Bankruptcy warning highlighted as Sierra Pacific loses $303.9 million

David Strow

Wednesday, May 15, 2002 | 11:03 a.m.

The parent company of Nevada Power Co. reported a massive loss Tuesday and blamed the shortfall on Nevada regulators' partial denial of its rate hike request in March.

As a result, Sierra Pacific Resources said repeatedly in its quarterly report, the company now faces the possibility of bankruptcy.

Sierra Pacific Resources posted a loss of $303.9 million, or $2.98 per share, for the quarter ended March 31. This was up substantially from the loss of $83.5 million, or $1.06 per share, in the year-ago period.

Nevada Power was responsible for virtually all of the loss, with a net loss of $301 million, compared to $55.3 million in the year-ago period. Its sister utility, Sierra Pacific Power, posted net income of $10 million, up from a net loss of $4.5 million.

The loss directly resulted from a $310.7 million write-off of deferred energy costs and "other rate related write-offs" from the books of Nevada Power. Without this charge, Sierra Pacific would have reported a profit of $6.8 million, or 7 cents per share.

Revenues sank 10 percent to $638.4 million. Both utilities brought in far more revenue from sales to ratepayers as the result of rate hikes and customer growth -- Nevada Power's "retail" revenue rose 25 percent, while Sierra Pacific Power's was up 18 percent. But both utilities sold less wholesale power to other utilities, and these sales came at lower prices. This resulted in a 48 percent decrease in wholesale revenue at Nevada Power and a 69 percent decrease at Sierra Pacific Power.

Even while revenues went down, Sierra Pacific's operating expenses rose 18 percent to $869 million.

"I would say the earnings were disappointing, even before the write-off," said Ron Tanner, utilities analyst with Legg Mason Wood Walker. "Costs go up when a company is junk (credit ratings). Somehow they're going to have to get those costs recovered, or the company will continue to erode."

Still, Tanner said the report wasn't a surprise. Investors appeared to share that attitude; this morning, Sierra Pacific stock was unchanged at $6.64.

The spike in market prices for electricity seen in the year-ago quarter caused Sierra Pacific to take heavy losses, as it sold power to its customers at rates below the price it paid other utilities for the electricity. Sales at below market prices continued through 2001, but the utility later began recording the losses on its balance sheet as "deferred energy costs" -- an asset that it expected to collect at a later date from ratepayers through rate hikes.

The PUC shot down this effort in March, awarding Nevada Power just $485 million of the $922 million hike it requested. That made much of the deferred energy costs noncollectible, forcing this quarter's write-offs.

Sierra Pacific repeated its warning that the PUC's decision had left it in severe financial trouble. Discussing its financial condition in its quarterly report, the company repeatedly referred to the possibility of bankruptcy.

After the PUC's decision, two major credit firms reduced Sierra Pacific's credit rating to below investment grade status. Several electricity suppliers, including an affiliate of fallen energy giant Enron Corp., responded by cut off Nevada Power.

That's left Sierra Pacific and its two utilities with a "serious liquidity problem," the company said. Its report said there are a variety of scenarios that could trigger bankruptcy, including:

"I would say it has the highest possibility (of bankruptcy) of any utility right now," Tanner said. "If you don't get any concessions from the suppliers of power, it's a very high probability."

Tanner believes everything hinges on Sierra Pacific Power's request for a $205 million rate hike. A decision should be handed down by the PUC by month's end.

"If the commission gives the same proportion of disallowance they did in the Nevada Power case, then I think the (power) suppliers will have to renegotiate very quickly or the company goes bankrupt in June," Tanner said.