Ex-San Diego utility buddies team up to engineer Nevada Power merger

Friday, May 1, 1998 | 10:11 a.m.

Michael Niggli and Malyn Malquist were colleagues at San Diego Gas and Electric and good friends outside the office for more than 16 years.

When they called to congratulate each other about their respective appointments as top executives -- Niggli at Nevada Power Co. in Las Vegas and Malquist at Sierra Pacific Resources in Reno -- the first glimmer of what would be a blockbuster business deal first surfaced.

"I was up in Carson City meeting the members of the Public Utilities Commission and paid a visit to Malyn," Niggli recalled of a February visit to Malquist, who was appointed chairman, president and chief executive officer within a week of the day Niggli had become Nevada Power's president and chief operating officer.

"He shared his vision of his hopes for his company," Niggli said. "It was as though I was looking in a mirror."

Niggli and Malquist agreed that day to get some of their analysts to investigate what kind of business relationship the two companies could have. The end result was Thursday's announcement that Nevada Power and Sierra Pacific would merge to become a $2.3 billion utility company with 800,000 electric, 100,000 gas and 65,000 water customers in Nevada and the Lake Tahoe and Truckee areas of California.

The holding company would be called Sierra Pacific Resources and would be based in Reno. Nevada Power Co. would be one of its electrical subsidiaries and would be operated from Las Vegas. All customers will continue to be served by companies with which they are familiar in Southern Nevada and Northern Nevada. The bottom line: very few visible changes for customers.

Analysts and shareholders expressed their support for the deal. Researchers who observe the utilities industry were universal in their praise of the merger while shareholders boosted both stocks in Thursday trading -- a rarity in merger deals.

Nevada Power's stock climbed 5/16 to 24 9/16 while Sierra Pacific's was up 9/16 to 35.

"It's an all-around good deal, it's as good as they (company executives) say it is," said Alan Lindstrom, senior vice president and director of research for utilities for San Francisco-based Redwood Securities Group.

One of the reasons the deal is so tasty to investors is that it will resolve what has been a growing concern of earnings dilution.

"Personally, I wasn't thrilled with the alternative for Nevada Power," Lindstrom explained. "They were continuing to have their electrical loads grow at about 7 percent per year and they were trying to pay out all earnings as dividends while trying maintain that growth. Basically, they were strapped for cash to finance their growth."

What the merger would do is knock the dividend down to Sierra Pacific's rate of $1 per share per year from $1.60. Investors who can't live without that level of dividend will be given the option of cashing out for $26 a share, a 5 percent premium on the average price of the stock on the 10 days leading up to the day before the merger was announced.

"Over 90 percent of earnings were returned in dividends," said Ron Tanner, managing director of utilities research for Legg Mason in Baltimore. "If they had cut the dividend without the cash-out option, there would have been negative shareholder reaction in terms of the share price. But this allows them to cut the dividend in a way that preserves shareholder value. Look at the way the two stocks have reacted. Most of the time, the buying company's stock goes down and the selling company's goes up. In this case, they both went up."

Tanner said in the utility industry, there have been several mergers, "but this one really made sense for everybody."

"And Malyn Malquist is a hero to be able to take a back seat and step down from a chief executive's role to make the deal work," Tanner said.

Malquist will lead the two Las Vegas-based electric utility subsidiaries while Niggli will head the new holding company overseeing the entire operation.

"It's obviously a good deal for the companies and the shareholders," said Andrew Levi, a director with Credit Suisse/First Boston, based in New York City. "But it's also good for the state. The customer is going to get lower costs because some of the savings will be passed on to consumers."

Theoretically, that's true. Levi pointed out that Niggli and Malquist represent a good team that has been together a long time. Sierra Pacific has been a strong company and has maintained low rates for customers for years though cost reductions and reduced fuel costs.

Because there will be cost reductions through the elimination of duplicate functions, Nevada Power should benefit with growth to its bottom line. How that translates as a benefit to customers or shareholders remains to be seen.

The Public Utilities Commission of Nevada and the Utility Shareholders Association of Nevada are taking a wait-and-see approach.

Judy Sheldrew of the PUC and Fred Schmidt, the state's consumer advocate and the head of the Bureau of Consumer Protection for the Attorney General's office, said it's too early to tell how things would turn out for consumers.

"With respect to what individual shareholders should do, we can't make a recommendation at this point," said Joyce Newman, executive director of the Carson City-based Utility Shareholders Association of Nevada, a group that serves as an advocate for shareholders before state legislative and regulatory agencies.

"I would say that it makes a lot of sense with competition on the horizon," Newman said "It's clearly a way to gain efficiencies."

Part of that gain in efficiencies involves job cuts. But Niggli and Malquist downplayed the impact in their announcement on Thursday, saying there are about 250 duplicate positions and an annual attrition rate of about 300 at their companies.

With a hiring freeze in place, the merging companies hope to satisfy the downsizing through attrition in the time it takes for the merger to be completed, about a year.

Sierra Pacific has 1,500 employees while Nevada Power has 1,900. Because there's no overlap in service, most of the rank-and-file workers won't be hit with layoffs.

Management positions will be cut. And one of those leaving will be Charles Lenzie, chairman and chief executive officer of Nevada Power, who will retire when the merger is completed. Some managers, officials said, may have to be relocated or retrained.