Analyst optimistic about utility mergers

Tuesday, Feb. 23, 1999 | 10:02 a.m.

Investing in utilities will never be the same because the utility industry itself is undergoing drastic change.

Lauran Watson, interim director of investor and shareholder relations for Nevada Power Co., explained in a symposium in Las Vegas last week how the company's merger with Sierra Pacific Resources Inc., Reno, should change some investors' strategies.

Watson said in the past, investors looked at the company's steady payment of dividends and a 12.5 percent authorized rate of return as a convincing reason to invest in Nevada Power and similar utilities.

Now, utility companies nationwide are deregulating. Nevada Power's merger plan is part of an overall strategy to prepare for increased competition. With the combined resources of Nevada Power and Sierra Pacific, the new company, expected to be formally merged this summer, plans to compete with other power companies on a regional basis.

But Nevada Power won't be a power producer -- it will be a retail player. The transmission of power will continue to be regulated by state authorities and Nevada Power will profit at the hands of some of its competitors by moving electricity over the company's wires to their respective customers.

That should provide new opportunities for investors who will see utilities as a growth stock for the retail end and a source of dividends -- reduced from previous years -- on the transmission side.

Nevada Power reduced its quarterly dividend to $1 a share from $1.60 following the merger announcement.

Chicago-based Everen Securities Inc., sponsors of the symposium, lists Nevada Power and Sierra Pacific among the top electric utility investment options nationwide, primarily because of the growth the company has experienced and expects to continue.

Dan Rudakas, senior vice president with Everen, said in a research report on electric utility investments that Nevada Power will be in a better financial position as a result of the merger and that the company's plan to get out of the energy supply business would improve the company's risk profile.

Rudakas said his company estimates the total return potential to be 12.9 percent for the first year with a long-term annual total return estimate of 8.9 percent.

Everen researchers estimate total return for Sierra Pacific Resources to be 9.4 percent for the first year with a long-term potential of 8.4 percent.

"We believe Nevada Power holds higher total return potential than Sierra Pacific, but Nevada Power has more risk of a lower stock price in the event that the merger was not accomplished," Rudakas said in the report.

The two companies still have two federal regulatory hurdles to clear before the merger can be completed. The Federal Energy Regulatory Commission and the Securities and Exchange Commission must review the merger before final approval. The Public Utilities Commission of Nevada conditionally approved the merger last month.

Watson also explained how existing shares will be exchanged for shares in the new company. Nevada Power shareholders will get a one-for-one exchange or $26 in cash, while Sierra Pacific shareholders will get 1.44 shares of the new company or $37.55 for every share.

Watson said the company has a pool of $456.2 million in cash and there will be 77.8 million shares of the new company issued. She explained that shareholders with 100 shares or less will get cash in the transaction.

Everen also offered investors a written report on Southwest Gas Corp. at the symposium. Everen gave Southwest its highest investment rating based on the belief that its merger with ONEOK, Inc., of Tulsa, Okla., would be wrapped up by the fourth quarter. This was before Monday's surprise offer of $32 per share for Southwest from Southern Union Co.

Because Southwest is in the midst of an SEC-sanctioned "quiet period," the company did not have a speaker at the symposium.

Another speaker at the Everen symposium offered a broader perspective of the stock market.

Rai Chalasani, executive vice president and chief investment strategist for the company, predicted that there could be a lull in stock prices in the last half of 1999 as investors react to perceived Y2K computer bug problems. Chalasani indicated computer difficulties may be minimal -- but persons owning stocks may be skittish enough to bail out of the market. He recommended taking a stronger position in the bond market.