NEVADA POWER CO - 10-Q Quarterly Report

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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, 2003

OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether any registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

Sierra Pacific Resources Yes [X] No [ ];
Nevada Power Company Yes [ ] No [X];
Sierra Pacific Power Company Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.

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, 2003

CONTENTS

2

SIERRA PACIFIC RESOURCES

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the financial statements.
3

SIERRA PACIFIC RESOURCES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)

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)

The accompanying notes are an integral part of the financial statements
5

NEVADA POWER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of the financial statements.
7

NEVADA POWER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

The accompanying notes are an integral part of the financial statements.
8

NEVADA POWER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

The accompanying notes are an integral part of the financial statements
9

SIERRA PACIFIC POWER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of the financial statements.

10

SIERRA PACIFIC POWER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

The accompanying notes are an integral part of the financial statements.
11

SIERRA PACIFIC POWER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

The accompanying notes are an integral part of the financial statements
12

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, results of
operations and 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; therefore, they should be read in conjunction with the
audited financial statements included in SPR's, NPC's, and SPPC's Annual Reports
on Form 10-K for the year ended December 31, 2002.

The results of operations and cash flows of SPR, NPC and SPPC for the
three-month and six-month periods ended June 30, 2003, 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, NPC and SPPC (collectively, the
"Utilities"), Tuscarora Gas Pipeline Company (TGPC), Sierra Gas Holding Company
(SGHC), Sierra Pacific Energy Company (SPE), Lands of Sierra (LOS), Sierra
Pacific Communications (SPC), and Sierra Water Development Company (SWDC).
Sierra Energy Company dba e-three (e-three) is a discontinued operation and as
such is no longer a consolidated subsidiary of SPR and is reported separately on
the financial statements of SPR. The condensed consolidated financial statements
of NPC include the accounts of NPC and its wholly-owned subsidiaries, NEICO, NVP
Capital I (Trust) and NVP Capital III (Trust). The condensed consolidated
financial statements of SPPC include the accounts of SPPC and its wholly-owned
subsidiaries, GPSF-B, Pinon Pine Corp. (PPC), Pinon Pine Investment Co., Pinon
Pine Company, L.L.C. and Sierra Pacific Funding L.L.C. All significant
intercompany transactions and balances have been eliminated in consolidation.

SIERRA PACIFIC RESOURCES

SPR, on a stand-alone basis, had cash and cash equivalents of approximately
$19.1 million at June 30, 2003. At July 31, 2003, SPR had cash balances of
approximately $19.5 million.

Currently, SPR has a substantial amount of outstanding debt and other
obligations including, but not limited to: $300 million of its unsecured 8 3/4%
Senior Notes due 2005; $240 million of its unsecured 7.93% Senior Notes due
2007; and $300 million of its 7.25% Convertible Notes due 2010.

SPR's future liquidity and its ability to pay the principal of and interest
on its indebtedness depend on SPPC's ability to continue to pay dividends to
SPR, on NPC's financial stability and a restoration of its ability to pay
dividends to SPR, and on SPR's ability to access the capital markets or
otherwise refinance maturing and/or convertible debt. Further adverse
developments at NPC or SPPC, including a material disallowance of deferred
energy costs in future rate cases or an adverse decision in the pending lawsuit
by Enron, could make it difficult to continue to operate outside of bankruptcy.
See Note 5, Dividend Restrictions, for information regarding the dividend
restrictions applicable to NPC and SPPC, and Note 11, Commitments and
Contingencies, for additional information regarding uncertainties that could
impact SPR's liquidity and financial condition.

The provisions that currently restrict dividends payable by NPC or SPPC
have adversely affected SPR's liquidity and will continue to negatively impact
SPR's liquidity until those provisions are no longer in effect. Management is
currently in the process of seeking consent for a modification of the financial
covenant contained in NPC's first mortgage indenture. There can be no assurance
that any such consent can be obtained or that any non-consenting first mortgage
bonds could be redeemed or defeased prior to

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

their stated maturity. The regulatory limitation contained in the Public Utility
Commission of Nevada's (PUCN) Compliance Order, Docket No. 02-4037, dated June
19, 2002, expires on December 31, 2003. Prior to the expiration date of the
Compliance Order, management may seek PUCN approval for a payment of dividends
by NPC or may seek a waiver from the PUCN of the dividend restriction.

Financing Transactions. On February 14, 2003, SPR issued and sold $300
million of its 7.25% Convertible Notes due 2010. Approximately $53.4 million of
the net proceeds from the sale of the notes was used to purchase U.S. government
securities that were pledged to the trustee for the first five interest payments
on the notes payable during the first two and one-half years. A portion of the
remaining net proceeds of the notes was used to repurchase approximately $58.5
million of SPR's Floating Rate Notes due April 20, 2003. Of the remaining net
proceeds, approximately $133 million was used to repay the remainder of SPR's
Floating Rate Notes due April 20, 2003, and the remaining proceeds are available
for general corporate purposes, including the payment of interest on SPR's other
outstanding indebtedness.

The Convertible Notes are not convertible prior to August 14, 2003. At any
time on or after August 14, 2003 through the close of business February 14,
2010, holders of the Convertible Notes may convert their notes into shares of
SPR's common stock and cash. Until SPR has obtained shareholder approval to
permit the Convertible Notes to be fully convertible into shares of common
stock, holders of the Convertible Notes will be entitled to receive 76.7073
shares of common stock and an amount of cash equal to the market value of
142.4564 shares of SPR's common stock at the time of conversion, based on the
average closing price of SPR's common stock over five consecutive trading days,
for each $1,000 principal amount of notes surrendered for conversion. At an
assumed five-day average closing price of $5.00 per share (based on the last
reported sale price of SPR's common stock on August 1, 2003), the total amount
of the cash payable on conversion of the Convertible Notes would be
approximately $214 million. If SPR does not obtain shareholder approval, SPR
will be required to pay the cash portion of any Convertible Notes as to which
the holders request conversion on or after August 14, 2003. The amount of cash
payable on conversion of the Convertible Notes will increase as the average
closing price of SPR's common stock increases. Although management does not
believe it is likely that a significant amount of the Convertible Notes will be
converted in the foreseeable future, in the event that SPR does not have
available funds to pay the cash portion of the Convertible Notes upon the
requested conversion, SPR may have to issue additional debt or equity to raise
the necessary funds. There can be no assurance that SPR will be able to access
the capital markets to issue such additional debt and/or equity or that it will
be able to do so on terms favorable to SPR.

If SPR does obtain shareholder approval, it may elect to satisfy the cash
payment component of the conversion price of the Convertible Notes solely with
shares of common stock. SPR has agreed to use reasonable efforts to obtain
shareholder approval, not later than 180 days after the date of issuance of the
Convertible Notes, for approval to issue and deliver shares of SPR's common
stock in lieu of the cash payment component of the conversion price of the
Convertible Notes. SPR has called a special shareholder meeting for August 11,
2003 to comply with the terms of the Convertible Notes. For further information
regarding the terms of the Convertible Notes, see Note 4, Long-Term Debt.

Effect of Holding Company Structure. Due to its holding company structure,
SPR's right as a common shareholder to receive assets of any of its direct or
indirect subsidiaries upon a subsidiary's liquidation or reorganization is
junior to the claims against the assets of such subsidiary by its creditors.
Therefore, SPR's debt obligations are effectively subordinated to all existing
and future claims of its subsidiaries' creditors, particularly those of NPC and
SPPC, including trade creditors, debt holders, secured creditors, taxing
authorities, guarantee holders and NPC's and SPPC's preferred security holders.
As of June 30, 2003, NPC, SPPC and their subsidiaries had approximately $2.89
billion of debt and other obligations outstanding and approximately $238.9
million of outstanding preferred securities. Although the Utilities are parties
to agreements that limit the amount of additional indebtedness they may incur,
the Utilities retain the ability to incur substantial additional indebtedness
and other liabilities.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The accompanying financial statements do not include any adjustments that
might result from the outcome of the uncertainties discussed above.

NEVADA POWER COMPANY

NPC had cash and cash equivalents of approximately $21.1 million at June
30, 2003. At July 31, 2003, NPC had cash balances of approximately $35.7
million.

In addition to anticipated capital requirements for construction, NPC has
approximately $355 million of debt maturing through the end of 2003. NPC expects
to finance these requirements with internally generated funds, including the
recovery of deferred energy costs, and the issuance of debt.

NPC's liquidity would be significantly affected by an adverse decision in
the lawsuit by Enron, or by unfavorable rulings by the PUCN in future NPC or
SPPC rate cases. Standard and Poor's Rating Group, Inc. (S&P) and Moody's
Investors Service, Inc. (Moody's) have NPC's credit ratings on "negative
outlook" and "stable", respectively. Future downgrades by either S&P or Moody's
could preclude or reduce NPC's access to the capital markets. Furthermore, if
NPC continues to experience financial difficulty or if its credit ratings are
further downgraded, NPC may experience considerable difficulty entering into new
power supply contracts, particularly under traditional payment terms. Most of
NPC's suppliers will not sell power to NPC under traditional payment terms and
are requiring NPC to pre-pay its power requirements or to make more frequent
payments on its power purchases. If NPC does not have sufficient funds or access
to liquidity to pre-pay its power requirements or to make more frequent payments
on its power purchases, and is unable to obtain power through other means, NPC's
results of operations, financial position, and cash flows will be adversely
affected. Adverse developments with respect to any one or a combination of the
foregoing could make it difficult to continue to operate outside of bankruptcy.

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, 2003, $930 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 (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 October 19, 2001. On the basis of (i), (ii) and
(iii) above, as of June 30, 2003, NPC had the capacity to issue approximately
$1.017 billion of additional General and Refunding Mortgage securities. Although
NPC has substantial capacity to issue additional General and Refunding Mortgage
securities on the basis of property additions and retired General and Refunding
Mortgage securities and first mortgage bonds, the financial covenants contained
in NPC's Series E Notes, Receivables Purchase Facility Agreements and NPC's $60
million Credit Agreement limit the amount of additional indebtedness that NPC
may issue and the reasons for which such indebtedness may be issued. NPC has
reserved $125 million of General and Refunding Mortgage bonds for issuance upon
the initial funding of NPC's receivables facility. See Note 3, Short-Term
Borrowings, for information regarding NPC's accounts receivable facility. NPC
intends to use its accounts receivable 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.

The accompanying financial statements do not include any adjustments that
might result from the outcome of the uncertainties discussed above.

SIERRA PACIFIC POWER COMPANY

SPPC had cash and cash equivalents of approximately $86.5 million at June
30, 2003. At July 31, 2003, SPPC had cash balances of approximately $75.6
million.

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In addition to anticipated capital requirements for construction, SPPC has
approximately $21 million of debt maturing through the end of 2003. SPPC expects
to finance these requirements with internally generated funds, including the
recovery of deferred energy costs.

SPPC's future liquidity could be significantly affected by unfavorable
rulings by the PUCN in future SPPC or NPC rate cases. S&P and Moody's have
SPPC's credit ratings on "negative outlook" and "stable", respectively. Future
downgrades by either S&P or Moody's could preclude or reduce SPPC's access to
the capital markets. Furthermore, if SPPC continues to experience financial
difficulty or if its credit ratings are further downgraded, SPPC may experience
considerable difficulty entering into new power supply contracts, particularly
under traditional payment terms. Most of SPPC's suppliers will not sell power to
SPPC under traditional payment terms and are requiring SPPC to pre-pay its power
requirements or to make more frequent payments on its power purchases. If SPPC
does not have sufficient funds or access to liquidity to pre-pay its power
requirements, and is unable to obtain power through other means, SPPC's results
of operations, financial position and cash flows will be adversely affected.
Adverse developments with respect to any one or a combination of the factors and
contingencies set forth above could make it difficult to continue to operate
outside of bankruptcy.

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, 2003, approximately $499.5 million
of SPPC's General and Refunding Mortgage bonds were outstanding. On May 1, 2003,
SPPC issued its $80 million General and Refunding Mortgage Note, Series D, due
2004, to secure SPPC's payment obligations with respect to $80 million of Washoe
County, Nevada, Water Facilities Refunding Revenue Bonds (Sierra Pacific Power
Company Project), Series 2001, which were issued for SPPC's benefit. 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 April 8, 2002. On the
basis of (i), (ii) and (iii) above, as of June 30, 2003, SPPC had the capacity
to issue approximately $364.9 million of additional General and Refunding
Mortgage securities. Although SPPC has substantial capacity to issue additional
General and Refunding Mortgage securities on the basis of property additions and
retired General and Refunding Mortgage securities and first mortgage bonds, the
financial covenants contained in SPPC's Term Loan Agreement and Receivables
Purchase Facility Agreements limit the amount of additional indebtedness that
SPPC may issue and the reasons for which such indebtedness may be issued. SPPC
has reserved $75 million of General and Refunding Mortgage Bonds for issuance
upon the initial funding of its receivables purchase facility. SPPC intends to
use its accounts receivable 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. See Note 3, Short-Term Borrowings, for information regarding
SPPC's accounts receivable facility.

The accompanying financial statements do not include any adjustments that
might result from the outcome of the uncertainties discussed above.

RECLASSIFICATIONS

Certain items previously reported have been reclassified to conform to the
current year's presentation. Net income and shareholders' equity were not
affected by these reclassifications.

NEVADA POWER COMPANY FINANCIAL STATEMENTS

The presentation of NPC's condensed consolidated statement of operations
for the three months and six months ended June 30, 2002, and NPC's condensed
consolidated statement of cash flows for the six months ended June 30, 2002 have
been revised. Specifically, the effects of the revisions were to eliminate

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the line item "Equity in losses of Sierra Pacific Resources" of $(47,571) and
$(52,069) on NPC's Condensed Consolidated Statement of Operations for the three
and six months ended June 30, 2002, respectively, and to eliminate the line item
"Equity in losses of SPR" of $(52,069) on NPC's Condensed Consolidated Statement
of Cash Flows. For additional information regarding this change in presentation,
see Note 1, Summary of Significant Accounting Policies of Notes to Financial
Statements in SPR's, NPC's and SPPC's Annual Reports on Form 10-K for the year
ended December 31, 2002.

DEFERRAL OF ENERGY COSTS

NPC and SPPC implemented deferred energy accounting procedures on March 1,
2001. See Note 1, Summary of Significant Accounting Policies, of Notes to
Financial Statements in SPR's, NPC's, and SPPC's Annual Reports on Form 10-K for
the year ended December 31, 2002, for additional information regarding the
implementation of deferred energy accounting by the Utilities.

The following deferred energy costs were included in the condensed
consolidated balance sheets as of June 30, 2003 (dollars in thousands):

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(1) Credits represent over-collections, that is, the extent to which gas or fuel
and purchased power costs recovered through rates exceed actual gas or fuel
and purchased power costs.

(2) Balances adjusted from amounts presented as of December 31, 2002, reflect,
primarily, a reclassification between amounts for terminated suppliers and
balances pending PUCN approval.

(3) Amounts related to terminated suppliers are discussed in Note 17,
Commitments and Contingencies, of Notes to Financial Statements in SPR's,
NPC's, and SPPC's Annual Reports on Form 10-K for the year ended December
31, 2002.

STOCK COMPENSATION PLANS

In December 2002, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure," as an amendment to SFAS
No. 123, "Accounting for Stock-Based Compensation." SPR has previously adopted
the disclosure-only provisions of SFAS No. 123, and as of December 31, 2002 has
adopted the updated disclosure requirements set forth in SFAS No. 148. At June
30, 2003, SPR had several stock-based compensation plans which are described
more fully in Note 15 "Stock Compensation Plans," of Notes to Financial
Statements in SPR's, NPC's, and SPPC's Annual Reports on Form 10-K for the year
ended December 31, 2002. SPR applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its stock option
plans. Accordingly, no compensation cost has been recognized for nonqualified
stock options and the employee stock purchase plan. Had compensation cost for
SPR's nonqualified stock options and the employee stock purchase plan been
determined based on the fair value at the grant dates for awards under those
plans, consistent with the provisions of SFAS No. 123, SPR's loss applicable to
common stock

17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

would have been increased to the pro forma amounts indicated below (dollars in
thousands, except loss per share):

RECENT PRONOUNCEMENTS

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees" (FIN 45), which
elaborates on the disclosures to be made in interim and annual financial
statements of a guarantor about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing a guarantee. Initial recognition and measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December 15,
2002. As of June 30, 2003, all guarantees of SPR and its subsidiaries were
intercompany, whereby the parent issued the guarantees on behalf of its
consolidated subsidiaries to a third party. Therefore, there was no impact on
the financial position, results of operation or cash flows of SPR, NPC or SPPC.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which elaborates on Accounting Research
Bulletin No. 51, "Consolidated Financial Statements." Among other requirements,
FIN 46 provides that a variable interest entity be consolidated by the
enterprise that is the primary beneficiary of the variable interest entity. FIN
46 applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
Management is currently reviewing the effect of adopting this statement on the
financial position, results of operation or cash flows of SPR, NPC or SPPC.

On April 30, 2003, the FASB issued SFAS No. 149, which amends accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Statement clarifies the
circumstances under which a contract with an initial net investment meets the
characteristics of a derivative as discussed in SFAS 133. In addition, SFAS 149
clarifies when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

June 30, 2003. Management is currently reviewing the effect of adopting this
statement on the financial position and results of operations of SPR, NPC and
SPPC.

On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Liabilities and Equity," which
requires that certain financial instruments with characteristics of both
liabilities and equities be classified as liabilities by their issuers. The
provisions of SFAS No. 150, which also include a number of new disclosure
requirements, are effective for (1) instruments entered into or modified after
May 31, 2003 and (2) pre-existing instruments as of the beginning of the first
interim period that commences after June 15, 2003. As a result, management
expects that NPC's obligated mandatorily redeemable preferred trust securities
will be classified as a liability once SFAS 150 goes into effect, which will be
the quarter ending September 30, 2003. Additionally, management will continue to
review the effect of adopting this statement on the financial position and
results of operations of SPR, NPC and SPPC.

NOTE 2. ASSET RETIREMENT OBLIGATIONS (AROS)

Effective January 1, 2003, the Utilities adopted the provisions of SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 generally
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or the normal
operation of a long-lived asset. SFAS No. 143 requires NPC to recognize an
estimated liability for the retirement of generation plant assets specified in
land leases for NPC's jointly-owned Navajo generating station because, at the
expiration of the leases, the leases require the lessees to remove the
facilities upon request of the Navajo Nation. However, the retirement obligation
and corresponding charges recognized were immaterial to the financial statements
of NPC. NPC also redesignated amounts from Accumulated Depreciation to a
regulatory liability in order to reflect the estimated costs of removal
collected through rates. NPC amortizes the amount added to Electric Plant In
Service and recognizes accretion expense in connection with the discounted
liability over the estimated remaining life of the Navajo generating station
assets. SPPC has no significant asset retirement obligations.

NPC and SPPC also collect removal costs in regulated rates for certain
assets that do not have associated legal asset retirement obligations. As of
June 30, 2003, NPC and SPPC estimate that they had approximately $133 million
and $151 million related to such removal costs recorded in Accumulated
Depreciation, respectively.

NOTE 3. SHORT-TERM BORROWINGS

NEVADA POWER COMPANY

On June 30, 2003, NPC entered into a Credit Agreement, which provides for a
$60 million revolving credit facility to provide additional liquidity to NPC for
its summer 2003 power purchases. As of July 31, 2003, NPC had borrowed $20
million under this credit facility.

NPC's Credit Agreement prohibits payments to SPR in respect of NPC's common
stock and provides that NPC's ratio of consolidated total debt to consolidated
total capitalization may not exceed .65 to 1.00. The Credit Facility, which is
secured by NPC's $60 million Series F General and Refunding Mortgage Bond, will
expire no later than September 8, 2003.

On October 29, 2002, NPC established an accounts receivable purchase
facility of up to $125 million. The accounts receivable purchase facility
expires October 28, 2003. Currently, NPC intends to negotiate an extension of
this facility. 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 purchase 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

19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

notes backed by the purchased receivables. 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. As of June 30, 2003, this facility
had not been activated.

SIERRA PACIFIC POWER COMPANY

On October 29, 2002, SPPC established an accounts receivable purchase
facility of up to $75 million. The accounts receivable purchase facility expires
October 28, 2003. Currently, SPPC intends to negotiate an extension of this
facility. If SPPC elects to activate the receivables purchase facility, SPPC
will sell all of its accounts receivable generated from the sale of electricity
and gas 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. 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. As of June 30, 2003, this facility
had not been activated.

20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4. LONG-TERM DEBT

Substantially all utility plant owned by NPC and SPPC is subject to the
liens of their respective indentures under which their First Mortgage bonds and
General and Refunding Mortgage bonds are issued.

SIERRA PACIFIC RESOURCES

In January 2003, SPR acquired $8.75 million aggregate principal amount of
its Floating Rate Notes due April 20, 2003 in exchange for approximately 1.3
million shares of its common stock, in two privately-negotiated transactions
exempt from the registration requirements of the Securities Act of 1933.

On February 5, 2003, SPR acquired 2.1 million of Premium Income Equity
Securities (PIES) including approximately $104.8 million of 7.93% Senior Notes
due 2007 that are a component of the PIES, in exchange for approximately 13.66
million shares of its common stock, in five privately negotiated transactions
exempt from the registration requirements of the Securities Act.

On February 14, 2003, SPR issued and sold $300 million of its 7.25%
Convertible Notes due 2010. Approximately $53.4 million of the net proceeds from
the sale of the notes was used to purchase U.S. government securities that were
pledged to the trustee for the first five interest payments on the notes payable
during the first two and one-half years. A portion of the remaining net proceeds
of the notes was used to repurchase approximately $58.5 million of SPR's
Floating Rate Notes due April 20, 2003. Of the remaining net proceeds,
approximately $133 million was used to repay SPR's Floating Rate Notes due April
20, 2003, and the remaining proceeds are available for general corporate
purposes. The Convertible Notes were issued with registration rights.

The Convertible Notes are not convertible prior to August 14, 2003. At any
time on or after August 14, 2003 through the close of business February 14,
2010, holders of the Convertible Notes may convert their notes into shares of
SPR's common stock. Until SPR has obtained shareholder approval to permit the
Convertible Notes to be fully convertible into shares of common stock, holders
of the Convertible Notes will be entitled to receive 76.7073 shares of common
stock and an amount of cash equal to the market value of 142.4564 shares of our
common stock at the time of conversion, based on the average closing price of
SPR's common stock over five consecutive trading days, for each $1,000 principal
amount of notes surrendered for conversion. At an assumed five-day average
closing price of $5.00 per share (based on the last reported sale price of SPR's
common stock August 1, 2003), the total amount of the cash payable on conversion
of the Convertible Notes would be approximately $214 million. If SPR does not
obtain shareholder approval, SPR will be required to pay the cash portion of any
Convertible Notes as to which the holders request conversion on or after August
14, 2003. The amount of cash payable on conversion of the Convertible Notes will
increase as the average closing price of SPR's common stock increases. Although
management does not believe it is likely that a significant amount of the
Convertible Notes will be converted in the foreseeable future, in the event that
SPR does not have available funds to pay the cash portion of the Convertible
Notes upon the requested conversion, SPR may have to issue additional debt or
equity to raise the necessary funds. There can be no assurance that SPR will be
able to access the capital markets to issue such additional debt and/or equity
or that it will be able to do so on terms favorable to SPR.

If SPR does obtain shareholder approval, it may elect to satisfy the cash
payment component of the conversion price of the Convertible Notes solely with
shares of common stock. SPR has agreed to use reasonable efforts to obtain
shareholder approval, not later than 180 days after the date of issuance of the
Convertible Notes, to issue and deliver shares of SPR's common stock in lieu of
the cash payment component of the conversion price of the Convertible Notes. SPR
has called a special shareholder meeting for August 11, 2003 to comply with the
terms of the Convertible Notes.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In addition, until SPR has obtained shareholder approval to permit the
Convertible Notes to be fully convertible into shares of common stock, SPR must
satisfy part of this obligation in cash. Accordingly, the portion of the
obligation relating to the amount to be settled upon conversion by issuing
shares is classified as a long-term liability and the portion to be settled with
working capital upon demand by the holder is classified as a current maturity.

The Convertible Notes provide for the payment of dividends to the holders
in an amount equal to any per share dividends on SPR common stock that would
have been payable to the holders if the holders of the notes had converted their
notes into shares of common stock at the applicable conversion rate on the
record date for such dividend.

The indenture under which the Convertible Notes were issued does not
contain any financial covenants or any restrictions on the payment of dividends,
the repurchase of SPR's securities or the incurrence of indebtedness. The
indenture does allow the holders of the Convertible Notes to require SPR to
repurchase all or a portion of the holders' Convertible Notes upon a change of
control. The indenture also provides for an event of default if SPR or any of
its significant subsidiaries, including NPC and SPPC, fails to pay any
indebtedness in excess of $10 million or has any indebtedness of $10 million or
more accelerated and declared due and payable. For further information regarding
accounting for the conversion option, see Note 10, Derivatives and Hedging
Activities.

SIERRA PACIFIC POWER COMPANY

On May 1, 2003, SPPC's $80 million Washoe County, Nevada, Water Facilities
Refunding Revenue Bonds, Series 2001, were successfully remarketed. The interest
rate on the bonds was adjusted from their prior two-year 5.75% term rate to a
7.50 % term rate for the period of May 1, 2003 to and including May 3, 2004. The
bonds will be subject to remarketing on May 3, 2004 and will continue to be
included in current maturities of long-term debt. 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 principal amount, plus
accrued interest. From May 1, 2003 to and including May 3, 2004, SPPC's payment
and purchase obligations in respect of the bonds are secured by SPPC's $80
million General and Refunding Mortgage Note, Series D, due 2004.

As of June 30, 2003, NPC's, SPPC's and SPR's aggregate annual amount of
maturities for long-term debt (including obligations related to capital leases)
for the balance of 2003, each of the next four years and thereafter is shown
below (in thousands of dollars):

* The 2003 SPR maturities of $162,495 include $142,180 of SPR's
Convertible Notes due 2010 that are deemed current in 2003, discussed above.

22

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5. DIVIDEND RESTRICTIONS

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 NPC and SPPC 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 that the Utilities may
declare and pay, and to federal statutory limitation on the payment of
dividends. In addition, certain agreements entered into by the Utilities set
restrictions on the amount of dividends they 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.

NEVADA POWER COMPANY

First Mortgage Indenture. NPC's first mortgage indenture limits the
cumulative amount of dividends and other distributions that NPC may pay on its
capital stock to the cumulative net earnings of NPC since 1953, subject to
adjustments for the net proceeds of sales of capital stock 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 preclude payment of
dividends until NPC, over time, generates sufficient earnings to eliminate the
deficit under this provision (which was approximately $279.3 million as of June
30, 2003), unless the restriction is waived, amended, or removed by the consent
of the first mortgage bondholders, or the first mortgage bonds are redeemed or
defeased. Management is currently in the process of seeking consent for the
modification of this restriction. There can be no assurance that any such
consent can be obtained or that any non-consenting first mortgage bonds could be
redeemed or defeased prior to their stated maturity. Under this provision, NPC
continues to have capacity to repurchase or redeem shares of its capital stock.

Series E Notes. NPC's 10 7/8% General and Refunding Mortgage Notes, Series
E, due 2009, which were issued on October 29, 2002, limit the amount of payments
in respect of common stock that NPC may pay to SPR. However, that limitation
does not apply to payments by NPC to enable SPR to pay its reasonable fees and
expenses (including, but not limited to, interest on SPR's indebtedness and
payment obligations on account of SPR's PIES) provided that:

- those payments do not exceed $60 million for any one calendar year,

- those payments comply with any regulatory restrictions then applicable to
NPC, and

- the ratio of consolidated cash flow to fixed charges for NPC's most
recently ended four full fiscal quarters immediately preceding the date
of payment is at least 1.75 to 1.

The terms of the Series E Notes also permit NPC to make payments to SPR in
an aggregate amount not to exceed $15 million from the date of the issuance of
the Series E Notes. In addition, NPC may make dividend payments to SPR in excess
of the amounts described above so long as, at the time of payment and after
giving effect to the payment:

- there are no defaults or events of default with respect to the Series E
Notes,

- NPC can meet a fixed charge coverage ratio test, and

- the total amount of such dividends is less than:

- the sum of 50% of NPC's consolidated net income measured on a quarterly
basis cumulative of all quarters from the date of issuance of the Series
E Notes, plus

- 100% of NPC's aggregate net cash proceeds from the issuance or sale of
certain equity or convertible debt securities of NPC, plus

23

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- the lesser of cash return of capital or the initial amount of certain
restricted investments, plus

- the fair market value of NPC's investment in certain subsidiaries.

If NPC's Series E Notes are upgraded to investment grade by both Moody's
and S&P, these dividend restrictions will be suspended and will no longer be in
effect so long as the Series E Notes remain investment grade.

NPC's $60 million Credit Agreement. On June 30, 2003, NPC established a
$60 million Credit Facility, which expires no later than September 8, 2003. This
facility prohibits payments to SPR in respect of NPC's common stock.

Accounts Receivable Facility. On October 29, 2002, NPC established an
accounts receivable purchase facility, which expires on October 28, 2003. The
agreements relating to the receivables purchase facility contain various
conditions, including a limitation on the payment of dividends by NPC to SPR
that is identical to the limitation contained in NPC's General and Refunding
Mortgage Notes, Series E, described above.

Preferred Trust Securities. 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.

PUCN Compliance Order. 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. As of June 30, 2003, NPC's equity
ratio was 35.3%. Prior to the expiration date of the Compliance Order,
management may seek PUCN approval for a payment of dividends by NPC or may seek
a waiver from the PUCN of the dividend restriction.

Federal Power Act. NPC is subject to the provisions of the Federal Power
Act that state that dividends cannot be paid out of funds that are properly
included in capital accounts. Although the meaning of this provision is unclear,
it could be interpreted to impose an additional material limitation on a
utility's ability to pay dividends in the absence of retained earnings.

SIERRA PACIFIC POWER COMPANY

Term Loan Agreement. SPPC's Term Loan Agreement dated October 30, 2002, as
amended, which expires October 31, 2005, limits the amount of dividends that
SPPC may pay to SPR. However, that limitation does not apply to payments by SPPC
to enable SPR to pay its reasonable fees and expenses (including, but not
limited to, interest on SPR's indebtedness and payment obligations on account of
SPR's PIES) provided that those payments do not exceed $90 million, $80 million
and $60 million in the aggregate for the twelve month periods ending on October
30, 2003, 2004 and 2005, respectively. The Term Loan Agreement also permits SPPC
to make dividend payments to SPR in an aggregate amount not to exceed $10
million during the term of the Term Loan Agreement. In addition, SPPC may make
dividend payments to SPR in excess of the amounts described above so long as, at
the time of the payment and after giving effect to the payment, there are no
defaults or events of default under the Term Loan Agreement, and such amounts,
when aggregated with the amount of dividends paid to SPR by SPPC since the date
of execution of the Term Loan Agreement, do not exceed the sum of:

- (i) 50% of SPPC's Consolidated Net Income for the period commencing
January 1, 2003 and ending with last day of fiscal quarter most recently
completed prior to the date of the contemplated dividend payment, plus

24

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- (ii) the aggregate amount of cash received by SPPC from SPR as equity
contributions on its common stock during such period.

Accounts Receivable Facility. On October 29, 2002, SPPC established an
accounts receivable purchase facility, which expires on October 28, 2003. The
agreements relating to the receivables purchase facility contain various
conditions, including a limitation on the payment of dividends by SPPC to SPR
that is identical to the limitation contained in SPPC's Term Loan Agreement,
described above.

Articles of Incorporation. 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. SPPC's Articles
also prohibit SPPC from declaring or paying any dividends on any shares of
common stock (other than dividends payable in shares of common stock), or making
any other distribution on any shares of common stock or any expenditures for the
purchase, redemption or other retirement for a consideration of shares of common
stock (other than in exchange for or from the proceeds of the sale 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. At the present time, SPPC
believes that these restrictions do not materially limit its ability to pay
dividends and/or to purchase or redeem shares of its common stock.

Federal Power Act. SPPC is subject to the provisions of the Federal Power
Act that state that dividends cannot be paid out of funds that are properly
included in capital accounts. Although the meaning of this provision is unclear,
it could be interpreted to impose an additional material limitation on a
utility's ability to pay dividends in the absence of retained earnings.

NOTE 6. EARNINGS PER SHARE (SPR)

The following table outlines the calculation for earnings per share (EPS).
The difference, if any, between Basic EPS and Diluted EPS is due to common stock
equivalent shares resulting from stock options, the employee stock purchase
plan, performance and restricted stock plans and the non-employee director stock
plan. However, due to net losses for the three-and six-month periods ended June
30, 2003 and 2002, these items are anti-dilutive. Accordingly, Diluted EPS for
these periods are computed using the weighted average shares outstanding before
dilution. Common stock equivalents were determined using the treasury stock
method.

25

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)