<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number 0-508
SIERRA PACIFIC RESOURCES
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 88-0198358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 30150 (6100 Neil Road)
Reno, Nevada 89520-3150
(Address of principal executive office) (Zip Code)
(702) 689-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at November 1, 1996
Common Stock, $1.00 par value 30,802,877 Shares
<PAGE>
SIERRA PACIFIC RESOURCES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - Financial Information
- ------------------------------
ITEM 1. Financial Statements
Report of Independent Accountants............................................ 2
Consolidated Balance Sheets - September 30, 1996 and
December 31, 1995................................................ 3
Consolidated Statements of Income - Three and Nine Months
Ended September 30, 1996 and 1995................................ 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1996 and 1995................................ 5
Notes to Consolidated Financial Statements................................... 6
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.................................................... 9
PART II - Other Information
- ---------------------------
ITEM 1. Legal Proceedings................................................ 19
ITEM 5. Other Information................................................ 19
ITEM 6. Exhibits and Reports on Form 8-K................................. 19
Signature Page.................................................................... 20
</TABLE>
<PAGE>
COOPERS
& LYBRAND......................................................................
a professional services firm
To the Board of Directors and Shareholders
of Sierra Pacific Resources:
We have reviewed the condensed consolidated balance sheet of Sierra Pacific
Resources and subsidiaries as of September 30, 1996 and the related consolidated
statements of income for the three- and nine-month periods ended September 30,
1996 and 1995 and consolidated statements of cash flows for the nine-month
periods ended September 30, 1996 and 1995. These financial statements are the
responsibility of management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and statement of capitalization of
Sierra Pacific Resources and subsidiaries as of December 31, 1995, and the
related statements of income, cash flows and retained earnings for the year then
ended (not presented herein); and in our report dated February 16, 1996 we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1995 is fairly presented, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
San Francisco, California
October 28, 1996
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a
limited liability association incorporated in Switzerland.
2
<PAGE>
SIERRA PACIFIC RESOURCES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Utility Plant, Original Cost:
Plant in service $1,913,062 $1,816,444
Less accumulated provision for depreciation 592,101 556,710
---------- ----------
1,320,961 1,259,734
Construction work in progress 192,757 153,067
---------- ----------
1,513,718 1,412,801
Investment in subsidiaries and other ---------- ----------
property, net 44,168 45,290
---------- ----------
Current Assets:
Cash and cash equivalents 9,682 4,243
Accounts receivable less provision for
uncollectible accounts: $1,579 at September 30,
1996 and $1,543 at December 31, 1995 75,680 92,177
Materials, supplies and fuel, at average cost 30,015 30,455
Other 3,957 2,538
---------- ----------
119,334 129,413
---------- ----------
Deferred Charges:
Regulatory tax asset 68,621 69,610
Other regulatory assets 66,382 82,841
Other 13,725 16,672
---------- ----------
148,728 169,123
---------- ----------
$1,825,948 $1,756,627
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common shareholder's equity $ 598,972 $ 544,550
Preferred stock 73,115 73,115
Preferred stock subject to mandatory redemption - 13,600
SPPC-obligated mandatorily redeemable preferred
securities of SPPC's subsidiary Trust, Sierra
Pacific Power Capital I, holding solely $50 million
principal amount of 8.60% Junior Subordinated
Debentures of SPPC, due 2036 48,500 -
Long-term debt 632,951 573,933
---------- ----------
1,353,538 1,205,198
---------- ----------
Current Liabilities:
Short-term borrowings 26,000 56,112
Current maturities of long-term debt
and preferred stock 10,423 17,358
Accounts payable 44,658 91,885
Accrued interest 13,663 6,109
Dividends declared 1,820 10,195
Accrued salaries and benefits 9,217 9,265
Other current liabilities 23,775 12,440
---------- ----------
129,556 203,364
---------- ----------
Deferred Credits:
Accumulated deferred federal income taxes 153,707 159,300
Accumulated deferred investment tax credit 42,319 43,797
Regulatory tax liability 43,592 45,084
Customer advances for construction 39,368 40,168
Other 63,868 59,716
---------- ----------
342,854 348,065
---------- ----------
$1,825,948 $1,756,627
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
SIERRA PACIFIC RESOURCES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ----------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating Revenues:
Electric $ 136,353 $ 128,815 $ 388,712 $ 368,789
Gas 8,196 7,050 44,530 45,404
Water 14,133 13,350 34,971 33,084
Other 2,130 2,005 6,599 6,321
----------- ----------- ----------- -----------
160,812 151,220 474,812 453,598
----------- ----------- ----------- -----------
Operating Expenses:
Operation:
Purchased power 29,687 28,484 90,710 89,080
Fuel for power generation 27,075 22,838 75,477 63,298
Gas purchased for resale 4,075 4,642 23,415 26,133
Deferral of energy costs - net (1) 551 (1,691) 9,225
Other 30,933 34,643 97,593 94,916
Maintenance 4,344 5,150 13,431 13,077
Depreciation and amortization 14,664 13,843 43,015 41,158
Taxes:
Income taxes 12,673 9,036 33,402 26,178
Other than income 4,612 4,537 13,784 13,475
----------- ----------- ----------- -----------
128,062 123,724 389,136 376,540
----------- ----------- ----------- -----------
Operating Income 32,750 27,496 85,676 77,058
----------- ----------- ----------- -----------
Other Income:
Allowance for other funds
used during construction 1,800 449 3,820 898
Other (expense) income- net (270) 45 890 199
----------- ----------- ----------- -----------
1,530 494 4,710 1,097
----------- ----------- ----------- -----------
Total Income 34,280 27,990 90,386 78,155
----------- ----------- ----------- -----------
Interest Charges:
Long-term debt 10,193 9,589 29,319 28,867
Other 1,215 942 3,613 2,826
Allowance for borrowed funds
used during construction and
capitalized interest (1,492) (785) (2,791) (1,719)
----------- ----------- ----------- -----------
9,916 9,746 30,141 29,974
----------- ----------- ----------- -----------
Income Before Preferred Dividends 24,364 18,244 60,245 48,181
Preferred Dividend Requirements 2,386 1,785 5,676 5,589
----------- ----------- ----------- -----------
Income Applicable to Common Stock $ 21,978 $ 16,459 $ 54,569 $ 42,592
=========== =========== =========== ===========
Weighted Average Shares 30,691,494 29,877,780 30,395,607 29,668,973
Net Income per Share 0.72 0.55 1.80 1.44
Dividends Paid Per Share of
Common Stock 0.295 0.28 0.87 0.84
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
SIERRA PACIFIC RESOURCES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
------------ ----------
<S> (UNAUDITED)
Cash Flows from Operating Activities:
- ------------------------------------ <C> <C>
Income before preferred dividends $ 60,245 $ 48,181
Non-cash items included in income:
Depreciation and amortization 43,015 41,158
Deferred taxes and deferred investment tax credit (7,573) (2,889)
AFUDC and capitalized interest (6,611) (2,617)
Deferred energy costs (1,691) 9,225
Write-off of merger costs 5,375 7,828
Other non-cash 3,092 6,866
Changes in certain assets and liabilities:
Accounts receivable 16,497 13,748
Other current assets (979) 376
Accounts payable (47,227) (2,553)
Other current liabilities 18,356 5,805
Other - net 14,064 (6,875)
-------- --------
Net Cash Flow from Operating Activities 96,563 118,253
-------- --------
Cash Flows Used in Investing Activities:
- ----------------------------------------
Additions to utility plant (153,332) (91,851)
Non-cash charges to utility plant 6,847 2,920
Net customer refunds and
Contributions in aid of construction 9,492 4,208
-------- --------
Net cash used for utility plant (136,993) (84,723)
Proceeds from sale of real estate - 1,429
Increase (decrease) in subsidiaries and other
non-utility property 1,677 (3,162)
-------- --------
Net Cash Used in Investing Activities (135,316) (86,456)
-------- --------
Cash Flows From Financing Activities:
- -------------------------------------
Increase (decrease) in short-term borrowings (28,468) 23,740
Proceeds from issuance of long-term debt 110,031 -
Retirement of long-term debt (60,435) (10,957)
Reduction of preferred stock (20,400) (6,800)
Proceeds from company obligated mandatorily
redeemable preferred securities 48,500 -
Decrease in funds held in trust, net 9,175 14,514
Increase in notes receivable - (30,939)
Sale of common stock 17,829 11,237
Expenses of external financing - (59)
Dividends paid (32,040) (30,798)
-------- --------
Net Cash provided (used) as a Result of Financing Activities 44,192 (30,062)
-------- --------
Net Increase in Cash and Cash Equivalents 5,439 1,735
Beginning Balance in Cash and Cash Equivalents 4,243 15,842
-------- --------
Ending Balance in Cash and Cash Equivalents $ 9,682 $ 17,577
======= ========
Supplemental Disclosures of Cash Flow Information:
- --------------------------------------------------
Cash Paid During Period For:
Interest $25,188 $ 23,086
Income Taxes $27,629 $ 24,051
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE>
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. MANAGEMENT'S STATEMENT
---------------------------------
In the opinion of Company management, the accompanying unaudited interim
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the consolidated
financial position, consolidated results of operations and consolidated cash
flows for the periods shown. These consolidated financial statements do not
contain the complete detail or footnote disclosure concerning accounting
policies and other matters which are included in full year financial statements
and, therefore, they should be read in conjunction with the Company's audited
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995. Coopers & Lybrand L.L.P., the Company's
independent accountants, have performed a review of the unaudited consolidated
financial statements, and their report thereon has been included on Page 2 of
this report.
The results of operations for the three and nine month periods ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the full year.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Sierra Pacific Power Company (SPPC), Lands of
Sierra Inc. (LOS), Sierra Energy Company (SECO), Tuscarora Gas Pipeline Company
(TGPC), Sierra Water Development Company (SWDC), and e-three. All significant
intercompany transactions and balances have been eliminated in consolidation.
Reclassifications
- -----------------
Certain items previously reported for years prior to 1996 have been
reclassified to conform with the current year's presentation. Net income and
shareholder's equity were not affected by these reclassifications.
NOTE 2. IMPAIRMENT OF LONG-LIVED ASSETS
-----------------------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of", which is effective
for fiscal years beginning after December 31, 1995. The Company adopted the
standard January 1, 1996 and has determined that under current cost based
regulation there exists no material impact on its financial statements as a
result of the adoption of the standard.
NOTE 3. PREFERRED STOCK
-------------------------
On June 3, 1996, Sierra Pacific Power Company (SPPC), the Company's
principal subsidiary, redeemed the remaining 408,000 shares of Series G, 8.24%
Preferred Stock, at par value, for $20.4 million.
On July 29, 1996, Sierra Pacific Power Capital I, (the Trust), a wholly
owned subsidiary of SPPC, issued $48.5 million (1,940,000 shares) 8.60% Trust
Originated Preferred Securities (the Preferred Securities). SPPC owns all the
common securities, 60,000 shares totalling $1.5 million (Common Securities),
issued by the Trust. The Preferred Securities and the Common Securities (the
Trust 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 Securities and using the proceeds thereof to purchase from
6
<PAGE>
SPPC its 8.60% Junior Subordinated Debentures due July 30, 2036, in a principal
amount of $50 million. The sole asset of the Trust is the Junior Subordinated
Debentures. SPPC's obligations under the Guarantee (agreement entered into in
connection with the Preferred Securities) when taken together with SPPC's
obligation to make interest and other payments on the Junior Subordinated
Debentures issued to the Trust, and SPPC's obligations under the Indenture
pursuant to which the Junior Subordinated Debentures are issued and its
obligations under the Declaration, including its liabilities to pay costs,
expenses, debts and liabilities of the Trust, provides a full and unconditional
guarantee by SPPC of the Trust's obligations under the Preferred Securities.
Financial statements of the Trust are consolidated with SPPC; separate
financial statements are not filed because the Trust is wholly-owned by SPPC and
essentially has no independent operations, and the guarantee is full and
unconditional. Proceeds to SPPC from the sale of the Junior Subordinated
Debentures were used to retire short-term indebtedness incurred to redeem $20.4
million in principal amount of Series G, 8.24% Preferred Stock and to reduce
other short-term debt of SPPC.
NOTE 4. DEFERRED ENERGY
-------------------------
In March 1995, the balances of SPPC's (Nevada jurisdiction) deferred energy
receivables accounts were collected and, according to the provisions of the
stipulation approved by the Public Service Commission of Nevada (PSCN) in
September 1994, SPPC suspended its deferred energy accounting, increased base
rates by $6.5 million, and decreased deferred fuel rates by $18.8 million.
Fluctuations in purchased gas, fuel and purchased power costs from the base fuel
rates are flowing through to earnings until January 1, 1997. SPPC and
regulators are currently re-evaluating the use of deferred energy accounting
practices in accordance with applications filed with the PSCN.
In June 1996, SPPC implemented the California Stipulation Agreement which
set the Energy Cost Adjustment Clause (ECAC), California Alternate Rates for
Energy (CARE) and Electric Revenue Adjustment Mechanism (ERAM) account balances
to zero resulting in a write-off of the $2.6 million overcollection in the
balancing accounts, thereby reducing energy costs by a like amount. The
Stipulation also reduced fuel rates by $2.3 million on an annual basis.
NOTE 5. LONG-TERM DEBT
------------------------
The Company redeemed $10 million of senior notes on April 1, 1996.
On February 27, 1996, SPPC registered for the issuance of up to $80 million
of collateralized debt securities which may be offered from time to time.
During March, 1996, SPPC issued $20 million of medium-term notes under the
program. In April, 1996, SPPC issued an additional $10 million in medium-term
notes. These are ten year non-callable notes, due in 2006, with interest rates
of 6.81% to 6.83% payable in semi-annual payments. In July 1996, SPPC issued an
additional $30 million principal amount of its $80 million Medium-Term Notes,
Series C. These are three year non-callable notes, due in 1999, with interest
rates of 6.83% to 6.86%. The net proceeds to SPPC from the sale of the notes
were used to reduce short-term debt and to fund construction projects.
On June 19, 1996, SPPC converted the interest rate on the $80 million Water
Facilities Bonds maturing in 2020 to a daily rate from a flexible (Commercial
Paper) rate which reduces letter of credit, trustee fees, and administrative
costs.
7
<PAGE>
NOTE 6. COMMON STOCK OFFERINGS
--------------------------------
On March 14, 1995, the Company registered with the Securities and Exchange
Commission (SEC) to offer shares of common stock pursuant to a continuous
offering program. The net proceeds of the shares sold to date have been used
primarily to make additional equity investments in SPPC, which is using the
funds for its construction program. As of November 1, 1996, approximately
191,200 of the shares remain unissued.
On August 1, 1996, the Company registered with the SEC an additional one
million shares of common stock for sale under the Company's Common Stock
Investment Plan. The Plan represents an amendment to the Company's existing
Dividend Reinvestment and Stock Purchase Plan. The net proceeds from the sale
by the Company of shares of Common Stock pursuant to the Plan will be used to
make additional investments in the common equities of the subsidiaries of the
Company and for other general corporate purposes. The subsidiaries propose to
use the funds received to fund construction, to reduce certain indebtedness and
for other general corporate purposes. Approximately 1,175,000 shares remain to
be issued, as of November 1, 1996.
NOTE 7. MERGER TERMINATION
-----------------------------
On June 28, 1996, Sierra Pacific Resources and Sierra Pacific Power Company
received notice from The Washington Water Power Company of its election to
terminate the Agreement and Plan of Reorganization, as amended, among the
Company, Sierra Pacific Power Company and The Washington Water Power Company.
As of June 30, 1996, SPPC had incurred $42 million in merger costs
composed of $13 million in transaction and transition costs and $29 million of
early retirement and severance program costs.
In accordance with the provisions of the merger stipulation with the Public
Service Commission of Nevada (PSCN), SPPC had been amortizing all costs over a
five year period which began January 1, 1995. Through June 30, 1996, $17
million of total merger costs had been expensed. Due to the termination of the
merger in June 1996, all transition and transaction costs have been written-off
in the period ended June 30, 1996. Consistent with the precedent set by the
PSCN in previous early retirement and severance programs, SPPC continues to
capitalize and amortize these costs. The amortization period for such costs has
been modified to ten years to conform to prior precedent set by the PSCN. SPPC
expects to recover the costs related to early retirement and severance costs in
future rates.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
Nevada, SPPC's primary jurisdiction, uses a marginal cost method for setting
rates by customer class. As a result of this methodology, changes in sales mix
(i.e., consumption by customer class) can result in increases or decreases in
revenues, irrespective of changes in total consumption.
<TABLE>
<CAPTION>
SPPC REVENUE MARGIN
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1996 1995 1996 1995
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Operating Revenues $158,682 $149,215 $ 468,213 $ 447,277
Energy Costs (60,239) (56,515) (186,019) (187,736)
-------- --------
Revenue Margin $ 98,443 $ 92,700 $ 282,194 $ 259,541
======== ======== ========= =========
</TABLE>
Total operating revenues for the three-months ended September 30, 1996
increased by 6.3% over the comparable period of 1995 due to increased energy
sales resulting from overall customer growth and increased use per customer due
to warmer weather than last year. A record peak load of 1,225 MW was achieved
on July 22, 1996. Total operating revenues for the nine-month period ended
September 30, 1996 increased by 4.7% over the comparable period of 1995, due to
customer growth and warmer weather, which was partially offset by a decrease in
electric rates in Nevada which took effect May, 1995.
9
<PAGE>
Energy costs are comprised of purchased power, fuel for power generation,
gas purchased for resale, and deferred energy. Average energy costs for the
three and nine months ended are set forth below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S>
Average cost per KWH of <C> <C> <C> <C>
purchased power 3.37c 3.69c 2.99c 3.44c
Average cost per KWH of
generated power 2.08c 1.85c 2.20c 2.01c
Average cost per therm of
gas purchased for resale 19.12c 38.31c 25.52c 33.05c
</TABLE>
While the total cost of purchased power increased by 4.2% and 1.8% for the
three and nine months ended September 30, 1996, over the comparable periods in
1995, the kilowatt-hours purchased increased by 14.1% and 17.3%, respectively,
during the same periods. The resulting decrease in cost per kilowatt-hour of
8.7% and 13.1%, respectively, is attributable to the availability of low cost
hydro-generated energy from sources in the Pacific Northwest.
Kilowatt-hours generated increased by 5.5% and 9.3%, respectively, for the
three and nine months ended September 30, 1996, over the comparable periods in
1995 due to increased customer demand and overall customer growth. The total
cost of fuel for power generation increased by 18.5% and 19.2% during the same
periods, reflecting higher fuel prices and increased generation. The cost per
kilowatt-hour generated increased by 12.4% and 9.5%, respectively, for the three
and nine months ended September 30, 1996 over the same periods in 1995. During
the periods, the Company continued to shift toward natural gas, and away from
more expensive oil and coal, as generation fuel.
While for the three and nine months ended September 30, 1996, SPPC increased
its therm usage by 50.0% and 6.5%, respectively, over the comparable periods in
1995, the total cost of gas purchased for resale during the same periods
decreased 25.1% and 17.6% due to per-therm cost decreases of 50.1% and 22.7%.
Deferred energy costs - net decreased by 100% and 118% for the three and
nine months ended September 30, 1996 over the comparable period of 1995 due to
the suspension of deferred energy accounting in Nevada's electric and natural
gas jurisdictions in March, 1995. In June, 1996, the California Energy Cost
Adjustment Clause, California Alternate Rates for Energy, and Electric Revenue
Adjustment Mechanism rates were set to zero which resulted in a $2.6 million
decrease in these costs. For further discussion of deferred energy matters,
refer to "Note 4. DEFERRED ENERGY" on page 7.
10
<PAGE>
Other operations expenses experienced a net decrease of 10.7% and a net
increase of 2.8% during the three and nine months ended September 30, 1996 over
the same period in 1995. For the three months ended, other operating expenses
decreased as there were no merger expenses in 1996 compared to 1995, offset by
additional coal contract related expenses of $1.5 million (see next paragraph
for more details). Other operations expenses for the nine months increased due
to buy-outs of a coal contract of $4.0 million, higher outside services costs
for computer programmers, and an increase in distribution expenses for
maintenance of overhead lines and meters.
In its 1995 Form 10-K, SPPC stated that it would be investigating
alternatives to mitigate a build-up of coal inventory. However, with lower
prices of natural gas and availability of inexpensive energy from the Pacific
Northwest, the coal inventory has grown. As of September 30, 1996, the coal
inventory balance was approximately 294,647 tons, or roughly 51 days of
consumption at 100% capacity. SPPC's policy has been to maintain an average
annual coal inventory sufficient to provide 40 days at full load. To mitigate
further inventory buildup, SPPC paid $2.5 million to buy out one year of a coal
contract which will satisfy the minimum commitment for the period from July 1,
1996 to June 30, 1997. Additionally, SPPC committed $1.5 million toward the
minimum contract commitment of tonnage for the 1997-1998 contract year. As part
of its strategy to manage the coal inventory, SPPC may commit to additional coal
contract buy-outs.
Maintenance expense decreased by 15.6% and 2.7%, respectively, during the
three and nine months ended September 30, 1996 over the same periods in 1995
primarily due to planned maintenance of SPPC's Tracy generating plant in 1995,
partially offset by planned maintenance on distribution overhead lines in 1996.
Depreciation and amortization expense for the three and nine months ended
September 30, 1996 increased by 5.9% and 4.5% over the comparable periods in
1995, due to continued increases in utility plant. Refer to the "CONSTRUCTION
PROGRAM AND REGULATORY PROCEEDINGS" section beginning on page 13 for additional
discussion of construction programs.
Income taxes increased for the three and nine months ended September 30,
1996 over the comparable periods in 1995, due to higher operating income before
taxes. Income taxes reflected in operating income and other income-net are
summarized on the following page. Other taxes increased due to higher property
taxes.
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1996 1995 1996 1995
--------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Currently payable $12,113 $ 8,255 $39,717 $27,644
Deferred taxes - net 277 1,019 (6,157) (574)
Investment tax credit - net (493) (492) (1,478) (1,477)
------- ------- ------- --------
Total income taxes $11,897 $ 8,782 $32,082 $25,593
======= ======= ======= ========
Income taxes charge to:
Operations $12,673 $ 9,036 $33,402 $26,178
Other Income - net (776) (254) (1,320) (585)
------- ------- ------- --------
Total income tax expense $11,897 $ 8,782 $32,082 $25,593
======= ======= ======= ========
Income before income taxes $36,261 $27,026 $92,327 $73,774
======= ======= ======= ========
Effective tax rate 32.8% 32.5% 34.7% 34.7%
======= ======= ======= ========
</TABLE>
Allowance for funds used during construction (AFUDC) and capitalized
interest increased by 166.8% and 152.6% during the three and nine months ended
September 30, 1996 compared to the corresponding periods in 1995, reflecting the
current period increase in construction work in progress (CWIP) and an AFUDC
rate increase from the prior year. Refer to the "CONSTRUCTION PROGRAM AND
REGULATORY PROCEEDINGS" section beginning on page 13 for additional discussion
of construction programs.
Other interest on debt increased 29.0% and 27.8% for the three and nine
months ended September 30, 1996 due to SPPC carrying greater amounts of
commercial paper debt 1996 which resulted in an increase in related interest.
Tuscarora Gas Transmission Company
- ----------------------------------
The Tuscarora Gas Transmission Company pipeline was completed in December,
1995. The pipeline delivered 3.2 and 13.9 million decatherms of gas for the
three and nine months ended September 30, 1996. The pipeline contributed $0.8
million of pre tax earnings for the three months ended September 30, 1996, and
$2.2 million for the nine months ended September 30, 1996 to Tuscarora Gas
Pipeline Company, a wholly owned subsidiary of the Company.
Lands of Sierra
- ---------------
Lands of Sierra (LOS), a wholly owned subsidiary of the Company, was
engaged in the development and management of land and real estate in Nevada and
California. LOS continues to liquidate properties. LOS sold land underlying a
condominium project in May, 1996 for a pre-tax gain of $1.8 million. In August
1996, LOS sold land in Tahoe City, California for a pre-tax gain of $.9 million.
12
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
During the first nine months of 1996, the Company and SPPC declared
quarterly common and preferred stock dividends aggregating $22.4 million.
The Company redeemed $10 million of Senior Notes in April, 1996.
In March and April, 1996, SPPC issued a total of $30 million principal
amount of Medium-Term Notes, Series C. In July 1996, SPPC issued an additional
$30 million principal amount of its $80 million Medium-Term Notes, Series C. To
date, an aggregate of $60 million of Medium-Term Notes, Series C, has been
issued.
On June 3, 1996, SPPC redeemed the remaining 408,000 shares of Series G
8.24% Preferred Stock at par value, for $20.4 million.
On July 29, 1996, Sierra Pacific Power Capital I, a wholly owned subsidiary
of SPPC, issued 1.94 million shares of 8.60% Trust Originated Preferred
Securities with a total liquidation value of $48.5 million. For further
discussion of Trust Originated Preferred Securities, refer to "Note 3. PREFERRED
STOCK" on page 6.
CONSTRUCTION PROGRAM AND REGULATORY PROCEEDINGS
- -----------------------------------------------
The Company's construction program and capital requirements for the period
1996-2000 were originally discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995. Estimated cash construction expenditures
for 1996 and 1997-2000 are $196.7 million and $494.8 million, respectively. As
of September 30, 1996, $137.0 million (69.6%) had been expended of the amount
projected for 1996. Of this amount, approximately 49.5% was provided by
internally-generated funds.
Alturas Intertie
- ----------------
This 345 kV line will originate at the Bonneville Power Administration
transmission line west of the northeastern California town of Alturas. It will
extend south some 165 miles to an existing Company substation in Reno. In
January 1996, the California Public Utilities Commission certified the final
Environmental Impact Report/Statement ("EIR/S") prepared for the project and
granted the Company a Certificate of Public Convenience and Necessity, which
recognizes the need for and benefit of the project.
In February 1996, the Bureau of Land Management (BLM) and the Federal Lead
Agency issued a positive Record of Decision for the project approving the
issuance of a right-of-way grant for approximately 70 miles of BLM land and
confirming that the EIR/S for the project meets the requirements of the National
Environmental Protection Act. The Toiyabe National Forest issued a Record of
Decision for a "no-action" alternative for eight miles of Forest Service land in
Washoe County, Nevada. The Washington D.C. Office of the National Forest
Service has ordered this decision withdrawn. SPPC, the Toiyabe National Forest,
and Modoc National Forest are continuing to work toward a mutually agreeable
solution for this project. On April 30, 1996, the Company appeared before the
Washoe County Commission and was granted a Special Use Permit for the Alturas
Project.
13
<PAGE>
The Public Service Commission of Nevada (PSCN) hearings were also held in
February 1996, as required under the Nevada Utility Environmental Protection Act
(UEPA). A conditional permit to construct was issued by the PSCN on June 13,
1996. The permit is conditioned upon SPPC obtaining permits from entities such
as the Forest Service and the Truckee Meadows Regional Planning Commission.
This decision affirms the need for the line and grants conditional approval
under UEPA. To date, SPPC has been unable to obtain permits from the Regional
Planning Commission and the U.S. Forest Service. The Company appeared before the
Regional Planning Governing Board on October 10, 1996. The Board remanded the
project to the local governing bodies for further review. Some level of risk
exists that litigation may be necessary to obtain these permits and/or that the
project will be unable to receive the necessary permits to proceed as currently
proposed. This could further delay the project and increase its cost. Assuming
SPPC obtains the required permits by Spring, 1997, the Alturas line is expected
to be operational by the Winter of 1997-98 and should provide greater system
reliability and additional supplies of electricity from hydroelectric power
plants in the Pacific Northwest. The current projected cost of the Alturas
Intertie Project is $120 million of which $64 million has already been expended
as of September 30, 1996.
Pinon Pine
- ----------
In August, 1992, SPPC executed a cooperative agreement with the U.S.
Department of Energy (DOE) for the construction of a coal-gasification power
plant. The project, known as the Pinon Pine power project (Pinon) was selected
by the DOE for funding under the fourth round of the Federal Clean Coal
Technology Program. This clean coal integrated gasification combined-cycle
power plant will be fully capable of operating on coal, natural gas and,
potentially, other fuels. The current rating is 106 megawatts. The DOE is
providing funding for approximately half of the construction cost and half of
the operating and fuel expenses for the first four years of operation.
Currently, the DOE has committed $154 million of funding for the project. The
DOE has authority under the Clean Coal Technology Program to fund up to $168
million. Any costs over $168 million are the responsibility of SPPC. Estimated
construction costs for Pinon Pine, including the DOE's portion, increased from
approximately $220 to $241 million. Pinon will be the first project using this
new technology at a commercial megawatt level. Part of the cost increase was
due to the nature of this project and the new technology needed to support this
one-of-a-kind project, which increased its scope and complexity from that which
was originally anticipated.
Construction began on the project in February, 1995, following resource
plan approval by the Public Service Commission of Nevada and the receipt of all
permits and other approvals. Engineering, procurement and construction
activities are underway. The combined cycle combustion turbine is currently
undergoing testing and is scheduled to be in service November, 1996. The coal
gasifier is anticipated to be completed in March, 1997. On August 20, 1996,
Federal legislation was signed extending the required in-service date for
alternative fuel (syngas) produced by the coal gasifier to June 30, 1998, in
order to be eligible for tax credits under Section 29 of the Internal Revenue
Code.
Pinon Pine Corporation and Pinon Pine Investment Company, subsidiaries of
SPPC, own 25% and 75%, respectively, of a 38% partnership interest in Pinon Pine
Company LLC (The LLC) with General Electric Capital Corporation (GECC) holding a
62% interest. The LLC was formed to take advantage of federal income tax
credits associated with the alternative fuel (syngas) produced by the coal
gasifier and available under Section 29 of the Internal Revenue Code.
14
<PAGE>
Water Treatment Facilities Construction
- ---------------------------------------
The Safe Drinking Water Act (SDWA) amendments passed by Congress in 1986
have significantly influenced the cost of SPPC's treatment plant facilities.
SPPC was officially notified in 1991 by the Nevada State Health Division that,
under the requirements of the Surface Water Treatment Rule (SWTR) of the SDWA,
filtration of water at its non-filtered plants would be required. SPPC
submitted and received approval of a filtration compliance plan with the Nevada
State Health Division that provided for a three-year extension to June 1996.
In order to comply with SWTR filtration requirements and meet projected
capacity demands, SPPC has completed construction of the second phase of the
Chalk Bluff treatment plant at a total cost of $88 million for the two phases as
of June 30, 1996. The first phase was completed in Spring of 1994 with a
capacity of 27 million gallons per day (MGD) using high rate filtration as
approved by the Nevada State Health Division in 1995. The second phase of the
facility was completed in May, 1996, providing a total production capacity of 69
MGD. Improvements to SPPC's Glendale treatment plant were also completed in
June, 1996. Completion of these projects results in full compliance with the
SWTR requirements.
Hunter Creek, one of two chemical-process plants, was removed from
operation as a treatment facility in October, 1995, and has been converted to a
30 million gallon covered storage facility as of April, 1996. The other,
Highland, was removed from operation as a treatment facility in June, 1996, and
is being converted to a covered treated water storage facility by April, 1997.
Combined, Hunter Creek and Highland will provide 50 million gallons of treated
water storage for fire protection, operating storage and emergency requirements.
SPPC uses groundwater from twenty-four supply wells. A manmade contaminant
tetrachloroethylene (PCE) has been found in five of these wells in levels
exceeding drinking water standards. Treatment equipment with a cost of $2.2
million has been installed on two of the wells, and they have been returned to
operation. The three other wells have been removed from operation until SPPC
completes its investigation concerning the contamination. On March 29, 1996,
SPPC entered into a Bilateral Compliance Agreement with the Nevada State Health
Division which requires these wells to be in compliance with drinking water
standards by October, 1998. SPPC will determine the economic viability of
treatment remediation as compared to other alternatives. SPPC continues its
involvement in a cooperative remediation effort with public officials to
determine the source and extent of the contaminant and to develop a plan to
abate contamination on an area-wide basis. Washoe County has the ability to
create a special remediation district to help cover the cost of this effort.
The development of the remediation plan is projected to be completed in 1997.
15
<PAGE>
State Regulatory Commissions
- ----------------------------
The Company's planned merger with The Washington Water Power Company
resulted in SPPC entering into stipulations with the California Public Utilities
Commission in June, 1996. Among other things, SPPC agreed with California to
reduce rates by $2.3 million annually by setting all balancing accounts rates to
zero and to set all balancing account balances to zero. Additionally, SPPC was
to file a General Rate Case, including a Performance Based Ratemaking Mechanism,
within 60 days of the end of the month in which the merger was terminated. The
rate reduction and the setting of the balances to zero was implemented in June,
1996. SPPC has requested an extension to January 1, 1997, of filing
requirements resulting from the termination of the merger. Commission Staff has
granted this request.
As required by a September, 1994 Nevada stipulation which froze SPPC's
electric, gas, and water rates for approximately two years, SPPC filed with the
Public Service Commission of Nevada (PSCN) an application to decrease deferred
electric energy rates $8.2 million and increase purchased gas rates $1.3
million, effective January 1, 1997. The deferred energy and purchased gas
filings were accompanied by a motion to adopt the rate plan previously approved
by the PSCN in the proceeding related to SPPC's merger with The Washington Water
Power Company. If approved, the rate plan would include a one-time refund of $9
million to Nevada electric customers, a one-time refund of $4 million to Nevada
gas customers, a rate freeze for electric and gas rates through December 31,
1999, and a 50/50 sharing between customers and shareholders of utility earnings
over 12 percent. In addition, the deferred energy and purchased gas filings
described above would be withdrawn. The motion has been set for oral argument
on December 6, 1996.
On June 28, 1996, the PSCN issued an order in its electric restructuring
investigation which approved forwarding to the Assembly Concurrent Resolution
(ACR) 49 Legislative Subcommittee a report entitled "The Structure of Nevada's
Electric Industry: Promoting the Public Interest." That report concluded that
the PSCN should continue to acquire information relating to past costs,
uneconomic bypass, unbundling, and the potential for anticompetitive practices.
Workshops are continuing to be scheduled to investigate these and other issues
related to Nevada's electric industry. The Subcommittee is scheduled to issue a
report to the Legislature for consideration during the 1997 legislative session.
Federal Energy Regulatory Commission (FERC)
- -------------------------------------------
On April 24, 1996, the FERC issued its final rules concerning transmission
open access and stranded cost recovery. The rules were finalized in Orders 888
and 889. The rules required transmission owning utilities to file open access
transmission tariffs and rates; SPPC filed open access transmission tariffs and
rates on July 9, 1996. The tariffs were accepted for filing and implemented
subject to refund, pending the outcome of FERC review.
On September 25, 1996, the FERC issued an order setting SPPC's proposed
transmission rates for hearing. A prehearing conference was convened on October
10, 1996 when a procedural schedule was set. This schedule requires SPPC to
file additional information by December 12, 1996 and a hearing on the rates will
begin on June 17, 1997.
16
<PAGE>
Under Order 889, SPPC is required to obtain or develop an electronic
bulletin board (OASIS) to facilitate the purchase and sale of transmission
service. The service was originally scheduled for implementation by November 1,
1996. However, the FERC extended the in-service date until January 3, 1997.
Coincidental to the issuance of Order 888, the FERC issued a Notice of
Proposed Rule (NOPR) requesting comments on a proposed rule to require the
transmission providers to sell capacity reservations on their systems by
December, 1997. SPPC submitted comments on October 21, 1996. The proposed
rules also require that the transmission provider must also reserve capacity on
its own system to serve its native load customers. SPPC is currently reviewing
the proposed rules and formulating comments.
OTHER BUSINESS
- --------------
Merger
- ------
On June 27, 1994, the Company, SPPC, The Washington Water Power Company
(WWP), and Altus Corporation (Altus) entered into an Agreement and Plan of
Merger and Reorganization (Merger Agreement), in which WWP, the Company and SPPC
would be merged into Altus. Under the terms of the Merger Agreement, if the
merger was not consummated on or before June 27, 1996, any party, by providing
written notice to the other, could terminate the Merger Agreement provided that
party was not then in breach of any obligation under the Agreement which caused
or resulted in the failure of the Merger Agreement to be consummated by that
date.
On June 28, 1996, WWP provided written notice to the Company and SPPC that
it was terminating the Merger Agreement. Since that time, petitions to withdraw
merger applications have been filed by one or more parties in all jurisdictions
having approval jurisdiction over the merger.
Electric Business
- -----------------
In its 1995 Form 10-K, SPPC discussed entering into long-term contracts with
its customers. Subsequently, tailored contracts and agreements have been
developed to provide revenue guarantees (minimum annual bill) and termination
charge security for capital investments made on behalf of individual customers.
Contract provisions mitigate the risk of extending service to customers,
primarily large mining customers, and are designed to recover over the life of
the agreements customer-specific investments in facilities. Contract provisions
for minimum bills are based on customers attaining minimum annual demand and
load factors. Contract provisions for termination charges include recovery of
all costs for customer-specific facilities and, for the first five years under
the contract, recovery of up to two years of minimum bills. To date, SPPC has
negotiated six such contracts, all of which have been approved by the PSCN.
Additionally, two more contracts are pending approval with the PSCN. These six
long term electric service contracts represent 242 MW under contract with
average annual sales of 1,786,709 Mwh.
SPPC is continuing to negotiate with other existing mining customers to
enter into long term service contracts.
17
<PAGE>
Water Business
- --------------
During 1995, comprehensive legislation was adopted by the Nevada
Legislature which provides for regional planning and cooperative management of
all aspects of water in the region. The Regional Water Planning Commission was
created to develop an integrated water plan. SPPC and Washoe County signed an
agreement in July, 1996, which provides methodology to determine retail service
area boundaries and establishes SPPC as the wholesale purveyor to the region.
These cooperative efforts between SPPC and local agencies will help ensure
regional planning and integrated water service. The agreement has been sent to
the PSCN for approval.
e-three
- -------
e-three, a wholly-owned subsidiary of the Company, was formed in October,
1996 to develop high-efficiency energy solutions to provide savings to customers
on heating, cooling, lighting, controls and operational costs. By providing
added value to its customers and by generating revenues from new sources, e-
three will play an important role in the Company's strategy to compete in the
rapidly evolving energy market.
Independent Grid Operator
- -------------------------
On July 12, 1996, SPPC and six other Northwest electric companies signed a
memorandum of understanding to create an independent transmission grid operator
called "IndeGo" to insure non-discriminatory, open access to electric
transmission facilities in compliance with recent FERC rulings. The group plans
to file the IndeGo proposal with FERC by December 31, 1996 and anticipates that
operation would commence by July, 1997. This memorandum of understanding
creates a mechanism to help facilitate the operation of an evolving competitive
electric power market. The seven utility companies will be able to increase the
efficiency of transmission operations and provide improved access for all users
of the regional transmission system.
18
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this Form 10-Q:
(15) Letter of independent accountants regarding interim financial
information of the Company.
(27) The Financial Data Schedule containing summary financial
information extracted from the condensed consolidated financial
statements on Form 10-Q for the period ended September 30, 1996,
for Sierra Pacific Resources, and is qualified in its entirety by
reference to such financial statements.
(b) Reports on Form 8-K:
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sierra Pacific Resources
-----------------------------
(Registrant)
Date: November 7, 1996 By: /s/Malyn K. Malquist
------------------ ------------------------
Malyn K. Malquist
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
20
<PAGE>
EXHIBIT (15)
COOPERS COOPERS & LYBRAND L.L.P.
& LYBRAND
a professional services firm
November 5, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: SIERRA PACIFIC RESOURCES
REGISTRATION STATEMENTS ON FORM S-3 AND S-8
We are aware that our report dated October 28, 1996, on our review of the
interim financial information of Sierra Pacific Resources for the period ended
September 30, 1996, and included in the Company's quarterly report on Form 10-Q
is incorporated by reference in the registration statements on Form S-3 of
Sierra Pacific Resources for the Company's 2,000,000 shares of continuously
offered stock plan (File No. 33-90284) and the Common Stock Investment Plan
(File No. 333-4374), in the registration statements on Form S-8 of Sierra
Pacific Resources for the Employees' Stock Purchase Plan and Employees' Stock
Ownership Plan (File No. 2-92454), Executive Long-term Incentive Plan (File No.
33-87646) and the Non-Employee Director Stock Plan (File No. 33-48152). Pursuant
to Rule 436 (c) under the Securities Act of 1933, this report should not be
considered a part of the registration statement prepared or certified by us
within the meaning of Sections 7 and 11 of that Act.
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand international, a
limited liability association incorporated in Switzerland.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements filed on Form 10-Q for the period ended
September 30, 1996, for Sierra Pacific Resources and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,513,718
<OTHER-PROPERTY-AND-INVEST> 44,168
<TOTAL-CURRENT-ASSETS> 11,934
<TOTAL-DEFERRED-CHARGES> 148,728
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,825,498
<COMMON> 30,755
<CAPITAL-SURPLUS-PAID-IN> 450,779
<RETAINED-EARNINGS> 117,438
<TOTAL-COMMON-STOCKHOLDERS-EQ> 598,972
48,500
73,115
<LONG-TERM-DEBT-NET> 632,951
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 26,000
<LONG-TERM-DEBT-CURRENT-PORT> 10,423
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 435,537
<TOT-CAPITALIZATION-AND-LIAB> 1,825,498
<GROSS-OPERATING-REVENUE> 474,812
<INCOME-TAX-EXPENSE> 33,402
<OTHER-OPERATING-EXPENSES> 355,734
<TOTAL-OPERATING-EXPENSES> 389,136
<OPERATING-INCOME-LOSS> 85,676
<OTHER-INCOME-NET> 4,710
<INCOME-BEFORE-INTEREST-EXPEN> 90,386
<TOTAL-INTEREST-EXPENSE> 30,141
<NET-INCOME> 60,245
5,676
<EARNINGS-AVAILABLE-FOR-COMM> 54,569
<COMMON-STOCK-DIVIDENDS> 17,975
<TOTAL-INTEREST-ON-BONDS> 1,662
<CASH-FLOW-OPERATIONS> 96,563
<EPS-PRIMARY> 1.80
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</TABLE>
