<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number 0-508
SIERRA PACIFIC 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
(Address of principal executive office) (Zip Code)
(702) 689-5408
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at November 1, 1996
Common Stock, $3.75 par value 1,000 Shares
<PAGE>
SIERRA PACIFIC POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - Financial Information
- ------------------------------
ITEM 1. Financial Statements
Report of Independent Accountants.......................... 2
Consolidated Balance Sheets - September 30, 1996 and
December 31, 1995.................................... 3
Consolidated Statements of Income - Three and Nine Months
Ended September 30, 1996 and 1995.................... 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1996 and 1995.................... 5
Notes to Consolidated Financial Statements................. 6
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.............................................. 8
PART II - Other Information
- ---------------------------
ITEM 1. Legal Proceedings.......................................... 16
ITEM 5. Other Information.......................................... 16
ITEM 6. Exhibits and Reports on Form 8-K........................... 16
Signature Page....................................................... 17
</TABLE>
<PAGE>
COOPERS COOPERS & LYBRAND L.L.P.
& LYBRAND
a professional services firm
To the Board of Directors and Shareholder
of Sierra Pacific Power Company:
We have reviewed the condensed consolidated balance sheet of Sierra Pacific
Power Company and subsidiaries as of September 30, 1996 and the related
condensed consolidated statements of income for the three- and nine-month
periods ended September 30, 1996 and 1995 and statements of cash flows for the
nine-month periods ended September 30, 1996 and 1995. These financial
statements are the responsibility of management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and statement of capitalization of
Sierra Pacific Power Company and subsidiaries as of December 31, 1995, and the
related consolidated statements of income, cash flows and shareholder's equity
for the year then ended (not presented herein); and in our report dated February
16, 1996 we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1995 is fairly
presented, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
San Francisco, California
October 28, 1996
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a
limited liability association incorporated in Switzerland.
2
<PAGE>
SIERRA PACIFIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Utility Plant at Original Cost:
Plant in service $ 1,913,062 $ 1,816,444
Less accumulated provision for
depreciation 592,101 556,710
----------- -----------
1,320,961 1,259,734
Construction work in progress 192,757 153,067
----------- -----------
1,513,718 1,412,801
----------- -----------
Non-utility Investments 22,425 22,519
----------- -----------
Current Assets:
Cash and cash equivalents 4,704 1,373
Accounts receivable less provision for
uncollectible accounts:
$1,579 at September 30, 1996
and $1,543 at December 31, 1995 74,981 91,262
Materials, supplies and fuel, at average cos t 30,015 30,455
Other 3,478 2,346
----------- -----------
113,178 125,436
----------- -----------
Deferred Charges:
Regulatory tax asset 68,621 69,610
Other regulatory assets 66,382 82,841
Other 13,678 16,611
----------- -----------
148,681 169,062
----------- -----------
$ 1,798,002 $ 1,729,818
=========== ===========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common shareholder's equity $ 600,361 $ 567,383
Preferred stock 73,115 73,115
Preferred stock subject to mandatory
redemption - 13,600
Company-obligated mandatorily redeemable
preferred securities of the Company's
subsidiary Trust, Sierra Pacific Power
Capital I, holding solely $50 million
principal amount of 8.6% Junior
Subordinated Debentures of the Company,
due 2036 48,500 -
Long-term debt 602,393 533,524
----------- -----------
1,324,369 1,187,622
----------- -----------
Current Liabilities:
Short-term borrowings 26,000 56,000
Current maturities of long-term debt
and preferred stock 423 7,208
Accounts payable 44,129 90,815
Accrued interest 12,368 5,300
Dividends declared 19,365 16,785
Accrued salaries and benefits 9,217 9,265
Other current liabilities 23,588 11,998
----------- -----------
135,090 197,371
----------- -----------
Deferred Credits:
Accumulated deferred federal income taxes 152,293 158,972
Accumulated deferred investment tax credit 42,319 43,797
Regulatory tax liability 43,592 45,084
Customer advances for construction 39,368 40,168
Other 60,971 56,804
----------- -----------
338,543 344,825
----------- -----------
$ 1,798,002 $ 1,729,818
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
SIERRA PACIFIC POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating Revenues:
Electric $136,353 $128,815 $388,712 $368,789
Gas 8,196 7,050 44,530 45,404
Water 14,133 13,350 34,971 33,084
-------- -------- -------- --------
158,682 149,215 468,213 447,277
-------- -------- -------- --------
Operating Expenses:
Operation:
Purchased power 29,687 28,484 90,710 89,080
Fuel for power generation 27,075 22,838 75,477 63,298
Gas purchased for resale 3,478 4,642 21,523 26,133
Deferral of energy costs - net (1) 551 (1,691) 9,225
Other 30,178 32,842 94,825 89,008
Maintenance 4,344 5,150 13,431 13,078
Depreciation and amortization 14,664 13,843 43,014 41,148
Taxes:
Income taxes 12,580 9,788 33,282 26,991
Other than income 4,588 4,513 13,708 13,375
-------- -------- -------- --------
126,593 122,651 384,279 371,336
-------- -------- -------- --------
Operating Income 32,089 26,564 83,934 75,941
-------- -------- -------- --------
Other Income:
Allowance for other funds
used during construction 1,800 449 3,820 898
Other income (expense) - net (428) (142) 511 (491)
-------- -------- -------- --------
1,372 307 4,331 407
-------- -------- -------- --------
Total Income 33,461 26,871 88,265 76,348
-------- -------- -------- --------
Interest Charges:
Long-term debt 9,549 8,812 27,243 26,499
Other 1,215 942 3,613 2,826
Allowance for borrowed funds
used during construction
and capitalized interest (1,492) (785) (2,791) (1,719)
-------- -------- -------- --------
9,272 8,969 28,065 27,606
-------- -------- -------- --------
Income Before Preferred Dividends 24,189 17,902 60,200 48,742
Preferred Dividend Requirements 2,386 1,786 5,676 5,589
Income Applicable to -------- -------- -------- --------
Common Stock $ 21,803 $ 16,116 $ 54,524 $ 43,153
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
SIERRA PACIFIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
--------- --------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
- ------------------------------------
Income before preferred dividends $ 60,200 $ 48,742
Non-cash items included in income:
Depreciation and amortization 43,014 41,148
Deferred taxes and deferred investment tax credit (8,660) (3,399)
AFUDC and capitalized interest (6,611) (2,617)
Deferred energy costs (1,691) 9,225
Write-off of merger costs 5,375 7,828
Other non-cash 3,092 6,568
Changes in certain assets and liabilities:
Accounts receivable 16,281 11,280
Other current assets (692) 236
Accounts payable (46,686) (4,071)
Other current liabilities 18,610 5,183
Other - net 13,568 (8,209)
--------- --------
Net Cash Flow from Operating Activities 95,800 111,914
--------- --------
Cash Flows Used in Investing Activities:
- ---------------------------------------
Additions to utility plant (153,332) (91,851)
Non-cash charges to utility plant 6,847 2,920
Net customer refunds and
Contributions in aid of construction 9,492 4,208
--------- --------
Net cash used for utility plant (136,993) (84,723)
Increase (decrease) in subsidiaries and
other non-utility property, net 650 (2)
--------- --------
Net Cash Used in Investing Activities (136,343) (84,725)
--------- --------
Cash Flows from Financing Activities:
- ------------------------------------
Decrease in short-term borrowings (28,468) (7,050)
Proceeds from issuance of long-term debt 110,031 -
Retirement of long-term debt (50,322) (10,302)
Reduction of preferred stock (20,400) (6,800)
Proceeds from Company obligated mandatorily
redeemable preferred securities 48,500 -
Decrease in funds held in trust 9,175 14,514
Investment from the parent company 28,000 26,830
Expenses of external financing - (60)
Dividends paid (52,642) (45,635)
--------- --------
Net Cash provided (used) as a Result of Financing
Activities 43,874 (28,503)
--------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 3,331 (1,314)
Beginning Balance in Cash and Cash Equivalents 1,373 5,116
--------- --------
Ending Balance in Cash and Cash Equivalents $ 4,704 $ 3,802
========= ========
Supplemental Disclosures of Cash Flow Information:
- -------------------------------------------------
Cash Paid During Period For:
Interest $ 23,599 $ 21,266
Income Taxes $ 28,907 $ 30,422
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. MANAGEMENT'S STATEMENT
---------------------------------
In the opinion of Company management, the accompanying unaudited interim
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the consolidated
financial position, consolidated results of operations and consolidated cash
flows for the periods shown. These consolidated financial statements do not
contain the complete detail or footnote disclosure concerning accounting
policies and other matters which are included in full year financial statements
and therefore, they should be read in conjunction with the Company's audited
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995. Coopers & Lybrand L.L.P., the Company's
independent accountants, have performed a review of the unaudited consolidated
financial statements, and their report thereon has been included on Page 2 of
this report.
The results of operations for the three and nine month periods ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the full year.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Sierra Pacific Capital Power I, Pinon Pine
Corporation, and Pinon Pine Investment Company. All significant intercompany
transactions and balances have been eliminated in consolidation.
Reclassifications
- -----------------
Certain items previously reported for years prior to 1996 have been
reclassified to conform with the current year's presentation. Net income and
shareholder's equity were not affected by these reclassifications.
NOTE 2. IMPAIRMENT OF LONG-LIVED ASSETS
-----------------------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of", which is effective
for fiscal years beginning after December 31, 1995. The Company adopted the
standard January 1, 1996, and has determined that under current cost-based
regulation there exists no material impact on its financial statements as a
result of the adoption of the standard.
NOTE 3. PREFERRED STOCK
-------------------------
On June 3, 1996, the Company redeemed the remaining 408,000 shares of
Series G, 8.24% Preferred Stock, at par value, for $20.4 million.
On July 29, 1996, Sierra Pacific Power Capital I (the Trust), a wholly-owned
subsidiary of the Company, issued $48.5 million (1,940,000 shares) 8.60% Trust
Originated Preferred Securities (the Preferred Securities). The Company owns
all the Common Securities, 60,000 shares totalling $1.5 million (Common
Securities) issued by the Trust. The Preferred Securities and the Common
Securities (the Trust Securities) represent undivided beneficial ownership
interests in the assets of the Trust, a statutory business trust formed under
the laws of the State of Delaware. The existence of the Trust is for the sole
purpose of issuing the Trust Securities and using the proceeds thereof to
purchase from the Company its 8.60% Junior Subordinated Debentures due July 30,
2036, in a principal amount of $50 million. The sole asset of the Trust is the
Junior Subordinated Debentures. The Company's obligations under the Guarantee
(agreement entered into in connection with the Preferred Securities), when taken
together with the Company's obligation to make interest and other payments on
the Junior Subordinated Debentures issued to the Trust, and the Company's
obligations under the Indenture pursuant to which the Junior Subordinated
Debentures are issued and its obligations under the Declaration, including its
liabilities to pay costs, expenses, debts and liabilities of the Trust, provides
a full and unconditional guarantee by the
6
<PAGE>
Company of the Trust's obligations under the Preferred Securities. Financial
statements of the Trust are consolidated with the Company; separate financial
statements are not filed because the Trust is wholly-owned by the Company and
essentially has no independent operations, and the guarantee is full and
unconditional. Proceeds to the Company from the sale of the Junior Subordinated
Debentures were used to retire short-term indebtedness incurred to redeem $20.4
million in principal amount of Series G, 8.24% Preferred Stock and to reduce
other short-term debt of the Company.
NOTE 4. DEFERRED ENERGY
-------------------------
In March 1995, the balances in the Company's (Nevada jurisdiction) deferred
energy receivables accounts were collected and, according to the provisions of
the stipulation approved by the Public Service Commission of Nevada (PSCN) in
September 1994, the Company suspended its deferred energy accounting, increased
base rates by $6.5 million, and decreased deferred fuel rates by $18.8 million.
Fluctuations in purchased gas, fuel and purchased power costs from the base fuel
rates are flowing through to earnings until January 1, 1997. The Company and
regulators are currently re-evaluating the use of deferred energy accounting
practices in accordance with the applications with the PSCN.
In June 1996, the Company implemented the California Stipulation Agreement
which set the Energy Cost Adjustment Clause (ECAC), California Alternate Rates
for Energy (CARE) and Electric Revenue Adjustment Mechanism (ERAM) account
balances to zero, resulting in a write-off of $2.6 million overcollection in the
balancing accounts, thereby reducing deferred energy costs by a like amount.
The Stipulation also reduced fuel rates by $2.3 million on an annual basis.
NOTE 5. LONG-TERM DEBT
------------------------
On February 27, 1996, the Company registered for issuance of up to $80
million of collateralized debt securities which may be offered from time to
time. During March 1996, the Company issued $20 million of medium-term notes
under the program. In April, 1996, the Company issued an additional $10 million
in medium-term notes. These are ten year non-callable notes, due in 2006, with
interest rates of 6.81% to 6.83% payable in semi-annual payments. In July 1996,
the Company issued an additional $30 million principal amount of its $80 million
Medium-Term Note Program, Series C. These are three year non-callable notes due
in 1999 with interest rates of 6.83% to 6.86%. The net proceeds to the Company
from the sale of the notes were used to reduce short-term debt and fund
construction projects.
On June 19, 1996, the Company converted the interest rate on the $80 million
Water Facilities Bonds maturing in 2020, to a daily rate from a flexible
(Commercial Paper) rate which reduces letter of credit, trustee fees, and
administrative costs.
Note 6. MERGER TERMINATION
----------------------------
On June 28, 1996, Sierra Pacific Power Company and its parent Sierra
Pacific Resources (SPR) received notice from The Washington Water Power
Company of its election to terminate the Agreement and Plan of Reorganization,
as amended, among Sierra Pacific Resources, the Company and The Washington Water
Power Company. As a result of the termination of the Merger Agreement, the
Company will continue to operate as a separate utility and a wholly-owned
subsidiary of Sierra Pacific Resources.
As of June 30, 1996, the Company incurred $42 million in merger costs
composed of $13 million in transaction and transition costs and $29 million of
early retirement and severance program costs.
7
<PAGE>
In accordance with the provisions of the merger stipulation with the Public
Service Commission of Nevada (PSCN), the Company had been amortizing all costs
over a five year period which began January 1, 1995. Through June 30, 1996, $17
million of total merger costs had been expensed. Due to the termination of the
merger in June 1996, all transaction and transition costs have been written off
in the period ended June 30, 1996. Consistent with the precedent set by the
PSCN in previous early retirement and severance programs, the Company continues
to capitalize and amortize these costs. The amortization period for such costs
has been modified to ten years to conform to prior precedent set by the PSCN.
The Company expects to recover the costs related to early retirement and
severance costs in future rates.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
Nevada, primary jurisdiction of the Company, uses a marginal cost method for
setting rates by customer class. As a result of this methodology, changes in
sales mix (i.e., consumption by customer class) can result in increases or
decreases in revenues, irrespective of changes in total consumption.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
-------- --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Operating Revenues $158,682 $149,215 $468,213 $447,277
Energy Costs (60,239) (56,515) (186,019) (187,736)
-------- -------- --------- --------
Revenue Margin $ 98,443 $ 92,700 $282,194 $259,541
======== ======== ========= ========
</TABLE>
Total operating revenues for the three-months ended September 30, 1996
increased by 6.3% over the comparable period of 1995 due to increased energy
sales resulting from overall customer growth and increased use per customer due
to warmer weather than last year. A record peak load of 1,225 MW was achieved
on July 22, 1996. Total operating revenues for the nine-month period ended
September 30, 1996, increased by 4.7% over the comparable period of 1995 due to
customer growth and warmer weather, partially offset by a decrease in electric
rates in Nevada which took effect May, 1995.
8
<PAGE>
Energy costs are comprised of purchased power, fuel for power generation,
gas purchased for resale and deferred energy. Average energy costs for the
three and nine months ended are set forth below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average cost per KWH of
purchased power 3.37c 3.69c 2.99c 3.44c
Average cost per KWH of
generated power 2.08c 1.85c 2.20c 2.01c
Average cost per therm of
gas purchased for resale 19.12c 38.31c 25.52c 33.05c
</TABLE>
While the total cost of purchased power increased by 4.2% and 1.8% for the
three and nine months ended September 30, 1996, over the comparable periods in
1995, the kilowatt-hours purchased increased by 14.1% and 17.3%, respectively,
during the same periods. The resulting decrease in cost per kilowatt-hour of
8.7% and 13.1%, respectively, is attributable to the availability of low cost
hydro-generated energy from sources in the Pacific Northwest.
Kilowatt-hours generated increased by 5.5% and 9.3%, respectively, for the
three and nine months ended September 30, 1996, over the comparable periods in
1995 due to increased customer demand and overall customer growth. The total
cost of fuel for power generation increased by 18.5% and 19.2% during the same
periods, reflecting higher fuel prices and increased generation. The cost per
kilowatt-hour generated increased by 12.4% and 9.5%, respectively, for the three
and nine months ended September 30, 1996 over the same periods in 1995. During
the periods the Company continued to shift toward natural gas and away from the
more expensive oil and coal as generation fuel.
While for the three and nine months ended September 30, 1996, the Company
increased its therm usage by 50.0% and 6.5%, respectively, over the comparable
periods in 1995, the total cost of gas purchased for resale during the same
periods decreased 25.1% and 17.6% due to per-therm cost decreases of 50.1% and
22.7%.
Deferred energy costs - net decreased by 100% and 118% for the three and
nine months ended September 30, 1996, over the comparable periods of 1995 due to
the suspension of deferred energy accounting in Nevada's electric and natural
gas jurisdictions in March, 1995. Also in June, 1996, the California Energy
Cost Adjustment Clause, California Alternate Rates for Energy and Electric
Revenue Adjustment Mechanism rates were set to zero which resulted in a $2.6
million decrease in these costs. For further discussion of deferred energy
matters, refer to "Note 4. DEFERRED ENERGY" on page 7.
Other operations expenses experienced a net decrease of 8.1% and a net
increase of 6.5% during the three and nine months ended September 30, 1996, over
the same periods in 1995. For the three months ended, other operating expenses
decreased as there were no merger expenses in 1996 compared to 1995, offset by
additional coal contract related expenses of $1.5 million (see next paragraph
for more details). Other operations expenses for the nine months increased due
to buy-outs of a coal contract of $4.0 million, higher outside services costs
for computer programmers, and an increase in distribution expenses for
maintenance of overhead lines and meters.
9
<PAGE>
In its 1995 Form 10-K, the Company stated that it would be investigating
alternatives to mitigate an inventory build-up of coal. However, with lower
prices of natural gas and availability of inexpensive energy from the Pacific
Northwest, the coal inventory has grown. As of September 30, 1996, the coal
inventory balance was approximately 294,647 tons, or roughly 51 days of
consumption at 100% capacity. The Company's policy has been to maintain an
average annual coal inventory sufficient to provide 40 days at full load. To
mitigate further inventory buildup, the Company paid $2.5 million to buy out one
of its coal contracts which will satisfy the minimum commitment for the period
from July 1, 1996, to June 30, 1997. Additionally, the Company committed $1.5
million toward the minimum contract committment of tonnage for the 1997-1998
contract year. As part of its strategy to manage the coal inventory, the
Company may commit to additional coal contract buy-outs.
Maintenance expense decreased by 15.6% and 2.7%, respectively, during the
three and nine months ended September 30, 1996 over the same periods in 1995
primarily due to planned maintenance of the Company's Tracy generating plant in
1995, partially offset by planned maintenance on distribution overhead lines in
1996.
Depreciation and amortization expense for the three and nine months ended
September 30, 1996, increased by 5.9% and 4.5% over the comparable periods in
1995 due to continued increases in utility plant. Refer to the "CONSTRUCTION
PROGRAM AND REGULATORY PROCEEDINGS" section beginning on page 11 for additional
discussion of construction programs.
Income taxes increased for the three and nine months ended September 30,
1996, over the comparable periods in 1995 due to higher operating income before
taxes. The decrease in the effective tax rate for the three-month period ended
September 30, 1996, over the comparable period in 1995 was due to the tax
effects of merger related expenses in 1995. Income taxes reflected in operating
income and other income-net are summarized below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1996 1995 1996 1995
--------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Currently payable $12,354 $ 9,647 $40,622 $29,805
Deferred taxes - net (56) 379 (7,182) (1,922)
Investment tax credit - net (493) (492) (1,478) (1,477)
------- ------- ------- -------
Total income taxes $11,805 $ 9,534 $31,962 $26,406
======= ======= ======= =======
Income taxes charged to:
Operations $12,580 $ 9,788 $33,282 $26,991
Other Income - net (775) (254) (1,320) (585)
------- ------- ------- -------
Total income tax expense $11,805 $ 9,534 $31,962 $26,406
======= ======= ======= =======
Income before income taxes
and preferred dividend
requirements $35,994 $27,436 $92,162 $75,148
======= ======= ======= =======
Effective tax rate 32.8% 34.7% 34.7% 35.1%
======= ======= ======= =======
</TABLE>
Allowance for funds used during construction (AFUDC) and capitalized
interest increased by 166.8% and 152.6% during the three and nine months ended
September 30, 1996, compared to the corresponding periods in 1995 reflecting the
current period increase in construction work in progress (CWIP) and an AFUDC
rate increase from the prior year. Refer to the "CONSTRUCTION PROGRAM AND
REGULATORY PROCEEDINGS" section beginning on page 11 for additional discussion
of construction programs.
10
<PAGE>
Other interest on debt increased 29.0% and 27.8% for the three and nine
months ended September 30, 1996, due to the Company carrying greater amounts of
commercial paper debt during 1996, resulting in an increase in related interest.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
During the first nine months of 1996, the Company earned $60.2 million in
income before preferred dividends and paid out $5.2 million in dividends to
holders of its preferred stock and $50 million common stock dividends to its
parent corporation, Sierra Pacific Resources. An additional investment of $28
million from the parent company accounts for a net increase in common
shareholder's equity of $33.0 million.
In March and April, 1996, the Company issued $30 million principal amount of
Medium-Term Notes, Series C. In July 1996, the Company issued an additional $30
million principal amount of its $80 million Medium-Term Notes, Series C. To
date, an aggregate of $60 million of Medium-Term Notes, Series C, has been
issued.
On June 3, 1996, the Company redeemed the remaining 408,000 shares of Series
G 8.24% Preferred Stock at par value for $20.4 million.
On July 29, 1996, Sierra Pacific Power Capital I, a wholly owned subsidiary
of the Company, issued 1.94 million shares of 8.60% Trust Originated Preferred
Securities with a total liquidation value of $48.5 million. For further
discussion of Trust Originated Preferred Securities refer to "Note 3. PREFERRED
STOCK" ON PAGE 6.
CONSTRUCTION PROGRAM AND REGULATORY PROCEEDINGS
- -----------------------------------------------
The Company's construction program and capital requirements for the period
1996-2000 were originally discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995. Estimated cash construction expenditures
for 1996 and 1997-2000 are $196.7 million and $494.8 million, respectively. As
of September 30, 1996, $137.0 million (69.6%) had been expended of the amount
projected for 1996. Of this amount, approximately 33.1% was provided by
internally-generated funds.
Alturas Intertie
- ----------------
This 345 kV line will originate at the Bonneville Power Administration
transmission line west of the northeastern California town of Alturas. It will
extend south some 165 miles to an existing Company substation in Reno. In
January 1996, the California Public Utilities Commission certified the final
Environmental Impact Report/Statement (EIR/S) prepared for the project and
granted the Company a Certificate of Public Convenience and Necessity, which
recognizes the need for and benefit of the project.
In February 1996, the Bureau of Land Management (BLM), the Federal Lead
Agency, issued a positive Record of Decision for the project approving the
issuance of a right-of-way grant for approximately 70 miles of BLM land and
confirming that the EIR/S for the project meets the requirements of the National
Environmental Protection Act. The Toiyabe National Forest issued a Record of
Decision for a "no-action" alternative for eight miles of Forest Service land in
Washoe County, Nevada. The Washington D.C. Office of the National Forest
Service has ordered this decision withdrawn. The Company, Toiyabe National
Forest, and Modoc National Forest are continuing to work toward a mutually
agreeable solution for this project. On April 30, 1996, the Company appeared
before the Washoe County Commission and was granted a Special Use Permit for the
Alturas Project.
11
<PAGE>
The Public Service Commission of Nevada (PSCN) hearings were also held in
February 1996, as required under the Nevada Utility Environmental Protection Act
(UEPA). A conditional permit to construct was issued by the PSCN on June 13,
1996. The permit is conditioned upon the Company obtaining permits from
entities such as the Forest Service and the Truckee Meadows Regional Planning
Commission. This decision affirms the need for the line and grants conditional
approval under UEPA. To date, the Company has been unable to successfully
obtain permits from the Regional Planning Commission and the U.S. Forest
Service. The Company appeared before the Regional Planning Governing Board on
October 10, 1996. The Board remanded the project to the local governing bodies
for further review. Some level of risk exists that litigation may be necessary
to obtain these permits and/or that the project will be unable to receive the
necessary permits to proceed as currently proposed. This could further delay the
project and increase its cost. Assuming the Company obtains the required
permits by Spring, 1997, the Alturas line is expected to be operational by the
Winter of 1997-98, and should provide greater system reliability and additional
supplies of electricity from hydroelectric power plants in the Pacific
Northwest. The current projected cost of the Alturas Intertie Project is $120
million of which $64 million has already been expended as of September 30, 1996.
Pinon Pine
- -----------
In August, 1992, the Company executed a cooperative agreement with the
U.S. Department of Energy (DOE) for the construction of a coal-gasification
power plant. The project, known as the Pinon Pine Power Project (Pinon) was
selected by the DOE for funding under the fourth round of the Federal Clean Coal
Technology Program. This clean coal integrated gasification combined-cycle
power plant will be fully capable of operating on coal, natural gas, and,
potentially, other fuels. The current rating is 106 megawatts. The DOE is
providing funding for approximately half of the construction cost and half of
the operating and fuel expenses for the first four years of operation.
Currently, the DOE has committed $154 million of funding for the project. The
DOE has authority under the Clean Coal Technology Program to fund up to $168
million. Any costs over $168 million are the responsibility of the Company.
Estimated construction costs for Pinon Pine, including the DOE's portion,
increased from approximately $220 to $241 million. Pinon will be the first
project using this new technology at a commercial megawatt level. Part of the
cost increase was due to the nature of this project and the new technology
needed to support this one-of-a-kind project, which increased its scope and
complexity from that which was originally anticipated.
Construction began on the project in February, 1995, following resource
plan approval by the Public Service Commission of Nevada and the receipt of all
permits and other approvals. Engineering, procurement and construction
activities are underway. The combined cycle combustion turbine is currently
undergoing testing and is scheduled to be in service November, 1996. The coal
gasifier is anticipated to be completed in March, 1997. On August 20, 1996,
Federal legislation was signed extending the required in-service date for
alternative fuel (syngas) produced by the coal gasifier to June 30, 1998, in
order to be eligible for tax credits under Section 29 of the Internal Revenue
Code.
Pinon Pine Corporation and Pinon Pine Investment Company, subsidiaries of
the Company, own 25% and 75%, respectively, of a 38% partnership interest in
Pinon Pine Company LLC (The LLC) with General Electric Capital Corporation
(GECC) holding a 62% interest. The LLC was formed to take advantage of federal
income tax credits associated with the alternative fuel (syngas) produced by the
coal gasifier and available under Section 29 of the Internal Revenue Code.
12
<PAGE>
Water Treatment Facilities Construction
- ---------------------------------------
The Safe Drinking Water Act (SDWA) amendments passed by Congress in 1986
have significantly influenced the cost of the Company's treatment plant
facilities. The Company was officially notified in 1991 by the Nevada State
Health Division that, under the requirements of the Surface Water Treatment Rule
(SWTR) of the SDWA, filtration of water at its non-filtered plants would be
required. The Company submitted and received approval of a filtration
compliance plan with the Nevada State Health Division that provided for a three-
year extension to June 1996.
In order to comply with SWTR filtration requirements and meet projected
capacity demands, the Company has completed construction of the second phase of
the Chalk Bluff treatment plant at a total cost of $88 million for the two
phases as of June 30, 1996. The first phase was completed in Spring of 1994
with a capacity of 27 million gallons per day (MGD) using high rate filtration
as approved by the Nevada State Health Division in 1995. The second phase of
the facility was completed in May, 1996 providing a total production capacity of
69 MGD. Improvements to the Company's Glendale treatment plant were also
completed in June, 1996. Completion of these projects results in full
compliance with the SWTR requirements.
Hunter Creek, one of two chemical-process plants, was removed from
operation as a treatment facility in October, 1995, and has been converted to a
30 million gallon covered storage facility as of April, 1996. The other plant,
Highland, was removed from operation as a treatment facility in June, 1996, and
is being converted to a covered treated water storage facility by April, 1997.
Combined, Hunter Creek and Highland will provide 50 million gallons of treated
water storage for fire protection, operating storage, and emergency
requirements.
The Company uses groundwater from twenty-four supply wells. A manmade
contaminant tetrachloroethylene (PCE) has been found in five of these wells in
levels exceeding drinking water standards. Treatment equipment with a cost of
$2.2 million has been installed on two of the wells, and they have been returned
to operation. The three other wells have been removed from operation until the
Company completes its investigation concerning the contamination. On March 29,
1996, the Company entered into a Bilateral Compliance Agreement with the Nevada
State Health Division which requires these wells to be in compliance with
drinking water standards by October, 1998. The Company will determine the
economic viability of treatment remediation as compared to other alternatives.
The Company continues its involvement in a cooperative remediation effort with
public officials to determine the source and extent of the contaminant and to
develop a plan to abate contamination on an area-wide basis. Washoe County has
the ability to create a special remediation district to help cover the cost of
this effort. The development of the remediation plan is projected to be
completed in 1997.
State Regulatory Commissions
- ----------------------------
The Company's planned merger with The Washington Water Power Company
resulted in the Company entering into stipulations with the California Public
Utilities Commission in June, 1996. Among other things, the Company agreed with
California to reduce rates by $2.3 million annually by setting all balancing
account rates to zero and to set all balancing account balances to zero.
Additionally, the Company was to file a General Rate Case, including Performance
Based Ratemaking Mechanism, within 60 days of the end of the month in which the
merger was terminated. The rate reduction and the setting of the balances to
zero was implemented in June, 1996. The Company has requested an extension to
January 1, 1997, of filing requirements resulting from the termination of the
merger. Commission staff has granted this request.
13
<PAGE>
As required by a September, 1994 Nevada stipulation which froze the
Company's electric, gas and water rates for approximately two years, the Company
filed with the Public Service Commission of Nevada (PSCN) an application to
decrease deferred electric energy rates $8.2 million and increase purchased gas
rates $1.3 million, effective January 1, 1997. The deferred energy and
purchased gas filings were accompanied by a motion to adopt the rate plan
previously approved by the PSCN in the proceeding related to the Company's
merger with The Washington Water Power Company. If approved, the rate plan
would include a one-time refund of $9 million to Nevada electric customers, a
one-time refund of $4 million to Nevada gas customers, a rate freeze for
electric and gas rates through December 31, 1999, and a 50/50 sharing between
customers and shareholders of utility earnings over 12 percent. In addition,
the deferred energy and purchased gas filings described above would be
withdrawn. The motion has been set for oral argument on December 6, 1996.
On June 28, 1996, the PSCN issued an order in its electric restructuring
investigation which approved forwarding to the Assembly Concurrent Resolution
(ACR) 49 Legislative Subcommittee a report entitled "The Structure of Nevada's
Electric Industry: Promoting the Public Interest." That report concluded that
the PSCN should continue to acquire information relating to past costs,
uneconomic bypass, unbundling and the potential for anticompetitive practices.
Workshops are continuing to be scheduled to investigate these and other issues
related to Nevada's electric industry. The Sub-committee is scheduled to issue
a report to the Legislature for consideration during the 1997 legislative
session.
Federal Energy Regulatory Commission
- ------------------------------------
On April 24, 1996, the FERC issued its final rules concerning transmission
open access and stranded cost recovery. The rules were finalized in Orders 888
and 889. The rules required transmission owning utilities to file open access
transmission tariffs and rates. The Company filed open access transmission
tariffs on July 9, 1996. The tariffs were accepted for filing and implemented
subject to refund pending the outcome of the FERC review.
On September 25, 1996, the FERC issued an order setting the Company's
proposed transmission rates for hearing. A prehearing conference was convened
on October 10, 1996, when a procedural schedule was set. This schedule requires
the Company to file additional information by December 12, 1996, and a hearing
on the rates will begin on June 17, 1997.
Under Order 889 the Company is required to obtain or develop an electronic
bulletin board (OASIS) to facilitate the purchase and sale of transmission
service. The service was originally scheduled for implementation by November 1,
1996. However, the FERC extended the in-service date until January 3, 1997.
Coincidental to the issuance of Order 888, the FERC issued a Notice of
Proposed Rule (NOPR) requesting comments on a proposed rule to require the
transmission providers to sell capacity reservations on their systems by
December, 1997. The Company submitted comments on October 21, 1996. The
proposed rules also require that the transmission provider must reserve capacity
on its own system to serve its native load customers. The Company is currently
reviewing the proposed rules and formulating comments.
14
<PAGE>
OTHER BUSINESS
- --------------
Merger
- ------
On June 27, 1994, the Company, SPR, The Washington Water Power Company
(WWP) and Altus Corporation (Altus), entered into an Agreement and Plan of
Merger and Reorganization (Merger Agreement) in which WWP, SPR and the Company
would be merged into Altus. Under the terms of the Merger Agreement, if the
merger was not consummated on or before June 27, 1996, any party, by providing
written notice to the other, could terminate the Merger Agreement provided that
party was not then in breach of any obligation under the Agreement which caused
or resulted in the failure of the Merger Agreement to be consummated by that
date.
On June 28, 1996, WWP provided written notice to the Company and SPR that it
was terminating the Merger Agreement. Since that time, petitions to withdraw
merger applications have been filed by one or more parties in all jurisdictions
having approval jurisdiction over the merger.
Electric Business
- -----------------
In its 1995 Form 10-K, the Company discussed entering into long-term
contracts with its customers. Subsequently, tailored contracts and agreements
have been developed to provide revenue guarantees (minimum annual bill) and
termination charge security for capital investments made on behalf of individual
customers. Contract provisions mitigate the risk of extending service to
customers, primarily large mining customers, and are designed to recover over
the life of the agreements customer-specific investments in facilities.
Contract provisions for minimum bills are based on customers attaining minimum
annual demand and load factors. Contract provisions for termination charges
include recovery of all costs for customer-specific facilities and, for the
first five years under the contract, recovery of up to two years of minimum
bills. To date, the Company has negotiated six such contracts, all of which
have been approved by the PSCN. Additionally, two more contracts are pending
approval with the PSCN. These six long term electric service contracts represent
242 MW under contract with average annual sales of 1,786,709 Mwh.
The Company is continuing to negotiate with other existing customers to
enter into long term service contracts.
Water Business
- --------------
During 1995, comprehensive legislation was adopted by the Nevada
Legislature which provides for regional planning and cooperative management of
all aspects of water in the region. The Regional Water Planning Commission was
created to develop an integrated water plan. The Company and Washoe County
signed an agreement in July, 1996, which provides methodology to determine
retail service area boundaries and establishes the Company as the wholesale
purveyor to the region. These cooperative efforts between the Company and local
agencies will help ensure regional planning and integrated water service. The
agreement has been sent to the PSCN for approval.
Independent Grid Operator
- -------------------------
On July 12, 1996, the Company and six other northwest electric companies
signed a memorandum of understanding to create an independent transmission grid
operator called "IndeGo" to insure non-discriminatory, open access to electric
transmission facilities in compliance with recent FERC rulings. The group plans
to file the IndeGo proposal with FERC by December 31, 1996, and anticipates that
operation would commence by July, 1997. This memorandum of understanding
creates a mechanism to help facilitate the operation of an evolving competitive
electric power market. The seven utility companies will be able to increase the
efficiency of transmission operations and provide improved access for all users
of the regional transmission system.
15
<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 are denoted with an asterisk (*). The
other listed exhibits have been filed with the Securities and Exchange
Commission during the period covered by this Report and are incorporated
herein by reference.
*(15) Letter of independent accountants 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 months period ended September 30,
1996, for Sierra Pacific Power Company and is qualified in its
entirety by reference to such financial statements.
(b) Reports on Form 8-K
Current report on Form 8-K dated August 2, 1996 relating to final forms of
exhibits to Sierra Pacific Power Capital I/the Company's Registration
Statement (No. 333-4032) in connection with its offering of $48.5 million of
Preferred Securities of Trust, guarantees of the Preferred Securities by the
Company and certain back-up undertakings, and the junior subordinated
debentures of the Company.
16
<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 7, 1996 By: /s/ Malyn K. Malquist
------------------- -------------------------
Malyn K. Malquist
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 7, 1996 By: /s/ Lynn M. Miller
-------------------- -------------------------
Lynn M. Miller
Controller
(Principal Accounting Officer)
17
<PAGE>
EXHIBIT (15)
COOPERS COOPERS & LYBRAND L.L.P.
& LYBRAND
a professional services firm
November 5, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: SIERRA PACIFIC POWER COMPANY
REGISTRATION STATEMENTS ON FORM S-3 AND S-8
We are aware that our report dated October 28, 1996, on our review of the
interim financial information of Sierra Pacific Power Company for the period
ended September 30, 1996, and included in the Company's quarterly report on Form
10-Q is incorporated by reference in the registration statements on Form S-3 of
Sierra Pacific Resources for the Company's 2,000,000 shares of continuously
offered stock plan (File No. 33-90284) and the Common Stock Investment Plan
(File No. 333-4374), in the registration statements on Form S-8 of Sierra
Pacific Resources for the Employees' Stock Purchase Plan and Employees' Stock
Ownership Plan (File No. 2-92454), Executive Long-term Incentive Plan (File No.
33-87646) and the Non-Employee Director Stock Plan (File No. 33-48152), and in
the registration statement on Form S-3 of Sierra Pacific Power Company for
Series C Medium Term Notes (File No. 333-1374) and for the Company's 1,940,000
shares of Trust Originated Preferred Securities (File No. 333-4032). Pursuant
to Rule 436 (c) under the Securities Act of 1933, this report should not be
considered a part of the registration statement prepared or certified by us
within the meaning of Sections 7 and 11 of that Act.
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand international, a
limited liability association incorporated in Switzerland.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FILED ON FORM 10-Q FOR THE NINE MONTHS PERIOD
ENDED SEPTEMBER 30, 1996 FOR SIERRA PACIFIC POWER COMPANY AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,513,718
<OTHER-PROPERTY-AND-INVEST> 22,425
<TOTAL-CURRENT-ASSETS> 113,178
<TOTAL-DEFERRED-CHARGES> 148,681
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,798,002
<COMMON> 4
<CAPITAL-SURPLUS-PAID-IN> 510,434
<RETAINED-EARNINGS> 89,923
<TOTAL-COMMON-STOCKHOLDERS-EQ> 600,361
48,500
73,115
<LONG-TERM-DEBT-NET> 602,393
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 26,000
<LONG-TERM-DEBT-CURRENT-PORT> 423
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 447,210
<TOT-CAPITALIZATION-AND-LIAB> 1,798,002
<GROSS-OPERATING-REVENUE> 468,213
<INCOME-TAX-EXPENSE> 33,282
<OTHER-OPERATING-EXPENSES> 350,997
<TOTAL-OPERATING-EXPENSES> 384,279
<OPERATING-INCOME-LOSS> 83,934
<OTHER-INCOME-NET> 4,331
<INCOME-BEFORE-INTEREST-EXPEN> 88,265
<TOTAL-INTEREST-EXPENSE> 28,065
<NET-INCOME> 60,200
5,646
<EARNINGS-AVAILABLE-FOR-COMM> 54,524
<COMMON-STOCK-DIVIDENDS> 50,000
<TOTAL-INTEREST-ON-BONDS> 1,162
<CASH-FLOW-OPERATIONS> 95,800
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Sierra Pacific Power Company is a wholly owned subsidiary of Sierra Pacific
Resources and as such its common stock is not publicly traded. SPPC does not
report EPS information.
</FN>
</TABLE>
