During 2002 and early 2003 the Panda–TECO joint venture replaced its EPC contractor and
sought to replace its power marketer; TECO cut back its capital spending plans, and issued
new debt and equity to protect its investment-grade credit rating and fulfil its obligations to
the joint venture; and the power market outlook became more uncertain for both projects.
New EPC contractor
The catastrophic decline of Enron, culminating in its bankruptcy filing, created many signif-
icant challenges for the Partnership. First and foremost was the challenge of avoiding disrup-
tion to the two construction sites. Because Enron’s bankruptcy posed serious questions as to
the long-term viability of NEPCO, many subcontractors and vendors, as well as much of the
site labour pool, were concerned that NEPCO would not be able to meet its current and future
obligations. The sponsors immediately took action to calm the fears of the site personnel,
most of whom were being paid by Enron, and provided assurance to subcontractors and ven-
dors of all their payment obligations. In addition, modifications to the EPC Contracts were
quickly worked out with NEPCO management to provide some immediate stability to
NEPCO, preventing the EPC contractor from being pulled directly into the Enron bankrupt-
cy filing. The swift actions by the sponsors prevented any significant disruptions at either of
the sites.
Additionally, Enron’s bankruptcy permitted the project lenders to stop funding construc-
tion costs for the two projects until the condition was cured or waived. To resolve the issue
TECO Energy replaced Enron as the guarantor of certain of NEPCO’s obligations under the
construction contracts, including payment by TECO Energy of any project cost overruns,
which were estimated to be US$63 million as of January 2002. That amount could be offset
by unused construction contingency upon completion of construction. TECO Energy also
agreed to inject an additional US$200 million equity capital into the project by mid-2002. It
would otherwise have made this capital contribution at a later stage of the project.
In late January 2002, as a result of the additional commitments that TECO made to
secure the project loans and the resulting increase in TECO Energy’s project-related risk,
Moody’s downgraded TECO Energy’s senior unsecured credit rating from ‘A2’ to ‘A3’.
During the first few months of 2002 the sponsors and lenders continued to express con-
cern about the long-term viability of NEPCO. In May 2002, with the concurrence of Panda
and TECO Energy, SNC–Lavalin, Canada’s largest engineering and construction company,
took over construction on both project sites. SNC–Lavalin assumed all construction activities
previously performed by NEPCO, and directly hired all of NEPCO’s site and management
personnel. In June SNC–Lavalin acquired all of NEPCO’s assets and placed them in a new
subsidiary, SNC–Lavalin Constructors, Inc., headed by John Gillis, NEPCO’s long-time
president. About 5,000 NEPCO employees were retained. The new EPC contract with
SNC–Lavalin provides for the projects to be completed on a cost-plus-fee basis, with the fee
portion at risk until completion of the projects. Significant schedule and performance penal-
ties provided by subcontractors remain, as does the guarantee by TECO Energy of certain
SNC–Lavalin obligations for the benefit of the lenders.
Aquila’s exit from energy trading
In March 2002 UtiliCorp United, historically a traditional regulated utility, was renamed
PANDA ENERGY–TECO POWER JOINT VENTURE, UNITED STATES