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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 SEPTEMBER 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 of
Commission File 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 November 6, 2002
Common Stock, $1.00 par value 102,138,325 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 SEPTEMBER 30, 2002
CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
SIERRA PACIFIC RESOURCES -
Condensed Consolidated Balance Sheets - September 30, 2002 and December 31, 2001.......... 3
Condensed Consolidated Statements of Operations - Three Months and Nine Months
Ended September 30, 2002 and 2001................................................... 4
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2002 and 2001................................................... 5
NEVADA POWER COMPANY -
Condensed Balance Sheets - September 30, 2002 and December 31, 2001....................... 6
Condensed Statements of Operations - Three Months and Nine Months
Ended September 30, 2002 and 2001................................................... 7
Condensed Statements of Cash Flows - Nine Months Ended September 30, 2002 and 2001........ 8
SIERRA PACIFIC POWER COMPANY -
Condensed Consolidated Balance Sheets - September 30, 2002 and December 31, 2001.......... 9
Condensed Consolidated Statements of Operations - Three Months and Nine Months
Ended September 30, 2002 and 2001................................................... 10
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 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..... 36
Sierra Pacific Resources Results of Operations...................................... 41
Nevada Power Company Results of Operations.......................................... 46
Sierra Pacific Power Company Results of Operations.................................. 53
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk................................ 65
ITEM 4. Controls and Procedures................................................................... 65
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings......................................................................... 66
ITEM 4. Submission of Matters to a Vote of Security Holders....................................... 66
ITEM 5. Other Information......................................................................... 66
ITEM 6. Exhibits and Reports on Form 8-K.......................................................... 66
Signature Page and Certifications ....................................................................... 68
2
SIERRA PACIFIC RESOURCES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
ASSETS
Utility Plant at Original Cost:
Plant in service $ 5,845,229 $ 5,683,296
Less: accumulated provision for depreciation 1,902,630 1,777,517
----------- -----------
3,942,599 3,905,779
Construction work-in-progress 261,691 203,456
----------- -----------
4,204,290 4,109,235
----------- -----------
Investments in subsidiaries and other property, net 182,486 128,892
----------- -----------
Current Assets:
Cash and cash equivalents 360,345 99,109
Restricted cash (Note 1) 22,750 -
Accounts receivable less provision for uncollectible accounts:
2002-$42,001 ; 2001-$39,335 467,881 394,489
Deferred energy costs - electric 254,226 333,062
Deferred energy costs - gas 18,957 19,805
Income tax receivable - 59,630
Materials, supplies and fuel, at average cost 96,053 94,167
Risk management assets (Note 10) 66,494 286,509
Other 24,040 14,071
----------- -----------
1,310,746 1,300,842
----------- -----------
Deferred Charges and Other Assets:
Goodwill (Note 12) 310,441 312,145
Deferred energy costs - electric 767,238 854,778
Deferred energy costs - gas 11,737 23,248
Income tax receivable 266,665 314,619
Regulatory tax asset 168,276 169,738
Other regulatory assets 139,914 102,959
Risk management assets (Note 10) 7,813 61,058
Risk management regulatory assets - net (Note 10) 78,441 664,383
Other 120,557 139,417
----------- -----------
1,871,082 2,642,345
----------- -----------
$ 7,568,604 $ 8,181,314
=========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholders' equity $ 1,413,738 $ 1,702,322
Accumulated other comprehensive loss (Note 10) (4,260) (6,986)
Preferred stock 50,000 50,000
NPC obligated mandatorily redeemable preferred trust securities 188,872 188,872
Long-term debt 2,986,517 3,376,105
----------- -----------
4,634,867 5,310,313
----------- -----------
Current Liabilities:
Short-term borrowings 350,000 177,000
Current maturities of long-term debt 431,327 122,010
Accounts payable 390,660 265,250
Accrued interest 74,294 37,565
Dividends declared 1,045 1,045
Accrued salaries and benefits 16,763 30,145
Deferred taxes on deferred energy costs 94,823 123,503
Risk management liabilities (Note 10) 132,121 855,301
Other current liabilities 28,966 15,678
----------- -----------
1,519,999 1,627,497
----------- -----------
Commitments & Contingencies (Note 11)
Deferred Credits and Other Liabilities:
Deferred federal income taxes 404,666 412,658
Deferred investment tax credit 49,355 51,947
Deferred taxes on deferred energy costs 273,432 307,309
Regulatory tax liability 45,708 46,702
Customer advances for construction 114,447 108,179
Accrued retirement benefits 95,351 82,624
Risk management liabilities (Note 10) 20,454 163,636
Contract termination reserves (Note 11) 315,780 -
Other 94,545 70,449
----------- -----------
1,413,738 1,243,504
----------- -----------
$ 7,568,604 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- ------------
OPERATING REVENUES:
Electric $ 997,559 $ 1,977,453 $ 2,251,813 $ 3,738,177
Gas 18,473 18,831 99,139 104,725
Other 3,987 5,650 8,328 13,350
------------- ------------- ------------- ------------
1,020,019 2,001,934 2,359,280 3,856,252
------------- ------------- ------------- ------------
OPERATING EXPENSES:
Operation:
Purchased power 604,683 2,195,051 1,546,394 3,636,006
Fuel for power generation 120,668 220,002 356,084 586,136
Gas purchased for resale 9,884 9,294 61,585 105,008
Deferred energy costs disallowed - - 487,224 -
Deferral of energy costs - electric - net (41,425) (737,634) (309,203) (1,080,846)
Deferral of energy costs - gas - net 4,281 3,453 14,649 (23,354)
Other 70,566 81,924 206,004 248,428
Maintenance 12,904 15,475 46,826 53,933
Depreciation and amortization 43,847 40,958 129,606 120,552
Taxes:
Income taxes 41,002 40,087 (145,949) 8,033
Other than income 10,282 11,134 33,585 32,358
------------- ------------- ------------- ------------
876,692 1,879,744 2,426,805 3,686,254
------------- ------------- ------------- ------------
OPERATING INCOME (LOSS) 143,327 122,190 (67,525) 169,998
------------- ------------- ------------- ------------
OTHER INCOME (EXPENSE):
Allowance for other funds used during construction (272) (106) 382 (793)
Other income - net 8,016 16,007 6,472 22,319
------------- ------------- ------------- ------------
7,744 15,901 6,854 21,526
------------- ------------- ------------- ------------
Total Income (Loss) Before Interest Charges 151,071 138,091 (60,671) 191,524
------------- ------------- ------------- ------------
INTEREST CHARGES:
Long-term debt 56,734 47,623 170,973 131,155
Other 11,097 5,474 23,993 20,767
Allowance for borrowed funds used during
construction and capitalized interest (902) (1,225) (3,483) (1,514)
------------- ------------- ------------- ------------
66,929 51,872 191,483 150,408
------------- ------------- ------------- ------------
INCOME (LOSS) BEFORE NPC OBLIGATED MANDATORILY
REDEEMABLE PREFERRED TRUST SECURITIES 84,142 86,219 (252,154) 41,116
Preferred dividend requirements of NPC obligated
mandatorily redeemable preferred trust securities 3,793 4,835 11,379 14,293
------------- ------------- ------------- ------------
INCOME (LOSS) BEFORE PREFERRED STOCK DIVIDENDS 80,349 81,384 (263,533) 26,823
Preferred stock dividend requirements of subsidiary 975 975 2,925 2,725
------------- ------------- ------------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 79,374 80,409 (266,458) 24,098
------------- ------------- ------------- ------------
DISCONTINUED OPERATIONS:
Income from operations of water business
disposed of (net of income taxes of
$0 and $888 in 2001, respectively) - - - 1,022
Gain on disposal of water business
(net of income taxes of $18,237) - - - 25,845
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX (Note 12) - - (1,566) -
------------- ------------- ------------- ------------
NET INCOME (LOSS) $ 79,374 $ 80,409 $ (268,024) $ 50,965
============= ============= ============= ============
Amounts per share - Basic and Diluted
Income (loss) from continuing operations $ 0.78 $ 0.89 $ (2.61) $ 0.29
Income from discontinued operations - 0.01
Gain on disposal of water business - 0.32
Cumulative effect of change in accounting
principle (net of tax) - (0.01) -
------------- ------------- ------------- ------------
Net income (loss) $ 0.78 $ 0.89 $ (2.62) $ 0.62
============= ============= ============= ============
Weighted Average Shares of Common Stock Outstanding 102,132,465 90,302,825 102,117,926 82,423,032
============= ============= ============= ============
Dividends Paid Per Share of Common Stock $ - $ 0.20 $ 0.20 $ 0.45
============= ============= ============= ============
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)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2002 2001
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (Loss) from continuing operations before preferred dividends $ (263,533) $ 26,823
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 130,097 124,011
Deferred taxes and deferred investment tax credit 79,410 107,795
AFUDC and capitalized interest (3,865) (730)
Amortization of deferred energy costs - electric 130,667 -
Amortization of deferred energy costs - gas 8,950 -
Deferred energy costs disallowed (net of taxes) 317,977 -
Early retirement and severance amortization 2,082 3,121
Gain on disposal of water business - (44,081)
Other non-cash (12,099) 3,676
Changes in certain assets and liabilities:
Accounts receivable (115,247) (498,883)
Deferral of energy costs - electric (123,308) (1,105,698)
Deferral of energy costs - gas 3,408 (25,938)
Materials, supplies and fuel (1,886) (19,849)
Other current assets (32,658) (4,093)
Accounts payable 166,144 543,413
Income tax receivable 108,992 -
Other current liabilities 35,293 18,061
Other - net 32,396 16,827
------------ -----------
Net Cash from Operating Activities 462,820 (828,478)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (259,831) (251,458)
AFUDC and other charges to utility plant 3,865 730
Customer advances (refunds) for construction 6,268 (3,219)
Contributions in aid of construction 32,381 24,259
------------ -----------
Net cash used for utility plant (217,317) (229,688)
Proceeds from sale of assets of water business - 318,882
Investments in subsidiaries and other property (53,672) (3,961)
------------ -----------
Net Cash from Investing Activities (270,989) 85,233
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 173,000 56,487
Proceeds from issuance of long-term debt - 900,000
Retirement of long-term debt (80,272) (536,103)
Sale of common stock 187 340,764
Dividends paid (23,510) (43,366)
------------ -----------
Net Cash from Financing Activities 69,405 717,782
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 261,236 (25,463)
Beginning Balance in Cash and Cash Equivalents 99,109 51,503
------------ -----------
Ending Balance in Cash and Cash Equivalents $ 360,345 $ 26,040
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during period for:
Interest $ 154,754 $ 112,982
Income taxes $ (185,011) $ 28,424
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
5
NEVADA POWER COMPANY
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Utility Plant at Original Cost:
Plant in service $ 3,500,244 $ 3,356,584
Less: accumulated provision for depreciation 999,584 928,939
------------ ------------
2,500,660 2,427,645
Construction work-in-progress 153,529 134,706
------------ ------------
2,654,189 2,562,351
------------ ------------
Investment in Sierra Pacific Resources (Note 2) 236,821 309,259
Investments in subsidiaries and other property, net 20,168 12,721
------------ ------------
256,989 321,980
------------ ------------
Current Assets:
Cash and cash equivalents 207,746 8,505
Restricted cash (Note 1) 10,872 -
Accounts receivable less provision for uncollectible accounts:
2002-$34,269; 2001-$30,861 306,868 210,333
Deferred energy costs - electric 197,542 281,555
Income tax receivable - 18,590
Materials, supplies and fuel, at average cost 45,434 48,511
Risk management assets (Note 10) 49,142 200,829
Other 10,732 6,698
------------ ------------
828,336 775,021
------------ ------------
Deferred Charges and Other Assets:
Deferred energy costs - electric 591,871 698,510
Income tax receivable 245,009 295,818
Regulatory tax asset 108,912 109,859
Other regulatory assets 53,904 31,588
Risk management assets (Note 10) 7,813 49,493
Risk management regulatory assets - net (Note 10) 7,198 351,264
Other 24,948 29,485
------------ ------------
1,039,655 1,566,017
------------ ------------
$ 4,779,169 $ 5,225,369
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholder's equity including $236,821 and $309,259
of equity in Sierra Pacific Resources in 2002 and 2001 (Note 2) $ 1,413,738 $ 1,702,322
Accumulated other comprehensive income 117 520
NPC obligated mandatorily redeemable preferred trust securities 188,872 188,872
Long-term debt 1,393,034 1,607,967
------------ ------------
2,995,761 3,499,681
------------ ------------
Current Liabilities:
Short-term borrowings 200,000 130,500
Current maturities of long-term debt 228,927 19,380
Accounts payable 332,333 202,555
Accrued interest 35,542 19,310
Dividends declared 78 71
Accrued salaries and benefits 5,520 12,450
Deferred taxes on deferred energy costs 68,349 98,544
Risk management liabilities (Note 10) 58,218 522,508
Other current liabilities 20,370 17,710
------------ ------------
949,337 1,023,028
------------ ------------
Commitments & Contingencies (Note 11)
Deferred Credits and Other Liabilities:
Deferred federal income taxes 210,773 223,641
Deferred investment tax credit 22,310 23,533
Deferred taxes on deferred energy costs 207,945 244,479
Regulatory tax liability 18,280 18,604
Customer advances for construction 64,525 61,454
Accrued retirement benefits 36,089 28,104
Risk management liabilities (Note 10) 5,818 78,558
Contract termination reserves (Note 11) 229,002 -
Other 39,329 24,287
------------ ------------
834,071 702,660
------------ ------------
$ 4,779,169 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ --------------------------------
2002 2001 2002 2001
------------- ------------- -------------- --------------
OPERATING REVENUES:
Electric $ 712,536 $ 1,395,496 $ 1,545,867 $ 2,562,949
OPERATING EXPENSES:
Operation:
Purchased power 440,559 1,686,816 1,102,551 2,728,176
Fuel for power generation 87,864 131,023 245,060 348,633
Deferred energy costs disallowed - - 434,123 -
Deferral of energy costs-net (43,224) (638,571) (238,059) (908,408)
Other 39,250 45,670 116,520 130,192
Maintenance 8,050 10,331 31,576 36,789
Depreciation and amortization 24,975 23,042 72,924 67,345
Taxes:
Income taxes 39,944 36,197 (116,536) 21,979
Other than income 5,935 6,221 19,122 18,118
------------- ------------- -------------- --------------
603,353 1,300,729 1,667,281 2,442,824
------------- ------------- -------------- --------------
OPERATING INCOME (LOSS) 109,183 94,767 (121,414) 120,125
------------- ------------- -------------- --------------
OTHER INCOME (EXPENSE):
Equity in earnings (losses) of Sierra
Pacific Resources (Note 2) 70 1,658 (51,999) (5,494)
Allowance for other funds used during
construction (262) (87) 239 (560)
Other income (expense) - net 4,933 11,021 (839) 14,189
------------- ------------- -------------- --------------
4,741 12,592 (52,599) 8,135
------------- ------------- -------------- --------------
Total Income (Loss) Before
Interest Charges 113,924 107,359 (174,013) 128,260
------------- ------------- -------------- --------------
INTEREST CHARGES:
Long-term debt 23,714 20,545 70,668 55,504
Other 7,251 3,269 14,133 10,982
Allowance for borrowed funds
used during construction and
capitalized interest (208) (657) (2,169) (570)
------------- ------------- -------------- --------------
30,757 23,157 82,632 65,916
------------- ------------- -------------- --------------
INCOME (LOSS) BEFORE NPC OBLIGATED MANDATORILY
REDEEMABLE PREFERRED TRUST SECURITIES 83,167 84,202 (256,645) 62,344
Preferred dividend requirements of NPC obligated
mandatorily redeemable preferred trust securities 3,793 3,793 11,379 11,379
------------- ------------- -------------- --------------
NET INCOME (LOSS) $ 79,374 $ 80,409 $ (268,024) $ 50,965
============= ============= ============== ==============
Net Income (Loss) Per Share - Basic (Note 2) $ 0.78 $ 0.89 $ (2.62) $ 0.62
============= ============= ============== ==============
- Diluted (Note 2) $ 0.78 $ 0.89 $ (2.62) $ 0.62
============= ============= ============== ==============
Weighted Average Shares of Common
Stock Outstanding (Note 2) 102,132,465 90,302,825 102,117,926 82,423,032
============= ============= ============== ==============
Dividends Paid Per Share of Common Stock (Note 2) $ - $ 0.20 $ 0.20 $ 0.45
============= ============= ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
NEVADA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (268,024) $ 50,965
Non-cash items included in income:
Depreciation and amortization 72,924 67,345
Deferred taxes and deferred investment tax credit 68,430 51,944
AFUDC and capitalized interest (2,408) (10)
Amortization of deferred energy costs 112,959 -
Deferred energy costs disallowed (net of taxes) 282,181 -
Other non-cash (14,184) 2,367
Equity in losses of SPR (Note 2) 51,999 5,494
Changes in certain assets and liabilities:
Accounts receivable (95,791) (411,765)
Deferral of energy costs (127,429) (928,987)
Materials, supplies and fuel 3,077 (5,809)
Other current assets (14,843) (725)
Accounts payable 129,728 523,642
Income tax receivable 70,807 -
Other current liabilities 11,961 12,632
Other - net 18,832 8,780
------------ ------------
Net Cash from Operating Activities 300,219 (624,127)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (196,006) (141,414)
AFUDC and other charges to utility plant 2,408 10
Customer advances (refunds) for construction 3,072 (4,054)
Contributions in aid of construction 27,635 5,630
------------ ------------
Net cash used for utility plant (162,891) (139,828)
Investments in subsidiaries and other property (2,200) -
------------ ------------
Net Cash from Investing Activities (165,091) (139,828)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 69,500 130,561
Proceeds from issuance of long-term debt - 500,000
Retirement of long-term debt (5,387) (254,112)
Investment by parent company 10,000 394,921
Dividends paid (10,000) (33,014)
------------ ------------
Net Cash from Financing Activities 64,113 738,356
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 199,241 (25,599)
Beginning Balance in Cash and Cash Equivalents 8,505 43,858
------------ ------------
Ending Balance in Cash and Cash Equivalents $ 207,746 $ 18,259
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during period for:
Interest $ 66,400 $ 28,160
Income taxes $ (102,904) $ 47,501
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
8
SIERRA PACIFIC POWER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Utility Plant at Original Cost:
Plant in service $ 2,344,985 $ 2,326,712
Less: accumulated provision for depreciation 903,046 848,578
------------ ------------
1,441,939 1,478,134
Construction work-in-progress 108,162 68,750
------------ ------------
1,550,101 1,546,884
------------ ------------
Investments in subsidiaries and other property, net 54,775 57,185
------------ ------------
Current Assets:
Cash and cash equivalents 143,868 11,772
Restricted cash (Note 1) 9,273 -
Accounts receivable less provision for uncollectible accounts:
2002 - $7,732; 2001 - $8,474 249,692 194,698
Deferred energy costs - electric 56,684 51,507
Deferred energy costs - gas 18,957 19,805
Materials, supplies and fuel, at average cost 46,795 42,290
Income tax receivable - 41,040
Risk management assets (Note 10) 17,352 85,680
Other 10,827 5,935
------------ ------------
553,448 452,727
------------ ------------
Deferred Charges and Other Assets:
Deferred energy costs - electric 175,367 156,268
Deferred energy costs - gas 11,737 23,248
Regulatory tax asset 59,364 59,879
Other regulatory assets 66,107 51,146
Risk management assets (Note 10) - 11,565
Risk management regulatory assets - net (Note 10) 71,243 313,119
Other 12,332 13,886
------------ ------------
396,150 629,111
------------ ------------
$ 2,554,474 $ 2,685,907
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholder's equity $ 670,365 $ 692,654
Accumulated other comprehensive income 56 247
Preferred stock 50,000 50,000
Long-term debt 917,100 923,070
------------ ------------
1,637,521 1,665,971
------------ ------------
Current Liabilities:
Short-term borrowings 150,000 46,500
Current maturities of long-term debt 2,400 2,630
Accounts payable 82,270 95,555
Accrued interest 24,489 8,408
Dividends declared 967 974
Accrued salaries and benefits 8,923 15,466
Deferred taxes on deferred energy costs 26,474 24,959
Risk management liabilities (Note 10) 73,903 332,793
Other current liabilities 7,586 3,387
------------ ------------
377,012 530,672
------------ ------------
Commitments & Contingencies (Note 11)
Deferred Credits and Other Liabilities:
Deferred federal income taxes 186,864 178,533
Deferred investment tax credit 27,045 28,414
Deferred taxes on deferred energy costs 65,487 62,831
Income tax payable 2,345 -
Regulatory tax liability 27,428 28,098
Customer advances for construction 49,922 46,725
Accrued retirement benefits 49,455 43,028
Risk management liabilities (Note 10) 14,636 77,324
Contract termination reserves (Note 11) 86,778 -
Other 29,981 24,311
------------ ------------
539,941 489,264
------------ ------------
$ 2,554,474 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ----------------------------
2002 2001 2002 2001
---------- ----------- ----------- -------------
OPERATING REVENUES:
Electric $ 285,023 $ 581,957 $ 705,946 $ 1,175,228
Gas 18,473 18,831 99,139 104,725
---------- ----------- ----------- -------------
303,496 600,788 805,085 1,279,953
---------- ----------- ----------- -------------
OPERATING EXPENSES:
Operation:
Purchased power 164,124 508,235 443,843 907,830
Fuel for power generation 32,804 88,980 111,024 237,504
Gas purchased for resale 9,884 9,294 61,585 105,008
Deferred energy costs disallowed - - 53,101 -
Deferral of energy costs - electric - net 1,799 (98,702) (71,144) (172,437)
Deferral of energy costs - gas - net 4,281 3,093 14,649 (23,354)
Other 25,064 28,222 75,687 79,090
Maintenance 4,854 5,143 15,250 17,143
Depreciation and amortization 18,592 17,620 55,861 52,328
Taxes:
Income taxes 7,601 8,630 (9,037) 7,974
Other than income 4,472 4,671 14,129 13,639
---------- ----------- ----------- -------------
273,475 575,186 764,948 1,224,725
---------- ----------- ----------- -------------
OPERATING INCOME 30,021 25,602 40,137 55,228
---------- ----------- ----------- -------------
OTHER INCOME (EXPENSE):
Allowance for other funds used during construction (10) (19) 143 (233)
Other income - net 1,954 4,309 4,631 5,322
---------- ----------- ----------- -------------
1,944 4,290 4,774 5,089
---------- ----------- ----------- -------------
Total Income Before Interest Charges 31,965 29,892 44,911 60,317
---------- ----------- ----------- -------------
INTEREST CHARGES:
Long-term debt 16,173 15,380 48,638 38,479
Other 2,943 1,455 7,051 7,437
Allowance for borrowed funds used during construction and
capitalized interest (694) (566) (1,314) (943)
---------- ----------- ----------- -------------
18,422 16,269 54,375 44,973
---------- ----------- ----------- -------------
INCOME (LOSS) BEFORE SPPC OBLIGATED MANDATORILY
REDEEMABLE PREFERRED TRUST SECURITIES 13,543 13,623 (9,464) 15,344
Preferred dividend requirements of SPPC obligated
mandatorily redeemable preferred trust securities - 1,042 - 2,914
---------- ----------- ----------- -------------
INCOME (LOSS) BEFORE PREFERRED DIVIDENDS 13,543 12,581 (9,464) 12,430
Preferred dividend requirements 975 975 2,925 2,725
---------- ----------- ----------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 12,568 11,606 (12,389) 9,705
---------- ----------- ----------- -------------
DISCONTINUED OPERATIONS:
Income from operations of water business disposed of (net of
income taxes of $0 and $888 in 2001, respectively) - - - 1,022
Gain on disposal of water business (net of income taxes of $18,237) - - - 25,845
---------- ----------- ----------- -------------
NET INCOME (LOSS) $ 12,568 $ 11,606 $ (12,389) $ 36,572
========== =========== =========== =============
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)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2002 2001
----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (Loss) from continuing operations before preferred dividends $ (9,464) $ 12,430
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 55,861 55,788
Deferred taxes and investment tax credits 10,979 55,807
AFUDC and capitalized interest (1,457) (719)
Amortization of deferred energy costs - electric 17,708 -
Amortization of deferred energy costs - gas 8,950 -
Deferred energy costs disallowed (net of taxes) 35,796 -
Early retirement and severance amortization 2,082 3,121
Gain on disposal of water business - (44,081)
Other non-cash (10,612) (3,580)
Changes in certain assets and liabilities:
Accounts receivable (54,994) (162,234)
Deferral of energy costs - electric 4,121 (176,712)
Deferral of energy costs - gas 3,408 (25,938)
Materials, supplies and fuel (4,506) (11,601)
Other current assets (14,165) (2,728)
Accounts payable (13,285) 80,416
Income tax receivable 43,385 -
Other current liabilities 13,738 13,742
Other-net 12,096 1,596
----------- ------------
Net Cash from Operating Activities 99,641 (177,626)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to utility plant (63,825) (110,043)
AFUDC and other charges to utility plant 1,457 719
Customer advances for construction 3,196 835
Contributions in aid of construction 4,746 18,628
----------- ------------
Net cash used for utility plant (54,426) (89,861)
Proceeds from sale of assets of water business - 318,882
Disposal of subsidiaries and other property - net 2,411 2,102
----------- ------------
Net Cash from Investing Activities (52,015) 231,123
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings 103,500 (89,962)
Proceeds from issuance of long-term debt - 400,000
Retirement of long-term debt (6,200) (281,980)
Investment by parent company 10,000 4,948
Dividends paid (22,830) (88,932)
----------- ------------
Net Cash from Financing Activities 84,470 (55,926)
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 132,096 (2,429)
Beginning Balance in Cash and Cash Equivalents 11,772 5,348
----------- ------------
Ending Balance in Cash and Cash Equivalents $ 143,868 $ 2,919
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during period for:
Interest $ 38,294 $ 29,154
Income taxes (62,109) 22,227
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 three- and nine-month periods ended
September 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 nine months ended September 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. 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
and by various intervenors, as 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 a subsidiary 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") agreed to replace the amount of
contracted power and natural gas that would have been supplied by the Utilities'
terminating suppliers during the peak summer period.
The separate decision of the PUCN on May 28, 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
nine months ended September 30, 2002. 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. The PUCN's May 28, 2002 decision on SPPC's deferred
energy application is being challenged by SPPC in a lawsuit filed August 22,
2002 in Nevada state court, which is discussed in Note 9, Regulatory Events.
NPC expects to file a deferred energy case on November 14, 2002,
requesting 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 case includes a reduction for
annual fuel and purchased power revenues of $148 million and recovery of the
deferred energy account balance in the amount of $65 million annually for a
three-year period. The net change will result in an annual revenue decrease of
$83 million representing a 5.6% rate decrease for residential customers and a
5.1% rate decrease for all other classes. The balance for the current deferral
period is approximately $425 million, which includes a balance of $196 million
which NPC is requesting recovery over a three-year period and costs of
approximately $229 million accrued for claims made by terminated suppliers for
which NPC is requesting an affirmation of prudency. (See Note 11, Commitment and
Contingencies.) These amounts are subject to whatever adjustments may be ordered
by the PERC 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 $100 million, which includes costs of approximately $82
million accrued for claims made by 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 rate cases, SPR
implemented certain measures that management expects 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.
On March 29 and April 1, 2002, Standard & Poor's Rating Group, Inc.
(S&P) and Moody's Investors Service, Inc. (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. SPR's ability to make
capital contributions to NPC and SPPC also became severely limited. The PUCN's
May 28, 2002 decision on SPPC's deferred energy application did not result in
any further downgrades of the unsecured debt ratings of SPR, NPC or SPPC.
As a result of the ratings downgrades, SPR's, NPC's, and SPPC'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 recently terminated
$200 million unsecured revolving credit facility that would permit NPC to draw
down funds under that facility.
In connection with the credit downgrades by S&P and Moody's, the
Utilities lost their A2/P2 commercial paper ratings and can no longer issue
commercial paper. At the time NPC and SPPC had commercial paper balances
outstanding of $198.9 million and $47.7 million, respectively, with weighted
average interest rates of 2.52% and 2.49%, respectively. Since the Utilities
were no longer able to roll over their commercial paper, they paid off their
maturing commercial paper with the proceeds of borrowings under their credit
facilities and terminated their commercial paper programs on May 28, 2002. The
Utilities do not expect to have direct access to the commercial paper market for
the foreseeable future.
With respect to NPC's and SPPC's contracts for purchased power, NPC and
SPPC purchase and sell electricity with 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.
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, which is substantially based on quoted market prices, can be used to
roughly approximate the termination payment at any point in time. The
mark-to-market value as of November 1, 2002, for all suppliers continuing to
provide power under a WSPP agreement was approximately $90.1 million and $59.9
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
13
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, and NPC paying any balances remaining prior to December 2003. NPC also
agreed to extend the suppliers' rights under the WSPP agreement. As of October
29, 2002, NPC paid all of the outstanding balances owed to its continuing
suppliers.
In early May, Enron Power Marketing Inc. ("Enron"), Morgan Stanley
Capital Group Inc., Reliant Energy Services, Inc. and several smaller suppliers
notified the Utilities 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' alleged inability to provide adequate assurances of
their ability to perform all of their outstanding material obligations under the
WSPP agreement. 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 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.
Enron initially filed a motion for partial summary judgment to require the
Utilities to make immediate payment of the full amount of Enron's claim, pending
final resolution of the lawsuit. Enron subsequently filed another motion for
summary judgment seeking final payment of its damages claim. In connection with
this suit, the Utilities filed motions to dismiss and/or to stay all proceedings
pending the final outcome of the Utilities' Section 206 complaints against Enron
and others. (See Note 9, Regulatory Events.) Hearings were conducted in
September, October, and early November 2002. In the event the Utilities' motions
are denied, further hearings will be scheduled on Enron's motion for summary
judgment. An adverse decision on Enron's motion for summary judgment or an
adverse decision in the lawsuit itself would have a material adverse affect on
the financial condition and liquidity of SPR and the Utilities and would 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 fulfill the Utilities' 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. Several
other continuing suppliers also entered into formal agreements with NPC
regarding deferred payments, and NPC deferred a portion of the payments to such
suppliers, as well as those suppliers who continued to supply but did not sign
agreements, beginning May 1, 2002 for charges incurred through September 15,
2002. As of October 29, 2002, NPC had paid in full all of the outstanding
delayed payments, approximately $101 million, to all continuing suppliers, and,
by the end of 2003, expects to make all payments determined to be due to
terminating suppliers other than Enron. The approximately $101 million paid in
October, and approximately $39 million accrued for amounts owed to terminating
suppliers, are included in SPR's and NPC's Accounts Payable balance as of
September 30, 2002.
Following the PUCN decisions, SPR and the Utilities were also required
to post cash collateral in connection with the surety bonds carried by their
surety company and the disbursement facilities provided by their bank. These
collateral amounts are classified as "Restricted cash" on the Balance Sheets of
SPR and the Utilities.
SPR has a qualified pension plan (the "Plan") that covers substantially
all employees of SPR, NPC and SPPC. The annual net benefit cost for the Plan is
expected to increase for 2003 by an amount between $12 million and $22 million
over the 2002 cost of $18.4 million. Also, the Plan currently has assets with a
fair value that is less than the present value of the accumulated benefit
obligation under the Plan. While the amount of the deficiency has not yet been
determined, SPR and the Utilities expect their combined minimum funding
requirement for 2002 will be at least $24 million. However, SPR and the
Utilities do not expect that their funding obligation for 2002 will have a
material adverse effect on their liquidity.
SPPC's Washoe County, Nevada, Water Facilities Refunding Revenue
Bonds, Series 2001 in the aggregate principal amount of $80,000,000, will be
subject to remarketing on May 1, 2003. In the event that these 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.
SPR has a substantial amount of debt and other obligations including,
but not limited to: $200 million of its unsecured Floating Rate Notes due April
20, 2003; $300 million of its unsecured 8 3/4% Senior Notes due 2005; and $345
million of its unsecured 7.93% Senior Notes due 2007. In connection with the
effects of the disallowance of a significant portion of the Utilities' deferred
purchased power costs by the PUCN as stated above, SPR's credit ratings, along
with those of NPC and SPPC, were downgraded to below investment grade. As a
result of the downgrades, SPR's ability to service its debt obligations and
refinance its maturing debt as it becomes due has become uncertain. In the event
that SPR's financial condition does not improve or becomes worse, it may have to
consider other options including the possibility of seeking protection in a
bankruptcy proceeding.
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, both as
discussed in Note 5, Dividend Restrictions, and on SPR's ability to access the
capital markets or otherwise refinance debt that matures in 2003 and thereafter.
Further adverse developments at NPC or SPPC, including a material disallowance
of deferred energy costs in future rate cases
14
or an adverse decision in the pending lawsuit by Enron to collect liquidated
damages (including Enron's motion for partial summary judgment to require the
Utilities to make immediate payment of the full amount of Enron's claim), could
cause SPR to become insolvent and would render SPR's ability to continue to
operate outside of bankruptcy uncertain.
NPC's liquidity would also be significantly affected by an adverse
decision in the pending lawsuit by Enron to collect liquidated damages
(including Enron's motion for partial summary judgment to require the Utilities
to make immediate payment of the full amount of Enron's claim), or by
unfavorable rulings by the PUCN in future NPC or SPPC rate cases. 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, and could adversely affect NPC's ability to continue to purchase power
and fuel. 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. 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 factors and
contingencies set forth above 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.
OTHER MATTERS
On July 7, 2002, the Board of County Commissioners of Clark County,
Nevada, added an Electric Utility Advisory Question to its November 5, 2002
general election ballot, which asked voters whether "the Nevada Legislature
should take appropriate action to enable the electrical energy provider for
southern Nevada to be a locally controlled, not for profit public utility." NPC
filed a lawsuit seeking to remove the question from the ballot, and the lawsuit
was dismissed. Although the referendum is non-binding, the results of this
advisory question, which was approved by a 57% to 43% vote, may impact future
utility legislation by the Nevada Legislature in its next legislative session
which may, in turn, directly or indirectly affect NPC and its operations.
On August 22, 2002, SPR received a letter from the Southern Nevada
Water Authority ("SNWA") stating that it was prepared to enter into good faith
negotiation of definitive agreements to acquire all of NPC's assets and assume
certain of NPC's existing indebtedness. On September 12, 2002, SPR responded
with a letter stating that it did not view the SNWA's letter as an offer and
expressing concerns with the SNWA's financing plans, certain significant legal
issues with the proposal and the SNWA's lack of utility management experience.
The SNWA has responded by reaffirming its purported offer to acquire NPC.
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.
15
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. Adoption of this statement
did not 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. Adoption of this statement did not 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 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 in each of the Financial Statements. These
summarized items are repeated below (in 000's):
Non-NPC Financial Items in the NPC Financial Statements
NPC Balance Sheets: September 30, 2002 December 31, 2001
- ------------------- ------------------ -----------------
Investment in Sierra Pacific Resources $236,821 $309,259
Equity in Sierra Pacific Resources $236,821 $309,259
The Investment in Sierra Pacific Resources reflects the net assets of
SPR, after deducting for all liabilities and preferred stock of SPR 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 First
Mortgage Indenture.
NPC Statements of Operations: Three Months Ended Three Months Ended
- ----------------------------- ------------------ ------------------
September 30, 2002 September 30, 2001
------------------ ------------------
Equity in Earnings of Sierra Pacific Resources $70 $1,658
Nine Months Ended Nine Months Ended
----------------- -----------------
September 30, 2002 September 30, 2001
------------------ ------------------
Equity in Losses of Sierra Pacific Resources $(51,999) $(5,494)
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 First Mortgage Indenture.
Excluding NPC's equity in the losses/earnings of its parent, SPR, NPC
earned approximately $79.3 million and $78.8 million, respectively, for the
three-month periods ended September 30, 2002, and 2001. Excluding NPC's equity
in the losses of its parent, SPR, NPC incurred a loss of approximately ($216.0)
million for the nine months ended September 30, 2002, and earned approximately
$56.5 million for the nine months ended September 30, 2001.
16
Net Income (Loss) Per Share, Weighted Average Shares of Common Stock
Outstanding, and Dividends Paid Per Share of Common Stock refer to stock share
amounts and dividends paid at SPR.
NPC Statements of Cash Flows: Nine Months Ended Nine Months Ended
- ----------------------------- ----------------- -----------------
September 30, 2002 September 30, 2001
------------------ ------------------
Equity in Losses of Sierra Pacific Resources $51,999 $5,494
As in the statement of operations, the Equity in Losses of Sierra
Pacific Resources reflects the nine 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 First Mortgage Indenture.
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 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, 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.
As of September 30, 2002, NPC had borrowed the entire $200 million of
funds available under its credit facility at an average interest rate of 3.72%.
On October 30, 2002, NPC paid in full and terminated its $200 million
credit facility and retired its Series C, General & Refunding Bond which secured
the credit facility with the proceeds from the issuance of NPC's $250 million
aggregate principal amount of 107/8% General and Refunding Notes, Series E, due
2009.
On October 29, 2002, NPC established an accounts receivables purchase
facility of up to $125 million, which was arranged by Lehman Brothers. If NPC
elects to activate the receivables purchase facility, NPC will sell all of its
accounts receivable generated from the sale of electricity to customers to its
newly created bankruptcy remote special purpose subsidiary. The receivables
sales will be without recourse except for breaches of customary representations
and warranties made at the time of sale. The subsidiary will, in turn, sell
these receivables to a bankruptcy-remote subsidiary of SPR. SPR's subsidiary
will issue variable rate revolving notes backed by the purchased receivables.
Lehman Brothers Holdings, Inc. will be the sole initial committed purchaser of
all of the variable rate revolving notes. The agreements relating to the
receivables purchase facility contain various conditions to purchase, covenants
and trigger events, termination events and other provisions customary in
receivables transactions. In connection with NPC's receivables facility, SPR has
agreed to guaranty NPC's performance of certain obligations as a seller and
servicer under the facility.
NPC has agreed to issue $125 million principal amount of its General
and Refunding Mortgage Bonds upon activation of the accounts receivables
purchase facility. The full principal amount of the Bond would secure certain of
NPC's obligations as seller and servicer, plus certain interest, fees and
expenses thereon to the extent not paid when due, regardless of the actual
amounts owing with respect to the secured obligations. As a result, in the event
of an NPC bankruptcy or liquidation, the holder of the Bond securing the
receivables facility may recover more on a pro rata basis than the holders of
other General and Refunding Mortgage securities, who could recover less on a pro
rata basis, than they otherwise would recover. However, in no event will the
holder of the Bond recover more than the amount of obligations secured by the
Bond.
NPC intends to use the accounts receivables purchase facility as a
back-up liquidity facility and does not plan to activate this facility in the
foreseeable future. NPC may activate the facility within five days upon the
delivery of certain customary funding documentation and the delivery of the $125
million General and Refunding Mortgage Bond.
17
NPC is in the process of negotiating a 364-day credit facility of up to
$50 million. The 364-day credit facility will be secured by $50 million
aggregate principal amount of NPC's General and Refunding Mortgage Bonds. The
closing of the 364-day credit facility will be subject to the completion of the
lender's due diligence, the negotiation and finalization of documentation and
other customary closing conditions. Although NPC has commenced negotiations of
the terms of the 364-day credit facility, it cannot give assurances that it will
enter into the credit facility or any similar arrangement.
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.
As of September 30, 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 at an average interest
rate of 3.69%.
On October 31, 2002, SPPC paid off and terminated its $150 million
credit facility and retired its Series B, General & Refunding Bond which secured
the credit facility with a combination of cash on hand and proceeds from its
$100 million Term Loan Facility.
On October 29, 2002, SPPC established an accounts receivables purchase
facility of up to $75 million, which was arranged by Lehman Brothers. If SPPC
elects to activate the receivables purchase facility, SPPC will sell all of its
accounts receivable generated from the sale of electricity to customers to its
newly created bankruptcy remote special purpose subsidiary. The receivables
sales will be without recourse except for breaches of customary representations
and warranties made at the time of sale. The subsidiary will, in turn, sell
these receivables to a bankruptcy-remote subsidiary of SPR. SPR's subsidiary
will issue variable rate revolving notes backed by the purchased receivables.
Lehman Brothers Holdings, Inc. will be the sole initial committed purchaser of
all of the variable rate revolving notes. The agreements relating to the
receivables purchase facility contain various conditions to purchase, covenants
and trigger events, termination events and other provisions customary in
receivables transactions. In connection with SPPC's receivables facility, SPR
has agreed to guaranty SPPC's performance of certain obligations as a seller and
servicer under the facility.
SPPC has agreed to issue $75 million principal amount of its General
and Refunding Mortgage Bonds upon activation of the accounts receivables
purchase facility. The full principal amount of the Bond would secure certain of
SPPC's obligations as seller and servicer, plus certain interest, fees and
expenses thereon to the extent not paid when due, regardless of the actual
amounts owing with respect to the secured obligations. As a result, in the event
of an SPPC bankruptcy or liquidation, the holder of the Bond securing the
receivables facility may recover more on a pro rata basis than the holders of
other General and Refunding Mortgage securities, who could recover less on a pro
rata basis, than they otherwise would recover. However, in no event will the
holder of the Bond recover more than the amount of obligations secured by the
Bond.
SPPC intends to use the accounts receivables purchase facility as a
back-up liquidity facility and does not plan to activate this facility in the
foreseeable future. SPPC may activate the facility within five days upon the
delivery of certain customary funding documentation and the delivery of the $75
million General and Refunding Mortgage Bond.
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):
18
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 - 51,963 - 51,963
------------ ---------- ------------ ------------
Subtotal 495,000 77,163 500,000 1,072,163
Thereafter 1,126,961 842,337 376,383 2,345,681
------------ ---------- ------------ ------------
Total $ 1,621,961 $ 919,500 $ 876,383 $ 3,417,844
============ ========== ============ ============
(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.
On October 25, 2002 NPC redeemed its 7 5/8% Series L, First Mortgage
Bonds in the aggregate principal amount of $15 million.
On October 29, 2002, NPC issued and sold $250 million of its 10 7/8%
General and Refunding Mortgage Notes, Series E, due 2009 for a purchase price of
$235.6 million. The Series E Notes were issued with registration rights. The
proceeds of the issuance were used to pay off NPC's $200 million credit facility
and for general corporate purposes. The Series E Notes will mature October 15,
2009.
As discussed in Note 5, Dividend Restrictions, NPC's Series E Notes
limit the amount of dividends that NPC may pay to SPR. The terms of the Series E
Notes also restrict NPC from incurring any additional indebtedness unless (i) at
the time the debt is incurred, the ratio of consolidated cash flow to fixed
charges for NPC's most recently ended four quarter period on a pro forma basis
is at least 2 to 1, or (ii) the debt incurred is specifically permitted, which
includes certain credit facility or letter of credit indebtedness, obligations
incurred to finance property construction or improvement, indebtedness incurred
to refinance existing indebtedness, certain intercompany indebtedness, hedging
obligations, indebtedness incurred to support bid, performance or surety bonds,
and certain letters of credit issued to support NPC's obligations with respect
to energy suppliers.
If NPC's Series E Notes are upgraded to investment grade by both
Moody's and S&P, the dividend restrictions and the restrictions on indebtedness
applicable to the Series E Notes will be suspended and will no longer be in
effect so long as the Series E Notes remain investment grade.
Among other things, the Series E Notes also contain restrictions on
liens (other than permitted liens, which include liens to secure certain
permitted debt) and certain sale and leaseback transactions. In the event of a
change of control of NPC,
19
the holders of Series E Notes are entitled to require that NPC repurchase the
Series E Notes for a cash payment equal to 101% of the aggregate principal
amount plus accrued and unpaid interest.
NPC's first mortgage indenture creates a first priority lien on
substantially all of NPC's properties. As of September 30, 2002, $372.5 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 connection with its $250 million 10 7/8% General
and Refunding Mortgage Notes, Series E, due 2009 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 September 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.
As of October 1, 2002, NPC had the capacity to issue approximately $871 million
of additional General and Refunding Mortgage securities, not including the
issuance of $250 million Series E Notes and the retirement of $200 million of
General and Refunding Mortgage Bonds that secured NPC's terminated credit
facility. However, the financial covenants contained in the Series E Notes
limits NPC ability to issue additional General and Refunding Mortgage bonds or
other debt. NPC has reserved $125 million of General and Refunding Mortgage
Bonds for issuance upon the initial funding of NPC's receivables facility and
$50 million of its General and Refunding Mortgage Bonds to secure a proposed
364-day facility, discussed below.
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.
SIERRA PACIFIC POWER COMPANY
On Octob