Sierra Pacific results hurt by PUC rulings

Kevin Rademacher

Friday, Aug. 8, 2003 | 11:18 a.m.

Regulatory disallowances associated with the Western energy crisis once again dragged down the earnings of Sierra Pacific Resources.

Sierra Pacific, parent of Nevada Power Co. of Las Vegas, recorded $91 million in disallowances from rate cases decided earlier this year, contributing to a second-quarter loss of $173 million, or $1.48 per share.

The company reported a loss of $42 million, or 41 cents a share, in the same 2002 quarter.

"While we are dissatisfied with the financial results for the second quarter, we believe the (rate case) decisions are the final step in putting the Western energy crisis behind us," Walter Higgins, chairman and chief executive of Sierra Pacific, said in an earnings announcement released this morning.

In May, the state Public Utilities Commission voted to disallow the recovery of $48 million of the $196 million Nevada Power spent on fuel and purchased power. Sierra Pacific Power in Reno was disallowed the recovery of $45 million of its fuel and purchased power expenses.

Rate case disallowances did not, however, make up all of the write-offs and charges Sierra Pacific took in the quarter.

Sierra Pacific also took an anticipated $124 million charge related to the conversion of $300 million in debt to stock. The loss would be created by the difference of a projected stock price of $6 per share when the debt was issued in February and the current stock price of less than $5 per share.

Shareholders are scheduled to vote Monday on the issuance of 42.7 million shares of common stock to convert that debt.

The company also had a $42 million write-off related to its unregulated business lines. That included a $9 million loss on the sale of its e.three subsidiary, an energy services group in Las Vegas. It also included a charge of $33 million for its Sierra Pacific Communications fiber-optics subsidiary, which saw one of its major joint venture partners declare bankruptcy.

"The write-down and sale involving our non-utility subsidiaries ... will reduce our exposure to risks associated with unregulated businesses and enable us to place greater focus on our core, regulated electric and gas businesses in Nevada and California," Higgins said.

In a conference call with investors also conducted this morning, Higgins said the company was in the process of closing or selling all of unregulated subsidiaries.

Jake Mercer, a utilities analyst with US Bancorp Piper Jaffray, said the financial position of the company is still shaky, but it appears to be improving.

"There is still some significant risk," he said. "It's moving in the right direction, but it's not out of the woods yet."

Nevada Power posted a loss of $22 million for the second quarter. Excluding rate case write-offs, the company estimated that the Las Vegas utility would have posted earnings of $8 million.

High interest costs continue to plague Nevada Power. The company's debt rating was cut to junk status after a $437 million rate case disallowance in 2001, and had since resulted in higher debt-financing costs. For the second quarter, Nevada Power saw interest charges increase $8 million over the second quarter 2002.

Second-quarter revenue for Nevada Power were $426 million, down from $477 million in the year-ago period. Operating expenses, however, were down from $447 million to $415 million.

Companywide, Sierra Pacific saw revenue of $667 million in the second quarter, down from $701 million for the same 2002 quarter. Operating expenses were $682 million for the second quarter, up from $680 million a year ago.

In the conference call, Richard Atkinson, Sierra Pacific's chief financial officer, blamed more than $30 million in losses on on increased interest expenses and higher pension and insurance costs.

Those costs, company officials said, would be addressed in a general rate case the utility will file with Public Utilities Commission later this year.

The company also announced today that it has initiated a private offering of $350 million in 10-year mortgage notes. That will be used to refinance an identical amount in debt maturing in September and October. The sale of the mortgage notes to is expected to be completed later this month.

Mercer said the wording of announcement appeared to indicate that a deal was already done, another potential boost for the company. Of the maturing debt being refinanced, $210 is unsecured debt demanding a higher interest charges, Mercer said.

"There going to get a lot better pricing," Mercer said. "If indeed the private placement is done, that's another real positive step."

Higgins in the conference call also indicated that the company would continue its legal challenges of a recent ruling by the Federal Energy Regulatory Commission to uphold about $300 million in long-term contracts the utilities entered into with several power sellers at the height of the energy crisis.

He also said the company will keep fighting Enron Corp.'s challenges in U.S. Bankruptcy court that Nevada Power owes $300 million for canceled power contracts.

Sierra Pacific stock was off 3 percent this morning, trading at $4.83, down 15 cents per share.