Sierra Pacific, Nevada Power debt under review by agencies

Tuesday, Nov. 9, 1999 | 11:25 a.m.

Effects unclear

It's unclear what effect Sierra Pacific Resource's plans to buy Portland General Electric will have on Nevada ratepayers, a state regulator said.

Don Soderberg, chairman of the Nevada Public Utilities Commission, said it's one of many questions the commission will have to answer before taking action on the Reno-based utility's request.

"The company becomes larger, and you assume there will be some operational efficiencies there," he said. "But we have to look at all terms to make sure it's viable."

Two credit rating companies are reviewing the long-term ratings of Sierra Pacific Resources Inc. and Nevada Power Co. because of Sierra Pacific's plan to buy Portland General Electric in Oregon.

Standard & Poor's today placed the rating of Sierra Pacific on CreditWatch with developing implications, which means the rating could be raised, lowered or affirmed.

Also, Duff & Phelps placed the credit ratings of PGE on Rating Watch-Uncertain.

S&P said the downside ratings potential reflects "the significant debt requirement of about $1.3 billion to fund the acquisition" and noted management will be challenged to realize cost savings to offset $1.1 billion of goodwill from the merger that will be amortized, or written off over 40 years.

Upside factors include the plan to sell Nevada power plants to help fund the acquisition and management's plan to maintain a balanced capital structure.

Steve Oldham, vice president of strategic development for Sierra Pacific, said the announcements by Standard & Poor's and Duff & Phelps were expected because there are many long-term financial implications analysts must study. Sierra Pacific has about $480 million in long-term debt.

Meanwhile, AG Edwards has downgraded Sierra Pacific's stock from an "accumulate" rating to a "maintain position" rating.

Oldham said most analysts are reviewing the $3.1 billion deal announced Monday and the objectives of the investors will determine whether the stock's rating is raised or lowered.

Sierra Pacific Chairman and Chief Executive Officer Michael Niggli was in New York today discussing details of the transaction with Wall Street to allay fears.

The deal was announced before the New York Stock Exchange opened Monday. Monday, Sierra Pacific's stock fell 50 cents to $21.12. It was down another 87 cents to $20.25 this morning.

In a conference call Monday, Niggli and Chief Operating Officer Malyn Malquist addressed employment issues and said a new series of layoffs could be in store as the company integrates employees from PGE.

Sierra Pacific executives acknowledged that consolidating employees is a part of the savings to be realized when Nevada's electricity monopoly acquires PGE from Houston-based Enron Corp.

Niggli and Malquist said it's too early to tell how many jobs could be cut, especially since it'll be a year before the deal closes and some positions just won't be filled when employees leave them voluntarily.

Malquist also said because both companies are growing faster than the national average and Sierra Pacific already has completed a downsizing, it's difficult to project how many employees will be needed.

The executives said they would look at the entire company when making decisions about employees and not focus only on the Portland operation.

Presently, Sierra Pacific has about 3,100 Nevada employees, most at its Reno headquarters and in Las Vegas, the center of its Nevada Power Co. affiliate. PGE, which would become another Sierra Pacific affiliate when the deal closes late next year, has 2,700 employees.

Malquist has been asked to remain as chief operating officer while Peggy Fowler, president of PGE, would retain her position. Ken Harrison, chief executive officer of PGE, would resign when the deal closes, but continue as chairman of Enron Communications and as a member of Enron's board of directors.

The $3.1 billion acquisition, a cash and stock deal including the assumption of $1 billion in debt, would have to be approved by five regulatory agencies, three at the federal level.

Niggli said Sierra Pacific was motivated to make the acquisition because of the company's ability to leverage with a larger customer base. Sierra Pacific and PGE will be able to share strategic alliances and get more favorable prices from vendors.

Shareholders also would benefit from the deal because Sierra Pacific would be able to reinvest profits from the divestiture of its Nevada power plants at about the same time the PGE deal closes. Sierra Pacific, selling off its power generation assets in Nevada, is acquiring the capacity to generate 1,700 megawatts of power in Oregon.

A PGE spokesman said 41 percent of its power is generated by hydroelectric plants, 24 percent through natural gas- and oil-fired plants and 11 percent from coal-burning plants. The utility has firm purchase agreements for the remaining 24 percent used.

As a purchaser of power on the open market, PGE is similar to Sierra Pacific. Occasionally, they sell excess power. More often, they buy during peak use periods. As a result, it isn't likely power generated in Oregon will be used by Nevada consumers.

However, Sierra Pacific is expected to develop transmission contracts that would allow for transfers from PGE.

One of the assets Sierra Pacific is acquiring is the decommissioned Trojan nuclear power plant, located on the Columbia River near Rainier, Ore. PGE operated it from May 1976 to November 1992, closing it permanently in January 1993. When it was closed, PGE cited high operating costs, defective steam generators and unfavorable energy market conditions.

All radioactive fuel was removed from the reactor and placed in an onsite storage facility in 1993. The company's plan has been to keep the used fuel there until a federal disposal or storage facility is capable of receiving it.

The Nuclear Regulatory Commission is one of the five agencies that must approve the transaction.

Ron Tanner, managing director of utilities research for Legg Mason, said Oregon is in the process of restructuring its electrical industry, but it isn't as far along as Nevada, which expects to start a competitive marketplace for electricity in March.

"A lot of states are not requiring the sale of their generation assets," Tanner said.

Sierra Pacific wants to retain transmission and distribution capabilities, so Tanner said he was not surprised with the company's planned acquisition.

"It's in line with their strategy," said Tanner, who added that the company's increased customer base will result in economies of scale for the company.

"There could be other deals that come along too," Tanner said. "I don't think they're going to pass up another deal if one comes along."

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