Stock dip hits thousands

Friday, April 5, 2002 | 5:53 a.m.

WEEKEND EDITION

When the stock price of Nevada Power Co.'s parent, Sierra Pacific Resources, tumbled sharply last week, the biggest losers on paper were individual investors without diversified financial portfolios.

Many such investors are retirees who are attracted to utility stocks because of their dividends and history of price stability, according to Joyce Newman, president of the 8,000-member Utility Shareholders Association of Nevada and herself an owner of Sierra Pacific stock.

"The vast majority of utility shareholders are seniors," Newman said. "They're over 60 and they're retired and most are middle income. But we have a lot of elderly people who don't have a lot of money.

"Years ago, utility stocks were known as widow or orphan stocks because they weren't risky stocks. But that was before the specter of deregulation reared its head. Deregulation has introduced uncertainty into the market."

One investor, 73-year-old retired Defense Department engineer Lee Bishop of Las Vegas, said he dumped his 530 shares Monday at a loss of between $6,000 and $7,000.

"This won't cause me to jump out of a window, but it's a real tragedy," Bishop said. "I was attracted to the stock six years ago mainly because of the dividends. They were getting the money to build the infrastructure in the valley and a lot of that money was coming from retirees. That's why this hurts so much.

"Those dividends amounted to hundreds of dollars a year. That was money I gave to my grandkids and to take my wife out to dinner, and other things like that. Now I have to cut back."

There's no way of telling how many investors such as Bishop dumped the stock. There's also no way of telling whether the stock will rebound.

Other losers, at least on paper, were officers and directors of Sierra Pacific and its subsidiaries. Combined, they held 862,753 shares as of last month, or eight-tenths of 1 percent of the company's stock.

Included on that list is Walter Higgins, Sierra Pacific chairman and chief executive, who has 49,868 shares.

Among Sierra Pacific's directors, the one who has the most company stock -- with 150,634 -- is Mary Coleman of La Jolla, Calif., president of Coleman Enterprises, a developer of shopping centers and industrial parks.

The stock plunged from $15.09 a share on March 28 to $9.11 on Monday after the March 29 ruling by Nevada's Public Utilities Commission that granted Nevada Power only $485 million of the $922 million it was seeking from ratepayers for energy used last March through September.

The New York Stock Exchange-listed stock dipped further on Tuesday as Wall Street analysts produced gloomy forecasts for the utility. Sierra Pacific's value plummeted by $720 million.

Even though the stock reached its lowest point since the July 1999 merger of Nevada Power and Sierra Pacific, not all of the 25,019 shareholders of record as of last month will be significantly hurt by the downturn. There are 20,686 individuals who hold 1,000 shares or less. But two-thirds of the 102.1 million shares are held by 391 institutional investors whose stake in Sierra Pacific is diluted by holdings in dozens, if not hundreds, of other companies.

Institutional investors generally are large investment companies that offer clients an assortment of mutual funds. Some bought Sierra Pacific stock for inclusion in a utility-specific fund. Others placed the stock in a fund for small and midsized companies.

"Because they have a number of stocks in the portfolio, if one goes south they can pretty much make it up," Univeristy of Nevada, Las Vegas finance professor Percy Poon said. "But if a mutual fund focuses on utilities, they might get hurt more than a general fund. It all depends on how much stock you are holding in that company. That's the advantage of diversifying your investments."

Large investors

The largest institutional investor in Sierra Pacific is Franklin Advisers, a San Mateo, Calif., company that owned 9.97 million shares or 9.7 percent as of last month. The only other investor with more than 5 percent is Putnam Investors of Boston, which held 5.4 million shares, or 5.3 percent.

Sierra Pacific represents the largest holding in one Franklin mutual fund, but that amounted to only 3.1 percent. In a note to investors in October, Franklin said it bought the stock at a 15 percent below "book value," which are its net assets per share.

"In our analysis, this valuation is a legacy of a protracted era of ill will between former management and regulators, during which the state initiated a badly conceived plan for California-style deregulation," Franklin stated in reference to Nevada lawmakers.

"Fortunately for Sierra Pacific's customers and shareholders, the recent turbulence in California's electricity markets brought the parties to an understanding of their mutual interests and responsibilities, deregulation was halted in Nevada, and Sierra Pacific will go forward as a traditionally regulated utility serving a growing territory.

"Although we expect a better regulatory environment for Sierra Pacific, uncertainty remains as to the actual rate structure that will emerge in 2002, as well as how severely Las Vegas will suffer over time from the tragic events of Sept. 11. Our investment is predicated on book value growing 5 percent a year, the current dividend being maintained, and the stock trading at 1.5 times book value in a few years."

Since the utility commission's ruling -- one that caught Wall Street off guard by the degree of its severity -- Franklin's diagnosis of Sierra Pacific last fall looks overly optimistic in hindsight. A Franklin spokeswoman declined comment on the rate case and its effect on her company.

But the Franklin fund -- the Franklin Balanced Sheet Investment Fund -- only dropped from $42.51 a share a day before the PUC ruling to $41.92 a share, a mere 1.4 percent, on Monday (the stock market was closed March 29 for Good Friday). In contrast, Sierra Pacific stock fell 39.6 percent.

Aside from Franklin and Putnam, other large institutional investors in Sierra Pacific include Jennison Associates (3.7 million shares or 3.6 percent), Boston Partners-Asset Management (2.99 million, 2.9 percent), Barclays Bank (2.5 million, 2.5 percent), Colonial Management Associates Inc. (2.2 million, 2.2 percent), Alliance Capital Management (2.2 million, 2.2 percent), Lazard Freres & Co. (2.2 million, 2.2 percent), Neuberger Berman (1.86 million, 1.8 percent) and Vanguard Group Inc. (1.38 million, 1.3 percent).

In most funds, Sierra Pacific stock represents significantly less than 1 percent of the total holdings.

Enron's shadow

Nevada Power isn't an Enron Corp. scandal waiting to happen, at least where employees are concerned.

In the case of Enron, the embattled Houston energy giant, employees with company stock in their 401(k) pension plans saw savings disappear as the stock plunged. While Enron executives were able to sell shares during the downward spiral, rank-and-file employees were prevented by company regulations from doing the same and were left penniless.

Most Nevada Power employees invest in their company's 401(k) plan, which can include either Sierra Pacific stock exclusively or a mix of that stock and many others, Nevada Power spokeswoman Sonya Headen said. But she said, Nevada Power's pension plan is far different than at Enron.

"Our employees can get rid of their stock at any time, so we are completely opposite of what Enron had done," Headen said. "We can blend our stock with other stocks, and we encourage all our employees to do it that way."

Nevada's Public Employees Retirement System lost $22 million on Enron, including $16 million in bonds and $6 million in a Standard & Poor's Index fund that reflects the overall stock market performance of the nation's top companies. But the pension plan for state and local government employees didn't have Sierra Pacific stock because the system invests only in large companies.

"Sierra Pacific is too small," Laura Wallace, PERS' investment officer, said. "If a company is in Standard & Poor's 500, there is a good chance we will own it. We don't deal a lot in smaller companies. Enron was part of the index, so that's why we had the exposure."

Likewise, Nevada didn't own Sierra Pacific stock. But that's not because of the company's size. State Treasurer Brian Krolicki said it is because the Nevada Constitution prevents the state from owning private-company stock. Instead, most of the state investments are in government-backed bonds.

Dividend future

With Sierra Pacific facing an uncertain future and looking to cut costs -- it announced Wednesday that it was delaying construction of two major transmission projects to save $125 million this year -- there has been increased speculation as to whether dividends will be slashed next.

The company last paid a quarterly dividend of 20 cents a share, or $20.4 million, on Feb. 20. That was down from 25 cents a share per quarter early last year.

Bishop, the small investor, said he wasn't counting on good fortune for Nevada Power down the road. He mostly blames Nevada politicians and regulators for forcing the utility into financial distress. He also discounted PUC and other critics who say the company displayed poor risk management and blew opportunities to sign low-cost, long-term energy contracts that could have saved ratepayers hundreds of millions of dollars.

"They are saying Nevada Power was imprudent with the wisdom of hindsight, but that's Monday-morning quarterbacking," Bishop said.

To individual investors such as Bishop, the stability of utility stocks was shattered by the West's power crisis that struck in 2000 and the prospect of allowing customers to buy retail electricity on the open market.

Today, he considers utility stocks as risky as technology stocks.

"If Sierra Pacific goes into bankruptcy, it'll wipe out the savings of thousands of people in the valley," Bishop said. "Even if the company doesn't go bankrupt, the dividends will go down to nothing.

"I sold my stock Monday morning, first thing. I bailed out, and I will not go back."

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