Higher rates for consumers and less value for shareholders are both real possibilities if the investor-owned utility Sierra Pacific Resources (Sierra Pacific) sticks with its plans for a massive increase in its use of coal to generate electricity. While other key U.S. utilities are hedging coal-related risks -- such as rising construction costs and pending federal legislation that will put a price on carbon dioxide (CO2) pollution -- by shifting more of their emphasis to renewable energy such as solar, wind and geothermal, Sierra Pacific is exposing its shareholders and ratepayers to "significant financial and environment risks" by heading in the opposite direction, according to a new report from Innovest Strategic Value Advisors (Innovest), an independent Wall Street firm.

Innovest calculates that the first phase of Sierra Pacific's planned $5 billion coal-fired Ely facility "will increase [the company's] coal capacity by 180 percent and its annual C02 emissions by an estimated 93 percent compared to 2004 emissions levels."

Titled "Sierra Pacific Resources: History of Mismanagement Leads to Concern Over Proposed Ely Energy Center," the Innovest report concludes: "The completion of the first 1,500 MW at the Ely facility would increase Sierra Pacific's reliance on coal-fired generation from 18 percent of owned capacity to an estimated 38 percent. The addition of this capacity would increase Sierra Pacific's annual CO2 emissions by an estimated 11.5 million tons ... In addition, although Sierra Pacific continues to pursue contracts with renewable energy providers, the company's strategic decision to focus on new coal capacity suggests a failure to recognize the environmental, regulatory, and financial benefits associated with a strategic focus on energy efficiency and renewable energy. Sierra Pacific's minimum compliance approach to renewable energy development is of particular concern for investors given Nevada's abundant resources and the company's potential to capitalize on establishing a leadership role in this area ... Sierra Pacific's strategy does not address recent regulatory and economic trends that continue to shift the competitive balance away from new coal-fired generation. The company's decision to pursue the Ely Energy Center will therefore likely have negative long-term financial implications for the company's shareholders and ratepayers."

Innovest Utilities Analyst Eric Kane, the author of the report, said: "In light of impending carbon regulation, Sierra Pacific's continuing focus on new coal capacity is in direct contrast to leading U.S. utilities that are reducing their carbon risk exposure and capitalizing on the opportunities associated with renewable energy and energy efficiency. Despite significant cost projection overruns and delays, the Ely generating facility remains the focal point of Sierra Pacific's Integrated Resource Plans for Sierra Pacific Power Company and Nevada Power Company. Although the power plant is intended to alleviate customers' reliance on natural gas and exposure to associated price fluctuations, the proposed facility presents significant environmental and financial risks that will likely translate into negative financial implications for both shareholders and ratepayers."

Former Nevada Public Utility Commission (PUC) Commissioner and Nevada State Consumer Advocate Tim Hay said: "It is no coincidence that electrical rates in Nevada have gone from among the lowest in the nation to some of the very highest today. Time and time again, Sierra Pacific has relied on shifting risk onto the backs of investors and ratepayers rather than putting in place a sound business strategy. The Enron debacle and the mismanaged Pinon Pine Coal Gasification Demonstration Project are just two examples illustrating how Sierra Pacific cannot be trusted to set the energy future for Nevada. Look at what the Innovest report says happened with the recent energy crisis in the Western U.S.: Between 1999 and 2007, Nevada's average residential retail price for electricity increased by 65 percent, compared to a 34 percent increase in California and a 30 percent increase in the national average."

Theo Spencer, senior project manager, Natural Resources Defense Council, said: "The Innovest report shows in unmistakable terms that Sierra Pacific has not adequately considered the associated risks with its plans. Coal is not the answer. It's not clean and it's not cheap, as its lobbyists would have you believe. More than 50 coal projects have been cancelled or put on hold in the last year. That's because smart companies see the writing on the wall. Congress will soon make polluters pay for their global warming emissions, and that makes coal a bad bet. Sierra Pacific should start making a serious effort to develop more renewable energy. Nevada has a lot of it, between solar, geothermal and wind. That's what smart companies are doing. It's time to end Sierra Pacific's tradition of sticking consumers and investors with the cost of bad decisions."

KEY INNOVEST REPORT FINDINGS

Citing the need for a forward-looking approach by Sierra Pacific, the Innovest report notes: "Although electric utilities continue to operate without federal limits on greenhouse gas emissions, consensus within the industry indicates that federal legislation on climate change is impending. As a result, several utilities have taken a proactive stance and developed voluntary greenhouse gas reduction initiatives. Furthermore, utilities have developed and joined coalitions to voice support for a mandatory cap on greenhouse gas emissions. Meanwhile, Sierra Pacific continues to focus its resource planning on new coal-fired generation; is yet to develop a voluntary greenhouse gas reduction policy; and does not include the potential price of carbon in its resource planning. The company's failure to incorporate climate related risks and opportunities into its strategy will create significant financial risks for shareholders and ratepayers."

Assuming future carbon costs of $10-$55 per ton, the Ely Energy Center could result in annual costs of between $115 million and $632.5 million, according to Innovest. "Although the structure of any future greenhouse gas emissions legislation will determine what percentage of carbon costs will be recoverable through rate increases, it is clear that these costs will result in higher electricity rates and or decreased shareholder value."

Strategic efforts by Sierra Pacific to increase renewable energy production coupled with expanded energy efficiency measures could drastically reduce the need for new coal-fired capacity and limit shareholder and ratepayer exposure to the associated environmental costs.

As the Innovest report notes: "Sierra Pacific's strategy of minimum compliance will isolate shareholders and ratepayers from the financial risks associated with non-compliance; however it prevents the company from recognizing the financial benefits associated with establishing a leadership role in renewable energy generation. Given the fact that Sierra Pacific operates in one of the states with the highest amount of renewable energy potential, the company could establish itself as a leader and capitalize on continuing growth in demand for clean energy. However, the company's strategic focus is predicated on a paradigm that does not account for the stakeholder, regulatory, and economic drivers that continue to reward investments in renewable energy."

BACKGROUND: SIERRA PACIFIC & ELY FACILITY

Sierra Pacific is an investor-owned corporation with operating subsidiaries engaged in the utility business, principally in the State of Nevada. The company's chief operating subsidiaries are Nevada Power Company, which serves approximately 807,000 electric customers in Las Vegas and surrounding areas of southern Nevada; and Sierra Pacific Power Company, which has approximately 361,000 electric customers in northern Nevada and the Lake Tahoe area of northern California, and provides natural gas service to approximately 146,000 customers in the Reno-Sparks metropolitan area of northern Nevada. Sierra Pacific Resources has a combined winter generating capacity of 4,703 MW (18 percent coal, 50 percent gas, and 32 percent gas/oil) and annual revenues of approximately $3 billion.

In January 2006, Sierra Pacific announced plans to develop a coal-fired power plant in Ely, Nevada. The proposed facility would serve customers of both Sierra Pacific Power Company and Nevada Power Company; and would utilize two 750 MW coal-fired generating units. The facility would be expanded to include two 500 MW coal gasification units once the technology is deemed to be commercially viable. Current estimates indicate that the project including a 250-mile transmission line will cost in excess of $5 billion.

ABOUT INNOVEST

Innovest Strategic Value Advisors is an internationally recognized investment research and advisory firm specializing in analyzing companies' performance on environmental, social, and strategic governance issues, with a particular focus on their impact on competitiveness, profitability, and share price performance. By assessing differentials typically not identified by traditional securities analysis, Innovest's IVA ratings uncover hidden risks and value potential for investors. Thomson Extel has ranked Innovest #1 for the provision of extra-financial research to the investment community for the past two years.

Organization name: Innovest
Country: USA