Water board OKs Nevada Power offer

Launce Rake and Steve Kanigher

Thursday, Aug. 22, 2002 | 11:20 a.m.

With a pledge that power costs could drop across the board by 20 percent, the Southern Nevada Water Authority board voted unanimously this morning to authorize a $3.2 billion offer to buy Nevada Power Co.

After a presentation by investment banker Morgan Stanley, the board gave General Manager Pat Mulroy authority to begin negotiating to buy the struggling Las Vegas utility from its parent company, Sierra Pacific Resources of Reno.

"I think we would be derelict in our duty if we didn't proffer an offer," said Clark County Commissioner Myrna Williams, a water authority board member.

Negotiations could take weeks to a few months depending on how much cooperation the authority gets from Sierra Pacific management, the financial analysts said.

A purchase, if approved by both Sierra Pacific stockholders and the water authority board, could take 12 to 18 months, analysts said.

The $3.2 billion offer would be equivalent to about $12 a share.

The stock price for Nevada Power parent Sierra Pacific Resources went up 5 percent this morning in early morning trading on the New York Stock Exchange at $7.60 a share.

Jack Leone, Sierra Pacific Resources spokesman, said that the company would have no immediate comment. He and other utility executives attended the meeting.

Last month the authority hired Morgan Stanley to look at putting together a bid for the electric utility.

At a meeting this morning, Morgan Stanley Managing Director Ray Spitzley put the cost of Nevada Power at $3.2 billion, including $2 billion in outstanding debt and $1.2 billion for the book value of the electric utility. The company's net assets as of March 31 were $1.092 billion.

A purchase, if consummated, would result in immediate rate reductions of 20 percent for all customers or $2 billion over 10 years, Spitzley said.

"Clearly these are very real, significant numbers," he said.

Spitzley said the purchase of Nevada Power would create and sustain 2,700 jobs in Southern Nevada and provide $900 million more in personal income.

"There is absolutely no doubt that this type of rate cut would be good for the local economy," Spitzley said.

Water authority board members were surprised by the amount of savings Morgan Stanley predicted.

"Those are pretty significant numbers, 20 percent across the board at a minimum," said Clark County Commissioner Dario Herrera, who serves on the water authority board.

The savings would come because the water authority can borrow money at a cheaper rate than a private company, Spitzley said.

The water authority has a "double A" bond rating whereas the electric utility's credit rating has been downgraded to "junk" status.

"It really all gets down to the cost of the money," he said.

Herrera made a pitch to support the ballot question if the Sierra Pacific management tries to foil or stop the offer.

Chuck Hauser, the board's attorney, said Sierra Pacific's management has a legal obligation to consider the offer and open discussions with water authority.

Shari Buck, a North Las Vegas City Councilwoman and authority board member, expressed reservations about the impact the deal could have on municipalities, customers and Nevada Power employees.

"I do not want to do anything that would diminish or delete our ability that would take care of our No. 1 priority, which is water," Buck said.

Amanda Cyphers, a Henderson City Councilwoman and board member, said that if savings are not passed on to customers the board would not approve the deal.

"There's a lot of questions that need to be answered, but that will happen as we go forward," Cyphers said.

Spitzley cautioned that more diligent investigation in the coming weeks could unearth deeper financial problems with the company that could affect the purchase price or the viability of the deal.

"At this point, we don't see downside to making an offer," Spitzley said.

Joyce Newman, president of the Utility Shareholders Association of Nevada, said today she didn't know what to make of the recommended $3.2 billion purchase price for Nevada Power.

"It's just too soon," she said. "I don't know what any of the other terms and conditions are. I cannot predict what it will accomplish for shareholders."

Steve Boss, president of the Nevada Energy Buyers Network, said that "it seems to be a fairly full offer but it's still subject to due diligence."

Boss' clients, which include resorts that have been granted permission by the PUC to purchase energy elsewhere, have remained neutral on the possible purchase of Nevada Power.

"What our clients are interested in is controlling the price of fuel and purchased power," he said.

The Southern Nevada Water Authority began expressing interest in purchasing Nevada Power after electricity ratepayers began enduring a series of rate increases tied to the energy crisis that struck the West in 2000.

The water authority's interest stemmed from the fact that it is Nevada Power's largest customer. Much of the electricity used by the water authority is for the purpose of pumping water out of Lake Mead for its Southern Nevada customers.

The water authority's interest in Nevada Power accelerated earlier this year when many residents and public officials began calling for the Las Vegas utility to be replaced. The public was angered by Nevada Power's request for $922 million from ratepayers for energy used last year.

Nevada Power argued that it was forced to pay high prices for energy from other suppliers from 2000 through last fall because electricity was in short supply. But critics, including the water authority, charged that Nevada Power made poor business decisions and could have done a better job protecting itself from the energy crisis.

The state Public Utilities Commission agreed in March and granted the utility only $485 million of the $922 million it was seeking. The decision drove down the stock price of Nevada Power parent Sierra Pacific Resources by 60 percent and relegated the company's credit rating to "junk" status.

Proponents of public power say that it saves ratepayers money and gives them better access to the decision-makers who determine how electricity should be generated and delivered to the public. Opponents say private enterprise is better equipped to run electricity companies because they are more efficient when it comes to spending money and they are not encumbered by the politics that impact government-run utilities.

The water authority represents water and wastewater districts in Southern Nevada and is run by a board of seven locally elected officials from Clark County and the cities of Las Vegas, North Las Vegas, Henderson and Boulder City.

An offer to buy Nevada Power would be forwarded to the board of Sierra Pacific Resources which, in turn, would make recommendations to shareholders. If a majority of the shareholders approve the sale, the decision would then have to be approved by the PUC.

Other approvals would then have to come from the Federal Energy Regulatory Commission, which regulates Nevada Power's wholesale energy transactions and oversees its transmission lines. The Securities and Exchange Commission also most likely would get involved, since it regulates publicly traded companies.