Nevada Power parent: Credit shaky

Monday, May 6, 2002 | 11:09 a.m.

Nevada Power Co's. ability to enter into future power contracts could be further diminished if a sister company doesn't get the money it seeks for energy used last year.

Walt Higgins, chairman and chief executive officer of Sierra Pacific Resources, Nevada Power's parent company, stopped short of suggesting that a significant reduction in the pending $205 million request from Sierra Pacific Power Co. of Reno would automatically push Nevada Power into bankruptcy.

But he said it is likely the credit ratings of cash-poor Nevada Power and its fellow utilities would be further downgraded, adding to the difficulty of securing electricity for Southern Nevadans.

"The impacts are indirect," Higgins said. "The cash of Sierra Pacific Power and Nevada Power is separate. Their rates are set separately and they are electrically separated. But the tendency of the rating agencies is to look at the entire entity when they evaluate our credit. They downgraded Sierra Pacific Power when Nevada Power received a bad decision. You could speculate that such a thing could happen to Nevada Power in this case."

Testimony before the state Public Utilities Commission in Carson City is expected to wrap up this week in the Sierra Pacific Power case. The utility, which serves 315,000 Northern Nevadans, is seeking the money for energy used from March 2001 through November.

The case, though much smaller in scale, is similar to the $922 million Nevada Power sought for energy used last year. In both cases utility executives said they made prudent energy purchases while their critics charged that the companies bought too much power and used poor business judgment.

The PUC on March 29 granted only $485 million of Nevada Power's request. That decision caused Sierra Pacific's stock to plunge on the New York Stock Exchange and reduced the utilities' credit ratings from investment grade to junk status. The ruling prompted Nevada Power to sue the PUC in Carson City District Court in an attempt to recover the full $922 million.

In Nevada Power's case the PUC disallowed $180 million based on a deal it believed should have been struck between the utility and Merrill Lynch in 1999 for a low-cost, multi-year energy contract. No such "smoking gun" exists in the Sierra Pacific Power case.

Industry analysts agreed with Higgins that a significant reduction by the PUC in the $205 million Sierra Pacific Power case could further damage the credit ratings of the parent company and Nevada Power. Even though the utilities' credit ratings are already in junk status, the grades they receive from rating agencies such as Standard & Poor's can be moved even lower within the junk range.

"We look at Sierra Pacific Resources and its subsidiaries as one entity," Swami Venkataraman, a credit analyst for Standard & Poor's, said. "I don't want to say that a significant denial will lead directly to bankruptcy. But it would mean that the entity as a whole would be that much weaker from a cash flow standpoint."

Ronald Tanner, an analyst with Legg Mason Wood Walker Inc., said a decision by the PUC to approve the entire $205 million would send a signal to Wall Street that the worst for the utilities could be over.

"If you knew the $437 million in the Nevada Power case was the last disallowance, there would be no chance of bankruptcy," Tanner said. "The $485 million they got isn't going to kill them, because they can still go into the market and borrow money."

But a significant disallowance in the Sierra Pacific Power case could have the reverse effect on Nevada Power, he said.

"It's conceivable that Nevada Power could file bankruptcy on its own," Tanner said. "It's more likely that Nevada Power would go bankrupt than the parent or Sierra Pacific Power."

That's because Sierra Pacific Power has better cash flow than Nevada Power, he said.

"Even if Sierra Pacific Power got $100 million disallowed, I don't think that would do the damage to Sierra Pacific Power that the $437 million disallowance did to Nevada Power," Tanner said. "We know Nevada Power got stung. The issue is whether that was enough for the commission or do they want more blood."

Sierra Pacific officials have not discounted pos sible bankruptcy for Nevada Power, though they continue to explore legal and financial avenues in an effort to avoid a Chapter 11 filing to reorganize company debts.

"If we chose to go into Chapter 11, it would be because we couldn't get enough money to pay current obligations and couldn't get suppliers to help us by allowing us to pay later," Higgins said. "The issue we're facing is a cash shortage to pay power bills. That shortage is a much greater problem for Nevada Power than for Sierra Pacific Power.

"Sierra Pacific Power has enough money not to run out of cash this summer. The cash flow for Nevada Power is not good enough to make it through the summer, and that's why we're working with our suppliers."

The PUC decision in the Sierra Pacific Power case is expected to be announced by June 1. As in the Nevada Power case, utility officials said Sierra Pacific Power was forced to pay high prices for energy last year as a result of the Western power crisis.

"Over the summer of 2000 we saw increasing shortages of energy throughout the West that manifested not only in increased prices but also in service interruption," Jonathan Perry, principal trader for the utilities, stated in pre-filed testimony in the ongoing rate case.

"In what has been characterized as a 'perfect storm' of market dysfunctionality, a drought in the Pacific Northwest meant significant curtailments of imports into the region, poor power plant performance within California brought native generation off line during critical periods, and (there was) the perception that demand had simply outgrown supply. In other words, in the fall of 2000 we were as worried about reliability of supply as we were price."

Perry testified that Sierra Pacific Power bought additional energy for the middle of last year because of concerns that electricity would be in short supply and because federal regulators and the Bush administration had failed to cap wholesale prices in Nevada.

The utilities have several critics, however, who want to see the $205 million request significantly reduced. Chief among them is the state Bureau of Consumer Protection, which is seeking a reduction of between $50 million and $281 million.

State Consumer Advocate Timothy Hay said the utility bought too much power and made poor decisions in the way it pursued energy contracts. The $50 million estimate is based solely on the purchase of excess power, whereas the $281 million recommended disallowance factors in the utility's imprudent business strategies, he said.

"Our impression thus far is that from the consumers' perspective, the hearings are going well," Hay said. "Many of the imprudent decisions in the Nevada Power case are the same in the Sierra Pacific Power case."

The PUC staff is recommending a disallowance of $38 million based on the belief that Sierra Pacific Power bought more energy than it needed.

"Part of it is they bought too much and part of it is they paid too much," Dick Burdette, PUC's manager of resource and market analysis, said. "In the south, we thought the company (Nevada Power) bought enough power to meet its peak load but bought too much for other months. In the north they (Sierra Pacific Power) bought too much for the peak and too much for the other months."

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