Power customers in the Southwest can rest a little easier now that Duke Energy North America signed a power supply deal with cash strapped Nevada Power Co. and Sierra Pacific Power, two utility subsidiaries of Sierra Pacific Resources that serve much of Nevada and the Lake Tahoe portion of California. The utilities were in serious danger of entering the summer without adequate supply arrangements because of a credit crisis caused by a recent regulatory decision that disallowed recovery of millions in past power costs.

Duke has agreed to sell the utilities up to 1,000 MW of electricity per hour, as well as natural gas, to fulfill customers’ power requirements during the peak summer period. In addition, Duke will further provide real-time purchases and sales of power between June 15 and Dec. 31, 2002, under mutually agreeable terms to assist Nevada Power and Sierra Pacific Power in balancing electricity demands.

The deals follow a liquidity crisis and credit downgrade at the utilities that threatened to pull the companies and their parent into Chapter 11 bankruptcy. The crisis was created mainly by a decision by Nevada regulators to reject the utilities’ plans to recover all of their wholesale power costs from last year.

The Public Utility Commission of Nevada (PUCN) ruled on March 29 to disallow the recovery of $438 million of the $922 million in deferred energy costs that had built up on Nevada Power’s balance sheet during 2001. The PUCN determined that the disallowed costs were not prudently incurred. Nevada regulators also cut 25% of Sierra Pacific Power Co.’s cost recovery (see Power Market Today, April 25, May 15, May 30).

Duke has agreed to accept a deferred payment program for a portion of the summer costs under its existing power supply contracts with Nevada Power. This plan was proposed to all continuing power suppliers in April to help Nevada Power address its short-term liquidity issues.

Concurrently, Nevada Power and Sierra Pacific Power agreed to drop their Federal Energy Regulatory Commission Section 206 complaint proceeding against Duke Energy, challenging the market-rate pricing of existing power supply contracts entered into with Duke Energy during the fall of 2001.

These agreements will be physically executed through its affiliate Duke Energy Trading and Marketing and will not increase Duke Energy’s credit risk, the company said. Under terms of the agreements, Duke will supply varying amounts up to 1,000 MW of electricity per hour between June 15 and Sept. 15, as well as natural gas. This would offset power and gas supply terminations by certain other suppliers, as well as previously unfilled short positions. Cancellation of power supply contracts by Morgan Stanley, Enron and others had both Nevada Power and Sierra Pacific Power in the northern half of the state facing potential shortfall and possibly insolvency this summer.

“Duke Energy worked earnestly with Sierra Pacific Resources to reach a solution that is beneficial to all parties with the most important objective of providing reliable power resources to consumers in Nevada,” said Jim Donnell, CEO of Duke Energy North America. “This agreement reinforces the strength and viability of long-term power supply contracts and ensures that Nevada consumers’ power needs will be met during the summer.”

Walter Higgins, CEO of Sierra Pacific Resources, said, “We are committed to doing everything possible to ensure that our customers have the power they need without interruption. The agreements with Duke Energy are a major step in that direction. We appreciate Duke Energy’s cooperation in our efforts to reliably serve our customers and meet our obligations. Our agreement with Duke Energy should give other suppliers confidence to adopt the extended payment program.”

Nevada regulators recently voted to approve $300 million in bond authority for Nevada Power. Proceeds from the bonds, along with cash flow, are to be used to help retire debt that comes due in the next 18 months, to meet capital expenditures for this year and for corporate liquidity purposes. “Our number one priority is to provide safe, reliable service to our customers, and this authority will help ensure we have the financial wherewithal to meet that goal,” said Higgins.

The company has set no timetable for issuing the bonds, which will be a function of overall market conditions and the appetite at the time for Nevada Power debt.

At least one of the major rating agencies, Standard & Poor’s (S&P), reacted positively within a day of the announced supply deal with Duke. S&P’s San Francisco-based utility analyst, Swami Venkataraman, called the deal “highly supportive of Sierra Pacific’s credit quality.”

“This agreement is a considerable boost to Nevada Power’s liquidity, since Duke is the utility’s largest power supplier after Enron,” Venkataraman said. “Nevada Power now faces a much smaller cash shortfall during the crucial summer season and the pressure to file for bankruptcy protection is significantly reduced.”

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