Duke deal boosts confidence in N. Power

Tuesday, June 11, 2002 | 10:52 a.m.

Barring a record heat wave, malfunctioning power plants or a shutdown of the Western power grid, Nevada Power Co. officials are confident they will be able to keep the lights on in Southern Nevada this summer.

Monday's announcement that the Las Vegas utility had reached a deal with Duke Energy North America to purchase sufficient energy to meet peak summer needs is also being seen as evidence that Nevada Power will be able to avoid bankruptcy, at least in the near future.

Walt Higgins, president of Nevada Power and chairman of parent Sierra Pacific Resources, said the energy deal will help replace contracts that were discontinued by other wholesale suppliers who were concerned about the utilities' poor credit ratings.

"I won't be completely comfortable until this summer is over but I am more comfortable than I was a week ago," Higgins said. "I am confident we are prepared for the summer."

Although the cost of the new contract was not disclosed, Higgins said portions that apply to energy delivered this summer will involve slightly above market prices and in some cases, market cost plus 10 percent. The contract will also apply to portions of summer 2003 and involve energy delivered to Nevada Power's sister utility, Sierra Pacific Power Co. of Reno.

The deal is expected to help Nevada Power's liquidity because it will be able to defer some of its costs for the summer energy to a later date. In exchange, Nevada Power and Sierra Pacific Power agreed to drop a federal complaint against Duke Energy, challenging the prices of prior contracts the Nevada utilities obtained from the Charlotte, N.C., company.

"We think this is positive on a number of fronts and gives us the impression that the power will be there," Donald Soderberg, chairman of the state Public Utilities Commission, said. "This gives us confidence that Nevada Power's cash flow will be better than it was on Friday."

Nevada Power had complained that it was placed in financial jeopardy when the PUC ruled on March 29 to give the utility only $485 million of the $922 million it is seeking from ratepayers for energy used last year. But Nevada Power has benefitted from good fortune in recent weeks.

Last month, the PUC granted a temporary one-cent per kilowatt hour rate increase to help Nevada Power with its cash flow. Then on Friday the PUC granted Nevada Power's request to issue $300 million in long-term bonds to help pay shorter-term debt and meet operating expenses.

"A lot of people were predicting doom for this company even a month ago," Soderberg said. "And now we have a major supplier willing to enter into a major transaction with the company. We think the company is meeting its challenges and that's important to us. I don't think they will be facing bankruptcy this summer."

State Consumer Advocate Timothy Hay also sounded upbeat about the Duke Energy deal, though he said he still wants to see the details.

"We're pleased it increases reliability and alleviates concerns in Southern Nevada," Hay said. "The question is, how much did they pay for that peace of mind and how much of it is the responsibility of the ratepayers. The way it has been described to me is that it has increased the company's liquidity and decreased the likelihood of a bankruptcy filing."

Nevada Power normally generates 2,000 to 2,200 megawatts of electricity on its own and buys wholesale power to make up the difference when average peak summer demand reaches approximately 3,900 megawatts. But demand has been known to reach 4,600 megawatts during peak summer days, forcing Nevada Power to turn to the more expensive spot energy market to make up the difference.

The contract with Duke Energy will supply up to 1,000 megawatts of electricity per hour during the summer months, with one megawatt enough to power about 1,000 homes. But Higgins said Duke Energy has also agreed to sell Nevada Power spot energy if necessary.

"We should be fine with Duke Energy and with our ability to access the market to make up the difference," Higgins said.

Still, the company continues to negotiate with other suppliers in an ongoing effort by Nevada Power to defer some of its energy costs.

Sierra Pacific stock, which trades on the New York Stock Exchange, rose 8.9 percent to $7.95 per share at Monday's closing bell.

Mark Maloney, who helps manage 1 million Sierra Pacific shares as part of the John Hancock Patriot Funds, told Bloomberg News that it was in the best interests of both Sierra Pacific and Duke Energy to renegotiate.

"Sierra Pacific has the customers and Duke has the supply," he said.

Maloney also told Bloomberg that the $300 million in new bonding authority and the agreement with Duke will give other power suppliers more confidence in their dealings with Sierra Pacific.

"A lot of the companies were waiting to see how the PUC voted on Friday for the bond deal," Maloney said. "Duke may have been the first to sign on board, but I'm sure there will be others to work with the company." This gives us confidence that Nevada Power's cash flow will be better than it was on Friday."