Reno-based utility must clear two hurdles

Two big issues a decision by the Public Utilities Commission and revision of some limitations in a bond issue now face Reno-based Sierra Pacific Resources as it continues its effort to get back on its feet.

Analysts for Standard & Poors and Moody's, the creditrating service, say Sierra Pacific Resources appears to have successfully staved off default on $192 million in debt when it floated $300 million in convertible notes this month.

But S&P analyst Swami Venkataraman cautions, "The coming months are crucial times for Sierra Pacific Resources." Two issues, she said in a research report, must be addressed before the utility holding company can return to health.

First is a case filed by Nevada Power the Sierra Pacific subsidiary that serves Las Vegas requesting relief from the state Public Utilities Commission.

The company wants the PUC's permission to charge its customers for $195 million in power it purchased from October 2001 to September 2002.

The PUC's decision, Venkataraman said, will give investors a clear indication of regulators' posture toward Nevada Power.

And that, in turn, will allow borrowers to understand some of the risks they assume when they loan money to Nevada Power.

"It is noteworthy that utilities in other states that were affected by the western U.S.

power crisis ....

Have been allowed to substantially fully recover their deferred power costs," Venkataraman wrote.

If the commission doesn't allow something close to full recovery of those costs, she said, the results would be "disastrous" for Nevada Power's credit rating.

Almost exactly a year ago, a PUC decision set off the Sierra Pacific Resources crisis.

Regulators refused to allow the company to charge ratepayers for about $434 million in power it purchased during the crisis and instead said the company's shareholders should pay the price.

The second big issue that Sierra Pacific Resources must resolve, the S&P analyst said, is its ability to tap into a flow of dividends from Nevada Power.

The parent company, Sierra Pacific Resources, gets almost all of its cash from dividends paid by Nevada Power and Sierra Pacific Power, the utility that serves northern Nevada.

But, Venkataraman noted, one of the upshots of last year's crisis was that a provision in one of Nevada Power's bond issues was triggered, and the Las Vegas utility no longer was allowed to pay dividends to the parent company.

While recent financial moves by the company provides some breathing space, the S&P analyst said Sierra Pacific Resources needs to regain access to Nevada Power's cash flow.

That would require a bondholders' vote.

Moody's, meanwhile, adds a third worry: Now-bankrupt Enron claims that the Nevada utility owes it $305 million on power contracts that Nevada Power terminated.

If Sierra Pacific loses the case, a Moody's analyst wrote, the financial pressures on the company will be great.

Still, both credit rating companies agreed that the PUC holds the most important key.

"Sierra Pacific has successfully surmounted several obstacles over the past year," Venkataraman wrote.

"However, repairing its relations with the PUC is the biggest and most crucial of all."