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NVE > SEC Filings for NVE > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for NV ENERGY, INC.


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Forward-Looking Statements and Risk Factors

The information in this Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to anticipated financial performance, management's plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions and other matters.

Words such as "anticipate," "believe," "estimate," "expect," "intend," "plan" and "objective" and other similar expressions identify those statements that are forward-looking. These statements are based on management's beliefs and assumptions and on information currently available to management. Actual results could differ materially from those contemplated by the forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such statements, factors that could cause the actual results of NVE, NPC or SPPC (NPC and SPPC are collectively referred to as the "Utilities") to differ materially from those contemplated in any forward-looking statement include, among others, the following:

(1) economic conditions, inflation rates, monetary policy, unemployment rates, customer bankruptcies, including major gaming customers with significant debt maturities, weaker housing markets, each of which affect customer growth, customer collections, customer demand and usage patterns;

(2) changes in the rate of industrial, commercial and residential growth in the service territories of the Utilities, and the impact of energy conservation programs, which could affect the Utilities' ability to accurately forecast electric and gas demand;

(3) construction risks, including but not limited to those associated with ON Line, such as difficulty in securing adequate skilled labor, cost and availability of materials and equipment, third-party disputes, equipment failure, engineering and design failure, work accidents, fire or explosions, business interruptions, recovery of possible cost overruns, delay of in-service dates, and pollution and environmental damage;

(4) changes in and/or implementation of environmental laws or regulations, including the imposition of limits on emissions of carbon or other pollutants from electric generating facilities, which could significantly affect the Utilities existing operations as well as our construction program;

(5) security breaches of our information technology or supervising control and data systems, or the systems of others upon which the Utilities rely, whether through cyber-attack, cyber-crime, sabotage, accident or other means, which may affect our ability to prevent system or service disruptions, generating facility shutdowns or disclosure of confidential corporate or customer information;

(6) unfavorable rulings in rate or other cases filed or to be filed by the Utilities with the PUCN, or with FERC, including, GRCs, the periodic applications to recover costs for fuel and purchased power that have been recorded by the Utilities in their deferred energy accounts, deferred natural gas costs recorded by SPPC for its gas distribution business, renewable energy and energy efficiency recovery programs;

(7) unseasonable or severe weather, drought, wildfire and other natural phenomena, which could affect the Utilities' customers' demand for power, seriously impact the Utilities' ability and/or cost to procure adequate supplies of fuel or purchased power, affect the amount of water available for electric generating plants in the southwestern U.S., and have other adverse effects on our business;

(8) employee workforce factors, changes in and renewals of collective bargaining unit agreements, strikes or work stoppages, an aging workforce, the ability to adjust the labor cost structure to changes in growth within our service territories;

(9) whether the Utilities' newly installed advanced metering system will integrate with other computer information systems, perform as expected, and in all other respects, meet operational, commercial and regulatory requirements;


(10) the effect of existing or future Nevada, or federal laws or regulations affecting the electric industry, including those which could allow additional customers to choose new electricity suppliers, or use alternative sources of energy, or change the conditions under which they may do so;

(11) whether the Utilities will be able to continue to obtain fuel and power from their suppliers on favorable payment terms and favorable prices, particularly in the event of unanticipated power demands, current suspension of the Utilities' commodity hedging programs, physical availability, sharp increases in the prices for fuel (including increases in long-term transportation costs) and/or power, or a ratings downgrade;

(12) changes in and/or implementation of FERC and NERC mandatory reliability, security, and other requirements for system infrastructure, which could significantly affect existing and future operations;

(13) wholesale market conditions, including availability of power on the spot market and the availability to enter into commodity financial hedges with creditworthy counterparties, including the impact as a result of the Dodd-Frank Act on counterparties who are lenders under our revolving credit facilities, which may affect the prices the Utilities have to pay for power as well as the prices at which the Utilities can sell any excess power;

(14) explosions, fires, accidents and mechanical breakdowns that may occur while operating and maintaining an electric and natural gas system in the Utilities' service territory, including gas distribution services that the Utilities may rely upon, that can cause unplanned outages, reduce generating output, damage the Utilities' assets or operations, subject the Utilities to third-party claims for property damage, personal injury or loss of life, or result in the imposition of civil, criminal, or regulatory fines or penalties on the Utilities;

(15) the extent to which NVE or the Utilities incur costs in connection with third-party claims or litigation that are not recoverable through insurance, rates, or from other third parties;

(16) the ability and terms upon which NVE, NPC and SPPC will be able to access the capital markets to support their capital needs, particularly in the event of: volatility in the global credit markets as a result of the viability of European sovereign debt or other problems, changes in availability and cost of capital either due to market conditions or as a result of unfavorable rulings by the PUCN, a downgrade of the current debt ratings of NVE, NPC or SPPC, and/or interest rate fluctuations;

(17) whether NVE's BOD will declare NVE's common stock dividends based on the BOD's periodic consideration of factors ordinarily affecting dividend policy, such as current and prospective financial condition, earnings and liquidity, prospective business conditions, regulatory factors, and restrictions contained in NVE's and the Utilities' agreements;

(18) whether the Utilities will be able to continue to pay NVE dividends under the terms of their respective financing and credit agreements and limitations imposed by the Federal Power Act;

(19) whether the Utilities can procure, obtain, and/or maintain sufficient renewable energy sources in each compliance year to satisfy the Portfolio Standard in the State of Nevada;

(20) changes in the business of the Utilities' major customers engaged in gold mining or gaming, including availability and cost of capital or power demands, which may result in changes in the demand for the Utilities' services, including the effect on the Nevada gaming industry from the opening of additional gaming establishments in other states and internationally;

(21) further increases in the unfunded liability or changes in actuarial assumptions, the interest rate environment and the actual return on plan assets for our pension and other post-retirement plans, which can affect future funding obligations, costs and pension and other post-retirement plan liabilities;

(22) the effect that any future terrorist attacks, wars, threats of war or pandemics may have on the tourism and gaming industries in Nevada, particularly in Las Vegas, as well as on the national economy in general;

(23) changes in tax or accounting matters or other laws and regulations to which NVE or the Utilities are subject or which change the rate of federal or state taxes payable by our shareholders or common stock dividends;

(24) whether, following the Great Basin Water Network, et al. v. Nevada State Engineer litigation, certain permitted water rights of the SNWA that are used to supply water to the Utilities' power production plants and service territories could be re-opened, which could adversely impact the operations of those plants and future growth and customer usage patterns; and


(25) unusual or unanticipated changes in normal business operations, including unusual maintenance or repairs.

Other factors and assumptions not identified above may also have been involved in deriving forward-looking statements, and the failure of those other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected. NVE, NPC and SPPC assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements.

NOTE REGARDING RELIANCE ON STATEMENTS IN OUR CONTRACTS

In reviewing the agreements filed as exhibits to this Quarterly Report on Form 10-Q, please remember that they are filed to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about NVE, the Utilities or the other parties to the agreements. The agreements contain representations and warranties by each of the parties that are specific to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties to the agreement if those statements prove to be inaccurate;
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
may apply standards of materiality in a way that is different from what may be viewed as material to investors; and
were made only as of the date of the applicable agreement or such other date or dates as may be specified in such agreements and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.

NOTE REGARDING STATISTICAL DATA

The statistical data used throughout this 10-Q, other than data relating specifically to NVE and its subsidiaries, are based upon independent industry publications, government publications, reports by market research firms or other published independent sources. NVE and the Utilities did not commission any of these publications or reports. These publications generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy or completeness of such information. While NVE and the Utilities believe that each of these studies and publications is reliable, NVE and the Utilities have not independently verified such data and make no representation as to the accuracy of such information.


EXECUTIVE OVERVIEW

Management's Discussion and Analysis of Financial Condition and Results of Operations explains the general financial condition and the results of operations of NVE and its two primary subsidiaries, NPC and SPPC, collectively referred to as the "Utilities" (references to "we," "us" and "our" refer to NVE and the Utilities collectively), and includes discussion of the following:

Critical Accounting Policies and Estimates:
Recent Pronouncements
For each of NVE, NPC and SPPC:
Results of Operations
Analysis of Cash Flows
Liquidity and Capital Resources

NVE's Utilities operate three regulated business segments which are NPC electric, SPPC electric and SPPC natural gas. The Utilities are public utilities engaged in the generation, transmission, distribution and sale of electricity and, in the case of SPPC, sale of natural gas. Other operations consist mainly of unregulated operations and the holding company operations. The Utilities are the principal operating subsidiaries of NVE and account for substantially all of NVE's assets and revenues. NVE, NPC and SPPC are separate filers for SEC reporting purposes and as such this discussion has been divided to reflect the individual filers (NVE, NPC and SPPC), except for discussions that relate to all three entities or the Utilities.

For the three months ended September 30, 2012, NVE recognized net income of $223.2 million, compared to $173.5 million for the same period in 2011. The increase in net income is primarily due to an increase in gross margin of $62.5 million (pre-tax) as a result of an increase in BTGR rates at NPC, effective January 1, 2012, an increase in usage by certain industrial customers, slight growth in the number of customers and to a lesser extent weather. See the Utilities' respective Results of Operations, for further discussion of gross margin. Also contributing to the increase in net income was a $6.2 million (pre-tax) decrease in interest expense, excluding AFUDC-debt, an increase in other income primarily due to a $5.5 million (pre-tax) gain on sale of telecommunication towers recorded in 2012 (reference Note 3, Regulatory Actions, in the Condensed Notes to Financial Statements in Form 10-K) and $1.4 million
(pre-tax) gains on investments in 2012, as well as, a $3.5 million (pre-tax)
loss on investments recorded in 2011. Offsetting the increase in net income was the absence of an $8 million reduction in maintenance expense recorded in 2011 as a result of the final calculation of a termination amount for a long term service agreement for the Higgins Generating Station which was previously expensed in 2010.

For the nine months ended September 30, 2012, NVE recognized net income of $304.8 million compared to $188.7 million for the same period in 2011. The increase in net income, similar to the three month period, is primarily due to an increase in gross margin of $170.0 million (pre-tax); however, in the case of usage, weather had a greater impact particularly during the second quarter of 2012. Also contributing to the increase from the prior period was a $17.4 million (pre-tax) decrease in interest expense, excluding AFUDC-debt, and a $5.8 million (pre-tax) adjustment recorded in the second quarter of 2011, as a result of an order from the PUCN adjusting EEIR revenue recorded in 2010. For further discussion of the EEIR adjustment, see Note 3, Regulatory Actions, EEIR, of the Notes to Financial Statements in the 2011 Form 10-K. Further contributing to the increase in net income was a $5.5 million (pre-tax) gain on sale of telecommunication towers recorded in 2012 (reference Note 3, Regulatory Actions, in the Condensed Notes to Financial Statements in Form 10-K), $2.3 million
(pre-tax) gains on investments in 2012, as well as, a $2.8 million (pre-tax)
loss on investments recorded in 2011, and a $4.9 million (pre-tax) construction contract settlement related to the Harry Allen Generating Station. These increases were partially offset by an increase in depreciation expense of $15.2 million (pre-tax) and a reduction in AFUDC (debt and equity) of $11.1 million (pre-tax), primarily due to the completion of the Harry Allen Generating Station in May 2011. Further offsetting the increase in net income was the absence of an $8 million reduction in maintenance expense recorded in 2011 as a result of the final calculation of a termination amount for a long term service agreement for the Higgins Generating Station which was previously expensed in 2010.

The Utilities are regulated by the FERC and the PUCN. The FERC has jurisdiction under the Federal Power Act with respect to wholesale rates, service, interconnection, accounting, and other matters in connection with the Utilities' sale of electricity for resale and interstate transmission. The FERC also has jurisdiction over the natural gas pipeline companies from which the Utilities take service. The PUCN has authority over rates charged to retail customers, the issuance of securities by the Utilities and transactions with affiliated parties. As a result of regulation, many of the fundamental business decisions of the Utilities, as well as the ROR they are permitted to earn on their utility assets, are subject to the approval of governmental agencies.

The Utilities' revenues and operating income are subject to fluctuations during the year due to impacts that seasonal weather, rate changes, and customer usage patterns have on demand for electric energy and resources. NPC is a summer peaking utility experiencing its highest retail energy sales in response to the demand for air conditioning. SPPC's electric system peak typically


occurs in the summer, while its gas business typically peaks in the winter. The variations in energy usage due to varying weather, customer growth and other energy usage patterns, including energy efficiency and conservation measures, necessitates a continual balancing of loads and resources and purchases and sales of energy under short and long term contracts. As a result, the prudent management and optimization of available resources has a direct effect on the operating and financial performance of the Utilities. Additionally, the timely recovery of purchased power and fuel costs, and other costs, and the ability to earn a fair return on investments are essential to the operating and financial performance of the Utilities.

Future Challenges

For the remainder of 2012 NVE and the Utilities must continue to balance the needs of our customers and regulatory requirements while still providing value to our shareholders. As customer growth and demand have stabilized, the Utilities are transitioning from an emphasis on capital investment to an emphasis on optimizing our assets and resources. The Utilities believe they are entering a period of decreasing need for rate relief, more stable earnings, improving returns and sustained free cash flow. We expect that this transition will allow NVE to build shareholder value through a combination of increasing its common stock dividend payout ratio, strengthening its capital structure and considering new investment opportunities. On May 7, 2012, the BOD approved a dividend policy, subject to its consideration of factors ordinarily affecting dividend policy, the objective of which is to achieve a dividend payout ratio of 55% to 65%. However, the accomplishment of such target may be over a period of time, which management is unable to predict at this time, and may be affected by certain challenges including, but not limited to:

Economic conditions in Nevada;
Executing the Evolution of Energy Strategy; and
Managing our regulatory environment.

Economic Conditions

Leading economic indicators for Nevada suggest that improvements in economic conditions will be very slow. Although the unemployment rate in Nevada remains above the national average, it has improved over the past year.

Economic conditions in Nevada have a significant influence on NVE's business decisions as we consider various interrelated factors including:

customer growth;
customer usage;
load factors;
managing operating and maintenance expenses within projected revenue without compromising safety, reliability and efficiency;
pressure on regulators to limit necessary rate increases or otherwise lessen rate impacts upon customers;
collections on accounts receivable; and
future capital projects and capital requirements.

Executing the Evolution of Energy Strategy

As discussed in their 2011 Form 10-K, NVE and the Utilities have transitioned from their three-part energy strategy to the Evolution of Energy Strategy outlined below, with less emphasis on capital investment to more emphasis on optimizing our assets and resources.

Evolution of Energy Strategy:

Empower customers through more focused energy efficiency programs
Pursue cost-effective renewable energy initiatives
Optimize generation efficiency and transmission facilities
Engage employees to improve processes, reduce costs, and enhance performance

Empower customers through more focused energy efficiency programs

The Utilities will continue with the implementation of NV Energize, which not only provides metering and customer service operating savings, but will also provide customers with better opportunities to become more energy efficient. NVE's traditional conservation and energy efficiency programs, which have focused on behavioral change and technology replacement, will be


enhanced by the new features enabled by NV Energize. Specifically, customers will have access to better information to help them manage their energy usage and select from enhanced energy efficiency options, including demand response and pricing programs. Through September 30, 2012, NVE has installed approximately 1.1 million Smart Meters in Nevada. NVE expected to have approximately 1.4 million meters installed statewide by the end of 2012; however, as alternative metering options are currently under consideration by the PUCN and not expected for final decision until sometime during the fourth quarter, NVE now anticipates the completion of the meter deployment to be in early 2013. The NV Energize capabilities will allow NVE to help customers implement the most cost-effective mix of energy efficiency and conservation options that will also qualify toward fulfillment of the Portfolio Standard.

Pursue cost-effective renewable energy initiatives

NVE must strive to effectively balance the need to meet the Portfolio Standard with the changes in load forecast and the uncertainty of renewable energy project development, either for financial or resource related reasons. In 2011, Nevada's Portfolio Standard was 15%. Both NPC and SPPC surpassed the minimum PEC requirement achieving 16.7% and 24.9%, respectively, through eligible resources in 2011. This represented the culmination of several years of developing a portfolio of diverse renewable resources throughout Nevada. While NVE is better positioned to meet the continued challenge based on recent renewable successes, NVE remains committed to incorporating clean, cost-effective renewable energy into its portfolio. As part of its continued commitment to renewable energy, NVE will continue to seek the best and most cost effective opportunities that will benefit our state, customers and environment. Depending on its needs and continuous analysis of the existing portfolio, NVE has a number of tools available to seek renewable energy values for our customers. These tools may include issuing requests for proposals for new renewable energy contracts, exploring opportunities to either jointly construct or develop projects using wind, geothermal and solar, undertaking additional short-term purchases from existing renewable facilities and restructuring existing renewable relationships for the benefit of our customers.

The Portfolio Standard requires a specific percentage of an electric service provider's total retail energy sales to be obtained from renewable energy resources. Renewable resources include biomass, geothermal, solar, waterpower, wind and qualified recovered energy generation projects. In addition, the Portfolio Standard allows energy efficiency measures from qualified conservation programs to meet up to 25% of the portfolio percentage. In 2012, the Utilities are required to obtain an amount of PECs equivalent to 15% of their total retail energy from renewables. Currently, the Portfolio Standard increases to 18% for 2013 and 2014, to 20% in 2015, after which it increases to 22% for the years 2020 through 2024, and to 25% for 2025 and beyond. Moreover, not less than 5% of the total Portfolio Standard must be satisfied from solar resources until 2016 when a minimum of 6% must be solar.

The Utilities acquire PECs through competitively-priced purchase power contracts, investments in renewable generating facilities and DSM programs. NVE seeks to meet the standard using the most cost-effective means for our customers and to pursue the best-value options that are available to the Utilities. In addition to the foregoing, this may also include economical short-term purchases of PECs (often from outside of Nevada) to fulfill projected shortfalls due to the attrition or timing of development of renewable energy projects, weather variability, regulatory/legal changes, or other supplier issues.

Optimize generation efficiency and transmission facilities

Since 2006, when NVE began its energy independence initiative, the Utilities have added approximately 3,800 MWs (nominally rated) of internal generation.
NVE has the ability to obtain approximately 80% of its energy from internal generation. In 2012, NVE's management continues to strive to optimize the Utilities' energy portfolio in order to meet load obligations in a cost-effective and reliable manner. In addition, to the extent the Utilities have the economical opportunity to sell excess capacity or energy, they may enter into such transactions to reduce overall energy costs. NVE anticipates it will have sufficient resources to meet its forecasted load requirements for 2012. However, resource adequacy could be affected by a number of factors, including the retirement of generating stations, plant outages, the timing of commercial operation of renewable energy projects and associated purchase power agreements, customer behavior with respect to energy efficiency and conservation programs, and environmental regulations which may limit our ability to operate certain generating units.

The construction of the ON Line will enable us to optimize our transmission capabilities. Upon completion, the ON Line will connect NVE's southern and northern service territories and, pending certain state and federal regulatory approvals, will provide the ability to jointly dispatch energy throughout the state and provide access to renewable energy resources in parts of northern and eastern Nevada, which will enhance NVE's ability to manage its Portfolio Standard, discussed above, and optimize its generating facilities.

ON Line is Phase 1 of a Joint Project between the Utilities and GBT-South. The Joint Project consists of two phases. In Phase 1 of the Joint Project, the parties would complete construction of a 500 kV interconnection between the Robinson Summit


substation on the SPPC system and the Harry Allen substation on the NPC system. The Utilities own a 25% interest in ON Line and have entered into a TUA with GBT-South for its 75% interest in ON Line. The Utilities' 25% interest in ON Line, which approximates $138 million (based on the revised costs, discussed below) will be allocated 95% and 5% to NPC and SPPC, respectively. The Utilities will have rights to 100% of the capacity of ON Line, which is . . .

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