Despite rebuff, water board pursues utility

Friday, Sept. 13, 2002 | 10:55 a.m.

The Southern Nevada Water Authority will not back down in its bid to purchase Nevada Power Co., despite rejection of its $3.2 billion offer by the parent of the Las Vegas electric company.

This is shaping up as Southern Nevada's version of a shoot-out at the O.K. Corral, with the rhetoric heating up on both sides.

The government-run water authority, Nevada Power's largest customer, plans a counter response after huddling today with financial and legal advisers, deputy water authority general manager Richard Wimmer said.

Wimmer said the water authority's offer -- which includes $1.2 billion for Nevada Power's assets and $2 billion in debt -- is good for shareholders of Nevada Power parent Sierra Pacific Resources and good for ratepayers because they would enjoy an estimated 20 percent discount.

"We're basically not surprised but we're really disappointed," Wimmer said.

"I'm surprised at some of the questions in their letter to us. It feels like delaying tactics.

"My initial reaction was that all their questions are easy to answer for someone who wants to listen to the answers."

Sierra Pacific disclosed Thursday that it was rejecting the offer to negotiate because the water authority's proposal would be financed entirely by debt and was "unrealistic."

In a letter to water authority General Manager Pat Mulroy, Sierra Pacific Chairman Walter Higgins also stated that the government-run authority had "no experience or track record either in accomplishing a multibillion-dollar corporate acquisition or the management of an electric utility."

In a prepared statement, Mulroy responded that Sierra Pacific's reaction was "entirely consistent with the behavior this company has displayed in all its dealings with Southern Nevada's ratepayers." She said it was "absurd" to think that the water authority didn't understand the utility business.

"It's obvious that Sierra Pacific's senior management either doesn't understand public financing and the SNWA's operation, or they simply don't want this offer considered," Mulroy stated. "This proposal is not only realistic, it's enormously beneficial to Sierra Pacific's shareholders, customers and Southern Nevada as a whole.

"It is obvious that they care first and foremost about maintaining the status quo, which will continue to be financially devastating for the Southern Nevada community."

At a press conference Thursday at Nevada Power headquarters, Higgins disclosed that the utility has been approached by potential buyers that he would not identify but who are capable of purchasing the company. Industry observers have speculated that possible suitors could include large investor-owned utilities from neighboring states such as Southern California Edison or Pinnacle West Capital Corp., which operates Arizona Public Service in Phoenix.

Higgins said the water authority's proposal reminded him of the type of "tricks" used by corporate raiders that are short on substance such as, "Maybe I'll pay you that."

"That's essentially what the (water authority) letter said and that's not the acceptable way to do business," Higgins said. "Any of you could have made this proposal to us. It took no money to do it."

One of his primary concerns has to do with the water authority's plan to finance the acquisition with 30-year municipal bonds that would be included in customers' electricity rates. The water authority maintains that the cost savings to ratepayers will come in large part from the fact that it has a "double A" credit rating compared to Nevada Power's "junk" status, meaning it is less expensive for the water authority to borrow money.

"SNWA has provided no reasonable assurance of the necessary financing," Higgins wrote in the letter. "The acquisition indebtedness would not be backed by the existing credit, assets or revenues of the SNWA water system, and revenues from SNWA's sales tax subsidy and regional connection fees -- which account for the majority of SNWA's total revenues -- would not be available to service the new debt.

"The overwhelming size disparity between Nevada Power and SNWA is a substantial obstacle in itself. As compared to Nevada Power's estimated revenues of approximately $1.5 billion this year, SNWA's 2001 revenues from operations were less than $70 million."

The water authority's response was that Sierra Pacific engaged in a similar financial arrangement last year when subsidiary Sierra Pacific Power Co. of Reno sold its water division for $350 million to the government-run Truckee Meadows Water Authority. The acquisition, which provides water to Reno and other parts of Washoe County, was financed totally by bond debt.

"It was exactly the same situation up in Northern Nevada," Guy Hobbs, a water authority financial adviser, said.

Hobbs, former chief financial officer for Clark County, said Sierra Pacific's letter looked as if it had been written by someone who was unfamiliar with public-sector credit markets.

State Consumer Advocate Timothy Hay agreed by saying that government acquisitions typically involve bond debt. He expressed disappointment in the response from Higgins.

"My initial reaction to the rejection is that it displays some degree of arrogance and irresponsibility to me," Hay said. "It certainly appears to be a stalling tactic. We certainly thought the Southern Nevada Water Authority was generous when you look at the value of Nevada Power's generating facilities. If Sierra Pacific is hoping to negotiate for a higher price, that may be fruitless."

Clark County Commissioner Dario Herrera, a member of the water authority board, said that "it's obvious that Nevada Power has very little interest in providing customers with an immediate 20 percent rate reduction."

"I'm still interested in having the water authority continue discussions," Herrera said. "But given Nevada Power's history and poor management decisions I'm not surprised by this.

"The leadership of the water authority is interested in providing rate savings to consumers and we ought to do everything we can to make sure that happens."

Higgins left open the possibility for future discussions if the water authority provided Sierra Pacific's board of directors "legal and financial plans that demonstrate SNWA's ability to execute a fully financed, premium offer and a feasible plan for implementation that is consistent with our obligations to customers, shareholders and our other stakeholders."

Joyce Newman, president of the Utility Shareholders Association of Nevada, said she assumed that the Sierra Pacific board had "good reasons" to reject the proposal that was contained in an Aug. 22 letter from Mulroy to Higgins.

"I never saw the details of the offer so it would be presumptuous of me to make an opinion on it," Newman said.

The stock market's initial reaction was also relatively static, with Sierra Pacific shares closing Thursday at $7.03, up four cents for the day. This morning, it rose to $7.25 today in early morning trading before drifting back to $7.03 later in the day.

Sierra Pacific intends to launch a campaign against a Clark County ballot measure on the November general election ballot that will ask voters whether they would like to see Nevada Power taken over by a public power authority. An affirmative vote would be forwarded to the state Legislature for consideration next year.

State law prohibits a public entity from making a hostile takeover of an investor-owned power company. But Mulroy has said that changing that law is one option the water authority may pursue if its attempt at a friendly acquisition of Nevada Power fails.