DBRS Rates Sierra Pacific Resources at BB (low) & Related Entities at BBB (low)

DBRS has today assigned a new Senior Notes rating of BB (low) to Sierra Pacific Resources (SPR), and new General & Refunding Mortgage Bonds ratings to its two subsidiaries, Nevada Power Company (NPC) and Sierra Pacific Power Company (SPPC), at BBB (low). All trends are Stable.

NPC’s and SPPC’s assigned ratings reflect the continued improvement in their financial and business profiles. Since 2002, operating results at NPC and SPPC have strengthened consistently, as core earnings and cash flow have steadily improved. Combined with lower interest expense from numerous re-financings, this has resulted in balanced increases in coverage and liquidity ratios more reflective of the assigned ratings categories. In addition, the Nevada regulatory environment has been more supportive over the same time frame, demonstrated by the fact there have been no fuel cost disallowances since 2002.

The significant growth in Nevada provides both a source of earnings growth and capital expenditure challenges for SPR and its two utility subsidiaries. NPC and SPPC have historically sourced the majority of their load requirements from spot market purchases and third-party power contracts, exposing the utilities to volatile natural gas prices (the primary fuel for generation in the state). To address this, as well as load growth, the utilities plan to invest approximately $4 billion over the next five years to build new generation facilities and enhance system reliability. In addition to this $4 billion program, SPR has applied for regulatory approval to construct the approximately $4 billion Ely Energy Centre project, a 1,500 MW coal-fired facility and a significant transmission line. While these capital projects (all of which require regulatory approval before construction) offer potential for earnings and cash flow enhancement, they will also result in free cash flow deficits which will pressure SPR’s and NPC’s balance sheets and credit metrics over the medium term. The funding of these deficits will result in SPR, NPC and SPPC being heavily reliant on the public capital markets during this time of major capital investment.

NPC and SPPC provide nearly 100% of SPR’s earnings and cash flows, and SPR’s ratings reflect the improvement in its utility subsidiaries’ performance as noted above. SPR’s ratings remain primarily constrained by two factors. Firstly, regulatory-mandated restrictions limit the combined amount of dividends the utilities can pay to SPR annually to the amount of SPR’s annual cash interest obligations. This lends uncertainty to the potential for any material debt reduction at the holding company level. Secondly, it will be reliant on the equity market to partially fund its anticipated equity injections into NPC and SPPC.

Note:
All figures are in U.S. dollars unless otherwise noted.