1
Information contained herein, marked with [***], is being filed pursuant
to a request for confidential treatment.
Exhibit 10.15
CAPACITY, ENERGY AND ANCILLARY SERVICES AGREEMENT
BETWEEN
MERCHANT ENERGY GROUP OF THE AMERICAS, INC.
AND
AES EASTERN ENERGY, L.P.
This Agreement for the marketing of capacity, energy and
ancillary services (this "Agreement") is made as of April 8, 1999 by and between
Merchant Energy Group of the Americas, Inc., a Delaware corporation ("MEGA") and
AES Eastern Energy, L.P., a Delaware limited partnership ("AES") (MEGA and AES
are individually referred to as a "Party," and collectively as the "Parties").
WHEREAS, AES desires to engage MEGA, a power marketer
authorized by the Federal Energy Regulatory Commission ("FERC") to buy and sell
electric power at wholesale negotiated rates pursuant to the Federal Power Act
and the rules and regulations promulgated thereunder by FERC, to merchandise the
available energy, capacity and ancillary services directly or indirectly from
the Somerset, Cayuga, ▇▇▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇▇ generating facilities directly or
indirectly owned or controlled by AES and more particularly described in Exhibit
A attached hereto ("Generating Portfolio"), during the term of this Agreement
subject to the limitations set forth in this Agreement; and
WHEREAS, MEGA will seek to optimize, in accordance with
Prudent Marketing Practices, the value of the Generating Portfolio by seeking to
maximize the Market Price, as defined herein, for the available energy,
capacity, and ancillary services produced by the Generating Portfolio, subject
to the limitations set forth in this Agreement; and
WHEREAS, AES is an electric wholesale generating company with
authority to sell electric power at wholesale; and
WHEREAS, the Parties, through this Agreement, agree to terms
and conditions pursuant to which MEGA and AES shall work exclusively together,
during the term of this Agreement and subject to the limitations set forth in
this Agreement and AES' Operating Authority, as defined herein, to market the
available capacity, energy and ancillary services from the Generating Portfolio
on behalf of AES; and
WHEREAS, the financial obligations of MEGA under this
Agreement are guaranteed by Gener S.A. ("Gener"); and
WHEREAS, capitalized terms used throughout this Agreement will
have the respective meanings assigned to such terms herein; and
NOW, THEREFORE, in consideration of the mutual obligations and
undertakings set forth herein, it is agreed as follows:
2
1. TERM OF AGREEMENT
(a) The rights and obligations of the Parties under this
Agreement will become effective on the date of financial closing of AES', or its
nominee's, purchase from New York State Electric & Gas Corporation ("NYSEG") and
NGE Generation, Inc. of the Somerset, Cayuga, ▇▇▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇▇ generating
facilities (the "Effective Date") and will continue (unless earlier terminated
in accordance with the provisions hereinafter set forth) up to and including
▇▇▇▇▇ ▇▇, ▇▇▇▇ (▇▇▇ "▇▇▇▇▇▇▇ ▇▇▇▇").
(▇) Commencing August 1, 1999, AES may provide written notice
to MEGA terminating this Agreement effective ninety (90) days subsequent to
presentation of such notice. Commencing August 1, 2000, MEGA may provide written
notice to AES terminating this Agreement effective one hundred twenty (120) days
subsequent to presentation of such notice. A Party may terminate this Agreement
pursuant to this paragraph for any reason and without explanation to the other
Party.
(c) The Term, as defined below, of this Agreement will
automatically be extended for one year at the end of the Initial Term and any
succeeding term until one of the Parties provides written notice of termination
pursuant to the procedures set forth in paragraph 1(b) (the Initial Term, as
extended, being hereinafter referred to as the "Term").
(d) During the Term of this Agreement, the Parties agree that
they will use good faith efforts to negotiate a longer-term agreement for
merchandising available energy, capacity and ancillary services from the
Generating Portfolio. Nothing in this Agreement obligates either Party to enter
into such longer-term agreement.
2. PURCHASE AND SALE OF AVAILABLE ENERGY, CAPACITY AND ANCILLARY SERVICES
(a) AES agrees to sell and deliver to MEGA, to the exclusion
of all others during the Term of this Agreement, and MEGA agrees to purchase and
receive, all of the available energy as dispatched, capacity, and ancillary
services of the Generating Portfolio on behalf of AES for the Term of this
Agreement. Available energy, capacity, and ancillary services ("Available
Energy, Capacity, and Ancillary Services") will be the energy, capacity, and
ancillary services available from the Generating Portfolio in excess of the
energy, capacity, and ancillary services AES is committed to provide to NYSEG
from the Generating Portfolio, as of the date of this Agreement, under the New
York Transition Agreement by and between AES NY, L.L.C., as predecessor in
interest to AES and AES Creative Resources, L.P., and NYSEG dated as of August
3, 1998, or the Interconnection Agreement by and between NYSEG and AES NY,
L.L.C. dated as of August 3, 1998 (the "Existing Contracts").
(b) When MEGA markets Available Energy, Capacity and Ancillary
Services from the Generating Portfolio, in accordance with this Agreement, AES
will supply MEGA the Available Energy, Capacity and Ancillary Services in
consideration for the specified Market Price, as defined in Section 3. AES shall
retain full operating authority over the Generating Portfolio, shall determine
the level of production, timing and nature of outages and the quantity of
Available
2
3
Energy, Capacity and Ancillary Services to be made available for marketing by
MEGA from the Generating Portfolio and shall retain the authority to make all
operating decisions regarding the Generating Portfolio ("AES Operating
Authority").
(c) MEGA shall market Available Energy, Capacity and Ancillary
Services through direct pool transactions with the New York Power Pool ("NYPP"),
indirect pool transactions as a satellite NYPP member through NYSEG, bilateral
transactions, and other physical and financial transactions, including physical
and financial transactions used to hedge or leverage the Generating Portfolio.
(d) MEGA shall use commercially reasonable efforts and devote
all necessary personnel and resources available to it to market the Available
Energy, Capacity and Ancillary Services.
(e) MEGA and AES shall work cooperatively and exclusively to
market Available Capacity, Energy and Ancillary Services, provided that any Long
Term Transaction will be subject to AES' prior approval. A Long Term Transaction
is defined as any transaction with a term extending beyond twenty-four (24)
months after the date such transaction is entered into.
(f) MEGA will market the Available Energy, Capacity and
Ancillary Services in compliance with, and subject to, the rules and guidelines
of the North American Electric Reliability Council (or any successor
organization) ("NERC"), NYPP (or any successor organization), the New York ISO
(or any successor organization), the Existing Contracts, the Risk Policies and
Procedures, and Prudent Marketing Practices (hereinafter defined). In the event
of conflict between the terms of this Agreement and the requirements of NERC,
NYPP, the New York ISO, the Existing Contracts, the Risk Policies and
Procedures, and Prudent Marketing Practices, the provisions of this Agreement
will be subordinate. The Party discovering such conflict will notify the other
Party in writing and the Parties will negotiate in good faith to modify the
terms of this Agreement in a manner that preserves for the Parties as nearly as
possible the full economic value of this Agreement promptly upon discovery of
such conflict. If the Parties are unable to reach an agreement within ten (10)
days of such notice being given, either Party may request arbitration pursuant
to Section 14. "Prudent Marketing Practices" shall mean those practices and
procedures, not in conflict with the Risk Policies and Procedures, practiced
generally in the power marketing industry in the United States and that do not
expose either Party to undue risk.
3. MARKET PRICE
(a) MEGA will remit the Market Price to AES pursuant to
Section 9 of this Agreement. For purposes of this Agreement, Market Price is
defined as the sum of all revenues received by MEGA for sales of Available
Energy, Capacity, and Ancillary Services less Costs actually incurred by MEGA in
connection with sales of Available Energy, Capacity and Ancillary Services
pursuant to this Agreement, provided such Costs are incurred in accordance with
practices generally followed by the electric utility industry. "Costs" shall
include without limitation all costs of transmission for the Available Energy,
Capacity and Ancillary Services, control area services, inadvertent energy
flows, imbalance charges, and/or transmission losses;
3
4
taxes (other than income taxes, or other taxes imposed in lieu of income taxes
to the extent such taxes do not exceed the amount MEGA would otherwise have paid
as income tax on fees paid to MEGA under this Agreement); fees or charges
imposed on MEGA by FERC or other regulatory authorities directly related to the
sales made pursuant to this Agreement, the cost of replacement capacity, energy
or transmission purchased by MEGA if required to meet contractual commitments to
third parties due to an outage or other circumstances (whether or not such
circumstances are a result of a Force Majeure) affecting the ability of the
Generating Portfolio to fulfill such commitments; option premiums; broker
commissions; and other costs associated with hedging instruments, both physical
and financial. Costs do not include charges for MEGA's personnel, equipment,
travel, telephone or other similar expenses (including computer time). MEGA will
use commercially reasonable efforts to maximize the Market Price subject to the
Risk Policies and Procedures, Prudent Marketing Practices and the other
provisions of this Agreement and to minimize the Costs.
(b) AES will accept losses incurred in the normal course of
MEGA's activities on behalf of AES under this Agreement, provided, however, that
AES will have no liability associated with any losses incurred as a result of
activities performed by MEGA not in accordance with the Risk Policies and
Procedures. In the event MEGA incurs a loss as a result of activities performed
other than in compliance with the Risk Policies and Procedures, MEGA will incur
such loss on its own behalf and not on behalf of AES.
4. TITLE
MEGA will take title to, and possession of, Available Energy,
Capacity and Ancillary Services at the interconnection point between the
respective facilities comprising the Generating Portfolio and the facilities of
NYSEG (the "Delivery Point"). In the event that developments of the NYPP or New
York ISO make it necessary for the Parties to designate a different Delivery
Point under this Section, the Parties will deem this Section amended to
designate that different Delivery Point without further action.
5. TRANSMISSION OF AVAILABLE ENERGY, CAPACITY, AND ANCILLARY SERVICES
PRODUCED BY THE GENERATING PORTFOLIO
(a) MEGA shall be responsible for and shall make all
arrangements necessary to receive the Available Energy, Capacity and Ancillary
Services sold under this Agreement from the Generating Portfolio, commencing at
the Delivery Point. Actual costs incurred for transmission from the Delivery
Point shall be included in Costs pursuant to this Section 3.
(b) In arranging any necessary transmission service, MEGA
shall obtain any necessary approvals, including entering into transmission
contracts with any transmitting utility downstream from the Delivery Point and
administering such agreements, including all dispatch and scheduling
coordination with NYSEG, NYPP, New York ISO or other transmission provider. AES
shall cooperate with MEGA (i) to ensure that all transmission requests
(including any necessary adjustments thereto) are made timely to the
transmission provider and that such transmission requests reflect the actual
expected Available Energy, Capacity and Ancillary
4
5
Services of the Generating Portfolio and (ii) to respond to any directives of
the transmission provider or control area authority.
(c) AES shall be responsible for all arrangements for the
delivery to the Delivery Point of the Available Energy, Capacity and Ancillary
Services sold to MEGA pursuant to this Agreement.
6. PROVISION OF INFORMATION
AES shall provide all information in a timely manner that is
reasonably requested by MEGA to assist in the scheduling and receipt of the
Available Energy, Capacity and Ancillary Services of the Generating Portfolio
under this Agreement. Without limitation, AES shall provide MEGA with (i) its
projection of the total Available Energy, Capacity and Ancillary Services from
the Generating Portfolio for the next month, (ii) its projection on the ramp
rates of the total Available Energy, Capacity and Ancillary Services on a daily
basis for such month, (iii) any scheduled maintenance, repairs, overhauls or
other shut-downs or dispatch of the Generating Portfolio (or any component
thereof) during the next month and the anticipated duration of any resulting
interruptions, and (iv) the marginal costs of the Generating Portfolio. AES
shall provide MEGA notice during each calendar month of any changes in such
projections and information as soon as possible. The procedures for scheduling
and delivery to MEGA of the Available Energy, Capacity and Ancillary Services
shall be developed in concert with NYSEG operations personnel and other
appropriate operating authorities.
7. FORCE MAJEURE
(a) Except with regard to a Party's obligation to make
payments under this Agreement, in the event either Party hereto is rendered
unable, wholly or in part, by Force Majeure to carry out its obligations, upon
such Party's giving notice and full particulars of such Force Majeure as soon as
reasonably possible, such notice to be confirmed in writing or by facsimile to
the other Party, such obligations of said Party will, to the extent they are
affected by such Force Majeure, be suspended during the continuance of said
inability. Notwithstanding anything to the contrary in this Agreement, during
any periods when MEGA is unable to market the Available Energy, Capacity and
Ancillary Services under this Agreement due to an event of Force Majeure, AES
shall have the right to sell to third parties such Available Energy, Capacity
and Ancillary Services that MEGA is excused from marketing pursuant to this
Section 7 to the extent and for so long as MEGA is unable to market and/or
purchase Available Energy, Capacity and Ancillary Services; provided, however,
AES shall not be required to terminate any such third-party sales that may
extend beyond the period of the Force Majeure.
(b) A Party affected by an event of Force Majeure will use due
diligence to fulfill its obligations hereunder and to remove any disability
caused by such event at the earliest practicable time. Nothing herein will
require a Party to settle any strike or labor dispute.
(c) "Force Majeure" means an event that (i) is not within the
control of the Party relying thereon and (ii) could not have been prevented or
avoided by such Party through the exercise of due diligence. Subject to the
foregoing, Force Majeure includes, without limitation,
5
6
unavailability of primary fuel as a result of Force Majeure (as defined herein
and applied to third parties), floods, earthquakes, storms, fire, civil
disturbances or disobedience, acts of industrial disorder which are part of a
national or regional strike or labor dispute, actions or restraints by court
order, governmental authority or arbitration award (so long as the claiming
Party has not sought and has opposed, to the extent reasonable, such actions or
restraints), curtailments of firm transmission so long as the Party claiming
curtailment of firm transmission service as a force majeure event has first
sought to maintain that firm transmission service by means of redispatch,
exercise of fixed transmission rights or transmission congestion contracts, or
other means, such as interruptible transmission service, and reductions or
interruptions in services which in the reasonable judgment of the claiming Party
or the system operator are necessary to protect the integrity of the system or
to restore service. Force Majeure specifically excludes regulatory disallowance
of the passthrough of costs incurred by a Party.
8. LIMITATION ON DAMAGES
Neither Party will be liable to the other Party under this
Agreement for consequential, indirect, incidental, special, punitive, or
exemplary damages, including without limitation, costs of replacement energy or
capacity, or claims of customers of the other party relating to loss of energy
supply, except as such costs are included as Costs as defined in Section 3
herein or pursuant to Section 13.
9. PAYMENTS
(a) Unless otherwise agreed, on or before the tenth (10th) day
of each calendar month, MEGA will provide AES with a statement of payment
covering the prior calendar month. The statement of payment will set forth the
Market Price, the quantity of Available Energy, Capacity and Ancillary Services
that was sold, and MEGA's Costs actually incurred in connection therewith,
provided such Costs were incurred in accordance with practices generally
followed by the electric utility industry, together with any other relevant
transactions (including payments received pursuant to Section 9(e)) during the
previous calendar month. Except for payment remitted directly to AES by any
Counterparty, as provided in Section 9(f) herein, MEGA will remit the amount due
by wire transfer, pursuant to instructions for such wire transfer provided by
AES, in a manner to minimize any working capital requirement on the part of MEGA
and to minimize to the extent practicable the amount of time between the time
AES provides energy, capacity and/or ancillary services and the payment for
same. MEGA will remit the payments received for transactions entered into under
this Agreement on the 15th, 21st and 26th day of each calendar month ("Payment
Dates") less MEGA's Costs actually incurred, provided such Costs are incurred in
accordance with practices generally followed by the electric utility industry,
as described in Section 3.
(b) If a Payment Date under this Agreement is not a Business
Day (a Business Day being defined as any day, other than a Saturday, Sunday or
holiday, on which banks are open for business in New York City), then such
Payment Date will be changed to the next Business Day following that calendar
day, except that any Payment Date hereunder on a Saturday will be changed to the
preceding Business Day.
6
7
(c) If MEGA fails to remit any amount payable by it when due,
interest on such unpaid sum will accrue at a rate equal to the prime rate, as
reported by the Wall Street Journal on the date payment was due, plus 2% per
annum ("Interest Rate").
(d) If AES, in good faith, disputes the amount of any payment
statement provided by MEGA, or any part thereof, AES will provide a written
explanation of the basis for the dispute. If the Parties are unable to resolve
the dispute within five (5) Business Days of such notice, they will refer the
dispute to the Management Group (as defined in Exhibit E) for resolution. If the
Management Group fails to resolve the dispute within five (5) Business Days of
referral, and MEGA continues to retain amounts that AES claims it is owed for
more than three (3) Business Days past the next following Payment Date, AES may
exercise its rights under Section 10, provided, however, that AES' exercise of
its rights shall not in any way affect MEGA's rights under Section 10 or 14 in
response to AES' action.. Either Party has one (1) year to dispute any payment
statement or any amounts therein.
(e) To the extent that MEGA incurs or anticipates incurring
Costs that at any time will exceed its revenues received and not yet remitted to
AES in accordance with Sections 3 and 9 of this Agreement (such amount defined
as the "Deficit Amount"), then AES will, following AES' receipt of a reasonably
detailed statement from MEGA (including the date by which MEGA is obligated to
pay such costs) for such Deficit Amount, by no later than one Business Day prior
to the date that such Costs must be paid by MEGA, remit to MEGA the Deficit
Amount by wire transfer pursuant to instructions for such wire transfer provided
by MEGA. AES will use all reasonable efforts to remit such payment to MEGA in a
manner to minimize any working capital requirement on the part of MEGA. If AES
fails to remit to MEGA any amount payable by it under this Section 9(e) when
due, interest on such unpaid portion will accrue at the Interest Rate.
(f) From time to time, to manage the amount of the AES
Receivable relative to the Guaranty and the Letter of Credit pursuant to Section
12, the Parties may identify certain counterparties from whom payments would be
made directly to AES. In such event, MEGA would direct such counterparties to
remit payments directly to AES or its designee by wire transfer pursuant to
instructions for such wire transfer provided by AES.
(g) MEGA will not be responsible and has no liability to AES
for third parties that fail to make payments to MEGA so long as MEGA contracted
with such third parties in accordance with the credit policies specified in the
Risk Policies and Procedures. MEGA shall use commercially reasonable efforts to
recover such receivables. In the event MEGA is unable to collect such
receivables, MEGA will assign to AES the rights to such receivables to the
extent permissible. Amounts actually received shall be included in Market Price
as defined in Section 3.
(h) The Parties recognize that there may be simultaneous
transactions with the same third parties entered into by MEGA in performing its
obligations under this Agreement ("AES Transactions") and in transacting
business independent of its obligations under this Agreement ("MEGA
Transactions"). In such event, provided that the third party is not in default
and otherwise has paid any amounts owed MEGA when due, (i) MEGA will pay to AES
any payment due AES under this Agreement when such payments would have otherwise
been due or (ii) AES will pay MEGA any payment due MEGA under this Agreement
when such payment would have otherwise been due as the case may be. In the event
that the third party is in default
7
8
or has otherwise not made payments when due, MEGA shall use commercially
reasonable efforts to collect any amounts due. In the event that MEGA fails to
collect, and provided that the AES Transactions were entered into in accordance
with the Risk Policies and Procedures, MEGA shall reasonably determine the loss
or gain associated with the MEGA Transactions and the AES Transactions. Any
resulting gain shall be used to offset any resulting loss. Should the resulting
loss exceed the gain, the net loss shall be for the account of the party
otherwise suffering the loss. In the event that both the AES Transactions and
the MEGA Transactions result in losses, each respective party shall suffer its
respective loss. In the event both the MEGA Transactions and the AES
Transactions suffer losses and the Parties secure full or partial payment
resulting from credit support arrangements or otherwise, the full or partial
payment shall be apportioned to the Parties pro-rata against the amount of their
respective losses. The Parties shall share the actual and reasonable cost of
recovery in proportion to the amount of their respective losses.
(i) For the purpose of this Section 9, payments received by
MEGA after 2:00 p.m. Eastern Standard Time shall be considered to have been paid
on the following Business Day.
(j) In the event AES draws under the Letter of Credit in
accordance with its terms and subsequently it is determined by arbitration in
accordance with the terms of Section 14 hereof (i) that MEGA did not cause an
Event of Default hereunder, (ii) that any statement made by AES in the draw
certificate presented by AES to the issuer of the Letter of Credit was untrue at
the time such certificate was presented by AES, or (iii) that any Event of
Default caused by MEGA did not result in damages equal to or greater than the
amount drawn by AES under the Letter of Credit, then in such event, AES agrees
to pay to MEGA, upon demand of MEGA an amount equal to (A) in the case of
clauses (i) and (ii) above, the full amount drawn under the Letter of Credit,
and in the case of clause (iii) above, the amount drawn under the Letter of
Credit in excess of the amount of damages actually incurred by AES as a result
of an Event of Default caused by MEGA, plus (B) interest accrued on such amount
from the date MEGA reimbursed the bank issuing the Letter of Credit for the
amount drawn at the Interest Rate.
10. DEFAULT AND REMEDIES UPON DEFAULT
(a) Each of the following will constitute "Events of Default"
under this Agreement:
(1) The failure of either Party, or any party
guaranteeing either Party's obligations hereunder ("Guarantor"), to make payment
or perform as required or take other corrective action deemed satisfactory by
the Performing Party (as hereinafter defined in its sole discretion) (i) under
this Agreement (which Event of Default will not include a delay in payment that
is cured within three (3) Business Days of the date when due or that is under
review by the Management Group pursuant to the dispute resolution process under
Section 9 (d) or any other failure of performance that is cured within ten (10)
Business Days of a demand for cure, provided, however, that any failure under
Section 10 Paragraph (a)(8) shall not be granted any cure period) or (ii) under
any collateral, security, guarantee or other agreement undertaken in connection
with this Agreement, including the Guaranty and Letter of Credit (any such
collateral, security, guarantee or other agreement, together with the Guaranty
and the Letter of Credit, are
8
9
collectively referred to herein as a "Related Agreement"), after giving effect
to any applicable notice or grace period thereunder.
(2) The filing by either Party or any Guarantor of a
bankruptcy petition or acquiescence by either Party or any Guarantor in the
filing of a bankruptcy petition by any other person against either Party or any
Guarantor;
(3) The filing of an involuntary bankruptcy petition
against either Party or any Guarantor; provided, however, that any such default
will be deemed cured if any involuntary bankruptcy petition filed against either
Party or any Guarantor is dismissed within thirty (30) days after it was filed;
(4) The making by either Party or any Guarantor of a
general assignment for the benefit of its creditors;
(5) The inability of either Party or any Guarantor to
pay its debts as such debts become due or an admission in writing by either
Party or any Guarantor of its inability to pay its debts as they become due or
of its generally insolvent condition;
(6) The dissolution or liquidation of either Party or
any Guarantor or the passage of a resolution requiring the dissolution or
liquidation of either Party or any Guarantor; provided, however, that any such
dissolution or liquidation pursuant to a consolidation, acquisition,
amalgamation or merger involving either Party or any Guarantor consented to by
the other Party will not be deemed an Event of Default hereunder;
(7) The transfer of all or substantially all of the
assets of either Party or any Guarantor, the merger of either Party or any
Guarantor with any other person or the consolidation of either Party or any
Guarantor with any other person (i) which causes a material adverse change in
the financial condition of such Party or any Guarantor or (ii) pursuant to which
the entity existing after the transfer, merger or consolidation does not assume
the obligations of such Party or any Guarantor by operation of law or otherwise;
(8) The failure by either Party to give adequate
security for, or assurances of, its ability to perform any of its obligations
under this Agreement within three (3) Business Days of a written request to do
so when the other Party has reasonable grounds for insecurity;
(9) If Gener's long-term debt securities are not, at
any time, rated Investment Grade or better. "Investment Grade" shall mean a
rating of (i) Baa3 or better by ▇▇▇▇▇'▇ Investor Services or (ii) BBB- or better
by Standard & Poor's Corporation;
(10) The making of a materially incorrect or
misleading representation or failure to maintain any warranty under this
Agreement; or
(11) The failure by MEGA to cause the Letter of
Credit (as defined below) to be renewed or replaced by another letter of credit
substantially in the same form as the
9
10
prior Letter of Credit not later than ninety (90) days prior to the scheduled
date of expiry of the Letter of Credit;
(b) Upon an Event of Default, the Party not in default
("Performing Party") may take one or more of the following actions with respect
to the Party in default ("Defaulting Party") or its Guarantor:
(1) In the event that MEGA is the Defaulting Party
hereunder, AES, as the Performing Party, may take one or more of the following
actions:
(A) Withhold or suspend all or a portion of
its deliveries of Available Energy, Capacity, or Ancillary Services to MEGA
required hereunder;
(B) By at least one (1) Business Day's
written notice to MEGA, designate in such written notice a date for termination
of this Agreement and all the Parties' obligations hereunder, notwithstanding
any required notice otherwise due pursuant to Section 1 of this Agreement, but
subject to Sections 15(b), 16 and 17;
(C) To the extent permissible under the
terms of third party transactions or as agreed to by the third party, require
MEGA to transfer or assign to AES or its designee all transactions entered into
for the sale of Available Energy, Capacity and Ancillary Services pursuant to
this Agreement as of the date of such default;
(D) Proceed to enforce the Guaranty or draw
down the Letter of Credit in accordance with its terms, to recover any damages
due under this Agreement and implement the default remedies in any other Related
Agreement; and
(E) Require MEGA to liquidate all or a
portion of the outstanding transactions entered into by it pursuant to this
Agreement. In the event of such liquidation, MEGA shall set off or aggregate, as
appropriate, any or all Transaction Settlement Amounts (discounted as
appropriate) and any or all other amounts owing between the Parties under this
Agreement so that all such amounts are aggregated and/or netted to a single
liquidated amount payable by one Party to the other (the "Net Settlement
Amount"), and shall notify AES of the Net Settlement Amount. For each
transaction, the "Transaction Settlement Amount" shall be the difference between
the price contracted for by MEGA with a third party ("Contract Price") and the
price at which MEGA obtains or would be able to obtain under an offsetting
transaction at the time AES terminates this Agreement ("Current Price"). If such
liquidation results in a gain, the Transaction Settlement Amount shall be
credited to AES. If such liquidation results in a loss, the Transaction
Settlement Amount for such Transaction shall be charged to AES. MEGA may include
in its calculation of the Net Settlement Amount any losses incurred by it as a
result of the close-out or liquidating commercially reasonable ▇▇▇▇▇▇ related to
the transactions that are being liquidated, all as determined in a commercially
reasonable manner. MEGA may not include in its calculation of the Net Settlement
Amount any other damages, or expenses incurred by it as a result of such
close-out and liquidation, including without limitation, damages and expenses
incurred in obtaining, maintaining or liquidating commercially reasonable ▇▇▇▇▇▇
related to the
10
11
transactions that are being liquidated. Payment of the Net Settlement Amount
shall be due within one Business Day after the termination of this Agreement by
MEGA pursuant to this Section.
(2) In the event that AES is the Defaulting Party
hereunder, MEGA, as the Performing Party, may take one or more of the following
actions:
(A) Withhold or suspend payments to AES
required hereunder sufficient to compensate MEGA for actual or reasonably
anticipated damages caused by the AES default;
(B) Upon at least one (1) Business Day's
written notice to AES, designate in such written notice a date for termination
of this Agreement and all the Parties' obligations hereunder, notwithstanding
any required notice otherwise due pursuant to Section 1 of this Agreement but
subject to Sections 15(b), 16 and 17.
(C) Implement the default remedies in any
Related Agreement; and
(D) Liquidate all outstanding transactions
entered into by it pursuant to this Agreement. In the event of such liquidation,
MEGA shall set off or aggregate, as appropriate, any or all Transaction
Settlement Amounts (discounted as appropriate) and any or all other amounts
owing between the Parties under this Agreement and shall notify AES of the Net
Settlement Amount. If such liquidation results in a gain, the Transaction
Settlement Amount shall be credited to AES. If such liquidation results in a
loss, the Transaction Settlement Amount for such Transaction shall be charged to
AES. MEGA may include in its calculation of the Net Settlement Amount any other
commercially reasonable expenses incurred by it as a result of such close-out
and liquidation, including without limitation any losses or expenses incurred in
obtaining, maintaining or liquidating commercially reasonable ▇▇▇▇▇▇ related to
the transactions that are being liquidated, all as determined in a commercially
reasonable manner. Payment of the Net Settlement Amount shall be due within one
Business Day after the termination of this Agreement by MEGA pursuant to this
Section.
(3) The Performing Party may enforce any of its
remedies under this Agreement successively or concurrently at its option.
Subject to Section 8, all of the remedies set forth above are in addition to all
other remedies available to the Performing Party at law or in equity. No delay
or failure on the part of a Performing Party to exercise any right or remedy to
which it may become entitled on account of an Event of Default will constitute a
waiver of any such right and the Performing Party will be entitled to exercise
such right or remedy at any time during the continuance of an Event of Default.
Any waiver by a Party of an Event of Default of the other Party shall be in
writing. In the event of liquidation as described above, each Party shall have a
general right of set-off with respect to all amounts owed by each Party to the
other Party, provided that any amount not then due and payable that is included
in such setoff, shall, if appropriate, be discounted to present value in a
commercially reasonable manner.
11
12
11. FEE STRUCTURE
(a) Apart from and in addition to any payments provided for in
Section 9, or Section 11(b) below, AES will pay MEGA Eighty-Eight Thousand Five
Hundred and No/100 Dollars ($88,500.00) per month in advance for services
provided under this Agreement ("Fee") commencing on the Effective Date (pro
rated for a partial month). Each such payment will be made on the first day of
each calendar month thereafter (or if such day is not a Business Day, on the
first Business Day thereafter).
(b) In addition to the compensation pursuant to Section 11(a)
hereunder, MEGA will be compensated for any transaction extending one year
beyond the Term as negotiated on a case by case basis up to a maximum of five
(5%) of the Gross Margin of the transaction ("Commission"), where Gross Margin
is defined as the margin above all incremental costs to AES of supplying the
product, i.e., emissions allowances, variable operation and maintenance costs
and fuel costs. MEGA's minimum compensation for all such transactions extending
one year beyond the Term in the aggregate shall be $0.10/MWh (or equivalent
dictated by the nature of the transaction) provided, however, that such minimum
compensation shall not be greater than the lesser of (1) $2,500,000 or (2)
$125,000 multiplied by the total number of months this Agreement remains in
effect (e.g., for a transaction of 3 million MWh per year for five years or an
equivalent sale of 342.46 MW for five years, MEGA's minimum compensation would
be $1.5 million in either case, provided that the Agreement remains in effect
for at least 12 months).
12. PERFORMANCE GUARANTEES
Within five (5) Business Days of executing this Agreement,
MEGA will provide to AES the Guaranty and the Letter of Credit.
(a) The Guaranty will be substantially in the form set forth
in Exhibit B. Initially, the amount of the Guaranty will be Forty Million
Dollars ($40,000,000.00). In the event that the reasonably anticipated amount
payable to AES, which will reflect a reduction for any payments received or
anticipated to be received directly by AES pursuant to Section 9(f) ("AES
Receivable"), exceeds this amount plus the amount of the Letter of Credit
provided pursuant to Section 12(b), MEGA will, not later than ten (10) days
after written demand therefor, provide additional collateral in one of three
forms: (i) an additional, or supplemental, parent guarantee from Gener, in
substantially the same form as the Guaranty, (ii) a letter of credit issued by a
financial institution with a rating of A3 or better by ▇▇▇▇▇'▇ Investor's
Service or A- or better by Standard & Poor's, with a term of not less than one
year and payable upon presentation of a sight draft executed by an authorized
AES representative certifying that such sum is owing to AES by MEGA in
connection with this Agreement, or (iii) cash to be held by a third party
acceptable to AES pursuant to an escrow or security agreement in form and
substance satisfactory to AES, such that the total collateral (including the
Guaranty) is greater than or equal to the AES Receivable.
(b) The Letter of Credit shall be issued by a U.S. financial
institution or a financial institution with a U.S. branch or agency with a
rating of A3 or better by ▇▇▇▇▇'▇
12
13
Investor's Service or A- or better by Standard' & Poor's, in the amount of Ten
Million Dollars ($10,000,000) with a term of not less than one year and shall be
substantially in the form of Exhibit C. MEGA shall cause the Letter of Credit to
be renewed or replaced by another Letter of Credit in substantially the same
form as the previous Letter of Credit not later than ninety (90) days prior to
the scheduled expiry of the Letter of Credit.
(c) In addition, Gener will provide MEGA with a minimum of Two
Hundred and Fifty Million Dollars ($250,000,000.00) in direct financial support,
consisting of equity contributions, letters of credit and/or direct payment
guarantees to third parties, in MEGA's sole discretion, in part to support
MEGA's ability to enter into the transactions necessary to market the Available
Energy, Capacity and Ancillary Services. While Gener's obligation to provide
financial support hereunder will be limited to Two Hundred and Fifty Million
Dollars ($250,000,000.00), it is MEGA's intent to maintain adequate liquidity in
order to perform under the terms and conditions of this Agreement.
(d) AES will be, from and after the Effective Date of this
Agreement, a creditworthy entity that will own or have rights to the Generating
Portfolio. AES has, through capital contributions of its indirect parent, The
AES Corporation, invested in excess of 20% of the purchase price of the
Generating Portfolio. AES will provide to MEGA annual budgets and quarterly
financial statements.
13. INDEMNIFICATION
(a) MEGA shall indemnify, defend and hold AES, and all of AES'
directors, employees, agents, affiliates and permitted assigns, harmless from
and against all claims, losses, liabilities, damages, judgments, awards, fines,
penalties, costs and expenses (including reasonable attorneys' fees and
disbursements) directly incurred in connection with or directly arising out of
(i) any violation of applicable law, regulation or order by MEGA and (ii) any
merchandising or distribution of Available Energy, Capacity and Ancillary
Services by MEGA in connection with this Agreement that is not in accord with
the Risk Policies and Procedures, as well as any merchandising or distribution
of any energy, capacity or ancillary services outside of this Agreement.
(b) AES shall indemnify, defend and hold MEGA, and all of
MEGA's directors, employees, agents, affiliates and permitted assigns, harmless
from and against all claims, losses, liabilities, damages, judgments, awards,
fines, penalties, costs and expenses (including reasonable attorneys' fees and
disbursements) directly incurred in connection with or directly arising out of
(i) any violation of applicable law, regulation or order by AES and (ii) any
merchandising or distribution of Available Energy, Capacity and Ancillary
Services by AES in connection with this Agreement. AES shall indemnify and hold
MEGA harmless from and against any liabilities incurred by MEGA as a result of
AES' failure to perform in accordance with this Agreement.
(c) Neither Party shall be required to indemnify the other
Party for the gross negligence or willful misconduct of the other Party or such
Party's affiliates, directors, employees, agents or permitted assigns.
13
14
14. ARBITRATION
(a) Any dispute between the Parties arising from or with
respect to this Agreement will be submitted to binding arbitration upon the
request of either Party. A copy of any such request will be in writing and
served on the other Party and will specify the issue or issues in dispute and
summarize the complaining Party's claim with respect thereto. The dispute will
be resolved in accordance with the Commercial Arbitration Rules of the American
Arbitration Association ("AAA"), as modified herein, or such other rules as are
mutually agreed upon by the Parties. The arbitration tribunal will consist of
three (3) arbitrators, each of whom will be disinterested in the subject matter
of the dispute, have appropriate qualifications and experience with respect to
arbitration of business disputes, and possess relevant industry experience.
Within ten (10) Business Days from the date of request for arbitration, each
Party will appoint an arbitrator. The third arbitrator, who will chair the
tribunal, will be selected by the party-appointed arbitrators. If any Party
fails to appoint an arbitrator or the party-appointed arbitrators fail to
appoint the third arbitrator, said arbitrators will be selected pursuant to AAA
Rules. Any arbitration will be completed as soon as possible, but in any event
no later than ninety (90) days after the appointment of the tribunal, unless the
Parties agree otherwise. All decisions of the tribunal will be by majority vote.
Any interim or final award will be rendered by written decision with an
explanation of the basis of the decision. The tribunal will not have any
authority to award extra-contractual or punitive damages. Judgment upon the
award rendered by the tribunal may be entered in any court having jurisdiction
thereof.
(b) Each Party to a dispute subject to this Section of the
Agreement will bear its own costs and attorneys' fees, and will share equally
with the other Party the costs of the arbitrators and any hearing expenses in
connection with any arbitration.
15. ASSIGNMENT
(a) The rights and obligations created by this Agreement will
inure to the benefit of, and be binding upon the successors and permitted
assigns of, the respective Parties hereto. A Party is not permitted to assign
its rights and obligations under this Agreement without the prior written
consent of the other party, provided, however, either Party may assign this
Agreement as collateral for financing purposes.
(b) At the end of the Term of this Agreement, MEGA and AES
shall use commercially reasonable efforts to assign to AES, or any designee of
AES, any and all transactions MEGA has entered into in accordance with the Risk
Policies and Procedures in the performance of this Agreement. AES shall provide
commercially reasonable credit support and shall make all reasonable efforts to
enter into agreements with transaction counterparties to facilitate such
assignments. Should AES fail to reach agreement with transaction counterparties
and unless the parties otherwise agree, the Parties will enter into "back to
back" transaction(s) for the net open position. In any such arrangement, MEGA
would buy or sell the identical product from or to AES at the identical price
that it had bought or sold with the transaction counterparty. AES would assume
all liabilities and obligations for the outstanding transaction with the
counterparty and would provide credit support reasonably satisfactory to MEGA.
MEGA will
14
15
receive as compensation for entering into any "back to back" transactions an
amount equal to $0.10 per MWh (or equivalent dictated by the nature of the
transaction).
(c) The Parties will endeavor to make any Long-Term
Transactions entered into by MEGA assignable to AES.
16. ACCOUNTS AND RECORDS
Both Parties will keep, in accordance with generally accepted
accounting principles, complete and accurate records of its operations under
this Agreement for a three (3) year period. Each Party or any third-party
representative of a Party may, at its sole expense and during normal working
hours, examine the records of the other Party to the extent reasonably necessary
to verify the accuracy of any statement, charge, or computation made pursuant to
the provisions of this Agreement, upon reasonable notice to the other Party. All
such examinations will be subject to confidentiality requirements pursuant to
Section 20. This Section 16 will survive any termination of this Agreement for a
period of the greater of (i) three (3) years from the date of such termination
or (ii) the minimum period required by FERC's rules for the purpose of such
statement and payment adjustments and compliance with federal regulations.
Payment together with interest at the Interest Rate shall be made to correct any
inaccuracy within thirty (30) days after discovery of such inaccuracy.
17. AFTER TERMINATION
Sections 3, 8, 9, 10, 14, 16 and 20 of this Agreement will
continue in effect after termination of this Agreement to the extent necessary
to provide for final adjustments and disposition of any claims outstanding,
including any such claims arising under Section 13 of this Agreement.
18. SEVERABILITY OF PROVISIONS
A ruling by any court or government agency having jurisdiction
that any provision of this Agreement is invalid will not result in invalidation
of the entire Agreement, but all remaining terms will remain in full force and
effect. If any court or government agency requires a change to an amendment to
this Agreement, then to the extent permitted by applicable law, either Party may
withdraw from the amendment, in which event this Agreement will continue in
effect as written before the attempted amendment. Except to the extent required
by arbitration pursuant to Section 14 or by mutual consent, the Parties will
neither seek nor support another entity that seeks any regulatory or judicial
order modifying any term of this Agreement or any transaction hereunder. The
Parties will oppose any challenge or proposed changes to the terms of this
Agreement, unless both Parties agree in writing to make the proposed change(s).
Absent such agreement, and to the extent permitted by applicable law, it is the
Parties' intent that no charge under or term of this Agreement be changed by any
order of any agency or court under Section 205 or 206 of the Federal Power Act
or under any other provision of law.
15
16
19. INTERPRETATION
THE INTERPRETATION AND PERFORMANCE OF THIS AGREEMENT WILL BE
IN ACCORDANCE WITH, AND CONTROLLED BY, THE LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
20. CONFIDENTIALITY
The Parties will maintain the confidentiality of the
Agreement, the specific terms and conditions of the Agreement, and any
information provided pursuant to the Agreement. Neither Party will publish,
disclose, or otherwise divulge this Agreement or the information provided
pursuant to this Agreement to any third party at any time, other than to such
Party's guarantors, counsel and advisors, without the prior written consent of
the other Party, except:
(i) A Party may disclose that it is a Party to this Agreement and
may disclose the length of the term of this Agreement.
(ii) A Party may disclose this Agreement to rating agencies,
financial institutions or other entities that provide (or may
potentially provide) capital or financing or refinancing to a
Party, and to its advisors.
(iii) A Party may disclose this Agreement and any information
provided pursuant to this Agreement, if the release of such
information is required by a governmental or judicial body of
competent jurisdiction or pursuant to an arbitration
proceeding instituted pursuant to this Agreement.
The confidentiality restrictions contained in this provision
will not apply to information that is in the public domain at the time of a
request, or for disclosure of information that passes into the public domain by
acts other than acts of a Party to this Agreement.
MEGA shall use all reasonable care to protect the
confidentiality of any proprietary AES information provided under this Agreement
and shall not disclose such information to any party (other than Gener) which
acquires an interest in MEGA without the prior written consent of AES, which
shall not be unreasonably withheld.
21. NOTICE
Except as otherwise specifically provided herein or otherwise
agreed to by the Parties, any notice, request, demand, statement and/or other
communication provided for herein or otherwise given or made in connection
herewith will be in writing and will be sent to the Parties at the following
addresses:
16
17
AES:
AES Eastern Energy, L.P.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇ ▇▇▇▇▇▇▇▇
MEGA:
Merchant Energy Group of the Americas, Inc.
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: Contract Administration
Notices will be deemed to have been given and received (a)
when personally delivered, (b) upon receipt from a private courier service, (c)
when delivered by the US Postal Service, registered or certified, to the
appropriate Party, or (d) on a Business Day during which a facsimile is properly
sent and received. Either Party may change the address, facsimile number, or
telephone number to which notice is to be given by written notice to the other
Party. In addition, either Party may appoint an agent to give or receive
operational notices for specific deliveries of Available Energy, Capacity and
Ancillary Services, provided that copies of notices given to such an agent will
also be sent to such Party as above provided. The Parties will make appropriate
arrangements for communication by telephone or otherwise in emergency
situations.
22. WAIVERS
Any waiver at any time by either Party of its rights with
respect to this Agreement, or with respect to any other matter arising in
connection with this Agreement, will not be deemed a waiver with respect to any
subsequent matter arising in connection therewith. Any delay, short of the
statutory period of limitations in assessing or enforcing any right, will not be
deemed a waiver of such right.
23. RISK POLICIES AND PROCEDURES
Subject to the Risk Policies and Procedures, provided as
Exhibit D, the other limitations set forth in this Agreement and AES' Operating
Authority, MEGA will have full flexibility to manage its marketing, trading and
hedging activities on behalf of AES under this Agreement. Transactions or
activities specifically approved by AES in advance shall be deemed to be in
accordance with the Risk Policies and Procedures and the other provisions of
this Agreement.
17
18
24. TAXES
Each Party will use reasonable efforts to administer this
Agreement and implement the provisions hereof in accordance with the intent to
minimize taxes. Both Parties agree to modify the terms of this Agreement in a
reasonable manner, consistent with the intent of the Parties as set forth
herein, to minimize the taxes (excluding income taxes) payable by the Parties.
MEGA shall require exemption certificates from third-party buyers in every
instance in which such buyers resell the Available Energy, Capacity and
Ancillary Services from MEGA.
All transactions under this Agreement will include full
reimbursement for, and AES will pay, or cause to be paid, or reimburse MEGA if
it has paid, all taxes (other than income taxes, or other taxes imposed in lieu
of income taxes to the extent such taxes do not exceed the amount MEGA would
otherwise have paid as income tax on fees paid to MEGA under this Agreement)
payable in connection with the transactions contemplated under this Agreement.
If MEGA is required to remit such tax, the amount will be deducted from any sums
due to AES, as provided in Section 3 herein. Either Party, upon written request
of the other Party, will provide a certificate of exemption or other reasonably
satisfactory evidence of exemption if either Party is exempt from taxes, and
will use reasonable efforts to obtain and cooperate with obtaining any exemption
from or reduction of any tax.
25. REPRESENTATIONS AND WARRANTIES
25.01. Organization; Powers.
(a) AES represents and warrants that it is a duly formed and
validly existing limited partnership under the laws of the State of Delaware and
has the requisite power and authority to carry on its business as now being
conducted and currently proposed to be conducted and to execute, deliver and
perform its obligations under this Agreement.
(b) MEGA represents and warrants that it is a duly formed and
validly existing corporation under the laws of the State of Delaware and has the
requisite power and authority to carry on its business as now being conducted
and currently proposed to be conducted and to execute, deliver and perform its
obligations under this Agreement.
25.02. Authorization; Enforceability.
(a) AES represents and warrants that it has taken all action
necessary to authorize it to execute, deliver and perform its obligations under
this Agreement and this Agreement, when executed and delivered, will constitute
a legal, valid and binding obligation of AES, enforceable in accordance with its
terms, subject to bankruptcy, reorganization, moratorium or other similar laws
affecting the enforcement of the rights of creditors generally and to general
principles of equity.
(b) MEGA represents and warrants that it has taken all action
necessary to authorize it to execute, deliver and perform its obligations under
this Agreement and this Agreement, when executed and delivered, will constitute
a legal, valid and binding obligation of
18
19
MEGA, enforceable in accordance with its terms, subject to bankruptcy,
reorganization, moratorium or other similar laws affecting the enforcement of
the rights of creditors generally and to general principles of equity.
25.03. No Conflict.
(a) AES represents and warrants that the execution, delivery
and performance of this Agreement does not and will not (i) violate any laws,
statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions,
rules, regulations, permits, licenses, authorizations, directions and
requirements of any federal, state, local or foreign governmental department,
commission, board, bureau, authority, agency, court, instrumentality or judicial
or regulatory body or entity ("Legal Requirement") applicable to AES or the
violation of which could reasonably be expected to result in a material adverse
effect on the business, assets or financial condition of AES ("Material Adverse
Effect"); or (ii) conflict with, result in a breach of, or constitute a default
under any indenture or agreement to which AES is a party.
(b) MEGA represents and warrants that the execution, delivery
and performance of this Agreement does not and will not (i) violate any Legal
Requirement applicable to MEGA or the violation of which could reasonably be
expected to result in a Material Adverse Effect on the business, assets or
financial condition of MEGA; or (ii) conflict with, result in a breach of, or
constitute a default under any indenture or agreement to which MEGA is a party.
25.04. No Default.
(a) AES represents and warrants that as of the date hereof, no
condition or event that would constitute an Event of Default has occurred and is
continuing.
(b) MEGA represents and warrants that as of the date hereof,
no condition or event that would constitute an Event of Default has occurred and
is continuing.
25.05. Compliance.
(a) AES represents and warrants that it is in compliance with
all Legal Requirements and governmental approvals applicable to it and this
Agreement, to the extent that such non-compliance could not reasonably be
expected to result in a Material Adverse Effect and AES is using its best
efforts to remedy such noncompliance as quickly as possible.
(b) MEGA represents and warrants that it is in compliance with
all Legal Requirements and governmental approvals applicable to it and this
Agreement, to the extent that such non-compliance could not reasonably be
expected to result in a Material Adverse Effect and MEGA is using its best
efforts to remedy such noncompliance as quickly as possible.
25.06. Litigation.
(a) AES represents and warrants that there are no actions,
suits or proceedings pending or, to the best of its knowledge, threatened (in
writing) against AES in any court or before or by any federal, state, local or
foreign governmental department, commission, board,
19
20
bureau, authority, agency, court, instrumentality or judicial or regulatory body
or entity, wherein an unfavorable ruling or finding could reasonably be expected
to result in a Material Adverse Effect for AES or its ability to perform under
this Agreement.
(b) MEGA represents and warrants that there are no actions,
suits or proceedings pending or, to the best of its knowledge, threatened (in
writing) against MEGA in any court or before or by any federal, state, local or
foreign governmental department, commission, board, bureau, authority, agency,
court, instrumentality or judicial or regulatory body or entity, wherein an
unfavorable ruling or finding could reasonably be expected to result in a
Material Adverse Effect for MEGA or its ability to perform under this Agreement.
25.07. Governmental Approvals.
(a) AES represents and warrants that all governmental
approvals necessary for it to enter into this Agreement have been obtained, are
in full force and effect and are final and non-appealable.
(b) MEGA represents and warrants that all governmental
approvals necessary for it to enter into this Agreement have been obtained, are
in full force and effect and are final and non-appealable.
25.08. Tax Matters.
(a) AES represents and warrants that it has filed all required
tax and information returns that it is required to file and has paid all taxes
it is required to pay to the extent due (other than those taxes it is contesting
in good faith and by appropriate proceedings and for which funds have been set
aside (by surety bond, escrowed funds or other means) sufficient to defease such
amounts or may finally be determined to be due and payable).
(b) MEGA represents and warrants that it has filed all
required tax and information returns that it is required to file and has paid
all taxes it is required to pay to the extent due (other than those taxes it is
contesting in good faith and by appropriate proceedings and for which funds have
been set aside (by surety bond, escrowed funds or other means) sufficient to
defease such amounts or may finally be determined to be due and payable).
26. TRAINING
MEGA will provide space and training for two (2) AES employees
in MEGA's office to participate in the marketing, trading and/or to oversee the
operations of MEGA with respect to the AES Generating Portfolio. All such
employees shall be required to enter into a confidentiality agreement with MEGA
pursuant to which they shall agree not to disclose to any person any information
regarding MEGA's trading operation or information regarding MEGA's customers or
prices obtained, other than information related to the Generation Portfolio and
MEGA's marketing activities with respect thereto which may be disclosed to AES
officers, directors, employees and agents.
20
21
27. MISCELLANEOUS
(a) Each Party will prepare, execute and deliver to the other
Party any documents reasonably required to implement any provision hereof.
(b) Any number of counterparts of this Agreement may be
executed and each will have the same force and effect and be deemed to
constitute an original.
(c) This Agreement constitutes the entire understanding
between the Parties and will supersede any and all previous and contemporaneous
written or oral understandings pertaining to the subject matter of this
Agreement.
(d) The Parties consent to electronic recording of scheduling
and other communications hereunder, which recordings may be used as evidence of
the Parties' intended course of conduct under this Agreement (subject to
objections for relevance and materiality), provided that, in the event of a
dispute, a Party will provide to the other Party a copy of any recording
relevant to the issue in dispute.
(e) This Agreement and any transaction pursuant hereto confer
no rights whatsoever upon any person other than the Parties and will not create,
or be interpreted as creating, any standard of care, duty or liability to any
person not a Party hereto. This Agreement does not establish a partnership or
joint venture between the Parties. MEGA has entered into this Agreement in
return for consideration hereunder. There is no promised or implied obligation
of either Party to enter into additional arrangements nor to expand the
Generating Portfolio; provided, however, the Parties agree that they will
attempt to negotiate a longer term Agreement as described in Section 1 herein.
(g) Article and Section headings used herein are for
convenience of reference only, are not part of this Agreement and are not to
affect the construction of, or to be taken into consideration in interpreting,
this Agreement.
(h) Neither this Agreement nor any provision hereof may be
waived, amended or modified except pursuant to an agreement or agreements in
writing entered into by AES and MEGA.
(i) MEGA must give notice to AES of any transfer or other
disposition of more than 10% of the equity interests in MEGA no later than sixty
(60) days prior to such transfer or other disposition. Upon any such transfer,
AES shall have the right to terminate this Agreement upon ninety (90) days
notice. Prior to divulging any information regarding the Generating Portfolio
including any non-public information and all trading strategies related to the
Generating Portfolio (other than to Gener), MEGA must provide AES one hundred
and twenty (120) days written notice. Furthermore, all such confidential
information must be shielded from and be held confidential from the transferee
should AES decide to exercise its right to terminate this Agreement.
IN WITNESS WHEREOF, the Parties hereto have caused this
Agreement to be signed by their respective duly authorized representatives as of
the date first above written.
21
22
MERCHANT ENERGY GROUP OF THE AES EASTERN ENERGY, L.P.
AMERICAS, INC.
By: By:
Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ Name: ▇▇▇ ▇▇▇▇▇▇▇▇
Title: Executive Vice President Title:
Date: April 8, 1999 Date: April 8, 1999
Attest: Attest:
22
23
EXHIBIT A
GENERATING PORTFOLIO
STATION PREVIOUS NAME LOCATION UNIT CAPACITY (MW)
------- ------------- --------- ---- -------------
Somerset ▇▇▇▇▇▇▇ Somerset, NY 1 ▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇ 1 150
2 ▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇ 7 43
8 ▇▇
▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇ 3 56
4 105
24
EXHIBIT B
GUARANTY
This Guaranty ("Guaranty") is made on April ___, 1999 by Gener
S.A., a Chilean corporation (the "Guarantor"), in favor of AES Eastern Energy,
L.P., a Delaware limited Partnership ("AES") (AES and Guarantor also are
referred to herein as the "Party" or, collectively, the "Parties").
RECITALS:
WHEREAS, Merchant Energy Group of the Americas, Inc. ("MEGA"),
a wholly-owned indirect subsidiary of Guarantor, and AES desire to enter into a
Capacity, Energy, and Ancillary Services Agreement dated on the same date as
this Guaranty (the "Agreement"), pursuant to which MEGA will market capacity,
energy and ancillary services produced by AES and AES will compensate MEGA;
WHEREAS, the Guarantor has determined that AES' financial
commitments pursuant to the Agreement will confer a direct and material benefit
on the Guarantor;
WHEREAS, the Agreement requires as a condition precedent to
the execution thereof that MEGA's obligations thereunder be guaranteed by the
Guarantor as set forth herein;
WHEREAS, Guarantor is providing this Guaranty to induce AES to
enter into the Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and
in order to induce AES to enter into the Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Guarantor hereby agrees as follows:
1. To induce AES to enter into the Agreement and the
transactions contemplated by the Agreement, the Guarantor irrevocably and
unconditionally guarantees to AES the prompt and complete payment and
performance, when due, of all receivables, now or hereafter owed by MEGA to AES
under the terms of the Agreement ("Guaranteed Obligations"). Payment and
performance by Guarantor of the Guaranteed Obligations hereunder shall be made
in full irrespective of any claim, set off or other right that Guarantor may
have at any time against AES, MEGA or any other person or entity, whether in
connection herewith or with any unrelated transaction.
2. Notwithstanding the foregoing, the Guarantor's obligations
under this Guaranty are subject to the following limitations:
(a) The maximum liability of the Guarantor hereunder shall in
no event exceed $40,000,000 (the "Guaranty Maximum Amount").
25
(b) At any time, the Guarantor or MEGA may provide to AES
either (i) a standby letter of credit from a U.S. financial institution
with a rating of A3 or better by ▇▇▇▇▇'▇ Investor's Service or A-or
better by Standard & Poor's, in the amount of the Guaranty Maximum
Amount securing the Guaranteed Obligations in a form reasonably
satisfactory to the AES or (ii) cash collateral in the amount of the
Guaranty Maximum Amount securing the Guaranteed Obligations under terms
reasonably satisfactory to AES, in full satisfaction of the Guarantor's
obligations under this Guaranty, and upon receipt by AES of such letter
of credit or cash collateral this Guaranty will terminate; provided,
however, that, in the absence of cash collateral, the Guarantee shall
be automatically reinstated without further action by either Guarantor
or AES in the event that Guarantor fails to cause such letter of credit
to be renewed or replaced by another letter of credit in the same
amount and in substantially the same form as the previous letter of
credit, and such Guarantee shall remain in effect until a replacement
letter of credit reasonably satisfactory to AES is put into effect.
3. The Guarantor is liable as a primary obligor for the
amounts due hereunder. This Guaranty shall be construed as an irrevocable,
unconditional, absolute and continuing guaranty of the full and punctual payment
and performance of all of the Guaranteed Obligations and not of their
collectibility only, irrespective of the validity or enforceability of the
Agreement, the absence of any action to enforce the same, the recovery of any
judgment against MEGA or any action to enforce the same or any other
circumstances which might otherwise constitute a legal or equitable discharge or
defense of a guarantor. This Guaranty shall remain in full force and effect
until all Guaranteed Obligations have been fully paid and performed.
4. A separate action may be brought and prosecuted against the
Guarantor whether or not any action is brought or prosecuted against MEGA or any
other person and whether or not MEGA or any other person is joined in any action
against the Guarantor. Upon the occurrence and during the continuation of an
Event of Default (as defined in the Agreement), AES may proceed directly and at
once, without notice, under this Guaranty to collect and recover the full amount
or any portion of the Guaranteed Obligations then due, without first proceeding
against MEGA or against any security or collateral provided by MEGA or any other
person.
5. It will not be necessary for AES, in order to enforce this
Guaranty, to exhaust AES' remedies against MEGA, to enforce any security or
support for the payment or performance of the Guaranteed Obligations, or to
enforce any other means of obtaining payment or performance of the Guaranteed
Obligations. The Guarantor waives any rights under applicable state law related
to the foregoing. Until irrevocable payment in full of the Guaranteed
Obligations, the Guarantor will not exercise any right of subrogation (including
any statutory rights of subrogation under Section 509 of the Bankruptcy Code, 11
U.S.C. Section 509, or under applicable state law) or any right to participate
in any claim or remedy of AES against MEGA, but this standstill is not intended
as a permanent waiver of the subrogation rights of the Guarantor.
6. AES will make demands for payment hereunder by providing
the Guarantor with written notice as provided below, and the Guarantor will make
payments due hereunder within ten (10) days after receipt of any such notice.
The Guarantor will make each payment to AES in U.S. Dollars in immediately
available funds as directed by AES.
2
26
7. To the extent required hereunder, the Guaranteed
Obligations will be paid strictly in accordance with the terms of the Agreement,
regardless of any bankruptcy or other law affecting any of such terms or the
rights of AES with respect thereto. The Guarantor's obligations under this
Guaranty will not be impaired by any increase, reduction, extension, or
rearrangement of the Agreement, any amendment, supplement, or other modification
of the Agreement, any grant or impairment of any security or support for the
Guaranteed Obligations, the failure to give notice of any default or Event of
Default, however denominated, under the Agreement or of the bringing of action
to enforce the payment or performance of the Guaranteed Obligations or any other
notice of any kind relating to the Guaranteed Obligations, any change in
ownership of MEGA or the insolvency, bankruptcy or any other change in the legal
status of MEGA, or any other action which affects the Guaranteed Obligations (in
each case subject to the limitations expressed in Section 2).
8. In the event that the performance of MEGA's obligations
under the Agreement are stayed or performance is delayed or deferred due to
bankruptcy, insolvency or reorganization of MEGA, all Guaranteed Obligations of
Guarantor shall remain in full force and effect and shall become immediately due
to the extent that MEGA would have otherwise been required to pay the
obligations under the Agreement absent the stay, delay or deferral in the
enforceability of such obligations as a result of such insolvency, bankruptcy or
reorganization of MEGA. Guarantor hereby waives any legal or equitable defenses
arising out of the insolvency, bankruptcy or similar legal disability of MEGA.
9. The Guarantor is a corporation duly organized, validly
existing and in good standing under the Laws of Chile and is duly qualified to
do business as a foreign corporation and is in good standing in each
jurisdiction in which qualification is necessary in view of its current or
proposed business and operations or the ownership of its properties. The
Guarantor has all necessary rights, franchises, and privileges and full power
and authority to conduct its business as currently conducted and as proposed to
be conducted.
10. The Guarantor represents and warrants that (a) it has the
legal right to execute and deliver this Guaranty and to perform its obligations
hereunder, (b) this Guaranty and the performance of Guarantor's obligations
hereunder have been duly authorized by the Guarantor and constitute legal, valid
and binding obligations of the Guarantor enforceable against the Guarantor in
accordance with their terms and (c) neither the execution and delivery by the
Guarantor of this Guaranty, nor the consummation of the transactions herein
contemplated, nor compliance with the provisions hereof will violate any law,
rule, regulation, order, writ, judgment, injunction, decree or award binding on
the Guarantor or the provisions of any indenture, instrument, or agreement to
which the Guarantor or the Guarantor's property is bound, or conflict with or
constitute a default thereunder, or result in the creation or imposition of any
lien in, of or on the property of the Guarantor pursuant to the terms of any
such indenture, instrument or agreement.
11. All notices and other communications between the Guarantor
and AES provided for or otherwise given or made in connection with this Guaranty
will be in writing, including telecopy, and delivered or transmitted to the
address set forth below, or to such other address as will be designated by the
Guarantor or AES in written notice to the other party.
3
27
If to the Guarantor:
Gener S.A.
▇▇▇▇▇▇▇▇▇▇ ▇▇▇, ▇▇▇▇ ▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇
Attn: ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇, CFO
Telephone: ▇▇▇-▇▇▇-▇▇▇-▇▇▇▇
Telecopier: ▇▇▇-▇▇▇-▇▇▇-▇▇▇▇
If to AES:
AES Eastern Energy, L.P.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ________________
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Telecopier: _____________
12. THIS GUARANTY WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES
OF CONFLICT OF LAWS. Disputes arising under this Guaranty will be settled by one
arbitrator pursuant to the rules of the American Arbitration Association (the
"AAA") for Commercial Arbitration (the "Rules"). Such arbitration will be held
in New York, New York, or at such other location as mutually agreed to by the
parties hereto. Arbitration may be commenced at any time by any Party after
giving thirty (30) days advance written notice to the other Party of the need
for arbitration. The arbitrator will be selected by the joint agreement of the
Parties hereto, but if they do not so agree within thirty (30) days after the
date of the notice referred to above, the selection will be made pursuant to the
Rules from the panel of arbitrators maintained by the AAA. At the conclusion of
any arbitration proceeding, the arbitrator will make specific written findings
of fact and conclusions of law. NO PARTY WILL BE ENTITLED TO, AND EACH PARTY
WAIVES ITS RIGHTS TO, ANY SPECIAL, EXEMPLARY, PUNITIVE, OR CONSEQUENTIAL
DAMAGES. The costs and fees of the arbitration will be borne by the Parties in
the manner determined in writing by the arbitrator. This arbitration provision
will be specifically enforceable by the Parties. The determination of the
arbitrator pursuant to this Section will be final and binding on the parties and
may be entered for enforcement before any court of competent jurisdiction.
13. Any waiver, amendment or modification of this Guaranty or
any consent to departure by the Guarantor from the terms hereof shall be
effective only if the same is in writing and is signed by AES and, in the case
of any such amendment or modification, also signed by the Guarantor, and shall
not be otherwise effective. Any such waiver and consent shall be effective only
in the specific instance and for the purpose for which it was given.
14. This Guaranty will bind and inure to the benefit of the
Guarantor and AES and their respective successors and permitted assigns.
However, the Guarantor shall not transfer any of its obligations hereunder
without the prior written consent of AES, which may be withheld
4
28
for any reason, and any purported transfer without that consent shall be void.
Guarantor agrees that AES may assign this Guaranty as collateral for financing
purposes.
15. This Guaranty constitutes the entire agreement, and
supersedes all prior written agreements and understandings, and all oral
agreements, between the Parties with respect to the subject matter hereof and
may be executed simultaneously in several counterparts, each of which shall be
deemed an original, and all of which together shall constitute one and the same
instrument.
5
29
16. The invalidity or unenforceability of any one or more
phrases, sentences, clauses or Sections in this Guaranty shall not affect the
validity or enforceability of the remaining portions of this Guaranty.
Executed as of the date first above written.
GENER S.A.
By:
-------------------------------
Name: ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
Title: Chief Executive Officer
Agreed and Accepted this [ ]day of [ ], 1999 by:
[ ]
-----------------------------------
By:
-------------------------------------------------------
Name:
--------------------------------------------------
Title:
-------------------------------------------------
6
30
EXHIBIT C
FORM OF LETTER OF CREDIT
[LETTERHEAD OF ISSUING BANK]
March__, 1999
AES Eastern Energy, L.P.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
IRREVOCABLE STANDBY LETTER OF CREDIT NO. _______
Ladies and Gentlemen:
By instructions of our client, [Gener, S.A. on behalf of] Merchant
Energy Group of the Americas, Inc., a Delaware corporation ("MEGA"), we issue in
favor of AES Eastern Energy, L.P. ("AES") this standby irrevocable letter of
credit no. _______ (this "Letter of Credit") in the amount of [U.S.$10,000,000
(Ten Million Dollars and No Cents, legal tender of the United States of America;
the "Maximum Amount")]. This Letter of Credit is unconditional and irrevocable,
and is payable on demand in accordance with the presentation procedure set forth
below at our address at ___________________________. Demand under this Letter of
Credit shall be made through presentation of this Letter of Credit at our
offices on any business day on or prior to ______________, 2000 (the "Expiry
Date"), together with a completed certificate in the form of Annex A, such
certificate purportedly signed by a duly authorized representative of AES.
Multiple drawings are permitted so long as the aggregate amount drawn does not
exceed the Maximum Amount. This Letter of Credit will remain in force from the
date of its issuance until our close of business on the Expiry Date. This Letter
of Credit shall be governed by the [International Standby Practices 1998
("ISP98"), and to the extent not inconsistent with the ISP98, by the laws of the
State of New York] [the Uniform Customs and Practices for Documentary Credits
(1993 Revision), International Chamber of Commerce Publication No. 500 (the
"UCP"), or any successor to the UCP, and to the extent not inconsistent with the
UCP, by the laws of the State of New York]. [NOTE: THE ISSUING BANK SHOULD
DECIDE WHICH RULE SHOULD GOVERN, WITH MEGA'S CONSENT]
[NAME OF ISSUING BANK]
_______________________________________
By:
___________________________________
Title:
________________________________
31
ANNEX A
___________, 19__
[Name and Address
of Issuing Bank]
Re: Your Irrevocable Standby Letter of Credit No. ______ (the
"Letter of Credit")
Ladies and Gentlemen:
The undersigned hereby certifies, in connection with the above-referenced Letter
of Credit (capitalized terms used herein having the meaning set forth in the
Letter of Credit), as follows:
1. MEGA has failed to comply with certain of its obligations under the
Capacity, Energy and Ancillary Service Agreement dated as of _______, 1999 (the
"Agreement") between MEGA and AES and as a result thereof, an Event of Default
(as defined in the Agreement) has occurred and is continuing (herein, "MEGA
Default").
2. AES has given MEGA written notice of the intent of AES to draw under
the Letter of Credit as a result of the MEGA Default at least five (5) Business
Days in advance of this certificate.
3. AES has performed all of its obligations under the Agreement, the
failure of which to perform would constitute an Event of Default as defined
under paragraphs 10 (a) (2) through 10 (a) (8) of the Agreement, and no such
Event of Default or event or condition which would become such an Event of
Default with notice or lapse of time or both, has occurred other than the MEGA
Default.
4. Pursuant to the terms of the Agreement AES believes in good faith
that it has or will incur damages equal to or exceeding $__________ as a result
of the MEGA Default.
5. Pursuant to the terms of the Agreement, AES is entitled to draw
under the Letter of Credit for an amount equal to $_________.
32
In connection therewith, please pay to AES an amount equal to U.S.$________
[insert amount not to exceed U.S.$10,000,000] at the following location:
[insert wire instructions where payment under the Letter of Credit to AES should
be made].
AES EASTERN ENERGY, L.P.
By:
-------------------------------,
its General Partner
-----------------------------------
By:
-------------------------------
Title:
----------------------------
2
33
EXHIBIT D
RISK POLICIES AND PROCEDURES
34
RISK POLICIES AND PROCEDURES
FOR THE CAPACITY, ENERGY AND ANCILLARY SERVICE AGREEMENT
BETWEEN
MERCHANT ENERGY GROUP OF THE AMERICAS, INC.
AND
AES EASTERN ENERGY, L.P.
4/8/99
1
35
TABLE OF CONTENTS
PAGE NUMBER
A. POLICY INTRODUCTION 3
B. MESA RISK COMMITTEE 3
I. Policy Creation and Oversight 3
II. Composition of the MESA Risk Committee 3
III. Role of MESA Risk Committee 3
C. TRADING POLICY 4
I. Introduction 4
II. Responsibilities of the Head Trader 4
III. Trading Restrictions 4
IV. Trading Compliance 5
V. Trading Risk Portfolios 5
D. EXPOSURE LIMITS AND MEASUREMENTS 6
I. Introduction 6
II. Volumetric Limits 6
III. Loss Limits 7
IV. Commodities Authorized to Trader 7
V. Value at Risk Limitation 7
VI. Term Limits 7
VII. Reports 7
E. RISK CONTROL 8
I. Introduction 8
II. Risk Control 8
III. Risk Analysis 9
IV. Policy Exceedances, Violations and Notification 9
F. ADMINISTRATIVE PROCESSES 10
I. Introduction 10
II. Trade Execution 10
III. Legal Contract Management 11
IV. Trader & Originator Commercial Responsibilities 11
V. Credit Risk Management 11
VI. Trade Transaction and Deal Entry 12
VII. Daily Activity Tie-Out 13
VIII. Confirmations 13
IX. Position Reporting 14
X. P&L Reporting 15
2
36
XI. Scheduling 15
XII. Invoice Preparation 15
XIII. Cash Management 15
SCHEDULE A. VOLUMETRIC LIMITS 17
SCHEDULE B. LOSS LIMITS 18
SCHEDULE C. COMMODITIES AUTHORIZED TO TRADE 19
SCHEDULE D. EXPOSURE LIMITS 20
SCHEDULE E. DEAL LIMITS 21
DEFINITIONS 22
3
37
A. POLICY INTRODUCTION
The purpose of this Policy is to establish the boundaries under which MEGA will
(1) hedge the price risk related to the Generating Portfolio, (2) seek to
maximize the Market Price received for the Energy, Capacity and Ancillary
Services and (3) schedule and commercially dispatch the Generating Portfolio.
AES Eastern Energy, L.P. ("AES") can amend any and all of the procedures
outlined in this policy.
AES and MEGA will each have two management members on a Risk Management
Committee (hereinafter referred as "MESA Risk Committee"). AES will have up to
two people participating with MEGA to manage the activities permitted within
this policy. For policy purposes, the group of individuals from MEGA and AES
hereinafter referred as MESA. The limits, definitions and procedures defined
herein pertain to this Policy and not any other policy of MEGA.
The MESA Risk Committee as specified in this document will guide the operation
of MESA.
B. MESA RISK COMMITTEE
I. POLICY CREATION AND OVERSIGHT
The MESA Risk Committee shall oversee the implementation of these Risk
Policies and Procedures. The MESA Risk Committee in conjunction with
AES, shall suggest and implement changes in administrative procedures
and controls.
II. COMPOSITION OF THE MESA RISK COMMITTEE
The members of the MESA Risk Committee will include two members of the
senior management of MEGA and AES. The management of AES and MEGA will
appoint the MESA Risk Committee members.
III. ROLE OF THE MESA RISK COMMITTEE
The MESA Risk Committee will have independent and unequivocal authority
to interpret and oversee the application and implementation of the
procedures and controls that are necessary to effectively manage the
risk resulting from the activities undertaken by MESA's trading and
commercial activities relating to The Generating Portfolio. The primary
roles of the MESA Risk Committee are to interface with AES; review,
monitor and act on any limit infractions; assess new
4
38
policies that may need to be adopted; and monitor MESA's principal
commercial risks on an ongoing basis.
The MESA Risk Committee will meet in the event Daily Loss Limits (as
defined herein) exceed those on Schedule B. Additionally, the MESA
Risk Committee shall determine if Value at Risk (as defined herein)
exposures may exceed those specified in Schedule D. In either case,
financial exposures that exceed the MESA Risk Committee's Authority
shall be referred to AES for review. The MESA Risk Committee will have
the responsibility of notifying AES of any exceedance or violation of
this Policy.
The MESA Risk Committee shall meet on an ad hoc basis as necessary. The
minutes of the meetings will be summarized for all meeting participants
as soon as practicable. Members may participate by teleconference if
necessary.
C. TRADING POLICY
I. INTRODUCTION
MEGA manages its commodity pricing and delivery risks with exchange
traded instruments, over-the-counter products, derivatives and physical
contracts. This Policy governs activities and transactions of MEGA on
behalf of AES under the Agreement. The associated business risks are
managed on a portfolio basis and will be marked-to-market daily. MEGA
shall operate within the limits established in this policy for
Volumetric Limits (Schedule A), Commodities Authorized To Trade
(Schedule C), and Term Limits (Schedule E). MEGA will seek to manage
the position within Stop-Loss Limits (Schedule B) and Exposure Limits
(Schedule D).
II. RESPONSIBILITIES OF THE HEAD TRADER
The Head Trader will oversee the daily trading activities, within the
scope and guidelines established by the Trading Policy. The Head Trader
will by appointed by the MEGA's Managing Director of Trading and
approved by the MESA Risk Committee. The Head Trader will be
responsible for trading results. The Head Trader shall:
1. Be aware of all trading positions and strategies.
2. Manage the commodity portfolio risks of MEGA.
3. Assess the overall market exposure of the trading positions.
4. Establish and ensure conformance to individual trading limits for
subordinate positions.
5. Execute the decisions of the MESA Risk Committee.
III. TRADING RESTRICTIONS
1. AUTHORIZED TRADERS- The Head Trader shall notify MESA Risk Committee of
those individuals authorized to trade, together with their respective
trading limits, on behalf of MEGA in performance of its responsibilities
under the Agreement. Authorized personnel will execute all trades in full
compliance with this Policy. Employees participating in any activities
covered under this Policy will review and become familiar with the Policy.
5
39
2. SPECULATIVE TRADING-Will be permitted within the strict limitations of this
Policy. Speculative trading will be limited to and shall have strategic
significance for The Generating Portfolio.
3. LEGAL QUESTIONS- If questions arise regarding the legality of a
transaction, employees shall consult MEGA's legal counsel.
4. PERMITS AND AUTHORIZATIONS- MEGA will have the requisite permits and
authorizations to engage in trading both physical and financial markets.
MEGA will only engage in trading instruments that it can monitor through
position reports, P&L reports, or other applicable administrative tools.
IV. TRADING COMPLIANCE
This Policy requires financial and physical traders to operate in full
compliance within the established restrictions of trading activity as
follows:
1. TRADING DESK - The Trading Desk, managed by the Head Trader,
manages and approves all pricing components and contractual
issues for all transactions including originated deals within
full compliance of this Policy. The Trading Desk ensures a
consistent pricing discipline and the disaggregration of the
transaction's associated financial risk.
2. CREDIT APPROVAL - Before entering into a transaction with
pre-approved counterparties, the Traders must determine, by
review of the approved credit line report, the credit status
of the counterparty. Prior to deal execution with new
counterparties, the Credit Department must review and approve
requests for counterparties not previously listed. The MEGA
Credit Policy (Appendix A) shall govern credit approval for a
deal and for counterparty.
3. CONTRACT APPROVAL - Before entering into a transaction, the
Traders must determine whether a valid contract exists with
the counterparty. This information is available from the MEGA
Contract Administration Department. If a contract (master buy
or sell agreement, master swap agreement, or other form of
contract) is not in place, the MEGA Contract Administration
Department initiates the contracting process as directed by
Trading. MEGA's counsel will be responsible for drafting any
new contract language as needed.
4. TRADE REVIEWS - The party responsible for committing MEGA to
the transaction is responsible for timely review of the
documentation, confirmation and the accuracy of the detail
input into the trading system by Risk Control (as defined
herein).
6
40
5. DEAL TICKETS - Traders will review all salient pricing and
delivery terms in the Trading transactions so that all pricing
exposures are captured in the trading system.
6. CONFIRMATIONS- Confirmations will be initialed by the trader
responsible for committing MEGA to the transaction and signed
by their direct supervisor within 48 hours of receipt from
Risk Control.
V. TRADING RISK PORTFOLIOS
The Risk Portfolios of the trading activities are detailed below. New
portfolios may be added after receiving approval of the MESA Risk
Committee. The most restrictive limit in the attached schedules shall
always apply. The energy, capacity, fuels and any applicable ancillary
services will be grouped into the following portfolio groupings:
1. INDEX PORTFOLIO - Aggregates all Index purchase and sales
obligations excluding cash month transactions.
1. CASH MONTH PORTFOLIO - Aggregates all Cash month purchase and
sales obligations.
2. BASIS PORTFOLIO Aggregates all Basis purchase and sales
obligations excluding cash month transactions.
3. PRICE PORTFOLIO Aggregates all fixed price positions.
4. TRANSPORTATION/TRANSMISSION PORTFOLIO Aggregates the
Transportation and Transmission contract obligations,
including interruptible and firm commitments.
5. EMISSION ALLOWANCES-Aggregates all NOX, SO2, and any other
required Emission Allowances.
D. EXPOSURE LIMITS AND MEASUREMENTS
I. INTRODUCTION
MEGA has established specific volumetric limits, stop-loss limits,
commodity authorizations, value at risk limits and term limits
(Schedules A-F).
This section describes risk measurements as part of the risk control
process to measure and monitor the risk of positions related to the
trading positions. Risk Control shall generate the reports. Volumetric
limits, commodity authorizations, and term limits shall not exceed the
established limits unless the MESA Risk Committee or AES as
appropriate, has approved those limit exceptions. Where there are
multiple limitations applicable to a transaction, the most restrictive
limits shall apply.
7
41
The risk limits will be monitored daily and exceedances will be
reported weekly for the first three months of the Agreement. After the
initial start-up of three months the limits will be monitored daily.
The daily limits will go into effect the earlier of the three month
passage or as soon as the position becomes compliant. In addition, the
limits will be based on a rolling 24 month time frame.
II. VOLUMETRIC LIMITS (SCHEDULE A)
The MESA Risk Committee has placed volumetric limits on the Net Open
Position of the individual Risk Portfolios supporting the MEGA's
activity. The limits are specific to the Approved Commodities detailed
in Schedule A of this policy and cannot be exceeded on a net present
value analysis basis. These limits can only be changed in writing by
AES.
The Net Open Position of the Portfolios will not exceed the aggregate
volumetric limits established in Schedule A of this Policy.
III. STOP-LOSS LIMITS (SCHEDULE B)
The established Stop-Loss Limits are for aggregate Risk Portfolios
associated with the Generating Portfolio. When these limits are
exceeded, Risk Control will notify the Head Trader and the MESA Risk
Committee. The notification and processes are outlined in Schedule B.
IV. COMMODITIES AUTHORIZED TO TRADE (SCHEDULE C)
MEGA's trading group is authorized to trade the commodities and
instruments provided in Schedule C. The Head Trader shall provide
commodity authorizations to Risk Control for specific individuals in
the department. The MESA Risk Committee shall approve the addition or
deletion of any commodities or instruments.
V. VALUE AT RISK (SCHEDULE D)
Value at Risk in the Trading positions shall be measured by taking the
summation of the aggregated Value at Risk amount for each trading book
within MEGA. Risk Analysis is responsible for reviewing the underlying
assumptions, valuation processes and methodologies in calculating and
reporting commodity value at risk. AES must approve any changes in the
absolute level of Value at Risk.
If the Value at Risk limit is exceeded, Risk Control will notify the
MESA Risk Committee. If the Value at Risk exceeds the established limit
for the Head Trader, but falls below the established limit
8
42
for AES, the MESA Risk Committee shall determine the action to be taken
and communicate that to AES. If the Value at Risk exceeds the authority
level of the MESA Risk Committee, AES will decide what action will be
taken.
VI. TERM LIMITS (SCHEDULE E)
Term limits measure the duration of a transaction that MEGA is
authorized to enter into under this Policy .
VII. REPORTS
1 POSITION REPORT- A report of open positions is generated daily
by Risk Control will be distributed to senior traders, the
MEGA Managing Director of Trading, and members of the MESA
Risk Committee as requested. The position report will detail
positions by commodity and type of portfolio risk. Additional
detail reports will have information regarding delivery points
and delivery period. Risk positions can be viewed on a
consolidated basis and by portfolio. This report will identify
the delta and gamma position based upon the current market
price of the underlying commodity and current volatility
levels. Additionally there will be available a report to
illustrate sensitivity of the delta, gamma, ▇▇▇▇, and theta of
the portfolio given a range of increases and decreases in the
price of the underlying commodity.
- Delta- The change in option value due to changes in the price of the
underlying commodity.
- Gamma- The change in the option value due to the rate of change in the
price of the underlying commodity.
- ▇▇▇▇- The change in option value due to changes in the volatility of
the underlying commodity.
- Theta- The change in option value due to the remaining time until
expiration of the option contract.
- Rho- The change in option value due to changes in interest rates.
1 DAILY PROFIT AND LOSS ANALYSIS ("P&L")- A daily ▇▇▇▇-to-market
P&L is critical to monitor performance. This information is
contained in the Position Report. The P&L should include
complete ▇▇▇▇-to-market of all forward positions for
physicals, futures, options, and swaps (including both
realized and unrealized gains and losses), a valuation of
inventory at market, and accruals of major execution expenses.
The P&L should capture daily results from all trading
positions, existing as well as new.
1 EXECUTIVE SUMMARY The Executive Summary shall provide
aggregated P&L information and net position reports for the
Risk Portfolios and aggregate trading activities. The summary
shall explain the daily change in portfolio value in terms of
existing positions vs new positions created during the day
("daily origination"). It shall also describe the contribution
to P&L of curve shift (change in the underlying commodity
price), volatility, theta, and rho.
1 EXPOSURE REPORT Risk Analysis shall prepare an exposure report
that will detail the potential exposures using Value at Risk
and Stress Testing measurements. This information will also
reside in the Executive Summary.
9
43
E. RISK CONTROL
I. INTRODUCTION
MEGA shall review risk control issues and commodity exposure on a daily
and on-going basis. Risk Control shall report outside the Trading
group, to the CFO.
II. RISK CONTROL
Risk Control monitors compliance with the controls outlined in this
Policy. Risk Control shall supervise all daily operational accounting
activities Risk Analysis. Additional areas of responsibility and
authority include the following:
1 PORTFOLIO TESTING/COMPLIANCE - Risk Control directs tests of
the Risk Portfolios, to monitor the Risk Portfolios for
compliance under the limits established by this policy.
1 RISK CONTROLS - Risk Control is responsible for periodically
reviewing the risk controls in Risk Control, recommending any
necessary modification to these controls and incorporating any
future approved modifications to the of MEGA Trading Policy.
1 BROKERAGE ACCOUNTS - Risk Control, as directed by the Head and
the CFO, shall authorize the opening, closing and
modifications of all brokerage accounts required to support
the activities of the MEGA organization. Risk Control
authorizes any correspondence authorizing the opening of a new
account. Risk Control is responsible for notifying brokers
which authorized individuals can trade on those accounts and
any other changes made to these accounts.
1 VALUATION METHODS - Risk Control is responsible for reviewing
and approving the underlying assumptions, reviewing and
approving the valuation processes and devising the proper
controls for all transactions whose valuation methods are not
currently being used in the existing Risk Portfolios.
1 REVIEWING REPORTS - Risk Control shall review the Daily
Position Report and any other applicable reports for accuracy
and compliance with established limits prior to distribution.
I RISK ANALYSIS
Risk Analysis will stay informed of new industry analysis and make
recommendations on changes to underlying analysis or models. Areas of
responsibility and authority include the following:
1 VALUE AT RISK- Risk Analysis is responsible for creation of
the Value at Risk reports. This function shall review the
assumptions in the calculation model(s) and understand the
methodology. Risk Analysis shall test the model periodically
to check it validity.
10
44
1 STRESS TESTING - Risk Analysis ensures the adequacy of
regularly performed stress testing to determine value impact
to the portfolios. The open market positions will be
stress-tested to determine market exposure given certain kinds
of market price moves.
1 REVIEWING ▇▇▇▇ TO MARKET METHODOLOGY- Risk Analysis shall
review the methodology of the gathering of the marks and the
rationale for choosing the official marks, monitor the
official marks by against other gathered marks to look for
trends and divergence, and validating the forward pricing
curves.
2 MONITOR POSITIONS VIS-A-VIS CORPORATE LIMITS- Risk Analysis
shall review the positions on a daily basis to determine that
they fall within these policy limits for exposure and value at
risk.
IV. POLICY EXCEEDANCES, VIOLATIONS AND NOTIFICATION
Notification by Risk Control shall be given immediately following the
recognition of a violation of this Policy, in the event Daily P&L
exceeds the Loss Limit or if the Value-at-Risk exceeds the Exposure
Limit.. Following the initial notification, Risk Control shall report
any incremental losses in accordance with this Policy.
In the event an individual reporting to the Head Trader exceeds his or
her limits, but the measurement falls within the limits established
under this Policy, Risk Control shall notify the Head Trader of the
exceedance or violation. The Head Trader will then decide the course of
action and advise Risk Control.
In the event the exceedance or violation exceeds the limits established
under this Policy, or the aggregate risk measures are higher than the
limits established for the MEGA, Risk Control shall immediately notify
the Head Trader and the MESA Risk Committee
The MESA Risk Committee will advise AES of the action plan(s) regarding
a Loss Limit or Value-at-Risk exceedance. For any other exceedance or
violation , the Head Trader shall provide recommendations to the MESA
Risk Committee as soon as practicable, generally within 24 hours of the
violation. The decision of the MESA Risk Committee will be communicated
to Risk Control. Risk Control will issue a daily written report
regarding the execution of such approved course of action until such
time as the exceedance or violation has been remedied, as well as a
summary report of the resolution of the exceedance or violation.
F. ADMINISTRATIVE PROCESSES
11
45
I. INTRODUCTION
Administrative procedures and controls within MEGA shall be consistent
with the principles of this Policy. The process of monitoring,
controlling and reporting risk consistent with established limits is
integral to the overall control process. The key administrative
functions in MEGA include Credit, Legal, Risk Control, Financial
Accounting, and Contract Administration. The functions listed above
report to the CFO. These functions do not report to Trading,
Origination, or Corporate Development for control purposes.
II. TRADE EXECUTION
The departments responsible for each step are included below:
1 Counterparty and Master Agreement Set-Up (Legal/Contract
Administration)
2 Trade execution (Trading)
3 Credit Risk Management (Credit Department)
4 Trade Transaction and Deal Entry (Trading/Risk Control)
5 Daily Activity Tie-Out (Risk Control)
6 Confirmations (Risk Control)
7 Position Reporting (Risk Control).
8 Prepare and distribute accurate daily position reports (Risk
Control)
9 Scheduling (Trading)
10 P&L Reporting (Risk Control)
11 Risk Analysis (Risk Control)
12 Invoice Preparation (Risk Control)
13 Cash Management (Treasury)
14 Preparation of financial statements (Financial Accounting)
I CONTRACT MANAGEMENT
MEGA will establish counterparty terms and conditions as well as
maintain counterparty tables to hold all pertinent information for each
counterparty with whom MEGA does business or intends to do business.
Signed agreements will govern trading transactions. Legal counsel will
draft master agreements such as General Terms and Conditions for fuels
and natural gas, enabling agreements for physical electricity, and
Master Swap and ISDA Agreements for derivatives transactions. The
Contract Administration group will manage the distribution and filing
of contracts. If a counterparty requires a different form of contract,
that will be reviewed by Contract Administration and by legal counsel
(as necessary).
Legal will manage the negotiation of forms of contract, as well as any
amendments counterparties request in MEGA contracts. Legal will prepare
the form of confirmation(s) under which MEGA will engage in trading.
The confirmation incorporated with the Master Agreements or Enabling
Agreements encompasses the binding terms under which MEGA and the
counterparty agree to do business.
12
46
All transactions will be entered into in compliance with the MEGA
contract administration policies. All transactions, therefore, will be
entered into based on a MEGA contract that has obtained legal approvals
before execution. Contract Management is responsible for:
1 MAINTENANCE OF PERMANENT CONTRACT FILES- this includes
monitoring anniversary dates for re-determining existing
contracts and other date sensitive clauses.
1 ROUTING NEW AND AMENDED AGREEMENTS TO APPROPRIATE DEPARTMENTS.
In addition, notification of impending anniversary dates,
non-standard trading terms, and new proposed language changes
will be communicated to the appropriate departments.
IV. TRADER AND ORIGINATOR COMMERCIAL RESPONSIBILITIES
Traders are responsible for verifying the following prior to execution
of a transaction:
1. The transaction does not exceed the trader's limits
2. The transaction does not exceed the counterparty's credit limit
3. Executed contracts are in place with counterparty
4. Transaction/trade is accurately price by Trading Desk
Traders will execute transactions on taped telephone lines. Traders
will enter basic deal terms into the system or write up deal sheets.
Trades will be recorded electronically or on deal sheets as soon as
possible after the deal is struck, and no later than by close of
business same day (defined as the hour of the day that trades must be
entered before official daily P&L is calculated). Risk Control will
review the terms of the deal, and add appropriate other terms in order
to complete the confirmations.
V. CREDIT RISK MANAGEMENT
The processes of establishing counterparty credit limits and monitoring
credit exposure are integral to effective corporate controls. These are
detailed in the MEGA Credit Policy. The MEGA Credit Policy will serve
as the MESA Credit Policy. Credit limits must be established for all
new counterparties before transactions are entered into. Based on an
analysis of the counterparty's creditworthiness, such limits cover all
exposure to that counterparty, including both receivables and payables,
as well as gains or losses on open market positions (doing a ▇▇▇▇ to
market analysis).
MEGA's Credit Manager monitors the counterparty limits with MEGA and
MEGA's limits with the counterparty. This requires capturing power,
gas, and derivative credit limits for each counterparty as well as
MEGA's reciprocating limits with the counterparty.
13
47
Exposure is measured on both a net basis (for those counterparties who
have master netting agreements in place) and a gross basis. Both a
dollar amount of credit line and the term limit should be established.
Additional credit support (i.e.- letters of credit, parent company
guarantees and margining) may be required of counterparties when deemed
prudent. Credit will actively interface with trading personnel to
ensure adequate credit procedures are employed when transacting
business. Credit limits above a maximum dollar amount that may be
approved by the MEGA's Risk Committee or AES, as detailed in the Credit
Policy.
Counterparty credit status will be monitored daily. This includes
reviewing all changes made to an account's credit limit regarding
current outstanding contracts' ▇▇▇▇ to market value, accounts payable
and receivable, outstanding letters of credit issued either to MEGA or
the counterparty, and margining agreements. Trading is notified of any
credit issues associated with current and potential counterparties.
Within 24 hours, the Credit Manager receives a copy of all transacted
deals for the previous day. In the unlikely event a trader has executed
a transaction outside of the pre-approved credit limits and the Credit
Manager determines that insufficient credit information or instruments
are in place to secure the deal, the Credit Manager may require the
trader to go back and negotiate the proper credit terms. If that is not
possible, the trader will be required to cancel or liquidate the
transaction.
All transactions will be entered into in compliance with the applicable
policies in the MEGA Credit Policy (Appendix A). The Credit Department
minimizes and monitors the credit risk associated with MEGA trading
activities:
1. CREDIT EVALUATION/APPROVALS - The Credit Department must
evaluate all potential and existing customers' credit
worthiness and maintain the status of their account in the
approved credit line report. The Credit Department shall
perform a credit evaluation prior to establishing any new
broker relationship.
2. CREDIT RESERVES - The Credit Department has the responsibility
of establishing and maintaining appropriate credit reserves
for the MEGA portfolios.
1 INDEPENDENCE - The Credit Department will be independent from
the business or trading units whose activities create the risk
being evaluated.
VI. TRADE TRANSACTION AND DEAL ENTRY
All transactions will be recorded by the traders, and then reviewed by
Risk Control. The transactions are entered into the trading system so
they can be integrated into the trading positions. Although the system
will record changes in position during the day as trades are entered,
there will be an official "end of day" (5 pm EST) in order to calculate
official daily positions and P&Ls.
After the traders record the transactions, Risk Control will review
the transactions to add contractual terms before sending a confirmation
to the counterparty. Trading will then cross-check the deals to verify
correct data input. At that time confirmations may be sent to the
counterparties.
14
48
From time to time amendments may be made to transactions because new
terms are negotiated or the original deal entry was incorrect. No
change can be made without both Trading and Risk Control approving the
change. Every amendment or change to a transaction will result in an
audit trail with time and date stamp, user identification, and terms
which were amended. There will be a complete record of all changes to
the trade.
VII. DAILY ACTIVITY TIE-OUT
Once all trades are entered into the system for the day the following
occurs:
1 Trade activity reports are run by Risk Control
2 Risk Control compares Trade activity reports against the deal
tickets to ensure data entry accuracy
3 Risk Control compares Broker confirmations against the trade
activity report to ensure the deal sheet was properly written
4 Risk Control verbally confirms trades with the counterparties
based on the trade activity report
5 Risk Control distributes Trade activity reports to each trader
so that the traders can verify all trades were captured
VIII. CONFIRMATIONS
Risk Control is responsible for the timely confirmation of the price,
volume, and terms of transactions with customers and counterparties
after the execution of a transaction. Risk Control shall generate
contract confirmations and send to counterparties. Confirmation of all
transactions occurs within 24 hours of execution.
After the trader has provided the pertinent trading terms of the deal,
Risk Control shall confirm with Contract Administration and Legal the
legal terms governing the confirmation, including but not limited to,
cover costs, default terms, force majeure and liquidated damages
language. Then Risk Control shall prepare the confirmation. The trader
who agreed to the trade shall review and initial the prepared MEGA
confirmation. Their supervisor shall also review and execute the deal.
The confirmation is faxed to the counterparty by end of the day. Risk
Control logs the date of the confirmation. Then the deal-related
documentation (deal ticket, confirm, fax confirm, and other
documentation) is gathered and filed. Signed confirmations received
from counterparties shall be filed immediately in the contract files.
Risk Control shall monitor the return of the confirmations and conduct
follow-up calls as necessary to obtain executed confirmations for the
files.
15
49
Where MEGA agrees that a third party confirmation governs in the deal,
the Trader signs an internally generated confirmation. Then, when Risk
Control receives the counterparty's confirmation, they log the receipt
date and verify the terms against the MEGA documentation. Counterparty
confirmation shall be reviewed and reconciled through consultations
with the traders and review of the deal entry. If no exceptions exist
between the two confirmations, the trader may initial the third party
confirmation, and his supervisor shall also review and sign the
confirmation. Risk Control returns confirmation exceptions to the
Trader for reconciliation and immediate counterparty contact. Risk
Control also reviews and reconciles the brokers' commissions invoice to
MEGA's records of brokered trades and negotiated fees.
When a trade is brokered between a trader and a third party, the trader
notes that at deal entry. On a daily basis, Risk Control confirms
trades with the various industry brokers. For exchange-based trades,
Trading will verbally check-out with brokers. For all brokered trades,
Risk Control shall verbally check out with brokers, and then cross
check broker confirmations against MEGA records of the trade. If there
is any discrepancy in terms, Risk Control shall immediately notify the
trader of the discrepancy. The trader is responsible for acting upon
that information to resolve the discrepancy. Discrepancies shall be
resolved within one day of receipt of confirmation. An amended
confirmation is sent out immediately. All documentation is filed.
At a minimum, contact with the counterparty will be faxing a corrected
confirmation and a phone contact. Contract Administration reviews which
confirmations have not been returned within five days and proceeds to
follow-up immediately.
I POSITION REPORTING
An essential component of measuring performance and assuring compliance
with this Policy is the generation of accurate, timely management
reporting. Reports are prepared through the use of automated systems in
conjunction with some manual applications. There are basic reports that
are critical to effectively measure the current status of the Company's
portfolios and are required by policy to be generated.
Risk Control is responsible for the preparation of critical management
reports detailing the Company's position. Risk Control shall determine
that the management reports accurately report commodity positions in
the appropriate portfolios. A daily summary will be provided to the
MESA Risk Committee members, traders, Risk Control/Risk Analysis and
other parties designated by the MESA Risk Committee detailing open
positions, curve shifts, and portfolio values.
1 DAILY POSITION REPORT- Preparation of this report is the
responsibility of Risk Control. Information detailed shall
include the position of each of the Risk Portfolios, Net Open
Position, unrealized gains and losses and such other measures,
as well as any other controls or amendments that may be
required by the Head Trader or the MESA Risk Committee. Any
portfolios or transactions that are in excess of established
limitations will be reflected in this report. This report is
reviewed by Risk Control and is then distributed to the
members of the MESA Risk Committee.
16
50
1 PREPARATION OF RISK PORTFOLIO DETAIL- Detail of the
transactions that make up each of the Risk Portfolios must be
kept current and available for review. The detail information
provided in the portfolios is summarized in the Daily Position
Report.
1 OFFICIAL DAILY POSITIONS- While Trading will have day-time
position records on-line and real time, Risk Control is
responsible for generating close of business position that
will be the 'official' daily position.
I P&L REPORTING
The first step to generating P&L reports is to obtain market prices.
Risk Control shall obtain market prices ("official marks") from various
places (the exchange, brokers, proprietary models, the option model or
traders.
Once the market prices are entered and the settlement prices
determined, Risk Control can then run the P&L reports. A hierarchy of
books exists in the system so that a summary P&L report can be
generated. Once all of the individual book P&Ls are run for the day,
Risk Control compiles an Executive Summary report and distributes it.
17
51
I SCHEDULING
MEGA's trading system will either have coordinated scheduling
functions. In the scheduling system, MEGA's schedulers will be able to:
1 Show schedules by month, day, and hour
2 Generate tags
3 Identify book-outs
4 Identify back-to-backs
5 View contracted capacity
6 View Storage contracts
7 Monitor Inventory
8 Capture injection rates and withdrawal quantities
9 Reconcile actuals with nominated quantities
XII. INVOICE PREPARATION
Risk Control prepares invoices off the trading system. Copies are
provided to financial accounting for entry into the accounting and
treasury systems. Critical invoicing reports include:
1 COMMISSION SUMMARY REPORT -The commission report gives MEGA
the flexibility to determine commissions based on date,
instrument, trade book, trader or broker. This report is
primarily used by Risk Control and general ledger accounting.
2 TRADE EXPIRATION REPORT- The trade expiration report is
intended to assist Risk Control in determining which trades
need to be invoiced on any particular day.
XIII. CASH MANAGEMENT
The Treasury function under the direction of the CFO is responsible for
funding all properly authorized margin calls required to support MEGA's
trading activity. The Risk Control Manager forwards cash flow
information (incoming or outgoing) to Treasury on a timely basis, and
notifies Treasury in writing of the opening, closing or modification of
any broker relationship or brokerage account. The cash management
aspect of the MEGA process encompasses accounts receivable, accounts
payable, bank reconciliations, treasury, and margin call payments.
18
52
SCHEDULE A
VOLUMETRIC LIMITS
----------------------------------------------------------------------------------------------------------------------------
PRICE PORTFOLIOS FORWARDS PORTFOLIO SPOT PORTFOLIO
AGGREGATED NET OPEN AGGREGATED NET OPEN
POSITIONS GWH POSITIONS GWH/DAY
----------------- ------------------ ------------------ --------------
On Peak Off Peak On Peak Off Peak
----------------- ------------------ ------------------ --------------
Electricity [***] [***] [***] [***]
Coal Under review Under review
Fuel Oil Under review Under review
Natural Gas Under review Under review
----------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
BASIS PORTFOLIOS ON PEAK (MAX MWH/HR)
------------------------------------------------------------------------------
Regions Permitted Forward Markets Spot Markets
▇▇▇▇▇▇▇* Other ▇▇▇▇▇▇▇* Other
----------------- ------------------- ----------------- -------------------
PJM [***] [***] [***] [***]
----------------- ------------------- ----------------- -------------------
Allegheny [***] [***] [***] [***]
----------------- ------------------- ----------------- -------------------
NEPOOL [***] [***] [***] [***]
----------------- ------------------- ----------------- -------------------
------------------------------------------------------------------------------
OFF PEAK (MAX MWH/HR)
------------------------------------------------------------------------------
Forward Markets Spot Markets
▇▇▇▇▇▇▇* Other ▇▇▇▇▇▇▇* Other
----------------- ------------------- ----------------- -------------------
PJM [***] [***] [***] [***]
----------------- ------------------- ----------------- -------------------
Allegheny [***] [***] [***] [***]
----------------- ------------------- ----------------- -------------------
NEPOOL [***] [***] [***] [***]
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
INDEX PORTFOLIOS FORWARDS PORTFOLIO SPOT PORTFOLIO
AGGREGATED NET OPEN AGGREGATED NET OPEN
POSITIONS GWH POSITIONS GWH/DAY
----------------- ------------------ ------------------ ---------------
On Peak Off Peak On Peak Off Peak
----------------- ------------------ ------------------ ---------------
Electricity [***] [***] [***] [***]
Coal Under review Under review
Fuel Oil Under review Under review
Natural Gas Under review Under review
---------------------------------------------------------------------------------------------------------------------------
MAXIMUM FORWARD COMMITMENT UNDER FIRM LD IS [***]MWH/HR.
TRANSMISSION TRADING IS PERMITTED UNDER THIS POLICY IF TRANSMISSION PATH
DIRECTLY CONNECTS TO NYPP.
[***] Filed separately with the Commission pursuant to a request for
confidential treatment.
19
53
SCHEDULE B
LOSS LIMITS
Defined as the level of losses determined on a ▇▇▇▇ to market basis which
trigger an immediate management review and a course of action & strategy
including possible liquidation of outstanding positions:
Daily $[***] MM
Monthly $[***] MM
[***] Filed separately with the Commission pursuant to a request for
confidential treatment.
20
54
SCHEDULE C
COMMODITIES AUTHORIZED TO TRADE
MEGA is authorized to trade the following commodities. Volumetric limits are
applied to specific portfolio groupings to facilitate financial risk management
associated with CrossCommodity Hedging. The Company prohibits employees from
trading any Approved Commodity for their own account or for the benefit of any
party other than of MEGA or its affiliates.
- Electricity
- Transmission
- All Related Ancillary Services
Under Review
- Coal
- Fuel Oil
- Natural Gas
- Weather Derivatives
21
55
SCHEDULE D
EXPOSURE LIMITS
TRADING - the reasonably calculated risk exposure for the Aggregate Trading
Portfolios expressed in dollar terms. Transactions should reduce the VAR. In
addition to the VAR limit, the portfolio will have a daily stress test matrix.
TOTAL PORTFOLIO VALUE $[***]
Value at Risk Criteria for Trading Positions:
[***]
[***] Filed separately with the Commission pursuant to a request for
confidential treatment.
22
56
SCHEDULE E
DEAL LIMITS
Within the value at risk limits and volumetric limits, the following
term limits shall apply to transactions. AES must approve any
transaction extending beyond the later of (I) [***] or (II) [***]
[***] Filed separately with the Commission pursuant to a request for
confidential treatment.
23
57
DEFINITIONS
A MESA
Formal agreement between AES and MEGA to merchandise and commercially
direct AES NYSEG generation units.
B. AES
AES Corp or any designated affiliate relating to MESA.
C. APPROVED COMMODITIES
Those commodities that are approved for trading by the MESA Risk
Committee as detailed in Schedule C of this policy.
D. BASIS
The risk component that relates to the differential between the
contract specifications for a commodity and the applicable hub.
Hubs are market locations, as opposed to exchanges, that are more
reflective of current market conditions.
E. BASIS PORTFOLIO
The Risk Portfolio where all Basis risk of transactions is recorded.
F. CASH MONTH
Deals that are physically delivered or settled within the current
business month.
G. CUSTOMERS
Refers to any third party customer or counterparty of MEGA.
H. DAILY LOSS EXPOSURE
The loss in value for any Risk Portfolio on a daily basis as
detailed in Schedule B of this policy. The Daily Loss Exposure
will be calculated on a marktomarket net present value basis.
I. DOLLAR LOSS LIMITATION
Refers to the aggregate change in the value of the Risk
Portfolios during any daily, monthly or annual reporting period,
calculated on a markto market net present value basis as detailed
in Schedule B of this Policy.
J. EXCHANGE TRADED INSTRUMENTS
Refers to financial instruments that are traded on regulated
exchanges such as the New York Mercantile Exchange, Kansas City
Board of Trade and the Chicago Board of Trade.
A MESA RISK COMMITTEE
Refers to individuals selected by AES and MEGA for the guidance
this endeavor.
L. INDEX
Published indices often agreed upon as the price references for
energy contracts.
M. INDEX PORTFOLIO
24
58
The portfolio where all Index risk for specific transactions is
recorded.
N. INTEREST RATE PORTFOLIO
The portfolio where interest rate risk for specific transactions is
recorded.
O. NET OPEN POSITION
The net present value of the aggregate open positions of the Risk
Portfolios.
P. POSITION
The difference between the buy/long and sell/short positions of
transactions in any of the Risk Portfolios.
Q. OPTION
A transaction where the holder has the right but not the
obligation to buy or sell a commodity at a time and place
specified in the contract.
R. PRICE PORTFOLIO
The portfolio where fixed price risk for specific transactions is
recorded.
S. RISK PORTFOLIOS
Refers to the Index Portfolio, Basis Portfolio, Price Portfolio,
Transportation Portfolio, Interest Rate Portfolio, and all other
portfolios that can be used to manage transaction risk.
T. SPECULATIVE POSITION
Transactions entered into with the intent to profit solely from
the rise or fall in price where the transaction lacks any element
of shifting or managing risk.
U. TRADER
An employee who commits MEGA or its affiliates to either long or
short term physical or financial buy/sell transactions for
commodity, transportation, or storage in accordance with this
Policy.
V. TRANSPORTATION
The movement of an energy commodity from point A to point B.
W. TRANSPORTATION PORTFOLIO
The Risk Portfolio where the Transportation component for all
purchase and sales obligations is recorded.
X. VALUE AT RISK
The statistical application to determine the size of the
potential loss and the probability of its occurrence from
holding a portfolio of instruments for a given period of time.
25
59
EXHIBIT E
MANAGEMENT GROUP
The Management Group shall consist of any one of the following representatives
from MEGA and any one of the following representatives from AES
MEGA
1. ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
2. ▇▇▇▇▇ ▇▇▇▇
AES
1. ▇▇▇▇▇ ▇▇▇▇▇▇▇▇
2. ▇▇▇ ▇▇▇▇▇▇
Either Party may change its representatives on the Management Group upon written
notice to the other Party.