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April 17, 2001

Nevada Governor Warns of Possible Bankruptcy for Sierra Pacific 

by Will McNamara 
Director, Electric Industry Analysis

[News item from California Energy Markets] Nevada Governor Kenny Guinn said 
the state's investor-owned utility companies could fail in a month without a 
deferred energy rate increase mechanism. Guinn said Nevada Power and Sierra 
Pacific Power "could be moving toward bankruptcy in 30 days" if the 
Legislature fails to quickly approve deferred energy rate increases. Without 
approval, the utilities will have difficulty borrowing money to buy power on 
the wholesale market and to buy natural gas for use in their own power 
plants, the governor said.  

Analysis: The prognosis appears to be getting increasingly worse for Sierra 
Pacific Resources (NYSE: SRP) and its two utility subsidiaries, Sierra 
Pacific Power and Nevada Power. At issue at the present time is the company's 
ability to secure significant rate increases that will cover its growing 
costs for securing power on the wholesale market, which reportedly reached 
$889 million for year-end 2000. The timeline for a rate increase approval, 
and the specific amount of the rate increase, should be the deciding factors 
that determine whether or not Sierra Pacific Resources becomes the next major 
utility operation to file bankruptcy. 

Along with this new warning from Gov. Guinn, Sierra Pacific Resources' board 
of directors also just announced that it will not pay the dividend that is 
historically paid on May 1. The board cited "continued uncertainty over how 
Nevada will resolve its energy crisis." The company's CEO Walt Higgins 
acknowledged that the dividend is "vitally important in retaining investor 
confidence in Nevada," but also said that it is equally important that the 
dividend reflect the company's current financial condition. The company 
typically has paid a quarterly dividend of 25 cents, and the suspension of 
paying this quarter's dividend will save the company "less than $20 million." 
In addition, Sierra Pacific Resources is engaged in cost-cutting measures 
that are focused on reducing "all expenses other than those associated with 
safety and customer service."  

The various news surrounding Sierra Pacific Resources played a direct role in 
the sharp decline in the company's stock on April 16. Shares of the company 
dropped $1.24, or 8.6 percent, to $13.26. This is down from a 52-week high of 
$19.43 and book value of $17.82. 

I have been tracking the growing financial problems of Sierra Pacific 
Resources for several weeks. For background information, please reference my 
IssueAlerts from 3/26/01 and 4/8/01. As a brief summary, Sierra Pacific 
Resources has found itself in a similar predicament to that experienced by 
the California utilities, which has led Pacific Gas & Electric Co. to 
bankruptcy court. Essentially, Sierra Pacific Resources reported a 
fourth-quarter 2000 loss of $18.2 million, or 23 cents a share, as a result 
of soaring costs of power in the western United States. The company incurred 
losses as a direct result of "the growing and unrecovered cost of purchased 
power in the volatile wholesale market." The situation has grown increasingly 
worse for the company over the last month. "Without some rate relief, the 
cost of fuel and power is close to crippling our ability to serve the needs 
of our customers," said Mark Ruelle, the company's chief financial officer. 
The company attributed the financial losses to nearly $258 million of 
unanticipated fuel and purchased power costs. 

Sierra Pacific Resources already received an emergency rate increase of 17 
percent ($311 million) on March 1. Clearly that increase has not been deemed 
sufficient by the company or the governor to pay down the reported $3.7 
billion in debt that the company currently carries. In an effort to save 
Sierra Pacific Resources from financial insolvency, Gov. Guinn has proposed 
the use of deferred energy rate cases, which the state's Senate Commerce and 
Labor Committee passed on April 6 (the full Senate must still approve the 
measure). The motion is being attached as an amendment to the previously 
approved Assembly Bill 369, which prohibited the pending sale of Sierra 
Pacific Resources' power plants and essentially returned Nevada to a 
regulated market. The Nevada Assembly has yet to approve the measure, which 
has prompted Gov. Guinn's warnings about a possible bankruptcy for Sierra 
Pacific Resources. The State Assembly is scheduled to review the amendment 
this week. 

Up to this point, the operating utilities of Sierra Pacific Resources have 
been raising rates on a monthly basis to accommodate wholesale power 
purchases that they must make to supply power to customers. Essentially, a 
deferred rate increase would allow Sierra Pacific Power and Nevada Power to 
recover any fuel and power purchase costs that exceed current rates. Under 
the amendment, the utilities' increased cost of purchasing wholesale power 
and natural gas would be factored into the once-a-year rate increase, called 
"deferred" because it takes effect after the power purchases have been made 
rather than immediately. The rate increase(s) could also be spread out over 
three years to minimize impact on customers. In other words, customers would 
not be exposed to the anticipated high cost for power that is expected to 
occur this summer in Nevada, but instead would incur the increase(s) a year 
from now (or possibly spread over a three-year program).  

The benefit for the utilities is that their creditworthiness would be 
maintained, which would allow them to continue to buy wholesale power and 
support various other projects. Lenders allow the utilities to use accounts 
for unrecovered cost increases as a security for loans because they expect 
the utilities will be able to collect the money later through deferred energy 
rate cases. Sierra Pacific Resources officially supports the move toward 
deferred energy rate increases (as opposed to monthly increases) for two 
reasons: 1) Sierra Pacific Resources believes further rate increases are 
desperately needed; and 2) a once-a-year rate increase would be less 
detrimental to the company's customers. It has been estimated that the 
increase could be as much as $500 million next year, based on Sierra Pacific 
Resources' projections that its power purchase costs could increase by 
$0.02/kWh, or about 25 percent. If the deferred rate increase method is 
approved, Sierra Pacific would no longer receive monthly rate increases. 
Also, the company would be required to forfeit any unrecovered power costs 
that have not been recouped through monthly rate increases that have taken 
place to date, which reportedly would save customers about $215 million. 

Further, Sierra Pacific Resources has agreed to credit customers for the 
first month of collections that occurred with regard to the 17-percent, $311 
million rate increase that took effect March 1. This reportedly should save 
customers an additional $18 million, rounding off total savings to 
approximately $233 million. After providing the customer credit for the one 
month, Sierra Pacific Power and Nevada Power would continue to collect the 
additional 17-percent until next year when their rates are formally adjusted. 
Another provision of the pending amendment stipulates that Sierra Pacific 
Resources cannot participate in a deferred energy rate case if it completes 
the proposed sale of Portland General to Enron by July 1 (a deal that has 
been troubled due to Sierra Pacific Resources' financial problems). 

Along with the volatility of the western wholesale markets, Sierra Pacific 
Resources has also been financially impacted by the recent restriction 
against the sale of its power plants. Assembly Bill 369, to which the 
amendment regarding the deferred rate increases is being added, blocks the 
sale of Nevada power plants before July 1, 2007.  Nevada utilities will be 
allowed to apply to the Public Utilities Commission of Nevada for plant sales 
that include a state of "substantial financial emergency" after July 1, 2003. 
Nevada regulators passed the measure out of concern about the state's 
existing power supply and whether or not out-of-state companies would sell 
power from the plants back into the state. The measure has impacted Sierra 
Pacific Power and Nevada Power because they were counting on receiving 
approximately $1.7 billion from pending sales of their power plants.  

There is a rather striking parallel between what is happening in Nevada and 
what has been well documented as the California energy crisis. Interestingly, 
the California utilities began to experience their financial difficulties 
after deregulation had already been in effect for about two years. The Nevada 
utilities are experiencing financial problems, which are also related to the 
costs of procuring wholesale power, in advance of the start of deregulation. 
Wisely, Nevada regulators have postponed the start of competition until 
market stability can be achieved within the state. Key to achieving this 
stability will be the financial solvency of Sierra Pacific Resources' two 
operating utilities. Whether or not bankruptcy proceedings in Nevada can be 
averted remains to be seen, but the sole determining factor appears to lie in 
what the State Assembly will soon decide with regard to deferred energy rate 
increases.  

An archive list of previous IssueAlerts is available at
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