Nevada Power to receive $170 mil. windfall

David Strow

Monday, April 8, 2002 | 11:17 a.m.

As Nevada Power Co. tries to stay afloat, the utility disclosed for the first time today its parent company will receive an unexpected windfall from the federal government by the end of the month -- $170 million in tax refunds.

Nevada Power said the refunds are "unplanned," the result of "recent federal legislation extending the carryback period on losses." Today's announcement was made not to customers or regulators -- but to shareholders and suppliers of Nevada Power parent Sierra Pacific Resources.

The announcement annoyed critics of Nevada Power, who said the refunds were not disclosed when the utility made its most recent rate hike requests to the Public Utilities Commission of Nevada.

"I think it continues to erode the credibility of the company, that this didn't appear until after the hearing was concluded," said State Consumer Advocate Timothy Hay.

Hay said the announcement also contradicts Nevada Power's decision last week to delay some infrastructure investments to preserve cash. These reductions will save $125 million in 2002, the utility has said.

Las Vegas attorney Steve Boss, who represents the Nevada Energy Buyers Group, said he knew nothing about the tax refund. The group represents businesses that opposed Nevada Power when the utility sought $922 million for energy used last year and a separate $22.9 million general rate increase request for administrative costs.

"It would probably have an impact on the general rate case," Boss said. "What a general rate case does is set revenue costs. So if there is a tax refund that is reflected in revenues, that should be part of the general rate case.

"The question is whether the tax refund is related to the activities of the holding company or derives from things at the subsidiary level. If it derives from activities at the subsidiary level, that needs to be considered in the general rate case."

The company said it first learned of the tax break last month, after it had testified about its tax position during PUC hearings to consider its $922 million rate hike request for energy used last year.

"It was an unexpected change in the tax law a few weeks ago that accounts for operating losses," said Paul Heagen, Nevada Power spokesman. "It helps with our cash flow, but it does not take away our financial problems or change our credit rating."

News of the refund came in a letter sent by Nevada Power and its sister utility, Sierra Pacific Power Co., to the utilities' power suppliers on April 1. The letter was filed in a report by Nevada Power parent company Sierra Pacific Resources with the Securities and Exchange Commission this morning.

The letter does not clarify whether it is Nevada Power or Sierra Pacific Resources that is receiving the refund.

Nevada Power asked the PUC for $922 million in hikes to pay back deferred energy costs, which were losses the utility took on electricity it sold to Southern Nevada customers over the past year. In the separate "general" rate case, it requested a hike of $22.9 million to pay for increased costs associated with its Southern Nevada operations.

Both requests were slashed by the PUC. Nevada Power saw $437 million of its deferred energy claims disallowed by the commission, and was also ordered by the commission to reduce its general rates by $42.9 million.

These decisions set up a liquidity crisis for Nevada Power, as major credit agencies Standard & Poor's and Moody's Investors Service reduced the utility's unsecured credit ratings to below-investment grade levels. This decision will make it more expensive and more difficult for the utility to issue unsecured debt in the future. It also ended up derailing Nevada Power's "commercial paper" program, by which the utility was able to issue short-term debt to investors at favorable interest rates to meet its short-term cash needs. A key use of short-term debt for the two utilities is the purchase of power from other energy suppliers.

But Nevada Power and Sierra Pacific Power maintained some of their short-term borrowing power last week, when their banks agreed to let the utilities keep $350 million in credit lines. The $170 million should further strengthen their near-term position.

"Obviously, this (the refund) assists their cash flow position," Hay said.

The stock market, however, appeared largely unaware of -- or unimpressed by -- news of the refund. This morning Sierra Pacific's stock was down 5 cents to $8.

Over the longer term, the two utilities still have access to the debt markets. Though its unsecured credit rating is below investment grade, the two companies still carry an investment grade rating for "secured" debt -- that is, debt that uses the utilities' assets as collateral.

Nevada Power has the ability to issue more than $700 million in secured debt, while Sierra Pacific Power can issue more than $200 million.

"The ability to issue such debt is dependent on maintaining an investment grade rating for the debt, obtaining approval from the (PUC) to issue such debt and the market appetite for the debt," the SEC filing said.