Attached is a portfolio summary of the NEPCO Project Life VAR's by the
category of risks. I have been trying to get the VARS summed in this order
since we initiated this activity, but we lost our analyst and it has been a
bit of a struggle. The table effectively identifies the Construction Risk as
the major risk not the Guarantees. They are interrelated and I have provided
a comment on the connectivity. Brian will be in Houston on Wednesday. There
are several issues to discuss on NEPCO. We should likely meet with you
and/or Basil to discuss.
Comments and clarifications: (Thousands 000 Omitted) (Project Life Portfolio
Revenue VAR ( $12,351)
This VAR is simply the interest rate risk over time
Materials / Equipment VAR ($21,700)
Calculated price risk of Procurement of Materials and Equipment over life of
Project. Heavily influenced by the Balance of Plant and bulks as the
Equipment Island is normally a transfer from the owner with minimal risk to
Construction VAR ($43,896)
This VAR represents the execution risks in engineering, construction and
start up. It is influenced by three elements: Definition, Productivity, and
Timing. Money spend can be accelerated to avoid Liquidated Damages thus the
link to guarantees. The sensitivity of this VAR is primarily the
availability of data for engineering timing plus engineering and
construction labor price and productivity.
Schedule / Performance VAR ($26,177)
This VAR is calculated on the Performance LD's, Schedule LD's, and Aggregate
Guarantees plus the Warranty. Due to the timing and segregation of these
risks, the project life VAR is not so severe. The risks of LD's especially
schedule LD's can be often off set by increased spending.
Total Project VAR ($75,913)
The attachment provides only the P95 VAR, representing near worse case. We
also calculate the P75 VAR which is $31,212. The credit risks of the owner
and the five major suppliers which is not shown on the attachment must also
be considered. It is calculated at an additional $31,162.
An informed buyer would likely calculate the risk in NEPCO to be in range of
$50 to $100 million and would likely discount the profit stream by this
amount or ask us to guarantee the contracts.
NEPCO has a project reserve / contingency of $75 million and a profit backlog
of $131 million plus a warranty reserve on the books.