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Fitch Initiates Ratings on Sierra Pacific Resources &


NEW YORK--(BUSINESS WIRE)--Sept. 29, 2005 Fitch has assigned initial ratings to Sierra Pacific Resources (SRP) and its subsidiaries, Nevada Power Co. (NPC) and Sierra Pacific Power Co. (SPPC) as outlined below. The Rating Outlook is Stable.

Sierra Pacific Resources

-- Senior unsecured debt 'B+'.

Nevada Power Co. (NPC)

-- First mortgage bonds 'BB+';

-- General and refunding mortgage bonds 'BB+';

-- Secured revolving bank facility rated 'BB+';

-- Senior unsecured debt rated 'BB-';

-- Trust preferred securities rated 'B+'.

Sierra Pacific Power Co. (SPPC)

-- First mortgage bonds 'BB+';

-- General and refunding mortgage bonds 'BB+';

-- Secured revolving bank facility rated 'BB+';

-- Preferred stock rated 'B+'.

The ratings and Outlook of NPC and SPPC reflect adequate system liquidity, the absence of near-term maturities, a historically challenging regulatory environment in Nevada, exposure to the wholesale energy markets, high capital spending needs, and relatively weak but improving financial profiles. In addition, the utilities remain exposed to ongoing litigation. The ratings of NPC and SPPC represent their individual credit profiles and are not currently constrained by their parent's ratings. SRP's senior unsecured debt ratings reflect its consolidated financial profile as well as the structural subordination of SRP debt to that of its subsidiaries. The Stable Outlook also reflects the assumption that the utilities receive reasonable rate treatment in future general and deferred energy rate filings.

The contentious regulatory environment in Nevada that contributed to the utility subsidiaries' financial distress in 2002-2003 has significantly improved over the past two years. Since early 2004, NPC and SPPC have both benefited from favorable deferred energy and general rate case rulings by the Public Utility Commission of Nevada (PUCN). In stark contrast to the PUCN's 2002 and 2003 rulings, which disallowed approximately $580 million in total deferred energy costs primarily incurred during the western U.S. energy crisis, recent rulings have provided for nearly full recovery of such expenses. Coordination between company management and regulators on power and fuel supply procurement issues appears to have improved substantially. Regulatory decisions will remain critical going forward as the utilities must consistently file for recovery of capital investments and deferred energy costs.

Successful refinancings during 2004 and 2005 have largely eliminated near-term debt maturities and reduced interest expense. The next substantial debt maturity in the SRP system is at SPPC in 2008, when $320 million comes due. Liquidity has also improved materially over the past 18 months with the reduction of deferred energy balances and the reestablishment of multiyear secured revolving credit facilities in May 2004. Because output from the utilities' own generation portfolios is considerably short of meeting their load requirements, and substantial amounts of power must be purchased from the wholesale markets, high and volatile power and gas prices subject NPC and SPPC to greater commodity price exposure relative to other utilities. To manage seasonal working capital borrowings, NPC and SPPC currently have revolving credit facilities of $350 million and $75 million, respectively.

Primary credit concerns include exposure to the wholesale power and gas markets, regulatory risk associated with recovering the utilities' deferred energy costs, ongoing litigation with Enron Corp., and significant capital expenditure requirements over the next several years. To increase its generation portfolio and expand its transmission and distribution system to meet high-growth electric demand, SPPC and NPC, in particular, will need to incur significant capital investments over the next five years, including approximately $650 million on two new generating facilities. These investments should spur significant earnings growth, but because these anticipated expenditures will exceed internally generated cash, the utilities will rely on external financing. In Fitch's view, an over-reliance on debt with insufficient amounts of equity to support future capital expenditures would impair the company's financial progress.

SRP and its utilities remain exposed to litigation with Enron related to power supply contracts that were terminated during 2002. Last year's district court's ruling was favorable for the utilities and reduced the near-term risk of this dispute; however, the ultimate outcome of this case is uncertain. Under a 'worst-case scenario' in the event of an adverse judgment and a failed remarketing of bonds currently held in escrow, Enron could force NPC and SPPC to pay Enron $276 million (this is net of $60 million in cash already held in escrow). Fitch notes that the company's financial flexibility is much improved since 2003 and currently believes it could successfully remarket the general and refunding mortgage bonds being held in escrow, issue new debt, or utilize its existing credit facilities to meet such obligations.

The unsecured debt at the parent level remains structurally subordinated to the obligations of its subsidiaries. Although the holding company has improved liquidity and intends to hold $30 million in cash, the holding company relies on dividends from its subsidiaries to meet its obligations, and limits have been put in place by the PUCN, a court order, and certain mortgage bonds that restrict the flow of these distributions to the parent. Fitch believes that permitted dividends will be sufficient to meet parent needs over the next several years, but any further deterioration of the subsidiaries' financial results would affect parent cash flow.

Consolidated as well as unconsolidated credit metrics at SRP remain weak and consistent with the 'B' rating category. However, these ratios have improved over the past several years and are expected to further strengthen as the company recovers its deferred energy costs and completes major construction projects. Additionally, the company's capital structure is expected to improve due to recent and anticipated conversions of hybrid securities to common equity. Ratios at NPC currently appear weak but this is, in part, due to debt associated with the purchase and construction of the Lenzie plant. As NPC adds its recent generation, transmission, and distribution expenditures to rate base and recovers its capital investments, credit metrics are expected to improve over the next several years. However, the stronger ratios at NPC and SPPC would still be consistent with senior unsecured debt ratings of 'BB'.

A positive rating action could result from further improvement in credit metrics due to capital and deferred energy cost recovery, the continuation of constructive rate orders by the PUCN, further equity issuances or a significant reduction in system debt levels. A negative rating action could result from an adverse outcome to the ongoing Enron litigation, events restricting the parent's or utilities' access to adequate liquidity, the disallowance of significant deferred energy costs, or capital expenditures by regulators or over-reliance on debt financings for substantial construction expenditures.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, ''. Published ratings, criteria, and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance, and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

CONTACT: Fitch Ratings Ari Kagan CFA, 212-908-0644 Philip W. Smyth CFA, 212-908-0531 (New York) Media Relations: Brian Bertsch, 212-908-0549 (New York)

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