Fund agitating at utility

Kevin Rademacher

Wednesday, April 21, 2004 | 10:42 a.m.

Upset with falling stock value, the second-largest holder of stock in Nevada Power Co.'s parent -- Sierra Pacific Resources -- announced that it will withhold votes for the reelection of three directors.

Franklin Resources Inc., which hold 8.8 million shares in the company, said the board has "continuously failed in its duty."

Among those that will not receive votes from Franklin is Walter Higgins, Sierra's chairman and chief executive. He was singled out in a report filed by the mutual fund manager on Tuesday.

The report said that the company's book value stock price when Higgins took over on Aug. 8, 2000, was $18.29 per share on 78.4 million shares. At year-end 2003, the book value stock price had fallen to $9.87 on 200.2 million shares.

"Although the decline in book value has been partially due to operating losses and write-offs of disallowed energy costs by regulators, management contributed to this decline through numerous capital transactions," the report said.

Also up for reelection to Sierra's board are James R. Donnelley, a director since 1987, and John F. O'Reilly, a director since 1995.

Specifically, the report criticized the company's decision to issue $300 million in convertible debt -- which can be converted to stock -- that diluted the interest of existing shareholders. The report also criticized the "management's apparent unwillingness to control costs or reduce capital spending."

The report said that while the company's cost of capital has risen -- due largely to a damaged credit rating -- capital expenditures rose from $302 million in 2001 to $328.1 million in 2003. Sierra Pacific has frequently stated that the high capital expenditure costs are necessary because of the rapid growth in Southern Nevada.

Jack Leone, a spokesman for Sierra, declined to comment on the Franklin report.

"We don't comment on what individuals or companies may or may not do," he said.

The vote will be decided at a shareholders meeting scheduled for May 3 at Harrah's hotel-casino in Reno.

More than 90 percent of the stock in Sierra Pacific Resources is controlled by by institutional investors. The largest holder, FMR Corp. (better known as Fidelity Investments) holds 11.7 million shares, or about 10 percent of the outstanding shares.

Jake Mercer, a utilities analyst with Piper Jaffray & Co., said such moves to withhold votes are becoming common in all industries.

"Five years ago, this would have been much more unusual than it is today," he said. "That Sierra Pacific has been targeted is not a huge surprise."

He said the troubled financial state of the company that began in 2002, when regulators disallowed the recovery from ratepayers of more than $400 million spent by Nevada Power during the Western energy crisis, continues to haunt the company.

That has been magnified from investors' perspective by the dilution of shares and the cancelling of dividend payments.

"Some people blame the problems on management," Mercer said. "Some people blame the problems on (Nevada regulators) and management. ... Certainly when securities aren't performing, eventually shareholders are going to be upset."

Nevada Consumer Advocate Tim Hay said the dissatisfaction can be traced back to a decision not to consider an offer by the Southern Nevada Water Authority to buy Nevada Power. Hay said that the board of director's decision to ignore the offer, even if it was flawed, discouraged interest from other parties.

Exploring those options "would have lowered rates to consumers and protected shareholders," Hay said.