Monday, June 30, 2003 | 11:22 a.m.
At midnight tonight a Nevada law blocking the takeover of a public utility by a government agency will expire.
In theory, the sunset of SB425 -- passed by the 2001 Nevada Legislature -- would clear the way for the Southern Nevada Water Authority (SNWA) to pursue a takeover of Nevada Power Co.
The water authority in 2002 made a $3.2 billion offer to buy Nevada Power from its parent company, Sierra Pacific Resources. The offer includes $1.2 billion for the Las Vegas electric company's assets and the assumption of about $2 billion in debt.
The SNWA made its offer for the utility after the state Public Utilities Commission cited widespread imprudent business practices in disallowing $437 million of a $922 million Nevada Power rate case request. The huge judgment caused the electric company's bond rating to be cut to junk status, costing the company millions of dollars in higher interest costs.
The Water Authority has said it could cut electric rates 20 percent by restructuring debt under its investment-grade credit rating.
While officials from Nevada Power and Sierra Pacific maintain that the company is not for sale, Pat Mulroy, general manager of the Water Authority, has been vocal about the status of the offer.
"The offer is still on the table," she said in a May interview. "That safety net is still out there. We don't see the company being financially sound enough at this point that one would comfortably say the company has turned the corner and the power situation in Southern Nevada looks like it has turned the corner."
Still, the SNWA said that the expiration of SB425 doesn't matter because the offer was never meant to be hostile.
"We never viewed the offer as anything but friendly," said Vince Alberta, spokesman for the SNWA.
Senate Bill 425 was part of a legislative strategy supported by Gov. Kenny Guinn in 2001 to help existing power companies such as Nevada Power retain as many customers as possible as the Western power crisis began to take its toll on utilities.
Nevada Power executives decided last year that they would not pursue efforts to have the law extended.
"We wanted to make it clear to the Legislature and the citizens of the state that we didn't want to be contentious," said Pat Shalmy, president of Nevada Power.
An aggressive takeover effort by the Water Authority to seize control of Nevada Power would be difficult, even without the now defunct state law, said Robert Lawless, a corporate law professor at UNLV's William S. Boyd School of Law.
Specifically, SNWA's proposal to buy Sierra Pacific Resources' Nevada Power unit would be difficult to force from a legal perspective. Since it is not a formal takeover of a company, legally it amounts to little more than a business decision, Lawless said.
"The courts will not interfere with the business judgment of a company," he said.
Without legal support, the bid's only hope -- absent the support of Sierra Pacific's board of directors -- is shareholder pressure, and even that could be tough to generate.
"Obviously, as you take debt off the balance sheet, it improves the financial position of the company," said Jake Mercer, a utilities analyst with US Bancorp Piper Jaffray. "But you also take a cash generating subsidiary off the balance sheet. What, at the end of the day, is going to be better for you?"
While the utility still faces issues related to its weak credit rating and the stock price of the parent company is relatively low, the outlook is improving.
Nevada Power received a favorable ruling from the PUC in May when it rejected proposed disallowances of $180 million in a new rate case, instead throwing out just $47 million. The improvement over 2002's $437 million disallowance sent stock prices for the parent company higher. After hitting an all-time low of $2.92 a share in February, the stock jumped from $3.77 a share to $4.68 a share on news of the PUC decision in May.
Sierra Pacific closed at $5.94 on Friday, down from $15.09 the day before the PUC announced its 2002 disallowance. But signs of improvement have been recognized by Wall Street.
"If the financial position would be worse, then obviously the incentive to sell would be greater," Mercer said. "If now shareholders think they can dig themselves out of a hole, they won't look as favorably on a sale."
Shalmy said the company is well aware of its past and future challenges.
"I think we have responded well to criticism," he said. "Any good company is going to try to improve. That's what we're doing. ... We're not for sale. Obviously, if someone comes forward with an offer, we've got to look at it, but we are proceeding as if we are going to be around for another 100 years."
A turning point in the company's new-found security came when PUC commissioners praised improvements the company made since its troubled appearance in front of the commission a year earlier.
"Obviously, the decision was very important, but the comments by the commission, I think, were what Wall Street really looked at," Shalmy said.
He did, however, say that the company faced challenges in keeping up with expansion needed to meet rising demand as the Las Vegas population continues to grow.
"Our financial situation is continuing to challenge us," he said. "We need to look hard at how we are spending our money."
Those challenges, he insisted, will not be around forever.
"I think the future is bright for us," Shalmy said.
Lawless said the better chance for a hostile takeover of Nevada Power would come in a bid for Sierra Pacific Resources as a whole. Even that, however, would be difficult given current state statutes.
"If you want a piece, you almost have to buy the whole thing and sell off what you don't want," Lawless said. "Nevada Power's stock is all owned by Sierra Pacific."
Nevada currently has three anti-takeover statutes on the books, and all of them present challenges for hostile bids, Lawless said. Each of the statutes is designed to give the board of directors of the company being acquired more power. While they can assist in repelling a hostile bid, they can be set aside by a board to allow a consensual merger.
The first hurdle is a "control share" statute that, in Nevada, causes an entity acquiring more than a fifth of a company's stock to lose its voting rights. Those voting rights can only be reinstated by the board of directors.
That means buying up stock could turn into a losing proposition for a hostile bidder since it would not be able to cast votes in its own favor.
The second statute, known as a "freeze out," dictates that a company can't merge with a shareholder owning more than 10 percent of the shares for three years. That would mean after acquiring the shares needed to approve a merger, the companies could not actually merge for three years.
Again, the freeze-out period can be set aside by the directors of the company being acquired to allow a consensual merger to move forward.
The final anti-takeover provision is an "other constituents" measure. That allows the board of directors to base its decisions on the protection of parties other than shareholders. In the case of Sierra Pacific, that would mean that directors could cite the well being of customers or suppliers when justifying its decision to reject a merger.
"The idea of all of these devices is to put power in the hands of the board of directors," Lawless said.
Legal challenges to such statutes are not out of the ordinary, but winning court approval of a hostile takeover in such a situation would be difficult.
"The courts are likely to defer to what the board of directors have decided," Lawless said.
That assessment follows claims Nevada Power executives made a year ago when they decided to forego efforts to have SB425 renewed.
"We had research done, and we felt there were legal reasons why we could fend off a hostile takeover," Shalmy said.
Ultimately, however, shareholders will have a significant voice.
"The board of directors has a lot of leeway to turn down a lot offers," Lawless said. "But ultimately they are subject to the regulation of the marketplace ... The marketplace can and will bring about change if they they think directors are not acting to maximize share price."
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