FYI
---------------------- Forwarded by Mitchell Taylor/Corp/Enron on 08/22/2000 
04:09 PM ---------------------------


"JOANNE RUTKOWSKI" <JRUTKOWS@LLGM.COM> on 08/22/2000 02:47:45 PM
To: <Dwight.Larson@enron.com>, <J_Mark_Metts@enron.com>, 
<Mitchell.Taylor@enron.com>, <Sarah.Novosel@enron.com>, "DOUGLAS HAWES" 
<DWHAWES@LLGM.COM>
cc:  

Subject: SEC Timing


Mark and Dwight,

You've asked us to outline a strategy for getting the SEC order by year-end.

The first issue is to get rid of the intervenors.  If we can tell the SEC 
staff that we are settling with TANC and SMUD and the Nevada Commission, we 
can ask them to focus again on the substantive issues.

As you know, there are two major issues: (i) the integration, which we 
believe we have more or less under control, and (ii) the capital structure of 
the resulting system, which is dependent in the first instance on the timing 
of the Sierra auction.

Concerning integration, the question is whether Sierra's "blended approach" 
(that is, a 50 MW long-term firm path between PGE and Nevada Power and a 
combination of nonfirm and short-term firm linking Sierra to the rest of the 
system) is beyond current SEC precedent.  In AEP and Xcel, the SEC found that 
a long-term firm path was sufficient to establish that two parts of a system 
were "physically interconnected or capable of interconnection."  Although 
Xcel also involved the use of a nonfirm path, that was on an interim basis, 
pending the completion of certain upgrades necessary for the firm contract 
path.  Absent some statement to the contrary, it is our understanding that 
the staff would not approve the "blended approach" by delegated authority.

There is, however, an alternative approach to integration under which we 
would ask the SEC staff to find that PGE and Nevada were integrated and that 
Sierra constituted a permissible "additional" system under the (A)(B)(C) 
clauses of Section 11(b)(1).  Sierra has completed the studies needed to 
justify this approach.  Based on conversations with Bob Wason and Cathey 
Baker on the SEC staff, we believe that this approach could be approved by 
delegated authority.


Concerning the capital structure of the resulting system, there is a 
perception on the part of the staff that Sierra is significantly 
overextended.  As you know, the SEC generally requires registered holding 
companies to maintain a minimum of 30% common equity.  While there is 
precedent to support a floor of 27.6%, the staff has advised companies that 
they will require a minimum of 28.5% equity, with a commitment to reach 30% 
within  a reasonable period of time, before approving a matter pursuant to 
delegated authority.

There is some confusion about Sierra's prospects in this regard.  The most 
recent amendment, filed June 14th, indicates that Sierra will be at 20.8% 
common equity at closing, with a representation that Sierra will increase its 
consolidated common equity to approximately 29 percent as a result of: (a) 
proceeds from the sale of generating assets of Sierra Pacific and Nevada 
Power aggregating approximately $1 billion, 100 percent of which will reduce 
debt of the consolidated company; (b) proceeds from divestiture of non-core 
assets, or some combination of common equity and divestiture of non-core 
assets, which together would be approximately equivalent to the issuance of 
$260 million in terms of impact on Sierra Pacific's equity ratio; (c) 
issuance of up to $600 million of hybrid securities; and (d) increased 
retained earnings realized from the combined operations of Sierra and PGE 
aggregating approximately $80 million in 2000 and $100 million in 2001.

It is unclear how good these numbers are.  They do not, for example, reflect 
Sierra's second quarter earnings release or the effect of a writeoff in 
connection with PGE's Trojan Plant.
Bill Weeden will be meeting with Mark Ruelle Thursday to come up with "firm" 
numbers.

In other matters, the SEC staff has indicated that it would give "credit" 
toward equity capitalization if the company has executed definitive 
agreements for sale of the subject assets, such as the Sierra water business 
and its generation assets.  It is important to know when such sales may be 
announced so that we can factor them into our calculations.

Assuming that Sierra can establish, based on these types of definitive 
agreements, that the merged company will be at 28.5% (once the underlying 
sales close) and Nevada has indicated that it will withdraw its intervention 
and Oregon has indicated that it will approve the merger, we would be in a 
position to meet with the SEC staff and ask for a year-end order based on our 
ability to settle with the California intervenors.

Bill said he will call me Thursday after his meetings or Friday at the latest.

Best,

Joanne