<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
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) 689-5400
(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 August 12,1997
Common Stock, $3.75 par value 1,000 Shares
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<PAGE>
SIERRA PACIFIC POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
CONTENTS
<TABLE>
<CAPTION> PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
Report of Independent Accountants................................. 3
Condensed Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996.......................................... 4
Condensed Consolidated Statements of Income - Three-Months
and Six-Months Ended June 30, 1997 and 1996................ 5
Condensed Consolidated Statements of Cash Flows - Six-Months
Ended June 30, 1997 and 1996............................... 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................................................. 16
ITEM 5. OTHER INFORMATION................................................. 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 16
Signature Page............................................................ 17
</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 June 30, 1997, and the related
condensed consolidated statements of income and cash flows for the three-month
and six-month periods then ended. The condensed interim financial statements as
of June 30, 1996, and for the three-month and six-month periods then ended were
reviewed by other accountants whose report dated July 26, 1996, stated that they
were not aware of any material modifications that should be made to those
statements in order for them to be in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company'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, 1996, 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 February 14, 1997, 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, 1996,
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
August 7, 1997
3
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SIERRA PACIFIC POWER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Utility Plant at Original Cost:
Plant in service $2,006,619 $1,984,781
Less: accumulated provision for depreciation 635,418 606,406
---------- ----------
1,371,201 1,378,375
Construction work-in-progress 204,070 164,835
---------- ----------
1,575,271 1,543,210
---------- ----------
Investments in subsidiaries and other property, net 22,767 22,394
---------- ----------
Current Assets:
Cash and cash equivalents (847) 890
Accounts receivable less provision for uncollectible accounts $1,729 at
June 30, 1997 and $2,196 at December 31, 1996 81,082 94,782
Materials, supplies and fuel, at average cost 25,035 27,586
Other 4,651 3,948
---------- ----------
109,921 127,206
---------- ----------
Deferred Charges:
Regulatory tax asset 67,625 67,667
Other regulatory assets 65,070 67,319
Other 19,025 14,832
---------- ----------
151,720 149,818
---------- ----------
$1,859,679 $1,842,628
========== ==========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholder's equity $ 618,854 $ 606,896
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 607,080 607,287
---------- ----------
1,347,549 1,335,798
---------- ----------
Current Liabilities:
Short-term borrowings 71,000 38,000
Current maturities of long-term debt and preferred stock 446 15,434
Accounts payable 40,475 53,998
Accrued interest 6,505 6,178
Dividends declared 19,365 17,365
Accrued salaries and benefits 16,760 11,300
Other current liabilities 16,377 21,560
---------- ----------
170,928 163,835
---------- ----------
Deferred Credits:
Accumulated deferred federal income taxes 161,990 162,438
Accumulated deferred investment tax credit 40,850 41,835
Regulatory tax liability 41,750 42,870
Customer advances for construction 38,375 39,429
Other 58,237 56,423
---------- ----------
341,202 342,995
---------- ----------
$1,859,679 $1,842,628
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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SIERRA PACIFIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
--------- ------ ------ -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Electric $130,603 $124,601 $265,258 $252,358
Gas 11,803 11,267 39,980 36,334
Water 12,411 11,508 21,437 20,838
-------- -------- -------- --------
154,817 147,376 326,675 309,530
-------- -------- -------- --------
OPERATING EXPENSES:
Operation:
Purchased power 29,600 29,853 61,478 61,022
Fuel for power generation 26,838 24,539 49,645 48,402
Gas purchased for resale 6,405 5,091 20,337 18,045
Other 29,686 32,870 61,673 62,957
Maintenance 5,428 4,610 11,477 9,087
Depreciation and amortization 15,447 14,288 30,825 28,350
Taxes:
Income taxes 10,068 8,408 22,911 20,702
Other than income 4,708 4,537 9,400 9,120
-------- -------- -------- --------
128,180 124,196 267,746 257,685
-------- -------- -------- --------
OPERATING INCOME 26,637 23,180 58,929 51,845
-------- -------- -------- --------
OTHER INCOME:
Allowance for other funds used during construction 1,494 1,357 2,928 2,020
Other income - net 309 628 562 939
-------- -------- -------- --------
1,803 1,985 3,490 2,959
-------- -------- -------- --------
Total Income 28,440 25,165 62,419 54,804
-------- -------- -------- --------
INTEREST CHARGES:
Long-term debt 10,084 9,159 20,030 17,694
Other 1,162 1,262 1,962 2,398
Allowance for borrowed funds used during construction and
capitalized interest (1,186) (1,152) (2,354) (1,299)
-------- -------- -------- --------
10,060 9,269 19,638 18,793
-------- -------- -------- --------
INCOME BEFORE OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES 18,380 15,896 42,781 36,011
Preferred dividend requirements of Company-obligated
mandatorily redeemable preferred securities (1,043) -- (2,086) --
-------- -------- -------- --------
INCOME BEFORE PREFERRED DIVIDENDS 17,337 15,896 40,695 36,011
Preferred dividend requirements (1,365) (1,505) (2,730) (3,290)
-------- -------- -------- --------
INCOME APPLICABLE TO COMMON STOCK $ 15,972 $ 14,391 $ 37,965 $ 32,721
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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SIERRA PACIFIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
SIX-MONTHS ENDED
JUNE 30,
----------------
1997 1996
------ -----
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before preferred dividends $ 40,695 $ 36,011
Non-cash items included in income:
Depreciation and amortization 30,825 28,350
Deferred taxes and deferred investment tax credit (2,509) (8,111)
AFUDC and capitalized interest (5,282) (3,319)
Early retirement and severance amortization 2,446 1,059
Other non-cash (1,706) 9,399
Changes in certain assets and liabilities:
Accounts receivable 13,700 17,680
Materials, supplies and fuel 2,551 (267)
Other current assets (703) (2,401)
Accounts payable (13,524) (46,343)
Other current liabilities 116 3,779
Other - net (2,173) 6,085
-------- --------
Net Cash Flows From Operating Activities 64,436 41,922
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to utility plant (73,521) (89,470)
Non-cash charges 5,055 3,968
Net customer refunds and contributions in aid
construction 9,889 4,659
-------- --------
Net Cash Used In Investing Activities (58,577) (80,843)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 34,349 39,862
Proceeds from issuance of long-term debt -- 30,000
Reduction of preferred stock -- (20,400)
Reduction of long-term debt (15,215) (220)
Decrease in funds held in trust -- 9,175
Investment from the parent company 10,000 15,000
Dividends paid (36,730) (34,570)
-------- --------
Net Cash (Used In) Provided From Financing Activities (7,596) 38,847
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,737) (74)
Beginning balance in Cash and Cash Equivalents 890 1,373
-------- --------
Ending balance in Cash and Cash Equivalents $ (847) $ 1,299
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During Period For:
Interest $ 23,119 $ 19,829
Income Taxes $ 54,575 $ 23,350
</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 for the year ended December 31, 1996.
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 six-month periods
ended June 30, 1997 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 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 1997 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. LONG TERM DEBT
- -----------------------
The Company redeemed $15 million 6.5% First Mortgage Bonds on June 30,
1997.
NOTE 3. RECENT PRONOUNCEMENTS OF THE FASB
- ------------------------------------------
In addition, the FASB issued SFAS 129 entitled "Disclosure of
Information about Capital Structure" in February 1997. This statement
establishes standards for disclosing information about an entity's capital
structure. The Company already complies with SFAS 129 and foresees no material
impact on the financial statements in adopting the statement for periods ending
after December 15, 1997.
On June 30, 1997, the FASB issued SFAS 130 entitled "Reporting
Comprehensive Income". This statement requires companies to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position, and is effective for financial statements issued for fiscal
years beginning after December 15, 1997. Management does not believe this new
FASB will have a material impact on the financial statements of the Company.
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 not
determined the effect of this statement on its financial statement disclosure.
7
<PAGE>
NOTE 4. REGULATORY ACCOUNTING
- ------------------------------
The Company's rates are currently subject to the approval of the Public
Utilities Commission of Nevada (PUCN) and are designed to recover the cost of
providing generation, transmission and distribution services to its customers.
As a result, the company qualifies for the application of SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation". This statement
recognizes that the rate actions of a regulator can provide reasonable assurance
of the existence of an asset and requires the capitalization of incurred costs
that would otherwise be charged to expense where it is probable that future
revenue will be provided to recover these costs. SFAS No. 101, "Regulated
Enterprises-Accounting for the Discontinuation of Application of FASB Statement
No. 71" requires that an enterprise whose operations cease to meet the
qualifying criteria of SFAS 71 should discontinue the application of that
statement by eliminating the effects of any actions of regulators that had been
previously recognized.
As discussed under Regulatory Proceedings, legislation has been passed
in California and Nevada which will effectively define electric generation as a
competitive service to be provided by any qualified generator or marketer. As a
result of this legislation the generation operations of the Company may in the
future no longer qualify for application of SFAS 71. The total impact of the new
legislation on the Company's reporting practices is not currently determinable,
since only general guidelines currently exist. However, the Company believes
that it continues to qualify for application of SFAS 71.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
Total operating revenues for the three-months and six-months ended June
30, 1997 increased by 5.0% and 5.5% ($7.4 million and $17.1 million) over the
comparable periods in 1996 due to increased sales resulting from overall
customer growth and the previously accrued refund provision. Listed below are
the revenues and revenue margin by division: (dollars in thousands)
<TABLE>
<CAPTION>
THREE-MONTHS SIX-MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
-------------------- --------------------
<S> <C> <C> <C> <C>
Operating Revenues:
Electric $130,603 $124,601 $265,258 $252,358
Gas 11,803 11,267 39,980 36,334
Water 12,411 11,508 21,437 20,838
-------- -------- -------- --------
Total Revenues $154,817 $147,376 $326,675 $309,530
-------- -------- -------- --------
Energy Costs:
Electric $ 56,438 $ 54,392 $111,123 $109,424
Gas 6,405 5,091 20,337 18,045
-------- -------- -------- --------
Total Energy Costs $ 62,843 $ 59,483 $131,460 $127,469
-------- -------- -------- --------
Revenue Margin $ 91,974 $ 87,893 $195,215 $182,061
======== ======== ======== ========
Revenue Margin by Division:
Electric $ 74,165 $ 70,209 $154,135 $142,934
Gas 5,398 6,176 19,643 18,289
Water 12,411 11,508 21,437 20,838
-------- -------- -------- --------
Total $ 91,974 $ 87,893 $195,215 $182,061
======== ======== ======== ========
</TABLE>
Energy costs are comprised of purchased power, fuel for power
generation and gas purchased for resale. Average energy costs for the three-
months and six-months ended June 30, 1997 and 1996 are set forth below.
9
<PAGE>
<TABLE>
<CAPTION>
THREE-MONTHS SIX-MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------------- ----------------
1997 1996 1997 1996
----------------- ----------------
<S> <C> <C> <C> <C>
Average cost per KWH of 3.46c 2.61c 3.44c 2.83c
purchased power
Average cost per KWH of 2.18c 2.30c 2.12c 2.23c
generated power
Average costs per therm of 30.08c 26.41c 28.75c 27.33c
gas purchased for resale
</TABLE>
Megawatt-hours (MWH) purchased decreased by 25.3% and 17.0% (289,631 MWH and
366,038 MWH) for the three-month and six-month periods ended June 30, 1997
compared to the same periods in 1996. The total cost of purchased power
decreased by .8% and increased by .7% ($.2 million and .5 million) for the
three-months and six-months ended June 30, 1997, compared to the same periods in
1996. The decrease for the three-month period is due to increased internal
generation as a result of higher prices for purchased power. The increase for
the six-month period is due to the lack of available lower priced hydro-
generated energy in the Pacific Northwest.
Megawatt-hours (MWH) generated increased by 15.2% and 9.7% (162,859 MWH and
207,116 MWH) for the three-months and six-months ended June 30, 1997, over the
comparable 1996 periods due to cheaper fuel costs for generation coupled with
increased customer demand due to customer growth and the lack of available
hydropower. The total cost of fuel for power generation increased by 9.4% and
2.6% ($2.3 million and $1.2 million) reflecting increased generation. The cost
per KWH generated decreased by 5.2% and 4.9%(.12c and .11c) for the three-months
and six-months ended June 30, 1997 compared to the same periods in 1996.
For the three-months and six-months ended June 30, 1997, the Company
increased the therms of gas purchased for resale by 10.5% and 7.2% (2,024,313
and 4,723,258 therms) over the comparable periods in 1996. The total cost
during the same period increased 25.8% and 12.7% ($1.3 million and $2.3 million)
due to per-therm cost increases of 13.8% and 5.2% (.4c and .1c) and customer
growth.
Other operations expenses decreased 9.7% and 2.0% ($3.2 million and $1.3
million) for the three-months and six-months ended June 30, 1997, compared to
the same periods in 1996. This was primarily due to the expensing of remaining
merger costs in 1996 as a result of termination of a proposed merger.
Maintenance expenses increased 17.7% and 26.3% ($.8 million and 2.4 million)
for the three-months and six-months ended 1997 over 1996 due to flood-related
expenses for overhead and underground lines, mains and existing structures and
increased labor for planned maintenance outages at the Valmy Plant in 1997.
Depreciation and amortization expenses for the three months and six-months
ended June 30, 1997 increased 8.1% and 8.7% ($1.2 million and $2.5 million) due
to increases in utility plant. The most notable increases were attributable to
the Chalk Bluff water treatment facility and the Pinon Pine combined cycle
combustion turbine generator.
Income taxes increased for the three-months and six-months ended June 30,
1997, over the comparable 1996 periods primarily due to increased income before
income taxes. The increase in the effective tax rate for the three-month period
ended June 30, 1997 over the comparable period in 1996 was as a result of the
effects of a proposed merger termination in June 1996. Income taxes reflected in
operating income and other income-net are summarized below: (dollars in
thousands)
10
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<TABLE>
<CAPTION>
THREE-MONTHS SIX-MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
------------------- -------------------
<S> <C> <C> <C> <C>
Currently payable $11,619 $10,671 $24,680 $28,268
Deferred taxes - net (1,434) (2,103) (1,525) (7,126)
Investment tax credit - net (492) (492) (985) (985)
------------------- --------------------
Total income taxes $ 9,693 $ 8,076 $22,170 $20,157
=================== ===================
Income taxes charged to:
Operations $10,068 $ 8,408 $22,911 $20,702
Other income - net (375) (332) (741) (545)
------------------- -------------------
Total income tax expense $ 9,693 $ 8,076 $22,170 $20,157
=================== ===================
Income before income taxes and
preferred dividend
requirements $27,030 $23,972 $62,865 $56,168
=================== ===================
Effective tax rate 35.9% 33.7% 35.3% 35.9%
=================== ===================
</TABLE>
Allowance for funds used during construction (AFUDC) and capitalized
interest increased by 6.8% and 59.1% ($.2 million and $2.0 million) for the
three-months and six-months ended June 30, 1997, compared to the corresponding
period in 1996. This is due to an increase in construction work-in-progress
(CWIP) from the prior year and an increase in the capitalization rates used.
Most notable is the CWIP associated with the Alturas Intertie of $75.0 million
at June 30, 1997 compared to $46.1 million at March 31, 1996. In 1996, the CWIP
balance had a larger percentage of water projects that used a lower AFUDC rate
than electric projects.
Other income - net decreased 51% and 40% for the three-months and six-
months ended June 30, 1997 ($.3 million and $.4 million) compared to comparable
periods in 1996. The reduction resulted from the sale of land owned by the
Company in 1996 ($.4 million) and recording of a provision for asset devaluation
on equipment owned by the Company in 1997 ($.3 million).
Interest on long-term debt increased 10.1% and 13.2% ($.9 million and $2.3
million) for the three-months and six-months ended June 30, 1997, due to
interest expenses associated with the issuance of $80.0 million medium-term
notes, Series C, in 1996. Other interest expense decreased 7.9% and 18.2% ($.1
million and $.4 million) for the three-months and six-months ended June 30, 1997
compared to 1996. The reduction is due primarily to a reversal of previously
accrued interest on a refund provision in 1997 compared to 1996.
Due to the issuance in the third quarter of 1996 of 8.6% trust originated
preferred securities by the Company's subsidiary trust, Sierra Pacific Power
Capital I, the preferred dividends on mandatorily redeemable preferred
securities increased $1.0 million and $2.1 million for the three-months and six-
months ended June 30, 1997. No such securities were outstanding for the same
period in 1996.
Preferred dividend requirements for all other preferred securities
decreased 9.3% and 17.0% ($.1 million and $.6 million) for the three-months and
six-months ended June 30, 1997 compared to the comparable periods in 1996, due
to the redemption of Series G preferred stock in June 1996, by the Company.
11
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------
During the first six months of 1997, the Company earned $40.7 million in
income before preferred dividends, declared $2.7 million in dividends to holders
of its preferred stock and declared $36.0 million in common stock dividends to
its parent, Sierra Pacific Resources.
In February 1997, the Public Utilities Commission of Nevada (PUCN) approved
a decrease of $7.1 million in the Company's annual electric rates. For further
discussion of the regulatory action, refer to the Company's 1996 Annual Report
on Form 10-K.
On June 30, 1997 the Company redeemed $15 million 6.5% First Mortgage Bonds.
CONSTRUCTION EXPENDITURES AND FINANCING
- ---------------------------------------
The Company's construction program and capital requirements for the period
1997-2001 were originally discussed in the Company's 1996 Annual Report on Form
10-K. Of the amount projected for 1997, as of June 30, 1997, $58.6 million
(43.2%) had been spent. Of this amount, approximately 47.3% was provided by
internally-generated funds.
ALTURAS INTERTIE
- ----------------
The Company is currently developing the Alturas Intertie transmission line
in order to better serve existing native load and new customers and to
significantly increase the Company's access to lower cost resources. On May 14,
1997 the Company received approval from the Regional Planning Governing Board
that the Alturas Project is in conformance with the Truckee Meadows Regional
Plan. This was the final approval needed from the local agencies in Reno and
Washoe County.
The discovery phase for acquiring the Utility Environmental Protection Act
Permit from the PUCN is ongoing and the procedural schedule has been set. The
hearings will commence on August 12, 1997. A decision from the Commission is
expected in September 1997.
In a letter to the Company dated July 3, 1997, the Modoc National Forest
gave clear direction to pursue route segment B for the northern most portion of
the project which would interconnect with the Bonneville Power Administration
transmission system near Alturas, California. This off-forest alternative which
involves private lands was addressed as an alternative in the Environmental
Impact Report/Statement and will require a modification to the Order issued by
the California Public Utilities Commission (CPUC). The Company filed a Petition
for Modification to the Order with the CPUC on July 14, 1997. A decision is
expected from the CPUC in September 1997.
The Company issued invitations to bid to the qualified contractors on July
22, 1997. Construction could begin in October or November 1997 provided the
approvals are received on schedule, with project completion anticipated in late
1998. For further discussion, refer to the Company's 1996 Annual Report on Form
10-K.
PINON PINE POWER PROJECT
- ------------------------
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. This clean coal integrated gasification combined-cycle power plant will
be fully capable of operating on syngas produced from coal, natural gas, and,
potentially, other solid fuels. The project consists of a coal gasification
facility and a Company-owned power island and post-gasification facilities to
clean and partially cool the syngas produced by the gasifier. Estimated
12
<PAGE>
construction, start-up and commissioning costs for Pinon, including the DOE
portion are approximately $283.0 million, which includes permitting, taxes,
start-up, commissioning, operator training, capitalized interest and AFUDC.
Cost increases are primarily attributable to resolving start-up technical issues
and to costs incurred due to the later than originally anticipated in-service
date for the gasification island and post-gasification facilities. Expected DOE
funding for construction, start-up and commissioning costs is $129.4 million.
Construction began on the project in February 1995 with the natural gas fired
portion (combined cycle combustion turbine) completed and placed in service
December 1996. The balance of the plant is expected to be placed in service
late Fall 1997. Based on the currently anticipated in-service date, liquidated
damages based on reduced capacity as discussed in the Company's 1996 Annual
Report on Form 10-K are expected and are currently estimated and reserved at
$1.8 million. For additional information regarding the Pinon Pine Power
Project, refer to the Company's 1996 Annual Report on Form 10-K.
REGULATORY PROCEEDINGS
----------------------
CALIFORNIA MATTERS
- ------------------
On May 6, 1997, the California Public Utilities Commission (CPUC) issued
an order implementing portions of the California restructuring bill signed into
law in September 1996. Beginning January 1, 1998, all investor-owned utilities,
including SPPC, must offer all customers direct access. Under the order,
customers may choose to continue to take service from their incumbent utility at
tariffed rates, purchase energy from marketers or contract directly with a
generator.
On June 27, 1997, the Company filed with the CPUC its transition plan which
addresses the Company's cost recovery and rate unbundling proposal during the
transition period (1998-2001) and contains a description of its transmission
system and constraints. The CPUC has ordered the Company to supplement its plan
by providing information which would conform the Company's transition plans to
the plans filed by Pacific Gas and Electric, Southern California Edison and San
Diego Gas and Electric (Major Utilities).
The Company also filed an implementation plan with the CPUC on July 1,
1997, which describes procedures the Company will use to offer energy to its
direct access customers. The plan is modeled after one developed by the Major
Utilities. The plan provides a framework for: the direct access service
election process; access to customer information; billing; credit and
collections; metering; load profiling; customer service; and procedures for
aggregation and transmission service.
The Company's Customer Education Program (CEP) and budget were approved on
August 1, 1997. A separate CEP was requested on May 30, 1997 because of
differences between the Major Utilities and the Company's implementation of
direct access. For further discussion of regulatory actions, please refer to
California Matters in the Company's 1996 Annual Report on Form 10-K.
- ------------------
The Company is still reviewing the compliance requirements associated with
this bill. At this time, management cannot fully predict how these requirements
will impact approximately 15.2% of the company's electric customers in
California.
NEVADA MATTERS
- --------------
The Nevada Legislature passed Assembly Bill 366 during the 1997 legislative
session. This law provides for restructuring the electric utility industry in
the State of Nevada. Listed below are the key issues addressed by the new law:
. Shareholders must be compensated fully for all costs determined by the
PUCN to be recoverable costs.
. Customers may begin obtaining generation, aggregation and any other
potentially competitive services from an alternative seller no later
than December 31, 1999.
. All "potentially competitive services" (i.e., a component of electric
service which the PUCN determines to be suitable for purchase from
alternative sellers) are deemed to be competitive on October 1, 2001.
13
<PAGE>
. The vertically integrated electric utility shall be designated, through
an affiliate, to provide electric service to customers unable or
unwilling to select an alternative seller.
. Effective December 31, 1999, a vertically integrated electric utility may
not provide "potentially competitive services" except through an
affiliate.
. Rates charged for residential service by the vertically integrated
electric utility must not exceed the rate charged for that service on
July 1, 1997, effective until two years after the date upon which the
regulations for the pricing method for that service are repealed (though
adjustments are permitted for just and reasonable cause).
. All alternative sellers must obtain a license.
Following the enactment of this comprehensive electricity restructuring
law, the Company is evaluating alternatives for providing generation,
transmission and distribution services to its customers. Because many of the
provisions in the new law provide only general guidance, it is not possible at
this time to predict the full ramifications of this legislation to the Company.
However, because the new law defines (to the extent that the PUCN determines)
the Company's electric generation as a "potentially competitive service",
effective December 31, 1999 the Company can no longer generate and sell
electricity directly to its distribution customers but instead will be required
to provide such service through an affiliate of the Company. The Company is
currently exploring the feasibility of releasing this property from the first
mortgage indenture and transferring the assets to an affiliate. No decision has
been made to date regarding the feasibility or desirability of such a transfer.
FEDERAL ENERGY REGULATORY COMMISSION
- ------------------------------------
On July 8, 1996 the Company filed its Open Access Transmission Tariff as
required by the Federal Energy Regulatory Commission (FERC) Order 888. The FERC
accepted the rates contained in the filing, subject to refund and a hearing on
the reasonableness of the rates. On May 28, 1997, SPPC received approval from
the FERC on a settlement between the Company, the Truckee-Donner Public Utility
District (TDPUD) and FERC staff on rates for open access transmission and
ancillary services. On June 25, 1997, to comply with Order 888-A, the Company
filed revised open access transmission tariffs with FERC.
On July 18, 1997, SPPC filed changes to its Open Access tariffs with FERC
clarifying how its limited import capacity should be allocated among network
transmission customers.
On July 1, 1997, the Company filed with FERC a settlement agreement
between Paiute Pipeline (Paiute), the Company, FERC staff and other customers.
This settlement resolves the rate case filed by Paiute on July 1, 1996. In that
general rate case, Paiute requested a 34.3% increase in firm transportation
rates and a 12.9% increase in liquid natural gas storage rates. These rates were
placed into effect January 1, 1997, subject to refund. The settlement agreement
provides for a 16.7% increase in transportation rates and a 5.6% increase in
storage rates. The settlement also provides for a rate freeze through mid-2000
and includes a maximum interruptible transportation rate of 10c/Decatherm. On
July 22, 1997, Paiute filed to place the settlement rates into effect on August
1, 1997 and on July 28, 1997 the Administrative Law Judge certified the
settlement to the Commission. A refund of approximately $1.0 million for January
through July 1997 is forthcoming upon acceptance of the settlement by the
Commission.
On July 22, 1997, a settlement between Northwest Pipeline, FERC staff and
its customers was filed with FERC. The settlement resolves the rate case filed
by Northwest on September 1, 1996. On March 1, 1997, in anticipation of
settlement, rates lower than those filed were placed into effect, subject to
refund. The settlement provides for a rate freeze through mid-2000. The Company
anticipates a refund in excess of $1.0 million.
For further discussion on FERC regulatory matters, refer to the Company's
1996 Annual Report on Form 10-K.
14
<PAGE>
OTHER BUSINESS
--------------
ELECTRIC BUSINESS
- -----------------
The Company's contract with Black Butte Coal Company for coal shipments from
the Black Butte Mine in Wyoming to the Valmy Power Station, is in effect until
June 30, 2007 or until all commitments required by the contract are delivered or
canceled. In keeping with the Company's intent to amortize the contract more
rapidly, the Company paid $3.7 million in June 1997 to buy out coal from the
Black Butte Mine. The Company had accrued a liability of $1.5 million as of
December 31, 1996 and incurred $2.2 million in additional expenses in 1997.
For further discussion of the Black Butte Coal buy out, refer to the
Company's 1996 Annual Report on Form 10-K.
The Company currently has two long-term firm purchased power agreements from
utility suppliers for which it has exercised its termination option.
Termination notice was given to PacifiCorp on April 29, 1997 regarding its
PacifiCorp/Utah agreement for the purchase of 75 Megawatts (MW). The
termination notice provides for termination of the agreement effective April 20,
2000. Additionally, termination notice was given to Tri-State on May 23, 1997
regarding the Tri-State agreement for the purchase of 25 MW. The termination
notice provides for termination of the agreement effective June 1, 1999.
WATER BUSINESS
- --------------
As required by NAC 703.2207, the Company filed a written "Notice of Intent
to File Application for Adjustment in Rates" on July 10, 1997, sixty days prior
to the anticipated filing date. The adjustments to rates are expected to
include additions to rate base, changes in the cost of capital, revised
depreciation rates, changes in the cost of service, changes in rate design and
changes in the levels of administrative and general costs. The filing date is
expected in the third quarter of 1997.
15
<PAGE>
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 is
deemed material to the Company's financial condition.
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 acknowledging awareness
regarding interim financial information of the Company.
*(27) The Financial Data Schedule containing summary financial
information extracted from the condensed consolidated
financial statements filed on Form 10-Q for the six-month
period ended June 30, 1997, for Sierra Pacific Power Company
and is qualified in its entirety by reference to such
financial statements.
(b) Reports on Form 8-K
None
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: August 12, 1997 By /s/ Mark A. Ruelle
--------------- -------------------------------------
Mark A. Ruelle
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: August 12, 1997 By /s/ Mary Simmons
--------------- -------------------------------------
Mary Simmons
Controller
(Principal Accounting Officer)
17
<PAGE>
EXHIBIT (15)
August 11, 1997
Sierra Pacific Power Company
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 condensed interim
financial information of Sierra Pacific Power Company and subsidiaries for the
period ended June 30, 1997, as indicated in our report dated August 7, 1997;
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 June 30, 1997, is
incorporated by reference in Registration Statement No. 333-17041 on Form S-3.
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS FILED ON FORM 10-Q FOR THE SIX-MONTH PERIOD
ENDED JUNE 30, 1997 FOR SIERRA PACIFIC POWER COMPANY AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,575,271
<OTHER-PROPERTY-AND-INVEST> 22,767
<TOTAL-CURRENT-ASSETS> 109,921
<TOTAL-DEFERRED-CHARGES> 151,720
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,859,679
<COMMON> 4
<CAPITAL-SURPLUS-PAID-IN> 528,434
<RETAINED-EARNINGS> 90,416
<TOTAL-COMMON-STOCKHOLDERS-EQ> 618,854
48,500
73,115
<LONG-TERM-DEBT-NET> 607,080
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 71,000
<LONG-TERM-DEBT-CURRENT-PORT> 446
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 440,684
<TOT-CAPITALIZATION-AND-LIAB> 1,859,679
<GROSS-OPERATING-REVENUE> 326,675
<INCOME-TAX-EXPENSE> 22,911
<OTHER-OPERATING-EXPENSES> 244,835
<TOTAL-OPERATING-EXPENSES> 267,746
<OPERATING-INCOME-LOSS> 58,929
<OTHER-INCOME-NET> 3,490
<INCOME-BEFORE-INTEREST-EXPEN> 62,419
<TOTAL-INTEREST-EXPENSE> 19,638
<NET-INCOME> 42,781
4,816
<EARNINGS-AVAILABLE-FOR-COMM> 37,965
<COMMON-STOCK-DIVIDENDS> 36,730
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 64,436
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>SIERRA PACIFIC POWER COMPANY IS A WHOLLY-OWNED SUBSIDIARY OF SIERRA PACFIC
RESOURCES AND, AS SUCH, ITS COMMON STOCK IS NOT PUBLICLY TRADED. SPPC DOES NOT
REPORT EPS INFORMATION.
</FN>
</TABLE>
