Risk management includes commodity limits such as open position limits, Value at Risk
(VaR) limits, and cash flow limits for all electricity and natural gas activities. The purpose of
these commodity limits is to define clearly the fixed and index price positions allowable in
the context of the Partnership’s desired risk profile, business objectives and debt-coverage
requirements. VaR limits are used to prevent excessive risk concentrations. VaR is a statisti-
cal measure that indicates the maximum probable loss over a defined period of time within a
specific confidence level; that is, the value of capital that is being risked based on dynamic
market price behaviour. The period of time for financial institutions is generally one day.
The Partnership’s credit policy defines guidelines for contracts with power purchasers,
gas suppliers and gas transporters to minimise the exposure to any counterparty that fails to
fulfil its trade obligations. The Credit Manager works closely with the Energy Coordinator to
ensure traders’ compliance with credit policies and procedures. The Credit Manager performs
stress tests on the credit characteristics of each project’s portfolio of power and natural gas
agreements, in order to assess the potential maximum loss over a predetermined period and
to determine an estimate of aggregate portfolio credit risk for each project.
Engaging in energy commodity transactions, including power, capacity, fuel supply and
natural gas transportation, requires approval at the level indicated in Exhibit 13.3.
Contracts
EPC contract
NEPCO was originally responsible for design, procurement, construction and testing under
separate but similar EPC contracts. The contracts contained schedule and performance guar-
antees on a per-unit basis, and liquidated damage provisions for up to 25 per cent of each
plant’s total contract price, in line with typical EPC contracts in the industry. The contracts
also contained comprehensive warranty packages covering design, engineering, construction
work and equipment for each project.
At the time of the loan syndication, in May 2001, NEPCO’s obligations under the EPC
contract were fully guaranteed by its parent, Enron Corporation, then rated ‘BBB+’ by
Standard & Poor’s, and ‘Baa1’ by Moody’s. (Enron’s bankruptcy in 2001 and SNC–Lavalin’s
assumption of NEPCO’s EPC contract responsibilities are discussed below in the section
‘Subsequent developments’.)
PANDA ENERGY–TECO POWER JOINT VENTURE, UNITED STATESExhibit 13.3
Transaction approval limits
Nominal
Authorised transaction value Nominal Nominal
personnel (US$ million) transaction term transaction size
Bank’s administrative agent >150 Greater then three years Pursuant to the terms of the EMP
Management committee 150 Three years Pursuant to the terms of the EMP
General manager 75 91 days to one year One half of estimated generating
plant output for a one month period
Energy coordinator 10 90 days or less One half of estimated generating
plant output for a three
month period