Credit raters differ on Sierra Pacific

Kevin Rademacher

Tuesday, Feb. 18, 2003 | 11:07 a.m.

The nation's two major corporate debt ratings services have issued new, conflicting, outlooks for Sierra Pacific Resources.

Moody's Investors Service last week confirmed a credit outlook upgrade for Sierra -- owner of Nevada Power Co. -- from negative to stable. With the move, Moody's assigned a B2 rating on the utility's previously announced refinacing of $300 million in debt.

"We are always pleased with improved credit ratings," said Sierra Pacific spokeswoman Sonya Headen.

Despite the upgrade, however, a B2 rating falls short of a vote of confidence.

"Bonds and preferred stock which are rated B generally lack characteristics of the desirable investment," according to Moody's rating definitions.

A day before the Moody's report was issued, Standard & Poors released a statement on Sierra Pacific. That report, authored by utilities analyst Swami Venkataraman, said, "All ratings will have a negative outlook."

A new deferred-energy case pending with the state Public Utilities Commission (PUC) and undecided lawsuits were cited as key hurdles.

"Current ratings do not incorporate the potential adverse ruling on a lawsuit filed by Enron Corp. asserting its claim to $305 million of marked-to-market profits on its terminated power sale contracts with Nevada Power," according to the Standard & Poor's report.

"We will continue to monitor the developments relating to these issues," the Moody's report added.

Each of these issues could be decided by mid-summer.

"We know the company has a number of challenges," said Don Soderberg, chairman of the PUC. "From our perspective, we want to see the company move forward. We want to see these things resolved before summer hits."

Venkataraman emphasized that a new deferred-energy case, which would allow the company to recover $195 million spent on power costs between October 2001 and September 2002, is the most significant obstacle.

"The ability to recover costs is fundamental to any utitlity," he said. "If not, Sierra Pacific must begin to look at bankruptcy or possibly selling itself, whether it's to (the Southern Nevada Water Authority) or another entity."

While a rejection by the PUC could be devastating, Venkataraman said a positive outcome could significantly boost the company's future prospects.

"If this part of the ruling is favorable, it will begin to lay the groundwork for economic recovery," he said.

A year after the PUC cut a more than $900 million rate increase request by $434 million, a favorable ruling will be a sign of improved relations with state regulators, the analyst said.

"It is ultimately the company's ability to rebuild confidence with its customers and regulators in Nevada that would be crucial for its return to investment-grade credit quality," Venkataraman said.

Soderberg said the company has made progress, but those moves will have no bearing on the deferred-energy case.

"There are a lot of operational aspects of the company that seem to be improving," he said. "In the big picture, we are pleased the company is meeting some of these other challenges, but we can't factor that into the case that's before us."

Also looming in the coming weeks is a District Court ruling in Carson City in which Sierra Pacific is seeking reinstatement of the $434 million rejected by the PUC in last year's deferred-energy case.

Timothy Hay, chief deputy attorney general and Nevada consumer advocate, said the odds of a Sierra Pacific sweep are slim.

"It's an exceptionally volatile situation," he said. "I certainly would not be betting on that if I were management."