Nevada Governor Warns of Possible Bankruptcy for Sierra Pacific ,
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April 17, 2001

Nevada Governor Warns of Possible Bankruptcy for Sierra Pacific=20

by Will McNamara=20
Director, Electric Industry Analysis

[News item from California Energy Markets] Nevada Governor Kenny Guinn said=
=20
the state's investor-owned utility companies could fail in a month without =
a=20
deferred energy rate increase mechanism. Guinn said Nevada Power and Sierra=
=20
Pacific Power "could be moving toward bankruptcy in 30 days" if the=20
Legislature fails to quickly approve deferred energy rate increases. Withou=
t=20
approval, the utilities will have difficulty borrowing money to buy power o=
n=20
the wholesale market and to buy natural gas for use in their own power=20
plants, the governor said. =20

Analysis: The prognosis appears to be getting increasingly worse for Sierra=
=20
Pacific Resources (NYSE: SRP) and its two utility subsidiaries, Sierra=20
Pacific Power and Nevada Power. At issue at the present time is the company=
's=20
ability to secure significant rate increases that will cover its growing=20
costs for securing power on the wholesale market, which reportedly reached=
=20
$889 million for year-end 2000. The timeline for a rate increase approval,=
=20
and the specific amount of the rate increase, should be the deciding factor=
s=20
that determine whether or not Sierra Pacific Resources becomes the next maj=
or=20
utility operation to file bankruptcy.=20

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

The various news surrounding Sierra Pacific Resources played a direct role =
in=20
the sharp decline in the company's stock on April 16. Shares of the company=
=20
dropped $1.24, or 8.6 percent, to $13.26. This is down from a 52-week high =
of=20
$19.43 and book value of $17.82.=20

I have been tracking the growing financial problems of Sierra Pacific=20
Resources for several weeks. For background information, please reference m=
y=20
IssueAlerts from 3/26/01 and 4/8/01. As a brief summary, Sierra Pacific=20
Resources has found itself in a similar predicament to that experienced by=
=20
the California utilities, which has led Pacific Gas & Electric Co. to=20
bankruptcy court. Essentially, Sierra Pacific Resources reported a=20
fourth-quarter 2000 loss of $18.2 million, or 23 cents a share, as a result=
=20
of soaring costs of power in the western United States. The company incurre=
d=20
losses as a direct result of "the growing and unrecovered cost of purchased=
=20
power in the volatile wholesale market." The situation has grown increasing=
ly=20
worse for the company over the last month. "Without some rate relief, the=
=20
cost of fuel and power is close to crippling our ability to serve the needs=
=20
of our customers," said Mark Ruelle, the company's chief financial officer.=
=20
The company attributed the financial losses to nearly $258 million of=20
unanticipated fuel and purchased power costs.=20

Sierra Pacific Resources already received an emergency rate increase of 17=
=20
percent ($311 million) on March 1. Clearly that increase has not been deeme=
d=20
sufficient by the company or the governor to pay down the reported $3.7=20
billion in debt that the company currently carries. In an effort to save=20
Sierra Pacific Resources from financial insolvency, Gov. Guinn has proposed=
=20
the use of deferred energy rate cases, which the state's Senate Commerce an=
d=20
Labor Committee passed on April 6 (the full Senate must still approve the=
=20
measure). The motion is being attached as an amendment to the previously=20
approved Assembly Bill 369, which prohibited the pending sale of Sierra=20
Pacific Resources' power plants and essentially returned Nevada to a=20
regulated market. The Nevada Assembly has yet to approve the measure, which=
=20
has prompted Gov. Guinn's warnings about a possible bankruptcy for Sierra=
=20
Pacific Resources. The State Assembly is scheduled to review the amendment=
=20
this week.=20

Up to this point, the operating utilities of Sierra Pacific Resources have=
=20
been raising rates on a monthly basis to accommodate wholesale power=20
purchases that they must make to supply power to customers. Essentially, a=
=20
deferred rate increase would allow Sierra Pacific Power and Nevada Power to=
=20
recover any fuel and power purchase costs that exceed current rates. Under=
=20
the amendment, the utilities' increased cost of purchasing wholesale power=
=20
and natural gas would be factored into the once-a-year rate increase, calle=
d=20
"deferred" because it takes effect after the power purchases have been made=
=20
rather than immediately. The rate increase(s) could also be spread out over=
=20
three years to minimize impact on customers. In other words, customers woul=
d=20
not be exposed to the anticipated high cost for power that is expected to=
=20
occur this summer in Nevada, but instead would incur the increase(s) a year=
=20
from now (or possibly spread over a three-year program). =20

The benefit for the utilities is that their creditworthiness would be=20
maintained, which would allow them to continue to buy wholesale power and=
=20
support various other projects. Lenders allow the utilities to use accounts=
=20
for unrecovered cost increases as a security for loans because they expect=
=20
the utilities will be able to collect the money later through deferred ener=
gy=20
rate cases. Sierra Pacific Resources officially supports the move toward=20
deferred energy rate increases (as opposed to monthly increases) for two=20
reasons: 1) Sierra Pacific Resources believes further rate increases are=20
desperately needed; and 2) a once-a-year rate increase would be less=20
detrimental to the company's customers. It has been estimated that the=20
increase could be as much as $500 million next year, based on Sierra Pacifi=
c=20
Resources' projections that its power purchase costs could increase by=20
$0.02/kWh, or about 25 percent. If the deferred rate increase method is=20
approved, Sierra Pacific would no longer receive monthly rate increases.=20
Also, the company would be required to forfeit any unrecovered power costs=
=20
that have not been recouped through monthly rate increases that have taken=
=20
place to date, which reportedly would save customers about $215 million.=20

Further, Sierra Pacific Resources has agreed to credit customers for the=20
first month of collections that occurred with regard to the 17-percent, $31=
1=20
million rate increase that took effect March 1. This reportedly should save=
=20
customers an additional $18 million, rounding off total savings to=20
approximately $233 million. After providing the customer credit for the one=
=20
month, Sierra Pacific Power and Nevada Power would continue to collect the=
=20
additional 17-percent until next year when their rates are formally adjuste=
d.=20
Another provision of the pending amendment stipulates that Sierra Pacific=
=20
Resources cannot participate in a deferred energy rate case if it completes=
=20
the proposed sale of Portland General to Enron by July 1 (a deal that has=
=20
been troubled due to Sierra Pacific Resources' financial problems).=20

Along with the volatility of the western wholesale markets, Sierra Pacific=
=20
Resources has also been financially impacted by the recent restriction=20
against the sale of its power plants. Assembly Bill 369, to which the=20
amendment regarding the deferred rate increases is being added, blocks the=
=20
sale of Nevada power plants before July 1, 2007.  Nevada utilities will be=
=20
allowed to apply to the Public Utilities Commission of Nevada for plant sal=
es=20
that include a state of "substantial financial emergency" after July 1, 200=
3.=20
Nevada regulators passed the measure out of concern about the state's=20
existing power supply and whether or not out-of-state companies would sell=
=20
power from the plants back into the state. The measure has impacted Sierra=
=20
Pacific Power and Nevada Power because they were counting on receiving=20
approximately $1.7 billion from pending sales of their power plants. =20

There is a rather striking parallel between what is happening in Nevada and=
=20
what has been well documented as the California energy crisis. Interestingl=
y,=20
the California utilities began to experience their financial difficulties=
=20
after deregulation had already been in effect for about two years. The Neva=
da=20
utilities are experiencing financial problems, which are also related to th=
e=20
costs of procuring wholesale power, in advance of the start of deregulation=
.=20
Wisely, Nevada regulators have postponed the start of competition until=20
market stability can be achieved within the state. Key to achieving this=20
stability will be the financial solvency of Sierra Pacific Resources' two=
=20
operating utilities. Whether or not bankruptcy proceedings in Nevada can be=
=20
averted remains to be seen, but the sole determining factor appears to lie =
in=20
what the State Assembly will soon decide with regard to deferred energy rat=
e=20
increases. =20

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