Fitch Initiates Ratings on Sierra Pacific Resources &

Subsidiaries 
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, 'www.fitchratings.com'.
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)
 
 
Press spacebar to pause and continue. Press esc to stop.