While its private sector electric utilities squirmed and made contingency plans for a possible Chapter 11 bankruptcy filing, Nevada’s energy regulators put a positive spin on an adverse Enron Corp. court ruling that went against the state’s two electric utilities late last month. When the three-member Nevada Public Utilities Commission met last Wednesday the court decision wasn’t mentioned.

Earlier, the Nevada PUC’s chairman, Don Soderberg, told local news media he was “encouraged” by the ruling in Enron’s ongoing federal bankruptcy proceeding that found the bankruptcy court could not change the contract provisions between Enron and the two Sierra Pacific Resources utilities, Nevada Power Co. and Sierra Pacific Power Co. Enron claims it is owed nearly $300 million collectively from the two utilities as termination payments for contracts they allegedly violated last year.

Soderberg said the judge didn’t rule on the validity of Enron’s claims, but simply said the Federal Energy Regulatory Commission — not his court — should determine whether the contract is valid, or whether it should be changed.

In the wake of last week’s adverse court ruling regarding its legal dispute, Reno, NV-based Sierra Pacific Resources said last Tuesday its two utilities could face the prospect of bankruptcy if they are required to come up with nearly $300 million to pay Enron Power Marketing Inc.

The major credit-rating agencies, Standard & Poor’s Ratings Services and Moody’s Investors Service, responded almost immediately with negative outlooks for both utilities. S&P kept a “B+” rating and a negative credit watch for the utility holding company and its utilities; Moody’s changed its outlook for “stable” to “negative,” noting the change was a direct response to the bankruptcy court ruling. “Moody’s expects the utility companies will pursue a variety of possible avenues of recourse in the courts,” the rating agency said, adding the caveat that it did not expect “a near-term resolution.”

Moody’s cited concerns “about possible adverse effects on credit quality for the utility companies and their parent company. The additional pressures of permanently funding the full amount of the Enron claims would be yet another financial burden fro the companies to cope with in the aftermath of the adverse regulatory decisions rendered in the Nevada PUC in 2002.”

Noting that Nevada Power owes $200 million potentially and Sierra Pacific Power about $87 million, the parent company said in a filing to federal Securities and Exchange Commission Sept. 2 that “any requirement to pay or provide security” to Enron in its ongoing Chapter 11 bankruptcy “could adversely affect” the parent company’s and the two utilities’ “cash flow, financial condition and liquidity, and make it difficult for one or more of Sierra Pacific Resources, Nevada Power and Sierra Pacific Power to continue to operate outside of bankruptcy.”

S&P’s San Francisco analyst Swami Venkataraman said that S&P “believes that the risk of the utilities having to post collateral…is heightened by the (Enron) bankruptcy court’s decision (Aug. 28). Posting cash collateral would weaken financial measures below that required by the ‘B+’ rating level.”

Enron Power Marketing (EPM) had five business days (to the end of the day Sept. 5) following the court decision to file its claim, and Sierra Pacific has 10 days after that to respond to Enron’s filing, according to S&P.

EPM was granted by the bankruptcy court its motion for a summary judgment in its claims against the two Nevada utilities for termination payments on long-term power contracts that were dropped after the Sierra Pacific Resources (SPR) companies dropped below investment-grade credit rating last year.

“S&P has always considered the possibility of a negative outcome on this litigation as a credit risk for SPR and its subsidiaries, and this risk was partly responsible for the previous negative outlook on the company,” Venkataraman said. “However, the likelihood is now high that the utilities will have to satisfy Enron’s request for termination payments.”

In its SEC filing Tuesday, SPR said its utilities are “evaluating their options and will consider all possible courses of action.” If they are required to post collateral or make payments, the holding company said the utilities anticipate issuing secured bonds for which Nevada Power ($777 million) and Sierra Pacific Power ($364.9 million) have net utility property collectively totaling more than $1 billion.

In addition it said the bond sale would require approval from the Nevada PUC, and the utilities may have to also access the capital markets. However, the holding company said, “there can be no assurances that the utilities will have sufficient regulatory approval to issue bonds or be able to access the capital markets to raise funds or that they can do so in a timely manner.”

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