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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Registrant, State of Incorporation, Address
Commission File of Principal Executive Offices and Telephone I.R.S. employer
Number Number Identification Number
1-8788 SIERRA PACIFIC RESOURCES 88-0198358
P.O. Box 10100
(6100 Neil Road)
Reno, Nevada 89520-0400 (89511)
(775) 834-4011
1-4698 NEVADA POWER COMPANY 88-0045330
6226 West Sahara Avenue
Las Vegas, Nevada 89146
(702) 367-5000
0-508 SIERRA PACIFIC POWER COMPANY 88-0044418
P.O. Box 10100
(6100 Neil Road)
Reno, Nevada 89520-0400 (89511)
(775) 834-4011
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 7, 2002
Common Stock, $1.00 par value 102,133,074 Shares
of Sierra Pacific Resources
Sierra Pacific Resources is the sole holder of the 1,000 shares of outstanding
Common Stock, $1.00 stated value, of Nevada Power Company.
Sierra Pacific Resources is the sole holder of the 1,000 shares of outstanding
Common Stock, $3.75 stated value, of Sierra Pacific Power Company.
This combined Quarterly Report on Form 10-Q is separately filed by Sierra
Pacific Resources, Nevada Power Company and Sierra Pacific Power Company.
Information contained in this document relating to Nevada Power Company is filed
by Sierra Pacific Resources and separately by Nevada Power Company on its own
behalf. Nevada Power Company makes no representation as to information relating
to Sierra Pacific Resources or its subsidiaries, except as it may relate to
Nevada Power Company. Information contained in this document relating to Sierra
Pacific Power Company is filed by Sierra Pacific Resources and separately by
Sierra Pacific Power Company on its own behalf. Sierra Pacific Power Company
makes no representation as to information relating to Sierra Pacific Resources
or its subsidiaries, except as it may relate to Sierra Pacific Power Company.
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SIERRA PACIFIC RESOURCES
NEVADA POWER COMPANY
SIERRA PACIFIC POWER COMPANY
QUARTERLY REPORTS ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
SIERRA PACIFIC RESOURCES -
Condensed Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 ............. 3
Condensed Consolidated Statements of Operations - Three Months and Six Months
Ended June 30, 2002 and 2001 ........................................................ 4
Condensed Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2002 and 2001 ........................................................ 5
NEVADA POWER COMPANY -
Condensed Balance Sheets - June 30, 2002 and December 31, 2001 .......................... 6
Condensed Statements of Operations - Three Months and Six Months
Ended June 30, 2002 and 2001 ........................................................ 7
Condensed Statements of Cash Flows - Six Months Ended June 30, 2002 and 2001 ............ 8
SIERRA PACIFIC POWER COMPANY -
Condensed Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 ............. 9
Condensed Consolidated Statements of Operations - Three Months and Six Months
Ended June 30, 2002 and 2001 ........................................................ 10
Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2002 and 2001 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ......................................... 12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 28
Sierra Pacific Resources Results of Operations ...................................... 33
Nevada Power Company Results of Operations .......................................... 36
Sierra Pacific Power Company Results of Operations .................................. 42
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk .............................. 52
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ....................................................................... 53
ITEM 4. Submission of Matters to a Vote of Security Holders ..................................... 53
ITEM 5. Other Information ....................................................................... 53
ITEM 6. Exhibits and Reports on Form 8-K ........................................................ 53
Signature Page ................................................................................... 56
2
SIERRA PACIFIC RESOURCES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) (UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Utility Plant at Original Cost:
Plant in service $ 5,778,360 $ 5,683,296
Less: accumulated provision for depreciation 1,861,615 1,777,517
------------ ------------
3,916,745 3,905,779
Construction work-in-progress 261,719 203,456
------------ ------------
4,178,464 4,109,235
------------ ------------
Investments in subsidiaries and other property, net 130,371 128,892
------------ ------------
Current Assets:
Cash and cash equivalents 200,314 99,109
Accounts receivable less provision for uncollectible accounts:
2002-$40,662; 2001-$39,335 420,044 394,489
Deferred energy costs - electric 220,317 333,062
Deferred energy costs - gas 17,967 19,805
Income tax receivable -- 18,590
Materials, supplies and fuel, at average cost 96,916 94,167
Risk management assets (Note 10) 153,781 286,509
Other 34,865 14,071
------------ ------------
1,144,204 1,259,802
------------ ------------
Deferred Charges and Other Assets:
Goodwill (Note 12) 310,441 312,145
Deferred energy costs - electric 749,009 854,778
Deferred energy costs - gas 16,326 23,248
Income tax receivable 295,201 355,659
Regulatory tax asset 168,276 169,738
Other regulatory assets 138,335 102,959
Risk management assets (Note 10) 17,726 61,058
Risk management regulatory assets - net (Note 10) 234,986 664,383
Other 132,944 139,417
------------ ------------
2,063,244 2,683,385
------------ ------------
$ 7,516,283 $ 8,181,314
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholders' equity $ 1,334,339 $ 1,702,322
Accumulated other comprehensive loss (Note 10) (4,878) (6,986)
Preferred stock 50,000 50,000
NPC obligated mandatorily redeemable preferred trust securities 188,872 188,872
Long-term debt 3,168,406 3,376,105
------------ ------------
4,736,739 5,310,313
------------ ------------
Current Liabilities:
Short-term borrowings 350,000 177,000
Current maturities of long-term debt 221,447 122,010
Accounts payable 227,376 265,250
Accrued interest 43,680 37,565
Dividends declared 1,057 1,045
Accrued salaries and benefits 20,892 30,145
Deferred taxes on deferred energy costs 83,399 123,503
Risk management liabilities (Note 10) 330,675 855,301
Other current liabilities 30,785 15,678
------------ ------------
1,309,311 1,627,497
------------ ------------
Commitments & Contingencies (Note 11)
Deferred Credits and Other Liabilities:
Deferred federal income taxes 405,262 412,658
Deferred investment tax credit 50,220 51,947
Deferred taxes on deferred energy costs 267,867 307,309
Regulatory tax liability 51,029 46,702
Customer advances for construction 109,400 108,179
Accrued retirement benefits 90,276 82,624
Risk management liabilities (Note 10) 67,177 163,636
Other (Note 11) 429,002 70,449
------------ ------------
1,470,233 1,243,504
------------ ------------
$ 7,516,283 $ 8,181,314
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
SIERRA PACIFIC RESOURCES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
OPERATING REVENUES:
Electric $ 673,685 $ 1,121,274 $ 1,254,254 $ 1,760,724
Gas 25,583 21,729 80,666 85,894
Other 1,586 5,070 4,341 7,700
------------ ------------ ------------ ------------
700,854 1,148,073 1,339,261 1,854,318
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Operation:
Purchased power 660,228 1,088,147 941,711 1,440,955
Fuel for power generation 104,643 179,909 235,416 366,134
Gas purchased for resale 13,107 25,171 51,701 95,714
Deferred energy costs disallowed 53,101 -- 487,224 --
Deferral of energy costs - electric - net (253,537) (361,902) (267,778) (343,572)
Deferral of energy costs - gas - net 2,176 (8,302) 10,368 (26,447)
Other 63,408 62,204 135,438 166,504
Maintenance 17,015 20,154 33,922 38,458
Depreciation and amortization 37,560 40,562 85,759 79,594
Taxes:
Income taxes (28,334) 13,223 (186,951) (32,054)
Other than income 11,588 10,613 23,303 21,224
------------ ------------ ------------ ------------
680,955 1,069,779 1,550,113 1,806,510
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 19,899 78,294 (210,852) 47,808
------------ ------------ ------------ ------------
OTHER (EXPENSE) INCOME:
Allowance for other funds used during construction (3) (151) 654 (687)
Other income (expense) - net 5,583 5,043 (1,544) 6,312
------------ ------------ ------------ ------------
5,580 4,892 (890) 5,625
------------ ------------ ------------ ------------
Total Income (Loss) Before Interest Charges 25,479 83,186 (211,742) 53,433
------------ ------------ ------------ ------------
INTEREST CHARGES:
Long-term debt 55,439 43,310 114,239 83,532
Other 8,266 7,411 12,896 15,293
Allowance for borrowed funds used during construction and
capitalized interest (1,078) (688) (2,581) (289)
------------ ------------ ------------ ------------
62,627 50,033 124,554 98,536
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE NPC OBLIGATED MANDATORILY
REDEEMABLE PREFERRED TRUST SECURITIES (37,148) 33,153 (336,296) (45,103)
Preferred dividend requirements of NPC obligated
mandatorily redeemable preferred trust securities 3,793 4,729 7,586 9,458
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE PREFERRED STOCK DIVIDENDS (40,941) 28,424 (343,882) (54,561)
Preferred stock dividend requirements of subsidiary 975 875 1,950 1,750
------------ ------------ ------------ ------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (41,916) 27,549 (345,832) (56,311)
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Income from operations of water business disposed of
(net of income taxes of $410 and $888 in 2001,
respectively) -- 641 -- 1,022
Gain on disposal of water business
(net of income taxes of $18,237) -- 25,845 -- 25,845
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX (Note 12) -- -- (1,566) --
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (41,916) $ 54,035 $ (347,398) $ (29,444)
============ ============ ============ ============
Amounts per share - Basic and Diluted
(Loss) income from continuing operations $ (0.41) $ 0.35 $ (3.39) $ (0.72)
Income from discontinued operations -- 0.01 -- 0.01
Gain on disposal of water business -- 0.33 0.33
Cumulative effect of change in accounting principle
(net of tax) -- -- (0.01)
------------ ------------ ------------ ------------
Net (loss) income $ (0.41) $ 0.69 $ (3.40) $ (0.38)
============ ============ ============ ============
Weighted Average Shares of Common Stock Outstanding 102,110,536 78,491,053 102,110,536 78,483,135
============ ============ ============ ============
Dividends Paid Per Share of Common Stock $ -- $ -- $ 0.20 $ 0.25
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
SIERRA PACIFIC RESOURCES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations before preferred dividends $ (343,882) $ (54,561)
Income from discontinued operations before preferred dividends -- 1,222
Gain on disposal of water business -- 25,845
Non-cash items included in income:
Depreciation and amortization 86,671 83,055
Deferred taxes and deferred investment tax credit 68,289 111,696
AFUDC and capitalized interest (3,235) 389
Amortization of deferred energy costs - electric 59,976 --
Amortization of deferred energy costs - gas 7,661 --
Deferred energy costs disallowed (net of taxes) 317,977 --
Early retirement and severance amortization 1,458 3,121
Gain on disposal of water business -- (44,081)
Other non-cash (23,462) (3,463)
Changes in certain assets and liabilities:
Accounts receivable (25,555) (320,191)
Deferral of energy costs - electric (479) (347,467)
Deferral of energy costs - gas 1,099 (28,111)
Materials, supplies and fuel (2,749) (16,224)
Other current assets (20,732) (48,903)
Accounts payable (37,875) 410,396
Income tax receivable 79,048 --
Other current liabilities 11,971 (5,382)
Other - net 36,906 15,938
---------- ----------
Net Cash from Operating Activities 213,087 (216,721)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (181,384) (158,652)
AFUDC and other charges to utility plant 3,235 (389)
Customer refunds for construction 1,221 (3,537)
Contributions in aid of construction 24,466 16,122
---------- ----------
Net cash used for utility plant (152,462) (146,456)
Proceeds from sale of assets of water business -- 318,882
Investments in subsidiaries and other property (1,640) (5,944)
---------- ----------
Net Cash from Investing Activities (154,102) 166,482
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings 173,000 (113,054)
Proceeds from issuance of long-term debt -- 670,000
Retirement of long-term debt (108,262) (353,160)
Sale of common stock -- 433
Dividends paid (22,518) (21,780)
---------- ----------
Net Cash from Financing Activities 42,220 182,439
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 101,205 132,200
Beginning Balance in Cash and Cash Equivalents 99,109 51,503
---------- ----------
Ending Balance in Cash and Cash Equivalents $ 200,314 $ 183,703
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during period for:
Interest $ 120,457 $ 98,650
Income taxes $ (185,011) $ (33,842)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
5
NEVADA POWER COMPANY
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS) (UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Utility Plant at Original Cost:
Plant in service $ 3,442,405 $ 3,356,584
Less: accumulated provision for depreciation 977,161 928,939
------------ ------------
2,465,244 2,427,645
Construction work-in-progress 165,036 134,706
------------ ------------
2,630,280 2,562,351
------------ ------------
Investment in Sierra Pacific Resources (Note 2) 236,605 309,259
Investments in subsidiaries and other property, net 13,502 12,721
------------ ------------
250,107 321,980
------------ ------------
Current Assets:
Cash and cash equivalents 59,877 8,505
Accounts receivable less provision for uncollectible accounts:
2002-$32,285; 2001-$30,861 292,282 210,333
Deferred energy costs - electric 167,923 281,555
Income tax receivable -- 18,590
Materials, supplies and fuel, at average cost 47,166 48,511
Risk management assets (Note 10) 100,092 200,829
Other 17,696 6,698
------------ ------------
685,036 775,021
------------ ------------
Deferred Charges and Other Assets:
Deferred energy costs - electric 569,760 698,510
Income tax receivable 264,549 295,818
Regulatory tax asset 108,912 109,859
Other regulatory assets 52,807 31,588
Risk management assets (Note 10) 15,000 49,493
Risk management regulatory assets - net (Note 10) 112,055 351,264
Other 24,678 29,485
------------ ------------
1,147,761 1,566,017
------------ ------------
$ 4,713,184 $ 5,225,369
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholder's equity including $236,605 and $309,259
of equity in Sierra Pacific Resources in 2002 and 2001 (Note 2) $ 1,334,339 $ 1,702,322
Accumulated other comprehensive income 415 520
NPC obligated mandatorily redeemable preferred trust securities 188,872 188,872
Long-term debt 1,605,777 1,607,967
------------ ------------
3,129,403 3,499,681
------------ ------------
Current Liabilities:
Short-term borrowings 200,000 130,500
Current maturities of long-term debt 19,047 19,380
Accounts payable 200,814 202,555
Accrued interest 25,658 19,310
Dividends declared 78 71
Accrued salaries and benefits 7,508 12,450
Deferred taxes on deferred energy costs 58,773 98,544
Risk management liabilities (Note 10) 181,760 522,508
Other current liabilities 21,475 17,710
------------ ------------
715,113 1,023,028
------------ ------------
Commitments & Contingencies (Note 11)
Deferred Credits and Other Liabilities:
Deferred federal income taxes 203,389 223,641
Deferred investment tax credit 22,718 23,533
Deferred taxes on deferred energy costs 199,416 244,479
Regulatory tax liability 23,601 18,604
Customer advances for construction 61,234 61,454
Accrued retirement benefits 32,769 28,104
Risk management liabilities (Note 10) 33,225 78,558
Other (Note 11) 292,316 24,287
------------ ------------
868,668 702,660
------------ ------------
$ 4,713,184 $ 5,225,369
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
6
NEVADA POWER COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
OPERATING REVENUES:
Electric $ 477,059 $ 808,441 $ 833,331 $1,167,453
OPERATING EXPENSES:
Operation:
Purchased power 485,926 839,538 661,992 1,041,360
Fuel for power generation 73,474 102,258 157,196 217,610
Deferred energy costs disallowed -- -- 434,123 --
Deferral of energy costs-net (185,199) (281,145) (194,835) (269,837)
Other 37,284 33,750 77,270 84,522
Maintenance 11,876 13,478 23,526 26,458
Depreciation and amortization 17,140 22,427 47,949 44,303
Taxes:
Income taxes (57) 16,246 (156,480) (14,218)
Other than income 6,453 5,847 13,187 11,897
---------- ---------- ---------- ----------
446,897 752,399 1,063,928 1,142,095
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) 30,162 56,042 (230,597) 25,358
---------- ---------- ---------- ----------
OTHER (EXPENSE) INCOME:
Equity in losses of Sierra Pacific Resources (Note 2) (47,571) 20,985 (52,069) (7,152)
Allowance for other funds used during construction 80 (122) 501 (473)
Other income (expense) - net 5,585 2,747 (5,772) 3,168
---------- ---------- ---------- ----------
(41,906) 23,610 (57,340) (4,457)
---------- ---------- ---------- ----------
Total (Loss) Income Before Interest Charges (11,744) 79,652 (287,937) 20,901
---------- ---------- ---------- ----------
INTEREST CHARGES:
Long-term debt 22,876 18,339 46,954 34,959
Other 4,352 3,750 6,882 7,713
Allowance for borrowed funds used during construction and
capitalized interest (849) (265) (1,961) 87
---------- ---------- ---------- ----------
26,379 21,824 51,875 42,759
---------- ---------- ---------- ----------
(LOSS) INCOME BEFORE NPC OBLIGATED MANDATORILY
REDEEMABLE PREFERRED TRUST SECURITIES (38,123) 57,828 (339,812) (21,858)
Preferred dividend requirements of NPC obligated
mandatorily redeemable preferred trust securities 3,793 3,793 7,586 7,586
---------- ---------- ---------- ----------
NET (LOSS) INCOME $ (41,916) $ 54,035 $ (347,398) $ (29,444)
========== ========== ========== ==========
Net (Loss) Income Per Share - Basic (Note 2) $ (0.41) $ 0.69 $ (3.40) $ (0.38)
========== ========== ========== ==========
- Diluted (Note 2) $ (0.41) $ 0.69 $ (3.40) $ (0.38)
========== ========== ========== ==========
Weighted Average Shares of Common
Stock Outstanding (000's) (Note 2) 102,111 78,491 102,111 78,483
========== ========== ========== ==========
Dividends Paid Per Share of Common Stock (Note 2) $ -- $ -- $ 0.20 $ 0.25
========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
NEVADA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (347,398) $ (29,444)
Non-cash items included in income:
Depreciation and amortization 47,949 44,303
Deferred taxes and deferred investment tax credit 51,987 89,758
AFUDC and capitalized interest (2,462) 560
Amortization of deferred energy costs 57,577 --
Deferred energy costs disallowed (net of taxes) 282,181 --
Other non-cash (13,782) (1,670)
Equity in losses of SPR (Note 2) 52,069 7,152
Changes in certain assets and liabilities:
Accounts receivable (81,949) (273,126)
Deferral of energy costs (20,317) (272,777)
Materials, supplies and fuel 1,345 (3,306)
Other current assets (10,998) (75,578)
Accounts payable (1,740) 414,458
Income tax receivable 49,859 --
Other current liabilities 5,170 (223)
Other - net 31,946 4,971
---------- ----------
Net Cash from Operating Activities 101,437 (94,922)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (139,634) (88,552)
AFUDC and other charges to utility plant 2,462 (560)
Customer refunds for construction (220) (3,739)
Contributions in aid of construction 21,286 3,903
---------- ----------
Net cash used for utility plant (116,106) (88,948)
Investments in subsidiaries and other property (942) --
---------- ----------
Net Cash from Investing Activities (117,048) (88,948)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 69,500 --
Proceeds from issuance of long-term debt -- 350,000
Retirement of long-term debt (2,523) (151,699)
Investment of SPR 10,000 21,921
Dividends paid (9,994) --
---------- ----------
Net Cash from Financing Activities 66,983 220,222
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 51,372 36,352
Beginning balance in Cash and Cash Equivalents 8,505 43,858
---------- ----------
Ending balance in Cash and Cash Equivalents $ 59,877 $ 80,210
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during period for:
Interest $ 47,545 $ 40,910
Income taxes $ (102,904) $ (10,015)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
8
SIERRA PACIFIC POWER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) (UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
---------- ----------
ASSETS
Utility Plant at Original Cost:
Plant in service $2,335,955 $2,326,712
Less: accumulated provision for depreciation 884,454 848,578
---------- ----------
1,451,501 1,478,134
Construction work-in-progress 96,683 68,750
---------- ----------
1,548,184 1,546,884
---------- ----------
Investments in subsidiaries and other property, net 55,603 57,185
---------- ----------
Current Assets:
Cash and cash equivalents 112,196 11,772
Accounts receivable less provision for uncollectible accounts:
2002 - $8,377; 2001 - $8,474 230,652 194,698
Deferred energy costs - electric 52,394 51,507
Deferred energy costs - gas 17,967 19,805
Materials, supplies and fuel, at average cost 46,130 42,290
Risk management assets (Note 10) 53,689 85,680
Other 16,458 5,935
---------- ----------
529,486 411,687
---------- ----------
Deferred Charges and Other Assets:
Deferred energy costs - electric 179,249 156,268
Deferred energy costs - gas 16,326 23,248
Income tax receivable 12,289 41,040
Regulatory tax asset 59,364 59,879
Other regulatory assets 65,615 51,146
Risk management assets (Note 10) 2,726 11,565
Risk management regulatory assets - net (Note 10) 122,931 313,119
Other 11,811 13,886
---------- ----------
470,311 670,151
---------- ----------
$2,603,584 $2,685,907
========== ==========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholder's equity $ 657,797 $ 692,654
Accumulated other comprehensive income 416 247
Preferred stock 50,000 50,000
Long-term debt 917,561 923,070
---------- ----------
1,625,774 1,665,971
---------- ----------
Current Liabilities:
Short-term borrowings 150,000 46,500
Current maturities of long-term debt 2,400 2,630
Accounts payable 61,781 95,555
Accrued interest 10,364 8,408
Dividends declared 986 974
Accrued salaries and benefits 10,804 15,466
Deferred taxes on deferred energy costs 24,626 24,959
Risk management liabilities (Note 10) 148,915 332,793
Other current liabilities 7,513 3,387
---------- ----------
417,389 530,672
---------- ----------
Commitments & Contingencies (Note 11)
Deferred Credits and Other Liabilities:
Deferred federal income taxes 191,529 178,533
Deferred investment tax credit 27,502 28,414
Deferred taxes on deferred energy costs 68,451 62,831
Regulatory tax liability 27,428 28,098
Customer advances for construction 48,166 46,725
Accrued retirement benefits 46,280 43,028
Risk management liabilities (Note 10) 33,952 77,324
Other (Note 11) 117,113 24,311
---------- ----------
560,421 489,264
---------- ----------
$2,603,584 $2,685,907
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
9
SIERRA PACIFIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
OPERATING REVENUES:
Electric $ 196,626 $ 312,833 $ 420,923 $ 593,271
Gas 25,583 21,729 80,666 85,894
---------- ---------- ---------- ----------
222,209 334,562 501,589 679,165
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Operation:
Purchased power 174,302 248,608 279,719 399,595
Fuel for power generation 31,169 77,652 78,220 148,524
Gas purchased for resale 13,107 25,171 51,701 95,714
Deferred energy costs disallowed 53,101 -- 53,101 --
Deferral of energy costs - electric - net (68,338) (80,755) (72,943) (73,735)
Deferral of energy costs - gas - net 2,176 (8,303) 10,368 (26,447)
Other 22,876 23,174 50,623 50,868
Maintenance 5,139 6,676 10,396 12,000
Depreciation and amortization 20,153 17,859 37,269 34,708
Taxes:
Income taxes (21,539) 1,464 (16,638) (656)
Other than income 4,881 4,574 9,657 8,968
---------- ---------- ---------- ----------
237,027 316,120 491,473 649,539
---------- ---------- ---------- ----------
OPERATING (LOSS) INCOME (14,818) 18,442 10,116 29,626
---------- ---------- ---------- ----------
OTHER (EXPENSE) INCOME:
Allowance for other funds used during construction (83) (30) 153 (214)
Other income (expense) - net (293) 1,499 2,677 1,013
---------- ---------- ---------- ----------
(376) 1,469 2,830 799
---------- ---------- ---------- ----------
Total (Loss) Income Before Interest Charges (15,194) 19,911 12,946 30,425
---------- ---------- ---------- ----------
INTEREST CHARGES:
Long-term debt 16,020 12,529 32,465 23,099
Other 2,966 3,022 4,108 5,982
Allowance for borrowed funds used during construction and
capitalized interest (229) (423) (620) (377)
---------- ---------- ---------- ----------
18,757 15,128 35,953 28,704
---------- ---------- ---------- ----------
(LOSS) INCOME BEFORE SPPC OBLIGATED MANDATORILY
REDEEMABLE PREFERRED TRUST SECURITIES (33,951) 4,783 (23,007) 1,721
Preferred dividend requirements of SPPC obligated
mandatorily redeemable preferred trust securities -- 936 -- 1,872
---------- ---------- ---------- ----------
(LOSS) INCOME BEFORE PREFERRED DIVIDENDS (33,951) 3,847 (23,007) (151)
Preferred dividend requirements 975 875 1,950 1,750
---------- ---------- ---------- ----------
(LOSS) INCOME FROM CONTINUING OPERATIONS (34,926) 2,972 (24,957) (1,901)
---------- ---------- ---------- ----------
DISCONTINUED OPERATIONS:
Income from operations of water business disposed of (net of
income taxes of $410 and $888 in 2001, respectively) -- 641 -- 1,022
Gain on disposal of water business (net of income taxes of $18,237) -- 25,845 -- 25,845
---------- ---------- ---------- ----------
NET (LOSS) INCOME $ (34,926) $ 29,458 $ (24,957) $ 24,966
========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
10
SIERRA PACIFIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations before preferred dividends $ (23,007) $ (151)
Income from discontinued operations before preferred dividends -- 1,222
Gain on disposal of water business -- 25,845
Non-cash items included in income:
Depreciation and amortization 38,181 38,168
Deferred taxes and investment tax credits 16,304 21,932
AFUDC and capitalized interest (773) (171)
Amortization of deferred energy costs - electric 2,399 --
Amortization of deferred energy costs - gas 7,661 --
Deferred energy costs disallowed (net of taxes) 35,796 --
Early retirement and severance amortization 1,458 3,121
Gain on disposal of water business -- (44,081)
Other non-cash (8,975) (8,635)
Changes in certain assets and liabilities:
Accounts receivable (35,954) (60,552)
Deferral of energy costs - electric 19,838 (74,692)
Deferral of energy costs - gas 1,099 (28,110)
Materials, supplies and fuel (3,840) (12,991)
Other current assets (10,522) 26,728
Accounts payable (33,774) (814)
Income tax receivable 28,752 --
Other current liabilities 1,421 5,569
Other-net 13,211 5,358
---------- ----------
Net Cash from Operating Activities 49,275 (102,254)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (41,750) (70,101)
AFUDC and other charges to utility plant 773 171
Customer refunds for construction 1,441 203
Contributions in aid of construction 3,180 12,219
---------- ----------
Net cash used for utility plant (36,356) (57,508)
Proceeds from sale of assets of water business -- 318,882
Disposal of subsidiaries and other property - net 1,582 1,447
---------- ----------
Net Cash from Investing Activities (34,774) 262,821
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings 103,500 (108,942)
Proceeds from issuance of long-term debt -- 320,000
Retirement of long-term debt (5,739) (201,450)
Investment by parent company 10,000 4,948
Dividends paid (21,838) (77,950)
---------- ----------
Net Cash from Financing Activities 85,923 (63,394)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 100,424 97,173
Beginning Balance in Cash and Cash Equivalents 11,772 5,348
---------- ----------
Ending Balance in Cash and Cash Equivalents $ 112,196 $ 102,521
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during year for:
Interest $ 33,997 $ 31,412
Income taxes (62,109) (18,071)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. MANAGEMENT'S STATEMENT (SPR, NPC, SPPC)
In the opinion of the management of Sierra Pacific Resources (SPR),
Nevada Power Company (NPC), and Sierra Pacific Power Company (SPPC), 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 audited financial
statements included in SPR's, NPC's, and SPPC's Combined Annual Report on Form
10-K for the year ended December 31, 2001.
The results of operations for the six months ended June 30, 2002 are
not necessarily indicative of the results to be expected for the full year.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements of SPR include the
accounts of SPR and its wholly owned subsidiaries, Nevada Power Company, Sierra
Pacific Power Company, (collectively, the "Utilities"), Tuscarora Gas Pipeline
Company (TGPC), Sierra Gas Holding Company (SGHC), Sierra Energy Company dba e-
three (e-three), Sierra Pacific Energy Company (SPE), Lands of Sierra (LOS),
Sierra Pacific Communications (SPC), and Sierra Water Development Company
(SWDC). All significant intercompany transactions and balances have been
eliminated in consolidation.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The March 29, 2002 decision of the Public Utilities Commission of
Nevada (PUCN) on NPC's deferred energy application to disallow $434 million of
deferred purchased fuel and power costs accumulated between March 1, 2001 and
September 30, 2001 had a significant negative impact on the results of
operations of SPR and NPC for the six months ended June 30, 2002. Several of the
intervenors from NPC's deferred energy rate case filed petitions with the PUCN
for reconsideration of its decision, seeking additional disallowances ranging
from $12.8 million to $488 million. The petitions for reconsideration were
granted in part and denied in part by the PUCN on May 24, 2002, but no
additional disallowances to the deferred energy balance resulted from that
decision. The Bureau of Consumer Protection of the Nevada Attorney General's
Office has since filed a petition in NPC's pending state court case seeking
additional disallowances. Although the PUCN's March 29, 2002 decision on NPC's
deferred energy application is being challenged by NPC in a lawsuit filed in
Nevada state court, which is discussed in Note 9, Regulatory Events, the
decision caused the two major national rating agencies to issue an immediate
downgrade of the credit ratings on SPR's, NPC's and SPPC's debt securities
(followed by further downgrades late in April). Following those events, the
market price of SPR's Common Stock fell substantially, NPC and SPPC were obliged
within 5 business days of the downgrades to issue general and refunding mortgage
bonds to secure their bank lines of credit, NPC was obliged to obtain a waiver
and amendment from its credit facility banks before it was permitted to draw
down on the facility, NPC and SPPC were no longer able to issue commercial
paper, a number of NPC's power suppliers contacted NPC regarding its ability to
pay the purchase price of outstanding contracts, and several power suppliers,
including an affiliate of Enron Corp., Morgan Stanley Capital Group Inc.,
Reliant Energy Services, Inc. and several smaller suppliers, terminated their
power supply agreements with one or both of the Utilities. As discussed below,
Duke Energy Trading and Marketing ("Duke") has agreed to replace the amount of
contracted power and natural gas that would have been supplied by the Utilities'
terminating suppliers.
The separate decision of the PUCN on May 29, 2002 on SPPC's deferred
energy application to disallow $53.1 million of deferred purchased fuel and
power costs accumulated between March 1, 2001 and November 30, 2001 had a
significant negative impact on the results of operations of SPR and SPPC for the
quarter ended June 30, 2002 and for the six months ended June 30, 2002. SPPC is
currently evaluating its options regarding a possible court challenge to the
PUCN order. Several of the intervenors from SPPC's deferred energy rate case
filed petitions with the PUCN for reconsideration of its decision, seeking an
additional disallowance of $126 million. On July 18, 2002, the petitions for
reconsideration were granted in part and denied in part by the PUCN, but no
additional disallowances to the deferred energy balance resulted from that
decision.
NPC is required to file its next deferred energy case in approximately
mid-November 2002 and will request recovery and/or an affirmation of prudency
for fuel and purchased power costs incurred and recorded in its deferred energy
account for the period October 1, 2001, through September 30, 2002. The amount
recorded is expected to approximate $400 million, which will include costs of
approximately $229 million accrued for terminated suppliers. (See Note 11,
Commitments and Contingencies.) These amounts are subject to whatever
adjustments may be ordered by the FERC in NPC's Section 206 complaints. (See
Note 9, Regulatory Events.)
12
SPPC is required to file its next deferred energy case in approximately
mid-January 2003 and will request recovery and/or an affirmation of prudency for
all costs for fuel and purchased power recorded in its deferred energy account
over the period December 1, 2001, through November 30, 2002. That amount is
expected to approximate $90 million, which will include costs of approximately
$82 million accrued for terminated suppliers. (See Note 11, Commitments and
Contingencies.) These amounts are subject to whatever adjustments may be ordered
by the FERC in SPPC's Section 206 complaints. (See Note 9, Regulatory Events.)
A significant disallowance in future deferred energy rate cases filed
by either Utility could further weaken the financial condition, liquidity, and
capital resources of SPR, NPC, and SPPC. In particular, such a decision or
decisions could cause further downgrades of debt securities by the rating
agencies, could make it impracticable to access the capital markets, and could
cause additional power suppliers to terminate purchased power contracts and seek
liquidated damages. Under such circumstances, there can be no assurance that
SPR, NPC, or SPPC would be able to remain solvent or continue operations. Under
such circumstances, there also can be no assurance that SPR, NPC, or SPPC would
not seek protection under the bankruptcy laws.
In response to the decisions by the PUCN in NPC's recent rate cases,
SPR implemented certain measures that will positively impact cash flow by $125
million in 2002. Two major transmission construction projects, discussed in the
Form 10-K for the year ended December 31, 2001, have been delayed for a total
capital preservation impact of $80.8 million. The delay in NPC's Centennial Plan
has an impact of $46.4 million and the delay of SPPC's Falcon to Gonder Project
has an impact of $34.4 million. An additional $28.9 million was reduced from the
Utilities' capital budgets by curtailing or delaying other projects. Management
expects that the balance of the $125 million cash flow enhancement will be
obtained from various land sales. Additional cost-cutting actions by SPR may be
necessary.
With respect to NPC's and SPPC's contracts for purchased power, NPC and
SPPC purchase and sell electricity with their counterparties under the Western
Systems Power Pool ("WSPP") agreement, which is an industry standard contract.
The WSPP contract is posted on the WSPP website. These contracts provide that a
material adverse change may give rise to a right to request collateral, which,
if not provided within 3 business days, could cause a default. A default must be
declared within 30 days of the event giving rise to the default becoming known.
As the Utilities continue to negotiate arrangements with their suppliers, the
Utilities have extended to all continuing suppliers their rights under the WSPP
agreement, including the right to declare a default. A default will result in a
termination payment equal to the present value of the net gains and losses for
the entire remaining term of all contracts between the parties aggregated to a
single liquidated amount due within 3 business days following the date the
notice of termination is received. The mark-to-market value can be used to
roughly approximate the termination payment at any point in time. The
mark-to-market value as of July 31, 2002, for all suppliers continuing to
provide power under a WSPP agreement was approximately $248 million and $108
million, respectively, for NPC and SPPC.
Following the PUCN decisions, a number of power suppliers requested
collateral from NPC and SPPC. On April 4, 2002, the Utilities sent a letter to
their suppliers advising them that, assuming the Utilities could access the
capital markets for secured debt and no other significant negative developments
occurred, the Utilities expected to be able to honor their obligations under the
power supply contracts. However, the Utilities noted that a simultaneous call
for 100% mark-to-market collateral in the short-term would likely not be met. On
April 24, 2002, the Utilities met with representatives of various suppliers to
discuss SPR's and the Utilities' financial situation and plans, and indicated
that they intended to propose extended payment terms for the above-market
portions of NPC's existing power contracts. Such extended payment terms were
proposed to NPC's suppliers in a letter dated May 2, 2002, and proposed paying
less than contract prices, but more than market prices plus interest, for the
period May 1 to September 15, 2002. NPC may pay any balances remaining prior to
December 2003. NPC also agreed to extend the suppliers' rights under the WSPP
agreement.
In early May, Enron Power Marketing Inc. ("Enron"), Morgan Stanley
Capital Group Inc., Reliant Energy Services, Inc. and several smaller suppliers
notified NPC and SPPC that they would end power deliveries to NPC and SPPC based
on what they believed to be their contractual right to end deliveries because of
the Utilities' inability to provide adequate assurances of their ability to
perform all of their outstanding material obligations. Each of these terminating
suppliers has asserted, or has indicated that it will assert, a claim for
liquidated damages. As discussed in Note 11, Commitments And Contingencies,
Enron has filed suit in its bankruptcy case in the Bankruptcy Court for the
Southern District of New York seeking approximately $216 million and $93 million
from NPC and SPPC, respectively. In connection with this suit, Enron has filed a
motion to require the Utilities to post collateral equal to the amount of
Enron's claims pending the outcome of the lawsuit. A hearing in this case has
been scheduled for September 6, 2002. An adverse decision on the petition to
require the Utilities to post collateral pending the outcome of Enron's lawsuit
or an adverse decision in the lawsuit itself could have a material adverse
affect on the financial condition and liquidity of SPR and the Utilities and
could render their ability to continue to operate outside of bankruptcy
uncertain. At this time, SPR and the Utilities are not able to predict the
outcome of a decision in this matter.
13
On June 10, 2002, Duke Energy Trading and Marketing ("Duke") entered
into an agreement with SPR and the Utilities to supply up to 1,000 megawatts of
electricity per hour, as well as natural gas, to NPC and SPPC to fulfill
customers' power requirements during the peak summer period. The effect of the
Duke agreement was to replace the amount of contracted power and natural gas
that would have been supplied by the various terminating suppliers, including
Enron. Duke also agreed to accept deferred payment for a portion of the amount
due under its existing power contracts with NPC for purchases made through
September 15, 2002. Although the other continuing suppliers have not entered
into formal agreements with NPC regarding deferred payments, NPC has been
deferring a portion of the payments to such suppliers since May 1, 2002 and
intends to continue to do so for charges incurred through September 15, 2002.
SPR's future liquidity depends, in part, on SPPC's ability to continue
to pay dividends to SPR, on a restoration of NPC to financial stability
including a restoration of its ability to pay dividends to SPR, and on SPR's
ability to access the capital markets or otherwise refinance debt that will be
maturing in 2003 and thereafter. Further adverse developments at NPC or SPPC,
including a material disallowance of deferred energy costs in future rate cases,
an adverse decision in the pending lawsuit by Enron to collect liquidated
damages (including its motion requesting the posting of collateral), a refusal
by one or more of NPC's continuing power suppliers to continue to accept
extended payment terms through the summer of 2002, or an inability of NPC or
SPPC to renew, replace or refinance all or a portion of their respective credit
facilities which expire on November 28, 2002, could cause SPR to become
insolvent and would render SPR's ability to continue to operate outside of
bankruptcy uncertain.
NPC's short-term liquidity depends significantly on the willingness of
NPC's power suppliers to continue to accept deferred payments for a portion of
the amounts owed by NPC on purchased power contracts through the summer months
of 2002. NPC's liquidity could also be significantly affected by an adverse
decision in the pending lawsuit by Enron to collect liquidated damages
(including its motion seeking the posting of collateral), by unfavorable rulings
by the PUCN in future NPC or SPPC rate cases, by an inability to renew, replace
or refinance all or a portion of its credit facility that expires on November
28, 2002, or by the PUCN's reconsideration of its compliance order authorizing
NPC to issue up to $300 million in long-term debt. Both S&P and Moody's have
NPC's credit ratings on "watch negative" or "possible downgrade", and any
further downgrades could further preclude NPC's access to the capital markets.
Adverse developments with respect to any one or a combination of the foregoing
could cause NPC to become insolvent and would render NPC's ability to continue
to operate outside of bankruptcy uncertain.
SPPC's future liquidity could be significantly affected by unfavorable
rulings by the PUCN in future SPPC or NPC rate cases, or by an inability to
renew, replace or refinance all or a portion of SPPC's credit facility that
expires on November 28, 2002. Both S&P and Moody's have SPPC's credit ratings on
"watch negative" or "possible downgrade", and any further downgrades could
further preclude SPPC's access to the capital markets and could adversely affect
SPPC's ability to continue purchasing power and fuel. Adverse developments with
respect to any one or a combination of the foregoing could cause SPPC to become
insolvent and could render SPPC's ability to continue to operate outside of
bankruptcy uncertain.
The accompanying financial statements do not include any adjustments
that might result from the outcome of the uncertainties discussed above.
Also see Note 5, Dividend Restrictions, Note 9, Regulatory Events and
Note 11, Commitments and Contingencies.
RECLASSIFICATIONS
Certain items previously reported for years prior to 2002 have been
reclassified to conform to the current year's presentation. Net income and
shareholders' equity were not affected by these reclassifications.
RECENT PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
three new pronouncements, Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations," SFAS No. 142, "Goodwill and Other Intangible
Assets," and SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001.
See Note 12, Change in Accounting for Goodwill, for a discussion of
SPR's implementation of SFAS No. 142.
SFAS No. 143, effective for fiscal years beginning after June 15, 2002,
requires an entity to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. Management does not
expect the adoption of SFAS No. 143 to have a material effect on the financial
position or results of operations of SPR, NPC, and SPPC.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This standard provides guidance on
the impairment of long-lived assets and for long-lived assets to be disposed of.
The
14
standard supersedes the current authoritative literature on impairments as well
as disposal of a segment of a business and was adopted January 1, 2002.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". Among other things, this statement rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
will now be used to classify those gains and losses. Management does not
anticipate that adoption of this statement will have an impact on the financial
position or results of operations of SPR, NPC or SPPC.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. Management does not anticipate that adoption of this statement will
have an impact on the financial position or results of operations of SPR, NPC or
SPPC.
NOTE 2. FINANCIAL STATEMENTS OF NEVADA POWER COMPANY (NPC)
In accordance with Generally Accepted Accounting Principles, the 1999
merger between SPR and NPC was accounted for as a reverse purchase, with NPC
deemed to be the acquirer of SPR as reflected in the SPR Consolidated Financial
Statements. However, after the merger with SPR and as a result of the structure
of the transactions, NPC is a separate legal entity, which is a wholly owned
subsidiary of SPR. As a legal matter, NPC does not own any equity interest in
SPR. The audited NPC Financial Statements accommodate the presentation of
financial information of NPC on a stand-alone basis by summarizing all non-NPC
financial information into a few items on each of the Financial Statements.
These summarized items are repeated below (in 000's):
Non-NPC Financial Items on the NPC Financial Statements
NPC Balance Sheets: June 30, 2002 December 31, 2001
- ------------------- ------------- -----------------
Investment in Sierra Pacific Resources $ 236,605 $ 309,259
Equity in Sierra Pacific Resources $ 236,605 $ 309,259
The Investment in Sierra Pacific Resources reflects the net assets,
after deducting for all liabilities and preferred stock of Sierra Pacific
Resources not related to NPC. The Equity in Sierra Pacific Resources reflects
the sum of paid-in-capital and retained earnings of SPR, without the benefit of
NPC.
These line items do not represent any asset to which holders of NPC's
securities may look for recovery of their investment. These items must be
disregarded for determining the ability of NPC to satisfy its obligations or to
pay dividends (preferred or common), for calculating NPC's ratios of earnings to
fixed charges and preferred stock dividends and for all of NPC's financial
covenants and earnings tests including those under its charter and mortgage.
NPC Statements of Operations: Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Equity in (Losses) Earnings of Sierra Pacific Resources $(47,571) $20,985
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Equity in Losses of Sierra Pacific Resources $ (52,069) $(7,152)
This line does not represent any item of revenue or income to which
holders of NPC's securities may look for recovery of their investment. This item
must be disregarded for determining the ability of NPC to satisfy its
obligations or its ability to pay dividends (preferred or common), for
calculating NPC's ratios of earnings to fixed charges and preferred dividends
and for all of NPC's financial covenants and earnings tests including those
under its charter and mortgage.
Excluding NPC's equity in the losses/earnings of its parent, SPR, NPC
earned approximately $5.7 million and $33.1 million, respectively, for the
three-month periods ended June 30, 2002, and 2001. Excluding NPC's equity in the
losses
15
of its parent, SPR, NPC incurred losses of approximately $295.3 million and
$22.3 million, respectively, for the six-month periods ended June 30, 2002, and
2001.
NPC Statements of Cash Flow: Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Equity in Losses of Sierra Pacific Resources $52,069 $7,152
As in the statement of operations, the Equity in Losses of Sierra
Pacific Resources reflects the six months of SPR net losses, after SPPC
preferred stock dividends.
This line item does not represent any item of cash flow to which
holders of NPC's securities may look for recovery of their investment. This item
must be disregarded for determining the ability of NPC to satisfy its
obligations or its ability to pay dividends (preferred or common), for
calculating NPC's ratios of earnings to fixed charges and preferred dividends
and for all of NPC's financial covenants and earnings tests including those
under its charter and mortgage.
NOTE 3. SHORT-TERM BORROWINGS (SPR, NPC, SPPC)
SIERRA PACIFIC RESOURCES
On April 3, 2002, SPR terminated its $75 million unsecured revolving
credit facility in connection with the amendment of NPC's $200 million unsecured
revolving credit facility, discussed below.
NEVADA POWER COMPANY
On November 29, 2001, NPC put into place a $200 million unsecured
revolving credit facility for working capital and general corporate purposes,
including commercial paper backup. As a result of NPC's rate case decisions
(discussed in Note 9 - Regulatory Events) and the credit downgrades by Standard
& Poors (S&P) and Moody's, which occurred on March 29 and April 1, 2002,
respectively, the Banks participating in NPC's credit facility determined that a
material adverse event had occurred with respect to NPC, thereby precluding NPC
from borrowing funds under its credit facility. The Banks agreed to waive the
consequences of the material adverse event in a waiver letter and amendment that
was executed on April 4, 2002. As required under the waiver letter and
amendment, on April 4, 2002, NPC issued and delivered its General and Refunding
Mortgage Bond, Series C, due November 28, 2002, in the principal amount of $200
million, to the Administrative Agent for the credit facility.
The waiver letter and amendment also provides that (i) NPC may not
create or incur any liens on its properties to secure obligations to its power
and/or commodity trading counterparties or power suppliers, (ii) in the event
that NPC issues more than $250 million of its General and Refunding Mortgage
Bonds, other than to secure NPC's 6.20% Senior Unsecured Notes, Series B due
April 15, 2004, the principal amounts of such issuances will be applied as
mandatory prepayments of the loans outstanding under the credit facility and the
commitments under the facility will correspondingly be reduced, and (iii) the
SPR credit facility be terminated. On June 25, 2002, NPC and the Banks executed
Amendment No. 2 to NPC's Credit Agreement that prohibits NPC from paying any
dividends and prohibits the voluntary prepayment or redemption of NPC's existing
indebtedness, except in the ordinary course of business. Amendment No. 2 also
modifies the restriction in the waiver letter and amendment with respect to
creating or incurring liens to secure obligations to NPC's power and/or
commodity trading counterparties or power suppliers. Under Amendment No. 2, NPC
may create or incur liens on up to an aggregate total of $50 million of its
deposit and investment accounts and its investment properties to support NPC's
obligations to fuel or other energy suppliers, to secure NPC's cash management
obligations and/or to secure purchase money liens on property or liens existing
on such property at the time of purchase.
As of May 2, 2002, NPC had borrowed the entire $200 million of funds
available under its credit facility to pay off maturing commercial paper. As of
June 30, 2002, NPC had $200 million outstanding under its credit facility at an
average interest rate of 3.72%. In connection with the credit rating downgrades
referenced above, NPC lost its A2/P2 commercial paper ratings and can no longer
issue commercial paper. NPC's credit facility expires November 28, 2002.
SIERRA PACIFIC POWER COMPANY
On November 29, 2001, SPPC put into place a $150 million unsecured
revolving credit facility for working capital and general corporate purposes,
including commercial paper backup. Under this credit facility, SPPC was
required, in the event of a ratings downgrade of its senior unsecured debt, to
secure the facility with General and Refunding Mortgage Bonds. In satisfaction
of its obligation to secure the credit facility, on April 8, 2002, SPPC issued
and delivered its General and Refunding Mortgage Bond, Series B, due November
28, 2002, in the principal amount of $150 million, to the Administrative Agent
for the credit facility. On June 25, 2002, SPPC and the Banks executed Amendment
No. 1 to SPPC's Credit Agreement
16
that prohibits SPPC from paying any dividends in the event of a default under
the Credit Agreement and prohibits the voluntary prepayment or redemption of
SPPC's existing indebtedness, except in the ordinary course of business.
Amendment No. 1 also allows SPPC to create or incur liens on up to an aggregate
total of $50 million of its deposit and investment accounts and its investment
properties to support SPPC's obligations to fuel or other energy suppliers, to
secure SPPC's cash management obligations and/or to secure purchase money liens
on property or liens existing on such property at the time of purchase.
As of May 10, 2002, SPPC had borrowed the entire $150 million of funds
available under its credit facility to, in part, pay off maturing commercial
paper, and to maintain a cash balance at SPPC. As of June 30, 2002, SPPC had
$150 million outstanding under its credit facility at an average interest rate
of 3.69%. In connection with the credit ratings downgrades referenced above,
SPPC lost its A2/P2 commercial paper ratings and can no longer issue commercial
paper. SPPC's credit facility expires on November 28, 2002.
NOTE 4. LONG-TERM DEBT (SPR, NPC, SPPC)
NPC's, SPPC's and SPR's aggregate annual amount of maturities for
long-term debt for the next five years is shown below (in thousands of dollars):
SPR Holding Co. SPR
NPC SPPC and Other Subs. Consolidated
---------- ---------- --------------- ------------
2002 $ 15,000 $ -- $ -- $ 15,000
2003 350,000 20,400 (1) 200,000 570,400 (1)
2004 130,000 2,400 -- 132,400
2005 -- 2,400 300,000 302,400
2006 -- 52,400 -- 52,400
---------- ---------- ---------- ----------
Subtotal 495,000 77,600 500,000 1,072,600
Thereafter 1,129,824 842,361 345,068 2,317,253
---------- ---------- ---------- ----------
Total $1,624,824 $ 919,961 $ 845,068 $3,389,853
========== ========== ========== ==========
(1) In addition to the amounts shown in the table, on May 1, 2003,
$80,000,000 aggregate principal amount of the Washoe County, Nevada,
Water Facilities Refunding Revenue Bonds (Sierra Pacific Power Company
Project) Series 2001, will be subject to remarketing. In the event that
the Bonds cannot be successfully remarketed on that date, SPPC will be
required to purchase the outstanding Bonds at a price of 100% of the
principal amount, plus accrued interest.
SIERRA PACIFIC RESOURCES
On April 20, 2002, $100 million of SPR's floating rate notes matured
and were paid in full. The notes had been issued on April 20, 2000, and the net
proceeds used to make a capital contribution to NPC.
NEVADA POWER COMPANY
On May 13, 2002, NPC issued a General and Refunding Mortgage Bond,
Series D, due April 15, 2004, in the principal amount of $130 million, for the
benefit of the holders of NPC's 6.20% Senior Unsecured Notes, Series B, due
April 15, 2004. The Senior Unsecured Notes Indenture required that in the event
that NPC issued debt secured by liens on NPC's operating property, in excess of
15% of its Net Tangible Assets or Capitalization (as both terms are defined in
the Senior Unsecured Notes Indenture), NPC would equally and ratably secure the
Senior Unsecured Notes. NPC triggered this negative pledge covenant on April 23,
2002, when it borrowed certain amounts under its secured credit facility.
NOTE 5. DIVIDEND RESTRICTIONS (SPR, NPC, SPPC)
Since SPR is a holding company, substantially all of its cash flow is
provided by dividends paid to SPR by NPC and SPPC on their common stock, all of
which is owned by SPR. The two Utilities are public utilities and are subject to
regulation
17
by state utility commissions which may impose limits on investment returns or
otherwise impact the amount of dividends that the Utilities may declare and pay.
In addition, certain agreements entered into by SPR, NPC and SPPC set
restrictions on the amount of dividends the Companies may declare and pay and
restrict the circumstances under which such dividends may be declared and paid.
SPPC's charter also contains a dividend restriction for the benefit of SPPC's
preferred stock holders.
Any of the provisions which restrict dividends payable by NPC or SPPC
could adversely affect the liquidity of SPR.
SIERRA PACIFIC RESOURCES
The Master Amendment to Confirmation Agreements with Duke Energy
Trading and Marketing L.L.C. (discussed below) prohibits SPR from using any
amounts received from NPC to pay a dividend or to make any other payment on
account of SPR's common stock until certain deferred payments are paid in full
and certain energy and gas deliveries have been made and paid for under the
Agreement. Under the Agreement, all deferred payments are due and payable on
December 31, 2003, although NPC currently expects that such payments will be
completed prior to that date.
NEVADA POWER COMPANY
The PUCN issued a Compliance Order, Docket No. 02-4037, on June 19,
2002, relating to NPC's request for authority to issue long-term debt. The PUCN
order requires that, until such time as the order's authorization expires
(December 31, 2003), NPC must either receive the prior approval of the PUCN or
reach an equity ratio of 42% before paying any dividends to SPR. If NPC achieves
a 42% equity ratio prior to December 31, 2003, the dividend restriction ceases
to have effect.
In addition, NPC's first mortgage indenture limits the cumulative
amount of dividends that NPC may pay on its capital stock to the cumulative net
earnings of NPC since 1953. At the present time, this restriction precludes NPC
from making further payments of dividends on NPC's common stock and will
continue to bar such payments unless the restriction is waived or removed by the
consent of the first mortgage bondholders, the first mortgage bonds are redeemed
or defeased, or until, over the passage of time, NPC generates sufficient
earnings to overcome the shortfall created by the write-off of $465 million in
connection with the March 2002 decision in NPC's deferred energy rate case.
On June 4, 2002, NPC entered into a Master Amendment to Confirmation
Agreements with Duke Energy Trading and Marketing L.L.C. which, among other
things, limits the amount of dividends NPC may declare or pay on its equity
securities until NPC completes certain deferred payments under the Agreement,
which are due on December 31, 2003. Under the Agreement, until the deferred
payments are paid in full, NPC may not declare any dividend or make any dividend
payments other than (1) payments to SPR to enable SPR to pay its reasonable fees
and expenses (including interest on SPR's debts and payment of obligations under
SPR's PIES) incurred in the ordinary course of business in calendar year 2003,
up to a maximum amount of $20,000,000 and (2) any currently scheduled payments
to any of NPC's preferred trust vehicles on account of NPC's preferred trust
securities.
On June 25, 2002, NPC entered into Amendment No. 2 to its $200 million
credit agreement. The amendment provides that NPC may not declare or pay any
dividend on its capital stock for the duration of the credit facility which
expires on November 28, 2002.
Finally, the terms of NPC's preferred trust securities provide that no
dividends may be paid on NPC's common stock if NPC has elected to defer payments
on the junior subordinated debentures issued in conjunction with the preferred
trust securities. At this time, NPC has not elected to defer payments on the
junior subordinated debentures.
SIERRA PACIFIC POWER COMPANY
SPPC's Articles of Incorporation contain restrictions on the payment of
dividends on SPPC's common stock in the event of a default in the payment of
dividends on SPPC's preferred stock and prohibit SPPC from declaring or paying
any dividends on any shares of common stock except from the net income of SPPC,
and its predecessor, available for dividends on common stock accumulated
subsequent to December 31, 1955, less preferred stock dividends plus the sum of
$500,000. As of June 30, 2002, SPPC was not prohibited by these restrictions
from paying dividends.
In addition, on June 25, 2002, SPPC entered into Amendment No. 1 to its
$150 million credit agreement. This amendment prohibits the payment of dividends
on SPPC's capital stock if SPPC is in default under the terms of its credit
facility.
18
NOTE 6. EARNINGS PER SHARE (SPR)
SPR follows SFAS No. 128, "Earnings Per Share". The difference, if any,
between Basic EPS and Diluted EPS would be due to common stock equivalent shares
resulting from stock options, employee stock purchase plan, performance shares
and a non-employee director stock plan. However, due to net losses for the three
months ended June 30, 2002, and the six-month periods ended June 30, 2002 and
2001, these items are anti-dilutive. Common stock equivalents were determined
using the treasury stock method.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
BASIC EPS
Numerator ($000)
Income (Loss) from continuing operations $ (41,916) $ 27,549 $ (345,832) $ (56,311)
Income from discontinued operations -- 641 -- 1,022
Gain on disposal of water business -- 25,845 -- 25,845
Cumulative effect of change in accounting principle -- -- (1,566) --
------------- ------------- ------------- -------------
Net income (loss) $ (41,916) $ 54,035 $ (347,398) $ (29,444)
============= ============= ============= =============
Denominator
Weighted average number of shares outstanding 102,110,536 78,491,053 102,110,536 78,483,135
------------- ------------- ------------- -------------
Per-Share Amounts:
Income (Loss) from continuing operations $ (0.41) $ 0.35 $ (3.39) $ (0.72)
Income from discontinued operations -- 0.01 -- 0.01
Gain on disposal of water business -- 0.33 -- 0.33
Cumulative effect of change in accounting principle -- -- (0.01) --
------------- ------------- ------------- -------------
Net income (loss) $ (0.41) $ 0.69 $ (3.40) $ (0.38)
============= ============= ============= =============
DILUTED EPS
Numerator ($000)
Income (Loss) from continuing operations $ (41,916) $ 27,549 $ (345,832) $ (56,311)
Income from discontinued operations -- 641 -- 1,022
Gain on disposal of water business -- 25,845 -- 25,845
Cumulative effect of change in accounting principle -- -- (1,566) --
------------- ------------- ------------- -------------
Net income (loss) $ (41,916) $ 54,035 $ (347,398) $ (29,444)
============= ============= ============= =============
Denominator
Weighted average number of shares outstanding
before dilution 102,110,536 78,491,053 102,110,536 78,483,135
Stock options(1) -- 22,160 15,806 11,605
Executive long term incentive plan- performance shares(1) 7,815 47,698 13,378 41,531
Non-Employee Director stock plan(1) 11,288 9,355 10,321 9,355
Employee stock purchase plan(1) 578 3,602 1,619 3,017
------------- ------------- ------------- -------------
102,130,217 78,573,868 102,151,660 78,548,643
------------- ------------- ------------- -------------
Per-Share Amounts(1):
Income (Loss) from continuing operations $ (0.41) $ 0.35 $ (3.39) $ (0.72)
Income from discontinued operations -- 0.01 -- 0.01
Gain on disposal of water business -- 0.33 -- 0.33
Cumulative effect of change in accounting principle -- -- (0.01) --
------------- ------------- ------------- -------------
Net income (loss) $ (0.41) $ 0.69 $ (3.40) $ (0.38)
============= ============= ============= =============
(1) Because of net losses for the three months ended June 30, 2002, and the
six-month periods ended June 30, 2002 and 2001, stock equivalents would
be anti-dilutive. Accordingly, Diluted EPS for those periods are
computed using the weighted average number of shares outstanding before
dilution.
19
NOTE 7. SEGMENT INFORMATION (SPR)
SPR operates three business segments providing regulated electric and
natural gas services. NPC provides electric service to Las Vegas and surrounding
Clark County. SPPC provides electric service in northern Nevada and the Lake
Tahoe area of California. SPPC also provides natural gas service in the
Reno-Sparks area of Nevada. Other segment information includes segments below
the quantitative threshold for separate disclosure. On June 11, 2001, SPPC sold
its water utility business. Accordingly, the water business is not included in
the segment information below.
Information as to the operations of the different business segments is
set forth below based on the nature of products and services offered. SPR
evaluates performance based on several factors, of which the primary financial
measure is business segment operating income. Intersegment revenues are not
material.
Financial data for business segments is as follows (in thousands):
Three Months Ended NPC SPPC Total
June 30, 2002 Electric Electric Electric Gas Other Consolidated
- ------------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating Revenues $ 477,059 $ 196,626 $ 673,685 $ 25,583 $ 1,586 $ 700,854
============ ============ ============ ============ ============ ============
Operating Income (Loss) $ 30,162 $ (18,342) $ 11,820 $ 3,524 $ 4,555 $ 19,899
============ ============ ============ ============ ============ ============
Three Months Ended NPC SPPC Total
June 30, 2001 Electric Electric Electric Gas Other Consolidated
- ------------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating Revenues $ 808,441 $ 312,833 $ 1,121,274 $ 21,729 $ 5,070 $ 1,148,073
============ ============ ============ ============ ============ ============
Operating Income $ 56,042 $ 17,887 $ 73,929 $ 554 $ 3,811 $ 78,294
============ ============ ============ ============ ============ ============
Six Months Ended NPC SPPC Total
June 30, 2002 Electric Electric Electric Gas Other Consolidated
- ---------------- ------------ ------------ ------------ ------------ ------------ ------------
Operating Revenues $ 833,331 $ 420,923 $ 1,254,254 $ 80,666 $ 4,341 $ 1,339,261
============ ============ ============ ============ ============ ============
Operating Income (Loss) $ (230,597) $ 5,059 $ (225,538) $ 5,057 $ 9,629 $ (210,852)
============ ============ ============ ============ ============ ============
Six Months Ended NPC SPPC Total
June 30, 2001 Electric Electric Electric Gas Other Consolidated
- ---------------- ------------ ------------ ------------ ------------ ------------ ------------
Operating Revenues $ 1,167,453 $ 593,271 $ 1,760,724 $ 85,894 $ 7,700 $ 1,854,318
============ ============ ============ ============ ============ ============
Operating Income (Loss) $ 25,358 $ 23,977 $ 49,335 $ 5,649 $ (7,176) $ 47,808
============ ============ ============ ============ ============ ============
NOTE 8. DISCONTINUED OPERATIONS (SPR, SPPC)
As previously reported, SPPC closed the sale of its water business to
the Truckee Meadows Water Authority for $341 million on June 11, 2001.
Accordingly, the water business is reported as a discontinued operation for the
three- and six-month periods ending June 30, 2001. SPPC recorded a $25.8 million
gain on the sale, net of income taxes, for the same periods.
Revenues from operations of the water business were $11.8 million and
$23.2 million for the three- and six-month periods ended June 30, 2001,
respectively. The net income from operations of the water business, as shown in
the Condensed Consolidated Statements of Operations of SPR and SPPC, includes
preferred dividends of approximately $100,000 and $200,000 for the three- and
six-month periods ended June 30, 2001, respectively. These amounts are not
included in the revenues and income (loss) from continuing operations shown in
the accompanying statements of operations.
NOTE 9. REGULATORY EVENTS (SPR, NPC, SPPC)
NEVADA MATTERS (NPC, SPPC)
NEVADA POWER COMPANY GENERAL RATE CASE (NPC)
On October 1, 2001, NPC filed an application with the PUCN seeking an
electric general rate increase. This application was mandated by AB 369, which
was enacted by the Nevada legislature in April 2001. On December 21, 2001, NPC
filed a Certification to its general rate filing updating costs and revenues
pursuant to Nevada regulations. In the certification filing, NPC requested an
increase in its general rates charged to all classes of electric customers
designed to
20
produce an increase in annual electric revenues of $22.7 million, which is an
overall 1.7% rate increase. The application also sought a return on common
equity ("ROE") for Nevada Power's total electric operations of 12.25% and an
overall rate of return ("ROR") of 9.30%.
On March 27, 2002, the PUCN issued its decision on the general rate
application, ordering a $43 million revenue decrease with an ROE of 10.1% and
ROR of 8.37%. The effective date for the decision was April 1, 2002. The
decision also resulted in adverse adjustments to depreciation aggregating $7.9
million, and the adverse treatment of approximately $5 million of revenues
related to SO2 Allowances. On April 15, 2002, NPC filed a petition for
reconsideration with the PUCN. In the petition, NPC raised six issues for
reconsideration: the treatment of revenues related to SO2 Allowances, in
particular the calculation of the annual amortization amount, which appeared to
be in error; the adjustment for "excess" capital investment related to common
facilities at the Harry Allen generating station; the rejection of adjustments
to accumulated depreciation reserves related to the establishment of revised
depreciation rates for transmission, distribution and common facilities; the
delay in allowing NPC to recover its merger costs without the benefit of
carrying charges; the finding that NPC has no need for, and is entitled to, zero
funds cash working capital; and the establishment of a 10.1% ROE. On May 24,
2002, the PUCN issued an order on the petition for reconsideration. In its order
the PUCN reaffirmed its findings in the original order for the issues related to
"excess" capital investment at the Harry Allen generating station, merger costs,
cash working capital, and the 10.1% ROE. The commission, however, did modify its
original order to include adjustments related to SO2 Allowances and depreciation
issues. Revised rates for these changes went into effect on June 1, 2002.
NEVADA POWER COMPANY DEFERRED ENERGY CASE (NPC)
On November 30, 2001, NPC filed an application with the PUCN seeking to
clear deferred balances for purchased fuel and power costs accumulated between
March 1, 2001 through September 30, 2001. This application was mandated by AB
369. The application sought to establish a Deferred Energy Accounting Adjustment
("DEAA") rate to clear accumulated purchased fuel and power costs of $922
million and spread the cost recovery over a period of not more than three years.
On March 29, 2002, the PUCN issued its decision on the deferred energy
application, allowing NPC three years to collect $488 million but disallowing
$434 million of deferred purchased fuel and power costs. On April 11, 2002, NPC
filed a lawsuit in First District Court of Nevada seeking to reverse portions of
the decision of the PUCN denying the recovery of deferred energy costs incurred
by NPC on behalf of its customers in 2001 on the grounds that such power costs
were not prudently incurred. NPC asserts that, as a result of the PUCN's
decision, NPC's credit rating was reduced to below investment grade, SPR
suffered a reduction in its equity market capitalization by approximately 41%,
and the disallowed costs are effectively imposed upon SPR's shareholders.
In its lawsuit, NPC alleges that the order of the PUCN is: in violation
of constitutional and statutory provisions; made upon unlawful procedure;
affected by other error of law; clearly erroneous in view of the reliable,
probative and substantial evidence on the whole record; arbitrary and capricious
and characterized by abuse of discretion. NPC's lawsuit requests that the
District Court reverse portions of the order of the PUCN and remand the matter
to the PUCN with direction that the PUCN authorize NPC to immediately establish
rates that would allow NPC to recover its entire deferred energy balance of $922
million, with a carrying charge, over three years. A hearing has been scheduled
for October 17, 2002. At this time, NPC is not able to predict the outcome or
the timing of a decision in this matter.
Various intervenors in NPC's deferred energy case before the PUCN filed
petitions with the PUCN for reconsideration of the order, seeking additional
disallowances of between $12.8 million and $488 million. On May 24, 2002, the
PUCN issued an order denying any further disallowances. In its order the PUCN
granted NPC the authority to increase the deferred energy cost recovery charge
for the month of June 2002 by one cent per kilowatt-hour. This increase
accelerated the recovery of the deferred balance by approximately $16 million
for the month of June 2002 only. The Bureau of Consumer Protection of the Nevada
Attorney General's Office has since filed a petition in NPC's pending state
court case seeking additional disallowances.
SIERRA PACIFIC POWER COMPANY GENERAL RATE CASE (SPPC)
On November 30, 2001, SPPC filed an application with the PUCN seeking
an electric general rate increase. This application was mandated by AB 369. On
February 28, 2002, SPPC filed a certification to its general rate filing,
updating costs and revenues pursuant to Nevada regulations. In the certification
filing, SPPC requested an increase in its general rates charged to all classes
of electric customers, which were designed to produce an increase in annual
electric revenues of $15.9 million representing an overall 2.4% rate increase.
The application also sought an ROE for SPPC's total electric operations of
12.25% and an overall ROR of 9.42%. Public hearings for SPPC's general rate case
began on April 8, 2002, and concluded on April 18. Various parties intervened in
SPPC's general rate case including the Staff of the PUCN, the Bureau of Consumer
Protection from the Nevada Attorney General's office, and Barrick Goldstrike
Mines ("Barrick"), among others. The reduction of SPPC's revenue requirements
proposed by the intervenors ranged from $8.0 million to $33.1 million.
21
On May 28, 2002, the PUCN issued its decision on the general rate
application, ordering a $15.3 million revenue decrease with an ROE of 10.17% and
ROR of 8.61%. The effective date of the decision was June 1, 2002. Various
parties to the case had filed petitions for reconsideration of the order. On
July 18, 2002, the PUCN issued a final decision on the petitions for
reconsideration, clarifying issues contained its original order. As a result of
the clarifications, SPPC was ordered to change the total annual electric revenue
decrease from $15.3 million to $15.8 million.
SIERRA PACIFIC POWER COMPANY DEFERRED ENERGY (SPPC)
On February 1, 2002, SPPC filed an application with the PUCN seeking to
clear deferred balances for purchased fuel and power costs accumulated between
March 1, 2001 and November 30, 2001. This application was mandated by AB 369.
The application sought to establish a DEAA rate to clear accumulated purchased
fuel and power costs of $205 million and spread the cost recovery over a period
of not more than three years. It also sought to recalculate the Base Tariff
Energy Rate to reflect anticipated ongoing purchased fuel and power costs. The
total rate increase resulting from the requested DEAA would have amounted to
9.8%. Various parties intervened in SPPC's deferred energy rate case including
the Staff of the PUCN, the Bureau of Consumer Protection from the Nevada
Attorney General's office, and Barrick, among others. Intervenors proposed
disallowances ranging from $40.4 million to $361 million.
On May 28, 2002, the PUCN issued its decision on the deferred energy
application, allowing SPPC three years to collect $152 million but disallowing
$53 million of deferred purchased fuel and power costs. SPPC is currently
evaluating its options regarding a possible court challenge to the PUCN order.
Several of the intervenors from SPPC's deferred energy rate case filed petitions
with the PUCN for reconsideration of its decision, seeking an additional
disallowance of $126 million. On July 18, 2002, the petitions for
reconsideration were granted in part and denied in part by the PUCN, but no
additional disallowances to the deferred energy balance resulted from that
decision.
CUSTOMERS FILE UNDER AB661 (NPC, SPPC)
AB 661, passed by the Nevada legislature in 2001, allows commercial and
governmental customers with an average demand greater than 1 MW to select new
energy suppliers. The Utilities would continue to provide transmission,
distribution, metering and billing services to such customers. AB 661 requires
customers wishing to choose a new supplier to receive the approval of the PUCN
and meet public interest standards. In particular, departing customers must
secure new energy resources that are not under contract to the Utilities,
remaining customers or the Utility cannot be negatively impacted by the
departure, and the departing customers must pay any deferred energy balances.
The PUCN adopted regulations prescribing the criteria that will be used to
determine if there will be negative impacts to remaining customers or the
Utility. Certain limits are placed upon the departure of NPC customers until
2003; most significantly, the amount of load departing is limited to
approximately 1100 MW in peak conditions. Customers must provide 180-day notice
to the Utilities. AB 661 permitted customers to file applications with the PUCN
beginning in the fourth quarter of 2001, and customers could begin to receive
service from new suppliers by mid-2002.
On January 10, 2002, Barrick, an approximately 130 MW SPPC customer,
filed an application with the PUCN to exit the system of SPPC and to purchase
energy, capacity and ancillary services from a provider other than SPPC. A
stipulation filed on March 8, 2002 by SPPC and Barrick was rejected by the PUCN
on March 29, 2002. The PUCN indicated a desire for more information regarding
transmission access, the definition of a new electric resource, and the
computation of exit fees. Subsequently, a second application was filed and later
withdrawn by Barrick. At this point it is not known whether Barrick intends to
refile its application.
During May 2002, Rouse Fashion Show Management LLC, Coast Hotels and
Casinos Inc., Station Casinos, Inc., Gordon Gaming Corporation, MGM Mirage, and
Park Place Entertainment filed separate applications with the PUCN to exit the
system of NPC and to purchase energy, capacity and ancillary services from a
provider other than NPC. The loads of these customers aggregate 260 MW on peak.
Hearings on the applications of all the customers except Park Place
Entertainment were completed on July 19, and the PUCN issued its decision on
July 31, 2002. In its decision, the PUCN approved the applications of these
customers to choose an energy supplier other than NPC. The earliest any of these
customers could begin taking energy from an alternative provider would be
November 1, 2002. If all five customers whose applications were approved were to
leave its system, NPC would incur an annual loss in revenue of $48 million,
which would be offset by a reduction in costs, primarily for fuel and purchased
power, of $46 million with the difference being paid by exit fees from the
departing customers. These customers will also be responsible for their share of
balances in NPC's deferred energy accounts up until the time they leave and must
continue to pay their share of these balances after they leave. For example, if
all five customers whose applications were approved leave the system on November
1, 2002, their remaining share of NPC's previously approved deferred energy
balance is estimated to be $27 million. Additionally, these departing customers
would be responsible for paying their share of yet to be approved accumulated
deferred energy balances from October 1, 2001 to their date of departure. They
will also remain accountable to any rulings made by the District Court on legal
actions brought in NPC's past deferred energy case. They could also benefit from
any refunds that might be granted on power contracts under review with the FERC.
Additionally, if any departed customers return to NPC as their energy provider,
they will be charged
22
for their energy at a rate equivalent to NPC's incremental cost of service. The
incremental cost of service tariff is scheduled for hearing before the PUCN in
the first week of September 2002.
A hearing on the application of Park Place Entertainment was held on
August 2, 2002, and on August 12, 2002, the PUCN approved the application with
terms and conditions similar to those described above for the aforementioned
five customers.
NEVADA POWER COMPANY ADDITIONAL FINANCE AUTHORITY (NPC)
On April 26, 2002, Nevada Power filed with the PUCN an application
seeking additional finance authority. In the application NPC asked for authority
to issue secured long-term debt in an aggregate amount not to exceed $450
million through the period ending 2003. A hearing was held on June 3, 2002, and
the PUCN issued an order on June 19, 2002, authorizing the issuance of $300
million of the requested authority. Other provisions of the PUCN's order are
discussed in NPC's "Financial Condition, Liquidity, and Capital Resources."
CALIFORNIA MATTERS (SPPC)
RATE STABILIZATION PLAN
SPPC serves approximately 44,500 customers in California. On June 29,
2001, SPPC filed with the California Public Utility Commission (CPUC) a Rate
Stabilization Plan, which includes two phases. Phase One, which was also filed
June 29, 2001, is an emergency electric rate increase of $10.2 million annually
or 26%. If granted, the typical residential monthly electric bill for a customer
using 650 kilowatt-hours would increase from approximately $47.12 to $60.12. On
August 14, 2001, a pre-hearing conference was held, and a procedural order was
established. On September 27, 2001, the Administrative Law Judge issued an order
stating that no interim or emergency relief could be granted until the end of
the "rate freeze" period mandated by the California restructuring law for
recovery of stranded costs. In accordance with the judge's request, on October
26, 2001, SPPC filed an amendment to its application declaring the rate freeze
period to be over. On December 5 and 11, 2001, hearings were held and on January
11, 2002 and January 25, 2002 opening briefs and reply briefs were filed. On
July 17, 2002, the CPUC approved the requested 2-cent per kilowatt-hour
surcharge, subject to refund and interest pending the outcome of Phase Two. The
increase of $10 million or 26% is applicable to all customers except those
eligible for low-income and medical-needs rates and is effective July 18, 2002.
Phase Two of the Rate Stabilization Plan was filed with the CPUC on
April 1, 2002, and includes a general rate case and requests the CPUC to
reinstate the Energy Cost Adjustment Clause, which would allow SPPC to file for
periodic rate adjustments to reflect its actual costs for wholesale energy
supplies. Phase Two also includes a proposal to terminate the 10% rate reduction
mandated by AB 1890, but does not include a performance - based rate-making
proposal. This request was for an additional overall increase in revenues of
17.1%, or $8.9 million annually. Hearings are scheduled for February 25 through
March 3, 2003, and a decision by the CPUC is expected the third quarter of 2003.
FERC MATTERS (SPPC, NPC)
FERC 206 COMPLAINTS
In December 2001, the Utilities filed ten FERC 206 complaints with the
FERC seeking their review of the long-term contracts the Utilities entered into
prior to the FERC price caps. The Utilities believe the contract prices are
unjust and unreasonable. The FERC ordered the case set for hearing and assigned
an administrative law judge ("ALJ"). A primary issue is whether or not the
dysfunctional short-term market, which was previously declared by the FERC,
impacted the long-term market. Written direct testimony was filed by the parties
on June 28, 2002. The ALJ's schedule calls for hearings to be held in October
2002 and for a draft decision in December 2002. The Utilities have engaged in
bilateral discussions with respondents in this matter. At this time, the
Utilities are not able to predict the outcome of a decision in this matter.
NOTE 10. DERIVATIVES AND HEDGING ACTIVITIES (SPR, NPC, SPPC)
Effective January 1, 2001, SPR, SPPC, and NPC adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138, both issued by
the Financial Accounting Standards Board. As amended, SFAS No. 133 requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position, measure those instruments at fair value, and
recognize changes in the fair value of the derivative instruments in earnings in
the period of change unless the derivative qualifies as an effective hedge.
SPR's and the Utilities' objective in using derivatives is to reduce
exposure to energy price risk and interest rate risk. Energy price risks result
from activities that include the generation, procurement and marketing of power
and the procurement
23
and marketing of natural gas. Derivative instruments used to manage energy price
risk include forwards, options, and swaps. These contracts allow the Utilities
to reduce the risks associated with volatile electricity and natural gas
markets.
Derivatives used to manage interest rate risk include interest rate
swaps designed to moderate exposure to interest-rate changes and lower the
overall cost of borrowing. On April 1, 2002, SPR paid $9.5 million to terminate
an interest rate swap related to $200 million of SPR floating rate notes
maturing April 20, 2003.
At June 30, 2002, the fair value of the derivatives resulted in the
recording of $172 million, $115 million and $57 million in risk management
assets and $398 million, $215 million and $183 million in risk management
liabilities in the Consolidated Balance Sheets of SPR, NPC and SPPC,
respectively. Due to deferred energy accounting under which the Utilities
operate, regulatory assets and liabilities are established to the extent that
electricity and natural gas derivative gains and losses are recoverable or
payable through future rates. Accordingly, at June 30, 2002, $235 million, $112
million and $123 million in net risk management regulatory assets were recorded
in the Consolidated Balance Sheets of SPR, NPC, and SPPC, respectively. In
addition, for the six months ended June 30, 2002, the unrealized gains and
losses resulting from the change in the fair value of derivatives designated and
qualifying as cash flow hedges for SPR, NPC, and SPPC were recorded in Other
Comprehensive Income. Such amounts are reclassified into earnings when the
related transactions are settled or terminate. Accordingly, $3.8 million
relating to SPR's terminated interest rate swap were reclassified into earnings
during the six months ended June 30, 2002.
The effects of the adoption of SFAS No. 133 on comprehensive income and
the components thereof at June 30, 2002, and 2001, are as follows (in
thousands):
SPR NPC SPPC
---------- ---------- ----------
Net Loss for the six months ended June 30, 2002 $ (347,398) $ (295,329)(1) $ (24,957)
Change in market value of risk management assets and
liabilities as of June 30, 2002, net of taxes 2,108 (105) 169
---------- ---------- ----------
Total Comprehensive Loss for the
six months ended June 30, 2002 $ (345,290) $ (295,434) $ (24,788)
========== ========== ==========
Net (Loss) Income for the six months ended June 30, 2001 $ (29,444) $ (22,292)(2) $ 24,966
Cumulative effect upon adoption of change in
accounting principle, January 1, 2001, net of taxes (1,923) 444 212
Change in market value of risk management assets and
liabilities as of June 30, 2001, net of taxes (1,540) 617 293
---------- ---------- ----------
Total Comprehensive (Loss) Income for the
six months ended June 30, 2001 $ (32,907) $ (21,231) $ 25,471
========== ========== ==========
(1) Does not include NPC's equity in SPR's losses of $(52,069).
(2) Does not include NPC's equity in SPR's losses of $(7,152).
NOTE 11. COMMITMENTS AND CONTINGENCIES (SPR, NPC, SPPC)
NEVADA POWER COMPANY AND SIERRA PACIFIC POWER COMPANY
In early May, Enron Power Marketing Inc. ("Enron"), Morgan Stanley
Capital Group Inc., Reliant Energy Services, Inc. and several smaller suppliers
notified NPC and SPPC that they would end power deliveries to the Utilities
based on what they believed to be their contractual right to end deliveries
because of the Utilities' inability to provide adequate assurances of their
ability to perform all of their outstanding material obligations. Each of these
terminating suppliers has asserted, or has indicated that it will assert, a
claim for liquidated damages. Enron has filed suit in its Bankruptcy Court for
the Southern District of New York asserting claims for liquidated damages of
approximately $216 million and $93 million against NPC and SPPC, respectively.
Enron's claim is subject to the Utilities' defense that Enron's claims are
already at issue in the FERC proceeding challenging the contract prices, and to
other defenses that the Utilities intend to pursue in a timely manner. In
connection with the lawsuit filed by Enron in Bankruptcy Court, Enron has filed
a motion to require the Utilities to post collateral equal to the amount of
Enron's
24
claims pending the outcome of the lawsuit. A hearing in this case has been
scheduled for September 6, 2002. An adverse decision on the petition to require
the Utilities to post collateral pending the outcome of Enron's lawsuit or an
adverse decision in the lawsuit itself could have a material adverse affect on
the financial condition and liquidity of SPR and the Utilities and could render
their ability to continue to operate outside of bankruptcy uncertain. At this
time, SPR and the Utilities are not able to predict the outcome of a decision in
this matter.
In connection with the claims by these energy suppliers, the Utilities
established reserves, included in their Balance Sheets in "Deferred Credits and
Other Liabilities, Other," totaling approximately $316 million, and, pursuant to
the deferred energy accounting provisions of AB 369, NPC and SPPC added
approximately $229 million and $82 million, respectively, to their deferred
energy balances for recovery in rates in future periods.
NEVADA POWER COMPANY
The Grand Canyon Trust and Sierra Club filed a lawsuit in the U.S.
District Court, District of Nevada, in February 1998, against the owners
(including NPC) of the Mohave Generation Station ("Mohave"), alleging violations
of the Clean Air Act regarding emissions of sulfur dioxide and particulates. An
additional plaintiff, National Parks and Conservation Association, later joined
the suit. The plant owners and plaintiffs have had numerous settlement
discussions and filed a proposed settlement with the court in October 1999. The
consent decree, approved by the court in November 1999, established emission
limits for sulfur dioxide and opacity and required installation of air pollution
controls for sulfur dioxide, nitrogen oxides and particulate matter. The new
emission limits must be met by January 1, 2006 and April 1, 2006 for the first
and second units respectively. However, if the owners sell their entire
ownership interest with a closing date prior to December 30, 2002, the new
emission limits become effective 36 months and 39 months from the date of last
closing for the two respective units. The estimated cost of new controls is $395
million. As a 14% owner in the Mohave Station, NPC's cost could be $55 million.
In May 1997, the Nevada Division of Environmental Protection (NDEP)
ordered NPC to submit a plan to eliminate the discharge of Reid Gardner Station
wastewater to groundwater. The NDEP order also required a hydrological
assessment of groundwater impacts in the area. In June 1999, NDEP determined
that wastewater ponds had degraded groundwater quality. In August 1999, NDEP
issued a discharge permit to Reid Gardner Station and an order that requires all
wastewater ponds to be closed or lined with impermeable liners over the next 10
years. This order also required NPC to submit a Site Characterization Plan to
NDEP to ascertain impacts. This plan is under review by NDEP. After approval, an
estimate of remediation costs will be determined by NPC. New pond construction
and lining costs are estimated at $15 million.
At the Reid Gardner Station, the NDEP has determined that there is
additional groundwater contamination that resulted from oil spills at the
facility. NDEP has required submitting a corrective action plan. The extent of
contamination has been determined and remediation is occurring at a modest rate.
A hydro-geologic evaluation of the current remediation technology will occur in
2002 to verify efficiency and to expedite remediation. Remediation modifications
are not expected to materially affect the financial position of SPR or NPC.
In May 1999, NDEP issued an order to eliminate the discharge of NPC's
Clark Station wastewater to groundwater. The order also required a hydrological
assessment of groundwater impacts in the area. This assessment, submitted to
NDEP in February 2001, warranted a Corrective Action Plan, which was approved in
June 2002. Remediation costs are expected to be approximately $100,000. In
addition to remediation, NPC will spend $789,000 to line existing ponds. After
review and approval of the Corrective Action Plan by NDEP, NPC will implement
remediation.
In July 2000, NPC received a request from the EPA for information to
determine the compliance of certain generation facilities at the Clark Station
with the applicable State Implementation Plan. In November 2000, NPC and the
Clark County Health District entered into a Corrective Action Order requiring,
among other steps, capital expenditures at the Clark Station totaling
approximately $3 million. In March 2001, the EPA issued an additional request
for information that could result in remediation beyond that specified in the
November 2000 Corrective Action Order. If the EPA prevails, capital expenditures
and temporary outages of four of Clark Station's generation units could be
required. Additionally, depending on the time of year that the compliance
activity and corresponding generation outage would occur, the incremental cost
to purchase replacement energy could be substantial.
Nevada Electric Investment Company (NEICO), a wholly owned subsidiary
of NPC, owns property in Wellington, Utah, which was the site of a coal washing
and load out facility. The site now has a reclamation estimate supported by a
bond of $4 million with the Utah Division of Oil and Gas Mining. The property
was under contract for sale and the contract required the purchaser to provide
$1.3 million in escrow towards reclamation. However, the sales contract was
terminated and NEICO took title to the escrow funds. The property is currently
leased with the intention to reclaim coal fines with subsequent reduction to the
reclamation bond.
25
SIERRA PACIFIC POWER COMPANY
In September 1994, Region VII of EPA notified SPPC that it was being
named as a potentially responsible party (PRP) regarding the past improper
handling of Polychlorinated Biphenyls (PCBs) by PCB Treatment, Inc., located in
Kansas City, Kansas, and Kansas City, Missouri (the Sites). The EPA is
requesting that SPPC voluntarily pay an undefined, pro rata share of the
ultimate clean-up costs at the Sites. A number of the largest PRP's formed a
steering committee, which is chaired by SPPC. The responsibility of the
Committee is to direct clean-up activities, determine appropriate cost
allocation, and pursue actions against recalcitrant parties, if necessary. The
EPA issued an administrative order on consent requiring signatories to perform
certain investigative work at the Sites. The steering committee retained a
consultant to prepare an analysis regarding the Sites. The Site evaluations have
been completed. EPA is developing an allocation formula to allocate the
remediation costs. SPPC has recorded a preliminary liability for the Sites of
$650,000 of which approximately $136,000 has been spent through June 30, 2002.
Once evaluations are completed, SPPC will be in a better position to estimate
and record the ultimate liabilities for the Sites.
OTHER SUBSIDIARIES OF SPR
LOS, a wholly owned subsidiary of SPR, owns property in North Lake
Tahoe, California, which is leased to independent condominium owners. The
property has both soil and groundwater petroleum contaminate resulting from an
underground fuel tank that has been removed from the property. Additional
contaminate from a third party fuel tank on the property has also been
identified and is undergoing remediation. A closure request is pending Lahontan
Regional Water Quality Control Board approval. Estimated future remediation
costs are not expected to be significant.
NOTE 12. CHANGE IN ACCOUNTING FOR GOODWILL (SPR, NPC, SPPC)
SFAS No. 142, adopted January 1, 2002, changed the accounting for
goodwill from an amortization method to one requiring at least an annual review
for impairment. Upon adoption, SPR ceased amortizing goodwill.
SPR's Consolidated Balance Sheet as of June 30, 2002, includes
approximately $325.6 million of goodwill resulting from the July 28, 1999 merger
between SPR and NPC. Approximately $19.6 million of amortization of this
goodwill has been deferred as a regulatory asset. The PUCN stipulation approving
the merger allows for future recovery of this goodwill in rates charged to
customers of SPR's regulated utility subsidiaries, NPC and SPPC, provided that
NPC and SPPC demonstrate that merger savings exceed merger costs. The amount and
timing of the recovery of this goodwill will be determined by the outcome of
general rate cases to be filed by the Utilities with the PUCN.
SPR's Consolidated Balance Sheet as of December 31, 2001, also included
approximately $6.2 million of goodwill related to unregulated operations. SFAS
No. 142 provides that an impairment loss shall be recognized if the carrying
value of each reporting unit's goodwill exceeds its fair value. For purposes of
testing goodwill for impairment, a discounted cash flow model was used to
determine the fair value of each reporting unit of SPR's unregulated operations.
The reporting units included in SPR's unregulated operations evaluated for
goodwill impairment were Lands of Sierra (LOS), Sierra Pacific Communications
(SPC), Tuscarora Gas Pipeline Company (TGPC), and "Energy" (a reporting unit
consisting of Sierra Energy Company dba e- three, Nevada Electric Investment
Company, and Sierra Pacific Energy Company). As a result of the impairment
testing, which included revenue forecasts and appraisal of assets, SPR recorded
a transitional goodwill impairment charge of approximately $1.7 million ($1.6
million, net of applicable taxes) as a cumulative effect of a change in
accounting principle on SPR's Condensed Consolidated Statements of Operations
for the six months ended June 30, 2002. The goodwill impairment recognized by
reporting unit was approximately $600,000, $40,000 and $1.5 million for LOS, SPC
and "Energy," respectively. Goodwill assigned to TGPC was determined not to be
impaired.
The changes in the carrying amount of goodwill for the six-month period
ended June 30, 2002 are as follows:
REGULATED UNREGULATED
(IN $000'S) OPERATIONS OPERATIONS TOTAL
---------- ---------- ----------
Balance as of January 1, 2002 $ 305,982 $ 6,163 $ 312,145
Impairment loss -- (1,704) (1,704)
---------- ---------- ----------
Balance as of June 30, 2002 $ 305,982 $ 4,459 $ 310,441
========== ========== ==========
A reconciliation of SPR's previously reported net (losses) income and
(losses) earnings per share to the amounts adjusted for the adoption of SFAS No.
142 net of the related income tax effect follows:
26
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
NET (LOSSES) EARNINGS:
Reported net (loss) earnings $ (41,916) $ 54,035 $ (347,398) $ (29,444)
Add back amortization of goodwill, net of tax -- 48 -- 96
---------- ---------- ---------- ----------
Adjusted net (losses) earnings (41,916) 54,083 (347,398) (29,348)
Add back cumulative effect of change in
accounting principle, net of tax -- - 1,566 --
---------- ---------- ---------- ----------
Adjusted (losses) earnings before cumulative effect of
change in accounting principle $ (41,916) $ 54,083 $ (345,832) $ (29,348)
========== ========= ========== ==========
BASIC AND DILUTED (LOSSES) EARNINGS PER SHARE:
Reported (losses) earnings per share $ (0.41) $ 0.69 $ (3.40) $ (0.38)
Add back amortization of goodwill, net of tax -- -- -- --
---------- ---------- ---------- ----------
Adjusted (losses) earnings per share (0.41) 0.69 (3.40) (0.38)
Add back cumulative effect of change in
accounting principle, net of tax -- -- 0.01 --
---------- ---------- ---------- ----------
Adjusted (losses) earnings per share before cumulative
effect of change in accounting principle $ (0.41) $ 0.69 $ (3.39) $ (0.38)
========== ======== ========= ==========
NOTE 13. PINON PINE (SPR, SPPC)
SPPC, through its wholly owned subsidiaries, Pinon Pine Corp., Pinon
Pine Investment Co., and GPSF-B, owns Pinon Pine Company, L.L.C. (the "LLC").
The LLC was formed to take advantage of federal income tax credits associated
with the alternative fuel (syngas) produced by the coal gasifier available under
Section 29 of the Internal Revenue Code. The entire project, which includes an
LLC-owned gasifier and an SPPC-owned power island and post-gasification facility
to partially cool and clean the syngas, is referred to collectively as the Pinon
Pine Power Project ("Pinon Pine"). Construction of Pinon Pine was completed in
June 1998.
Pinon Pine is a project co-funded by the Department of Energy (DOE)
under an agreement between SPPC and DOE that expired December 31, 2000. Through
December 31, 2001, the DOE funded $167 million for construction, operation, and
maintenance of the project. Included in the Consolidated Balance Sheets of SPR
and SPPC is the net book value of the gasifier and related assets, which is
approximately $105 million as of December 31, 2001, of which $50 million is
included in Utility Plant, and $55 million is included in Investments in
subsidiaries and other property.
To date, SPPC has not been successful in obtaining sustained operation
of the gasifier. In 2001 SPPC retained an independent engineering consulting
firm, to complete a comprehensive study of the Pinon Pine gasification plant by
mid-2002. The scope of the study includes evaluation of the potential
modifications required to make the facility operational and reliable using
several technology scenarios. The evaluation of each scenario is to include an
estimate of the additional capital expenditures necessary for reliable operation
of the facility, and the risks associated with that technology.
SPPC has received a preliminary report on the results of the study,
which indicates that Pinon Pine will not operate as a demonstration plant for
the production of syngas by a coal gasifier, as originally intended. The final
report is not expected to differ significantly. Accordingly, in its next general
rate case, SPPC intends to pursue recovery of Pinon Pine, net of salvage,
through regulated rates based, in part, on the PUCN's approval of Pinon Pine as
a demonstration project in an earlier resource plan. However, if SPPC is
unsuccessful in obtaining recovery, there could be a material adverse effect on
SPPC's and SPR's financial condition and results of operations.
NOTE 14. SUBSEQUENT EVENTS (SPPC)
On July 23, 2002, a dividend of $975,000 ($0.4875 per share) was
declared on SPPC's preferred stock. The dividend is payable on September 1,
2002, to holders of record as of August 9, 2002.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
THE INFORMATION IN THIS FORM 10-Q INCLUDES FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
THESE FORWARD-LOOKING STATEMENTS RELATE TO ANTICIPATED FINANCIAL PERFORMANCE,
MANAGEMENT'S PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, BUSINESS PROSPECTS,
OUTCOME OF REGULATORY PROCEEDINGS, MARKET CONDITIONS AND OTHER MATTERS. WORDS
SUCH AS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTEND," "PLAN" AND
"OBJECTIVE" AND OTHER SIMILAR EXPRESSIONS IDENTIFY THOSE STATEMENTS THAT ARE
FORWARD-LOOKING. THESE STATEMENTS ARE BASED ON MANAGEMENT'S BELIEFS AND
ASSUMPTIONS AND ON INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD-LOOKING
STATEMENTS. IN ADDITION TO ANY ASSUMPTIONS AND OTHER FACTORS REFERRED TO
SPECIFICALLY IN CONNECTION WITH SUCH STATEMENTS, FACTORS THAT COULD CAUSE THE
ACTUAL RESULTS OF SIERRA PACIFIC RESOURCES (SPR), NEVADA POWER COMPANY (NPC), OR
SIERRA PACIFIC POWER COMPANY (SPPC) TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED
IN ANY FORWARD-LOOKING STATEMENT INCLUDE, AMONG OTHERS, THE FOLLOWING:
(1) UNFAVORABLE RULINGS IN RATE CASES TO BE FILED BY NPC AND SPPC (THE
"UTILITIES") WITH THE PUBLIC UTILITIES COMMISSION OF NEVADA (PUCN),
INCLUDING THE PERIODIC APPLICATIONS TO RECOVER COSTS FOR FUEL AND
PURCHASED POWER THAT HAVE BEEN RECORDED BY THE UTILITIES IN THEIR
DEFERRED ENERGY ACCOUNTS AND DEFERRED NATURAL GAS RECORDED BY SPPC
FOR ITS GAS DISTRIBUTION BUSINESS;
(2) THE OUTCOME OF NPC'S PENDING LAWSUIT IN NEVADA STATE COURT SEEKING
TO REVERSE PORTIONS OF THE PUCN'S MARCH 29, 2002 ORDER DENYING THE
RECOVERY OF $434 MILLION OF DEFERRED ENERGY COSTS, INCLUDING THE
OUTCOME OF THE PETITION FILED BY THE BUREAU OF CONSUMER PROTECTION
OF THE NEVADA ATTORNEY GENERAL'S OFFICE SEEKING ADDITIONAL
DISALLOWANCES;
(3) THE ABILITY OF SPR, NPC AND SPPC TO ACCESS THE CAPITAL MARKETS TO
SUPPORT THEIR REQUIREMENTS FOR WORKING CAPITAL, INCLUDING AMOUNTS
NECESSARY TO FINANCE DEFERRED ENERGY COSTS, CONSTRUCTION COSTS AND
THE REPAYMENT OF MATURING DEBT, PARTICULARLY IN THE EVENT OF
ADDITIONAL UNFAVORABLE RULINGS BY THE PUCN, A FURTHER DOWNGRADE OF
THE CURRENT DEBT RATINGS OF SPR, NPC OR SPPC AND/OR ADVERSE
DEVELOPMENTS WITH RESPECT TO NPC'S OR SPPC'S POWER AND FUEL
SUPPLIERS;
(4) WHETHER SUPPLIERS, SUCH AS ENRON, WHICH HAVE TERMINATED THEIR POWER
SUPPLY CONTRACTS WITH NPC AND/OR SPPC WILL BE SUCCESSFUL IN PURSUING
THEIR CLAIMS AGAINST THE UTILITIES FOR LIQUIDATED DAMAGES UNDER
THEIR POWER SUPPLY CONTRACTS, AND WHETHER ENRON WILL BE SUCCESSFUL
IN REQUESTING THAT COLLATERAL BE POSTED IN THE AMOUNT OF ITS CLAIMS
PENDING RESOLUTION OF ITS LAWSUIT AGAINST NPC AND SPPC;
(5) WHETHER SPR, NPC AND SPPC WILL BE ABLE TO MAINTAIN SUFFICIENT
STABILITY WITH RESPECT TO THEIR LIQUIDITY AND RELATIONSHIPS WITH
SUPPLIERS TO BE ABLE TO CONTINUE TO OPERATE OUTSIDE OF BANKRUPTCY;
(6) WHETHER CURRENT SUPPLIERS OF PURCHASED POWER, NATURAL GAS OR FUEL TO
NPC OR SPPC WILL CONTINUE TO DO BUSINESS WITH NPC OR SPPC OR WILL
TERMINATE THEIR CONTRACTS AND SEEK LIQUIDATED DAMAGES FROM THE
RESPECTIVE UTILITY;
(7) WHETHER CURRENT SUPPLIERS OF PURCHASED POWER TO NPC WILL CONTINUE TO
ACCEPT DELAYED PAYMENT OF A PORTION OF THE PURCHASE PRICE UNDER
THEIR CONTRACTS WITH NPC DURING THE PERIOD FROM MAY 1 THROUGH
SEPTEMBER 15, 2002;
(8) WHETHER NPC AND SPPC WILL BE ABLE, EITHER THROUGH FEDERAL ENERGY
REGULATORY COMMISSION ("FERC") PROCEEDINGS OR NEGOTIATION, TO OBTAIN
LOWER PRICES ON THEIR LONGER-TERM PURCHASED POWER CONTRACTS WHICH
ARE PRICED ABOVE CURRENT MARKET PRICES FOR ELECTRICITY;
(9) WHETHER THE PUCN WILL ISSUE FAVORABLE ORDERS IN A TIMELY MANNER TO
PERMIT THE UTILITIES TO BORROW MONEY AND ISSUE ADDITIONAL SECURITIES
TO FINANCE THE UTILITIES' OPERATIONS AND TO PURCHASE POWER AND FUEL
NECESSARY TO SERVE THEIR RESPECTIVE CUSTOMERS; AND, IN PARTICULAR,
THE PUCN'S DECISION ON THE PETITION OF THE BUREAU OF CONSUMER
PROTECTION OF THE NEVADA ATTORNEY GENERAL'S OFFICE TO RECONSIDER THE
PUCN'S RECENT ORDER AUTHORIZING THE ISSUANCE BY NPC OF ADDITIONAL
LONG-TERM DEBT;
28
(10) WHETHER THE UTILITIES WILL NEED TO PURCHASE ADDITIONAL POWER ON THE
SPOT MARKET TO MEET UNANTICIPATED POWER DEMANDS (FOR EXAMPLE, DUE TO
UNSEASONABLY HOT WEATHER) AND WHETHER SUPPLIERS WILL BE WILLING TO
SELL SUCH POWER TO THE UTILITIES IN LIGHT OF THEIR WEAKENED
FINANCIAL CONDITION;
(11) THE EFFECT OF PRICE CONTROLS PROMULGATED FROM TIME TO TIME BY THE
FERC ON THE PRICE AT WHICH THE UTILITIES CAN SELL EXCESS POWER IN
THE WHOLESALE MARKETS AND ON THE OVERALL AVAILABILITY OF PURCHASED
POWER ON THE SPOT MARKET;
(12) THE EFFECT OF A NON-BINDING REFERENDUM TO BE INCLUDED ON THE BALLOT
IN CLARK COUNTY, NEVADA IN NOVEMBER 2002 ASKING VOTERS TO INDICATE
WHETHER THEY WOULD FAVOR THE ESTABLISHMENT OF A NON-PROFIT ENTITY TO
PROVIDE ELECTRICITY SERVICES IN SOUTHERN NEVADA;
(13) THE EFFECT THAT ANY FUTURE TERRORIST ATTACKS MAY HAVE ON THE TOURISM
AND GAMING INDUSTRIES IN NEVADA, PARTICULARLY IN LAS VEGAS, AS WELL
AS ON THE ECONOMY IN GENERAL;
(14) THE EFFECT OF EXISTING OR FUTURE NEVADA, CALIFORNIA OR FEDERAL
LEGISLATION OR REGULATIONS AFFECTING ELECTRIC INDUSTRY
RESTRUCTURING, INCLUDING LAWS OR REGULATIONS WHICH COULD ALLOW
ADDITIONAL CUSTOMERS TO CHOOSE NEW ELECTRICITY SUPPLIERS OR CHANGE
THE CONDITIONS UNDER WHICH THEY MAY DO SO;
(15) UNSEASONABLE WEATHER AND OTHER NATURAL PHENOMENA, WHICH CAN HAVE
POTENTIALLY SERIOUS IMPACTS ON THE UTILITIES' ABILITY TO PROCURE
ADEQUATE SUPPLIES OF FUEL OR PURCHASED POWER TO SERVE THEIR
RESPECTIVE CUSTOMERS AND ON THE COST OF PROCURING SUCH SUPPLIES;
(16) INDUSTRIAL, COMMERCIAL AND RESIDENTIAL GROWTH IN THE SERVICE
TERRITORIES OF THE UTILITIES;
(17) THE LOSS OF ANY SIGNIFICANT CUSTOMERS;
(18) CHANGES IN THE BUSINESS OF MAJOR CUSTOMERS, PARTICULARLY THOSE
ENGAGED IN GOLD MINING OR GAMING, WHICH MAY RESULT IN CHANGES IN THE
DEMAND FOR SERVICES OF THE UTILITIES, INCLUDING THE EFFECT ON THE
NEVADA GAMING INDUSTRY OF THE OPENING OF ADDITIONAL INDIAN GAMING
ESTABLISHMENTS IN CALIFORNIA AND OTHER STATES;
(19) CHANGES IN ENVIRONMENTAL REGULATIONS, TAX OR ACCOUNTING MATTERS OR
OTHER LAWS AND REGULATIONS TO WHICH THE UTILITIES ARE SUBJECT;
(20) FUTURE ECONOMIC CONDITIONS, INCLUDING INFLATION OR DEFLATION RATES
AND MONETARY POLICY;
(21) FINANCIAL MARKET CONDITIONS, INCLUDING CHANGES IN AVAILABILITY OF
CAPITAL OR INTEREST RATE FLUCTUATIONS;
(22) UNUSUAL OR UNANTICIPATED CHANGES IN NORMAL BUSINESS OPERATIONS,
INCLUDING UNUSUAL MAINTENANCE OR REPAIRS; AND
(23) EMPLOYEE WORKFORCE FACTORS, INCLUDING CHANGES IN COLLECTIVE
BARGAINING UNIT AGREEMENTS, STRIKES OR WORK STOPPAGES.
OTHER FACTORS AND ASSUMPTIONS NOT IDENTIFIED ABOVE MAY ALSO HAVE BEEN
INVOLVED IN DERIVING THESE FORWARD-LOOKING STATEMENTS, AND THE FAILURE OF THOSE
OTHER ASSUMPTIONS TO BE REALIZED, AS WELL AS OTHER FACTORS, MAY ALSO CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. SPR, NPC AND SPPC
ASSUME NO OBLIGATION TO UPDATE FORWARD-LOOKING STATEMENTS TO REFLECT ACTUAL
RESULTS, CHANGES IN ASSUMPTIONS OR CHANGES IN OTHER FACTORS AFFECTING
FORWARD-LOOKING STATEMENTS.
CRITICAL ACCOUNTING POLICIES
The following items represent critical accounting policies that under
different conditions or using different assumptions could have a material effect
on the financial condition, liquidity and capital resources of SPR and the
Utilities.
Regulatory Accounting
The Utilities' 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, the Utilities qualify for the application of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation", issued by the Financial Accounting
Standards Board (FASB). 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
29
expense where it is probable that future revenue will be provided to recover
these costs. SFAS No. 71 prescribes the method to be used to record the
financial transactions of a regulated entity. The criteria for applying SFAS No.
71 include the following: (i) rates are set by an independent third party
regulator, (ii) approved rates are intended to recover the specific costs of the
regulated products or services, and (iii) rates that are set at levels that will
recover costs can be charged to and collected from customers.
Deferred Energy Accounting
On April 18, 2001, the Governor of Nevada signed into law Assembly Bill
(AB) 369. The provisions of AB 369, which are described in greater detail in
"Regulation and Rate Proceedings," later, include, among others, a reinstatement
of deferred energy accounting for fuel and purchased power costs incurred by
electric utilities. In accordance with the provisions of SFAS No. 71, the
Utilities implemented deferred energy accounting on March 1, 2001, for their
respective electric operations. Under deferred energy accounting, to the extent
actual fuel and purchased power costs exceed fuel and purchased power costs
recoverable through current rates, that excess is not recorded as a current
expense on the statement of operations but rather is deferred and recorded as an
asset on the balance sheet. Conversely, a liability is recorded to the extent
fuel and purchased power costs recoverable through current rates exceed actual
fuel and purchased power costs. These excess amounts are reflected in
adjustments to rates and recorded as revenue or expense in future time periods,
subject to PUCN review. AB 369 provides that the PUCN may not allow the recovery
of any costs for purchased fuel or purchased power "that were the result of any
practice or transaction that was undertaken, managed or performed imprudently by
the electric utility." In reference to deferred energy accounting, AB 369
specifies that fuel and purchased power costs include all costs incurred to
purchase fuel, to purchase capacity, and to purchase energy. The Utilities also
record, and are eligible under the statute to recover, a carrying charge on such
deferred balances.
As described in more detail under "Regulatory Matters - Nevada Matters
- - Nevada Power Company Deferred Energy Case" below, on November 30, 2001, NPC
filed an application with the PUCN seeking to clear deferred balances for
purchased fuel and power costs accumulated between March 1, 2001 and September
30, 2001. The application sought to establish a rate to clear accumulated
purchased fuel and power costs of $922 million and spread the cost recovery over
a period of not more than three years. On March 29, 2002, the PUCN issued its
decision on the deferred energy application, disallowing $434 million of
deferred purchased fuel and power costs and allowing NPC to collect the
remaining $488 million over three years beginning April 1, 2002. As a result of
this disallowance, NPC wrote off $434 million of deferred energy costs, the two
major national rating agencies immediately downgraded the credit rating on
SPR's, NPC's and SPPC's debt securities (followed by further downgrades late in
April), and the market price of SPR's Common Stock fell substantially.
As described in more detail under "Regulatory Matters - Nevada Matters
- - Sierra Pacific Power Company Deferred Energy Case" below, SPPC filed an
application with the PUCN seeking to clear its deferred balances for purchased
fuel and power costs accumulated between March 1, 2001 and November 30, 2001.
The application sought to establish a rate to clear accumulated purchased fuel
and power costs of $205 million and spread the cost recovery over a period of
not more than three years. On May 28, 2002, the PUCN issued its decision on
SPPC's deferred energy application, disallowing $53 million of deferred
purchased fuel and power costs and allowing SPPC to collect the remaining $152
million over three years beginning June 1, 2002. As a result of this decision,
SPPC wrote off the $53 million of disallowed deferred energy costs.
In the meantime, both Utilities have continued to be entitled under
AB369 to utilize deferred energy accounting for their electric operations.
Because of contracts entered into during the Western energy crisis in 2001 to
assure adequate supplies of electricity for their customers, the Utilities are
continuing to incur fuel and purchased power costs in excess of amounts they are
permitted to recover in current rates. As a result, during the six months ended
June 30, 2002, both Utilities continued to record additional amounts in their
deferral of energy costs accounts. If not for deferred energy accounting during
the first six months of 2002, SPR's, NPC's and SPPC's results of operations,
financial condition, liquidity and capital resources would have been adversely
affected. For example, without the deferred energy accounting provisions of AB
369, the reported net losses of SPR, NPC, and SPPC for the six months ended June
30, 2002 of ($347.4) million, ($295.3) million(1), and ($25.0) million would
have been (net of income tax) reported as net losses of ($521.5) million, ($422)
million(1), and ($72.4) million, respectively. Similarly, the reported net
income of NPC for the quarter ended June 30, 2002 of 5.7 million(1) would have
been (net of income tax) reported as a net loss of ($114.7) million(1), and the
reported net losses of SPR and SPPC for the quarter ended June 30, 2002 of
($41.9) million and ($34.9) million would have been (net of income tax) reported
as net losses of ($206.7) million and ($79.3) million, respectively. As
demonstrated with respect to the Utilities' recent deferred energy cases, a
significant disallowance by the PUCN of costs currently deferred could have a
material adverse affect on the future results of operations of SPR, NPC and
SPPC. See the Form 10-K for the year ended December 31, 2001 for a more detailed
discussion of deferred energy accounting.
- --------
(1) Excludes equity in losses of SPR
30
Derivatives and Hedging Activities
Effective January 1, 2001, SPR, SPPC, and NPC adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138. As amended, SFAS No. 133 requires that an entity recognize all
derivative instruments as either assets or liabilities in the statement of
financial position and measure the instruments at fair value.
In order to manage loads, resources and energy price risk, the
Utilities buy fuel and power under forward contracts. In addition to forward
fuel and power purchase contracts, the Utilities also use options and swaps to
manage price risk. All of these instruments are considered to be derivatives
under SFAS No. 133. The risk management assets and liabilities recorded in the
balance sheets of the Utilities and SPR are primarily comprised of the fair
value of these forward fuel and power purchase contracts and other energy
related derivative instruments.
Fuel and purchased power costs are subject to deferred energy
accounting. Accordingly, the energy related risk management assets and
liabilities and the corresponding unrealized gains and losses (changes in fair
value) are offset with a regulatory asset or liability rather than recognized in
the statements of income and comprehensive income. Upon settlement of a
derivative instrument, actual fuel and purchased power costs are recognized if
they are currently recoverable or deferred if they are recoverable or payable
through future rates.
The fair values of the forward contracts and swaps are determined based
on quotes obtained from independent brokers and exchanges. The fair values of
options are determined using a pricing model which incorporates assumptions such
as the underlying commodity's forward price curve, time to expiration, strike
price, interest rates, and volatility. The use of different assumptions and
variables in the model could have a significant impact on the valuation of the
instruments.
SPR and the Utilities have other non-energy related derivative
instruments such as interest rate swaps. The transition adjustment resulting
from the adoption of SFAS No. 133 related to these types of derivative
instruments was reported as the cumulative effect of a change in accounting
principle in Other Comprehensive Income. Additionally, the changes in fair
values of these non-energy related derivatives are also reported in the
statements of comprehensive income until the related transactions are settled or
terminate, at which time the amounts will be reclassified into earnings. $3.8
million relating to a terminated interest rate swap were reclassified into
earnings during the quarter ended June 30, 2002. No other amounts were
reclassified into earnings during the three- and six-month periods ended June
30, 2002 and 2001.
See Note 22 of "Notes to Financial Statements" in the Form 10-K for the
year ended December 31, 2001, and "Item 3 - Quantitative and Qualitative
Disclosures about Market Risk" in this Report for additional information
regarding derivatives and hedging activities.
Provision for Uncollectible Accounts
The Utilities reserve for doubtful accounts based on past experience
writing off uncollectible customer accounts. The collapse of the energy markets
in California, and the subsequent bankruptcy of the California Power Exchange
and the financial difficulties of the Independent System Operator, resulted in
the Utilities reserving for outstanding receivables for power purchases by these
two entities of $19.9 million and $1.5 million (before taxes) for NPC and SPPC,
respectively. The weakening economy and the disruption to the leisure travel
industry after September 11th also impacted the Utilities' customer
delinquencies in 2001. As of December 31, 2001, additional amounts of $14.8
million and $6.1 million were reserved for delinquent retail customer accounts
of NPC and SPPC, respectively. During the six months ended June 30, 2002, $2.9
million and $1.5 million were added to the provisions for uncollectible retail
customer accounts of NPC and SPPC, respectively. The adequacy of these reserves
will vary to the extent that future collections differ from past experience.
Uncollectible retail customer accounts amounting to $2.3 million and $1.9
million, respectively, for NPC and SPPC, were written off against these
provisions during the six months ended June 30, 2002. Significant collection
efforts are underway to recover portions of the rest of the delinquent accounts.
MAJOR FACTORS AFFECTING RESULTS OF OPERATIONS
As discussed in the results of operations sections that follow,
operating results for the six months ended June 30, 2002 were severely affected
by the PUCN's March 29, 2002 decision in NPC's deferred energy rate case to
disallow $434 million of deferred purchased fuel and power costs. As a result of
this disallowance, NPC wrote off $465 million of deferred energy costs and
related carrying charges during that quarter. In addition, the decision of the
PUCN on May 29, 2002 on SPPC's deferred energy application to disallow $53.1
million of deferred purchased fuel and power costs accumulated between March 1,
2001 and November 30, 2001 had a significant negative impact on the results of
operations of SPR and SPPC for the quarter and the six-month period ended June
30, 2002. As a result of this disallowance, SPPC wrote off $55.1 million of
deferred energy costs
31
and related carrying charges during that quarter. The discussion below provides
the context in which these decisions were made.
In an effort to mitigate the effects of higher fuel and purchased power
costs that developed in the Western United States in 2000,the Utilities entered
into the Global Settlement with the PUCN in July 2000, which established a
mechanism that initiated incremental rate increases for each Utility. Cumulative
electric rate increases under the Global Settlement were $127 million and $65
million per year for NPC and SPPC, respectively.
However, because the rate adjustment mechanism of the Global Settlement
was subject to certain caps and could not keep pace with the continued
escalation of fuel and purchased power prices, on January 29, 2001, the
Utilities filed a Comprehensive Energy Plan (CEP) with the PUCN. The CEP
included a request for emergency rate increases (CEP Riders). On March 1, 2001,
the PUCN permitted the requested CEP Riders to go into effect subject to later
review. The CEP Riders provided further rate increases of $210 million and $104
million per year, respectively, for NPC and SPPC.
Notwithstanding the increases under the Global Settlement and the CEP
Riders, the Utilities' revenues for fuel and purchased power recovery continued
to be less than the related expenses. Accordingly, the Utilities sought
additional relief pursuant to legislation.
On April 18, 2001, the Governor of Nevada signed into law AB 369. The
provisions of AB 369 include a moratorium on the sale of generation assets by
electric utilities until 2003, the repeal of electric industry restructuring,
and, beginning March 1, 2001, a reinstatement of deferred energy accounting for
fuel and purchased power costs incurred by electric utilities. The stated
purposes of this emergency legislation included, among others, to control
volatility in the price of electricity in the retail market in Nevada and to
ensure that the Utilities have the necessary financial resources to provide
adequate and reliable electric service under present market conditions.
As discussed above in "Critical Accounting Policies," deferred energy
accounting allows the Utilities an opportunity to recover in future periods that
portion of their costs for fuel and purchased power not covered by current rates
and defers to future periods the expense associated with the amounts by which
fuel and purchased power costs exceed the costs to be recovered in current
rates. Recovery is subject to PUCN review as to prudency and other matters.
AB 369 requires each Utility to file general rate applications and
deferred energy applications with the PUCN by specific dates. NPC's deferred
energy application, filed on November 30, 2001, sought to establish a Deferred
Energy Accounting Adjustment ("DEAA") rate, effective on April 1, 2002, to clear
accumulated purchased fuel and power costs of $922 million and spread the cost
recovery over a period of not more than three years, resulting in an average net
increase of 21%. SPPC's deferred energy application, filed on February 1, 2002,
sought to establish a DEAA rate to clear accumulated purchased fuel and power
costs of $205 million and spread the cost recovery over a period of not more
than three years, resulting in an average net increase of 9.8%. See "Regulatory
Matters," later, for a discussion of the Utilities' general rate case filings
and decisions.
The March 29, 2002 decision of the PUCN on NPC's deferred energy
application to disallow $434 million of deferred purchased fuel and power costs
accumulated between March 1, 2001 and September 30, 2001 had a significant
negative impact on the results of operations of SPR and NPC for the six months
ended June 30, 2002. Several of the intervenors from NPC's deferred energy rate
case filed petitions with the PUCN for reconsideration of its decision, seeking
additional disallowances ranging from $12.8 million to $488 million. The
petitions for reconsideration were granted in part and denied in part by the
PUCN on May 24, 2002, but no additional disallowances to the deferred energy
balance resulted from that decision. The Bureau of Consumer Protection of the
Nevada Attorney General's Office has since filed a motion in NPC's pending state
court case seeking additional disallowances. Although the PUCN's March 29, 2002
decision on NPC's deferred energy application is being challenged by NPC in a
lawsuit filed in Nevada state court, which is discussed below under "Regulatory
Matters", the decision caused the two major national rating agencies to issue an
immediate downgrade of the credit ratings on SPR's, NPC's and SPPC's debt
securities (followed by further downgrades late in April). Following those
events, the market price of SPR's common stock fell substantially, NPC and SPPC
were obliged within 5 business days of the downgrades to issue general and
refunding mortgage bonds to secure their bank lines of credit, NPC was obliged
to obtain a waiver and amendment from its credit facility banks before it was
permitted to draw down on the facility, NPC and SPPC were no longer able to
issue commercial paper, a number of NPC's power suppliers contacted NPC
regarding its ability to pay the purchase price of outstanding contracts, and
several power suppliers, including an affiliate of Enron Corp., terminated their
power supply agreements with one or both of the Utilities.
The separate decision of the PUCN on May 29, 2002 on SPPC's deferred
energy application to disallow $53.1 million of deferred purchased fuel and
power costs accumulated between March 1, 2001 and November 30, 2001 had a
significant negative impact on the results of operations of SPR and SPPC for the
quarter and the six months ended June 30, 2002. SPPC is currently evaluating its
options regarding a possible court challenge to the PUCN order. Several of the
intervenors from SPPC's deferred energy rate case filed petitions with the PUCN
for reconsideration of its decision, seeking an additional
32
disallowance of $126 million. On July 18, 2002, the petitions for
reconsideration were granted in part and denied in part by the PUCN, but no
additional disallowances to the deferred energy balance resulted from that
decision.
A significant disallowance in future deferred energy rate cases filed
by either Utility could further weaken the financial condition, liquidity, and
capital resources of SPR, NPC, and SPPC. In particular, such a decision or
decisions could cause further downgrades of debt securities by the rating
agencies, could make it impracticable to access the capital markets, and could
cause additional power suppliers to terminate purchased power contracts and seek
liquidated damages. Under such circumstances, there can be no assurance that
SPR, NPC, or SPPC would be able to remain solvent or continue operations. Under
such circumstances, there also can be no assurance that SPR, NPC, or SPPC would
not seek protection under the bankruptcy laws.
SIERRA PACIFIC RESOURCES
During the first six months of 2002, SPR incurred a loss of $345.4
million before preferred stock dividend requirements, and paid $20.6 million in
common stock dividends on March 15, 2002. NPC and SPPC, SPR's principal
subsidiaries, paid common stock dividends of $10 million and $19.9 million,
respectively, to their parent, SPR. SPPC also paid $1.95 million in dividends to
holders of its preferred stock. During the first six months of 2002, NPC and
SPPC each received a capital contribution of $10 million from SPR.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Since SPR is a holding company, substantially all of its cash flow is
provided by dividends paid to SPR by NPC and SPPC on their common stock, all of
which is owned by SPR. Since these two subsidiaries are public utilities, they
are subject to regulation by state utility commissions which may impose limits
on investment returns or otherwise impact the amount of dividends which may be
paid by those companies. In addition, certain agreements entered into by NPC and
SPPC set restrictions on the amount of dividends the Utilities may declare and
pay and restrict the circumstances under which such dividends may be declared
and paid. The specific restrictions on dividends contained in agreements to
which NPC and SPPC are party, as well as specific regulatory limitations on
dividends, are summarized below.
- NPC's first mortgage indenture limits the cumulative amount of
dividends that NPC may pay on its capital stock to the cumulative
net earnings of NPC since 1953. At the present time, this
restriction precludes NPC from making further payments of dividends
on NPC's common stock and will continue to bar such payments unless
the restriction is waived or removed by the consent of the first
mortgage bondholders, the first mortgage bonds are redeemed or
defeased, or until, over the passage of time, NPC generates
sufficient earnings to overcome the shortfall created by the
write-off of $465 million in connection with the March 2002 decision
in NPC's deferred energy rate case.
- NPC's Credit Agreement, as amended on June 25, 2002, prohibits the
payment of dividends on NPC's common stock for the duration of that
facility, which expires on November 28, 2002.
- On June 4, 2002, NPC entered into a Master Amendment to Confirmation
Agreements with Duke Energy Trading and Marketing L.L.C. which,
among other things, limits the amount of dividends NPC may declare
or pay on its equity securities until NPC completes certain deferred
payments under the Agreement, which are due on December 31, 2003.
Under the Agreement, until the deferred payments are paid in full,
NPC may not declare any dividend or make any dividend payments other
than (1) payments to SPR to enable SPR to pay its reasonable fees
and expenses (including interest on SPR's debts and payment of
obligations under SPR's PIES) incurred in the ordinary course of
business in calendar year 2003, up to a maximum amount of
$20,000,000 and (2) any currently scheduled payments to any of NPC's
preferred trust vehicles on account of NPC's preferred trust
securities.
- The PUCN issued a Compliance Order, Docket No. 02-4037, on June 19,
2002, relating to NPC's request for authority to issue long-term
debt. The PUCN order requires that, until such time as the order's
authorization expires (December 31, 2003), NPC must either receive
the prior approval of the PUCN or reach an equity ratio of 42%
before paying any dividends to SPR. If NPC achieves a 42% equity
ratio prior to December 31, 2003, the dividend restriction ceases to
have effect.
- The terms of NPC's preferred trust securities provide that no
dividends may be paid on NPC's common stock if NPC has elected to
defer payments on the junior subordinated debentures issued in
conjunction with the preferred trust securities. At this time, NPC
has not elected to defer payments on the junior subordinated
debentures.
- SPPC's Credit Agreement, which was also amended on June 25, 2002,
prohibits dividends on SPPC's capital stock if there is a default or
an event of default under the Credit Agreement. The Agreement
expires November 28, 2002.
33
- SPPC's Articles of Incorporation contain restrictions on the payment
of dividends on SPPC's common stock in the event of a default in the
payment of dividends on SPPC's preferred stock and prohibit SPPC
from declaring or paying any dividends on any shares of common stock
except from the net income of SPPC, and its predecessor, available
for dividends on common stock accumulated subsequent to December 31,
1955, less preferred stock dividends, plus the sum of $500,000.
Any of these provisions which restrict dividends payable by NPC or
SPPC could adversely affect the liquidity of SPR.
On March 29 and April 1, 2002, S&P and Moody's lowered the unsecured
debt ratings of SPR, NPC and SPPC to below investment grade in response to the
decision of the PUCN with respect to NPC's rate cases. On April 23 and 24, 2002,
the unsecured debt ratings of SPR and the Utilities were further downgraded by
both rating agencies and the Utilities' secured debt ratings were downgraded to
below investment grade. The downgrades have affected SPR's, NPC's and SPPC's
liquidity primarily in two principal areas: (1) their respective financing
arrangements and (2) NPC's and SPPC's contracts for fuel, for purchase and sale
of electricity and for transportation of natural gas.
As a result of the ratings downgrades, SPR's ability to access the
capital markets to raise funds is severely limited. On April 3, 2002, SPR
terminated its $75 million unsecured revolving credit facility as a condition to
the banks agreeing to an amendment of NPC's $200 million unsecured revolving
credit facility that would permit NPC to draw down funds under that facility.
See "Nevada Power Company - Financial Condition, Liquidity and Capital
Resources" for more information.
In response to the decisions by the PUCN in NPC's recent rate cases,
SPR has implemented certain measures that will positively impact cash flow by
$125 million in 2002. Two major transmission construction projects, discussed in
the Form 10-K for the year ended December 31, 2001, have been delayed for a
total capital preservation impact of $80.8 million. The delay in NPC's
Centennial Plan has an impact of $46.4 million and the delay of SPPC's Falcon to
Gonder Project has an impact of $34.4 million. An additional $28.9 million was
reduced from the Utilities' capital budgets by curtailing or delaying other
projects. Management expects that the balance of the $125 million cash flow
enhancement will be obtained from various land sales. Additional cost-cutting
actions by SPR may be necessary.
With respect to NPC's and SPPC's contracts for purchased power, NPC
and SPPC purchase and sell electricity with their counterparties under the
Western Systems Power Pool ("WSPP") agreement, which is an industry standard
contract. The WSPP contract is posted on the WSPP website. These contracts
provide that a material adverse change may give rise to a right to request
collateral, which, if not provided within 3 business days, could cause a
default. A default must be declared within 30 days of the event giving rise to
the default becoming known. As the Utilities continue to negotiate arrangements
with their suppliers, the Utilities have extended to all continuing suppliers
their rights under the WSPP agreement, including the right to declare a default.
A default will result in a termination payment equal to the present value of the
net gains and losses for the entire remaining term of all contracts between the
parties aggregated to a single liquidated amount due within 3 business days
following the date the notice of termination is received. The mark-to-market
value can be used to roughly approximate the termination payment at any point in
time. The mark-to-market value as of July 31, 2002, for all suppliers continuing
to provide power under a WSPP agreement was approximately $248 million and $108
million, respectively, for NPC and SPPC.
Following the PUCN decisions, a number of power suppliers requested
collateral from NPC and SPPC. On April 4, 2002, the Utilities sent a letter to
their suppliers advising them that, assuming the Utilities could access the
capital markets for secured debt and no other significant negative developments
occurred, the Utilities expected to be able to honor their obligations under the
power supply contracts. However, the Utilities noted that a simultaneous call
for 100% mark-to-market collateral in the short-term would likely not be met. On
April 24, 2002, the Utilities met with representatives of various suppliers to
discuss SPR's and the Utilities' financial situation and plans, and indicated
that they intended to propose extended payment terms for the above-market
portions of NPC's existing power contracts. Such extended payment terms were
proposed to NPC's suppliers in a letter dated May 2, 2002, and proposed paying
less than contract prices, but more than market prices plus interest, for the
period May 1 to September 15, 2002. NPC may pay any balances remaining prior to
December 2003. NPC also agreed to extend the suppliers' rights under the WSPP
agreement.
In early May, Enron Power Marketing Inc. ("Enron"), Morgan Stanley
Capital Group Inc., Reliant Energy Services, Inc. and several smaller suppliers
notified NPC and SPPC that they would end power deliveries to the Utilities
based on what they believed to be their contractual right to end deliveries
because of the Utilities' inability to provide adequate assurances of their
ability to perform all of their outstanding material obligations. Each of these
terminating suppliers has asserted, or has indicated that it will assert, a
claim for liquidated damages. As discussed in Note 11, Commitments And
Contingencies, Enron has filed suit in its bankruptcy case in the Bankruptcy
Court for the Southern District of New York asserting claims for liquidated
damages of approximately $216 million and $93 million against NPC and SPPC,
respectively. Enron's claim is subject to the Utilities' defense that Enron's
claims are already at issue in the FERC proceeding challenging the contract
prices, and to other defenses that the Utilities intend to pursue in a timely
manner. In connection with the lawsuit filed by Enron in Bankruptcy Court, Enron
has filed a motion to require the Utilities to post collateral equal to the
amount of Enron's claims pending the outcome of the lawsuit. A hearing in this
case has been scheduled for September 6, 2002. An adverse decision on
34
the petition to require the Utilities to post collateral pending the outcome of
Enron's lawsuit or an adverse decision in the lawsuit itself could have a
material adverse affect on the financial condition and liquidity of SPR and the
Utilities and could render their ability to continue to operate outside of
bankruptcy uncertain. At this time, SPR and the Utilities are not able to
predict the outcome of a decision in this matter.
On June 10, 2002, Duke Energy Trading and Marketing ("Duke") entered
into an agreement with SPR and the Utilities to supply up to 1,000 megawatts of
electricity per hour, as well as natural gas, to NPC and SPPC to fulfill
customers' power requirements during the peak summer period. The effect of the
Duke agreement was to replace the amount of contracted power and natural gas
that would have been supplied by the various terminating suppliers, including
Enron. Duke also agreed to accept deferred payment for a portion of the amount
due under its existing power contracts with NPC for purchases made through
September 15, 2002. Although the other continuing suppliers have not entered
into formal agreements with NPC regarding deferred payments, NPC has been
deferring a portion of the payments to such suppliers since May 1, 2002 and
intends to continue to due so for charges incurred through September 15, 2002.
With respect to the purchase and sale of natural gas, NPC and SPPC
use several types of contracts. Standard industry sponsored agreements include:
- the Gas Industry Standards Board ("GISB") agreement which is used
for physical gas transactions,
- the GasEDI Base Contract for Short Term Sale and Purchase of Natural
Gas which is also used for physical gas transactions,
- the International Swap Dealers Association (ISDA) agreement which is
used for financial gas transactions.
Alternatively, the gas transactions might be governed by a
non-standard bilateral master agreement negotiated between the parties, or by
the confirmation associated with the transaction. The natural gas contract terms
and conditions are more varied than the electric contracts. Consequently, some
of the contracts contain language similar to that found in the WSPP agreement
and other agreements have unique provisions dealing with material adverse
changes.
Gas transmission services are provided under the FERC Gas Tariff or
a custom agreement. These contracts require the entities to establish and
maintain creditworthiness to obtain service. These contracts are subject to FERC
approved tariffs which, under certain circumstances, require the Utilities to
provide collateral to continue receiving service. To date, a letter of credit
has been provided to one of SPPC's gas suppliers.
In March 2002, NPC received a federal income tax refund of $79.3
million. Additionally, SPR and the Utilities received $105.7 million of refunds
in the second quarter of 2002. These refunds were the result of income tax
losses generated in 2001. Federal legislation passed in March 2002 changed the
allowed carry-back of these losses from two years to five years. This change
permitted SPR and the Utilities to accelerate the receipt of a portion of their
income tax receivables sooner than expected. The remaining receivable of $300.5
million will be utilized in future periods to reduce taxes payable when SPR and
the Utilities recognize taxable income.
At June 30, 2002, SPR had cash investments of approximately $27.7
million. At July 31, 2002, SPR had cash investments of approximately $20.7
million.
SPR's future liquidity depends, in part, on SPPC's ability to
continue to pay dividends to SPR, on a restoration of NPC to financial stability
including a restoration of its ability to pay dividends to SPR, and on SPR's
ability to access the capital markets or otherwise refinance debt that will be
maturing in 2003 and thereafter. Further adverse developments at NPC or SPPC,
including a material disallowance of deferred energy costs in future rate cases,
an adverse decision in the pending lawsuit by Enron to collect liquidated
damages (including its motion requesting the posting of collateral), a refusal
by one or more of NPC's continuing power suppliers to continue to accept
extended payment terms through the summer of 2002, or an inability of NPC or
SPPC to renew, replace or refinance all or a portion of their respective credit
facilities which expire on November 28, 2002, could cause SPR to become
insolvent and would render SPR's ability to continue to operate outside of
bankruptcy uncertain.
35
NEVADA POWER COMPANY
During the quarter ended June 30, 2002, NPC earned approximately $5.7
million (excluding NPC's equity in the losses of its parent, SPR) and paid no
dividends on its common stock. During the six months ended June 30, 2002, NPC
incurred a loss of approximately $295.3 million (excluding NPC's equity in the
losses of its parent, SPR), and paid $10 million in dividends on its common
stock, all of which was reinvested in NPC as a contribution to capital.
The causes for significant changes in specific lines comprising the
results of operations for NPC are as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------------- --------------------------------------
Change from Change from
2002 2001 Prior Year % 2002 2001 Prior Year %
---------- ---------- ------------ ---------- ---------- ------------
ELECTRIC OPERATING REVENUES ($000):
Residential $ 166,825 $ 172,520 -3.3% $ 297,931 $ 275,699 8.1%
Commercial 90,367 83,573 8.1% 160,058 139,129 15.0%
Industrial 135,402 118,603 14.2% 224,162 190,825 17.5%
---------- ---------- ---------- ----------
Retail revenues 392,594 374,696 4.8% 682,151 605,653 12.6%
Other 84,465 433,745 -80.5% 151,180 561,800 -73.1%
---------- ---------- ---------- ----------
TOTAL REVENUES $ 477,059 $ 808,441 -41.0% $ 833,331 $1,167,453 -28.6%
========== ========== ========== ==========
Retail sales in thousands
of megawatt-hours (MWH) 4,315 4,440 -2.8% 7,885 7,756 1.7%
Average retail revenue per MWH $ 90.98 $ 84.39 7.8% $ 86.51 $ 78.09 10.8%
Residential electric revenues decreased for the three months ending
June 30, 2002 in contrast to the previous period last year. This decrease was a
result of several factors, including, cooler weather (10% decrease in cooling
degree days) in 2002 compared to 2001. However, residential electric revenues
increased for the six months ended June 30, 2002 due to an overall increase in
the number of customers and rates. The milder second quarter 2002 weather
resulted in a minimal revenue impact for the six months ending June 30, 2002.
Higher rates resulted from an increase in rates effective March 1, 2001,
pursuant to the Comprehensive Energy Plan (CEP) and a rate change effective
April 1, 2002, that included a new DEAA (Deferred Energy Accounting Adjustment)
rate. See NPC's Annual Report on Form 10-K for the year ended December 31, 2001
for a discussion of the Global Settlement and the CEP, and the Regulatory
Matters section of this second quarter Form 10-Q for more detailed DEAA and rate
information. Voluntary energy conservation by residential customers resulted in
lower sales per residential customer. The PUCN mandated a one-time rate increase
of $0.01 per kilowatt-hour for the DEAA for only the month of June 2002. This
allowed NPC to accelerate the recovery from all customer classes of
approximately $16 million of the deferred energy balance.
Both commercial and industrial electric revenues increased for the
three and six months period, due, in part, to increases to the number of
customers and rates. There was also a one-time rate increase of $0.01 per
kilowatt-hour for the DEAA for only the month of June 2002 as discussed above.
The decreases in Electric Operating Revenues - Other for the three- and
six-month periods ended June 30, 2002, compared to the same periods in 2001 were
due to a decrease in prices and sales volumes of wholesale electric power to
other utilities, as a result of changing market conditions. See NPC's Annual
Report on Form 10-K for the year ended December 31, 2001, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operation,
Purchased Power Procurement, for a discussion of NPC's purchased power
procurement strategies.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------------- --------------------------------------
Change from Change from
2002 2001 Prior Year % 2002 2001 Prior Year %
---------- ---------- ------------ ---------- ---------- ------------
PURCHASED POWER ($000) $ 485,926 $ 839,538 -42.1% $ 661,992 $1,041,360 -36.4%
Purchased Power in thousands of MWHs 3,594 5,217 -31.1% 5,782 7,685 -24.8%
Average cost per MWH of Purchased Power(1) $ 71.49 $ 160.92 -55.6% $ 74.89 $ 135.51 -44.7%
- ---------
(1) Not including contract termination costs, discussed below
36
NPC's purchased power costs and volume were lower for both the three-
and six-month periods ended June 30, 2002 than for the same period of the prior
year. These decreases were the result of lower volumes and prices of Short-Term
Firm energy purchased. The decreases were offset, in part, by a $229 million
reserve recorded in the current quarter for terminated contracts, which are part
of the power portfolio costs and which are described in more detail in
"Financial Condition, Liquidity, and Capital Resources." Purchases associated
with risk management activities, which are included in Short-Term Firm energy,
also decreased significantly in 2002, for both the current quarter and
year-to-date. Risk management activities include transactions entered into for
hedging purposes and to minimize purchased power costs. See NPC's Annual Report
on Form 10-K for the year ended December 31, 2001, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operation,
Purchased Power Procurement, for a discussion of NPC's purchased power
procurement strategies.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------------- --------------------------------------
Change from Change from
2002 2001 Prior Year % 2002 2001 Prior Year %
---------- ---------- ------------ ---------- ---------- ------------
FUEL FOR POWER GENERATION ($000) $ 73,474 $ 102,258 -28.1% $ 157,196 $ 217,610 -27.8%
Thousands of MWHs generated 2,415 2,573 -6.1% 4,656 5,074 -8.2%
Average cost per MWH of Generated Power $ 30.42 $ 39.74 -23.5% $ 33.76 $ 42.89 -21.3%
Fuel for generation costs for both the three and six months ended June
30, 2002, were significantly lower than the prior year due to substantial
decreases in natural gas prices and volume.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------------- --------------------------------------
Change from Change from
DEFERRAL OF ENERGY COSTS-NET ($000) 2002 2001 Prior Year % 2002 2001 Prior Year %
---------- ---------- ------------ ---------- ---------- ------------
Deferred energy costs $ (185,199) $ (281,145) -34.1% $ (194,835) $ (269,837) -27.8%
Deferred energy costs disallowed -- -- N/A 434,123 -- N/A
---------- ---------- ---------- ----------
$ (185,199) $ (281,145) -34.1% $ 239,288 $ (269,837) N/A
========== ========== ========== ==========
Deferral of energy costs - net for the three- and six-month periods
ended June 30, 2002, reflects the deferral in the second quarter of 2002 of
approximately $229 million for contract termination costs, as described in more
detail in "Financial Condition, Liquidity, and Capital Resources." Deferral of
energy costs - net also reflects the amortization of prior deferred costs
resulting from an increase in rates beginning April 1, 2002, pursuant to the
PUCN's March 29, 2002, decision on NPC's deferred energy rate case, and the
one-time rate increase of $0.01 per kilowatt-hour for the month of June 2002.
The amortization is offset, in part, by the recording of additional deferrals of
electric energy costs, reflecting the extent to which actual fuel and purchased
power costs exceeded the fuel and purchased power costs recovered through
current rates. Deferral of energy costs - net for the six-months ended June 30,
2002, also reflects the write-off of $434 million of deferred energy costs for
the seven months ended September 30, 2001, that were disallowed by the PUCN in
their decision on NPC's deferred energy rate case. For both the three- and
six-month periods ended June 30, 2001, NPC recorded large deferrals of electric
energy costs, as shown in the table above.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------------- --------------------------------------
Change from Change from
2002 2001 Prior Year % 2002 2001 Prior Year %
---------- ---------- ------------ ---------- ---------- ------------
ALLOWANCE FOR OTHER FUNDS
USED DURING CONSTRUCTION ($000) $ 80 $ (122) $ 501 $ (473)
ALLOWANCE FOR BORROWED FUNDS
USED DURING CONSTRUCTION ($000) $ 849 $ 265 $ 1,961 $ (87)
---------- ---------- ---------- ----------
$ 929 $ 143 549.7% $ 2,462 $ (560) N/A
========== ========== ========== ==========
37
NPC's total allowance for funds used during construction (AFUDC) is
higher for the three- and six-month periods ended June 2002 as a result of an
increase in capital expenditures for the Centennial Plan and adjustments in 2001
to refine amounts assigned to specific components of facilities that were
completed in different periods. The increase is offset by a decrease in the
AFUDC rate in 2002 as a result of an increase in short-term debt.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------------- --------------------------------------
Change from Change from
($000) 2002 2001 Prior Year % 2002 2001 Prior Year %
---------- ---------- ------------ ---------- ---------- ------------
OTHER OPERATING EXPENSE $ 37,284 $ 33,750 10.5% $ 77,270 $ 84,522 -8.6%
MAINTENANCE EXPENSE $ 11,876 $ 13,478 -11.9% $ 23,526 $ 26,458 -11.1%
DEPRECIATION AND AMORTIZATION $ 17,140 $ 22,427 -23.6% $ 47,949 $ 44,303 8.2%
INCOME TAXES $ (57) $ 16,246 -100.4% $ (156,480) $ (14,218) 1000.6%
TAXES OTHER THAN INCOME TAXES $ 6,453 $ 5,847 10.4% $ 13,187 $ 11,897 10.8%
INTEREST CHARGES ON LONG-TERM DEBT $ 22,876 $ 18,339 24.7% $ 46,954 $ 34,959 34.3%
INTEREST CHARGES-OTHER $ 4,352 $ 3,750 16.1% $ 6,882 $ 7,713 -10.8%
OTHER INCOME (EXPENSE) - NET $ 5,585 $ 2,747 103.3% $ (5,772) $ 3,168 -282.2%
Other operating expense for the three-month period ending June 30, 2002
was higher, compared with the same period in the prior year, due to increased
expenses related to a new Credit and Collections Action Plan, higher reserve
rates for uncollectible accounts, costs associated with obtaining a tax refund
and legal fees associated with the PUCN's Deferred Energy Rate Case decision.
These increases were partially offset by credits associated with the reversal of
a $3 million reserve provision established in 2001 as a result of the conclusion
of electric industry restructuring in Nevada and a $2.7 million reversal of
NPC's Short-term Incentive Plan accrual. Other operating expense for the
six-month period ending June 30, 2002 was less, compared with the same period in
the prior year. In addition to the previously mentioned items, the decrease
reflects a $16.1 million increase in the provision for uncollectible accounts in
2001 related to the California Power Exchange, and the original $3 million
reserve provision established in 2001 as a result of the conclusion of electric
industry restructuring. These reductions in 2002 were partially offset by
increased expenses in 2002 related to insurance premiums, a Mill Tax rate
increase, and the delayed outage and adjustments at Reid Gardner.
Maintenance costs for the three- and six-month periods ending June 30,
2002, decreased from the prior year due to delayed outages at Reid Gardner and
Clark Station. The 2001 costs are higher due to engineering costs associated
with a major turbine overhaul on Reid Gardner.
Depreciation and amortization is lower for the three-month period ended
June 2002 as a result of a successful petition for reconsideration of a PUCN
decision, which reversed $8.7 million of additional depreciation recorded in the
first quarter of 2002. This decrease is partly offset by an increase in the
computer depreciation rate and additions to plant-in-service. Depreciation and
amortization increased in the six-month period ending June 2002 as a result of
additions to plant-in-service offset in part by plant-in-service asset
reconciliations pursuant to a PUCN order.
NPC recorded a small income tax benefit for the three months ended June
30, 2002, compared to income tax expense for the same period in 2001, as a
result of a net pre-tax loss in the current year compared to pre-tax net income
in the prior year. For the six months ended June 30, 2002, NPC recorded a
significantly increased income tax benefit compared to 2001, reflecting a much
higher pre-tax loss in the current year compared to the prior year.
Taxes other than income increased for the three- and six-month periods
ending June 30, 2002, due to increased property taxes related to an increase in
plant-in-service, and due to higher payroll taxes.
Interest charges on long-term debt for the three- and six-month
periods ending June 30, 2002, increased over the same periods in 2001 due to
$446 million and $246 million net increases, respectively, in long-term debt
outstanding between the same periods.
Interest charges-other for the three-months ended June 30, 2002,
increased from the prior year due to $1.3 million in interest expense on delayed
payments not applicable to the same period, 2001. For the six months ended June
30, 2002, the $1.3 million partially offset the reduction in interest expense
that resulted from lower commercial paper and short-term debt balances carried
forward from the first quarter of the year.
38
Other income (expense) - net for the three months ended June 30, 2002,
increased compared to the same period in the prior year primarily due to a $5.0
million increase in carrying charges for deferred energy. Other income (expense)
- - net for the six months ended June 30, 2002, reflects the first quarter
write-off of approximately $20.1 million, net of taxes, of carrying charges on
deferred energy costs that were disallowed by the PUCN in their March 29, 2002
decision on NPC's deferred energy rate case. The write-off was offset in part by
the recording of current year carrying charges on deferred energy costs.
ANALYSIS OF CASH FLOWS
NPC's cash flows during the six months ended June 30, 2002, improved
slightly compared to the same period in 2001, resulting primarily from an
increase in cash flows from operating activities offset, in part, by a decrease
in cash flows from financing activities. Although NPC recorded a substantially
larger loss for the six months ended June 30, 2002 than the same period in 2001,
the increase in the current year's loss resulted largely from the write-off of
disallowed deferred energy costs for which the cash outflow had occurred in
2001. Current year cash flows from operating activities also benefited from a
smaller increase in accounts receivable compared to the prior year and from
lower energy prices, which necessitated a smaller deferral of energy costs.
These 2002 cash flow benefits were, however, largely offset by a much smaller
increase in accounts payable than in 2001. Cash flows from operating activities
in the current year also reflect the receipt of an income tax refund resulting
from a tax law change that took effect in March 2002. Cash flows from financing
activities were lower because of a decrease in net long-term debt issued during
the six months ended June 30, 2001 offset, in part, by an increase in short-term
borrowings during the six months ended June 30, 2002.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, NPC had cash investments of approximately $23.9
million. At July 31, 2002, NPC had cash investments of approximately $51.9
million.
As discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Nevada Power Company - Construction
Expenditures and Financing" and " - Capital Structure" in the Annual Report on
Form 10-K for the year ended December 31, 2001, NPC anticipated external capital
requirements for construction costs and for the repayment of maturing short-term
and long-term debt during 2002 totaling approximately $403 million, which NPC
planned to fund through a combination of (i) internally generated funds, (ii)
the issuance of short-term debt and preferred stock, and (iii) capital
contributions from SPR.
On March 29 and April 1, 2002, following the decision by the PUCN in
NPC's deferred energy rate case, S&P and Moody's lowered NPC's unsecured debt
ratings to below investment grade. On April 23 and 24, 2002, NPC's unsecured
debt ratings were further downgraded and its secured debt ratings were
downgraded to below investment grade. As a result of these downgrades, NPC's
ability to access the capital markets to raise funds is severely limited. Since
SPR's credit ratings were similarly downgraded, SPR's ability to make capital
contributions to NPC also became severely limited.
In connection with the credit downgrades by S&P and Moody's, NPC lost
its A2/P2 commercial paper ratings and can no longer issue commercial paper. NPC
had a commercial paper balance outstanding of $198.9 million at the time with a
weighted average interest rate of 2.52%. Since NPC was no longer able to roll
over its commercial paper, it paid off its maturing commercial paper with the
proceeds of borrowings under its credit facility and terminated its commercial
paper program on May 28, 2002. NPC does not expect to have direct access to the
commercial paper market for the foreseeable future.
NPC's $200 million unsecured revolving credit facility was also
affected by the decision in the deferred energy rate case. Following the
announcement of that decision, the Banks participating in NPC's credit facility
determined that a material adverse event had occurred with respect to NPC,
thereby precluding NPC from borrowing funds under its credit facility. The Banks
agreed to waive the consequences of the material adverse event in a waiver
letter and amendment that was executed on April 4, 2002. As required under the
waiver letter and amendment, NPC issued and delivered its General and Refunding
Mortgage Bond, Series C, due November 28, 2002, in the principal amount of $200
million, to the Administrative Agent as security for the credit facility.
The waiver letter and amendment also provided that (i) NPC may not
create or incur any liens on its properties to secure obligations to its power
and/or commodity trading counterparties or power suppliers, (ii) in the event
that NPC issues more than $250 million of its General and Refunding Mortgage
Bonds, other than to secure NPC's 6.20% Senior Unsecured Notes, Series B due
April 15, 2004, the principal amounts of such issuances will be applied as
mandatory prepayments of the loans outstanding under the credit facility and the
commitments under the facility will correspondingly be reduced, and (iii) the
SPR credit facility be terminated.
On June 25, 2002, NPC and the Banks executed Amendment No. 2 to NPC's
Credit Agreement that prohibits NPC from paying any dividends and prohibits the
voluntary prepayment or redemption of NPC's existing indebtedness, except in the
39
ordinary course of business. Amendment No. 2 also modifies the restriction in
the waiver letter and amendment with respect to creating or incurring liens to
secure obligations to NPC's power and/or commodity trading counterparties or
power suppliers. Under Amendment No. 2, NPC may create or incur liens on up to
an aggregate total of $50 million of its deposit and investment accounts and its
investment properties to support NPC's obligations to fuel or other energy
suppliers, to secure NPC's cash management obligations, and/or to secure liens
on property securing all or part of the purchase price of the property or liens
existing in such property at the time of purchase.
By May 2, 2002, NPC had borrowed the entire $200 million of funds
available under its credit facility to pay off maturing commercial paper. The
borrowing costs under the credit agreement are at a variable interest rate
consisting of a spread over LIBOR or an alternate base rate that is based upon a
pricing grid tied to the credit rating on NPC's senior unsecured long-term debt.
NPC's credit agreement contains financial covenants requiring that NPC
maintain a ratio of (i) Total Indebtedness to (ii) the sum of Total Indebtedness
and Shareholders Equity that does not exceed 0.60:1 as of the last day of each
fiscal quarter and a Consolidated Interest Coverage Ratio of not less than 2.0:1
calculated as of the last day of each fiscal quarter for the preceding four
consecutive fiscal quarters. As of June 30, 2002, NPC was in compliance with
these financial covenants.
NPC's credit facility expires on November 28, 2002. NPC is currently
evaluating various options to renew, replace or refinance the credit facility.
If NPC is unable to renew, replace or refinance all or a portion of the credit
facility prior to its expiration date, there would be a material adverse effect
on NPC's liquidity and NPC could become insolvent.
NPC is also currently negotiating a receivables purchase facility, in a
principal amount not to exceed $125 million. Under the proposed facility, NPC
would sell receivables in a true sale to special purpose entities that would
in-turn sell those assets or interests in those assets to a commercial paper
conduit or directly to a financial institution. This facility would be used to
provide additional liquidity for working capital and general corporate purposes
in addition to NPC's existing credit facility. If completed, NPC expects the
facility to be accounted for in compliance with SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The special purpose entities would be wholly owned subsidiaries and their
financial positions and results of operations would be reflected in the
consolidated financial statements of SPR and NPC. Completion of this facility is
dependent on the negotiation of mutually satisfactory terms and the satisfaction
of customary closing conditions, and no assurance can be given at this time that
the facility will in fact be completed.
NPC's first mortgage indenture creates a first priority lien on
substantially all of NPC's properties. As of June 30, 2002, 272.5 million of
NPC's first mortgage bonds were outstanding. Although the first mortgage
indenture allows NPC to issue additional mortgage bonds on the basis of (i) 60%
of net utility property additions and/or (ii) the principal amount of retired
mortgage bonds, NPC agreed in the waiver letter and amendment to its credit
agreement that it would not issue any more first mortgage bonds.
NPC's General and Refunding Mortgage Indenture creates a lien on
substantially all of NPC's properties in Nevada that is junior to the lien of
the first mortgage indenture. As of June 30, 2002, $820 million of NPC's General
and Refunding Mortgage securities were outstanding. Additional securities may be
issued under the General and Refunding Mortgage Indenture on the basis of (1)
70% of net utility property additions, (2) the principal amount of retired
General and Refunding Mortgage bonds, and/or (3) the principal amount of first
mortgage bonds retired after delivery to the indenture trustee of the initial
expert's certificate under the General and Refunding Mortgage Indenture. At June
30, 2002, NPC had the capacity to issue approximately $861 million of additional
General and Refunding Mortgage bonds. However, the financial covenants contained
in the credit agreement described above may limit NPC's ability to issue
additional general and refunding bonds or other debt. In addition, the waiver
letter and amendment to the credit agreement entered into on April 4, 2002
requires that, in the event that NPC issues more than $250 million of its
General and Refunding Mortgage Bonds, the principal amounts of such issuances
will be applied as mandatory prepayments of the loans outstanding under the
credit facility and the commitments under the facility will correspondingly be
reduced. The Duke agreement, referenced below, also requires prepayments of
certain deferred payments established under the agreement in the event that NPC
receives excess financing proceeds from issuances of General and Refunding
Mortgage Bonds.
NPC also has the ability to release property from the liens of the two
mortgage indentures on the basis of net property additions, cash and/or retired
bonds. To the extent NPC releases property from the lien of its General and
Refunding Mortgage Indenture, it will reduce the amount of bonds issuable under
that indenture.
On May 13, 2002, NPC issued a General and Refunding Mortgage Bond,
Series D, due April 15, 2004, in the principal amount of $130 million, for the
benefit of the holders of NPC's 6.20% Senior Unsecured Notes, Series B, due
April 15, 2004. The Senior Unsecured Notes Indenture required that, in the event
that NPC issued debt secured by liens on NPC's operating property in excess of
15% of its Net Tangible Assets or Capitalization (as both terms are defined in
the Senior
40
Unsecured Notes Indenture), NPC would equally and ratably secure the Senior
Unsecured Notes. NPC triggered this negative pledge covenant on April 23, 2002.
On June 19, 2002, the PUCN issued a Compliance Order, Docket No.
02-4037, authorizing NPC to issue $300 million of long-term debt. Authority for
$450 million had been requested by NPC. The PUCN order requires NPC, if it is
able, to issue the $50 million of remaining authorized short-term debt, before
it issues any long-term debt authorized by the order. Moreover, the order
provides that, if NPC is able to issue short-term debt at any point prior to
September 1, 2002 (whether or not the issuance of short-term debt actually
occurs), the amount of long-term debt authorized by the order will be
automatically reduced to $250 million. In addition, the PUCN ordered that NPC
immediately issue $50 million to $100 million of debt, using its best efforts to
expedite the process in a prudent manner. The PUCN order also provides that NPC
will bear the burden of demonstrating that any financings undertaken pursuant to
the order, including any determination made regarding the length of such
commitment, the type of security or rate, is reasonable. Finally, the order
requires that, until such time as the order's authorization expires (December
31, 2003), NPC must either receive the prior approval of the PUCN or reach an
equity ratio of 42% before paying any dividends to SPR. If NPC achieves a 42%
equity ratio prior to December 31, 2003, the dividend restriction ceases to have
effect.
On July 3, 2002, the Bureau of Consumer Protection of the Nevada
Attorney General's Office filed a petition with the PUCN requesting that the
hearing in Docket No. 02-4037 be reopened to allow for the introduction of
additional evidence or for the PUCN to reconsider its decision granting NPC
authority to issue long-term debt. No assurance can be given as to the outcome
or timing of a decision by the PUCN on this petition.
In early May, Enron Power Marketing Inc. ("Enron"), Morgan Stanley
Capital Group Inc., Reliant Energy Services, Inc. and several smaller suppliers
notified NPC that they would end power deliveries to NPC based on what they
believed to be their contractual right to end deliveries because of the
Utility's inability to provide adequate assurances of its ability to perform all
of its outstanding material obligations. Each of these terminating suppliers has
asserted, or has indicated that it will assert, a claim for liquidated damages.
As discussed in Note 11, Commitments And Contingencies, Enron has filed suit in
its bankruptcy case in the Bankruptcy Court for the Southern District of New
York asserting claims for liquidated damages of approximately $216 million and
$93 million against NPC and SPPC, respectively. Enron's claim is subject to the
Utilities' defense that Enron's claims are already at issue in the FERC
proceeding challenging the contract prices, and to other defenses that the
Utilities intend to pursue in a timely manner. In connection with the lawsuit
filed by Enron in Bankruptcy Court, Enron has filed a motion to require the
Utilities to post collateral equal to the amount of Enron's claims pending the
outcome of the lawsuit. A hearing in this case has been scheduled for September
6, 2002. An adverse decision on the petition to require the Utilities to post
collateral pending the outcome of Enron's lawsuit or an adverse decision in the
lawsuit itself could have a material adverse affect on the financial condition
and liquidity of NPC and could render its ability to continue to operate outside
of bankruptcy uncertain. At this time, SPR and the Utilities are not able to
predict the outcome of a decision in this matter.
On June 10, 2002, Duke Energy Trading and Marketing ("Duke") entered
into an agreement with SPR and the Utilities to supply up to 1,000 megawatts of
electricity per hour, as well as natural gas, to NPC and SPPC to fulfill
customers' power requirements during the peak summer period. The effect of the
Duke agreement was to replace the amount of contracted power and natural gas
that would have been supplied by the various terminating suppliers, including
Enron. Duke also agreed to accept deferred payment for a portion of the amount
due under its existing power contracts with NPC for purchases made through
September 15, 2002. Although the other continuing suppliers have not entered
into formal agreements with NPC regarding deferred payments, NPC has been
deferring a portion of the payments to such suppliers since May 1, 2002 and
intends to continue to due so for charges incurred through September 15, 2002.
NPC's short-term liquidity depends significantly on the willingness of
NPC's power suppliers to continue to accept deferred payments for a portion of
the amounts owed by NPC on purchased power contracts through the summer months
of 2002. NPC's liquidity could also be significantly affected by an adverse
decision in the pending lawsuit by Enron to collect liquidated damages
(including its motion seeking the posting of collateral), by unfavorable rulings
by the PUCN in future NPC or SPPC rate cases, by an inability to renew, replace
or refinance all or a portion of its credit facility that expires on November
28, 2002, or by the PUCN's reconsideration of its compliance order authorizing
NPC it issue up to $300 million in long-term debt. Both S&P and Moody's have
NPC's credit ratings on "watch negative" or "possible downgrade", and any
further downgrades could further preclude NPC's access to the capital markets.
Adverse developments with respect to any one or a combination of the foregoing
could cause NPC to become insolvent and would render NPC's ability to continue
to operate outside of bankruptcy uncertain.
41
SIERRA PACIFIC POWER COMPANY
During the quarter ended June 30, 2002, SPPC incurred a loss of
approximately $34.0 million before preferred stock dividends. During this
period, SPPC paid $975,000 in dividends to holders of its preferred stock and
paid $9.9 million in dividends on its common stock, all of which is held by its
parent, SPR. During the six months ended June 30, 2002, SPPC incurred a loss of
approximately $23.0 million before preferred stock dividends. During this
period, SPPC paid $1.95 million in dividends to holders of its preferred stock
and paid $19.9 million in dividends on its common stock, $10 million of which
was reinvested in SPPC as a contribution to capital.
The components of SPPC's gross margin are set forth below (dollars in
thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------------------ ------------------------------------------
Change from Change from
2002 2001 Prior Year % 2002 2001 Prior Year %
---- ---- ------------ ---- ---- ------------
Operating Revenues:
Electric $196,626 $312,833 -37.1% $420,923 $593,271 -29.1%
Gas 25,583 21,729 17.7% 80,666 85,894 -6.1%
-------- -------- -------- --------
Total Revenues 222,209 334,562 -33.6% 501,589 679,165 -26.1%
-------- -------- -------- --------
Energy Costs:
Electric 190,234 245,505 -22.5% 338,097 474,384 -28.7%
Gas 15,283 16,868 -9.4% 62,069 69,267 -10.4%
-------- -------- -------- --------
Total Energy Costs 205,517 262,373 -21.7% 400,166 543,651 -26.4%
-------- -------- -------- --------
Gross Margin $ 16,692 $ 72,189 -76.9% $101,423 $135,514 -25.2%
======== ======== ======== ========
Gross Margin by Segment:
Electric $ 6,392 $ 67,328 -90.5% $ 82,826 $118,887 -30.3%
Gas 10,300 4,861 111.9% 18,597 16,627 11.8%
-------- -------- -------- --------
Total $ 16,692 $ 72,189 -76.9% $101,423 $135,514 -25.2%
======== ======== ======== ========
The causes for significant changes in specific lines comprising the
results of operations for SPPC are as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------------------ ------------------------------------------
Change from Change from
2002 2001 Prior year % 2002 2001 Prior year %
---- ---- ------------ ---- ---- ------------
ELECTRIC OPERATING REVENUES ($000):
Residential $ 45,050 $ 46,965 -4.1% $105,453 $ 98,474 7.1%
Commercial 58,639 60,120 -2.5% 121,355 111,294 9.0%
Industrial 59,994 65,323 -8.2% 123,126 119,908 2.7%
-------- -------- -------- --------
Retail revenues 163,683 172,408 -5.1% 349,934 329,676 6.1%
Other 32,943 140,425 -76.5% 70,989 263,595 -73.1%
-------- -------- -------- --------
TOTAL REVENUES $196,626 $312,833 -37.1% $420,923 $593,271 -29.1%
======== ======== ======== ========
Retail sales in thousands of
megawatt-hours (MWH) 2,144 2,096 2.3% 4,280 4,229 1.2%
Average retail revenue per MWH $ 76.34 $ 82.26 -7.2% $ 81.76 $ 77.96 4.9%
Retail electric revenues were lower for the three months ending June
30, 2002, in contrast to the same period the previous year. This decrease was a
result of cooler weather in May 2002 and an overall rate decrease that was
effective June 1, 2002 (refer to Note 9, Regulatory Events).
Retail electric revenues increased for the six months ended June 30,
2002, compared to the prior year primarily due to rate increases resulting from
the 2001 Global Settlement and 2001 Comprehensive Energy Plan (CEP). During the
first quarter 2001, these rate increases were being phased in on a monthly basis
whereas retail revenues for the first quarter of 2002 reflect the cumulative
impact of those increases. The second quarter 2002 weather effects resulted in a
minimal revenue impact for the six months ending June 30, 2002.
The decrease in Other electric revenues for the three and six month
periods ended June 30, 2002, compared to the same period in 2001 were due to the
decrease in prices and sales volume of wholesale electric power to other
utilities, as a
42
result of changing market conditions. See SPPC's Annual Report on Form 10-K for
the year ended December 31, 2001, Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operation, Purchased Power Procurement,
for a discussion of SPPC's purchased power procurement strategies.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------------- ---------------------------------------
Change from Change from
2002 2001 Prior year % 2002 2001 Prior year %
---- ---- ------------ ---- ---- ------------
GAS OPERATING REVENUES ($000):
Residential $13,636 $10,130 34.6% $43,108 $31,754 35.8%
Commercial 5,081 5,423 -6.3% 22,085 16,064 37.5%
Industrial 3,896 1,998 95.0% 11,560 6,629 74.4%
Miscellaneous 1,012 111 811.7% 1,408 628 124.2%
------- ------- ------- -------
Total retail revenue 23,625 17,662 33.8% 78,161 55,075 41.9%
Wholesale revenue 1,958 4,067 -51.9% 2,505 30,819 -91.9%
------- ------- ------- -------
TOTAL REVENUES $25,583 $21,729 17.7% $80,666 $85,894 -6.1%
======= ======= ======= =======
Retail sales in thousands
of decatherms 2,233 2,190 2.0% 8,239 7,483 10.1%
Average retail revenues per decatherm $ 10.58 $ 8.06 31.3% $ 9.49 $ 7.36 28.9%
Retail gas revenues for the three- and six-month periods ended June 30,
2002 were significantly higher than the same period in the prior year primarily
due to PUCN-authorized rate increases effective on February 1 and November 5,
2001. These rate increases were granted as a result of higher gas costs that
SPPC had incurred.
Wholesale gas revenues for the three- and six-month periods ended June
30, 2002 were significantly lower than the same period in 2001, primarily due to
lower wholesale sales.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------------------- -------------------------------------------
Change from Change from
2002 2001 Prior Year % 2002 2001 Prior Year %
---- ---- ------------ ---- ---- ------------
PURCHASED POWER ($000): $174,302 $248,608 -29.9% $279,719 $399,595 -30.0%
Purchased Power in thousands
of MWHs 1,621 1,703 -4.8% 3,324 3,150 5.5%
Average cost per MWH of
Purchased Power(1) $ 53.99 $ 145.98 -63.0% $ 58.04 $ 126.86 -54.2%
- ----------
(1) Not including contract termination costs, discussed below
Purchased power costs were lower for the three- and six-month periods
ended June 30, 2002, than the prior year because the majority of SPPC's total
energy requirements utilize Short-Term Firm purchased power for which costs have
significantly decreased from those a year ago. The decreases were offset, in
part, by an $86.8 million reserve recorded in the current quarter for terminated
contracts, which are described in more detail in "Financial Condition,
Liquidity, and Capital Resources." Prices for SPPC's risk management activities
also decreased substantially. Risk management activities include transactions
entered into for hedging purposes and to minimize purchased power costs. See
SPPC's Annual Report on Form 10-K for the year ended December 31, 2001, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operation, Purchased Power Procurement, for a discussion of SPPC's purchased
power procurement strategies.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------------------- -------------------------------------------
Change from Change from
2002 2001 Prior Year % 2002 2001 Prior Year %
---- ---- ------------ ---- ---- ------------
FUEL FOR POWER GENERATION ($000) $ 31,169 $ 77,652 -59.9% $ 78,220 $148,524 -47.3%
Thousands of MWHs generated 1,129 1,492 -24.3% 2,341 3,075 -23.9%
Average fuel cost per MWH
of Generated Power $ 27.61 $ 52.05 -47.0% $ 33.41 $ 48.30 -30.8%
43
Fuel for Power Generation costs for the three- and six-month periods
ended June 30, 2002 were significantly lower than the same period of the prior
year as both volumes generated and natural gas prices decreased significantly.
Volumes were lower because it was more economical to purchase power than to
generate power.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------------- ----------------------------------------
Change from Change from
2002 2001 Prior Year % 2002 2001 Prior Year %
---- ---- ------------ ---- ---- ------------
GAS PURCHASED FOR RESALE ($000) $13,107 $25,171 -47.9% $51,701 $95,714 -46.0%
Gas Purchased for Resale
(thousands of decatherms) 2,542 3,450 -26.3% 8,502 9,950 -14.6%
Average cost per decatherm $ 5.16 $ 7.30 -29.3% $ 6.08 $ 9.62 -36.8%
Gas Purchased for Resale decreased significantly for the three- and
six-month periods ended June 30, 2002 compared to the prior year because of much
lower gas prices and reduced volumes of wholesale gas sales.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------------- ----------------------------------------
Change from Change from
2002 2001 Prior Year % 2002 2001 Prior Year %
---- ---- ------------ ---- ---- ------------
DEFERRAL OF ENERGY COSTS-NET ($000)
Deferred energy costs - electric $(68,338) $(80,755) -15.4% $(72,943) $ (73,735) -1.1%
Deferred energy costs disallowed - electric 53,101 -- N/A 53,101 -- N/A
Deferred energy costs - gas 2,176 (8,303) N/A 10,368 (26,447) N/A
-------- -------- -------- ---------
Total $(13,061) $(89,058) -85.3% $ (9,474) $(100,182) -90.5%
======== ======== ======== =========
Deferral of energy costs - net for the three- and six-month periods
ended June 30, 2002, reflects the write-off of $53 million of electric deferred
energy costs incurred in the nine months ended November 30, 2001, that were
disallowed by the PUCN in their May 28, 2002, decision on SPPC's deferred energy
rate case. The write-off was more than offset by the deferral in the second
quarter of 2002 of approximately $82 million for contract termination costs, as
described in more detail in "Financial Condition, Liquidity, and Capital
Resources." For the three months ended June 30, 2002, this deferral of contract
termination costs was offset, in part, by the recording of additional energy
expense incurred from two sources. Consistent with the provisions of deferred
energy accounting, additional expense was recorded to the extent fuel and
purchased power costs recovered through current rates exceeded actual fuel and
purchased power costs, which had decreased significantly. And, pursuant to the
PUCN's decision on SPPC's deferred energy rate case, rates were increased
beginning June 1, 2002, resulting in the amortization of prior deferred costs.
For the six months ended June 30, 2002, SPPC recorded deferrals of electric
energy costs, reflecting the extent to which actual fuel and purchased power
costs exceeded the fuel and purchased power costs recovered through current
rates. For both the three- and six-month periods ended June 30, 2001, SPPC
recorded large deferrals of electric energy costs, as shown in the table above.
SPPC's deferred energy costs gas - net for the three- and six-month
periods ended June 30, 2002 reflects the amortization of prior deferred costs
due to the PUCN-authorized recovery of those costs. Deferral of energy costs-net
for gas for the three months ended June 30, 2001 reflects undercollections of
such costs because revenue received from 2001 base purchased gas rates did not
cover the increased cost of natural gas experienced by SPPC.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------- --------------------------------
Change from Change from
2002 2001 Prior Year % 2002 2001 Prior Year %
---- ---- ------------ ---- ---- ------------
ALLOWANCE FOR OTHER FUNDS USED
DURING CONSTRUCTION ($000) $ (83) $ (30) $ 153 $(214)
ALLOWANCE FOR BORROWED FUNDS USED
DURING CONSTRUCTION ($000) 229 423 620 377
----- ----- ----- -----
$ 146 $ 393 -62.8% $ 773 $ 163 374.2%
===== ===== ===== =====
Total allowance for funds used during construction (AFUDC) decreased
for the three months ended June 30, 2002, compared to the prior year due to
decreases in Construction Work-in-Progress (CWIP) and in the AFUDC rate. Total
AFUDC
44
for the six months ended June 30, 2002, increased over the prior year because
AFUDC in 2001 reflected an adjustment to refine amounts assigned to specific
components of facilities that were completed in different periods. This increase
was offset, in part, by a decrease in CWIP and the second quarter AFUDC rate
reduction.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------------- ------------------------------------------
Change from Change from
(000'S) 2002 2001 Prior Year % 2002 2001 Prior Year %
------- ---- ---- ------------ ---- ---- ------------
OTHER OPERATING EXPENSE $ 22,876 $23,174 -1.3% $ 50,623 $ 50,868 -0.5%
MAINTENANCE EXPENSE $ 5,139 $ 6,676 -23.0% $ 10,396 $ 12,000 -13.4%
DEPRECIATION AND AMORTIZATION $ 20,153 $17,859 12.8% $ 37,269 $ 34,708 7.4%
INCOME TAXES $(21,536) $ 1,464 -1571.0% $(16,638) $ (656) 2436.3%
TAXES OTHER THAN INCOME TAXES $ 4,881 $ 4,574 6.7% $ 9,657 $ 8,968 7.7%
INTEREST CHARGES ON LONG-TERM DEBT $ 16,020 $12,529 27.9% $ 32,465 $ 23,099 40.5%
INTEREST CHARGES - OTHER $ 2,966 $ 3,022 -1.9% $ 4,108 $ 5,982 -31.3%
OTHER INCOME (EXPENSE) - NET $ (293) $ 1,499 -119.5% $ 2,677 $ 1,013 164.3%
Other operating expense for the three-month period ending June 30, 2002
was slightly lower than the same period in the prior year due to the reversal of
a $3.5 million reserve provision established in 2001 as a result of the
conclusion of electric industry restructuring in Nevada and the $2.6 million
reversal of SPPC's Short-term Incentive Plan accrual. These decreases were
offset by increased expenses related to a new Credit and Collections Action Plan
and insurance premiums. Additionally, there were increased costs associated with
obtaining a tax refund and legal fees associated with the PUCN's Deferred Energy
Rate Case decision. Other operating expense for the six-month period ending June
30, 2002 was also slightly less, compared with the same period in the prior
year. In addition to the previously mentioned items, there was a $2.7 million
increase in the provision for uncollectible accounts in 2001 related to the
California Power Exchange, the original $3.5 million reserve provision
established in 2001 as a result of the conclusion of electric industry
restructuring, and a $1.1 million reserve in 2002 for legal fees.
Maintenance costs for the three- and six- month periods ended June 30,
2002 were less than the same period last year as the 2001 costs included turbine
repairs on Unit 1 at Valmy.
Depreciation and amortization increased for the three- and six- month
periods ended June 30, 2002, compared to the same periods in 2001 as a result of
additions to plant-in-service assets and an increase to depreciation of $1.8
million to reflect an adjustment to depreciation rates related to combustion
turbines. These increases were offset in part by a PUCN-ordered reduction in
depreciation rates that was implemented in the three-month period ended June 30,
2002.
SPPC recorded a large income tax benefit for the three months ended
June 30, 2002, compared to income tax expense for the same period in 2001, as a
result of a net pre-tax loss in the current year compared to pre-tax net income
in the prior year. For the six months ended June 30, 2002, SPPC recorded a
significantly increased income tax benefit compared to 2001, reflecting a much
higher pre-tax loss in the current year compared to the prior year.
Taxes other than income increased for the three- and six- month periods
ended June 30, 2002 due to an increase in franchise and payroll tax expenses.
Interest charges on long-term debt for the three-month period ending
June 30, 2002, increased over the same period in 2001 due, primarily, to a $320
million increase in long-term debt at the end of May 2001. The increased level
of long-term debt was also responsible for the increase in interest for the six
months ended June 30, 2002, over the comparable period, 2001.
Interest charges-other was comparable between the three-month periods
ending June 30, 2002 and 2001. The decrease during the six months ended June 30,
2002, as compared to the same period in 2001 was attributable to lower
commercial paper and short-term debt balances during 2002.
Other income (expense) - net for the three months ended June 30, 2002,
reflects the write-off of approximately $2 million, net of taxes, of carrying
charges on deferred energy costs that were disallowed by the PUCN in their May
28, 2002 decision on SPPC's deferred energy rate case. The increase for the six
months ended June 30, 2002, compared to 2001 reflects the recording of current
year carrying charges on deferred fuel and purchased power costs, more than
offsetting the second quarter write-off.
ANALYSIS OF CASH FLOWS
SPPC's cash flows during the six months ended June 30, 2002, improved
slightly compared to the same period in 2001, as increases in cash flows from
operating and financing activities were largely offset by decrease in cash flows
from
45
investing activities. Although SPPC recorded a substantially larger loss for the
six months ended June 30, 2002 than the same period in 2001, the increase in the
current year's loss resulted largely from the write-off of disallowed deferred
energy costs for which the cash outflow had occurred in 2001. Other factors
contributing to 2002's improved cash flows from operating activities include
lower energy prices, which necessitated a smaller deferral of energy costs, and
improved cash positions in accounts receivable. Also, cash flows from operating
activities in the current year reflect the receipt of an income tax refund
resulting from a tax law change that took effect in March 2002. Cash flows from
investing activities decreased in 2002 because 2001 investing activities
included cash provided from the sale of the assets of SPPC's water business.
Cash flows from financing activities increased due to an increase in short-term
borrowings and a decrease in common dividends paid in 2002 offset, in part, by a
decrease in long-term debt issued in 2002.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, SPPC had cash investments of approximately $111.4
million. At July 31, 2002, SPPC had cash investments of approximately $115.6
million.
As discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Sierra Pacific Power Company -
Construction Expenditures and Financing" and " - Capital Structure" in the
Annual Report on Form 10-K for the year ended December 31, 2001, SPPC
anticipated having capital requirements for construction costs and for the
repayment of maturing short-term and long-term debt during 2002 totaling
approximately $189 million, which SPPC would need to fund through a combination
of (i) internally generated funds, (ii) the issuance of short-term debt, and
(iii) capital contributions from SPR.
On March 29 and April 1, 2002, following the decision by the PUCN in
NPC's deferred energy rate case, S&P and Moody's lowered SPPC's unsecured debt
ratings to below investment grade. On April 23 and 24, 2002, SPPC's unsecured
debt ratings were further downgraded and its secured debt ratings were
downgraded to below investment grade. The decision of the PUCN on May 29, 2002
on SPPC's deferred energy application to disallow $53.1 million of deferred
purchased fuel and power costs accumulated between March 1, 2001 and November
30, 2001 did not result in any further downgrades of SPPC's securities. However,
as a result of the downgrades following NPC's deferred energy decision, SPPC's
ability to access the capital markets to raise funds has been severely limited.
In connection with the credit ratings downgrades referenced above, SPPC
lost its A2/P2 commercial paper ratings and can no longer issue commercial
paper. At the time, SPPC had a commercial paper balance outstanding of $47.7
million with a weighted average interest rate of 2.49%. SPPC paid off its
maturing commercial paper with the proceeds of borrowings under its credit
facility and terminated its commercial paper program on May 28, 2002. SPPC does
not expect to have direct access to the commercial paper market for the
foreseeable future.
SPPC's $150 million unsecured revolving credit facility was also
affected by the downgrade in SPPC's credit rating. Under this facility, SPPC was
required, in the event of a ratings downgrade of its senior unsecured debt, to
secure the facility with General and Refunding Mortgage Bonds. In satisfaction
of its obligation to secure the credit facility, on April 8, 2002, SPPC issued
and delivered its General and Refunding Mortgage Bond, Series B, due November
28, 2002, in the principal amount of $150 million, to the Administrative Agent
for the credit facility. As of May 10, 2002, SPPC had borrowed the entire $150
million of funds available under its credit facility to, in part, pay off
maturing commercial paper, maintaining a cash balance at SPPC. SPPC's credit
facility expires on November 28, 2002. The borrowing costs under the Credit
Agreement are at a variable interest rate consisting of a spread over LIBOR or
an alternate base rate that is based upon a pricing grid tied to the credit
rating on SPPC's senior unsecured long-term debt.
The Credit Agreement contains a number of restrictive covenants
including restrictions on liens, sales of assets, mergers, and sale and
leaseback transactions. The Credit Agreement also contains financial covenants
requiring that SPPC maintain a ratio of (i) Total Indebtedness to (ii) the sum
of Total Indebtedness and Shareholders Equity that does not exceed 0.60:1 as of
the last day of each fiscal quarter and a Consolidated Interest Coverage Ratio
of not less than 2.0:1 calculated as of the last day of each fiscal quarter for
the preceding four consecutive fiscal quarters.
On June 25, 2002, SPPC and the Banks executed Amendment No. 1 to
SPPC's Credit Agreement that prohibits the voluntary prepayment or redemption of
SPPC's existing indebtedness, except in the ordinary course of business, and
prohibits the payment of dividends on SPPC's capital stock if SPPC is in default
under the terms of its credit facility. Under Amendment No. 1, SPPC may create
or incur liens on up to an aggregate total of $50 million of its deposit and
investment accounts and its investment properties to support SPPC's obligations
to gas or other energy suppliers, to secure SPPC's cash management obligations,
and/or to secure liens on property securing all or part of the purchase price of
the property or liens existing in such property at the time of purchase.
SPPC is currently negotiating a receivables purchase facility in a
principal amount not to exceed $125 million. Under the proposed facility, SPPC
would sell receivables in a true sale to special purpose entities that would
in-turn sell those assets
46
or interests in those assets to a commercial paper conduit or directly to a
financial institution. This facility would be used to provide additional
liquidity for working capital and general corporate purposes in addition to
SPPC's existing credit facility. If completed, SPPC expects the facility to be
accounted for in compliance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The special
purpose entities would be wholly owned subsidiaries and their financial
positions and results of operations would be reflected in the consolidated
financial statements of SPR, NPC, and SPPC. Completion of this facility is
dependent on the negotiation of mutually satisfactory terms and the satisfaction
of customary closing conditions, and no assurance can be given at this time that
the facility will in fact be completed.
SPPC's first mortgage indenture creates a first priority lien on
substantially all of SPPC's properties in Nevada and California. As of June 30,
2002, $505.3 million of SPPC's first mortgage bonds were outstanding. Although
the first mortgage indenture allows SPPC to issue additional mortgage bonds on
the basis of (i) 60% of net utility property additions and/or (ii) the principal
amount of retired mortgage bonds, SPPC agreed in its General and Refunding
Mortgage Indenture that it would not issue any additional first mortgage bonds.
SPPC's General and Refunding Mortgage Indenture creates a lien on
substantially all of SPPC's properties in Nevada that is junior to the lien of
the first mortgage indenture. As of June 30, 2002, $470 million of SPPC's
General and Refunding Mortgage bonds were outstanding. Additional securities may
be issued under the General and Refunding Mortgage Indenture on the basis of (i)
70% of net utility property additions, (ii) the principal amount of retired
General and Refunding Mortgage bonds, and/or (iii) the principal amount of first
mortgage bonds retired after delivery to the indenture trustee of the initial
expert's certificate under the General and Refunding Mortgage Indenture. At June
30, 2002, SPPC had the capacity to issue approximately $356 million of
additional General and Refunding Mortgage bonds. However, the financial
covenants contained in the credit agreement described above may limit SPPC's
ability to issue additional general and refunding bonds or other debt.
SPPC also has the ability to release property from the liens of the two
mortgage indentures on the basis of net property additions, cash and/or retired
bonds. To the extent SPPC releases property from the lien of its General and
Refunding Mortgage Indenture, it will reduce the amount of bonds issuable under
that indenture.
On May 1, 2002, Enron Power Marketing Inc. notified NPC and SPPC that
it would end power deliveries to the Utilities effective May 7. Enron advised
the Utilities that it was taking this action in line with its recently announced
new business configuration that does not include arrangements such as its
existing contracts with the Utilities. Enron also indicated that it had
exercised what it believes to be its contractual right to end deliveries because
of the recent downgrade in the credit ratings of the Utilities and their failure
to provide mark-to-market collateral. The Enron contracts covered approximately
10% of purchased power supplies for the combined Utilities for the remainder of
2002. As discussed in Note 11, Commitments And Contingencies, Enron has filed
suit in its bankruptcy case in the Bankruptcy Court for the Southern District of
New York asserting claims for liquidated damages of approximately $216 million
and $93 million against NPC and SPPC, respectively. Enron's claim is subject to
the Utilities' defense that Enron's claims are already at issue in the FERC
proceeding challenging the contract prices, and to other defenses that the
Utilities intend to pursue in a timely manner. In connection with the lawsuit
filed by Enron in Bankruptcy Court, Enron has filed a motion to require the
Utilities to post collateral equal to the amount of Enron's claims pending the
outcome of the lawsuit. A hearing in this case has been scheduled for September
6, 2002. An adverse decision on the petition to require the Utilities to post
collateral pending the outcome of Enron's lawsuit or an adverse decision in the
lawsuit itself could have a material adverse affect on the financial condition
and liquidity of SPPC and could render its ability to continue to operate
outside of bankruptcy uncertain. At this time, SPR and the Utilities are not
able to predict the outcome of a decision in this matter.
SPPC's future liquidity could be significantly affected by unfavorable
rulings by the PUCN in future SPPC or NPC rate cases, or by an inability to
renew, replace or refinance all or a portion of SPPC's credit facility that
expires on November 28, 2002. Both S&P and Moody's have SPPC's credit ratings on
"watch negative" or "possible downgrade", and any further downgrades could
further preclude SPPC's access to the capital markets and could adversely affect
SPPC's ability to continue purchasing power and fuel. Adverse developments with
respect to any one or a combination of the foregoing could cause SPPC to become
insolvent and could render SPPC's ability to continue to operate outside of
bankruptcy uncertain.
SIERRA PACIFIC RESOURCES (HOLDING COMPANY)
The Condensed Consolidated Statements of Operations of SPR include the
operating results of the holding company. The holding company recognized higher
interest costs, $36.7 million in 2002 compared to $27.8 million in 2001, due
primarily to the issuance of $345 million of additional debt associated with its
issuance of Premium Income Equity Securities in November of 2001.
47
TUSCARORA GAS PIPELINE COMPANY
The Condensed Consolidated Statements of Income of Sierra Pacific
Resources include the operating results of Tuscarora Gas Pipeline Company
(TGPC), a wholly owned subsidiary of SPR. For the three-and six-month periods
ended June 30, 2002, TGPC contributed $.7 million and $1.6 million,
respectively, in net income. For the three-and six-month periods ended June 30,
2001, TGPC contributed $.6 million and $1.3 million, respectively, in net
income.
E-THREE
The Condensed Consolidated Statements of Income of Sierra Pacific
Resources include the operating results of e-three, a wholly owned subsidiary of
SPR. For the three- and six-month periods ended June 30, 2002, e-three incurred
net losses of $.6 million and $.8 million, respectively. For the three months
ended June 30, 2001, e-three contributed $.2 million in net income; e-three
incurred a net loss of $.1 million for the six months ended June 30, 2001.
SIERRA PACIFIC COMMUNICATIONS
The Condensed Consolidated Statements of Income of Sierra Pacific
Resources include the operating results of Sierra Pacific Communications (SPC),
a wholly owned subsidiary of SPR. For the three- and six-month periods ended
June 30, 2002, SPC incurred net losses of $.6 million and $1.3 million,
respectively. SPC incurred net losses of $.4 million and $.8 million,
respectively, for the three- and six-month periods ended June 30, 2001.
REGULATORY MATTERS
Substantially all of the utility operations of both NPC and SPPC are
conducted in Nevada. As a result both companies are subject to utility
regulation within Nevada and therefore deal with many of the same regulatory
issues.
NEVADA MATTERS
NEVADA POWER COMPANY GENERAL RATE CASE (NPC)
On October 1, 2001, NPC filed an application with the PUCN seeking an
electric general rate increase. This application was mandated by AB 369, which
was enacted by the Nevada legislature in April 2001. On December 21, 2001, NPC
filed a Certification to its general rate filing updating costs and revenues
pursuant to Nevada regulations. In the certification filing, NPC requested an
increase in its general rates charged to all classes of electric customers
designed to produce an increase in annual electric revenues of $22.7 million,
which is an overall 1.7% rate increase. The application also sought a return on
common equity ("ROE") for Nevada Power's total electric operations of 12.25% and
an overall rate of return ("ROR") of 9.30%.
On March 27, 2002, the PUCN issued its decision on the general rate
application, ordering a $43 million revenue decrease with an ROE of 10.1% and
ROR of 8.37%. The effective date for the decision was April 1, 2002. The
decision also resulted in adverse adjustments to depreciation aggregating $7.9
million, and the adverse treatment of approximately $5 million of revenues
related to SO2 Allowances. On April 15, 2002, NPC filed a petition for
reconsideration with the PUCN. In the petition, NPC raised six issues for
reconsideration: the treatment of revenues related to SO2 Allowances, in
particular the calculation of the annual amortization amount, which appears to
be in error; the adjustment for "excess" capital investment related to common
facilities at the Harry Allen generating station; the rejection of adjustments
to accumulated depreciation reserves related to the establishment of revised
depreciation rates for transmission, distribution and common facilities; the
delay in allowing NPC to recover its merger costs without the benefit of
carrying charges; the finding that NPC has no need for and is entitled to zero
funds cash working capital; and the establishment of a 10.1% ROE. On May 24,
2002, the PUCN issued an order on the petition for reconsideration. In its order
the PUCN reaffirmed its findings in the original order for the issues related to
"excess" capital investment at the Harry Allen generating station, merger costs,
cash working capital, and the 10.1% ROE. The commission, however, did modify its
original order to include adjustments related to SO2 Allowances and depreciation
issues. Revised rates for these changes went into effect on June 1, 2002.
NEVADA POWER COMPANY DEFERRED ENERGY CASE (NPC)
On November 30, 2001, NPC filed an application with the PUCN seeking to
clear deferred balances for purchased fuel and power costs accumulated between
March 1, 2001 through September 30, 2001. This application was mandated by AB
369. The application sought to establish a Deferred Energy Accounting Adjustment
("DEAA") rate to clear accumulated purchased fuel and power costs of $922
million and spread the cost recovery over a period of not more than three years.
On March 29, 2002, the PUCN issued its decision on the deferred energy
application, allowing NPC three years to collect $488 million but disallowing
$434 million of deferred purchased fuel and power costs. On April 11, 2002, NPC
filed a
48
lawsuit in First District Court of Nevada seeking to reverse portions of the
decision of the PUCN denying the recovery of deferred energy costs incurred by
NPC on behalf of its customers in 2001 on the grounds that such power costs were
not prudently incurred. NPC asserts that, as a result of the PUCN's decision,
NPC's credit rating was reduced to below investment grade, SPR suffered a
reduction in its equity market capitalization by approximately 41%, and the
disallowed costs are effectively imposed upon SPR's shareholders.
In its lawsuit, NPC alleges that the order of the PUCN is: in violation
of constitutional and statutory provisions; made upon unlawful procedure;
affected by other error of law; clearly erroneous in view of the reliable,
probative and substantial evidence on the whole record; arbitrary and capricious
and characterized by abuse of discretion. NPC's lawsuit requests that the
District Court reverse portions of the order of the PUCN and remand the matter
to the PUCN with direction that the PUCN authorize NPC to immediately establish
rates that would allow NPC to recover its entire deferred energy balance of $922
million, with a carrying charge, over three years. A hearing has been scheduled
for October 17, 2002. At this time, NPC is not able to predict the outcome or
the timing of a decision in this matter.
Various intervenors in NPC's deferred energy case before the PUCN filed
petitions with the PUCN for reconsideration of the order, seeking additional
disallowances of between $12.8 million and $488 million. On May 24, 2002, the
PUCN issued an order denying any further disallowances. In its order the PUCN
granted NPC the authority to increase the deferred energy cost recovery charge
for the month of June 2002 by one cent per kilowatt-hour. This increase
accelerated the recovery of the deferred balance by approximately $16 million
for the month of June 2002 only. The Bureau of Consumer Protection of the Nevada
Attorney General's Office has since filed a petition in NPC's pending state
court case seeking additional disallowances.
SIERRA PACIFIC POWER COMPANY GENERAL RATE CASE (SPPC)
On November 30, 2001, SPPC filed an application with the PUCN seeking
an electric general rate increase. This application was mandated by AB 369. On
February 28, 2002, SPPC filed a certification to its general rate filing,
updating costs and revenues pursuant to Nevada regulations. In the certification
filing, SPPC requested an increase in its general rates charged to all classes
of electric customers, which were designed to produce an increase in annual
electric revenues of $15.9 million representing an overall 2.4% rate increase.
The application also sought an ROE for SPPC's total electric operations of
12.25% and an overall ROR of 9.42%. Public hearings for SPPC's general rate case
began on April 8, 2002, and concluded on April 18. Various parties intervened in
SPPC's general rate case including the Staff of the PUCN, the Bureau of Consumer
Protection from the Nevada Attorney General's office, and Barrick Goldstrike
Mines ("Barrick"), among others. The reduction of SPPC's revenue requirements
proposed by the intervenors ranged from $8.0 million to $33.1 million.
On May 28, 2002, the PUCN issued its decision on the general rate
application, ordering a $15.3 million revenue decrease with an ROE of 10.17% and
ROR of 8.61%. The effective date of the decision was June 1, 2002. Various
parties to the case had filed petitions for reconsideration of the order. On
July 18, 2002, the PUCN issued a final decision on the petitions for
reconsideration, clarifying issues contained its original order. As a result of
the clarifications, SPPC was ordered to change the total annual electric revenue
decrease from $15.3 million to $15.8 million.
SIERRA PACIFIC POWER COMPANY DEFERRED ENERGY (SPPC)
On February 1, 2002, SPPC filed an application with the PUCN seeking to
clear deferred balances for purchased fuel and power costs accumulated between
March 1, 2001 and November 30, 2001. This application was mandated by AB 369.
The application sought to establish a DEAA rate to clear accumulated purchased
fuel and power costs of $205 million and spread the cost recovery over a period
of not more than three years. It also sought to recalculate the Base Tariff
Energy Rate to reflect anticipated ongoing purchased fuel and power costs. The
total rate increase resulting from the requested DEAA would have amounted to
9.8%. Various parties intervened in SPPC's deferred energy rate case including
the Staff of the PUCN, the Bureau of Consumer Protection from the Nevada
Attorney General's office, and Barrick, among others. Intervenors proposed
disallowances ranging from $40.4 million to $361 million.
On May 28, 2002, the PUCN issued its decision on the deferred energy
application, allowing SPPC three years to collect $152 million but disallowing
$53 million of deferred purchased fuel and power costs. SPPC is currently
evaluating its options regarding a possible court challenge to the PUCN order.
Several of the intervenors from SPPC's deferred energy rate case filed petitions
with the PUCN for reconsideration of its decision, seeking an additional
disallowance of $126 million. On July 18, 2002, the petitions for
reconsideration were granted in part and denied in part by the PUCN, but no
additional disallowances to the deferred energy balance resulted from that
decision.
CUSTOMERS FILE UNDER AB661 (NPC, SPPC)
AB 661, passed by the Nevada legislature in 2001, allows commercial and
governmental customers with an average demand greater than 1 MW to select new
energy suppliers. The Utilities would continue to provide transmission,
distribution,
49
metering and billing services to such customers. AB 661 requires customers
wishing to choose a new supplier to receive the approval of the PUCN and meet
public interest standards. In particular, departing customers must secure new
energy resources that are not under contract to the Utilities, remaining
customers or the Utility cannot be negatively impacted by the departure, and the
departing customers must pay any deferred energy balances. The PUCN adopted
regulations prescribing the criteria that will be used to determine if there
will be negative impacts to remaining customers or the Utility. Certain limits
are placed upon the departure of NPC customers until 2003; most significantly,
the amount of load departing is limited to approximately 1100 MW in peak
conditions. Customers must provide 180-day notice to the Utilities. AB 661
permitted customers to file applications with the PUCN beginning in the fourth
quarter of 2001, and customers could begin to receive service from new suppliers
by mid-2002.
On January 10, 2002, Barrick, an approximately 130 MW SPPC customer,
filed an application with the PUCN to exit the system of SPPC and to purchase
energy, capacity and ancillary services from a provider other than SPPC. A
stipulation filed on March 8, 2002 by SPPC and Barrick was rejected by the PUCN
on March 29, 2002. The PUCN indicated a desire for more information regarding
transmission access, the definition of a new electric resource, and the
computation of exit fees. Subsequently, a second application was filed and later
withdrawn by Barrick. At this point it is not known whether Barrick intends to
refile its application.
During May 2002, Rouse Fashion Show Management LLC, Coast Hotels and
Casinos Inc., Station Casinos, Inc., Gordon Gaming Corporation, MGM Mirage, and
Park Place Entertainment filed separate applications with the PUCN to exit the
system of NPC and to purchase energy, capacity and ancillary services from a
provider other than NPC. The loads of these customers aggregate 260 MW on peak.
Hearings on the applications of all the customers except Park Place
Entertainment were completed on July 19, and the PUCN issued its decision on
July 31, 2002. In its decision, the PUCN approved the applications of these
customers to choose an energy supplier other than NPC. The earliest any of these
customers could begin taking energy from an alternative provider would be
November 1, 2002. If all five customers whose applications were approved were to
leave its system, NPC would incur an annual loss in revenue of $48 million,
which would be offset by a reduction in costs, primarily for fuel and purchased
power, of $46 million with the difference being paid by exit fees from the
departing customers. These customers will also be responsible for their share of
balances in NPC's deferred energy accounts up until the time they leave and must
continue to pay their share of these balances after they leave. For example, if
all five customers whose applications were approved leave the system on November
1, 2002, their remaining share of NPC's previously approved deferred energy
balance is estimated to be $27 million. Additionally, these departing customers
would be responsible for paying their share of yet to be approved accumulated
deferred energy balances from October 1, 2001 to their date of departure. They
will also remain accountable to any rulings made by the District Court on legal
actions brought in NPC's past deferred energy case. They could also benefit from
any refunds that might be granted on power contracts under review with the FERC.
Additionally, if any departed customers return to NPC as their energy provider,
they will be charged for their energy at a rate equivalent to NPC's incremental
cost of service. The incremental cost of service tariff is scheduled for hearing
before the PUCN in the first week of September 2002.
A hearing on the application of Park Place Entertainment was held on
August 2, 2002, and on August 12, 2002, the PUCN approved the application with
terms and conditions similar to those described above for the aforementioned
five customers.
NEVADA POWER COMPANY ADDITIONAL FINANCE AUTHORITY (NPC)
On April 26, 2002, Nevada Power filed with the PUCN an application
seeking additional finance authority. In the application NPC asked for authority
to issue secured long-term debt in an aggregate amount not to exceed $450
million through the period ending 2003. A hearing was held on June 3, 2002, and
the PUCN issued an order on June 19, 2002, authorizing the issuance of $300
million of the requested authority. Other provisions of the PUCN's order are
discussed in NPC's "Financial Condition, Liquidity, and Capital Resources."
ANNUAL PURCHASED GAS COST ADJUSTMENT (SPPC)
On July 1, 2002, SPPC filed a Purchased Gas Cost adjustment application
for its natural gas local distribution company. In the application SPPC has
asked for a reduction of $0.05421 to its Base Purchased Gas Rate (BPGR) and an
increase in its Balancing Account Adjustment charge (BAA) by the same amount.
This request would result in no change to revenues or customer rates. A
pre-hearing conference has been scheduled for August 20, 2002.
50
LIQUID PETROLEUM GAS COST ADJUSTMENT (SPPC)
On July 1, 2002, SPPC filed an application to adjust rates for its
liquid petroleum gas (LPG) distribution company. In the application SPPC has
asked for an increase of $0.04133 to its current LPG rate and a decrease in its
Balancing Account Adjustment charge (BAA) by the same amount. This request would
result in no change to revenues or customer rates. A pre-hearing conference has
been scheduled for August 20, 2002.
CALIFORNIA MATTERS (SPPC)
RATE STABILIZATION PLAN
SPPC serves approximately 44,500 customers in California. On June 29,
2001, SPPC filed with the California Public Utility Commission (CPUC) a Rate
Stabilization Plan, which includes two phases. Phase One, which was also filed
June 29, 2001, is an emergency electric rate increase of $10.2 million annually
or 26%. If granted, the typical residential monthly electric bill for a customer
using 650 kilowatt-hours would increase from approximately $47.12 to $60.12. On
August 14, 2001, a pre-hearing conference was held, and a procedural order was
established. On September 27, 2001, the Administrative Law Judge issued an order
stating that no interim or emergency relief could be granted until the end of
the "rate freeze" period mandated by the California restructuring law for
recovery of stranded costs. In accordance with the judge's request, on October
26, 2001, SPPC filed an amendment to its application declaring the rate freeze
period to be over. On December 5 and 11, 2001, hearings were held and on January
11, 2002 and January 25, 2002 opening briefs and reply briefs were filed. On
July 17, 2002, the CPUC approved the requested 2-cent per kilowatt-hour
surcharge, subject to refund and interest pending the outcome of Phase Two. The
increase of $10 million or 26% is applicable to all customers except those
eligible for low-income and medical-needs rates and is effective July 18, 2002.
Phase Two of the Rate Stabilization Plan was filed with the CPUC on
April 1, 2002, and includes a general rate case and requests the CPUC to
reinstate the Energy Cost Adjustment Clause, which would allow SPPC to file for
periodic rate adjustments to reflect its actual costs for wholesale energy
supplies. Phase Two also includes a proposal to terminate the 10% rate reduction
mandated by AB 1890, but does not include a performance - based rate-making
proposal. This request was for an additional overall increase in revenues of
17.1%, or $8.9 million annually. Hearings are scheduled for February 25 through
March 3, 2003, and a decision by the CPUC is expected in the third quarter of
2003.
FERC MATTERS (SPPC, NPC)
FERC 206 COMPLAINTS
In December 2001, the Utilities filed ten FERC 206 complaints with the
FERC seeking their review of the long-term contracts the Utilities entered into
prior to the FERC price caps. The Utilities believe the contract prices are
unjust and unreasonable. The FERC ordered the case set for hearing and assigned
an administrative law judge ("ALJ"). A primary issue is whether or not the
dysfunctional short-term market, which was previously declared by the FERC,
impacted the long-term market. Written direct testimony was filed by the parties
on June 28, 2002. The ALJ's schedule calls for hearings to be held in October
2002 and for a draft decision in December 2002. The Utilities have engaged in
bilateral discussions with respondents in this matter. At this time, the
Utilities are not able to predict the outcome of a decision in this matter.
51
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
SPR has evaluated its risk related to financial instruments whose
values are subject to market sensitivity, such as fixed and variable rate debt
and preferred trust securities obligations. As shown in SPR's Form 10-K for the
year ended December 31, 2001, the fair market value of SPR's consolidated
long-term debt and preferred trust securities was $3.684 billion, as of December
31, 2001. Due to the credit ratings downgrades by S&P and Moody's, SPR's
valuations for its market-sensitive financial instruments show a decline of
approximately 14% in the fair market value of these financial instruments to
$3.151 billion from December 31, 2001 to June 30, 2002, as shown in the table
below. Fair market value is determined using quoted market price for the same or
similar issues or on the current rates offered for debt of the same remaining
maturities.
Long-term debt (dollars in thousands):
Expected Maturity
Date
Expected Maturities Amounts Weighted Avg Int Rate* Fair Market Value
Fixed Rate NPC SPPC SPR Consolidated Consolidated Consolidated
- ---------- --- ---- --- ------------ ------------ ------------
2002 $ 15,000 $ -- $ -- $ 15,000 7.63%
2003 210,000 20,400 -- 230,400 5.97%
2004 130,000 2,400 -- 132,400 6.10%
2005 -- 2,400 300,000 302,400 8.73%
2006 -- 52,400 -- 52,400 6.71%
Thereafter 938,835 843,285 345,000 2,127,120 6.87%
---------- -------- -------- ---------- -------------
Total Fixed Rate $1,293,835 $920,885 $645,000 $2,859,720 $ 2,598,937
---------- -------- -------- ---------- -------------
Variable Rate
2002 $ -- $ -- $ -- $ --
2003 140,000 -- 200,000 340,000 3.43%
2004 -- -- -- --
2005 -- -- -- --
2006 -- -- -- --
Thereafter 115,000 -- -- 115,000 1.82%
---------- -------- -------- ---------- -------------
$ 255,000 $ -- $200,000 $ 455,000 $ 410,800
---------- -------- -------- ---------- -------------
Preferred securities
(fixed rate)
After 2006 $ 188,872 $ -- $ -- $ 188,872 8.03%
---------- -------- -------- ---------- -------------
$ 188,872 $ -- $ -- $ 188,872 $ 141,466
---------- -------- -------- ---------- -------------
Total $1,737,707 $920,885 $845,000 $3,503,592 $ 3,151,203
========== ======== ======== ========== =============
See the combined Form 10-K of SPR, NPC, and SPPC for the year ended
December 31, 2001, for a discussion of Commodity Price Risk.
52
PART II
ITEM 1. LEGAL PROCEEDINGS
Refer to SPR's, NPC's, and SPPC's Combined Annual Report on Form 10-K
for the year ended December 31, 2001, and to Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operation, in this Quarterly
Report on Form 10-Q, for a discussion of current legal matters. Although SPR,
NPC, and SPPC are involved in ongoing litigation on a variety of other matters,
in management's opinion, none individually or collectively are material to
SPR's, NPC's, or SPPC's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this Form 10-Q:
* - Confidential Material omitted and filed separately with the Securities
and Exchange Commission
NEVADA POWER COMPANY
Exhibit 4.1 Officer's Certificate establishing the terms of Nevada Power
Company's General and Refunding Mortgage Bonds, Series D, due
April 15, 2004.
Exhibit 4.2 Form of Nevada Power Company's General and Refunding Mortgage
Bonds, Series D, due April 15, 2004.
SIERRA PACIFIC RESOURCES
Exhibit 10.1 Severance and Release Agreement, dated May 24, 2002, among
Sierra Pacific Resources, its affiliates Nevada Power Company
and Sierra Pacific Power Company, and Mark A. Ruelle.
Exhibit 10.2 Severance and Release Agreement, dated May 18, 2002, among
Sierra Pacific Resources, its affiliates Nevada Power Company
and Sierra Pacific Power Company, and Steven C. Oldham.
NEVADA POWER COMPANY
Exhibit 10.3* Master Amendment to Confirmation Agreements (Power), dated as
of June 4, 2002, by and between Nevada Power Company and Duke
Energy Trading and Marketing, L.L.C.
Exhibit 10.4 Amendment No. 2 to Credit Agreement, dated as of June 25,
2002, by and among Nevada Power Company, the banks listed on
the signature pages thereto as Lenders, and Union Bank of
California, N.A., as administrative agent for the Lenders.
SIERRA PACIFIC POWER COMPANY
Exhibit 10.5* Master Amendment to Confirmation Agreements (Power), dated as
of June 4, 2002, by and between Sierra Pacific Power Company
and Duke Energy Trading and Marketing, L.L.C.
Exhibit 10.6 Amendment No. 1 to Credit Agreement, dated as of June 25,
2002, by and among Sierra Pacific Power Company, the banks
listed on the signature pages thereto as Lenders, and Union
Bank of California, N.A., as administrative agent for the
Lenders.
SIERRA PACIFIC RESOURCES, NEVADA POWER COMPANY AND SIERRA PACIFIC POWER COMPANY
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
53
(b) Reports on Form 8-K:
Form 8-K dated April 3, 2002, filed by SPR, NPC and SPPC - Item 5, Other Events
Disclosed, and included as an exhibit, SPR's press release dated April
3, 2002, announcing that NPC plans to file a petition for rehearing and/or
reconsideration of the PUCN order denying recovery of a portion of NPC's
deferred energy expenses.
Form 8-K dated April 4, 2002, filed by SPR, NPC and SPPC - Item 5, Other Events
Disclosed, and included as an exhibit, SPR's press release dated April
4, 2002, announcing the decision of a bank syndicate, headed by Union Bank of
California, to confirm NPC's $200 million credit facility and SPPC's $150
million credit facility.
Form 8-K dated April 4, 2002, filed by SPR, NPC and SPPC - Item 5, Other Events
Disclosed, and included as an exhibit, NPC's and SPPC's letters sent to
the counterparties to the Utilities' fuel and purchased power contracts
providing an update as to the consequences of the PUCN order denying recovery of
NPC's deferred energy expenses.
Form 8-K dated April 11, 2002, filed by SPR and NPC - Item 5, Other Events
Disclosed, and included as an exhibit, the petition for judicial review
filed on April 11, 2002, by NPC in District Court in Nevada seeking to reverse
portions of the recent decision of the PUCN denying the recovery of $437 million
of deferred energy costs incurred by NPC on behalf of its customers in 2001.
Form 8-K dated April 15, 2002, filed by SPR and NPC - Item 5, Other Events
Disclosed, and included as an exhibit, a Petition for Reconsideration
filed on April 15, 2002, by NPC with the PUCN seeking reconsideration of the
recent decisions of the PUCN with respect to NPC's general rate case and NPC's
application for approval of new revised depreciation rates.
Form 8-K dated April 23, 2002, filed by SPR, NPC and SPPC - Item 5, Other Events
Disclosed, and included as an exhibit, SPR's press release dated April
23, 2002, announcing that SPR will not be paying a common stock dividend during
the quarter ended June 30, 2002.
Form 8-K dated May 2, 2002, filed by SPR, NPC and SPPC - Item 5, Other Events
Disclosed, and included as an exhibit, SPR's press release dated May 2,
2002, announcing that Enron Power Marketing Inc. will end power deliveries to
SPR's two electric utilities effective May 7, 2002.
Form 8-K dated May 20, 2002, filed by SPR, NPC and SPPC - Item 5, Other Events
Disclosed, and included as an exhibit, SPR's press release dated May
20, 2002, announcing the departure of four executives.
Form 8-K dated May 28, 2002, filed by SPR, and SPPC - Item 5, Other Events
Disclosed that on May 28, 2002, the PUCN voted to allow SPPC to recover
approximately $150 million of deferred energy costs over a three-year period
beginning June 1, 2002. SPPC had originally sought to recover approximately $205
million in fuel and power purchases SPPC made on behalf of its customers in
2001. As a result of the PUCN's decision, SPPC will write-off approximately $55
million of the deferred energy balance, plus approximately $3 million in
subsequent carrying charges.
SPPC had also sought an increase in its general rates of approximately
$16 million; however, the PUCN approved a decrease of approximately $14 million
to SPPC's current rates, also effective June 1, 2002.
54
Form 8-K dated June 10, 2002, filed by SPR, NPC and SPPC - Item 5, Other Events
Disclosed, and included as an exhibit, SPR's press release dated June
10, 2002, announcing that Duke Energy North America, a subsidiary of Duke Energy
Corporation, has agreed to supply up to 1,000 megawatts of electricity per hour,
as well as natural gas, to NPC and SPPC to fulfill customers' power requirements
during the peak summer period.
Duke Energy also agreed to accept a deferred payment program for a
portion of the summer costs under its existing power-supply contracts with NPC.
Concurrently, NPC and SPPC agreed to drop their Federal Energy
Regulatory Commission Section 206 complaint proceedings against Duke Energy.
55
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
SIERRA PACIFIC RESOURCES
(Registrant)
Date: August 14, 2002 By: /s/ Dennis D. Schiffel
--------------- ----------------------------------
Dennis D. Schiffel
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 2002 By: /s/ John E. Brown
--------------- ----------------------------------
John E. Brown
Controller
(Principal Accounting Officer)
NEVADA POWER COMPANY
(Registrant)
Date: August 14, 2002 By: /s/ Dennis D. Schiffel
--------------- ----------------------------------
Dennis D. Schiffel
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 2002 By: /s/ John E. Brown
--------------- ----------------------------------
John E. Brown
Controller
(Principal Accounting Officer)
SIERRA PACIFIC POWER COMPANY
(Registrant)
Date: August 14, 2002 By: /s/ Dennis D. Schiffel
--------------- ----------------------------------
Dennis D. Schiffel
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 2002 By: /s/ John E. Brown
--------------- ----------------------------------
John E. Brown
Controller
(Principal Accounting Officer)
56