Enron ruling pushes Sierra Pacific closer to financial edge

Kevin Rademacher

Friday, Aug. 29, 2003 | 11:26 a.m.

Nevada Power Co. and its parent company -- Sierra Pacific Resources -- moved deeper into financial distress Thursday when the cash-strapped, money-losing utility was ordered to pay $309 million to the notorious energy giant Enron Corp.

Sierra Pacific stock fell this morning after a judge in Enron's bankruptcy case upheld Enron's energy-selling contracts with Nevada Power Co. of Las Vegas and sister company Sierra Pacific Power of Reno. The Federal Energy Regulatory Commission has already said those contracts were tainted by market manipulation. FERC, however, has refused to set aside those deals.

Sierra Pacific Resources has previously said such a ruling could push it into bankruptcy. The Southern Nevada Water Authority today confirmed that its $3.2 billion offer to buy Nevada Power is still available as a "safety net" for the struggling utility -- though so far Nevada Power hasn't shown any interest in being taken over.

In its second-quarter filings with the U.S. Securities and Exchange Commission, Sierra Pacific said, "An adverse decision in the pending lawsuit by Enron could make it difficult to continue to operate outside of bankruptcy."

Sierra Pacific is expected to appeal the ruling.

"We are currently studying the decision and will consider all possible courses of action once an order is issued," Walt Higgins, chairman and chief executive of Sierra Pacific, said in a statement. Company executives declined further comment this morning.

"Obviously it is -- if upheld -- going to have substantial and dramatic economic implications for the company," said Nevada Consumer Advocate Tim Hay.

Don Soderberg, chairman of the state Public Utilities Commission, agreed.

"You have to imagine $300 million would be a huge blow to any company," he said.

In March, the Federal Energy Regulatory Commission released an extensive report outlining manipulation in the Western market by Enron and other power traders between 1999 and 2001. That manipulation, the report said, drove up the cost of the resulting contracts. Still, federal regulators upheld the deals, reasoning that the public interest was better served by protecting the sanctity of contracts than by disallowing gains from manipulation.

The deals with the Nevada utilities were cancelled by Enron in 2002 after Sierra Pacific's credit rating was decimated by a $437 million rate case disallowance handed down against Nevada Power by the PUC.

In Thursday's ruling, U.S. Bankruptcy Court Judge Arthur J. Gonzalez said the court would not oppose FERC's decision regardless of Sierra Pacific's arguments.

"This court does not have jurisdiction to consider these issues as they are within FERC's exclusive jurisdiction," Gonzalez wrote.

Soderberg questioned the logic of the ruling.

"It really calls into questions the bankruptcy court's protection of rogue utility companies," he said. "Clearly, Enron did not have the ability to deliver on the contracts in questions when they cancelled them."

Such a ruling would typically be paid for by customers through higher bills. Hay, however, said the Bureau of Consumer Protection would oppose such a recovery on the basis of imprudent actions on the part of Sierra Pacific Resources. The signing of inflated contracts during the Western energy crisis was the basis of the massive disallowance in the 2002 rate case.

"If upheld, we don't believe these are prudently entered into contracts" Hay said. "We don't believe any liability should be passed on to the ratepayers."

Soderberg said the commission would have to rule on any effort by Nevada Power to recover the judgement through ratepayers.

"It is up in the air if the company can recover all or some of this judgment," he said.

Jake Mercer, a utilities analyst with US Bancorp Piper Jaffray, said he could not comment on the details of the ruling until he had more time to research the situation. On first glance, the ruling did not look good.

"Obviously, you've got to be disappointed with the decision if you are Sierra Pacific," he said.

The details of the judge's final order, which has not been released, could determine the near-term stability of Sierra Pacific, Mercer and Hay agreed. In that order, the judge will determine whether Sierra Pacific must post a bond for the judgment amount during an appeal. Such a bond for a company with a junk credit rating may be difficult to swing.

"The immediate goal is not to have to post any collateral," Soderberg said, adding that the PUC would intervene in any appeal on behalf of Sierra Pacific.

The ruling comes after a series of positive events for Nevada Power and its parent company.

In May, the PUC rejected a $180 million proposed disallowance in Nevada Power's request to be reimbursed for electric costs, opting instead for a more manageable $47 million disallowance for Nevada Power. The commission and company executives speculated that the ruling should put the effects of the Western power crisis behind the utilities and their customers.

Analysts also responded to the commission's comments on improved management practices at the utilities and a better relationship with state regulators, indicating that the events could lead to an improved credit rating.

"I think it's a positive step for the state and the utility in the long term," Mercer said in May.

Sierra Pacific also successfully refinanced its long-term debt and filed a resources plan with the PUC that called for the construction of new transmission lines and two new power plants over the next four years.

Still, the company has reported three consecutive money-losing quarters, including a $173 million loss in its most-recent quarter.

Sierra Pacific shares were off 8 percent this morning, down 43 cents to $4.97 a share.