Stock decline refuels Nevada Power debate

Wednesday, Feb. 12, 2003 | 11:19 a.m.

Internet chat lines buzzed with speculation about the future of Nevada Power Co. after the stock price of parent Sierra Pacific Resources Inc. fell 17 percent Tuesday to historic lows.

Sierra Pacific was the most heavily traded company on the New York Stock Exchange Tuesday with trading volume of 28.9 million shares, more than 47 times its average daily volume of 608,909 shares.

By closing at $3.75 a share, the drop from Monday's closing price of $4.52 represented the third largest decline on the stock exchange Tuesday. The stock fluctuated this morning, at one point declining and then trading up 1 cent at 1:20 p.m. in New York.

Overall, Sierra Pacific's stock price has declined 90 percent since it was created by a July 1999 merger of Sierra Pacific Power Co. of Reno and Nevada Power of Las Vegas.

The drop was caused by a reaction to a decision by the company to issue $300 million in bonds to refinance debt.

The impact the falling stock price will have on Southern Nevada ratepayers is subject to debate. The deal involves bonds that can be converted upon maturity into company stock and cash under a formula, which would reduce the value of stock owned by current shareholders.

Walt Higgins, chairman, president and chief executive of Sierra Pacific, said in a prepared statement that the deal would be good for customers and make the struggling company more financially viable. There was no hint in the release that the company would change its mind and agree to sell Nevada Power.

"We are especially pleased that the transaction announced (Tuesday) morning was achieved so rapidly because it places us on solid financial footing to continue rebuilding and strengthening our capital structure," Higgins said.

"The flexibility and liquidity created by this transaction allows us to place greater focus on the operational basics of our business so that we can better serve our customers throughout Nevada and the Lake Tahoe region of California and restore our company's financial health."

But state Consumer Advocate Timothy Hay said he disagreed.

"This makes a structural change in the company more likely, either through a merger with a bigger company or a direct buyout as the Southern Nevada Water Authority has proposed," Hay said. "Frankly, I think that with the precipitous decline in the stock value, if anything, the water authority should lower its offer."

The Sierra Pacific transaction, designed to refinance debt that is due in April and increase the company's liquidity by $50 million, involves the issuance of $300 million in convertible bonds with an annual interest rate of 7.25 percent. When the notes mature in 2010 they can be converted into shares of the company stock and cash. Bloomberg News reported that the shares would need to rise 21 percent in value from Tuesday's closing share price of $3.75 to make the conversion worthwhile to the note holders.

Last week Sierra Pacific announced that it would issue 13.66 million shares of common stock in another transaction to reduce debt.

"I believe they have sold out existing shareholders," Hay said. "It's a Band-Aid approach and it doesn't bode well for shareholders or ratepayers because it does not address the issue of whether the company will be able to access future energy markets."

Nevada Power spokesman Jack Leone said Sierra Pacific, which has rejected a $3.2 billion bid by the water authority for Nevada Power, still does not plan to ask the Nevada Legislature to renew a state law that prevents government agencies from hostile takeovers of privately owned utilities. The law, Senate Bill 425 passed in 2001, expires on June 30 but company officials have said they believe they have other legal protection against hostile takeovers.

"Our legislative strategy as of now has not changed," Leone said.

Water authority spokesman Vince Alberta said only that "our offer is still on the table as presented."

Joyce Newman, president of the Utility Shareholders Association of Nevada, did not return phone messages for comment. But the tumbling stock price drew immediate reaction on Internet chat lines. Some participants speculated that the price would rebound while others questioned whether Sierra Pacific could avoid bankruptcy.

Nearly half of the shares are held by 10 large institutional investors such as mutual fund companies. Company executives and board members hold less than 1 percent of the stock.

Aside from the water authority offer, there has been speculation by observers of Nevada Power that other possible suitors for the Las Vegas electric company would include such utilities as Southern California Edison or Pinnacle West Capital Corp., parent company of Arizona Public Service in Phoenix, because of their proximity to Nevada.

Justin McCann, a utility analyst for Standard & Poor's in New York, said that "off the top of my head, I can't see any of the California companies or Pinnacle West doing anything. But that doesn't rule anything out."

Craig Shere, an equity analyst for Standard & Poor's Investment Advisory Services in New York, also said that he did not foresee an imminent buyout of Nevada Power by another company. He said that's because Sierra Pacific faces many upcoming financial hurdles this spring.

They include a possible Federal Energy Regulatory Commission ruling on a dispute with fallen energy giant Enron Corp. over prior energy contracts and a decision by the state Public Utilities Commission on a request by Nevada Power to recover $195.6 million over three years from ratepayers for energy used last year.

"Some of the liability exposure needs to be resolved before anyone is willing to bid on the company," Shere said. "I don't know that anyone wants to take on Nevada Power's operations if they can't get that money."

Standard & Poor's, a credit rating agency, announced Tuesday that the latest Sierra Pacific transaction to refinance debt "staves off a potential liquidity crisis given Sierra Pacific's inability to otherwise meet its debt-service obligation."

Sierra Pacific's credit rating remains in junk status, a position it found itself in after the PUC in March approved only $485 million of the $922 million Nevada Power was seeking from Southern Nevada ratepayers for energy used in 2001. Sierra Pacific has sued the PUC for full recovery of that request in a case that is pending.