,650 $ 12,980 -10.2%
DEPRECIATION AND AMORTIZATION $ 30,809 $ 21,876 40.8%
INCOME TAXES $(156,423) $(30,464) 413.5%
TAXES OTHER THAN INCOME TAXES $ 6,734 $ 6,050 11.3%
INTEREST CHARGES ON LONG-TERM DEBT $ 24,078 $ 16,620 44.9%
INTEREST CHARGES-OTHER $ 2,530 $ 3,963 -36.2%
OTHER INCOME (EXPENSE) - NET $ (11,357) $ 421 -2797.6%
Other operating expense for the three-month period ending March 31,
2002 was less, compared with the same period in the prior year, due to a $16.1
million increase in the provision for uncollectible accounts in 2001 related to
the California Power Exchange and a $3 million reserve provision established in
2001 as a result of the conclusion of electric industry restructuring in Nevada.
These reductions were partially offset by increased expenses in 2002 related to
collection activities, legal fees associated with the PUCN'S decision on NPC's
deferred energy rate case, and insurance premiums.
Maintenance costs for the three-month period ending March 31, 2002,
decreased from the prior year due to timing of scheduled plant maintenance.
Depreciation and amortization for the three-month period ending March
31, 2002, increased over the same period in 2001 due to a $7.9 million
adjustment resulting from the PUCN's March 27 decision in NPC's general rate
case, and, to a lesser extent, an increase in plant-in-service.
NPC recorded a larger income tax benefit for the three months ended
March 31, 2002, compared to 2001 due to a larger pre-tax net loss in the current
year.
Taxes other than income taxes were higher for the three months ended
March 31, 2002 due to an increase in property taxes related to an increase in
plant-in-service and due to higher payroll taxes.
Interest charges on long-term debt for the three-month period ending
March 31, 2002, increased over the same period in 2001 due to a $446 million
increase in long-term debt outstanding for the quarter ended March 31, 2002,
over the year earlier period.
Interest charges-other for the three-month period ending March 31,
2002, decreased from the prior year due to lower commercial paper and short-term
debt balances during 2002.
Other income (expense) - net reflects a loss for the three months ended
March 31, 2002, due to the write-off of approximately $20.1 million, net of
taxes, of carrying charges on deferred energy costs that were disallowed by the
PUCN in their March 29, 2002 decision on NPC's deferred energy rate case. The
write-off was offset in part by the recording of approximately $12.8 million,
net of taxes, of current year carrying charges on deferred energy costs.
ANALYSIS OF CASH FLOWS
NPC's cash flows during the three months ended March 31, 2002, improved
compared to the same period in 2001, resulting primarily from an increase in
cash flows from operating activities offset, in part, by a decrease in cash
flows from financing activities. Although NPC recorded a substantially larger
loss for the three months ended March 31, 2002 than the same period in 2001, the
increase in the current year's loss resulted largely from the write-off of
disallowed deferred energy costs for which the cash outflow had occurred in
2001. Cash flows from operating activities in the current year also reflect the
receipt of an income tax refund resulting from a tax law change that took effect
in March 2002. Cash flows from financing activities were lower due to a decrease
in short-term borrowings.
33
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the first three months of 2002, NPC incurred a loss of
approximately $301.0 million (excluding NPC's equity in the losses of its
parent, SPR), and paid $10 million in dividends on its common stock, all of
which was reinvested in NPC as a contribution to capital.
As discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Nevada Power Company - Construction
Expenditures and Financing" and " - Capital Structure" in the Annual Report on
Form 10-K for the year ended December 31, 2001, NPC anticipated external capital
requirements for construction costs and for the repayment of maturing short-term
and long-term debt during 2002 totaling approximately $403 million, which NPC
planned to fund through a combination of (i) internally generated funds, (ii)
the issuance of short-term debt and preferred stock, and (iii) capital
contributions from SPR. At April 30, 2002, NPC had estimated cash reserves of
approximately $67 million.
On March 29 and April 1, 2002, following the decision by the PUCN in
NPC's deferred energy rate case, S&P and Moody's lowered NPC's unsecured debt
ratings to below investment grade. On April 23 and 24, 2002, NPC's unsecured
debt ratings were further downgraded and its secured debt ratings were
downgraded to below investment grade. As a result of these downgrades, NPC's
ability to access the capital markets to raise funds is severely limited. Since
SPR's credit ratings were similarly downgraded, SPR's ability to make capital
contributions to NPC also became severely limited.
In connection with the credit downgrades by S&P and Moody's, NPC lost
its A2/P2 commercial paper ratings and could no longer issue commercial paper.
NPC had a commercial paper balance outstanding of $198.9 million at the time
with a weighted average interest rate of 2.52%. Since NPC was no longer able to
roll over its commercial paper, it paid off its maturing commercial paper with
the proceeds of borrowings under its credit facility. NPC does not expect to
have direct access to the commercial paper market for the foreseeable future.
NPC's $200 million unsecured revolving credit facility was also
affected by the decision in the deferred energy rate case. Following the
announcement of that decision, the Banks participating in NPC's credit facility
determined that a material adverse change had occurred with respect to NPC,
thereby precluding NPC from borrowing funds under its credit facility. The Banks
agreed to waive the consequences of the material adverse change in a waiver
letter and amendment that was executed on April 4, 2002. As required under the
waiver letter and amendment, NPC issued and delivered its General and Refunding
Mortgage Bond, Series C, due November 28, 2002, in the principal amount of $200
million, to the Administrative Agent as security for the credit facility.
The waiver letter and amendment also provides that (i) NPC may not
create or incur any liens on its properties to secure obligations to its power
and/or commodity trading counterparties or power suppliers, (ii) in the event
that NPC issues more than $250 million of its General and Refunding Mortgage
Bonds, other than to secure NPC's 6.20% Senior Unsecured Notes, Series B due
April 15, 2004, the principal amounts of such issuances will be applied as
mandatory prepayments of the loans outstanding under the credit facility and the
commitments under the facility will correspondingly be reduced, and (iii) the
SPR credit facility be terminated.
As of May 2, 2002, NPC had borrowed the entire $200 million of funds
available under its credit facility to pay off maturing commercial paper. NPC's
credit facility expires November 28, 2002. The borrowing costs under the credit
agreement are at a variable interest rate consisting of a spread over LIBOR or
an alternate base rate that is based upon a pricing grid tied to the credit
rating on NPC's senior unsecured long-term debt.
NPC's credit agreement contains financial covenants requiring that NPC
maintain a ratio of (i) Total Indebtedness to (ii) the sum of Total Indebtedness
and Shareholders Equity that does not exceed 0.60:1 as of the last day of each
fiscal quarter and a Consolidated Interest Coverage Ratio of not less than 2.0:1
calculated as of the last day of each fiscal quarter for the preceding four
consecutive fiscal quarters. As of March 31, 2002, NPC was in compliance with
these financial covenants.
NPC is currently negotiating a receivables purchase facility, in a
principal amount not to exceed $125 million. Under the proposed facility, NPC
would sell receivables in a true sale to special purpose entities that would
in-turn sell those assets or interests in those assets to a commercial paper
conduit or directly to a bank. This facility would be used to provide additional
liquidity for working capital and general corporate purposes in addition to
NPC's existing credit facility. If completed, NPC expects the facility to be
accounted for in compliance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The special
purpose entities would be wholly owned subsidiaries and their financial
positions and results of operations would be reflected in the consolidated
financial statements of SPR, NPC, and SPPC. Completion of this facility is
dependent on the negotiation of mutually satisfactory terms and the satisfaction
of customary closing conditions, and no assurance can be given at this time that
the facility will in fact be completed.
NPC's first mortgage indenture creates a first priority lien on
substantially all of NPC's properties. As of March 31, 2002, $387.5 million of
NPC's first mortgage bonds were outstanding. Although the first mortgage
indenture allows NPC to
34
issue additional mortgage bonds on the basis of (i) 60 percent of net utility
property additions and/or (ii) the principal amount of retired mortgage bonds,
NPC agreed in the waiver letter and amendment to its credit agreement that it
would not issue any more first mortgage bonds.
NPC's General and Refunding Mortgage Indenture creates a lien on
substantially all of NPC's properties in Nevada that is junior to the lien of
the first mortgage indenture. As of March 31, 2002, $690 million of NPC's
General and Refunding Mortgage securities were outstanding, with another $130
million of General and Refunding Mortgage Bonds issued on May 13, 2002, as
discussed below. Additional securities may be issued under the General and
Refunding Mortgage Indenture on the basis of (i) 70 percent of net utility
property additions, (ii) the principal amount of retired General and Refunding
Mortgage bonds, and/or (iii) the principal amount of first mortgage bonds
retired after delivery to the indenture trustee of the initial expert's
certificate under the General and Refunding Mortgage Indenture. At May 13, 2002,
NPC had the capacity to issue approximately $885 million of additional General
and Refunding Mortgage bonds. However, the financial covenants contained in the
credit agreement described above may limit NPC's ability to issue additional
general and refunding bonds or other debt. In addition, NPC has filed an
application with the PUCN for approval to issue up to $450 million of long-term
secured debt. Favorable action on this application will be required before any
additional general and refunding bonds or other secured debt may be issued. No
assurance can be given as to the outcome or timing of a decision by the PUCN on
this application.
NPC also has the ability to release property from the liens of the two
mortgage indentures on the basis of net property additions, cash and/or retired
bonds. To the extent NPC releases property from the lien of its General and
Refunding Mortgage Indenture, it will reduce the amount of bonds issuable under
that indenture.
On May 13, 2002, NPC issued a General and Refunding Mortgage Bond,
Series D, due April 15, 2004, in the principal amount of $130 million, for the
benefit of the holders of NPC's 6.20% Senior Unsecured Notes, Series B, due
April 15, 2004. The Senior Unsecured Notes Indenture required that, in the event
that NPC issued debt secured by liens on NPC's operating property in excess of
15% of its Net Tangible Assets or Capitalization (as both terms are defined in
the Senior Unsecured Notes Indenture), NPC would equally and ratably secure the
Senior Unsecured Notes. NPC triggered this negative pledge covenant on April 23,
2002.
On May 1, 2002, Enron Power Marketing Inc. notified NPC and SPPC that
it would end power deliveries to the Utilities effective May 7. Enron advised
the Utilities that it was taking this action in line with its recently announced
new business configuration that does not include arrangements such as its
existing contracts with the Utilities. Enron also indicated that it had
exercised what it believes to be its contractual right to end deliveries because
of the recent downgrade in the credit ratings of the Utilities and their failure
to provide mark-to-market collateral. The Enron contracts covered approximately
10% of purchased power supplies for the combined Utilities for the remainder of
2002. Enron has asserted claims for liquidated damages of approximately $199.7
million and $87.1 million against NPC and SPPC, respectively; however, that
amount is subject to the Utilities' pending complaint proceeding at the FERC
challenging the contract prices, and to other defenses that the Utilities intend
to pursue.
On May 9, 2002, Morgan Stanley Capital Group Inc. (MSCG) notified NPC
that it would end power deliveries to the Utility effective May 9. MSCG also
indicated that it had exercised what it believes to be its contractual right to
end deliveries because of NPC's inability to provide adequate assurances of its
ability to perform all of its outstanding material obligations. The MSCG
contracts covered approximately 1% of purchased power supplies for NPC for the
remainder of 2002. MSCG has stated that it will assert claims for any and all
amounts due and payable.
NPC's short-term liquidity depends significantly on the willingness of
NPC's power suppliers to agree to defer payments for a portion of the amounts
owed by NPC on purchased power contracts through the summer months of 2002.
NPC's liquidity could also be significantly affected by any further
disallowances of deferred energy costs upon any rehearing of the deferred energy
rate case, by unfavorable rulings by the PUCN in future NPC rate cases, or by an
unfavorable regulatory decision by the PUCN in SPPC's pending rate cases. Both
S&P and Moody's have NPC's credit ratings on "negative watch", and any further
downgrades could shut off NPC's access to the capital markets. Adverse
developments with respect to any combination of the foregoing could cause NPC to
become insolvent and would render NPC's ability to continue to operate outside
of bankruptcy uncertain.
35
SIERRA PACIFIC POWER COMPANY
The components of gross margin are set forth below (dollars in
thousands):
THREE MONTHS
ENDED MARCH 31,
-----------------------------------------
Change from
2002 2001 Prior Year %
-------- -------- ------------
Operating Revenues:
Electric $224,297 $280,438 -20.0%
Gas 55,083 64,165 -14.2%
-------- --------
Total Revenues 279,380 344,603 -18.9%
-------- --------
Energy Costs:
Electric 147,863 228,880 -35.4%
Gas 46,786 52,399 -10.7%
-------- --------
Total Energy Costs 194,649 281,279 -30.8%
-------- --------
Gross Margin $ 84,731 $ 63,324 33.8%
======== ========
Gross Margin by Segment:
Electric $ 76,434 $ 51,558 48.2%
Gas 8,297 11,766 -29.5%
-------- --------
Total $ 84,731 $ 63,324 33.8%
======== ========
The causes for significant changes in specific lines comprising the
results of operations for SPPC are as follows:
THREE MONTHS
ENDED MARCH 31,
--------------------------------------------
Change
from Prior
2002 2001 year %
-------------- -------------- ------------
ELECTRIC OPERATING REVENUES ($000):
Residential $ 60,403 $ 51,509 17.3%
Commercial 62,716 51,174 22.6%
Industrial 63,132 54,585 15.7%
-------------- --------------
Retail revenues 186,251 157,268 18.4%
Other 38,046 123,170 -69.1%
-------------- --------------
TOTAL REVENUES $ 224,297 $ 280,438 -20.0%
============== ==============
Retail sales in thousands of
megawatt-hours (MWH) 2,136 2,133 0.1%
Average retail revenue per MWH $ 87.20 $ 73.73 18.3%
</Table>
All classes of retail electric revenues for the three months ended
March 31, 2002 were higher than the same period in the prior year primarily due
to rate increases resulting from the 2001 Global Settlement and 2001
Comprehensive Energy Plan (CEP). During the first quarter of 2001, these rate
increases were being phased in on a monthly basis whereas retail revenues for
the first quarter of 2002 reflect the cumulative impact of those increases. See
SPPC's Annual Report on Form 10-K for the year ended December 31, 2001 for a
discussion of the Global Settlement and the CEP.
Other electric revenues for the three months ended March 31, 2002 were
significantly lower than the same period in 2001, primarily due to lower
wholesale power sales as a result of changing market conditions. See SPPC's
Annual Report on Form 10-K for the year ended December 31, 2001, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operation, Purchased Power Procurement, for a discussion of SPPC's purchased
power procurement strategies.
36
THREE MONTHS
ENDED MARCH 31,
---------------------------------------
Change
from Prior
2002 2001 year %
------- ------- -------------
GAS OPERATING REVENUES ($000):
Residential $29,472 $21,624 36.3%
Commercial 17,004 10,641 59.8%
Industrial 7,664 4,631 65.5%
Miscellaneous 396 517 -23.4%
------- -------
Total retail revenue 54,536 37,413 45.8%
Wholesale revenue 547 26,752 -98.0%
------- -------
TOTAL REVENUES $55,083 $64,165 -14.2%
======= =======
Retail sales in thousands
of decatherms 6,006 5,293 13.5%
Average retail revenues per decatherm $ 9.08 $ 7.07 28.4%
Retail gas revenues for the three months ended March 31, 2002 were
significantly higher than the same period in the prior year primarily due to
PUCN-authorized rate increases on February 1, and November 5, 2001. These rate
increases were granted as a result of higher gas costs that SPPC had incurred.
Wholesale gas revenues for the three months ended March 31, 2002 were
significantly lower than the same period in 2001, primarily due to lower
wholesale sales.
THREE MONTHS
ENDED MARCH 31,
-----------------------------------------------------------
Change from
2002 2001 Prior Year %
---------------- ------------------ ----------------
PURCHASED POWER ($000): $ 105,417 $ 150,987 -30.2%
Purchased Power in thousands
of MWHs 1,703 1,447 17.7%
Average cost per MWH of
Purchased Power $ 61.90 $ 104.34 -40.7%
Purchased power costs were lower for the three-month period ended March
31, 2002, than the prior year because the majority of SPPC's total energy
requirements utilize Short-Term Firm purchased power for which costs have
significantly decreased from those a year ago. Prices for SPPC's risk management
activities also decreased substantially. Risk management activities include
transactions entered into for hedging purposes and to minimize purchased power
costs. See SPPC's Annual Report on Form 10-K for the year ended December 31,
2001, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operation, Purchased Power Procurement, for a discussion of SPPC's
purchased power procurement strategies.
THREE MONTHS
ENDED MARCH 31,
-----------------------------------------
Change from
2002 2001 Prior Year %
------- ------- ------------
FUEL FOR POWER GENERATION ($000) $47,051 $70,872 -33.6%
Thousands of MWHs generated 1,212 1,583 -23.4%
Average fuel cost per MWH
of Generated Power $ 38.82 $ 44.77 -13.3%
37
Fuel for Power Generation costs for the three months period ended
March 31, 2002 were significantly lower than the same period of the prior year
as both volumes generated and natural gas prices decreased significantly. Volume
for the first quarter of 2002 was lower because it was more economical to
purchase power than to generate power.
THREE MONTHS
ENDED MARCH 31,
----------------------------------------------------------
Change
from Prior
2002 2001 Year %
--------------- ------------------ ---------------
GAS PURCHASED FOR RESALE ($000) $ 38,594 $ 70,543 -45.3%
Gas Purchased for Resale
(thousands of decatherms) 5,960 6,500 -8.3%
Average cost per decatherm $ 6.48 $ 10.85 -40.3%
Gas Purchased for Resale decreased significantly for the three months
period ended March 31, 2002 compared to the prior year because of much lower gas
prices and a reduced volume of wholesale gas sales.
THREE MONTHS
ENDED MARCH 31,
-----------------------------------------
Change from
2002 2001 Prior Year %
------------- ------------ ------------
DEFERRAL OF ENERGY COSTS-NET ($000)
Deferred energy costs - electric (4,605) 7,021 -165.6%
Deferred energy costs - gas 8,192 (18,144) N/A
------------- ------------
Total $ 3,587 $ (11,123) N/A
============= ============
SPPC recorded a deferral of energy costs electric - net for the three
months ended March 31, 2002, reflecting the extent to which actual fuel and
purchased power costs exceeded the fuel and purchased power costs recovered
through current rates. Deferral of energy costs electric - net for the three
months ended March 31, 2001, included a charge of approximately $7 million,
consistent with the provisions for implementation of deferred energy accounting
for electric operations beginning March 1, 2001.
SPPC's deferred energy costs gas - net for the three months ended March
31, 2002 reflects the amortization of prior deferred costs due to the
PUCN-authorized recovery of those costs. Deferral of energy costs-net for gas
for the three months ended March 31, 2001 reflects undercollections of such
costs because revenue received from 2001 base purchased gas rates did not cover
the increased cost of natural gas experienced by SPPC.
THREE MONTHS
ENDED MARCH 31,
-----------------------------------------------------
Change from
2002 2001 Prior Year %
------------- ------------- -------------
ALLOWANCE FOR OTHER FUNDS USED
DURING CONSTRUCTION ($000) $ 236 $ (184) N/A
ALLOWANCE FOR BORROWED FUNDS USED
DURING CONSTRUCTION ($000) 391 (46) N/A
------------- ------------
$ 627 $ (230) N/A
============= ============
Total allowance for funds used during construction (AFUDC) for the
three months ended March 31, 2002, increased over the prior year because AFUDC
in 2001 reflects an adjustment to refine amounts assigned to specific components
of
38
facilities that were completed in different periods. The year-to-year change
was offset, in part, by a decrease in the AFUDC rate in 2002.
THREE MONTHS
ENDED MARCH 31,
----------------------------------------
Change from
(000's) 2002 2001 Prior Year %
------- -------- ----------
OTHER OPERATING EXPENSE $27,747 $ 27,694 0.2%
INCOME TAXES $ 4,901 $ (2,121) N/A
TAXES OTHER THAN INCOME TAXES $ 4,776 $ 4,394 8.7%
INTEREST CHARGES ON LONG-TERM DEBT $16,445 $ 10,571 55.6%
INTEREST CHARGES - OTHER $ 1,142 $ 2,960 -61.4%
OTHER INCOME (EXPENSE) - NET $ 2,970 $ (486) N/A
Other operating expense for the three-month period ending March 31,
2002 was comparable with the prior year. Other operating expense for 2001
included a $3.5 million reserve provision established as a result of the
conclusion of electric industry restructuring in Nevada and a $2.7 million
increase in the provision for uncollectible accounts related to the California
Power Exchange. The absence of these charges in 2002 was offset primarily by
increased expenses related to collection activities, legal fees, and insurance
premiums.
SPPC recorded income tax expense for the three months ended March 31,
2002, compared to an income tax benefit for the same period in 2001, as a result
of pre-tax net income in the current year compared to a net pre-tax loss in the
prior year.
Taxes other than income taxes were higher for the three months ended
March 31, 2002 due primarily to an increase in property taxes related to an
increase in plant-in-service offset, in part, by a decrease in franchise taxes.
Interest charges on long-term debt for the three-month period ending
March 31, 2002, increased over the same period in 2001 due to a $100 million
increase in long-term debt outstanding for the quarter ended March 31, 2002,
over the year earlier period.
Interest charges-other for the three-month period ending March 31,
2002, decreased from the prior year due to lower commercial paper and short-term
debt balances during 2002.
Other income (expense) - net for the three months ended March 31, 2002
reflects the recording of approximately $3.3 million, net of taxes, of carrying
charges on deferred fuel and purchased power costs pursuant to the
implementation of deferred energy accounting on March 1, 2001.
ANALYSIS OF CASH FLOWS
SPPC's cash flows during the three months ended March 31, 2002,
improved slightly compared to the same period in 2001, as an increase in cash
flows from operating activities was largely offset by a decrease in cash flows
from financing activities. Factors contributing to 2002's improved cash flows
from operating activities include the recording of net income in 2002 compared
to a net loss in 2001, improved cash positions in both accounts receivable and
accounts payable, and the recovery of deferred energy costs resulting from
PUCN-authorized rate increases for gas customers. Cash flows from financing
activities were lower due to a substantial decrease in short-term borrowings.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the first three months of 2002, SPPC earned approximately $10.9
million before preferred stock dividends. SPPC paid $975,000 in dividends to
holders of its preferred stock and paid $10 million in dividends on its common
stock, all of which was reinvested in SPPC as a contribution to capital.
As discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Sierra Pacific Power Company -
Construction Expenditures and Financing" and " - Capital Structure" in the
Annual Report on Form 10-K for the year ended December 31, 2001, SPPC
anticipated having capital requirements for construction costs and for the
repayment of maturing short-term and long-term debt during 2002 totaling
approximately $189 million, which SPPC would need to fund through a combination
of (i) internally generated funds, (ii) the issuance of short-term debt, and
(iii) capital contributions from SPR. At April 30, 2002, SPPC had estimated cash
reserves of approximately $136 million.
39
On March 29 and April 1, 2002, following the decision by the PUCN in
NPC's deferred energy rate case, S&P and Moody's lowered SPPC's unsecured debt
ratings to below investment grade. On April 23 and 24, 2002, SPPC's unsecured
debt ratings were further downgraded and its secured debt ratings were
downgraded to below investment grade. As a result of these downgrades, SPPC's
ability to access the capital markets to raise funds is severely limited.
In connection with the credit ratings downgrades referenced above, SPPC
lost its A2/P2 commercial paper ratings and can no longer issue commercial
paper. At the time, SPPC had a commercial paper balance outstanding of $47.7
million with a weighted average interest rate of 2.49%. SPPC paid off its
maturing commercial paper with the proceeds of borrowings under its credit
facility. SPPC does not expect to have direct access to the commercial paper
market for the foreseeable future.
SPPC's $150 million unsecured revolving credit facility was also
affected by the downgrade in SPPC's credit rating. Under this facility, SPPC was
required, in the event of a ratings downgrade of its senior unsecured debt, to
secure the facility with General and Refunding Mortgage Bonds. In satisfaction
of its obligation to secure the credit facility, on April 8, 2002, SPPC issued
and delivered its General and Refunding Mortgage Bond, Series B, due November
28, 2002, in the principal amount of $150 million, to the Administrative Agent
for the credit facility. As of May 10, 2002, SPPC had borrowed the entire $150
million of funds available under its credit facility to, in part, pay off
maturing commercial paper, maintaining a cash balance at SPPC. SPPC's credit
facility expires on November 28, 2002. The borrowing costs under the Credit
Agreement are at a variable interest rate consisting of a spread over LIBOR or
an alternate base rate that is based upon a pricing grid tied to the credit
rating on SPPC's senior unsecured long-term debt.
The Credit Agreement contains a number of restrictive covenants
including restrictions on liens, sales of assets, mergers, and sale and
leaseback transactions. The Credit Agreement also contains financial covenants
requiring that SPPC maintain a ratio of (i) Total Indebtedness to (ii) the sum
of Total Indebtedness and Shareholders Equity that does not exceed 0.60:1 as of
the last day of each fiscal quarter and a Consolidated Interest Coverage Ratio
of not less than 2.0:1 calculated as of the last day of each fiscal quarter for
the preceding four consecutive fiscal quarters. As of March 31, 2002, SPPC was
in compliance with these financial covenants.
SPPC is currently pursuing a receivables purchase facility, in a
principal amount not to exceed $125 million. Under the proposed facility, SPPC
would sell receivables in a true sale to special purpose entities that would
in-turn sell those assets or interests in those assets to a commercial paper
conduit or directly to a bank. This facility would be used to provide additional
liquidity for working capital and general corporate purposes in addition to
SPPC's existing credit facility. If completed, SPPC expects the facility to be
accounted for in compliance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The special
purpose entities would be wholly owned subsidiaries and their financial
positions and results of operations would be reflected in the consolidated
financial statements of SPR, NPC, and SPPC. Completion of this facility is
dependent on the negotiation of mutually satisfactory terms and the satisfaction
of customary closing conditions, and no assurance can be given at this time that
the facility will in fact be completed.
SPPC's first mortgage indenture creates a first priority lien on
substantially all of SPPC's properties in Nevada and California. As of March 31,
2002, $509.7 million of SPPC's first mortgage bonds were outstanding. Although
the first mortgage indenture allows SPPC to issue additional mortgage bonds on
the basis of (i) 60 percent of net utility property additions and/or (ii) the
principal amount of retired mortgage bonds, SPPC agreed in its General and
Refunding Mortgage Indenture that it would not issue any additional first
mortgage bonds.
SPPC's General and Refunding Mortgage Indenture creates a lien on
substantially all of SPPC's properties in Nevada that is junior to the lien of
the first mortgage indenture. As of April 30, 2002, $470 million of SPPC's
General and Refunding Mortgage bonds were outstanding. Additional securities may
be issued under the General and Refunding Mortgage Indenture on the basis of (i)
70 percent of net utility property additions, (ii) the principal amount of
retired General and Refunding Mortgage bonds, and/or (iii) the principal amount
of first mortgage bonds retired after delivery to the indenture trustee of the
initial expert's certificate under the General and Refunding Mortgage Indenture.
At April 30, 2002, SPPC had the capacity to issue approximately $266 million of
additional General and Refunding Mortgage bonds.
SPPC also has the ability to release property from the liens of the two
mortgage indentures on the basis of net property additions, cash and/or retired
bonds. To the extent SPPC releases property from the lien of its General and
Refunding Mortgage Indenture, it will reduce the amount of bonds issuable under
that indenture.
On May 1, 2002, Enron Power Marketing Inc. notified NPC and SPPC that
it would end power deliveries to the Utilities effective May 7. Enron advised
the Utilities that it was taking this action in line with its recently announced
new business configuration that does not include arrangements such as its
existing contracts with the Utilities. Enron also indicated that it had
exercised what it believes to be its contractual right to end deliveries because
of the recent downgrade in the credit ratings of the Utilities and their failure
to provide mark-to-market collateral. The Enron contracts covered approximately
10% of purchased power supplies for the combined Utilities for the remainder of
2002. Enron has asserted claims for liquidated
40
damages of approximately $199.7 million and $87.1 million against NPC and SPPC,
respectively; however, that amount is subject to the Utilities' pending
complaint proceeding at the FERC challenging the contract prices, and to other
defenses that the Utilities intend to pursue.
SPPC's future liquidity depends, to a very large degree, on the outcome
of its pending rate cases before the PUCN. In particular, a significant
disallowance by the PUCN in the deferred energy rate case could result in
further downgrades in SPPC's credit ratings, could adversely affect SPPC's
ability to continue purchasing power and fuel, and could render SPPC's ability
to continue to operate outside of bankruptcy uncertain.
SIERRA PACIFIC RESOURCES (HOLDING COMPANY)
The Condensed Consolidated Statements of Operations of SPR for the
three months ended March 31, 2002, include the operating results of the holding
company. The holding company recognized higher interest costs, $19.2 million in
2002 compared to $14.0 million in 2001, due to the issuance of $345 million of
additional debt in November of 2001.
TUSCARORA GAS PIPELINE COMPANY
The Condensed Consolidated Statements of Operations of SPR for the
three-month periods ended March 31, 2002, and March 31, 2001, include the
operating results of Tuscarora Gas Pipeline Company (TGPC), a wholly owned
subsidiary of SPR. TGPC contributed $.9 million and $.7 million, respectively,
in net income for the three-month periods ended March 31, 2002, and March 31,
2001.
E-THREE
The Condensed Consolidated Statements of Operations of SPR for the
three-month periods ended March 31, 2002, and March 31, 2001, include the
operating results of e-three, a wholly owned subsidiary of SPR. e-three
incurred losses of $.2 million and $.4 million, respectively, for the
three-month periods ended March 31, 2002, and March 31, 2001.
SIERRA PACIFIC COMMUNICATIONS
The Condensed Consolidated Statements of Operations of SPR for the
three-month periods ended March 31, 2002, and March 31, 2001, include the
operating results of Sierra Pacific Communications (SPC), a wholly owned
subsidiary of SPR. SPC incurred net losses of $.7 million and $.4 million,
respectively, for the three-month periods ended March 31, 2002, and March 31,
2001.
REGULATORY MATTERS
Substantially all of the utility operations of both NPC and SPPC are
conducted in Nevada. As a result both companies are subject to utility
regulation within Nevada and therefore deal with many of the same regulatory
issues.
NEVADA MATTERS
NEVADA POWER COMPANY GENERAL RATE CASE (NPC)
On October 1, 2001, NPC filed an application with the PUCN seeking an
electric general rate increase. This application was mandated by AB 369, which
was enacted by the Nevada legislature in April 2001. On December 21, 2001, NPC
filed a Certification to its general rate filing updating costs and revenues
pursuant to Nevada regulations. In the certification filing, NPC requested an
increase in its general rates charged to all classes of electric customers
designed to produce an increase in annual electric revenues of $22.7 million,
which is an overall 1.7% rate increase. The application also sought a return on
common equity ("ROE") for Nevada Power's total electric operations of 12.25% and
an overall rate of return ("ROR") of 9.30%.
On March 27, 2002, the PUCN issued its decision on the general rate
application, ordering a $43 million revenue decrease with an ROE of 10.1% and
ROR of 8.37%. The effective date for the decision was April 1, 2002. The
decision also resulted in adverse adjustments to depreciation aggregating $7.9
million, and the adverse treatment of approximately $5 million of revenues
related to SO2 Allowances. On April 15, 2002, NPC filed a petition for
reconsideration with the PUCN. In the petition, NPC raised six issues for
reconsideration: the treatment of revenues related to SO2 Allowances, in
particular the calculation of the annual amortization amount, which appears to
be in error; the adjustment for "excess" capital investment related to common
facilities at the Harry Allen generating station; the rejection of adjustments
to accumulated depreciation reserves related to the establishment of revised
depreciation rates for transmission, distribution and common facilities; the
delay in allowing NPC to recover its merger costs without the benefit of
carrying charges; the finding that NPC has no need for
41
and is entitled to zero funds cash working capital; and the establishment of a
10.1% ROE. At this time, NPC is not able to predict the outcome or the timing of
a decision in this matter.
NEVADA POWER COMPANY DEFERRED ENERGY CASE (NPC)
On November 30, 2001, NPC filed an application with the PUCN seeking to
clear deferred balances for purchased fuel and power costs accumulated between
March 1, 2001 through September 30, 2001. This application was mandated by AB
369. The application sought to establish a Deferred Energy Accounting Adjustment
("DEAA") rate to clear accumulated purchased fuel and power costs of $922
million and spread the cost recovery over a period of not more than three years.
On March 29, 2002, the PUCN issued its decision on the deferred energy
application, allowing NPC three years to collect $488 million but disallowing
$434 million of purchased fuel and power costs. On April 11, 2002, NPC filed a
lawsuit in First District Court of Nevada seeking to reverse portions of the
decision of the PUCN denying the recovery of deferred energy costs incurred by
NPC on behalf of its customers in 2001. NPC asserts that, as a result of the
PUCN's decision, NPC's credit rating was reduced to below investment grade, SPR
suffered a reduction in its equity market capitalization by approximately 41%,
and the disallowed costs are effectively imposed upon SPR's shareholders.
In its lawsuit, NPC alleges that the order of the PUCN is: in violation
of constitutional and statutory provisions; made upon unlawful procedure;
affected by other error of law; clearly erroneous in view of the reliable,
probative and substantial evidence on the whole record; arbitrary and capricious
and characterized by abuse of discretion. NPC's lawsuit requests that the
District Court reverse portions of the order of the PUCN and remand the matter
to the PUCN with direction that the PUCN authorize NPC to immediately establish
rates that would allow NPC to recover its entire deferred energy balance of $922
million, with a carrying charge, over three years. At this time, NPC is not able
to predict the outcome or the timing of a decision in this matter.
Various intervenors in NPC's deferred energy case before the PUCN have
filed petitions with the PUCN for reconsideration of the order, seeking
additional disallowances of between $12.8 million and $488 million. NPC cannot
predict the outcome or timing of a decision regarding these petitions.
SIERRA PACIFIC POWER COMPANY GENERAL RATE CASE (SPPC)
On November 30, 2001, SPPC filed an application with the PUCN seeking
an electric general rate increase. This application was mandated by AB 369. On
February 28, 2002, SPPC filed a certification to its general rate filing,
updating costs and revenues pursuant to Nevada regulations. In the certification
filing, SPPC requested an increase in its general rates charged to all classes
of electric customers, which were designed to produce an increase in annual
electric revenues of $15.9 million representing an overall 2.4% rate increase.
The application also seeks an ROE for SPPC's total electric operations of 12.25%
and an overall ROR of 9.42%. Public hearings for SPPC's general rate case began
on April 8, 2002, and concluded on April 18. Various parties intervened in
SPPC's general rate case including the Staff of the PUCN, the Bureau of Consumer
Protection from the Nevada Attorney General's office, and Barrick Goldstrike
Mines ("Barrick"), among others. The reduction of SPPC's revenue requirements
proposed by the intervenors ranged from $8.0 million to $33.1 million. A
decision is expected on or before June 1, 2002.
SIERRA PACIFIC POWER COMPANY DEFERRED ENERGY (SPPC)
On February 1, 2002, SPPC filed an application with the PUCN seeking to
clear deferred balances for purchased fuel and power costs accumulated between
March 1, 2001 and November 30, 2001. This application was mandated by AB 369.
The application seeks to establish a DEAA rate to clear accumulated purchased
fuel and power costs of $205 million and spread the cost recovery over a period
of not more than three years. It also seeks to recalculate the Base Tariff
Energy Rate to reflect anticipated ongoing purchased fuel and power costs. The
total rate increase resulting from the DEAA would amount to 9.8%. Public
hearings began on April 29, 2002. Various parties have intervened in SPPC's
deferred energy rate case including the Staff of the PUCN, the Bureau of
Consumer Protection from the Nevada Attorney General's office, and Barrick,
among others. Intervenors have proposed disallowances ranging from $40.4 million
to $361 million. A decision is expected on or before June 1, 2002.
CUSTOMERS FILE UNDER AB661 (NPC, SPPC)
AB 661, passed by the Nevada legislature in 2001, allows commercial and
governmental customers with an average demand greater than 1 MW to select new
energy suppliers. The Utilities would continue to provide transmission,
distribution, metering and billing services to such customers. AB 661 requires
customers wishing to choose a new supplier to receive the approval of the PUCN
and meet public interest standards. In particular, departing customers must
secure new energy resources that are not under contract to the Utilities,
remaining customers or the Utility cannot be negatively impacted by the
departure, and the departing customers must pay any deferred energy balances.
The PUCN adopted regulations prescribing the criteria
42
that will be used to determine if there will be negative impacts to remaining
customers or the Utility. Certain limits are placed upon the departure of NPC
customers until 2003; most significantly, the amount of load departing is
limited to approximately 1100 MW in peak conditions. Customers must provide
180-day notice to the Utilities. AB 661 permitted customers to file applications
with the PUCN beginning in the fourth quarter of 2001, and customers could begin
to receive service from new suppliers by mid-2002.
On January 10, 2002, Barrick, an approximately 130 MW SPPC customer,
filed an application with the PUCN to exit the system of SPPC and to purchase
energy, capacity and ancillary services from a provider other than SPPC. A
stipulation filed on March 8, 2002 by SPPC and Barrick was rejected by the PUCN
on March 29, 2002. The PUCN indicated a desire for more information regarding
transmission access, the definition of a new electric resource, and the
computation of exit fees. Subsequently, a second application was filed and later
withdrawn by Barrick. At this point it is not known whether Barrick intends to
refile its application.
During May 2002, Rouse Fashion Show Management LLC, Coast Hotels and
Casinos Inc., Station Casinos, Inc., Gordon Gaming Corporation, and MGM Mirage
filed separate applications with the PUCN to exit the system of NPC and to
purchase energy, capacity and ancillary services from a provider other than NPC.
The loads of these customers aggregate 185 MW on peak. Hearings on these
applications are scheduled for June and decisions anticipated in July. These
customers are requesting to receive energy services from their new supplier in
fall 2002. Another customer, approximately 70 MW of peak load, has filed a
notice of intent to leave the system with an anticipated departure date of late
2002; their application can be filed in mid May.
CALIFORNIA MATTERS (SPPC)
RATE STABILIZATION PLAN
SPPC serves approximately 44,500 customers in California. On June 29,
2001, SPPC filed with the CPUC a Rate Stabilization Plan, which includes two
phases. Phase One, which was also filed June 29, 2001, is an emergency electric
rate increase of $10.2 million annually or 26%. If granted, the typical
residential monthly electric bill for a customer using 650 kilowatt-hours would
increase from approximately $47.12 to $60.12. On August 14, 2001, a pre-hearing
conference was held, and a procedural order was established. On September 27,
the Administrative Law Judge issued an order stating that no interim or
emergency relief could be granted until the end of the "rate freeze" period
mandated by the California restructuring law for recovery of stranded costs. In
accordance with the judge's request, on October 26, 2001, SPPC filed an
amendment to its application declaring the rate freeze period to be over. On
December 5 and 11, 2001, hearings were held and on January 11, 2002 and January
25, 2002 opening briefs and reply briefs were filed. A draft decision is
expected by the end of the second quarter of 2002.
Phase Two of the Rate Stabilization Plan was filed with the CPUC on
April 1, 2002, and includes a general rate case and requests the CPUC to
reinstate the Energy Cost Adjustment Clause, which would allow SPPC to file for
periodic rate adjustments to reflect its actual costs for wholesale energy
supplies. Phase Two also includes a proposal to terminate the 10% rate reduction
mandated by AB 1890, but does not include a performance -based rate-making
proposal. This request was for an overall increase in revenues of 17.1%, or $8.9
million annually.
FERC MATTERS (SPPC, NPC)
PRICE MITIGATION PLAN
On June 19, 2001, the FERC adopted a price mitigation plan applicable
to spot market wholesale power sales in California and throughout the western
United States during the period June 20, 2001 through September 30, 2002. The
price mitigation plan establishes a mechanism with which to determine the
maximum amount that may be charged for power sold during this period. The intent
of the mitigation plan is to simulate the price that might be charged for
electricity sold under competitive market conditions. Sellers that do not wish
to establish rates on the basis of this price mitigation plan may propose
cost-of-service rates covering all of their generating units in the WSCC for the
duration of the mitigation plan. Management believes that, under certain market
conditions, the FERC plan adversely affects the availability of spot market
power to the Utilities and reduces the price at which the Utilities can sell
power on the wholesale market. Another potential result from these price
mitigation measures could be the delay and/or cancellation of proposed power
plants throughout the western United States. If these results occur, the
long-term supply of energy could be reduced. Numerous parties, including NPC and
several northwest utilities, appealed the June 19 and July 25, 2001 orders from
the FERC to the District of Columbia Court of Appeals on the basis that the
price caps are unfair to electric customers who reside outside of California. In
a report to Congress on January 31, 2002, the FERC said the price mitigation
plan had little if any influence on prices at which Western utilities were able
to resell power. SPR is not persuaded by the FERC's report and continues to
pursue its appeal. Hearings began on May 1, 2002, with a decision expected in
May 2003. At this time, NPC is not able to predict the outcome or the timing of
a decision in this matter.
43
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
SPR has evaluated its risk related to financial instruments whose
values are subject to market sensitivity, such as fixed and variable rate debt
and preferred trust securities obligations. As shown in SPR's Form 10-K for the
year ended December 31, 2001, the fair market value of SPR's consolidated
long-term debt and preferred trust securities was $3.684 billion, as of December
31, 2001. Due to the recent credit ratings downgrades by S&P and Moody's, SPR's
valuations for its market-sensitive financial instruments show a decline of
approximately 16% in the fair market value of these financial instruments to
$3.096 billion from December 31, 2001 to April 26, 2002, as shown in the table
below. Fair market value is determined using quoted market price for the same or
similar issues or on the current rates offered for debt of the same remaining
maturities.
Long-term debt (dollars in thousands):
Expected Maturity
Date
-------------------------------------------- ------------------------------------------
Expected Maturities Amounts Weighted Avg Int Rate* Fair Market Value
-------------------------------------------- ------------------------------------------
Fixed Rate NPC SPPC SPR Consolidated Consolidated Consolidated
-------------------------------------------- -------------------- -------------------
2002 $ 15,000 $ 2,630 $ - $ 17,630 7.40%
2003 210,000 20,629 - 230,629 5.97%
2004 130,000 2,615 - 132,615 6.10%
2005 - 2,622 300,000 302,622 8.73%
2006 - 52,629 - 52,629 6.71%
Thereafter 938,835 844,511 345,000 2,128,346 6.87%
-------------------------------------------- ------------------ -------------------
Total Fixed Rate $ 1,293,835 $ 925,636 $ 645,000 $ 2,864,471 $ 2,459,456
-------------------------------------------- ------------------ -------------------
Variable Rate
2002 $ - $ - $ 100,000 $ 100,000 3.04%
2003 140,000 - 200,000 340,000 3.43%
2004 - - - -
2005 - - - -
2006 - - - -
Thereafter 115,000 - - 115,000 1.82%
-------------------------------------------- ----------------- ------------------
$ 255,000 $ - $ 300,000 $ 555,000 $ 513,500
-------------------------------------------- ----------------- ------------------
Preferred securities
(fixed rate)
After 2006 $ 188,872 $ - $ - $ 188,872 8.03%
-------------------------------------------- ----------------- ------------------
$ 188,872 $ - $ - $ 188,872 $ 122,767
-------------------------------------------- ----------------- ------------------
Total $ 1,737,707 $ 925,636 $ 945,000 $ 3,608,343 $ 3,095,723
============================================ ----------------- ==================
See the combined Form 10-K of SPR, NPC, and SPPC for the year ended
December 31, 2001, for a discussion of Commodity Price Risk.
44
PART II
ITEM 1. LEGAL PROCEEDINGS
Refer to SPR's, NPC's, and SPPC's Combined Annual Report on Form 10-K
for the year ended December 31, 2001, and to Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operation, Regulatory Matters,
Nevada Power Company Deferred Energy Case, in this Quarterly Report on Form
10-Q, for a discussion of current legal matters. Although SPR, NPC, and SPPC are
involved in ongoing litigation on a variety of other matters, in management's
opinion, none individually or collectively are material to SPR's, NPC's, or
SPPC's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this Form 10-Q:
NEVADA POWER COMPANY
Exhibit 4.1 Officer's Certificate establishing the terms of Nevada Power
Company's General and Refunding Mortgage Bonds, Series C, due
November 28, 2002
Exhibit 4.2 Form of Nevada Power Company's General and Refunding Mortgage
Bonds, Series C, due November 28, 2002
SIERRA PACIFIC POWER COMPANY
Exhibit 4.3 Officer's Certificate establishing the terms of Sierra
Pacific Power Company's General and Refunding Mortgage Bonds,
Series B, due November 28, 2002
Exhibit 4.4 Form of Sierra Pacific Power Company's General and Refunding
Mortgage Bonds, Series B, due November 28, 2002
NEVADA POWER COMPANY
Exhibit 10.1 Waiver Letter and Amendment to Credit Agreement, dated as of
November 1, 2001, among Nevada Power Company, Union Bank of
California, N.A., as Sole Bookrunner and Administrative Agent,
Wells Fargo Bank, N.A., as Syndication Agent, Bank One, NA,
BNP Paribas and Mellon Bank, N.A., as Co-Documentation Agents,
the Lenders party hereto from time to time, and Union Bank of
California, N.A. and Wells Fargo Bank, N.A., as Co-Lead
Arrangers.
Exhibit 10.2 Collective Bargaining Agreement dated as of February 1,
2002, effective through February 1, 2005, between Nevada Power
Company and the International Brotherhood of Electrical
Workers Local Union No. 396.
(b) Reports on Form 8-K:
Form 8-K dated March 22, 2002, filed by SPR and NPC - Item 5, Other Events
Disclosed, and included as an exhibit, NPC's press release dated March
22, 2002, announcing that NPC had reached two significant long-term power
agreements, both of which are subject to regulatory approval by the PUCN.
Form 8-K dated March 29, 2002, filed by SPR and NPC - Item 5, Other Events
Disclosed, and included as an exhibit, NPC's press release dated April
1, 2002, regarding the decision of the PUCN to allow NPC to recover, over three
years, $488 million out of the $922 million of deferred energy costs incurred by
NPC during the peak months of 2001.
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
SIERRA PACIFIC RESOURCES
------------------------
(Registrant)
Date: May 14, 2002 By: /s/ Dennis D. Schiffel
------------ ----------------------------------
Dennis D. Schiffel
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: May 14, 2002 By: /s/ John E. Brown
------------- -----------------------------------
John E. Brown
Controller
(Principal Accounting Officer)
NEVADA POWER COMPANY
--------------------
(Registrant)
Date: May 14, 2002 By: /s/ Dennis D. Schiffel
------------ ----------------------------------
Dennis D. Schiffel
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: May 14, 2002 By: /s/ John E. Brown
------------- -----------------------------------
John E. Brown
Controller
(Principal Accounting Officer)
SIERRA PACIFIC POWER COMPANY
----------------------------
(Registrant)
Date: May 14, 2002 By: /s/ Dennis D. Schiffel
------------ ----------------------------------
Dennis D. Schiffel
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: May 14, 2002 By: /s/ John E. Brown
------------- -----------------------------------
John E. Brown
Controller
(Principal Accounting Officer)
46