NPC provides collateral for debt

David Strow

Friday, April 5, 2002 | 11:11 a.m.

Nevada Power Co. received some short-term financial security Thursday, when its bankers agreed to let the utility keep a $200 million credit line.

However, the bankers' consent will come with a price. As security for the credit line, the banks are requiring Nevada Power to pledge to them up to $200 million in "general and refunding mortgage bonds" -- securities that give the banks a secondary lien on all of Nevada Power's assets.

On Thursday, Sierra Pacific Resources -- Nevada Power's parent company -- announced its bank syndicate, led by Union Bank of California, had confirmed credit lines for Nevada Power and Sierra Pacific Power. In all, the lines provide the two utilities with $350 million in short-term borrowing capability. For Nevada Power and Sierra Pacific, a key use of short-term debt is buying power from other utilities to meet the demand of its Nevada customers.

These power purchases are crucial to keeping electricity flowing in southern Nevada -- in 2001, two-thirds of the electricity Nevada Power sold to customers was acquired from other generators.

"This is going to pay power bills," said Paul Heagen, Nevada Power vice president. "This is going to keep the trucks on the street and the lights on."

But the company won't be able to ride out the hot summer with these credit lines alone, said Ronald Tanner, analyst with Legg Mason Wood Walker Inc.

"These credit lines aren't that big," Tanner said. "If you get a real hot summer, these credit lines won't be sufficient to cover (purchases). This gives them some flexibility, but by no means does it assure that they'll have the money to pay for it."

In its annual report, Sierra Pacific Resources said it was obligated to acquire $1.35 billion in power from other utilities in 2002.

Until last week, the two utilities didn't rely much on these credit lines. For its short-term cash needs, Nevada Power and Sierra Pacific relied on "commercial paper," or short-term debt sold to investors. For an investment-grade company, paper represents a cheaper source of immediate cash than a credit line -- Nevada Power, for example, paid a 2.85 percent interest rate on paper. This is nearly 2 percentage points below the prime rate.

The credit lines could be used for other purposes, but their main purpose was to serve as a back-up to commercial paper.

But Nevada Power's ability to rely on paper ended Monday, just days after the Public Utilities Commission of Nevada disallowed nearly half of the utility's $922 million rate hike request. This prompted Moody's Investors Service to slash its credit ratings on Nevada Power and Sierra Pacific -- and to lower the paper ratings of the two utilities from Prime-2 to Prime-3.

According to Sierra Pacific Resources' annual report, issued last month, "in the event that either (Nevada Power's) or (Sierra Pacific's) commercial paper programs are downgraded, the downgraded issuer would no longer be able to issue commercial paper."

In addition, the report said, a cut in the paper rating means the utilities have to immediately pay back any paper they now have outstanding, using the credit lines. Whatever is left is available to meet the two utilities' short-term credit needs.

Heagen confirmed that the utilities are no longer able to issue paper, and have had to use the credit lines to pay off their paper balances.

It is not clear how much paper the utilities now have outstanding. As of Dec. 31, Nevada Power had $130.5 million in paper outstanding, while Sierra Pacific had $46.5 million -- but paper is usually paid off in 90 days or less.

Because Nevada Power and Sierra Pacific had their credit ratings cut to "junk" status by Standard & Poor's, bank agreements obligate both utilities to secure the debt on their credit lines with an equal amount in general and refunding mortgage bonds issued to the banks. Heagen said this morning that these bonds have been pledged to the banks.

The bonds "create a lien on substantially all of (Nevada Power's) properties in Nevada," but the lien is junior to those of holders of the utility's first mortgage bonds.

While keeping the credit lines is an important step in keeping the two utilities solvent, they will not be a long-term solution, since they expire in late November.

In addition, the debt that builds on these credit lines must eventually be replaced with long-term debt, usually in the form of bonds. As of Dec. 31, Sierra Pacific Resources owed just under $300 million in short-term debt -- and $3.38 billion in long-term debt, owed primarily to bondholders.

Because Sierra Pacific Resources now carries a junk rating, investors will demand significantly higher interest rates on Nevada Power bonds.

"There's always people that will buy it, but it's very expensive," Tanner said. "The question is, can you borrow at a reasonable price?"

Tanner also believes the banks could still change their minds. He pointed to Sierra Pacific Resources' press release, which said the banks decided to let the utilities keep the credit lines "after review of the company's grounds for reconsideration of the (PUCN) order and aggressive cost control efforts."

"If they appeal the decision, and they don't get better treatment from the commission, that makes things more difficult," Tanner said.