Wednesday, Sept. 3, 2003 | 11:02 a.m.
The fallout of last week's bankruptcy court ruling continues to batter Nevada Power Co. and its parent company, Sierra Pacific Resources.
Moody's Investment Services on Tuesday reduced the credit outlook for Sierra Pacific from stable to negative. The company also left the utility's credit rating at junk levels.
The move came just two hours after Standard & Poor's issued a similar statement, placing Sierra Pacific and its subsidiaries on credit watch.
A U.S. Bankruptcy Court judge last week ruled that Sierra Pacific Resources, parent of Nevada Power of Las Vegas and Sierra Pacific Power of Reno, must pay Enron Corp. more than $300 million for power contracts cancelled in 2002.
Nevada Power is responsible for about $200 million of those contracts, Sierra Pacific Resources said Tuesday in filings with the U.S. Securities and Exchange Commission. Sister company Sierra Pacific Power Co. of Reno owes about $87 million, and in December an additional $25 million was placed in an escrow account by the utilities to cover power delivered under the contracts in April, the filing said. That puts the total amount of the disputed deals at about $312 million.
In May 2002, Enron exercised a clause in the contracts allowing it to terminate the deals if the companies lost credit worthiness. That happened after the state Public Utilities Commission disallowed $437 million of a proposed $922 million rate increase Nevada Power sought in 2002 to cover the cost of buying power during the Western energy crisis.
Nevada Power and Sierra Pacific had their credit ratings cut to junk status shortly after the PUC's March 2002 ruling.
"The lack of support by the bankruptcy court for (Nevada Power's) and (Sierra Pacific Power's) counter positions to Enron's claims raise Moody's concern about possible adverse effect on credit quality for the utility companies and their parent company," Moody's said in its statement on Tuesday.
Sierra Pacific has indicated that it will appeal the ruling, but the court could order the company to post a bond as collateral for the judgement. The company said it would meet those obligations through the issuance of debt.
Nevada Consumer Advocate Tim Hay said the utilities should not be allowed to recover the costs of the judgement or the interest charges needed to finance a bond through ratepayers. The company would need approval from the PUC to increase rates in order to recover those costs.
The uncertainty surrounding PUC approval was reflected in Standard & Poor's announcement.
"The utilities would have to apply to recover these costs from ratepayers through a deferred cost proceeding that would entail a prudency review by the (PUC), and a possible disallowance," said Swami Venkataraman, utilities analyst with Standard & Poor's. "To the extent that the (PUC) disallows any of these costs, Sierra Pacific Resources' consolidated financial profile would be further weakened."
The bankruptcy court judge based his ruling on a decision by the Federal Energy Regulatory Commission to uphold contracts signed during the Western energy crisis despite FERC's finding that the deal were the subject to market manipulation.
Last week, FERC agreed to reconsider that ruling, which could affect the bankruptcy court's decision. Standard & Poor's, however, is not optimistic about the outcome.
"Standard & Poor's does not consider the prospect of FERC's changing its stance as very likely, given its decision to generally uphold the sanctity of all contracts signed during the crisis," the S&P report said.
Standard & Poor's expects Enron to make its final demands to the bankruptcy court judge by Friday. Sierra Pacific will then have 10 days to respond. Following that response, the judge is expected to issue a final order.
Sierra Pacific stock, which fell 30 cents Tuesday, was trading this morning at $4.74, up 1 cent.
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