<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, 1998
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 1-8788
SIERRA PACIFIC RESOURCES
(Exact name of registrant as specified in its charter)
NEVADA 88-0198358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 10100 (6100 Neil Road)
Reno, Nevada 89520-0400
(89511)
(Address of principal executive office) (Zip Code)
(702) 834-4011
(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 11, 1998
Common Stock, $1.00 par value 30,956,181 Shares
================================================================================
1
<PAGE>
SIERRA PACIFIC RESOURCES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
CONTENTS
PART I - FINANCIAL INFORMATION
------------------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Report of Independent Accountants........................................... 3
Condensed Consolidated Balance Sheets September 30, 1998 and
December 31, 1997....................................................... 4
Condensed Consolidated Statements of Income - Three Months and Nine-Months
Ended September 30, 1998 and 1997....................................... 5
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1998 and 1997....................................... 6
Notes to Condensed Consolidated Financial Statements........................ 7
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................................................... 9
PART II - OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings...................................................... 11
ITEM 4. Submission of Matters to a Vote of Security Holders.................... 11
ITEM 5. Other Information...................................................... 11
ITEM 6. Exhibits and Reports on Form 8-K....................................... 11
Signature Page................................................................... 12
Appendix......................................................................... 14
</TABLE>
2
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Sierra Pacific Resources
Reno, Nevada
We have reviewed the accompanying condensed consolidated balance sheet of Sierra
Pacific Resources and subsidiaries as of September 30, 1998, the related
condensed consolidated statements of income for the three-month and nine-month
periods ended September 30, 1998 and 1997, and the related condensed
consolidated statements of cash flows for the nine-month periods ended September
30, 1998 and 1997. These financial statements are the responsibility of the
Corporation's 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 of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted 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 such condensed consolidated financial statements 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 consolidated statement of
capitalization of Sierra Pacific Resources and subsidiaries as of December 31,
1997, and the related consolidated statements of income, retained earnings, and
cash flows for the year then ended (not presented herein); and in our report
dated January 30, 1998, 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, 1997,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Reno, Nevada
October 23, 1998
3
<PAGE>
SIERRA PACIFIC RESOURCES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Utility Plant at Original Cost:
Plant in service $ 2,185,769 $ 2,063,269
Less: accumulated provision for depreciation 711,645 664,490
-------------- -------------
1,474,124 1,398,779
Construction work-in-progress 170,859 202,036
-------------- -------------
1,644,983 1,600,815
-------------- -------------
Investments in subsidiaries and other property, net 56,882 49,614
-------------- -------------
Current Assets:
Cash and cash equivalents 17,248 8,901
Accounts receivable less provision for uncollectible accounts:
$1,498-1998 and $1,704-1997 95,293 103,356
Materials, supplies and fuel, at average cost 26,741 25,255
Other 3,106 2,885
-------------- -------------
142,388 140,397
-------------- -------------
Deferred Charges:
Regulatory tax asset 66,416 66,563
Other regulatory assets 62,032 63,476
Other 17,855 15,015
-------------- -------------
146,303 145,054
-------------- -------------
$ 1,990,556 $ 1,935,880
============== =============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholders' equity $ 662,760 $ 633,394
Preferred stock 73,115 73,115
Preferred stock subject to mandatory redemption:
SPPC-obligated mandatorily redeemable preferred securities of
SPPC's subsidiary Sierra Pacific Power Capital I, holding
solely $50 million principal amount of 8.6% junior
subordinated debentures of SPPC, due 2036 48,500 48,500
Long-term debt 611,786 627,224
-------------- -------------
1,396,161 1,382,233
-------------- -------------
Current Liabilities:
Short-term borrowings 100,000 75,000
Current maturities of long-term debt and preferred stock 10,577 10,566
Accounts payable 53,886 62,105
Accrued interest 15,294 6,910
Dividends declared 11,478 10,941
Accrued salaries and benefits 13,666 14,978
Other current liabilities 31,527 19,382
-------------- -------------
236,428 199,882
-------------- -------------
Deferred Credits:
Accumulated deferred federal income taxes 168,233 165,076
Accumulated deferred investment tax credit 38,435 39,873
Regulatory tax liability 39,100 40,767
Customer advances for construction 33,729 38,478
Accrued retirement benefits 40,928 37,456
Other 37,542 32,115
-------------- -------------
357,967 353,765
-------------- -------------
$ 1,990,556 $ 1,935,880
============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
SIERRA PACIFIC RESOURCES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three-Months Ended Nine-Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Electric $ 157,250 $ 137,611 $ 434,558 $ 402,869
Gas 13,394 7,690 66,872 47,670
Water 16,802 14,482 37,881 35,919
Other 1,103 1,092 5,352 4,450
----------- ----------- ----------- -----------
188,549 160,875 544,663 490,908
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Operation:
Purchased power 44,863 32,279 118,615 93,757
Fuel for power generation 32,842 27,781 84,169 77,426
Gas purchased for resale 9,887 3,531 42,727 23,868
Other 30,783 30,558 94,263 97,197
Maintenance 5,034 4,827 15,737 16,304
Depreciation and amortization 17,098 16,746 50,692 47,572
Taxes:
Income taxes 10,422 11,417 31,121 33,440
Other than income 4,914 4,703 14,819 14,149
----------- ----------- ------------ -----------
155,843 131,842 452,143 403,713
----------- ----------- ------------ -----------
OPERATING INCOME 32,706 29,033 92,520 87,195
----------- ----------- ------------ -----------
OTHER INCOME:
Allowance for other funds used during construction 870 1,619 2,995 4,547
Other income - net 404 351 402 1,170
----------- ----------- ------------ -----------
1,274 1,970 3,397 5,717
----------- ----------- ------------ -----------
Total Income 33,980 31,003 95,917 92,912
----------- ----------- ------------ -----------
INTEREST CHARGES:
Long-term debt 9,972 10,261 30,291 31,429
Other 1,834 1,459 5,502 3,421
Allowance for borrowed funds used during construction and
capitalized interest (1,401) (1,283) (5,122) (3,637)
----------- ----------- ------------ -----------
10,405 10,437 30,671 31,213
----------- ----------- ------------ -----------
INCOME BEFORE OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES 23,575 20,566 65,246 61,699
Preferred dividend requirements of SPPC-obligated
mandatorily redeemable preferred securities (1,043) (1,043) (3,128) (3,128)
----------- ----------- ------------ -----------
INCOME BEFORE PREFERRED DIVIDENDS 22,532 19,523 62,118 58,571
Preferred dividend requirements (1,365) (1,365) (4,094) (4,094)
----------- ----------- ------------ -----------
INCOME APPLICABLE TO COMMON STOCK $ 21,167 $ 18,158 $ 58,024 $ 54,477
=========== =========== ============ ===========
Net Income Per Share - Basic $ 0.68 $ 0.59 $ 1.88 $ 1.76
Net Income Per Share - Diluted $ 0.68 $ 0.59 $ 1.87 $ 1.76
Weighted Average Shares of Comm
Stock Outstanding 30,956,869 30,891,370 30,944,579 30,873,646
Dividends Paid Per Share of Common Stock $ 0.325 $ 0.310 $ 0.960 $ 0.915
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
SIERRA PACIFIC RESOURCES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine-Months Ended
September 30,
--------------------------------------
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before preferred dividends $ 62,118 $ 58,571
Non-cash items included in income:
Depreciation and amortization 50,692 47,572
Deferred taxes and deferred investment tax credit 200 1,667
AFUDC and capitalized interest (8,118) (8,184)
Early retirement and severance amortization 3,196 3,497
Other 2,251 (2,040)
Changes in certain assets and liabilities:
Accounts receivable 3,680 14,209
Materials, supplies and fuel (1,486) 3,338
Other current assets (221) 754
Accounts payable (8,219) (8,759)
Other current liabilities 19,217 1,766
Other - net 1,519 3,595
------------- -------------
Net Cash Flows From Operating Activities 124,829 115,986
------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant (107,347) (102,431)
Net customer refunds and contributions in aid construction 15,731 17,067
------------- -------------
Net cash used for utility plant (91,616) (85,364)
------------- -------------
(Investments in) disposal of subsidiaries and other property - net (2,833) -
------------- -------------
Net Cash Used In Investing Activities (94,449) (85,364)
------------- -------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Increase in short-term borrowings 25,637 30,384
Proceeds from issuance of long-term debt - -
Reduction of long-term debt (15,455) (25,418)
Sale of common stock 1,532 2,144
Dividends paid (33,747) (32,336)
------------- -------------
Net Cash Used In Financing Activities (22,033) (25,226)
------------- -------------
Net increase in Cash and Cash Equivalents 8,347 5,396
Beginning balance in Cash and Cash Equivalents 8,901 4,949
------------- -------------
Ending balance in Cash and Cash Equivalents $ 17,248 $ 10,345
============= =============
Supplemental Disclosures of Cash Flow Information:
Cash Paid During Period For:
Interest $ 29,540 $ 30,163
Income Taxes $ 24,900 $ 22,379
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
NOTE 1. MANAGEMENT'S STATEMENT
- --------------------------------
In the opinion of the management of Sierra Pacific Resources, hereafter
known as the Company, the accompanying unaudited interim condensed consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the condensed consolidated
financial position, condensed consolidated results of operations and
consolidated cash flows for the periods shown. These condensed consolidated
financial statements do not contain the complete detail or footnote disclosure
concerning accounting policies and other matters which are included in full year
financial statements and therefore, they should be read in conjunction with the
Company's audited financial statements included in the Company's Annual Report
on Form 10-K and 10-K/A for the year ended December 31, 1997. Deloitte & Touche
LLP, the Company's independent accountants, have performed a review of the
unaudited condensed consolidated financial statements, and their report has been
included in this report.
The results of operations for the three-month and nine-month period ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the full year.
Principles of Consolidation
---------------------------
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Sierra Pacific Power Company (SPPC),
Tuscarora Gas Pipeline Company (TGPC), Sierra Gas Holding Company (formerly
Sierra Energy Company), Sierra Energy Company dba e three (e three), Sierra
Pacific Energy Company (SPEC), Lands of Sierra (LOS), and Sierra Water
Development Company (SWDC). All significant intercompany transactions and
balances have been eliminated in consolidation.
Reclassifications
-----------------
Certain items previously reported for years prior to 1998 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. RECENT PRONOUNCEMENTS OF THE FASB
- -------------------------------------------
On June 30, 1997, the FASB issued SFAS 131 entitled "Disclosure About
Segments of an Enterprise and Related Information". This statement establishes
additional standards for segment reporting in the financial statements and is
effective for fiscal years beginning after December 15, 1997. Management has
concluded that the Company will continue to define its primary operating
segments as electric, gas, water and other. The Company expects to provide the
additional disclosure requirements of this statement in its Annual Report on
Form 10-K for the year ended December 31, 1998.
In February 1998, the FASB issued SFAS 132 entitled "Employers' Disclosures
about Pensions and Other Postretirement Benefits". This statement revises
employers' disclosures about pension and other postretirement benefit plans for
fiscal years beginning after December 15, 1997. The statement does not change
the measurement or recognition of those plans. Therefore, management believes
this statement will not have a material impact on the financial statements of
the Company.
In June 1998, the FASB issued SFAS 133, entitled "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) 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 and is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. Management
does not believe this new statement will have a material impact on the
consolidated financial statements of the Company.
7
<PAGE>
NOTE 3. EARNINGS PER SHARE
- ---------------------------
The Company follows SFAS No. 128, "Earnings Per Share". This pronouncement
supersedes APB Opinion No. 15, "Earnings Per Share" and establishes new
standards for computing and presenting EPS. Previously reported primary and
fully diluted EPS are replaced with basic and diluted EPS. The difference
between Basic EPS and Diluted EPS is due to common stock equivalent shares
resulting from stock options, employee stock purchase plan, performance shares
and a non-employee director stock plan. Common stock equivalents were determined
using the treasury stock method. Prior period EPS have been restated to conform
with the new statement.
The following provides a reconciliation of Basic EPS and Diluted EPS.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- --------------------------
1998 1997 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic EPS
Numerator
Income available to common stockholders ($000) 21,167 18,158 58,024 54,477
------------- ------------ ------------ ------------
Denominator
Weighted average number of shares outstanding 30,956,869 30,891,370 30,944,579 30,873,646
------------- ------------ ------------ ------------
Per-Share Amount $0.68 $0.59 $1.88 $1.76
============= ============ ============ ============
Diluted EPS
Numerator
Income available to common stockholders ($000) 21,167 18,158 58,024 54,477
------------- ------------ ------------ ------------
Denominator
Weighted average number of shares outstanding 30,956,869 30,891,370 30,944,579 30,873,646
before dilution
Stock options 64,622 41,502 53,105 38,058
Executive long term incentive plan-performance shares 17,940 32,153 17,184 32,478
Non-Employee stock plan 8,658 5,573 7,116 4,875
Employee stock purchase plan 1,150 5,415 1,156 3,341
------------- ------------ ------------ ------------
31,049,239 30,976,013 31,023,140 30,952,398
------------- ------------ ------------ ------------
Per-Share Amount $0.68 $0.59 $1.87 $1.76
============= ============ ============ ============
</TABLE>
NOTE 4. LONG-TERM DEBT
- ------------------------
On April 1, 1998, the Company redeemed $10 million of 6.23% senior notes.
SPPC, the Company's subsidiary, redeemed $5 million of 8.65% medium term notes
on June 18, 1998.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When used anywhere in this Form 10-Q, or the Form 10-Q of Sierra Pacific
Power Company and in future filings by Sierra Pacific Power Company or Sierra
Pacific Resources with the Securities and Exchange Commission, in Sierra Pacific
Power Company or Sierra Pacific Resources' press releases and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimated", "project", or "outlook" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. Sierra Pacific Resources wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. Sierra Pacific Resources wishes to advise readers that various
factors described in these Forms 10-Q could cause Sierra Pacific Resources'
actual results for future periods to differ materially from any opinions or
statements expressed with respect to future periods in any current statements.
Sierra Pacific Resources specifically declines any obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
Sierra Pacific Power Company
- ----------------------------
Management Discussion and Analysis of Sierra Pacific Power Company (SPPC) is
contained in its Quarterly Report on Form 10-Q for the three and nine months
ended September 30, 1998, which is attached as an appendix.
Tuscarora Gas Pipeline Company
- ------------------------------
For the three and nine months ended September 30, 1998, Tuscarora Gas
Pipeline Company, a wholly-owned subsidiary of the Company, contributed net
income of $476,000 and $1,351,000 compared to $397,000 and $1,068,000 for the
comparable periods in 1997. The increase in net income for 1998 is primarily
due to the addition of a new customer and greater interruptible transportation
revenue.
On September 21, 1998, Tuscarora Gas Transmission Company, a subsidiary of
Tuscarora Gas Pipeline Company, received a rate order from the Federal Energy
Regulatory Commission (FERC). The FERC order found that the company had
justified its existing rates and could continue charging customers based on
those rates.
Lands of Sierra
- ---------------
For the three and nine months ended September 30, 1998, Lands of Sierra
incurred net income of $486,000 and $443,000 compared to ($31,000) and $91,000
net (loss)/income in 1997. The 1998 net income resulted from the reversal of a
previously established environmental reserve, which is no longer appropriate,
described later in the environmental section.
E.Three
- -------
For the three and nine months ended September 30, 1998, e.three incurred net
losses of $629,000 and $1,366,000 compared to $235,000 and $715,000 in 1997.
The increase in losses is due to the continuation of start-up activities,
primarily comprised of additional sales staffing requirements.
9
<PAGE>
In October 1998, e three acquired a 100% ownership interest, through the
issuance of Sierra Pacific Resources common stock, in Independent Energy
Consulting Incorporated (IEC). IEC is an energy consulting business that
provides energy procurement management services.
Sierra Pacific Energy Company
- -----------------------------
Sierra Pacific Energy Company's (SPEC) primary business, which operates
under the brand name Simple Choice, markets a package of products and services
in the Sierra Pacific Power Company operating territory. The Simple Choice
product line was obtained under a franchise from Enable Corporation, an
unaffiliated entity. Simple Choice customers can pay their Simple Choice bills,
along with their Sierra Pacific Power Company energy bills, on one statement.
SPEC sells products and services related to home, entertainment, communications
and energy. SPEC offers satellite television, long distance, appliances,
cellular telephone services, carbon-monoxide detectors, appliance warranties and
home security. Simple Choice began start-up operations during the third quarter
of 1998.
As described in the Company's 1997 Annual Report on Form 10-K, SPEC had
plans to develop a major customer information system to provide advanced
metering, billing and customer information services to large customers.
For the three months ended September 30, 1998 SPEC incurred net losses of
approximately $700,000 due to Simple Choice start-up costs and a partial
impairment of a component of the customer information system.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
During the first nine months of 1998, the Company earned $62.1 million in
income before preferred dividends and declared $30.2 million in common stock
dividends. SPPC, the Company's principal subsidiary, declared $4.1 million in
preferred stock dividends.
Construction Expenditures and Financing
- ---------------------------------------
Substantially all capital expenditures relate to SPPC. A description of
construction expenditures and financing of SPPC is contained in its Quarterly
Report Form 10-Q for the period ended September 30, 1998, attached as an
appendix.
Environmental
- -------------
As described in the Company's Annual Report on Form on Form 10-K for the
year ended December 31,1997, Lands of Sierra owns several parcels of commercial
property at Lake Tahoe where it was determined that there was soil and
groundwater contamination from underground fuel storage tanks. Lands of Sierra
has successfully utilized bioremediation techniques to remediate this site. As
a result, management now anticipates the remaining cost to fully remediate the
site at approximately $85 thousand. The excess amount previously reserved,
approximately $690 thousand, was reversed in September 1998.
Merger
- ------
As reported in Sierra Pacific Resources' report on Form 8-K dated July 7,
1998, the Company and Nevada Power filed a joint merger application with the
Public Utilities Commission of Nevada for approval of their proposed merger.
In the filing, Nevada Power and SPPC propose selling their generating
plants if the merger is completed. Capital raised from the sale will be
reinvested primarily in transmission and distribution facilities or used to
reduce outstanding capital.
10
<PAGE>
On October 9, 1998 the stockholders of both companies voted to approve the
merger. The merger is conditioned, among other things, upon obtaining approvals
from the Public Utilities Commission of Nevada, the Federal Energy Regulatory
Commission and the Securities Exchange Commission.
Through September 30, 1998, the Company had incurred a total of $5.3
million in costs to effect the merger. $4.7 million of the costs incurred have
been capitalized and the balance expensed during the period. See the Form 8-K
dated July 7, 1998, for additional details relating to the merger application
filing.
Year 2000
- ---------
All of the major business application software and computing infrastructure
are owned by SPPC. The Management Discussion and Analysis of SPPC contained in
its Quarterly Report on Form 10-Q, attached as an appendix, includes a
disclosure that addresses SPPC's assessment of the Year 2000 issue.
PART II
-------
ITEM 1. LEGAL PROCEEDINGS
Although the Company is involved in ongoing litigation on a variety of
matters, it is management's opinion that none individually or collectively are
material to the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this Form 10-Q:
(15) Letter of independent accountants acknowledging awareness
regarding unaudited 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 nine month period ended September
30, 1998, for Sierra Pacific Resources, and is qualified in its
entirety by reference to such financial statements.
(b) Reports on Form 8-K:
Filed July 7, 1998 Item 5, Other Events, and Item 7, Financial Statements
and Exhibits.
Exhibit 99.1
Press release, dated July 7,1998, that announced Sierra Pacific Resources
and Nevada Power Company filing of a joint merger application with the
Public Utilities Commission of Nevada for approval of their proposed
merger.
11
<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 13, 1998 By: /s/ Mark A. Ruelle
-------------------------------- ----------------------------
Mark A. Ruelle
Senior Vice President
Chief Financial Officer
Treasurer
(Principal Financial Officer)
(Principal Accounting Officer)
12
<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, 1998
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 POWER COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 88-0044418
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 10100 (6100 Neil Road)
Reno, Nevada 89520-0400
(89511)
(Address of principal executive office) (Zip Code)
(702) 834-4011
(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 November13, 1998
Common Stock, $3.75 par value 1,000 Shares
================================================================================
1
<PAGE>
SIERRA PACIFIC POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
CONTENTS
PART I - FINANCIAL INFORMATION
------------------------------
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Report of Independent Accountants............................................... 3
Condensed Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997.......................................................... 4
Condensed Consolidated Statements of Income - Three Months and Nine Months
Ended September 30, 1998 and 1997.......................................... 5
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1998 and 1997.......................................... 6
Notes to Condensed Consolidated Financial Statements............................ 7
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................................................... 8
PART II - OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings............................................................... 25
ITEM 5. Other Information............................................................... 25
ITEM 6. Exhibits and Reports on Form 8-K................................................ 25
Signature Page............................................................................ 26
Appendix.................................................................................. 28
</TABLE>
2
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholder of
Sierra Pacific Power Company
Reno, Nevada
We have reviewed the accompanying condensed consolidated balance sheet of Sierra
Pacific Power Company and subsidiaries as of September 30, 1998, the related
condensed consolidated statements of income for the three-month and nine-month
periods ended September 30, 1998 and 1997, and the related condensed
consolidated statements of cash flows for the nine-month periods ended September
30, 1998 and 1997. These financial statements are the responsibility of the
Corporation's 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 of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted 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 such condensed consolidated financial statements 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 consolidated statement of
capitalization of Sierra Pacific Power Company and subsidiaries as of December
31, 1997, and the related consolidated statements of income, common
shareholder's equity, and cash flows for the year then ended (not presented
herein); and in our report dated January 30, 1998, 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, 1997, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Reno, Nevada
October 23, 1998
3
<PAGE>
SIERRA PACIFIC POWER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Utility Plant at Original Cost:
Plant in service $ 2,185,769 $ 2,063,269
Less: accumulated provision for depreciation 711,645 664,490
---------------- ----------------
1,474,124 1,398,779
Construction work-in-progress 170,859 202,036
---------------- ----------------
1,644,983 1,600,815
---------------- ----------------
Investments in subsidiaries and other property, net 31,381 26,791
---------------- ----------------
Current Assets:
Cash and cash equivalents 13,461 6,920
Accounts receivable less provision for uncollectible accounts:
$1,498 -1998 and $1,704 -1997 95,658 104,926
Materials, supplies and fuel, at average cost 26,741 25,255
Other 2,656 2,572
---------------- ----------------
138,516 139,673
---------------- ----------------
Deferred Charges:
Regulatory tax asset 66,416 66,563
Other regulatory assets 62,032 63,476
Other 17,816 14,924
---------------- ----------------
146,264 144,963
---------------- ----------------
$ 1,961,144 $ 1,912,242
================ ================
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholder's equity $ 653,112 $ 639,556
Preferred stock 73,115 73,115
Preferred stock subject to mandatory redemption:
Company-obligated mandatorily redeemable preferred securities of the
Company's subsidiary Sierra Pacific Power Capital I, holding solely $50
million principal amount of 8.6% junior
subordinated debentures of the Company, due 2036 48,500 48,500
Long-term debt 601,562 606,889
---------------- ----------------
1,376,289 1,368,060
---------------- ----------------
Current Liabilities:
Short-term borrowings 100,000 75,000
Current maturities of long-term debt and preferred stock 466 454
Accounts payable 54,876 63,088
Accrued interest 14,620 6,394
Dividends declared 20,365 19,365
Accrued salaries and benefits 13,665 14,978
Other current liabilities 31,119 19,209
---------------- ----------------
235,111 198,488
---------------- ----------------
Deferred Credits:
Accumulated deferred federal income taxes 164,417 162,627
Accumulated deferred investment tax credit 38,435 39,873
Regulatory tax liability 39,100 40,767
Accrued Retirement Benefits 40,928 37,456
Customer advances for construction 33,729 38,478
Other 33,135 26,493
---------------- ----------------
349,744 345,694
---------------- ----------------
$ 1,961,144 $ 1,912,242
================ ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
SIERRA PACIFIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three-Months Ended Nine-Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------- -------------- -------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Electric $ 157,250 $ 137,611 $ 434,558 $ 402,869
Gas 13,394 7,690 66,872 47,670
Water 16,802 14,482 37,881 35,919
------------- -------------- -------------- ---------------
187,446 159,783 539,311 486,458
------------- -------------- -------------- ---------------
OPERATING EXPENSES:
Operation:
Purchased power 44,863 32,279 118,615 93,757
Fuel for power generation 32,842 27,781 84,169 77,426
Gas purchased for resale 9,887 3,531 42,727 23,868
Other 28,111 28,946 86,031 90,619
Maintenance 5,034 4,827 15,737 16,304
Depreciation and amortization 17,098 16,746 50,692 47,572
Taxes:
Income taxes 11,084 11,795 32,486 34,706
Other than income 4,901 4,684 14,782 14,084
------------- -------------- -------------- ---------------
153,820 130,589 445,239 398,336
------------- -------------- -------------- ---------------
OPERATING INCOME 33,626 29,194 94,072 88,122
------------- -------------- -------------- ---------------
OTHER INCOME:
Allowance for other funds used during construction 870 1,619 2,995 4,547
Other income - net 366 314 213 876
------------- -------------- -------------- ---------------
1,236 1,933 3,208 5,423
------------- -------------- -------------- ---------------
Total Income 34,862 31,127 97,280 93,545
------------- -------------- -------------- ---------------
INTEREST CHARGES:
Long-term debt 9,635 9,766 29,122 29,796
Other 1,834 1,459 5,502 3,421
Allowance for borrowed funds used during
constructio and capitalized interest (1,401) (1,283) (5,122) (3,637)
------------- -------------- -------------- ---------------
10,068 9,942 29,502 29,580
------------- -------------- -------------- ---------------
INCOME BEFORE OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES 24,794 21,185 67,778 63,965
Preferred dividend requirements of Company-obligated
mandatorily redeemable preferred securities (1,043) (1,043) (3,128) (3,128)
------------- -------------- -------------- ---------------
INCOME BEFORE PREFERRED DIVIDENDS 23,751 20,142 64,650 60,837
Preferred dividend requirements (1,365) (1,365) (4,094) (4,094)
------------- -------------- -------------- ---------------
INCOME APPLICABLE TO COMMON STOCK $ 22,386 $ 18,777 $ 60,556 $ 56,743
============= ============== ============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
SIERRA PACIFIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
1998 1997
----------- -------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before preferred dividends $ 64,650 $ 60,837
Non-cash items included in income:
Depreciation and amortization 50,692 47,572
Deferred taxes and deferred investment tax credit (1,167) 818
AFUDC and capitalized interest (8,118) (8,184)
Early retirement and severance amortization 3,196 3,497
Other 2,251 (2,039)
Changes in certain assets and liabilities:
Accounts receivable 4,885 14,384
Materials, supplies and fuel (1,486) 3,338
Other current assets (84) 1,202
Accounts payable (8,212) (8,042)
Other current liabilities 18,823 1,491
Other - net 2,682 1,190
----------- -------------
Net Cash Flows From Operating Activities 128,112 116,064
----------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant (107,347) (103,370)
Net customer refunds and contributions in aid construction 15,731 17,067
----------- -------------
Net cash used for utility plant (91,616) (86,303)
----------- -------------
(Investments in) disposal of subsidiaries and other property - net (156) -
----------- -------------
Net Cash Used In Investing Activities (91,772) (86,303)
----------- -------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Increase in short-term borrowings 25,637 30,384
Reduction of long-term debt (5,342) (15,306)
Investment from the parent company 10,000 18,000
Dividends paid (60,094) (56,094)
----------- -------------
Net Cash Used In Financing Activities (29,799) (23,016)
----------- -------------
Net increase in Cash and Cash Equivalents 6,541 6,745
Beginning balance in Cash and Cash Equivalents 6,920 890
----------- -------------
Ending balance in Cash and Cash Equivalents $ 13,461 $ 7,635
=========== =============
Supplemental Disclosures of Cash Flow Information:
Cash Paid During Period For:
Interest $ 28,530 $ 28,849
Income Taxes $ 27,385 $ 24,053
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
NOTE 1. MANAGEMENT'S STATEMENT
- ---------------------------------
In the opinion of the management of Sierra Pacific Power Company, hereafter
known as the Company, the accompanying unaudited interim condensed consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the condensed consolidated
financial position, condensed consolidated results of operations and condensed
consolidated cash flows for the periods shown. These condensed consolidated
financial statements do not contain the complete detail or footnote disclosure
concerning accounting policies and other matters which are included in full year
financial statements and therefore, they should be read in conjunction with the
Company's audited financial statements included in the Company's Annual Report
on Form 10-K and 10-K/A for the year ended December 31, 1997. Deloitte & Touche
LLP, the Company's independent accountants, have performed a review of the
unaudited consolidated financial statements, and their report has been included
in this report.
The results of operations for the three and nine month periods ended
September 30, 1998 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 Capital I, Pinon Pine
Corp., and Pinon Pine Investment Co. All significant intercompany transactions
and balances have been eliminated in consolidation.
Reclassifications
-----------------
Certain items previously reported for years prior to 1998 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. RECENT PRONOUNCEMENTS OF THE FASB
- -------------------------------------------
On June 30, 1997, the FASB issued SFAS 131 entitled "Disclosure About
Segments of an Enterprise and Related Information". This statement establishes
additional standards for segment reporting in the financial statements and is
effective for fiscal years beginning after December 15, 1997. Management has
concluded that the Company will continue to define its primary operating
segments as electric, gas and water. The Company expects to provide the
additional disclosure requirements of this statement in its Annual Report on
Form 10-K for the year ended December 31, 1998.
In February 1998, the FASB issued SFAS 132 entitled "Employers' Disclosures
about Pensions and Other Postretirement Benefits". This statement revises
employers' disclosures about pension and other postretirement benefit plans for
fiscal years beginning after December 15, 1997. The statement does not change
the measurement or recognition of those plans. Therefore, management believes
this statement will not have a material impact on the financial statements of
the Company.
In June 1998, the FASB issued SFAS 133, entitled "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) 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 and is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. Management
does not believe this new statement will have a material impact on the
consolidated financial statements of the Company.
7
<PAGE>
NOTE 3. LONG TERM DEBT
- ------------------------
The Company redeemed $5 million of 8.65% medium term notes on June 18,
1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
WHEN USED ANYWHERE IN THIS FORM 10-Q, OR THE FORM 10-Q OF SIERRA PACIFIC
RESOURCES AND IN FUTURE FILINGS BY SIERRA PACIFIC RESOURCES OR SIERRA PACIFIC
POWER COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION, IN SIERRA PACIFIC
RESOURCES OR SIERRA PACIFIC POWER COMPANY'S PRESS RELEASES AND IN ORAL
STATEMENTS MADE WITH THE APPROVAL OF AN AUTHORIZED EXECUTIVE OFFICER, THE WORDS
OR PHRASES "WILL LIKELY RESULT", "ARE EXPECTED TO", "WILL CONTINUE", "IS
ANTICIPATED", "ESTIMATED", "PROJECT", OR "OUTLOOK" OR SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL EARNINGS AND THOSE PRESENTLY ANTICIPATED OR
PROJECTED. SIERRA PACIFIC POWER COMPANY WISHES TO CAUTION READERS NOT TO PLACE
UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE MADE. SIERRA PACIFIC POWER COMPANY WISHES TO ADVISE READERS THAT
VARIOUS FACTORS DESCRIBED IN THESE FORMS 10-Q COULD CAUSE SIERRA PACIFIC POWER
COMPANY'S ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY
OPINIONS OR STATEMENTS EXPRESSED WITH RESPECT TO FUTURE PERIODS IN ANY CURRENT
STATEMENTS. SIERRA PACIFIC POWER COMPANY SPECIFICALLY DECLINES ANY OBLIGATION
TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS WHICH MAY BE MADE TO ANY
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF
SUCH STATEMENTS OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED
EVENTS.
The Company's business is subject to seasonal fluctuations based upon
weather patterns. Significant portions of the Company's net revenues and
profits are typically realized during the first and third quarters of the
Company's year, which include the peak heating and cooling periods. Because of
the seasonality of the Company's business, results for any quarter are not
necessarily indicative of the results that may be achieved for the full fiscal
year.
8
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
ELECTRIC OPERATIONS
- -------------------
The components of gross margin for electric operations were (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months
Ended September 30,
---------------------------------
Increase Increase
1998 1997 (Decrease) (Decrease) %
---------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Electric Operating Revenues (dollars):
Residential $ 41,760 $ 39,613 $ 2,147 5.4%
Commercial 51,224 48,579 2,645 5.4%
Industrial 48,020 44,260 3,760 8.5%
---------------- --------------- ---------------- --------------
Electric Revenues before Other 141,004 132,452 8,552 6.5%
Other 16,246 5,159 11,087 214.9%
---------------- --------------- ---------------- --------------
Total Revenues 157,250 137,611 19,639 14.3%
Electric Energy Costs:
Purchased Power 44,863 32,279 12,584 39.0%
Fuel for Power Generation 32,842 27,781 5,061 18.2%
---------------- --------------- ---------------- --------------
Total Energy Costs 77,705 60,060 17,645 29.4%
---------------- --------------- ---------------- --------------
Gross Electric Margin $ 79,545 $ 77,551 $ 1,994 2.6%
================ =============== ================ ==============
Electric Operating Sales Megawatt-Hours (MWH):
Total MWH Sales 2,615,367 2,139,582 475,785 22.2%
Less: Other Sales MWH 442,340 124,219 318,121 256.1%
---------------- --------------- ---------------- --------------
Electric Sales before Other
Sales MWH 2,173,027 2,015,363 157,664 7.8%
---------------- --------------- ---------------- --------------
Average Revenues per MWH $ 64.89 $ 65.72 $ (0.83) -1.3%
</TABLE>
Residential customer revenues increased because of higher use per
customer as a result of warmer weather in 1998 and an increase in customers of
2.5% over the prior year.
Commercial revenues were also higher in 1998 because of higher use per
customer and a 2.9% increase in total customers over the prior year.
Industrial revenues increased as a result of higher use per customer
(primarily in the mining segment). The Company believes that the higher use per
customer by the large mines reflects increased production levels.
Other revenues increased primarily because of an increase in wholesale
sales due to increased focus on this business opportunity.
Average revenues per MWH hour decreased because of a 10% California
rate reduction for residential and commercial customers effective January 1998.
Also, in August 1997, one of the company's industrial customers migrated to a
different customer classification (due to higher usage) that has a lower tariff
rate.
9
<PAGE>
Purchased power energy costs in the preceding table consisted of the
following total MWHs and average electric costs:
<TABLE>
<CAPTION>
Three Months
Ended September 30,
-------------------------------
Increase/ Increase/
1998 1997 (Decrease) (Decrease)%
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Purchased Power MWH 1,155,726 931,661 224,065 24.1%
Average cost per MWH of
Purchased Power $ 38.82 $ 34.65 $ 4.17 12.0%
</TABLE>
The total cost of purchased power increased because of an increase in the
volume purchased due to system load growth and additional resale sales in 1998.
The increase in cost was also due to higher average prices paid per MWH for non-
firm purchases during the summer of 1998.
Fuel for power generation provided the total MWHs and average electric
costs that follow (dollars in thousands):
<TABLE>
<CAPTION>
Three Months
Ended September 30
-------------------------------
Increase/ Increase/
1998 1997 (Decrease) (Decrease)%
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Fuel for Power Generation $ 32,842 $ 27,781 $ 5,061 18.2%
Power Generated MWH 1,616,631 1,352,341 264,290 19.5%
Average cost per MWH of
generation fuel $ 20.32 $ 20.54 $ (0.22) -1.1%
</TABLE>
The increase in the cost of fuel for power generation in the third quarter
of 1998 over the prior year was the result of higher generated volumes required
to meet continued customer growth and greater use per customer. The increase
was offset slightly by lower average costs per MWH of generation fuel. Lower
coal prices, mostly offset by higher natural gas prices, were responsible for
the lower average cost.
10
<PAGE>
The components of gross margin for electric operations were (dollars in
thousands):
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
--------------------------------
Increase Increase
1998 1997 (Decrease) (Decrease) %
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Electric Operating Revenues (dollars):
Residential $ 125,403 $ 120,612 $ 4,791 4.0%
Commercial 135,094 132,898 2,196 1.7%
Industrial 137,771 128,546 9,225 7.2%
-------------- -------------- ------------- -----------
Electric Revenues before Other 398,268 382,056 16,212 4.2%
Other 36,290 20,813 15,477 74.4%
-------------- -------------- ------------- -----------
Total Revenues 434,558 402,869 31,689 7.9%
Electric Energy Costs:
Purchased Power 118,615 93,757 24,858 26.5%
Fuel for Power Generation 84,169 77,426 6,743 8.7%
-------------- -------------- ------------- -----------
Total Energy Costs 202,784 171,183 31,601 18.5%
-------------- -------------- ------------- -----------
Gross Electric Margin $ 231,774 $ 231,686 $ 88 0.0%
============== ============== ============= ===========
Electric Operating Sales MWHs:
Total MWH Sales 7,116,928 6,037,341 1,079,587 17.9%
Less: Other Sales MWH 973,687 334,454 639,233 191.1%
-------------- -------------- ------------- -----------
Electric Sales before Other
Sales MWH 6,143,241 5,702,887 440,354 7.7%
-------------- -------------- ------------- -----------
Average Revenues per MWH $ 64.83 $ 66.99 $ (2.16) -3.2%
</TABLE>
Residential revenue increased due to an overall increase in customers of
2.8% and more extreme weather conditions in 1998. The increase in sales was
partially offset by a rate reduction that went into effect in March 1997.
Commercial revenues increased slightly because of an increase in customers
of 2.8%. However, most of this increase was offset by both lower use per
customer and a rate reduction in March 1997.
Industrial revenues increased because of higher use per customer. The
increase was in part offset by both an increase of $1.9 million in June 1997
revenues (the reversal of a prior year accrual) and a decrease in effective
rates beginning in March 1997.
Other revenues increased primarily due to an increase in wholesale sales
and additional facilities surcharge revenue. Higher wholesale sales reflect an
increased focus on that line of business. Facilities surcharge revenue
increased as a result of improved opportunities to provide facilities to
industrial customers.
The average revenues per mega-watt hour decreased because of a 10%
California rate reduction for residential and commercial customers effective
January 1998. Also, in 1997 two of the Company's industrial customers migrated
to different customer classifications (due to higher usage) that have lower
tariff rates.
11
<PAGE>
Purchased power energy costs in the preceding table consisted of the
following total MWHs and average electric costs:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------------------
Increase/ Increase/
1998 1997 (Decrease) (Decrease)%
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Purchased Power MWH 3,512,280 2,718,103 794,177 29.2%
Average cost per MWH of
Purchased Power $ 33.77 $ 34.49 $ (0.72) -2.1%
</TABLE>
Purchased power costs increased because of an increase in the volume of
purchased power due mostly to additional resale sales in 1998 and to a lesser
extent system load growth. The increase in the cost of purchased power was
partially offset by a reduction in the cost per MWH due to an increase in the
amount of non-firm energy purchases relative to firm purchases in 1998. Non-
firm purchases were considerably less expensive per MWH.
Fuel for power generation provided the following total MWH's and average
electric costs (dollars in thousands):
<TABLE>
<CAPTION>
Nine Months
Ended September 30
-------------------------------
Increase/ Increase/
1998 1997 (Decrease) (Decrease)%
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Fuel for Power Generation $ 84,169 $ 77,426 $ 6,743 8.7%
Power Generated MWH 4,069,649 3,694,325 375,324 10.2%
Average cost per MWH of
generation fuel $ 20.68 $ 20.96 $ (0.28) -1.3%
</TABLE>
The cost of fuel for generation for the nine month period ended September
30, 1998 was higher than the comparable period in 1997 because of increased
generation requirements needed to meet continued customer growth and greater use
per customer. The increase in the cost of fuel for generation was partially
offset by a reduction in the cost per MWH due to the availability of less
expensive spot market coal during 1998.
12
<PAGE>
GAS OPERATIONS
- --------------
The components of gross margin for gas operations were (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months
Ended September 30,
-------------------
Increase/ Increase/
1998 1997 (Decrease) (Decrease)%
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Gas Operating Revenues:
Residential $ 3,506 $ 3,521 $ (15) -0.4%
Commercial 2,198 2,087 111 5.3%
Industrial 1,960 1,796 164 9.1%
Miscellaneous 321 286 35 12.2%
------------ ------------ ---------- ---------
Total retail sales 7,985 7,690 295 3.8%
Wholesale sales 5,409 - 5,409 N/A
------------ ------------ ---------- ---------
Total sales 13,394 7,690 5,704 74.2%
------------ ------------ ---------- ---------
Gas Energy Costs for:
Wholesale 5,307 - 5,307 N/A
Retail 4,580 3,531 1,049 29.7%
------------ ------------ ---------- ---------
Total gas purchased for resale 9,887 3,531 6,356 180.0%
------------ ------------ ---------- ---------
Gross Gas Margin $ 3,507 $ 4,159 $ (652) -15.7%
============ ============ ========== =========
</TABLE>
Gas operating revenues above consisted of the following sales in decatherms
and average gas revenues:
<TABLE>
<CAPTION>
Three Months
Ended September 30,
--------------------------------
Increase Increase
1998 1997 (Decrease) (Decrease)%
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Gas Operating Sales (Decatherms):
Wholesale 3,229,436 - 3,229,436 -
Retail 1,285,076 1,251,246 33,830 2.7%
-------------- -------------- --------------- ------------
Total sales 4,514,512 1,251,246 3,263,266 260.8%
-------------- -------------- --------------- ------------
Average Revenues per Decatherm
Wholesale $ 1.67 $ - $ 1.67 -
Retail $ 6.21 $ 6.15 $ 0.07 1.1%
</TABLE>
Wholesale sales in 1998, not present in the third quarter of 1997, reflect
an increased focus on this business opportunity.
Commercial and industrial revenues increased over the prior year due to
customer growth and higher use per customer.
13
<PAGE>
Gas energy costs consisted of the following decatherm purchases and average
gas costs:
<TABLE>
<CAPTION>
Three Months
Ended September 30,
--------------------------------
Increase/ Increase/
1998 1997 (Decrease) (Decrease)%
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Gas energy costs (decatherms):
Wholesale 3,226,962 - 3,226,962 -
Retail 1,254,356 1,219,168 35,188 2.9%
------------- ------------- ------------- ----------
Total purchased for resale 4,481,318 1,219,168 3,262,150 267.6%
------------- ------------- ------------- ----------
Average cost per Decatherm
Wholesale $ 1.64 $ - $ 1.64 -
Retail $ 3.65 $ 2.90 $ 0.76 26.1%
</TABLE>
Consistent with the increase in gas sales from customer growth and greater
use per customer, other gas purchases (decatherms) were higher in 1998. The
average cost per decatherm was also higher because of an increase in the unit
cost of firm and spot purchases.
The components of gross margin for gas operations were (dollars in
thousands):
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
Increase/ Increase/
1998 1997 (Decrease) (Decrease)%
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Gas Operating Revenues:
Residential $ 28,032 $ 24,314 $ 3,718 15.3%
Commercial 15,301 13,390 1,911 14.3%
Industrial 8,529 8,013 516 6.4%
Miscellaneous 968 769 199 25.9%
------------- ------------- ------------- ---------
Total retail sales 52,830 46,486 6,344 13.6%
Wholesale sales 14,042 1,184 12,858 1086.0%
------------- ------------- ------------- ---------
Total sales 66,872 47,670 19,202 40.3%
------------- ------------- ------------- ---------
Gas Energy Costs:
Wholesale 13,438 867 12,571 1449.9%
Retail 29,289 23,001 6,288 27.3%
------------- ------------- ------------- ---------
Total gas purchased for resale 42,727 23,868 18,859 79.0%
------------- ------------- ------------- ---------
Gross Gas Margin $ 24,145 $ 23,802 $ 343 1.4%
============= ============= ============= =========
</TABLE>
14
<PAGE>
Gas operating revenues above consisted of the following sales in decatherms
and average gas revenues:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
---------------------------------
Increase Increase
1998 1997 (Decrease) (Decrease) %
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Gas Operating Sales (Decatherms):
Wholesale 7,811,885 511,872 7,300,013 1426.1%
Retail 9,346,123 8,137,607 1,208,516 14.9%
--------------- -------------- --------------- ---------------
Total sales 17,158,008 8,649,479 8,508,529 98.4%
--------------- -------------- --------------- ---------------
Average Revenues per Decatherm
Wholesale $ 1.80 $ 2.31 $ (0.51) -22.2%
Retail $ 5.65 $ 5.71 $ (0.06) -1.1%
</TABLE>
Residential, commercial and industrial revenues increased over the prior
year due to a 5.0% increase in customers and colder than normal weather in 1998.
Increased wholesale sales in 1998 reflect continued focus on this business
opportunity.
Gas energy costs consisted of the following decatherm purchases and average
gas costs:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
----------------------------------
Increase/ Increase/
1998 1997 (Decrease) (Decrease) %
-------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Gas energy costs (decatherms):
Wholesale purchases 7,811,885 511,872 7,300,013 1426.1%
Other gas purchases 9,383,733 8,112,335 1,271,398 15.7%
-------------- -------------- ------------- ---------------
Total gas purchased for resale 17,195,618 8,624,207 8,571,411 99.4%
-------------- -------------- ------------- ---------------
Average cost per Decatherm
Wholesale purchases $ 1.72 $ 1.69 $ 0.03 1.8%
Other gas purchases $ 3.12 $ 2.84 $ 0.28 9.9%
</TABLE>
Consistent with the increase in gas sales from customer growth and colder
weather in 1998, other gas purchases (decatherms) were higher in 1998. The
average cost per decatherm of all purchases was also higher because of an
increase in the unit cost of firm and spot purchases.
WATER OPERATIONS
- -----------------
<TABLE>
<CAPTION>
Three Months
Ended September 30,
---------------------------------
Increase/ Increase/
1998 1997 (Decrease) $ (Decrease) %
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Water Operating Revenues:
Sales and gross water margin $ 16,802 $ 14,482 $ 2,320 16.0%
============== ============= =============== =============
</TABLE>
15
<PAGE>
Water sales were higher in the third quarter of 1998 because of the price
increase effective April 2, 1998 and a 3.2% increase in total customers over the
prior year. The increased sales were partially offset by higher precipitation
levels in 1998 that reduced the need for irrigation.
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
---------------------------------
Increase/ Increase/
1998 1997 (Decrease) $ (Decrease) %
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Water Operating Revenues:
Sales and gross water margin $ 37,881 $ 35,919 $ 1,962 5.5%
============== ============= =============== =============
</TABLE>
Water sales for the first nine months of 1998 were higher than the prior
year. The same factors which contributed to higher sales in the third quarter
of 1998, the April price increase and a 3.2% increase in customers, were also
responsible for the increase in sales during the first six months.
OTHER FINANCIAL INFORMATION
- ---------------------------
<TABLE>
<CAPTION>
Three Months
Ended September 30,
----------------------------
Increase/ Increase/
1998 1997 Decrease $ Decrease %
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Allowance for other funds used
during construction $ 870 $ 1,619 $ (749) -46.3%
Allowance for borrowed funds used
during construction 1,401 1,283 118 9.2%
---------- ----------- ----------- ------------
$ 2,271 $ 2,902 $ (631) -21.7%
---------- ----------- ----------- ------------
</TABLE>
Total allowance for funds used during construction (AFUDC) was lower in the
third quarter of 1998 over the comparable period in 1997 because the Pinon Pine
power project was completed in June 1998. Consequently, the third quarter 1998
amounts do not include AFUDC for this project.
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
----------------------------
Increase/ Increase/
1998 1997 Decrease $ Decrease %
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Allowance for other funds used
during construction $ 2,995 $ 4,547 $ (1,552) -34.1%
Allowance for borrowed funds used
during construction 5,122 3,637 1,485 40.8%
---------- ----------- ----------- ------------
$ 8,117 $ 8,184 $ (67) -0.8%
---------- ----------- ----------- ------------
</TABLE>
Total allowance for funds used during construction for the nine months
ended September 30, 1998 was relatively unchanged compared to the same period in
1997. The 1998 amounts were lower due to the completion of the Pinon Pine power
project in June 1998. However, the continued construction of the Alturas
transmission line offset most of this reduction.
16
<PAGE>
The following table includes other items of financial information that
varied from the same items in the third quarter of 1997:
<TABLE>
<CAPTION>
Three Months
Ended September 30,
---------------------------------------------------
Increase/ Increase/
1998 1997 (Decrease) $ (Decrease) %
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Income Taxes $ 11,084 $ 11,795 $ (711) -6.0%
</TABLE>
Operating income taxes decreased due to a reclassification of interest
expense to operating income from non-operating income that lowered operating
income before income taxes and a lower effective tax rate in the 1998 period.
The following table includes other items of financial information that
varied from the same items in 1997:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
--------------------------------------------------
Increase/ Increase/
1998 1997 (Decrease) $ (Decrease) %
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Other operating expense $ 86,031 $ 90,619 $ (4,588) -5.1%
Depreciation and amortization 50,692 47,572 3,120 6.6%
Income Taxes 32,486 34,706 (2,220) -6.4%
Other income-net 213 876 (663) -75.7%
Interest Charges-Other 5,502 3,421 2,081 60.8%
</TABLE>
Other operating expense decreased due to higher stock compensation plan
costs and post-retirement benefits experienced in 1997. Also, 1998 costs were
lower because of the water rate case decision which directed the Company to
capitalize certain costs of approximately $0.6 million which were previously
expensed.
Depreciation and amortization expense was higher because of water division
additions and other customer improvements added to plant in service in late
1997.
Operating income taxes decreased due to a reclassification of interest
expense to operating income from non-operating income that lowered operating
income before income taxes and a lower effective tax rate in the 1998 period.
Other income-net decreased due to water rate case adjustments charged to
expense during 1998.
Interest chargesOther increased because of higher short-term debt balances
in 1998 utilized to partially finance the Alturas transmission line project.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
During the first nine months of 1998, the Company earned $64.7 million in
income before preferred dividends, declared $4.1 million in dividends to holders
of its preferred stock, and declared $57 million in common stock dividends to
its parent, Sierra Pacific Resources.
17
<PAGE>
CONSTRUCTION EXPENDITURES AND FINANCING
- ---------------------------------------
The Company's construction program and capital requirements for the period
1998-2002 were originally discussed in the Company's 1997 Annual Report on Form
10-K. Of the amount projected for 1998, as of September 30, 1998, $91.6
million (60.6%) had been spent. Of this amount, approximately 74.2% was
provided by internally-generated funds.
ALTURAS INTERTIE
- ----------------
As of September 30, 1998, the Company had spent approximately $119 million
on the Alturas Intertie transmission line. The current estimated total
construction cost, including AFUDC, is approximately $159 million. The increase
in the estimated construction cost of approximately $8.4 million over the amount
previously reported in the Company's 1997 Annual Report on Form 10-K is due to
higher costs associated with regulatory compliance as well as enhanced
construction techniques which are expected to expedite completion of the
project. Construction of the project is expected to be completed in late 1998.
For further discussion of major projects, refer to the Company's 1997 Annual
Report on Form 10-K.
PINON PINE
- ----------
On June 17, 1998, the Company completed the construction of the coal
gasifier portion of the Pinon Pine Power Project. Because of the in-service
date, the performance warranty requirements, as described in the Company's
Annual Report on Form 10-K for 1997, will not be met by December 31, 1998.
Consequently, the Company will be required to refinance General Electric Capital
Corporation's investment in Pinon Pine Company LLC. It is estimated that the
additional investment required will be approximately $30 million. For more
information concerning the Pinon Pine Power project see the Company's Annual
Report on Form 10-K for 1997.
REGULATORY MATTERS
- ------------------
NEVADA
As a result of the rate plan referred to in the Company's Form 10-K for
1997, the Company made its first earnings sharing filing on April 29, 1998. For
its electric division customers, the Company filed to refund $7.3 million based
upon calendar year 1997 results. The Company also proposed a refund of $1.7
million to its gas division customers for results of the same period. On
October 1, 1998, the PUCN issued an order continuing the case until a future
date. The hearings have been delayed pending the outcome of negotiations in the
merger case. The Company and other parties agreed at the last merger-related
pre-hearing conference to delay this case. A pre-hearing conference is scheduled
for December 7, 1998, to set a new schedule for this proceeding. Merger
hearings should be completed by that time.
As mentioned in its 1997 Form 10-K, the Company requested permission from
the PUCN to continue to serve customers in the Truckee-Carson Irrigation
District (TCID) leasehold area upon expiration of the leasehold agreement (June
1998. The PUCN determined that the Company was fit, willing, and able to serve
the leasehold area. The PUCN also determined that TCID's application was
deficient. However, the PUCN will allow TCID to reapply for a certificate
sometime in the future if it satisfies numerous conditions including obtaining a
judicial determination that it owns facilities in the area.
On July 1, 1998, the Company filed its electric resource plan with the
PUCN. The plan discusses generation and transmission alternatives that would
supply Northern Nevada with electricity for the period 1998 through 2017. On
October 6, 1998, hearings on the transmission system impact study were held.
The stipulation reached at the hearings, requires the Company to re-file its
resource plan on December 15, 1998, with an updated load forecast and more
detailed analyses.
As reported in Sierra Pacific Resources (SPR) report on Form 8-K filed on
July 7, 1998, SPR, the parent company of Sierra Pacific Power Company, filed
with the PUCN a joint application with Nevada Power Company for an order
authorizing a merger. Among other issues in the PUCN merger application, the
filing addresses:
. Benefits of the merger to customers, employees and stockholders.
. The impact of the proposed merger on competition and electricity prices.
18
<PAGE>
. Operation of the electric transmission system to ensure competing energy
suppliers have equal access to customers.
A decision from the PUCN is expected within 180 days of the filing date.
With regard to Nevada Assembly Bill 366 (electric and gas utility
restructuring) previously discussed in the Company's 1997 Form 10-K, the PUCN
opened several dockets to investigate issues relating to restructuring:
Docket 97-8001 is the general electric restructuring docket, covering
unbundled electric services, potentially competitive services, licensing,
non-price terms and conditions for distribution service, market power,
stranded costs and provider of last resort. The PUCN has issued several
draft rules for comment. An independent scheduling agent (ISA) is being
considered for the state to mitigate market power issues.
Docket 97-11018 was opened for unbundling of the Company's costs into the
eight unbundled services and to delineate transmission and distribution
facilities applying FERC's seven criteria outlined in its Order 888.
Docket 97-5034 establishes rules for both electric and gas utilities
related to sharing of corporate services, employee transfers between
affiliates, non-discriminatory treatment of affiliates and non-affiliates,
audits, sharing of name and logo and penalties for violation of these rules
for both electric and gas utilities.
Docket 97-8002 was opened to investigate issues relating to compliance with
Nevada AB 366 for natural gas issues. The docket addresses unbundling of
services, potentially competitive designation of services, licensing, and
alternative plans of regulation.
In early 1998 the PUCN issued "OII Number Two" requesting comments on four
subject areas: which services should become "potentially competitive";
guidelines for distribution open access tariffs; consumer protection; and
licensing of alternative sellers. Comments have been filed and workshops have
been held on these matters:
Potentially Competitive Services (PCS)
--------------------------------------
On June 8, 1998 the PUCN issued an order determining that billing,
metering, and customer services should be declared "potentially
competitive" effective December 31, 1999. Generation services were already
deemed to be potentially competitive by AB 366.
On August 26, 1998 the Company filed a letter explaining to the PUCN why
the Company was not filing an application to declare any additional
services as "potentially competitive". The Company's letter indicates that
the Company does not have the information necessary to meet the statutory
requirements for determining a service as potentially competitive. The
company's position is that metering is a non-competitive service, that
billing and customer service are components of the individual services
(e.g. billing for generation is part of the service "generation"), and that
there are new services for billing and customer service which consolidate
all unbundled services. Potentially competitive only applies to existing
services. The company also stated its continuing support of restructuring
and urged the PUCN to focus on getting ready for competitive generation and
aggregation.
On September 23, 1998, the PUCN Staff filed its application requesting
metering, billing, and customer service be declared potentially competitive
for the Company's service area.
The Company filed comments on the proposed filing requirements for
affiliates approval to provide PCS on October 13, 1998.
Distribution Open Access Tariffs
--------------------------------
The Company filed its comments on the proposed distribution tariffs rule on
September 3, 1998. On September 14-17, 1998, the PUCN held hearings on the
proposed rule for non-price distribution tariffs. On October 5, 1998, the
PUCN issued a revised proposed rule for distribution tariffs. Comments on
the proposed rule are due November 2, 1998, and a hearing will be held on
November 5, 1998.
19
<PAGE>
Licensing of Alternative Sellers and Consumer Protection Requirements for
-------------------------------------------------------------------------
Alternative Sellers
-------------------
After soliciting comments and holding workshops, on June 26, 1998 the PUCN
issued proposed rules on licensing of alternative sellers and consumer
protection requirements for alternative sellers. These rules provide the
licensing and reporting requirements of alternative sellers and establish
the conduct required when alternative sellers provide generation or
aggregation services to residential and small commercial customers.
The Company filed its comments on the PUCN's proposed rules on September 3,
1998. On September 14-17, 1998, the PUCN held hearings on the proposed
rules for licensing and consumer protection. On October 5, 1998, the PUCN
issued revised proposed rules for licensing, and consumer protection.
Comments on these proposed rules are due November 2, 1998 and a hearing
will be held on November 5, 1998.
Load Pockets and Market Power
-----------------------------
The working group filed a consensus report on the Independent Scheduling
Agent (ISA)concept on August 13, 1998. On July 15, 1998, the PUCN issued
Procedural Order No. 4 which set a schedule for the filing of a report on
Independent Scheduling Administrator, the submittal of a report by PUCN
Staff on load pocket mitigation, and the filing of a report on a generation
aggregation tariff.
A consensus report on the issues related to an interim Independent System
Administrator (iISA) was filed on August 13, 1998. The report outlines the
functions the iISA would perform. On August 21, 1998, the PUCN Staff filed
its report on its Load Pocket Market Power Mitigation Proposal. The report
describes Staff's proposed calculation of "Maximum Alternative Seller Load
Pocket Capacity".
On September 21, 1998, the PUCN issued Procedural Order No. 5. The order
directs the parties to develop a generation aggregation tariff. The order
also requests legal briefs on the state commission's ability to order a
utility to make a FERC filing. The tariffs and briefs are due October 12,
1998 and the hearing will be October 16, 1998.
The PUCN issued an order providing guidance to the parties on the
development of an interim ISA on October 12, 1998. The order provides some
guiding principles and the schedule for preparation of an ISA submittal to
the FERC by February 1, 1999. Also, the Company filed its legal brief on
jurisdictional issues raised in Procedural Order 5.
Transition Costs
----------------
The Company filed an extensive response to transition cost questions
including a "white paper" which addressed many aspects of transition costs.
The PUCN established a working group to resolve various issues that include
mitigation standards; filing requirements; tax and accounting issues; and
recovery mechanisms.
Provider of Last Resort
-----------------------
The Provider of Last Resort (PLR) will provide electric service to
customers who do not choose and customers who are not able to find service
with an alternative seller. The PUCN issued a proposed rule for the PLR on
September 9, 1998. The proposed rule describes the process to be used by
the PUCN to select the PLR, qualification criteria and obligations of the
PLR, and terms and conditions for PLR service. Comments on the proposed
rule are due October 13, 1998 and a workshop and hearing was held on
October 19, 1998.
October 13, 1998 the Company filed comments on the proposed rules for Provider
of Last Resort.
20
<PAGE>
Affiliate Transaction Rules
---------------------------
On July 20-21, 1998, the hearing continued on the PUCN's proposed affiliate
transaction rule. The PUCN asked for legal briefs on constitutional issues
related to prohibiting the sharing of name and logo. The PUCN also invited
the Staff of the Federal Trade Commission to comment on its proposed rule.
The PUCN may also conduct a survey of relative name recognition of the
incumbent utilities and potential new entrants to the Nevada market. The
Company filed its response to legal questions posed by the PUCN on the use
of name and logo by affiliates on August 11, 1998.
On August 24, 1998, the PUCN issued a revised proposed rule on affiliate
transactions. The revised proposed rule continues to prohibit the use of
name and logo by affiliates, but does allow an affiliate to identify
themselves as affiliates of the power company. A disclaimer similar to the
California disclaimer would be required.
The PUCN issued a new proposed rule on September 9, 1998 outlining the
application requirements for an affiliate to request approval to provide
PCS services. This rule is in addition to the Affiliate Transaction rule.
Comments on this proposed rule are due October 13, 1998 and a workshop and
hearing will be held on October 19, 1998.
On September 23, 1998, the company filed comments on the latest proposed
rule on affiliate transactions. The Company's comments focused on the
name/logo issue. On September 29, 1998 the PUCN held another hearing on
the proposed affiliate transaction rules. Discussion focused mainly on the
proposed prohibition of an affiliate's use of the utility's name/logo. The
PUCN issued a revised proposed rule for affiliate transactions on October
5, 1998. Comments on this proposed rule are due on November 2, 1998 and a
hearing was held on November 5, 1998.
Electric Transmission and Distribution Split
--------------------------------------------
On July 30, 1998, hearings were completed on the transmission and
distribution split. A settlement was not reached in the Company's case.
The PUCN Staff supported the Company's proposal. The PUCN approved the
Company's proposed transmission and distribution split at the August 24,
1998 agenda meeting. In addition to approving the Company's proposal, the
PUCN approved certain pricing principles to provide assurances to large
customers with facilities charges.
On September 8, 1998, the Company filed a Petition for Reconsideration on
the August 24, 1998 Order. The Company requests two modifications to the
PUCN's Order.
The PUCN ruled on Sierra's Petition for Reconsideration on October 6, 1998.
The PUCN accepted one of the requested modifications (related to capacity
and energy split of firm energy purchases) and rejected the other request.
Gas Restructuring
-----------------
In order to comply with Nevada AB 366 for natural gas deregulation, the
PUCN is developing new natural gas rules. The PUCN is following similar
processes as in electric restructuring to develop new rules. The PUCN
adopted the final rule on July 24, 1998, that outline the procedure for
determining whether a service is potentially competitive.
21
<PAGE>
CALIFORNIA
----------
On August 6, 1998, the California Public Utilities Commission (CPUC)
revised and clarified portions of its affiliate transaction rules. The
revisions included the following: a narrow exception allowing the temporary
assignment of utility employees to affiliates, an opportunity for utilities to
challenge the 15% fee for employees whose positions are impacted by
restructuring, clarification of corporate oversight and governance rules,
modification of product service rules and a change in the timing of compliance
audits for service provider information.
On August 28, 1998, the Company filed a revenue cycle unbundling proposal.
Revenue cycle services include meter ownership, meter services (O&M), meter
reading, and billing. Under the Company's proposal, customers who select their
own provider of a revenue cycle service would receive a credit on their bill.
At the suggestion of the CPUC, on September 24, 1998, the Company filed a
Petition for Modification of the December 16, 1997 order, requesting balancing
account treatment in lieu of revenue reduction bonds.
On September 29, 1998, the Company filed with the CPUC its generation
market valuation proposal. As a result of the pending merger, the Company and
Nevada Power plan to divest their generation assets. As a result, the market
will set the value of those assets that the CPUC may use to determine the
appropriate level of transition cost recovery for the Company.
FEDERAL ENERGY REGULATORY COMMISSION
- ------------------------------------
On October 2, 1998, the Company and Nevada Power filed an application with
the Federal Energy Regulatory Commission for merger approval. In a separate,
concurrent filing, the companies submitted an open access transmission tariff
for the merged company.
ENVIRONMENTAL
- -------------
On Tuesday, July 7, 1998, a phase shifter at the Company's Fort Churchill
generation plant experienced an internal failure causing a spill of
approximately 10,000 gallons of oil and solvent. It is estimated that it will
cost $290,000 to remediate the spill that contaminated the ground. Since
insurance will cover all amounts over the deductible, a reserve of $150,000 was
recognized for the deductible of $150,000.
As discussed in Sierra Pacific Power Company's Annual Report on Form 10-K
for 1997, a parcel formerly owned by the company was identified to have soil
contamination from a gas manufacturing process. An agreement was reached with
the owners of the property in July 1998 that documented the remediation to take
place. The agreement provides for the removal of two feet of soil. This soil
will be hauled off-site and incinerated. The current estimate for the removal
and incineration is $675,000. However, it is anticipated that some additional
work will be required that will bring the total cost to approximately $790,000.
This amount was fully reserved as of September 30, 1998. All remediation will
be completed by February 15, 1999.
MERGER
- ------
As reported in Sierra Pacific Resources report on Form 8-K dated July 7,
1998, the Company's parent filed a joint merger application with the PUCN for
approval of a proposed merger.
In the filing, Nevada Power and SPPC propose selling their generation
plants if the merger is completed. Capital raised from the sale will be
reinvested primarily in transmission and distribution facilities or to reduce
capital outstanding.
Through September 30, 1998, the Company had incurred a total of $5.3
million in costs to effect the merger. $4.7 million of the external costs
incurred have been capitalized and the balance of internal costs expensed during
the period.
22
<PAGE>
YEAR 2000
- ----------
The Company uses business application software programs and relies on
computing infrastructure that includes embedded systems that have a Year 2000
(Y2K) affect on the Company. In many cases, the Company's software programs
and embedded systems use two-digit years that may recognize a date using '00'
as the year 1900 rather than the year 2000. This could result in the computer
or device shutting down, performing incorrect computations, or performing in
an inconsistent manner.
In 1996 the Company established its Y2K project to address the Y2K issues. The
project's scope includes: (1) business application systems including, but not
limited to, customer information and billing, financial systems including
(time reporting, payroll, general ledger, accounts payable and purchasing, and
end-user developed systems) (2) embedded systems, including equipment that
operates or controls operating facilities including (power plants,
transmission and distribution, water, gas, telecommunications, and information
technology systems); (3) customer, vendor, and supplier relationships and (4)
testing and contingency planning.
To implement its Y2K strategies, the Company established a Y2K project office
currently headed by the Senior Vice President, Chief Financial Officer, and
Treasurer, an oversight committee representing all lines of businesses, and a
"champions team" representing generation, transmission and distribution, gas,
water, telecommunications, computer infrastructure, and building facilities.
Also represented are internal audit, engineering, procurement, legal, and
human resources. In addition, the Company has utilized the expertise of
outside consultants to assist in the project management and the technical
aspects of the project.
Business Application Systems
-----------------------------
The initial focus for the Y2K project team was on the business application
systems. In the fall of 1996 the Company purchased software assessment tools
and completed its inventory and code assessment for its mainframe business
systems in October 1996. The inventory is comprised of over 7 million lines of
COBOL code, and end-user programs.
The Company developed and strictly adheres to a Y2K methodology that includes
unit, system wide and Y2K date specific testing.
The first major Y2K ready business system, Customer Information and Billing
representing more than 2 million lines of code, was successfully implemented
in June, 1997. As of this writing, the Company has successfully implemented
more than 80% of its business systems and has a target completion date of
March 1999 to complete all systems. The Company is on schedule to meet that
date.
Embedded Systems
----------------
The Company hired an outside engineering consultant, Network Systems
Engineering Corporation (NSEC), to assist the Company's staff in conducting a
thorough and comprehensive inventory of its embedded systems at the component
level. All systems have been inventoried and assessed. This inventory
identified over 2000 potentially date sensitive items. The Company and NSEC
have contacted all manufacturers of those components that it has identified as
critical to operations and continues to contact other manufacturers of
embedded system components to determine whether their components are Y2K
compliant. At this time, 13% of the embedded systems components are not
compliant, 23% need further assessment, and 64% are compliant or not date
sensitive. Test plans are being prepared for those items that are critical to
the Company's business continuation. The Company's embedded systems plan calls
for all Y2K corrective procedures to be complete by October 1999.
Vendors and Suppliers
---------------------
The Company has contacted in writing all vendors and suppliers of products and
services that it considers critical to its operations. These contacts have
included, but are not limited to, suppliers of interstate transportation
capacity for coal supplies, natural gas producers, financial institutions, and
telephone service. The quality of responses is not uniform or consistent. The
next steps are to work with the major vendors and suppliers to assess their
Y2K readiness. The Company may consider new business and procurement
alternatives for products and services as necessary to the extent that
alternatives are available.
23
<PAGE>
Major Customers
---------------
The Company is communicating with major customers to inform them of any
potential vulnerability of the Company's ability to provide utility services
come January 1, 2000. The Company has met face to face with some of its major
customers to share its progress on Y2K. Also discussed at these meetings is
the customer's Y2K readiness. The Company will continue to keep its major
customers informed as to its progress on Y2K remediation, testing and
contingency planning.
Contingency Planning
--------------------
The Company's Y2K strategies include contingency planning for both business
and embedded systems. The planning effort includes critical Company areas such
as information technology, networks, vendors and suppliers, and operations
personnel. Quick action response teams and additional Company personnel are
planned to be available for the century rollover. Specific contingency plans
are being developed.
As part of its normal business practice, the Company maintains plans to follow
during emergency circumstances, some of which could arise from Y2K problems.
Presently, the Company continues to develop its contingency plans for
potential Y2K related problems.
Potential Risks
---------------
With respect to its internal operations, those over which the Company has
direct control, the Company believes the most significant potential risks are:
(1) its ability to use electronic devices to control and operate its
generation, gas, water, transmission and distribution systems; (2) its ability
to render timely bills to its customers; and (3) the ability to maintain
continuous operations of its computer systems.
The Company relies on suppliers of natural gas and electricity and other
products and services. Should any of these critical vendors fail, the impact
of any such failure could become a significant challenge to the Company's
ability to meet the demands of its customers. Business continuity interruption
could also have a material adverse financial impact, including but not limited
to, lost sales revenues, increased operating costs, and claims from customers
related to business interruptions. Based upon the information supplied to date
by critical vendors and suppliers, the Company believes the probability of
such failures is low. The Company's Y2K program emphasizes continued
monitoring of the progress of these critical vendors and suppliers toward
completion of their year 2000 programs.
Financial Implications
----------------------
To complete its Y2K program, the Company expects to incur non-recurring
expenses of approximately $2,800,000 to correct its business systems. These
expenses will occur over a three year period ending in March 1999. As of
August 31, 1998, the company has expended approximately $1,800,000 on its
business systems effort.
As of August 31, 1998, the Company had incurred expenses of $216,000 for the
inventory and assessment phases of the embedded systems project with final
inventory and assessment charges expected to be approximately $280,000.
The estimated expense for the correcting, testing, contingency planning, and
implementing phases for the embedded systems is approximately $6,000,000.
The Company's Y2K program is progressing and the Company believes it is taking
all reasonable steps necessary to be able to operate successfully through and
beyond the turn of the century.
24
<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 acknowledging awareness
regarding interim financial information of the Company.
(27) The Financial Data Schedule containing summary financial
information extracted from the consolidated financial statements
filed on Form 10-Q for the nine month period ended September 30,
1998, for Sierra Pacific Power Company and is qualified in its
entirety by reference to such financial statements.
(b) Reports on Form 8-K
25
<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 Power Company
---------------------------------
(Registrant)
Date: November 13, 1998 By /s/ Mark A. Ruelle
----------------------- ------------------------------
Mark A. Ruelle
Senior Vice President and
Chief Financial Officer
Treasurer
(Principal Financial Officer)
Date: November 13, 1998 BY /s/ Mary O. Simmons
------------------------ -------------------------------
Mary O. Simmons
Controller
(Principal Accounting Officer)
26
<PAGE>
EXHIBIT 15
Sierra Pacific Resources
6100 Neil Road
Reno, Nevada 89511
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Sierra Pacific Resources and subsidiaries for the periods ended
September 30, 1998 and 1997, as indicated in our report dated October 23, 1998;
because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, is
incorporated by reference in Registration Statement No. 333-4374 on Form S-3
Registration Statement No. 333-62895 on Form S-4, and Registration Statement
Nos. 2-92454, 33-87646, and 33-48152 on Forms S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Reno, Nevada
November 13, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> OPUR1
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
FINANCIAL RECORDS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,644,983
<OTHER-PROPERTY-AND-INVEST> 56,882
<TOTAL-CURRENT-ASSETS> 142,388
<TOTAL-DEFERRED-CHARGES> 146,303
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,990,556
<COMMON> 30,957
<CAPITAL-SURPLUS-PAID-IN> 456,098
<RETAINED-EARNINGS> 175,705
<TOTAL-COMMON-STOCKHOLDERS-EQ> 662,760
48,500
73,115
<LONG-TERM-DEBT-NET> 611,786
<SHORT-TERM-NOTES> 100,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 10,577
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 483,818
<TOT-CAPITALIZATION-AND-LIAB> 1,990,556
<GROSS-OPERATING-REVENUE> 544,663
<INCOME-TAX-EXPENSE> 31,121
<OTHER-OPERATING-EXPENSES> 421,022
<TOTAL-OPERATING-EXPENSES> 452,143
<OPERATING-INCOME-LOSS> 92,520
<OTHER-INCOME-NET> 3,397
<INCOME-BEFORE-INTEREST-EXPEN> 95,917
<TOTAL-INTEREST-EXPENSE> 30,671
<NET-INCOME> 65,246
4,094
<EARNINGS-AVAILABLE-FOR-COMM> 58,024
<COMMON-STOCK-DIVIDENDS> 30,189
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 124,829
<EPS-PRIMARY> $1.88
<EPS-DILUTED> $1.87
</TABLE>
