Spreadsheet: louise_kitchen__22559__TexMex risks
Sheet: Sheet1

Risk | Impact | Unmitigated Cost | Prob. Of Risk | Mitigant | Mitigated Cost | Notes
[NAME] agreement proceeds (poss. July 31) but we do not obtain Presidential Permit | 1) Liability for HVDC construction: $[NAME]) Liability to [NAME]: Index vs. Replacement Cost | High: $[NAME] 150+ | Low: Since 1977, no presidential permit has been refused and 78 have been approved. Nothing contentious has been identified with our application. Interventions due Friday, July 27. | Several Options: 1) Refile for tie line without HVDC and use existing or new Mexican-phase generation on US side of border. 2) Construct Mexican generation. Probably needs to be onsite. Physical, regulatory and economic issues with this. 3) Renegotiate obligations with DeAcero 4) Utilise existing and currently permitted 3rd party cross-border HVDC ties 5) Refile for one of two alternate sites for which we have conducted initial due diligence | High: $[NAME] (possible stranded HVDC asset) | 1) The [NAME] contract is structured so that after the Conditions Precedent Date of July 31, 2001, the parties are effectively committed to the transaction with high penalties if they otherwise abandon it.  The one exception to this reasoning is that certain Force Majeure events relieve the parties of their liabilities for events attributable to Force Majeure; however, it is unlikely that we would be successful in arguing that either our inability or delay in obtaining the Permit is a Force Majeure event.  2) The most likely right-of-way for the transmission lines are inside of ROW for which the Port of Brownsville has already applied for a Presidential Permit  (from the U.S. State Department for an international bridge). 3) DOE action must comply with NEPA  (National Environmental Protection Act).  2 possible environmental studies must be completed prior to granting of Presidential Permit:· Environmental Assessment – least onerous in terms of timing. Environmental assessments have been completed or are in process at each of the proposed HVDC Tie sites.· Environmental Impact Study– most onerous in terms of timing.  Could take as long as 18 months.   This occurs when for example, Native American burial grounds exist on the construction site.   DOE has indicated that this is an unlikely scenario.
Presidential Permit, when issued, could contain requirement for Open Access. | We could find ourselves bidding competitively for access. If we lose, we would have obligations under [NAME] contract. | High: mm $75 | Low | We have a verbal agreement with FERC that the Open Season provisions would not apply to [NAME]. Have initiated contacts with regulatory bodies to ensure this understanding.  Also, it is unlikely we would have no access or alternatives for 15 years of [NAME] obligations. If we had to, we could build another HVDC tie. | Medium
DeAcero Agreement proceeds, but there is a delay in acquiring Presidential Permit | 1) liability to ABB:Limited to direct costs, although they can cancel on 18 months delay. No penalty provisions.   2) Liability to [NAME]: Difference between Index Price in contract and replacement price of power, less $16K/day Capacity charge, which they continue to be liable for, even if we can't deliver. | Medium-Low | Medium: The permit is not required for construction purposes until 9 months after Notice to Proceed. | 1)Try to influence the process at the DOE. 2) If significant delays are likely, some of the above mitigants could be applied. | Medium-Low | 1) As of July 2001, we are 2 months into Presidential Permit Process. Process historically takes between 6 and 12 months with the variation in such timing being generally attributable to the degree of environmental impact that a project may have -- the lesser the impact, the shorter the review period and the greater the impact, the greater the review period.  We have anticipated a shorter review period because we foresee a limited environmental impact; however, because of the California power crisis, the review and granting of our Permit may be delayed beyond the 6-12 month period we initially forecasted.  For instance, an initial step in the application process is the publication of it in the Federal Register.  Historically, the timing of such publication is within 2-3 weeks of submitting the application to DOE.  In our case, although we submitted our application in early May, it was not published until late June because DOE had been directed to focus its attention first and foremost on California.  If such a directive remains in place, the review and granting of our Permit may take longer than the 6-12 month period initially foreacsted.   2) DOE action must comply with NEPA  (National Environmental Protection Act).  2 possible environmental studies must be completed prior to granting of Presidential Permit: i) Environmental Assessment – least onerous in terms of timing. Environmental assessments have been completed or are in process at each of the proposed HVDC Tie sites. ii) Environmental Impact Study– most onerous in terms of timing.  Could take as long as 18 months.   This occurs when for example, Native American burial grounds exist on the construction site.   DOE has indicated that this is an unlikely scenario.   3) Legal opinion is that permit delays would NOT be a Force Majeure event under the [NAME] contract, but could be Force Majeure under ABB contract.
DeAcero Agreement proceeds, but CFE fails to perform | The delivery point under the [NAME] contract is on the US side of the border. [NAME] is responsible for transmission to their site. If CFE does not perform according to their contractual obligations to [NAME], we are exposed to [NAME] credit risk | High: $82.4 million | Low. [NAME] are contracting with CFE. This contract should be executed prior to CP Date. | CFE will be contractually obligated to supply. Fundamentally, they should be motivated to comply, given current supply and demand projections for this area (they are short power) | Low
[NAME] contract proceeds, but HVDC tie is delayed due to construction issues. | Delays could be caused by any issues associated with construction of the plant, the transmission lines, construction permits, acquiring rights of Way, etc. Delays caused by items for which ABB is responsible result in penalties paid to Enron. Other delays such as acquiring permits or rights of way would not result in penalties paid by ABB. Any such delay is expected to be no more than x days or small number of months. | Low | High | none; other than close project supervision and effort to parallel-path items as much as possible. | Low | There are a large number of possible sources of delay. Following are examples. It is likely that some combination of items could result in a delay to final completion of the project. 1) ABB construction issues: If ABB does not deliver by contracted date (assuming delay is not caused by Enron), ABB must pay liquidated damages for delay. Americas’s estimates its potential exposure would be approximately $2.0MM in month one and $1.0MM in month 2 after ABB’s payments. 2) Interconnection – The 138kv bus of the Loma Alta substation is not owned by BPUB – it is owned by CP&L and Magic Valley.  BPUB will be the interconnecting party since it will be the owner and operator of the HVDC Tie and associated improvements.  BPUB already has a relationship with these parties. 3) Associated improvements – The engineering and construction of the transmission lines and requisite interconnects to and systems upgrades in both the BPUB and CFE electrical power transmission and distribution systems will be conducted by third-party contractors selected by Enron.  These contracts will be structured to shift performance and delay risk to the selected contractors. While cost estimates on the Mexican side are believed to be conservative, there are no assurances these estimates are exact.  However, Enron de Mexico’s experience with the Vitro project indicates that the CFE’s requirements fell generally in line with Enron engineering estimates. 4) The HVDC station will utilize “HVDC Light” technology.  This technology, while relatively new, is expected to be reliable and operate within acceptable parameters. 5) Rights of Way/Easements still need to be acquired on the Mexico side for the transmission lines. 6) Route surveys still need to be completed on the Mexico side. 7) Approval of CFE required for surveyed route. 8) Lead time for transmission towers could be significant and cannot be started until route is known.
Scheduling/Balancing Agreement needed with CFE for [NAME] load | It may be difficult to exercise optionality within contract if arrangements with CFE for scheduling and balancing are onerous. | Low | Low | The negotiation of this agreement is the responsibility of [NAME] and it could have some contract performance impact if they suffer undue penalties or are unable to acquire necessary power. [NAME] needs to sign agreement with CFE. | Low
Delay in construction of line expansion on US side. | Limited to 166 (firm) MW of 300 MW HVDC capacity. Balance of 134 MW available under SPS (interruptible for contingencies). Line expansion is planned for 2003 which would allow firm delivery of full 300 MW. | Low | Medium | Project economics are supported by [NAME] load alone. | Low
General [NAME] credit Risk | Loss of "Anchor Tenant" | High: $[NAME] 100+ | Medium | Find a replacement customer. This is a highly industrialised section of Mexico. Demand is growing 15% pa. Should not be difficult to find a replacement customer and several candidates have been identified; however, alternative customers will encounter same regulatory requirements with CFE.  Model contains a $20 million contingency for [NAME] failure. If [NAME] credit rating falls below BB+, ENA may require a LOC equal to one year's capacity charges. | Low
Section 201 Import Tarrif on Steel | Possible imposition of Tarrif on US Steel Imports - could impact on [NAME] credit risk | High: $[NAME] 100+ | Medium | Same Mitigants as above. Also, early indications are that NAFTA principles could prevail and Mexican producers would be exempt. | Low | The Decision on the imposition of this [NAME] is expected in February, 2002. It is anticipated that the WTO might challenge the tarriff, saying that if a tarrif is applied, it should apply to all countries and not exempt NAFTA members. Similarly, it is believed (subject to confirmation) that NAFTA would prevent the imposition of a new steel tarrrif on member countries.
Enron Lack of Access to completed Mexico Substation Upgrades | We may not be able to guarantee delivery of the additional 188 MW we hope to access after line expansion | Low | Low | Assume that if [NAME] is able to obtain access, other customers should be able to do the same. | Low
CFE does not act in good faith once station is built | Additional contracts may not be completed economically - CFE could charge exhorbitant rates. | Low |  | Contracts are with Mexican customers. CFE benefits from a link with US. Need to develop good relationships with CFE. [NAME] contract should specify rates and obligations in advance. [NAME] is supported by [NAME] alone. 15 years is a long time for regulatory issues to prevent economics. | Low
BPUB charges excessively for services | BPUB and Enron are to enter into a Transmission Agreement specifying the charges. As of 7/2001, this agreement has not yet been completed; however, its finalization is expected within the month. | Medium | Low | Transmission agreement is being negotiated. Should try to establish rates in the agreement (currently only general concepts are addressed) | Low
Mexico/US Power Spread | If power prices in Mexico were to drop significantly relative to US gas prices, then [NAME] would have an incentive to breach, leading to [NAME] credit exposure | Medium | Low | [NAME] has contractual obligations with us. We have a $20 million credit provision against DeAcero performance. Note: A DeAcero breach in this environment would be difficult to mitigate. | Low | Although short term fluctuations are possible in the near term, the overall risk is greater in the medium-long term, as CFE needs to accomplish a number of fundamental changes before they will be able to significantly reduce the cost of domestic delivered power. The risk of a fundamental, long term market shift against us does not become significant until we are close to investment payout.
Mexican Permitting Risk | If [NAME] does not acquire the necessary permits, we will not be able to deliver power to them and we will be exposed to [NAME] credit risk. It is possible that the same conditions preventing [NAME] from obtaining a permit could prevent other companies from obtaining permits | High | low | Enron de Mexico is working with the Comision Federal de Electricidad to provide for interconnection, wheeling and permitting in Mexico.  Given the public support for this project by the Mexican government, such approval is expected to be a matter of time. | Low
Contractual Risk | The negotiated provisions regarding the purchase obligation could be argued as a defense to the take or pay requirements for energy, and such take or pay requirements for energy could be argued not to be due in the event of [NAME]’s force majeure. | Low | Low | If expected short term market conditions prevail, [NAME] should be reluctant to take any action which would jeapordize what is projected to be a very profitable contract for them. | Low
Logistics | The customer may nominate non-wholesale volumes. | Low | High | Trading will manage this risk. Customer must submit a schedule for firm power one week in advance. | Low
Transmission Constraints | Transmission constraints on the US side may prevent physical delivery. | Low | Medium-Low | [NAME] is responsible for capacity payments even if transmission is constrained. | Low | ERCOT system upgrades are planned, but it is possible that certain activities on the ERCOT system could impact delivery of power.
We Sign ABB amendment, but [NAME] does not sign Power Contract | We do not incur any additional costs unless we issue a NTP. | None | High | Do not issue NTP unless [NAME] or other customer signs contract. | None
Unable to obtain financing replacement for Condor | Condor is full. Need to identify alternative. If we do not supply power within requirements specified by [NAME] contract, we are liable for difference between index and Replacement Costs | Medium | Medium | Obtain financing commitment in advance of DeAcero execution | none | [NAME] will go into high gear on Wednesday to find a replacement if [NAME] signs.
Market Price Variation | [NAME] is supplied under a contract price which is indexed to gas and multiplied by a heat rate. Risk of decoupling between gas and power. | high | high | Hedge the Heat Rate | none
General Regulatory risk | The parties are relying on Sec. 163 of the Public Utility Code, which states that public and private entities may join together to develop electric generating facilities without complying with public bid requirements.  This structure is similar to that used by the Austin Energy transaction. | high | Low | ENA and Government Affairs have met with senior representatives from both the ERCOT ISO and the PUCT.  Both entities support the project and proposed transaction and agree with our position that FERC’s open access rules will govern the HVDC tie. | none | A regulatory restriction should be considered a Force Majeure event under the contact.