<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1997 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) 689-4011
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: none.
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock: Series A, $2.44 Dividend, $50 par value
--------------- Series B, $2.36 Dividend, $50 par value
(Title of Class) Series C, $3.90 Dividend, $50 par value
Sierra Pacific Power Capital Trust I, $2.15 Dividend,
$25 stated value
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 by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
State the aggregate market value of the voting stock held by non-affiliates. As
of March 20, 1998: None
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class
Common Stock, $3.75 par value Outstanding at March 20, 1998: 1,000 shares
================================================================================
<PAGE>
The undersigned registrant hereby amends its Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 by revising Part II Item 8 with the
following two changes. The section has been revised to include a signed audit
report. Also, the Consolidated Statements of Cash Flows have been revised to
delete the item "Non cash charges to utility plant".
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIERRA PACIFIC POWER COMPANY
By: /s/ Mark A. Ruelle
-----------------------------
Mark A. Ruelle
Senior Vice President
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: August 25, 1998
2
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
------
<S> <C>
Reports of Independent Accountants........................................... 39, 40
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996......... 41
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995................................................ 42
Consolidated Statements of Common Shareholder's Equity for the
Years Ended December 31, 1997, 1996 and 1995....................... 43
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995................................... 44
Consolidated Statements of Capitalization as of December 31, 1997
and 1996........................................................... 45
Notes to Consolidated Financial Statements................................... 46-64
</TABLE>
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Sierra Pacific Power Company
Reno, Nevada
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Sierra Pacific Power Company and subsidiaries as
of December 31, 1997 and 1996, and the related consolidated statements of
income, common shareholder's equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. The consolidated financial statements for the year ended
December 31, 1995 were audited by other auditors whose report, dated February
16, 1996, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1997 and 1996 consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE
Reno, Nevada
January 30, 1998
39
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Sierra Pacific Power Company
We have audited the accompanying consolidated balance sheet and consolidated
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 years ended December 31, 1995 and 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, or a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sierra Pacific Power Company
and subsidiaries at December 31, 1995, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
February 16, 1996
40
<PAGE>
SIERRA PACIFIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
ASSETS 1997 1996
------ ----------- -----------
<S> <C> <C>
Utility Plant, at Original Cost:
Plant in service $2,063,269 $1,984,781
Less accumulated provision for depreciation 664,490 606,406
---------- ----------
1,398,779 1,378,375
Construction work in progress 202,036 165,939
---------- ----------
1,600,815 1,544,314
---------- ----------
Other Investments 26,791 21,290
---------- ----------
Current Assets:
Cash and cash equivalents 6,920 890
Accounts receivable less provision for
Uncollectible accounts: 1997 - $1,704; 1996 - $2,196 104,926 94,782
Materials, supplies and fuel, at average cost 25,255 27,586
Other 2,572 3,948
---------- ----------
139,673 127,206
---------- ----------
Deferred Charges:
Regulatory tax asset 66,563 67,667
Other regulatory assets 63,476 67,319
Other 14,924 14,832
---------- ----------
144,963 149,818
---------- ----------
$1,912,242 $1,842,628
========== ==========
CAPITALIZATION AND LIABILITIES
------------------------------
Capitalization:
Common shareholder's equity $ 639,556 $ 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 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 48,500
606,889 607,287
Long-term debt ---------- ----------
1,368,060 1,335,798
---------- ----------
Current Liabilities:
Short-term borrowings 75,000 38,000
Current maturities of long-term debt and redeemable preferred stock 454 15,434
Accounts payable 63,088 53,998
Accrued interest 6,394 6,178
Dividends declared 19,365 17,365
Accrued salaries and benefits 14,978 11,300
Other current liabilities 19,209 21,560
---------- ----------
198,488 163,835
---------- ----------
Deferred Credits:
Accumulated deferred federal income taxes 162,627 162,438
Accumulated deferred investment tax credits 39,873 41,835
Regulatory tax liability 40,767 42,870
Accrued retirement benefits 37,456 28,624
Customer advances for construction 38,478 39,429
Other 26,493 27,799
---------- ----------
345,694 342,995
---------- ----------
Commitments and Contingencies (Notes 5 and 16) $1,912,242 $1,842,628
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
41
<PAGE>
SIERRA PACIFIC POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating Revenues:
Electric $540,346 $507,004 $491,419
Gas 70,675 67,376 62,572
Water 46,519 45,344 43,793
-------- -------- --------
657,540 619,724 597,784
-------- -------- --------
Operating Expenses:
Operation:
Purchased power 130,612 122,272 119,464
Fuel for power generation 100,861 102,601 84,878
Gas purchased for resale 38,127 33,899 35,864
Deferral of energy costs-net 8 (1,736) 9,597
Other 120,600 121,798 117,619
Maintenance 23,387 20,672 18,391
Depreciation and Amortization 64,117 58,118 55,065
Taxes:
Income taxes 40,387 36,241 37,370
Other than income 19,269 18,851 17,725
-------- -------- --------
537,368 512,716 495,973
-------- -------- --------
Operating Income 120,172 107,008 101,811
-------- -------- --------
Other Income:
Allowance for other funds used during construction 5,723 5,231 1,245
Other (expense)income-net 810 867 (3,378)
-------- -------- --------
6,533 6,098 (2,133)
-------- -------- --------
Total Income Before Interest Charges 126,705 113,106 99,678
-------- -------- --------
Interest Charges:
Long-term debt 39,609 37,051 35,326
Other 4,583 4,579 1,781
Allowance for borrowed funds used during
construction and Capitalized Interest (4,785) (3,924) (3,412)
-------- -------- --------
39,407 37,706 33,695
-------- -------- --------
Income Before Mandatorily Redeemable Preferred
Securities 87,298 75,400 65,983
Preferred Dividend Requirements of Company-Obligated
Mandatorily Redeemable Preferred Securities (4,171) (1,749) -
-------- -------- --------
Income Before Preferred Dividends 83,127 73,651 65,983
Preferred Dividend Requirements (5,459) (6,300) (7,374)
-------- -------- --------
Income Applicable to Common Stock $ 77,668 $ 67,351 $ 58,609
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
SIERRA PACIFIC POWER COMPANY
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Common Stock
- ------------
Balance at Beginning of Year
and End of Year $ 4 $ 4 $ 4
Other Paid-In Capital
- ---------------------
Balance at Beginning of Year 518,434 482,434 447,106
Additional investment
by parent company 27,000 36,000 35,328
-------- -------- --------
Balance at End of Year 545,434 518,434 482,434
-------- -------- --------
Retained Earnings
- -----------------
Balance at Beginning of Year 88,458 84,945 84,167
Income before preferred dividends 83,127 73,651 65,983
Preferred stock dividends declared (5,459) (5,879) (9,205)
Common stock dividends declared (72,000) (64,000) (56,000)
Cost of issuing common stock
(reimbursement to parent company) (8) (259) -
-------- -------- --------
Balance at End of Year 94,118 88,458 84,945
-------- -------- --------
Total Common Shareholder's
Equity at End of Year $639,556 $606,896 $567,383
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
43
<PAGE>
SIERRA PACIFIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities:
- ------------------------------------
Income before preferred dividends $ 83,127 $ 73,651 $ 65,983
Non-Cash items included in income:
Depreciation and amortization 64,117 58,118 55,065
Deferred taxes and investment tax credits (2,772) 1,233 (2,699)
AFUDC and capitalized interest (10,508) (9,155) (4,657)
Deferred energy costs 8 (1,736) 9,597
Early Retirement and severance amortization 4,551 7,877 2,127
Merger Costs (50) 1,909 11,612
Other non-cash (2,109) 2,803 2,719
Changes in certain assets and liabilities:
Accounts receivable (10,144) (3,520) (15,965)
Materials, supplies and fuel 2,331 2,869 935
Other current assets 1,376 (1,602) 820
Accounts payable 9,090 (36,817) 41,260
Other current liabilities 1,543 12,475 (5,814)
Other - net 4,895 2,561 (7,048)
--------- --------- ---------
Net Cash Flows From Operating Activities 145,455 110,666 153,935
--------- --------- ---------
Cash Flows Used in Investing Activities:
- ---------------------------------------
Additions to utility plant (136,248) (193,634) (139,138)
Customer refunds for construction (951) (739) (571)
Contributions in aid of construction 26,321 15,272 6,621
--------- --------- ---------
Net cash used for utility plant (110,878) (179,101) (133,088)
Disposal of (investment in) subsidiaries and
other non-utility property-net (5,254) 681 (16,950)
--------- --------- ---------
Net Cash Used in Investing Activities (116,132) (178,420) (150,038)
--------- --------- ---------
Cash Flows From (Used in) Financing Activities:
- ----------------------------------------------
Increase (Decrease) in short-term borrowings 40,583 (16,059) 12,635
Proceeds from issuance of long-term debt - 80,041 -
Retirement of long-term debt (15,417) (427) (10,383)
Decrease in funds held in trust - 9,175 23,058
Retirement of preferred stock - (20,400) (6,800)
Proceeds from Company-obligated Mandatorily Redeemable
Preferred Securities - 48,500 -
Additional investment by parent company 27,000 36,000 35,329
Expenses of external financing - - (59)
Dividends paid (75,459) (69,559) (61,420)
--------- --------- ---------
Net Cash (Used in) From Financing Activities (23,293) 67,271 (7,640)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 6,030 (483) (3,743)
Beginning Balance in Cash and Cash Equivalents 890 1,373 5,116
--------- --------- ---------
Ending Balance in Cash and Cash Equivalents $ 6,920 $ 890 $ 1,373
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
- -------------------------------------------------
Cash Paid During Year For:
Interest $ 46,824 $ 41,256 $ 37,706
Income taxes $ 41,656 $ 39,993 $ 40,177
</TABLE>
The accompanying notes are an integral part of the financial statements.
44
<PAGE>
SIERRA PACIFIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Common Shareholder's Equity:
- ---------------------------
Common stock, $3.75 par value,
1,000 shares authorized, issued and outstanding $ 4 $ 4
Other paid-in capital 545,434 518,434
Retained earnings 94,118 88,458
---------- ----------
Total Common Shareholder's Equity 639,556 606,896
---------- ----------
Cumulative Preferred Stock:
- --------------------------
Not subject to mandatory redemption:
$50 par value:
Series A; $2.44 dividend 4,025 4,025
Series B; $2.36 dividend 4,100 4,100
Series C; $3.90 dividend 14,990 14,990
$25 stated value:
Class A Series 1; $1.95 dividend 50,000 50,000
---------- ----------
Total Preferred Stock 73,115 73,115
Company-obligated Mandatorily Redeemable Preferred
Securities of the Company's Subsidiary Trust,
Sierra Pacific Power Capital I, holding solely
$50 million principal amount of 8.60% Junior
Subordinated Debentures of the Company, due 2036 48,500 48,500
---------- ----------
Total preferred stock 121,615 121,615
---------- ----------
Long-Term Debt:
- --------------
First Mortgage Bonds:
Unamortized bond premium and discount, net (867) (906)
Debt Secured by First Mortgage Bonds:
2.00% Series Z due 2004 114 135
2.00% Series O due 2011 1,618 1,736
6.35% Series FF due 2012 1,000 1,000
6.55% Series AA due 2013 39,500 39,500
6.30% Series DD due 2014 45,000 45,000
6.65% Series HH due 2017 75,000 75,000
6.65% Series BB due 2017 17,500 17,500
6.55% Series GG due 2020 20,000 20,000
6.30% Series EE due 2022 10,250 10,250
6.95% to 8.65% Series A MTN due 2022 115,000 115,000
7.10% and 7.14% Series B MTN due 2023 58,000 58,000
6.83% and 6.86% Series C MTN due 1999 30,000 30,000
6.62% to 6.83% Series C MTN due 2006 50,000 50,000
5.90% Series JJ due 2023 9,800 9,800
5.90% Series KK due 2023 30,000 30,000
5.00% Series Y due 2024 3,275 3,335
6.70% Series II due 2032 21,200 21,200
---------- ----------
Subtotal, excluding current portion 527,257 527,456
Variable Rate Note:
Water Facilities Note: maturing 2020 80,000 80,000
Other, excluding current portion 499 737
---------- ----------
Total Long-Term Debt 606,889 607,287
---------- ----------
TOTAL CAPITALIZATION $1,368,060 $1,335,798
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies for utility operations are as follows:
GENERAL
- -------
Sierra Pacific Power Company (SPPC), a wholly owned subsidiary of Sierra
Pacific Resources (SPR), is a regulated public utility engaged principally in
the generation, purchase, transmission, distribution, and sale of electric
energy. It provides electricity to approximately 287,000 customers in a 50,000
square mile area including Reno, west, central, and northeastern Nevada, and
including the cities of Reno, Sparks, Carson City and Elko, and portions of
eastern California. SPPC also provides water and gas service in the cities of
Reno and Sparks, Nevada, and environs. In 1995, SPPC formed two subsidiaries
for the specific purpose of forming a partnership with a subsidiary of General
Electric Capital Corporation (GECC) to participate in the construction and
operation of the Pinon Pine gasifier facility. These subsidiaries are Pinon Pine
Corporation and Pinon Pine Investment Company. They are consolidated into the
financial statements of SPPC, with all significant intercompany transactions
eliminated. On July 29, 1996, SPPC formed a wholly owned subsidiary, Sierra
Pacific Power Capital I (Trust), for the purpose of completing a public offering
of trust originated preferred securities. Refer to Note 4 of the Company's
consolidated financial statements for the securities issuance and Note 3 for the
Pinon Pine Power Project.
SPPC maintains its accounts for electric and gas operations in accordance with
the uniform system of accounts prescribed by the Federal Energy Regulatory
Commission (FERC) and for water operations in accordance with the uniform system
of accounts prescribed by the National Association of Regulatory Utility
Commissioners.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of certain assets and
liabilities. These estimates and assumptions also affect the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of certain revenues and expenses during the reporting
period. Actual results could differ from these estimates.
Certain reclassifications have been made for comparative purposes but have not
affected previously reported net income or common shareholders' equity.
SPPC UTILITY PLANT
- ------------------
In addition to direct labor and material costs, SPPC also charges to the
construction of utility plant: the cost of time spent by administrative
employees in planning and directing construction work; property taxes; employee
benefits (including such costs as pensions, postretirement and postemployment
benefits, vacations and payroll taxes); and an allowance for funds used during
construction.
46
<PAGE>
The original cost of plant retired or otherwise disposed of and the cost of
removal less salvage are generally charged to the accumulated provision for
depreciation. The cost of current repairs and minor replacements is charged to
expense when incurred. The cost of renewals and betterments is capitalized.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION AND CAPITALIZED INTEREST
- ---------------------------------------------------------------------
SPPC capitalizes, as part of construction costs on utility plant, an allowance
for funds used during construction (AFUDC). AFUDC represents the cost of
borrowed funds and a reasonable return on other funds used for construction
purposes in accordance with rules prescribed by the FERC and the PUCN. AFUDC is
capitalized in the same manner as construction labor and material costs, with an
offsetting credit to "other income" for the portion representing other funds and
as a reduction of interest charges for the portion representing borrowed funds.
Recognition of this item as a cost of utility plant is in accordance with
established regulatory ratemaking practices. Such practices permit the utility
to earn a fair return on, and recover all capital costs in rates charged for
utility services. This is accomplished by including such costs in rate base and
in the provision for depreciation.
The AFUDC rates used during 1997, 1996 and 1995 were 8.30%, 8.91% and 8.16%,
respectively. As specified by the PUCN, certain projects were assigned a lower
AFUDC rate due to specific low-interest-rate financings directly associated with
those projects.
DEPRECIATION
- ------------
Depreciation is calculated using the straight-line composite method over the
estimated remaining service lives of the related properties. The provision, as
authorized by the PUCN, for 1997, 1996 and 1995, stated as a percentage of the
original cost of depreciable property, was 3.16%, 3.18% and 3.16%, respectively.
CASH AND CASH EQUIVALENTS
- -------------------------
Cash is comprised of cash on hand and working funds. Cash equivalents consist
of high quality investments in commercial paper of other corporations with
original maturities of three months or less.
SPPC engages in short-term investment activity whenever it is deemed
beneficial. As of December 31, 1997 SPPC's investment in commercial paper was
$4.7 million. SPPC had no commercial paper investments as of December 31, 1996.
REGULATORY ACCOUNTING AND OTHER REGULATORY ASSETS
- -------------------------------------------------
SPPC's rates are currently subject to the approval of the PUCN and are
designed to recover the cost of providing generation, transmission and
distribution services. As a result, SPPC 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
47
<PAGE>
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.
In 1997, the Emerging Issues Task Force (EITF) released Issue 97-4. In
doing so, it reached a consensus that a utility subject to a deregulation plan
for its generation business should stop applying SFAS No. 71 to the generating
portion of its business no later than the date when a plan with sufficient
detail of the effect of the plan is known. EITF 97-4 also reached a consensus
that regulatory assets and liability that originated in a portion of the
business which is discontinuing its application of SFAS No. 71 should be
evaluated on the basis of where (that is, the portion of the business in which)
the regulated cash flows to realize and settle them will be derived. The result
of the consensus is that there is no elimination of regulatory assets which the
deregulatory legislation or rate order specifies collection of, if they are
recoverable through a portion of the business which remains subject to SFAS No.
71.
In conformity with SFAS No. 71, the accounting for the utility business
conforms with generally accepted accounting principles as applied to regulated
public utilities and as prescribed by agencies and the commissions of the
various locations in which the utility businesses operate.
In accordance with these principles, certain costs that would otherwise be
charged to expense or capitalized as plant costs are deferred as regulatory
assets based on expected recovery from customers in future rates. Management's
expected recovery of deferred costs is based upon specific ratemaking decisions
or precedent for each item. The following other regulatory assets were included
in the consolidated balance sheets as of December 31 (dollars in thousands):
<TABLE>
<CAPTION>
DESCRIPTION 1997 1996 AMORTIZATION PERIODS
- ----------- -------- -------- --------------------
<S> <C> <C> <C>
Early Retirement and Severance Offers $24,644 $29,195 Various through 2005
Loss on Reacquired Debt 18,354 19,113 Various through 2023
Plant Assets 8,869 9,888 Various through 2031
Conservation and Demand Side Programs 6,146 6,805 Various through 2006
Other Costs 5,463 2,318 Various
------- -------
Total $63,476 $67,319
======= =======
</TABLE>
Currently, the electric utility industry is predominately regulated on a
basis designed to recover the cost of providing electric power to its retail and
wholesale customers. If cost-based regulation were to be discontinued in the
industry for any reason, including competitive pressure on the cost-based prices
of electricity, profits could be reduced, and utilities might be required to
reduce their asset balances to reflect a market basis less than cost.
Discontinuance of cost-based regulation would also require affected utilities to
write off their associated regulatory assets. Management cannot predict the
potential impact, if any, of these competitive forces on SPPC's future financial
position and results of operations.
DEFERRAL OF ENERGY COSTS
- ------------------------
SPPC has suspended deferred energy accounting in its Nevada (except for the
cost of liquid propane gas) and California jurisdictions. Prior to May 1995
(Nevada) and June 1996 (California), SPPC employed deferred energy accounting
procedures in its electric and gas operations, as provided by statutes. The
intent of these procedures was to capture fluctuations in the cost of
48
<PAGE>
purchased gas, fuel and purchased power. Deferred energy accounting required
SPPC to record the difference between actual fuel expense and fuel revenues as
deferred energy costs. Refer to Note 2 of SPPC's consolidated financial
statements.
FEDERAL INCOME TAXES AND INVESTMENT TAX CREDITS
- -----------------------------------------------
SPR and its subsidiaries file a consolidated federal income tax return.
Current income taxes are allocated based on the parent and each subsidiary's
respective taxable income or loss and investment tax credits as if each
subsidiary filed a separate return. Deferred taxes are provided on timing
differences at the statutory income tax rate in effect as of the most recent
balance sheet date.
For regulatory purposes, SPPC is authorized to provide for deferred taxes on
the difference between straight-line and accelerated tax depreciation on post-
1969 utility plant expansion property, deferred energy, and certain other
differences between financial reporting and taxable income, including those
added by the Tax Reform Act of 1986 (TRA). In 1981, SPPC began providing for
deferred taxes on the benefits of using the Accelerated Cost Recovery System for
all post-1980 property. In 1987 the TRA required SPPC to begin providing
deferred taxes on the benefits derived from using the Modified Accelerated Cost
Recovery System.
Investment tax credits are no longer available to SPPC. The deferred
investment tax credit balance is being amortized over the estimated service
lives of the related properties.
REVENUES
- --------
SPPC accrues unbilled utility revenues earned from the dates customers were
last billed to the end of the accounting period. These amounts are included in
accounts receivable.
NOTE 2. REGULATORY ACTIONS
NEVADA PROCEEDINGS
- ------------------
A rate plan, approved by the PUCN in February 1997 included: a one-time
refund of $13 million in electric rates, a $7 million rate reduction, a rate
freeze for electric and natural gas rates through December 1999, and continued
suspension of deferred energy accounting. In addition, the deferred energy and
purchased gas filings were withdrawn. Water prices were not affected by the
stipulated rate plan.
The rate plan also provides for a 50/50 sharing between customers and
shareholders of electric and gas utility earnings in excess of a 12 percent
return on average equity. In lieu of refunds, SPPC has an opportunity, subject
to certain conditions, to apply such excess to buying down or buying out of
long-term fuel and purchased power contracts currently in place. The first
earnings sharing filing will be made no later than April 30, 1998.
In September 1997, SPPC filed an application to increase its water prices
with the PUCN. Rate changes were requested primarily because of expenditures
for the Chalk Bluff Water Treatment Plant, improvements to the Glendale Water
Treatment Plant, as well as other improvements required by the federal Safe
Drinking Water Act. The application was updated in
49
<PAGE>
December to request a $13.7 million (or 30%) increase. Hearings began in January
1998, with rates expected to be effective in April 1998.
CALIFORNIA PROCEEDINGS
- ----------------------
As a result of the termination of a merger, certain filings were made in
SPPC's California jurisdiction. In a previous decision, which conditionally
approved the merger, SPPC was required to file various rate applications for
test year 1997 in the event the merger was not consummated by March 31, 1996.
In a second decision, the California Commission extended this deadline and
suspended deferred energy accounting, which reduced SPPC's rates by $2.3 million
effective June 1, 1996. With termination of the merger, another decision was
issued which ordered a rate freeze through December 31, 2000 and continued the
suspension of deferred energy accounting.
NOTE 3. JOINTLY-OWNED FACILITIES
VALMY
- -----
SPPC and Idaho Power Company each own an undivided 50% interest in the Valmy
generating station, with each company being responsible for financing its share
of capital and operating costs. SPPC is the operator of the plant for both
parties.
SPPC's share of direct operation and maintenance expenses for Valmy is
included in the accompanying consolidated statements of income.
The following schedule reflects SPPC's 50% ownership interest in the jointly-
owned electric utility plant at December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Electric Accumulated Construction
MW Plant Provision For Work In
Plant Capacity In Service Depreciation Progress
----- -------- ---------- ------------ --------
<S> <C> <C> <C> <C>
Valmy #1 129 $127,520 $49,642 $173
Valmy #2 137 $153,917 $48,850 $592
</TABLE>
PINON PINE
- ----------
Pinon Pine Corp. and Pinon Pine Investment Co., subsidiaries of SPPC, own 25%
and 75% respectively of a 38% interest in Pinon Pine Co., LLC (the LLC), with a
subsidiary of General Electric Capital Corporation (GECC) owning the remaining
62%. The LLC was formed to take advantage of federal income tax credits
available under IRC (S)29 from the production and sale of an alternative fuel
(syngas) produced by the coal gasifier. These tax credits will expire on June
30, 1998. The entire project, which includes an LLC-owned gasifier and an SPPC-
owned power island and post-gasification facilities to partially cool and clean
the syngas, is referred to collectively as the Pinon Pine Power Project.
SPPC has a funding agreement with the DOE. Under the agreement, the DOE will
provide funding towards the construction of the project, and towards the
operating and maintenance costs of the facility. The total DOE contribution is
capped at $168 million, and through December 31, 1997, the DOE has funded $138.5
million (including O&M expenses).
50
<PAGE>
Total capital costs for the Pinon Pine Power Project are now estimated to be
$298.7 million. The LLC capital investment is capped at $46 million, DOE capital
contributions are estimated at $131.8 million and SPPC capital investment is
estimated at $120.9 million exclusive of it's share of the LLC investment.
SPPC must satisfy certain performance requirements as part of the construction
agreement with the LLC. The initial performance warranty required that the
gasifier attain an average capacity factor of 30% during 1997, regardless of
delays in the in-service date. Since the gasifier was not in service in 1997,
the certain performance warranties required by the contract were not met.
Consequently, SPPC has reserved $2.8 million as satisfaction of the performance
obligation. If the average capacity factor falls below 70% for 1998, SPPC is
required to pay to the LLC lost revenues as a result of the actual average
capacity factor achieved compared to the 70% average capacity factor required by
the contract. If contracted performance levels are not met during 1998, SPPC
may be required to refinance GECC's investment in the LLC. Under the terms of
the LLC agreements, GECC would be reimbursed for capital invested plus a return
on capital. If the Company is required to buyout GECC, it is estimated that the
total payment would be approximately $30 million.
NOTE 4. PREFERRED STOCK
All issues of preferred stock are superior to common stock with respect to
dividend payments (which are cumulative) and liquidation rights. SPPC's
Restated Articles of Incorporation, as amended on August 19, 1992, authorize an
aggregate total of 11,780,500 shares of preferred stock at any given time.
The following table indicates the number of shares outstanding and the
dollar amount thereof at December 31 of each year. The difference between total
shares authorized and the amount outstanding represents undesignated shares
authorized but not issued.
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
(dollars in thousands) Shares Amount Shares Amount Shares Amount
--------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Not Subject to
Mandatory Redemption:
Series A 80,500 $ 4,025 80,500 $ 4,025 80,500 $ 4,025
Series B 82,000 4,100 82,000 4,100 82,000 4,100
Series C 299,800 14,990 299,800 14,990 299,800 14,990
Class A Series 1 2,000,000 50,000 2,000,000 50,000 2,000,000 50,000
--------- -------- --------- -------- --------- -------
Subtotal 2,462,300 73,115 2,462,300 73,115 2,462,300 73,115
Subject to Mandatory
Redemption:
Series G - - - - 408,000 20,400
Preferred Securities
of Sierra Pacific 1,940,000 48,500 1,940,000 48,500 - -
Power --------- -------- --------- -------- --------- -------
Capital I
Total 4,402,300 $121,615 4,402,300 $121,615 2,870,300 $93,515
========= ======== ========= ======== ========= =======
</TABLE>
51
<PAGE>
SPPC's Series G Preferred Stock was redeemable at any time at a redemption
price of $50 plus accrued dividends. SPPC was required to redeem 136,000 shares
at par value plus accrued dividends annually starting June 1, 1994. On June 3,
1996, SPPC redeemed the remaining 408,000 shares of Series G, 8.24% Preferred
Stock, at par value, for $20.4 million using the proceeds from the following
issuance of Preferred Securities.
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). SPPC owns
all the common securities of the Trust, 60,000 shares totaling $1.5 million
(common securities). The preferred securities and the common securities (the
Trust Securities) represent undivided beneficial ownership interests in the
assets of the Trust. The existence of the Trust is for the sole purpose of
issuing the Trust Securities and using the proceeds thereof to purchase from
SPPC its 8.60% Junior Subordinated Debentures due July 30, 2036, in a principal
amount of $50 million. The sole asset of the Trust is SPPC's Junior
Subordinated Debentures. SPPC's obligations under the guarantee agreement
entered into in connection with the preferred securities, when taken together
with the SPPC's obligation to make interest and other payments on the junior
subordinated debentures issued to the Trust, and SPPC's obligations under its
Indenture pursuant to which the junior subordinated debentures are issued and
its obligations under the declaration, including its liabilities to pay costs,
expenses, debts and liabilities of the Trust, provides a full and unconditional
guarantee by SPPC of the Trust's obligations under the Preferred Securities.
In addition to retiring the Series G Preferred Stock, proceeds were used to
reduce short-term borrowings.
The Preferred Securities of Sierra Pacific Power Capital I are redeemable only
in conjunction with the redemption of the related 8.60% junior subordinated
debentures. The junior subordinated debentures will mature on July 30, 2036,
and may be redeemed, in whole or in part, at any time on or after July 30, 2001,
or at any time in certain circumstances upon the occurrence of a tax event. A
tax event occurs if an opinion has been received from tax counsel that there is
more than an insubstantial risk that: the Trust is, or will be subject to
federal income tax with respect to interest accrued or received on the junior
subordinated debentures; the Trust is, or will be subject to more than a de
minimis amount of other taxes, duties or other governmental charges; interest
payable by SPPC to the Trust on the junior subordinated debentures is not, or
will not be, deductible, in whole or in part for federal income tax purposes.
Upon the redemption of the junior subordinated debentures, payment will
simultaneously be applied to redeem preferred securities having an aggregate
liquidation amount equal to the aggregate principal amount of the Junior
Subordinated Debentures. The preferred securities are redeemable at $25 per
preferred security plus accrued dividends.
NOTE 5. LONG-TERM DEBT
Substantially all utility plant is subject to the lien of the SPPC
indenture under which the first mortgage bonds are issued.
A financing agreement in connection with SPPC's $80 million Water
Facilities Bonds, maturing in 2020, requires SPCC to maintain a bank letter of
credit agreement. On July 19, 1996, SPPC converted the interest rate on the
bonds to a daily rate which reduced the letter of
52
<PAGE>
credit, trustee fees, and administrative costs. The fees are included in long-
term debt interest charges on the Consolidated Statement of Income.
SPPC issued $80 million principal amount of collateralized Medium-Term
Notes, Series C, consisting of ten year non-callable notes, due in 2006, with
interest rates ranging from 6.62% to 6.83% and three year non-callable notes,
due in 1999, with interest rates ranging from 6.83% to 6.86%. For all notes,
interest is payable in semi-annual payments. The proceeds to SPPC from the
sales of the notes were to reduce short-term debt and were used to fund
construction projects.
In December 1996, SPPC registered an additional $35 million of
collateralized debt securities. The net proceeds to SPPC from the sale of these
notes will be used for general corporate purposes including, but not limited to:
the acquisition of property; the construction, completion, extension or
improvement of facilities; or discharge or refunding of obligations, including
short-term borrowings. As of December 31, 1997, SPPC has not yet issued these
securities.
On June 30, 1997, SPPC redeemed $15 million 6.5% First Mortgage Bonds
which had been included in the current liability portion of the consolidated
balance sheet.
SPPC's aggregate annual amounts of maturities for long-term debt for each
fiscal year ended 1998 through 2002 are shown below (dollars in thousands):
1998 $500
1999 30,500
2000 300
2001 200
2002 200
53
<PAGE>
NOTE 6. TAXES
The following reflects the composition of taxes on income (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal:
Taxes estimated to be currently
Payable $40,574 $33,070 $39,150
Deferred taxes related to:
Excess of tax depreciation over
book depreciation 3,997 5,217 9,237
Deferral of energy costs
deducted currently for tax
purposes-net (3) (307) (4,112)
Contributions in aid of
construction and customer
Advances (3,966) (2,917) (1,798)
Avoided interest capitalized (1,578) (3,124) (569)
Costs of abandoned merger 301 4,359 (776)
Other-net 712 (33) (2,739)
Net amortization of investment tax
Credit (1,962) (1,961) (1,942)
State (California) 801 754 688
---------------------------------------------------
Total $38,876 $35,058 $37,139
===================================================
As Reflected in Statements of Income:
Federal income taxes 39,586 35,487 36,682
State income taxes 801 754 688
---------------------------------------------------
Operating Income 40,387 36,241 37,370
Other income-net (1,511) (1,183) (231)
---------------------------------------------------
Total $38,876 $35,058 $37,139
===================================================
</TABLE>
54
<PAGE>
The total income tax provisions differ from amounts computed by applying
the federal statutory tax rate to income before income taxes for the following
reasons (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C>
Income before preferred dividends $ 83,127 $ 73,651 $ 65,983
Total income tax expense 38,876 35,058 37,139
------------------------------------------------------------
122,003 108,709 103,122
Statutory tax rate 35% 35% 35%
------------------------------------------------------------
Expected income tax expense 42,701 38,048 36,093
Depreciation related to difference
in cost basis for tax purposes 1,591 2,456 2,394
Allowance for funds used during
construction - equity (1,912) (1,831) (540)
Tax benefit from the disposition
of assets (569) (1,130) (1,427)
ITC amortization (1,962) (1,961) (1,942)
Other-net (973) (524) 2,561
------------------------------------------------------------
$ 38,876 $ 35,058 $ 37,139
============================================================
Effective tax rate 31.9% 32.2% 36.0%
============================================================
</TABLE>
ACCUMULATED DEFERRED FEDERAL INCOME TAXES
- -----------------------------------------
The net accumulated deferred federal income tax liability consists of
accumulated deferred federal income tax liabilities less related accumulated
deferred federal income tax assets, as shown (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Accumulated Deferred Federal
Income Tax Liabilities:
AFUDC $ 7,174 $ 5,745 $ 4,459
Bond redemptions 6,423 6,690 7,184
Excess of tax depreciation over
book depreciation 154,240 142,441 136,067
Tax benefits flowed through
to customers 66,563 67,667 69,610
Other 5,853 7,532 5,403
-----------------------------------------------------------
Total 240,253 230,075 222,723
-----------------------------------------------------------
Accumulated Deferred Federal
Income Tax Assets:
Avoided interest capitalized 13,819 12,241 9,117
Contributions in aid of
construction and customer advances 30,697 25,980 23,102
Unamortized investment tax credit 21,471 22,527 23,583
Other 11,639 6,890 7,949
-----------------------------------------------------------
Total 77,626 67,638 63,751
-----------------------------------------------------------
Accumulated Deferred Federal Income Taxes $162,627 $162,437 $158,972
===========================================================
</TABLE>
55
<PAGE>
SPPC's balance sheets contain a net regulatory tax asset of $25.8 million
at year-end 1997 and $24.8 million at year-end 1996. The net regulatory asset
consists of future revenue to be received from customers (a regulatory tax
asset) of $66.6 million at year-end 1997 and $67.7 million at year-end 1996, due
to flow-through of the tax benefits of temporary differences. Offset against
these amounts are future revenues to be refunded to customers (a regulatory tax
liability), consisting of $19.3 million at year-end 1997 and $20.3 million at
year-end 1996, due to temporary differences which arose from liberalized
depreciation at tax rates which were in excess of current tax rates, and $21.5
million at year-end 1997 and $22.5 million at year-end 1996 due to temporary
differences caused by the investment tax credit. The regulatory tax liability
for temporary differences related to liberalized depreciation will continue to
be amortized using the average rate assumption method required by the Tax Reform
Act of 1986. The regulatory tax liability for temporary differences caused by
the investment tax credit will be amortized ratably in the same fashion as the
accumulated deferred investment credit.
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The December 31, 1997 carrying amount for cash, cash equivalents, current
assets, accounts payable, current liabilities, and construction trust funds
approximates fair value due to the short-term nature of these instruments.
The total fair value of SPPC's long-term debt at December 31, 1997, is
estimated to be $640.4 million (excluding current portion) based on quoted
market prices for the same or similar issues or on the current rates offered to
SPPC for debt of the same remaining maturities. The total fair value (excluding
current portion) was estimated to be $619.1 million at December 31, 1996.
NOTE 8. SHORT-TERM BORROWINGS
In 1995, SPPC replaced its lines-of-credit arrangements with an $80 million
revolving credit facility, which expired on December 29, 1997. At that time,
the Company replaced this line with various credit facilities totaling $100
million. As of January 29, 1998, SPPC revised its credit facilities resulting
in a $150 million credit facility for the Alturas project and a $50 million
revolving credit facility. SPPC pays the lender a facility fee on the
commitment quarterly, in arrears, based on SPPC's First Mortgage Bond rating.
Facility fees for 1997 and 1996 were approximately $101,000 for each year.
At December 31, 1997, SPPC's short-term borrowings of $75.0 million were
comprised entirely of commercial paper at an average interest rate of 6.12%. At
December 31, 1996, SPPC had $38.0 million of commercial paper at an average
interest rate of 5.65%.
The other subsidiaries of SPPC have no outstanding short-term borrowings at
this time.
NOTE 9. DIVIDENDS
The Restated Articles of Incorporation of SPPC and the indentures
relating to the various series of its First Mortgage Bonds contain restrictions
as to the payment of dividends on its common stock. Under the most restrictive
of these limitations, approximately $78.7 million of retained earnings were
available at December 31, 1997 for the payment of common stock cash dividends.
56
<PAGE>
NOTE 10. RETIREMENT PLAN
SPPC sponsors a noncontributory defined benefit retirement plan covering all
employees who satisfy the service requirement.
The plan provides benefits based on each covered employee's years of service,
highest five-year average compensation, and a step rate benefit formula
indirectly integrating the plan with Social Security.
Beginning in 1998, plan provisions applicable to employees covered by the
collective bargaining agreement were amended to recognize additional
compensation as pensionable pay and to reduce the penalty for retirement before
age 62.
SPPC's funding policy is to contribute an annual amount to an irrevocable
trust that is not less than the minimum funding requirement under the Employee
Retirement Income Security Act of 1974, and not in excess of the amount that can
be deducted for federal income tax purposes. The plan's assets are invested
primarily in common stocks, marketable bonds and other fixed-income securities.
The remainder is held in cash and cash equivalents. None of the plan assets are
invested in SPR common or SPPC preferred stock.
In April 1995, SPPC offered an early retirement plan to non-bargaining unit
employees age 50 and older with at least 15 years of credited service as of
January 1, 1996 and whose age and credited years of service equaled at least 70.
The present value of termination costs relating to the 112 employees who
accepted the offering was originally recorded in 1995 at $16.8 million, but was
revalued at $12.8 million during 1996 due to a revision in the measurement date.
These termination costs were fully deferred, as a regulatory asset, as of
December 31, 1995. During 1996, SPPC began amortizing the termination costs by
recognizing expense for both 1995 and 1996. SPPC is using a ten-year
amortization period for these costs, consistent with the treatment of previous
early retirement programs.
The following table sets forth a reconciliation of the funded status of the
plan with amounts included in SPPC's consolidated balance sheets as of December
31, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
Actuarial present value of benefit
obligations:
<S> <C> <C>
Vested benefit obligation $ 134,237 $ 118,383
========= =========
Accumulated benefit obligation $ 142,572 $ 125,547
========= =========
Projected benefit obligation $ 180,921 $ 157,660
========= =========
Less plan assets at fair value (190,535) (167,416)
--------- ---------
Projected benefit obligation (less than) in
excess of plan assets (9,614) (9,756)
Unrecognized net gain 35,379 26,661
Unrecognized prior service cost (9,419) (4,251)
--------- ---------
</TABLE>
57
<PAGE>
<TABLE>
<S> <C> <C>
Net balance sheet liability $ 16,346 $ 12,654
========= =========
</TABLE>
In the preceding table, unrecognized net gain represents the net gain
attributable to changes in actuarial assumptions and differences between actual
experience and actuarial assumptions.
Net periodic pension expense for 1997, 1996 and 1995 included the following
components (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ----------
<S> <C> <C> <C>
Service cost $ 5,825 $ 6,652 $ 6,320
Interest cost 11,920 11,778 10,380
Actual gain on plan assets (31,617) (19,954) (33,248)
Net amortizations and deferrals 17,564 7,736 23,518
Costs associated with 1995
early retirement plan - - 12,825
-------- -------- ---------
Net periodic pension cost as
Determined under SFAS No. 87 3,692 6,212 19,795
Amount expensed (deferred) under
SFAS No. 71 - net 2,599 3,882 (11,509)
-------- -------- ---------
Net periodic pension expense
Recognized $ 6,291 $ 10,094 $ 8,286
======== ======== ========
Amount charged to operating expense $ 4,188 $ 6,769 $ 5,416
======== ======== ========
Amount charged to utility plant
and clearing accounts $ 2,103 $ 3,325 $ 2,870
======== ======== ========
</TABLE>
In the preceding table, service cost represents the benefits earned during the
year while interest cost represents the increase in the accumulated benefit
obligation due to the passage of time.
The amount deferred under SFAS No. 71 represents the SFAS No. 88 costs arising
from the 1989, 1992 and 1995 early retirement programs. Pursuant to PUCN
directive and prior precedent, costs for the 1989, 1992 and 1995 programs are
being amortized over 10 years and are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
SFAS No. 88 costs associated with
the 1995 early retirement program $ - $ - $(12,825)
Amortization of 1995 early
retirement program 1,283 2,566 -
Amortization of 1992 early
retirement program 574 574 574
Amortization of 1989 early
retirement program 742 742 742
------ ------ --------
Net amount expensed (deferred)
under SFAS No. 71 $2,599 $3,882 $(11,509)
====== ====== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation as of December 31, 1997, 1996 and 1995
was 7.25%, 7.50% and 7.00% respectively. The assumed compensation increase rate
used for the same periods was
58
<PAGE>
5.00% for all years. For purposes of determining 1997, 1996 and 1995 pension
cost, the expected long-term rate of return on assets was 8.50%, 8.50% and 9.00%
respectively. Additionally, the projected benefit obligation as of December 31,
1997 reflects the adoption of the 1994 Group Annuity Generational Mortality
Table.
In addition to the employee retirement plan covering all employees, SPPC has a
Supplemental Executive Retirement Plan which is a non-qualified defined benefit
plan under which SPPC will pay out of general assets supplemental pension
benefits to key executives. SPPC also has a non-qualified supplemental pension
plan covering certain employees. This plan provides for incremental pension
payments from SPPC's funds so that total pension payments equal amounts that
would have been payable from SPPC's principal pension plan if it were not for
limitations imposed by income tax regulations. The unfunded liability under
these plans as of December 31, 1997 and 1996 was $5.2 million and $4.9 million,
respectively.
NOTE 11. POSTRETIREMENT BENEFITS
SPPC currently sponsors a defined benefit postretirement plan that covers
administrative employees and those covered under collective bargaining
agreements. The plan provides medical, dental and life insurance benefits for
retirees.
For management, professional and administrative employees the plan is
contributory for individuals retiring after January 1, 1993, with retiree
contributions tied to each retiree's length of service. Additionally, the plan
requires employees retiring after January 1, 1993 to participate in Medicare
Part "B". Life insurance benefits remain noncontributory for retirees.
However, the amount of life insurance provided for retirees is significantly
less than that provided to active employees. Also, dental coverage is
discontinued for all employees at age 65.
Beginning in 1998, plan provisions applicable to employees covered by the
collective bargaining agreement were amended. Retiree contributions were
increased to a minimum of 20% plus an additional amount for each year of service
fewer than 20. Also, the plan introduced a managed care option for future
retirees.
SPPC's funding policy for its postretirement benefit obligation takes
advantage of federal income tax deductions. Contributions are being made to two
voluntary employee's beneficiary associations and an IRC (S)401(h) account.
Plan assets are invested primarily in common stocks, marketable bonds and other
fixed income securities. The remainder is held in cash and cash equivalents.
None of the plan assets are invested in SPR common or SPPC preferred stock.
Postretirement health care costs for key executives continue to be paid from
SPPC's general assets.
59
<PAGE>
The following table sets forth a reconciliation of the funded status of the
plan with amounts included in the accompanying consolidated balance sheets as of
December 31, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 32,920 $ 37,941
Fully eligible active participants 6,056 6,227
Other active plan participants 26,507 29,358
-------- --------
Total 65,483 73,526
Less plan assets at fair value (39,326) (32,944)
-------- --------
Accumulated postretirement benefit obligation 26,157 40,582
in excess of plan assets
Unrecognized prior service cost 0 (415)
Unrecognized net gain 20,837 8,562
Unrecognized transition obligation (33,818) (39,419)
-------- --------
$ 13,176 $ 9,310
Net balance sheet liability ======== ========
</TABLE>
In the preceding table, unrecognized net gain represents the net change
attributed to changes in actuarial assumptions and differences between actual
experience and actuarial assumptions.
Net periodic postretirement benefit expense for 1997, 1996 and 1995 included
the following components (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Service cost $ 2,440 $ 2,587 $ 2,448
Interest cost 5,597 5,269 4,479
Actual gain on plan assets (4,996) (1,942) (3,891)
Net amortizations and deferrals 2,030 (94) 2,111
Amortization of transition 2,464 2,464 2,838
Obligation over 20 years
Costs associated with 1995 early
Retirement plan - - 8,047
------- ------- -------
Net periodic postretirement benefit 7,535 8,284 16,032
Cost determined under SFAS No. 106
Amount expensed (deferred) under
SFAS No. 71 - net 805 2,044 (7,086)
------- ------- -------
Net periodic postretirement expense
Recognized $ 8,340 $10,328 $ 8,946
======= ======= =======
Amount charged to operating expense $ 5,547 $ 6,903 $ 6,108
======= ======= =======
Amount charged to utility plant and
Clearing accounts $ 2,793 $ 3,425 $ 2,838
======= ======= =======
</TABLE>
In the table above service cost represents the benefits earned during the year
while interest cost represents the increase in the accumulated benefit
obligation due to the passage of time.
60
<PAGE>
The amount deferred under SFAS No. 71 for 1995 represents the present value of
termination benefits and curtailment losses resulting from the early retirement
and severance plans offered during that year. The present value of these costs
was originally recorded at $8.3 million during 1995, but was revalued to $8.0
million during 1996 because of a revision in the measurement date. These
termination costs were fully deferred, as a regulatory asset, as of December 31,
1995. Beginning in 1996, SPPC began amortization of the termination costs by
recognizing expense for both 1995 and 1996. SPPC is using a ten-year
amortization period for these costs which is consistent with the treatment of
previous early retirement programs.
The amortization of 1993 deferred costs represents the annual amounts expensed
from charges initially deferred pending the decision of the general rate case
filed in December 1992. These costs were deferred as a result of a regulatory
phase-in plan which did not allow immediate recognition of these costs when SPPC
adopted SFAS No. 106 in January 1993. As a result of the decision, issued in
June 1993, SPPC began to amortize these costs over a thirty-six month period
beginning July 1993.
The following schedule summarizes the amortization of the deferred costs
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ -----------
<S> <C> <C> <C>
SFAS No. 106 costs deferred $ - $ - $(8,047)
Amortization of 1995 early
Retirement program 805 1,610 -
Amortization of 1993 deferred costs - 434 961
------------- ------------ -----------
Net amount expensed (deferred) under
SFAS No. 71 $ 805 $2,044 $(7,086)
============= ============ ===========
</TABLE>
For measurement purposes, SPPC used a discount rate for obligations as of
December 31, 1997, 1996 and 1995 of 7.25%, 7.50% and 7.00% respectively. The
expected long-term return on assets was 8.50%, 8.50% and 9.00% for the same
periods, respectively. For 1996 and 1995 the company used a graduated medical
trend rate assumption with initial rates of 11.25% and 11.75%, respectively.
This medical trend rate declined by 0.50% over the next ten years to an ultimate
rate of 5.75% in 2007, remaining at that level thereafter. The obligation
valuation as of December 31, 1997 reflects the change to a constant medical
trend rate of 6.00% for each year as well as the adoption of the 1994 Group
Annuity Generational Mortality Table.
The health care cost trend rate has a significant effect on the amounts
reported. For example, an increase in the health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1997 by $11.4 million and the aggregate of
the service and interest cost component of net periodic postretirement benefit
cost for the year then ended by $1.5 million.
NOTE 12. POSTEMPLOYMENT BENEFITS
During 1995, SPPC offered a severance program to non-bargaining-unit employees
which provided both severance pay and medical benefits continuation totaling
$7.0 million and $0.5 million, respectively. These costs were deferred as a
regulatory asset as of December 31,
61
<PAGE>
1995. SPPC began amortization of these costs during 1996 over a ten-year period
consistent with the period used for pension and postretirement benefits. There
was no remaining liability for unpaid severance and benefits at December 31,
1997 or 1996.
NOTE 13. COMMITMENTS AND CONTINGENCIES
SPPC's estimated cash construction expenditures for the year 1998 and the
five-year period 1998-2002 are $151.1 million and $571.1 million, respectively.
Several of SPPC's purchased power, gas supply and pipeline capacity, and
coal supply contracts contain minimum volume provisions, which SPPC is either
meeting or exceeding. SPPC anticipates continuing to meet or exceed them in the
future. Estimated future commitments under non-cancelable agreements with
initial terms of one year or more at December 31, 1997 were as follows (in
thousands of dollars):
<TABLE>
<S> <C>
1998 $170,700
1999 148,900
2000 104,900
2001 83,800
2002 82,300
After 2002 to 2009 425,800
</TABLE>
SPPC has an operating lease for its corporate headquarters building, a
334,000 square foot, five-floor, multi-purpose building located in southeast
Reno, Nevada. The primary term of the lease is 25 years, ending in 2010. The
current annual rental is $5.4 million, which amount remains constant until the
end of the primary term. The lease has renewal options for an additional 50
years.
The total rental expense under all leases was approximately $7.4 million in
1997, $8.2 million in 1996 and $8.0 million in 1995.
Estimated future minimum lease commitments (including the corporate
headquarters building described above) under non-cancelable operating leases
with initial terms of one year or more at December 31, 1997 were as follows (in
thousands of dollars):
<TABLE>
<S> <C>
1998 $ 8,000
1999 7,200
2000 6,800
2001 6,300
2002 5,800
After 2002 to 2018 46,000
-------
Total $80,100
=======
</TABLE>
SPPC has no material capital lease commitments.
See Notes 1, 5, 7, and 13 of SPPC's consolidated financial statements for
additional commitments and contingencies.
62
<PAGE>
NOTE 14. SEGMENT INFORMATION
Information related to the segments of SPPC's business is detailed below
(dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1997 Electric Gas Water Total
- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Operating Revenues $ 540,346 $ 70,675 $ 46,519 $ 657,540
================= ================= ================= =================
Operating Income $ 99,671 $ 10,057 $ 10,444 $ 120,172
================= ================= ================= =================
Depreciation $ 52,239 $ 4,531 $ 7,347 $ 64,117
================= ================= ================= =================
Capital Expenditures $ 105,531 $ 12,191 $ 30,079 $ 147,801
================= ================= ================= =================
Identifiable Assets:
Net Utility Plant $1,228,872 $111,606 $260,337 $1,600,815
Other $ 152,877 $ 15,524 $ 12,945 $ 181,346
Other Utility Assets - - - $ 130,081
----------------- ----------------- ----------------- -----------------
Total Assets $1,381,749 $127,130 $273,282 $1,912,242
================= ================= ================= =================
December 31, 1996 Electric Gas Water Total
- ------------------------ ----------------- ----------------- ----------------- -----------------
Operating Revenues $ 507,004 $ 67,376 $ 45,344 $ 619,724
================= ================= ================= =================
Operating Income $ 86,428 $ 11,035 $ 9,545 $ 107,008
================= ================= ================= =================
Depreciation $ 47,797 $ 4,223 $ 6,098 $ 58,118
================= ================= ================= =================
Capital Expenditures $ 158,482 $ 10,798 $ 33,829 $ 203,109
================= ================= ================= =================
Identifiable Assets:
Net Utility Plant $1,183,727 $104,427 $256,160 $1,544,314
Other $ 140,852 $ 13,270 $ 12,653 $ 166,775
Other Utility Assets - - - $ 131,539
----------------- ----------------- ----------------- -----------------
Total Assets $1,324,579 $117,697 $268,813 $1,842,628
================= ================= ================= =================
December 31, 1995 Electric Gas Water Total
- --------------------- ----------------- ----------------- ----------------- -----------------
Operating Revenues $ 491,419 $ 62,572 $ 43,793 $ 597,784
================= ================= ================= =================
Operating Income $ 87,825 $ 5,041 $ 8,945 $ 101,811
================= ================= ================= =================
Depreciation $ 45,361 $ 4,019 $ 5,685 $ 55,065
================= ================= ================= =================
Capital Expenditures $ 99,537 $ 13,318 $ 31,342 $ 144,197
================= ================= ================= =================
Identifiable Assets:
Net Utility Plant $1,076,126 $ 98,367 $238,308 $1,412,801
Other $ 146,392 $ 11,505 $ 7,723 $ 165,620
Other Utility Assets - - - $ 151,397
----------------- ----------------- ----------------- -----------------
Total Assets $1,222,518 $109,872 $246,031 $1,729,818
================= ================= ================= =================
</TABLE>
63
<PAGE>
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents unaudited quarterly financial data (dollars in
thousands):
<TABLE>
<CAPTION>
Quarter Ended
--------------
March 31, 1997 June 30, 1997 Sept. 30, 1997 Dec. 31, 1997
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $171,858 $154,817 $159,783 $171,082
======== ======== ======== ========
Operating Income $ 32,292 $ 26,637 $ 29,194 $ 32,049
======== ======== ======== ========
Income Before Preferred
Dividends $ 24,400 $ 18,380 $ 20,142 $ 20,205
======== ======== ======== ========
Income Applicable to
Common Stock $ 21,992 $ 15,972 $ 18,777 $ 20,927
======== ======== ======== ========
Quarter Ended
-------------
March 31, 1996 June 30, 1996 Sept. 30, 1996 Dec. 31, 1996(1)
------------------------------------------------------------------------
Operating Revenues $162,154 $147,376 $158,682 $151,512
======== ======== ======== ========
Operating Income $ 28,665 $ 23,180 $ 32,089 $ 23,074
======== ======== ======== ========
Income Before Preferred
Dividends $ 20,114 $ 15,896 $ 23,482 $ 14,159
======== ======== ======== ========
Income Applicable to
Common Stock $ 18,329 $ 14,391 $ 21,803 $ 12,828
======== ======== ======== ========
</TABLE>
(1) Reflects $13 million Nevada electric revenue refund.
64
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 333-
17041 of Sierra Pacific Power Company on Form S-3 of our report dated January
30, 1998, appearing in and incorporated by reference in the Annual Report on
Form 10-K/A of Sierra Pacific Power Company for the year ended December 31,
1997.
DELOITTE & TOUCHE LLP
Reno, Nevada
September 3, 1998
65
