Nevada Power in $558 million deal for plant

Kevin Rademacher

Wednesday, June 23, 2004 | 10:57 a.m.

Nevada Power Co. of Las Vegas said this morning it reached a $558 million deal to purchase and complete a partially built 1,200-megawatt power plant owned by Duke Energy of North Carolina.

The plant is about 20 miles north of Las Vegas in the Apex Industrial Park.

The price of the plant includes $182 million for the project in its current state of completion. The balance of the total represents the construction costs needed to complete the natural-gas fired plant, which is estimated to be about 50 percent complete.

"We expect the facility to be fully operational by the summer of 2006," said Walter Higgins, chief executive of Sierra Pacific Resources, parent company of Nevada Power.

Nevada Power, which has been operating with a junk-bond credit rating since 2002, said it expects to fund the project through a combination of internally generated cash and external financing.

Jake Mercer, a utilities analyst with Piper Jaffary, said the project makes sense for Nevada Power and, if the state Public Utilities Commission signs off on the deal, financing should be available.

"I would hope the PUC would bless it," he said. "It would help alleviate their primary issue, which is the reliance on purchased power ... Once they get the blessing from the PUC it should make it easier to access the capital markets."

Nevada Consumer Advocate Tim Hay, a frequent critic of Nevada Power, said the plan appears sound at first glance.

"On the surface it looks like a good deal," Hay said, adding that he still needed to review of the details of the transaction. "How they intend to finance it is going to be a critical issue."

Sierra Pacific Resources, recently refinanced $335 million in 10-year debt at more than 8.5 percent. Better-rated companies are getting interest rates nearly 4 percentage points lower, analysts have indicated.

Such high interest rates could mute the benefit of the Duke plant purchase for customers.

"If they get a cheap plant but pay 12 percent to finance it, that would certainly diminish the benefit (to consumers)," Hay said.

Ultimately, the PUC will determine whether Nevada Power customers or Sierra Pacific Resources shareholders will pick up the tab for high interest rates, Hay said.

The financing for the plant could be worked out favorably, particularly if the company can partner with a better rated company like Duke in the financing portion of the deal, he said. Interest, Hay added, also is cheaper on an asset such as a power plant than for other types of deals.

Roberto Denis, Nevada Power's vice president for energy resources, said the company consulted with financial advisors throughout the negotiations with Duke.

"We have had significant advice in this area and believe that it is within our means," Denis said, adding that a detailed financing plan will be included in a coming PUC filing on the transaction.

While observers agree that Nevada Power is on more solid financial footing than it was two years ago, there is at least one dark cloud looming over the company. Hay said the deal for the plant and the subsequent construction project could be jeopardized if the company fails in its appeals of a $336 million bankruptcy judgment against it in the Enron Corp. bankruptcy case.

"There is a chance that could come down in the timeframe they are talking about for the plant," he said.

Nevada Power currently generates just 40 percent of the peak demand power needed to serve its customers. The balance of the needed power is purchased on the open market. It was that open market that became dysfunctional during the Western energy crisis of 2000-01, pushing contract prices higher and driving up rates in Nevada.

"This will go a long way toward reducing the amount of purchased power that we buy to fill the growing demand for electricity in Southern Nevada," Higgins said in a statement. "It also reduces our reliance on what has been a volatile energy marketplace. We believe acquiring a more balanced mix of our own generation and purchased power is clearly in the best interest of our customers and investors."

Denis said that given the growth of the Las Vegas market, the Duke plant would increase the company's generation percentage to about 50 percent by the time it is put in service in 2006.

One megawatt is estimated to be enough power to serve about 750 homes, making the Duke plant big enough to serve about 250,000 homes.

While Gov. Kenny Guinn has not commented on the deal, his energy advisor, Richard Burdette said this morning that the pact would appear to make sense.

"My own thoughts are that all the capacity that the company can get given it's current capital situation is for the better," Burdette said. "This is a lot of capacity."

Observers agreed that the price of the plant appears to be a good deal. In its own statement on the sale, Duke said it would receive a $148 million tax benefit from the transaction, indicating that the company was taking a loss.

Mercer said that a Washington state utility recently pulled off a similar power plant purchase that cost more than $500 a megawatt. The Nevada Power deal calculates out to about $275 a megawatt.

"I think this is good for the company," Mercer said.

Duke announced plans for the power plant in 2000, amid rising Western demand and high electricity prices during the energy crisis. Once prices fell and demand leveled off, Duke halted construction in 2002.

The sale is subject to regulatory approval from the PUC. A filing with the commission is expected before the end of the month. The sale is expected to be completed in the fourth quarter of this year.

In its filing, Denis said the company would ask the PUC to amend a resource plan approved last year that called for a $414 million, 520-megawatt power plant to be built at the Harry Allen generating station, also at Apex. The amendment would replace the big Harry Allen addition with the Duke acquisition.

A separate, $44 million, 80-megawatt plant planned for Harry Allen would move forward.

In trading this morning, shares of Sierra Pacific Resources were up 6 cents to $7.20.