Reeling stock prices could spell doom for Nevada Power’s future

Tuesday, April 2, 2002 | 10:55 a.m.

Wall Street analysts issued harsh warnings for shareholders of Sierra Pacific Resources of Reno after the stock of the Nevada Power Co. parent fell to record lows.

What this will mean for Nevada Power in the days and weeks ahead remains to be seen. The company issued a brief statement Monday about Friday's decision by the state Public Utilities Commission to give the utility only $485 million of the $922 million it was seeking from ratepayers for energy used last year.

"In doing so, the (PUC) has denied Nevada Power recovery of $437 million of costs incurred by the company on behalf of its customers in 2001 when the volatility in the Western energy markets drove the cost of electricity to unprecedented high prices," the company stated. "Nevada Power stated that it is currently reviewing the order and evaluating its options."

The PUC decision struck Wall Street like a thunderbolt, sending Sierra Pacific stock down to $9.11 a share at the close of trading Monday, a 39.6 percent decline from its prior closing of $15.09 on Thursday. The trading volume of 20.2 million shares was nearly 40 times its normal daily volume of 537,772 shares.

Monday's closing price was by far the lowest for Sierra Pacific since its merger with Nevada Power in July 1999. The previous low for the stock since the merger was on Feb. 7, 2001, when it closed at $10.80 a share.

By mid-morning Tuesday, the company's stock was trading at $7.95 a share on the New York Stock Exchange. The company's stock dropped 12.7 percent this morning, and the company's value has decreased by more than $725 million.

The analysts all agreed that the PUC disallowance of $437 million was far greater than Wall Street expected. Prior to the PUC decision, there had been widespread speculation that the reduction would be no more than $120 million. But there were mixed views as to whether Sierra Pacific could avoid bankruptcy.

"Your regulatory commission is insane," Ronald Tanner, an analyst with Legg Mason Wood Walker Inc., said. "They're trying to put the utilities in bankruptcy. Everybody is shocked at how the commission can be so unreasonable. They were looking at before the energy crisis and said the utility should have had a crystal ball and seen the energy crisis coming."

The PUC ruled that Nevada Power exhibited poor risk management in the way it went about purchasing energy, blew an opportunity in 1999 to lock in low-cost, long-term power through Merrill Lynch, and bought too much power last year. But Nevada Power had argued that it would have been too risky to execute long-term contracts in 1999 -- a year before the Western power crisis struck -- because there was still a possibility that it would lose customers through retail electricity deregulation.

"I don't see how a responsible commission can look back at 1999 and ding them on their power purchasing practices when the state was telling them deregulation was coming," Tanner said. "The commission didn't have the political spine to do what's good for shareholders. You'll get a very weak utility as a result. Nobody will want to do business with a dead utility."

Tanner rated the chances of Sierra Pacific filing for bankruptcy at only about 25 percent. But he said the PUC decision also may make it harder for Southern Nevada to attract replacement utilities should Nevada Power dissolve.

"The commission will have to give Sierra Pacific more support going forward," he said.

Standard & Poor's analysts Swami Venkataraman and William Ferara issued a statement that downgraded the credit ratings of Sierra Pacific and its subsidiaries from triple B to double B, which puts it in junk bond status. A lowered credit rating makes it harder and more costly for a company to borrow money. The analysts deemed the PUC decision "extremely negative" for Sierra Pacific.

"The prior ratings on Sierra Pacific and its utility subsidiaries relied heavily on Standard & Poor's estimation of the commitment of public officials in Nevada, including the commission, to support the credit quality of the utilities, particularly in light of the financial devastation of California's two largest utilities, which was caused in large measure by the absence of timely regulatory support," the analysts stated.

"The magnitude of the disallowance will severely weaken the financial profile of Sierra Pacific."

Moody's Investors Service likewise downgraded Sierra Pacific's credit rating from triple B to double B and also referred to the PUC decision as "unexpectedly harsh." The Moody's report from managing director of corporate finance John Diaz and vice president-senior analyst Kevin Rose stated that even though Nevada Power stands to gain about $160 million in revenue over each of the next three years, "it comes up well short of what NPC (Nevada Power Co.) needed to stabilize its debt protection measurements, and sets the stage for a significant write-down which would weaken its balance sheet."

"Furthermore, the ruling lies in stark contrast to previous actions by the PUCN which, together with actions by Nevada's Legislature, had been very supportive," the report stated.

While noting that another Sierra Pacific subsidy, Sierra Pacific Power Co., is also seeking $222 million for energy used last year, Diaz and Rose stated that "an equally large percentage of disallowance by the PUCN in that decision would create additional financial challenges for SPPC (Sierra Pacific Power Co.), and bring additional pressure to bear on the ratings of all three companies."

An equally grim report was issued by Lehman Brothers analysts Daniel Ford and Thomas O'Neill, who headlined their analysis, "Bad Friday: A Failure to Learn from CA." They said that while they were concerned that the disallowance would exceed the $84.5 million reduction recommended by the commission's staff, "Friday's final decision of a $437 million disallowance was shocking and exceeded our concerns."

They were not optimistic about the chances for a successful appeal by the utility before the commission or in district court.

"Given the tone of the draft and incremental climb in the final disallowance, we are not optimistic of success through PUCN challenge should it be pursued," Ford and O'Neill wrote. "Beyond the PUCN process, the company can seek recourse through the courts -- never a quick or straightforward process."

They wrote that the earliest Sierra Pacific could encounter a liquidity problem would be a "working capital crisis during the summer months as power consumption peaks."

They also wrote about risk to the dividends currently paid shareholders, which is now 20 cents per share quarterly, down from 25 cents a share per quarter early last year.

Merrill Lynch lowered its Sierra Pacific stock rating to neutral from near-term buy, long-term strong buy and noted that the Standard & Poor's downgrade put the utility's solvency at risk.

Goldman Sachs analyst Jonathan Raleigh also weighed in with a negative report by lowering the stock rating to "market perform" from "market outperform." He, too, called the PUC decision "surprisingly severe."

"We don't view this decision as bad enough to force a bankruptcy although near-term liquidity issues must become more transparent."

About the only good news for Nevada Power Monday came from Williams, a Tulsa, Okla., company that indicated it would still negotiate long-term energy contracts with the utility. Nevada Power had announced prior to the PUC ruling that it had reached agreements with Williams and Reliant Energy of Houston on long-term contracts that were intended to minimize rate hikes over the next six years.

"We intend to work with Nevada Power and its key stakeholders to find a viable long-term solution to help preserve Nevada Power's financial viability and assist in long-term rate stability for its customers," Steve Malcolm, Williams president and chief executive officer, said in a prepared statement.

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