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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1998 Commission File No. 1-4698
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Nevada Power Company
(Exact name of registrant as specified in its charter)
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Nevada 88-0045330
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6226 West Sahara Avenue, Las Vegas, Nevada 89146
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(Address of principal executive offices) (Zip Code)
(702) 367-5000
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(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the 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.
Common Stock outstanding November 3, 1998, 51,265,117 shares.
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PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
FOR THE FOR THE
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
ELECTRIC REVENUES ......................$327,776 $284,994 $691,974 $640,318
OPERATING EXPENSES AND TAXES:
Fuel .............................. 58,291 49,712 115,712 105,272
Purchased and interchanged power .. 104,361 96,821 232,558 225,342
Deferred energy cost
adjustments, net ................. (18,206) (24,797) (30,626) (46,397)
-------- -------- -------- --------
Net energy costs ................. 144,446 121,736 317,644 284,217
Other production operations ....... 6,399 6,168 16,301 15,154
Other operations .................. 31,756 27,079 84,985 75,330
Maintenance and repairs ........... 11,750 13,610 39,457 41,213
Provision for depreciation ........ 18,236 16,747 53,792 48,933
General taxes ..................... 5,739 5,282 16,892 15,740
Federal income taxes .............. 32,531 27,889 39,933 41,510
-------- -------- -------- --------
250,857 218,511 569,004 522,097
-------- -------- -------- --------
OPERATING INCOME ....................... 76,919 66,483 122,970 118,221
-------- -------- -------- --------
OTHER INCOME (EXPENSES):
Allowance for other funds used
during construction .............. 2,011 2,116 6,924 6,270
Miscellaneous, net ................ (321) (1,046) (1,363) (2,742)
-------- -------- -------- --------
1,690 1,070 5,561 3,528
-------- -------- -------- --------
INCOME BEFORE INTEREST DEDUCTIONS ...... 78,609 67,553 128,531 121,749
-------- -------- -------- --------
INTEREST DEDUCTIONS:
Interest on long-term debt ........ 13,522 12,583 42,047 37,546
Other interest .................... 2,188 407 4,027 1,155
Allowance for borrowed funds used
during construction .............. (1,525) (621) (4,223) (1,960)
-------- -------- -------- --------
14,185 12,369 41,851 36,741
-------- -------- -------- --------
Distribution requirements
on company-obligated mandatorily
redeemable preferred securities
of subsidiary trust .............. 2,437 2,437 7,311 4,820
-------- -------- -------- --------
NET INCOME ............................. 61,987 52,747 79,369 80,188
DIVIDEND REQUIREMENTS ON PREFERRED
STOCK ................................. 42 46 131 1,080
-------- -------- -------- --------
EARNINGS AVAILABLE FOR COMMON STOCK ....$ 61,945 $ 52,701 $ 79,238 $ 79,108
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ........................... 51,198 49,902 50,902 49,499
======== ======== ======== ========
EARNINGS PER AVERAGE COMMON SHARE ......$ 1.21 $ 1.06 $ 1.56 $ 1.60
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE .............$ .40 $ .40 $ 1.20 $ 1.20
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
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CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
September 30, December 31,
1998 1997
------------- ------------
(In Thousands)
ELECTRIC PLANT:
Original cost ..................................... $2,452,330 $2,378,296
Less accumulated depreciation ..................... 689,706 647,208
---------- ----------
Net plant in service ............................ 1,762,624 1,731,088
Construction work in progress ..................... 254,548 158,029
Other plant, net .................................. 68,162 71,592
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2,085,334 1,960,709
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INVESTMENTS ......................................... 22,977 13,571
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CURRENT ASSETS:
Cash and temporary cash investments ............... 1,027 720
Customer receivables .............................. 126,060 71,722
Other receivables ................................. 16,464 16,415
Receivable for proceeds from sale of Company-
obligated mandatorily redeemable preferred
securities of the Company's subsidiary trust, NVP
Capital III....................................... 70,000 -
Fuel stock and materials and supplies ............. 36,564 42,370
Deferred energy costs ............................. 63,170 30,597
Prepayments ....................................... 4,039 6,711
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317,324 168,535
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DEFERRED CHARGES .................................... 209,858 196,607
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$2,635,493 $2,339,422
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' equity:
Common stock, 51,265,117 and 50,399,746
shares issued, respectively .................... $ 53,886 $ 53,604
Premium and unamortized expense on capital stock 683,713 662,987
Retained earnings ............................... 135,370 117,032
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872,969 833,623
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Cumulative preferred stock ........................ 3,265 3,463
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Company-obligated mandatorily redeemable preferred
securities of the Company's subsidiary trust, NVP
Capital I, holding solely $122.6 million principal
amount of 8.2% junior subordinated debentures of
the Company, due 2037 ............................ 118,872 118,872
Company-obligated mandatorily redeemable preferred
securities of the Company's subsidiary trust, NVP
Capital III, holding solely $72.2 million principal
amount of 7.75% junior subordinated debentures of
the Company, due 2038 ............................ 70,000 -
Long-term debt .................................... 898,109 895,439
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1,963,215 1,851,397
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CURRENT LIABILITIES:
Notes payable ..................................... 103,290 -
Current maturities and sinking fund requirements .. 5,258 19,937
Accounts payable .................................. 84,768 64,737
Accrued taxes ..................................... 38,904 7,543
Accrued interest .................................. 15,348 7,284
Deferred taxes on deferred energy costs ........... 22,110 10,709
Customers' service deposits and other ............. 42,610 37,649
---------- ----------
312,288 147,859
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred investment tax credits ................... 28,449 29,544
Deferred taxes on income .......................... 250,253 235,846
Customers' advances for construction and other .... 81,288 74,776
---------- ----------
359,990 340,166
---------- ----------
$2,635,493 $2,339,422
========== ==========
See Notes to Condensed Consolidated Financial Statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1998 1997
-------- --------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 79,369 $ 80,188
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization ...................... 63,499 56,392
Deferred income taxes and investment tax credits ... 10,843 15,944
Allowance for other funds used during construction . (6,924) (6,270)
Changes in-
Receivables ........................................ (54,257) (54,704)
Fuel stock and materials and supplies .............. 5,806 (3,978)
Accounts payable and other current liabilities ..... 24,989 24,771
Deferred energy costs .............................. (33,373) (45,098)
Accrued taxes and interest ......................... 39,425 26,122
Other assets and liabilities ........................ (5,513) (1,163)
-------- --------
Net cash provided by operating activities ......... 123,864 92,204
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures and gross additions ....... (179,989) (135,076)
Investment in subsidiaries and other ................ (994) (137)
-------- --------
Net cash used in investing activities ............. (180,983) (135,213)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of capital stock ........................... 21,006 25,221
Issuance of company-obligated mandatorily
redeemable preferred securities ................... - 118,872
Deposit of funds held in trust ...................... (1,491) (1,592)
Withdrawal of funds held in trust ................... 7,269 -
Retirement of long-term debt ........................ (18,325) (3,864)
Retirement of preferred stock ....................... (199) (38,200)
Change in short-term borrowing ...................... 103,290 -
Cash dividends ...................................... (61,047) (61,204)
Other financing activities .......................... 6,923 1,604
-------- --------
Net cash provided by financing activities ......... 57,426 40,837
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS:
Net increase (decrease) during the period ........... 307 (2,172)
Beginning of period ................................. 720 2,544
-------- --------
End of period ....................................... $ 1,027 $ 372
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest, net of amounts capitalized ................ $ 48,186 $ 45,335
======== ========
Income taxes ........................................ $ - $ 3,520
======== ========
See Notes to Condensed Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by the registrant, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC), and reflect all adjustments which, in
the opinion of management are necessary for a fair presentation and are of a
normally recurring nature. Certain information and footnote disclosures have
been condensed in accordance with generally accepted accounting principles and
pursuant to such rules and regulations. The registrant believes that the
disclosures are adequate to make the information presented not misleading. It
is suggested that these condensed consolidated financial statements and notes
thereto be read in conjunction with the financial statements and the notes
thereto included in the registrant's latest annual report. Certain prior period
amounts have been reclassified, with no effect on income or common
shareholders' equity, to conform with the current period presentation.
(1) CONSOLIDATION POLICY:
The condensed consolidated financial statements include the accounts of
Nevada Power Company (Company) and its wholly-owned subsidiaries NVP Capital I
and NVP Capital III. All significant intercompany transactions and balances
have been eliminated in consolidation.
(2) RECENTLY ISSUED ACCOUNTING STANDARDS:
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 131 (FASB 131), Disclosures about Segments
of an Enterprise and Related Information, which is effective for annual
financial statements for periods beginning after December 15, 1997. FASB 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Due to recent legislation enacted in
Nevada for restructuring the electric utility industry, the Company cannot
predict the effect adoption of FASB 131 will have on disclosures in its
condensed consolidated financial statements.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 132 (FASB 132), Employers' Disclosures about
Pensions and Other Postretirement Benefits - an amendment of FASB Statements
No. 87, 88 and 106, which is effective for financial statements for fiscal
years beginning after December 15, 1997. FASB 132 revises employer's
disclosures about pension and other postretirement benefit plans but does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and eliminates certain disclosures that are no longer as useful as
they were when the above mentioned FASB statements were originally issued. The
adoption resulted in no material effect on the disclosures in the Company's
condensed consolidated financial statements.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133 (FASB 133), Accounting for Derivative
Instruments and Hedging Activities, which is effective for financial statements
for all fiscal quarters of all fiscal years beginning after June 15, 1999. FASB
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The adoption of FASB 133 will have no
material effect on the disclosures in the Company's condensed consolidated
financial statements.
(3) FEDERAL INCOME TAXES:
For interim financial reporting purposes, the Company reflects in the
computation of the federal income tax provision liberalized depreciation based
upon the expected annual percentage relationship of book and tax depreciation
and reflects the allowance for funds used during construction on an actual
basis. The total federal income tax expense as set forth in the accompanying
consolidated statements of income results in an effective
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federal income tax rate different than the statutory federal income tax
rate. The table below shows the effects of those transactions which created
this difference.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
(In Thousands) (In Thousands)
Federal income tax at statutory rate .$33,414 $28,439 $42,846 $43,287
Investment tax credit amortization ... (365) (365) (1,095) (1,095)
Other ................................ 433 433 1,299 1,299
------- ------- ------- -------
Recorded federal income taxes ........$33,482 $28,507 $43,050 $43,491
======= ======= ======= =======
Federal income taxes included in-
Operating expenses .................$32,531 $27,889 $39,933 $41,510
Other income, net .................. 951 618 3,117 1,981
------- ------- ------- -------
Recorded federal income taxes ........$33,482 $28,507 $43,050 $43,491
======= ======= ======= =======
(4) COMMITMENTS AND CONTINGENCIES:
On February 6, 1997, the Public Utilities Commission of Nevada (PUCN)
issued its opinion and order in the last phase of the 1995 deferred energy case
concerning the prudency of the Company's fuel and purchased power expenditures
during the period June 1993 to May 1995, a buyout of a coal supply agreement
and a credit to customers related to the use of coal reserves in an unregulated
subsidiary company. The PUCN order resulted in a fourth quarter 1996 charge of
$5.5 million, net of tax, for amounts disallowed by the PUCN. On May 7, 1997,
the Company filed a Petition for Judicial Review in the First District Court in
Carson City, Nevada challenging the PUCN's findings which resulted in
disallowances.
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 of the
Mohave Generating Station (Mohave) alleging violations of the Clean Air Act
regarding emissions of sulfur dioxide and particulates. The owners believe the
emission limits referenced in the suit are not applicable to Mohave. Also, the
owners previously partnered with the Environmental Protection Agency (EPA) and
the National Park Service on a multi-year study to determine the impacts, if
any, of Mohave emissions on visibility in the Grand Canyon (see the following
paragraph). The environmental groups want the owners to install pollution
control equipment at an estimated cost of $200 to $300 million. The Company
owns a 14 percent interest in Mohave. The outcome of this action cannot be
determined at this time.
The United States Congress authorized the EPA to study the potential
impact Mohave may have on visibility in the Grand Canyon area. Results of this
study are expected in the fourth quarter of 1998.
The Federal Clean Air Act Amendments of 1990 (Amendments) include
provisions for reduction of emissions of oxides of nitrogen by establishing new
emission limits for coal-fired generating units. This will require the
installation of additional pollution-control technology at two of the Reid
Gardner Station generating units at an estimated cost to the Company of no more
than $6 million. Installation will occur in the first quarter of 1999; $1.4
million has already been spent to retrofit a third unit.
In 1991, the EPA published an order requiring the Navajo Generating
Station (Navajo) to install scrubbers to remove 90 percent of sulfur dioxide
emissions beginning in 1997. As an 11.3 percent owner of Navajo, the Company
will be required to fund an estimated $48.9 million for installation of the
scrubbers. The first of three scrubber units was placed in commercial
operation in November 1997. The second scrubber entered start-up April 6, 1998
and will be in commercial operation by November 1998, with the last scrubber
unit operational by August 1999. Currently, the project is approaching 95
percent complete. The Company has spent approximately $44.4 million through
August 1998 on the scrubbers' construction. In 1992, the Company received
resource planning approval from the PUCN for its share of the cost of the
scrubbers.
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(5) SHORT-TERM BORROWING:
In April 1998, the Company obtained an additional $50 million bank
revolving credit facility which expires on April 16, 1999 and pays a facility
fee based on the Company's senior unsecured debt rating. Borrowing rates under
the bank line are determined by both current market rates and the Company's
senior unsecured debt rating.
(6) MERGER; DIVIDEND POLICY:
On April 30, 1998, Nevada Power Company and Sierra Pacific Resources
announced that their boards of directors unanimously approved an agreement
providing for a proposed merger of equals combination with stock and cash
consideration. Based upon then current market prices and expected financing
requirements, the combination would create a company with a total market
capitalization of approximately $4.0 billion ($2.3 billion in equity, $1.5
billion in debt and $240 million in preferred stock). In conjunction with the
Company's approval of the proposed merger, the Company's Board of Directors
stated that, beginning with the November 1998 dividend, it intends to adopt the
expected combined company initial annual dividend rate. This would result in
an indicated annual dividend rate of $1.00 per share for periods following the
August 1998 dividend payment. For further information regarding the proposed
merger please refer to the Company's Form 8-K filed with the SEC on April 30,
1998.
On July 7, 1998 Sierra Pacific Resources and Nevada Power Company issued a
press release announcing the filing of a joint merger application with the PUCN
for approval of their proposed merger. In the filing, Sierra Pacific Resources
and Nevada Power Company propose selling their generating plants if the merger
is completed and a long-term freeze in prices for regulated utility services
(transmission and distribution). Capital raised by the sale of generating
plants will be reinvested primarily in new transmission and distribution
facilities. An incentive mechanism through which net merger and other benefits
are shared by customers and investors has also been proposed. Among other
issues addressed in the PUCN merger application are: the impact of the merger
on competition and electricity prices; operation of the electric transmission
system to ensure competing energy suppliers have equal access to customers;
and benefits of the merger to employees and stockholders. The first phase of
hearings to be held over three weeks will start on November 9 in Las Vegas and
will concentrate on structural features of the merger, effects on competition
and existing contracts of the Company and Sierra Pacific Resources. Phase two
will concentrate on the breakdown of costs and effect on rates and quality of
service. Phase three will address PUCN jurisdiction and any remaining issues.
For further information regarding this filing please refer to the Company's SEC
Form 8-K filed with the SEC on July 8, 1998.
Both the Company and Sierra Pacific Resources held special stockholder
meetings during which stockholders of both companies voted to approve the
proposed merger. The proposed merger is conditioned, among other things, upon
further regulatory approvals including the PUCN and the Federal Energy
Regulatory Commission.
(7) PREFERRED SECURITIES:
On September 28, 1998, NVP Capital III (Trust), a wholly-owned subsidiary
of the Company, sold 2,800,000 7 3/4% Cumulative Quarterly Trust Issued
Preferred Securities at $25 per security. The proceeds of $70 million were
received at closing on October 6, 1998. The Company owns all the common
securities, 86,598 shares issued by the trust for $2.2 million. The trust
issued preferred securities and the common securities represent undivided
beneficial ownership interests in the assets of the Trust, a statutory
business trust formed under the laws of the state of Delaware. The existence
of the Trust is for the sole purpose of issuing the trust issued preferred
securities and the common securities and using the proceeds thereof to
purchase from the Company its 7 3/4% Junior Subordinated Deferrable Interest
Debentures due September 30, 2038, extendible to September 30, 2047 under
certain conditions, in a principal amount of $72.2 million. The sole asset
of the Trust is the deferrable interest debentures. Holders of the trust
issued preferred securities are entitled to receive preferential cumulative
cash distributions accruing from the date of original issuance and payable
quarterly in arrears on the last day of March, June, September and December of
each year. The trust issued preferred securities are subject to mandatory
redemption, in whole or in part, upon repayment of the deferrable interest
debentures at maturity or their earlier redemption in an amount equal to the
amount of related deferrable interest debentures maturing or being redeemed.
The trust issued preferred securities are redeemable at $25 per preferred
security plus
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accumulated and unpaid distributions thereon to the date of redemption.
The Company's obligations under the guarantee agreement entered into in
connection with the trust issued preferred securities when taken together
with the Company's obligation to make interest and other payments on the
deferrable interest debentures issued to the Trust, and the Company's
obligations under the Indenture pursuant to which the deferrable interest
debentures are issued and its obligations under the Declaration, including its
liabilities to pay costs, expenses, debts and liabilities of the Trust,
provides a full and unconditional guarantee by the Company of the Trust's
obligations under the trust issued preferred securities. Financial statements
of the Trust are consolidated with the Company's. Separate financial statements
are not filed because the Trust is wholly-owned by the Company and essentially
has no independent operations, and the Company's guarantee of the Trust's
obligations is full and unconditional. The $70 million in net proceeds to
the Company will be used for general corporate utility purposes which may
include capital expenditures, repayment of debt and working capital. A portion
of the proceeds were used to repay short-term debt incurred for general
corporate utility purposes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Overall net cash flows increased during the first nine months of 1998, as
compared to 1997, primarily due to more cash being provided by operating
activities and more cash being provided by financing activities partially
offset by more cash being used in investing activities. The increase in cash
being provided by operating activities was primarily due to an energy rate
increase effective February 1, 1998. The increase in cash used in investing
activities was primarily due to increased construction expenditures. The
increase in net cash provided by financing activities was primarily due to
increased short-term borrowing.
On April 30, 1998, Nevada Power Company and Sierra Pacific Resources
announced that their boards of directors unanimously approved an agreement
providing for a proposed merger of equals. On July 7, 1998 Sierra Pacific
Resources and Nevada Power Company issued a press release announcing the filing
of a joint merger application with the PUCN for approval of their proposed
merger. Stockholders of both companies voted to approve the proposed merger.
(See Note 6 to the condensed consolidated financial statements included in this
quarterly report.)
In April 1998, the Company filed a request with the PUCN for authorization
to increase energy rates under the state's deferred energy accounting
procedures by approximately $43 million for increased energy costs and $9.9
million for remaining issues from the 1997 deferred energy rate case. On
October 6, the PUCN approved $7.4 million of the $9.9 million increase
requested in connection with the 1997 deferred energy rate case. The effective
date and the effect on various customer classes has not been determined yet.
The $43 million energy rate increase request was dismissed by the PUCN on
July 15, 1998. After the dismissal, the Company immediately filed a request
with the PUCN for authorization to increase energy rates by approximately $49
million using a different test period. Because of the October 6 decision in
the 1997 deferred energy rate case referred to in the above paragraph, part of
this case will have to be refiled with the PUCN.
The Company's customer growth rate during 1997 and 1996 was 6.4 and 7.2
percent, respectively. The increase in customers for the first nine months of
1998 was at an annualized rate of 5.8 percent. At September 30, 1998, the
Company provided electric service to 540,938 customers.
Pursuant to Nevada law, every three years the Company is required to file
with the PUCN a forecast of electricity demands for the next 20 years and the
Company's plans to meet those demands. The Company filed its 1997 Resource
Plan on June 3, 1997. On October 20, 1997, the PUCN rendered a decision on
this plan. Among the major items in the Company's 1997 Resource Plan which
were approved by the PUCN are the following:
(1) the Company will proceed to build a 500 kV transmission project known
as the Crystal Transmission Project, with an in-service date of June
1, 1999;
(2) the Company will continue to pursue a strategy of relying on bulk
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power purchases to meet near-term incremental increases in load;
(3) the Company will proceed with a joint 230 kV transmission project with
the Colorado River Commission with costs subject to prudency review in
a future rate case;
(4) the Company received limited approval to proceed with six switchyard
projects;
(5) the Company received approval for pre-development costs to build two
144 megawatt (MW) combustion turbines in 2002 and 2003 which would
be converted to a 410 MW combined cycle plant in 2004. An amendment
to the 1997 Resource Plan will need to be filed by September 1999 for
full approval if the Company wants to proceed with building the
turbines.
To meet capital expenditure requirements through 1998, the Company plans
to utilize internally generated cash, the proceeds from industrial development
revenue bonds (IDBs), FMBs, unsecured borrowings, preferred securities and
common stock issues through public offerings.
Under the Stock Purchase and Dividend Reinvestment Plan (SPP) the Company
issued 1,515,716 and 869,895 shares, respectively, of its common stock in 1997
and the first nine months of 1998. Beginning in the third quarter of 1998, the
Company began using open market purchases of its common stock to meet the
requirements of the SPP.
On November 20, 1997, Clark County, Nevada issued $52.3 million Series
1997A IDBs (Nevada Power Company Project) due 2032 and Coconino County, Arizona
Pollution Control Corporation issued $20 million 5.8% Pollution Control Revenue
Bonds (PCRBs) Series 1997B (Nevada Power Company Project) due 2032. Net
proceeds from the sale of the IDBs were placed on deposit with a trustee and
are being used to finance the construction of certain facilities which qualify
for tax-exempt financing. At September 30, 1998, $47.2 million remained on
deposit with the trustee. Net proceeds from the sale of the PCRBs were placed
on deposit with a trustee and were used to finance the construction of the
Navajo scrubber facilities which qualify for tax-exempt financing.
In April 1998, the Company obtained an additional committed bank line for
$50 million which expires on April 16, 1999. The short-term financing is
expected to be utilized to fund some of the Company's construction expenditures
until long-term financing is secured.
In April 1998, the plant workers of the International Brotherhood of
Electrical Workers Union (IBEW) Local 396 ratified a new contract presented by
Company management. Clerical workers of the IBEW have been working without a
contract since February 1998. The contract for the clerical workers has
been scheduled for a vote on November 18.
INDUSTRY RESTRUCTURING
In July 1997, the Governor of the state of Nevada signed into law Assembly
Bill 366 (AB 366) which provides for competition to be implemented in the
electric utility industry in the state no later than December 31, 1999. In
August 1997, the PUCN opened an investigatory docket of the following issues to
be considered as a result of restructuring of the electric industry.
(1) Identification of all cost components in utility service and
establishment of allocation methods necessary for later pricing
of noncompetitive services;
(2) Designation of services as potentially competitive or noncompetitive;
(3) Determination of rate design and non-price terms and conditions for
noncompetitive services;
(4) Establishment of licensing requirements for alternative sellers of
potentially competitive services;
(5) Past (stranded) costs;
(6) Criteria and standards by which the PUCN will apply the legislative
requirements concerning affiliate relations;
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(7) Criteria and process by which the PUCN will appoint providers of
bundled electric service;
(8) Consumer protection;
(9) Anti-competitive behavior codes of conduct and enforcement;
(10) Price regulation for potentially competitive services in
immature markets;
(11) Compliance plans in accordance with regulation;
(12) Options for complying with legislative mandates for integrated
resource planning and portfolio standards;
(13) Innovative pricing for noncompetitive services.
The PUCN issued a final order regarding the first issue, the
identification of services. The PUCN designated unbundled services in eight
major categories with twenty-six unbundled services in total. The PUCN issued
another order on October 12, 1998 establishing principles for the creation of
an independent System Operator. The purpose of this order is to direct the
parties, including Nevada Power Company, to continue the efforts of the
established working group in establishing an independent system operator. The
Company is in the process of reviewing this order.
The other topics are still open issues and are in various stages of
completion. Nevada Power filed a motion for reconsideration after the PUCN
filed its final ruling on the second issue, the designation of services as
potentially competitive or noncompetitive. The PUCN approved the motion for
reconsideration and is rehearing the second issue. Workshops and/or hearings
have been held on licensing, affiliate relations, non-price distribution
tariffs, and generation tariffs. Final orders are expected on these issues by
the fourth quarter of 1998 or early in 1999.
CONTINUING APPLICABILITY OF FASB 71
The Company's rates are currently subject to approval by the PUCN and are
designed to recover the Company's costs of providing services to its customers.
A primary difference between a rate regulated entity and an unregulated entity
is the timing of recognizing certain assets and expenses for financial
reporting purposes. The Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" (FASB 71),
prescribes the method to be used to record the financial transactions of a
regulated entity. The criteria for applying FASB 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, (iii) rates set at levels that will recover costs, can be charged to
and collected from customers. If the Company determines as a result of
competitive changes in Nevada, PUCN orders or otherwise that its business, or a
portion of its business, fails to meet any of these three criteria of FASB 71,
it may have to eliminate from its Consolidated Financial Statements the related
transactions prescribed by the regulators that would not have been recognized
if it had been a non-regulated company, which could result in an impairment of
or write-off of utility assets. The Company believes, however, that it
continues to meet the criteria for operating as a rate regulated entity, as
prescribed by FASB 71.
In July 1997, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on several issues which have
arisen due to deregulation of the electric utility industry and the continuing
applicability of FASB 71. The EITF reached a consensus that a company should
stop applying FASB 71 to a separable portion of its business when deregulatory
legislation or a rate order which results in deregulation gives enough detail
for the company to reasonably determine how the transition plan to deregulation
will effect that separable portion. Once FASB 71 is no longer applied to that
separable portion of the business, it will be disclosed separately in the
company's financial statements. Any regulatory assets and liabilities that
originated in that separable portion of the company should be evaluated on the
basis of which portion of the business the regulated cash flows to settle them
will come from and will not be eliminated until they are recovered,
individually impaired or eliminated by the regulator or the portion of the
business where the regulated cash flows come from can no longer apply FASB 71.
Any new regulatory assets and liabilities are recognized within the portion of
the company where the regulated cash flows for their recovery or settlement
10
<PAGE>
are
derived and are eliminated in the same manner as existing regulatory assets and
liabilities as described above.
YEAR 2000
The Company has made Year 2000 readiness a top priority for all of its
departments. With officer oversight, the Company is committed to reviewing all
of its computers, software programs and electrical systems to verify that
appropriate actions are being taken in order to be Year 2000 ready, including
the ability to process, calculate, compare and sequence date data into the next
century, and, to make all necessary leap year corrections.
A plan is in place to identify, correct and test problems related to the
Year 2000 issue, including verification of the level of Year 2000 readiness of
business partners and suppliers. The responses of business partners and
suppliers are evaluated individually. A centralized data base is used to
identify and track the progress of work. A centralized control over incoming
correspondence and inquiries relating to Year 2000 and external communication
efforts is being maintained. The Company's readiness plan is reviewed
monthly. The Company's general policy requires that all newly purchased
products be Year 2000 ready or designed to allow the Company to determine
whether such products present Year 2000 issues.
The Company's Year 2000 readiness activities are tracked through monthly
reporting to the North American Electric Reliability Council (NERC). Overall
status for the Company as of September 30, 1998 shows identification of
potential problems at 95% complete, assessment at 50% complete and
remediation/testing at 10% complete. This status is within the NERC guidelines
and the Company's Year 2000 Project Schedule which calls for the Company to
achieve Year 2000 readiness by the end of June, 1999. One generation plant
will be remediated and tested in September of 1999 to conform with its annual
scheduled outage, however, this plant is similar to others in the Company's
system which will have been remediated and tested by the end of June 1999. No
material difficulties are anticipated at that time.
Even though the Company is confident that its critical systems will be
fully remediated by year-end 1999, the Company is engaged in early stages of
contingency planning. Contingency planning will likely be partially affected
by the responses received from business partners and suppliers received in
upcoming months. The contingency plan is expected to be finalized by the
second quarter of 1999. The Company is also working with utility and non-
utility suppliers, generation and transmission operators and regional
organizations to develop external contingency plans, where appropriate. Due to
the need to assess the readiness of business partners, suppliers, and
interconnected operators, the risk factors which will form the basis for the
Company's contingency plan are not fully known at this time and the reasonably
worst case scenario is also unknown, at this time. Due to the speculative
nature of contingency planning, it is uncertain whether such plans actually
will be sufficient to reduce the risk of material impacts on our operations due
to Year 2000 problems. However, if the Company or significant business
partners or suppliers fail to achieve Year 2000 readiness with respect to
critical systems, there could be a materially adverse impact on the utility's
financial position, results of operations and cash flows.
The estimated total cumulative cost to the Company of addressing Year 2000
readiness is in the range of $7 to $15 million, including operating and capital
expenditures. To date, approximately $925,000 in operating expenses and
approximately $32,000 in capital additions have been incurred.
11
<PAGE>
OPERATING RESULTS OF THE THIRD QUARTER OF 1998
COMPARED TO THIRD QUARTER OF 1997
Earnings per average common share were $1.21 for the third quarter of
1998, compared to $1.06 for the same period in 1997. Revenues and earnings
available for common stock increased due to higher kilowatthour sales from
warmer weather and customer growth. Revenues also increased due to an energy
rate increase effective February 1, 1998. The average number of customers
increased 6.09 percent and kilowatthour sales, excluding sales for resale, were
up 8.76 percent, as compared to the third quarter of 1997.
Fuel expense increased $8.6 million due to increased generation.
Purchased power increased $7.5 million due to increased power purchases. Other
operations expense increased $4.7 million primarily due to increased
administrative and general expense. Maintenance and repairs expense decreased
$1.9 million due to higher maintenance expense in 1997 for Reid Gardner
Generating Station. Depreciation expense increased $1.5 million because of a
growing asset base. Other interest expense increased $1.8 million due to
increased short-term borrowing.
Average common shares increased because of the sale of additional common
shares through the SPP to partially provide funds for the construction of
facilities necessary to meet increased customer demand for electricity.
OPERATING RESULTS OF THE FIRST NINE MONTHS OF 1998
COMPARED TO FIRST NINE MONTHS OF 1997
Earnings per average common share were $1.56 for the first nine months of
1998, compared to $1.60 for the same period in 1997. Although earnings
available for common stock were flat, earnings per share decreased due to an
increase in average common shares outstanding. Revenues increased due to
higher kilowatthour sales and an energy rate increase effective February 1,
1998. The average number of customers increased 6.30 percent and kilowatthour
sales, excluding sales for resale, were up 2.79 percent, as compared to the
first nine months of 1997.
Fuel expense increased $10.4 million due to increased generation.
Purchased power increased $7.2 million due to higher average purchased power
costs. Other operations expense increased $9.7 million primarily due to
increased administrative and general expense. Depreciation expense increased
$4.9 million because of a growing asset base. Interest on long term debt
increased by $4.5 million primarily due to the issuance in November 1997 of the
new Series 1997A $52.3 million IDBs and Series 1997B $20 million PCRBs and the
remarketing at fixed rates in January 1998 of variable rate revenue bonds
$76.75 million Series 1995A, $44 million Series 1995C, $20.3 million Series
1995D and $13 million Series 1995E. Distribution requirements on company-
obligated preferred securities of a subsidiary trust increased by $2.5 million
due to the issuance in April 1997 of the Quarterly Income Preferred Securities.
Average common shares increased because of the sale of additional common
shares through the SPP to partially provide funds for the construction of
facilities necessary to meet increased customer demand for electricity.
12
<PAGE>
PART II. OTHER INFORMATION
Items 1 through 5. None.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Exhibits Filed Description
-------------- -----------
27 Financial Data Schedule
b. Reports on Form 8-K.
Form 8-K filed on April 30, 1998.
Form 8-K filed on July 8, 1998.
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Nevada Power Company
--------------------
(Registrant)
STEVEN W. RIGAZIO
--------------------------------------
(Signature)
Date: November 6, 1998 Steven W. Rigazio
----------------
Vice President, Finance and Planning,
Treasurer, Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET OF NEVADA POWER COMPANY AS OF SEPTEMBER 30, 1998 AND
THE RELATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
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