Fitch Rates Sierra Pacific Power's $300 Million Mortgage Notes 'BB+'.

NEW YORK -- Fitch Ratings expects to assign a 'BB+' rating to Sierra Pacific Power Co.'s (SPPC) $300 million general and refunding mortgage notes, series M, due 2016. Net proceeds will be utilized to repay approximately $268 million in higher coupon debt and preferred stock. The Rating Outlook is Stable. The notes are being offered in a private placement under Rule 144A of the Securities Act.

SPPC's ratings and Stable Outlook reflect a more supportive regulatory environment in Nevada and assumes reasonable outcomes in pending and future rate filings, especially in light of the utility's large capital spending requirements. In addition, the ratings consider SPPC's improving financial profile and adequate system liquidity. A primary risk for SPPC fixed income investors is its exposure to the wholesale energy markets. Since mid-2004, SPPC has benefited from favorable deferred energy rate case rulings and been allowed to adjust its base tariff energy rate (BTER) to reduce the growth of deferred energy balances. Although, in May 2004, the Public Utilities Commission of Nevada (PUCN) disallowed recovery of $47 million of costs related to SPPC's investment in the Pinion Pine coal gasification plant; in January 2006, a Nevada district court vacated and remanded that order to the PUCN to further review whether SPPC's costs were 'justly and reasonably' incurred. The PUCN has since appealed the district court's decision.

Other positive recent developments include the settlement of litigation with Enron Corp. and PUCN approval of the construction of SPPC's new $421 million 514 MW gas-fired Tracy unit. As part of its authorization of the Tracy project, the PUCN granted the plant 'critical facility' status, allowing for a 1.5% enhanced return on equity, and also provided for the inclusion of the construction work in progress in rate base. SPPC, along with its affiliate Nevada Power Co. (NPC), has also recently announced its intention to build two coal-fired units in Ely, Nevada as well as a 250-mile transmission line that would connect SPPC system with NPC's. If the $3 billion project is approved, significant external financing will eventually be required. The first coal unit is scheduled to be online in 2011.

Because output from SPPC's own generation portfolio is considerably short of meeting its load requirements and substantial amounts of power must be purchased from the wholesale markets, high and volatile power and gas prices subject SPPC to meaningful commodity price exposure. To help manage seasonal working capital borrowings SPPC increased capacity under its revolving credit facility during 2005 to $250 million and extended its maturity until 2010.

To increase its generation portfolio and expand its transmission and distribution system to meet high-growth electric demand, SPPC will need to incur significant capital expenditures over the next five years. These investments should spur significant earnings growth but because these anticipated expenditures are expected to exceed internally generated cash, the company 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 recovery.

SPPC currently has both electric and gas general rate cases, as well as a deferred energy filing, pending before the PUCN. SPPC is requesting an aggregate electric and gas rate increase of $11.5 million based on an 11.4% return on equity. The deferred energy case seeks recovery of $47 million for energy costs incurred during the December 2004 to September 2005 timeframe as well as a $53 million increase to the going-forward BTER. Reasonable rate treatment in these filings and others will remain a key to further ratings improvement.

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