EXHIBIT B - 1 BURBANK WATER & POWER CREDIT RISK POLICY

Transcription

1 EXHIBIT B - 1 BURBANK WATER & POWER CREDIT RISK POLICY September 2008

2 EXHIBIT B - 2 CREDIT RISK POLICY OUTLINE 1.0 INTRODUCTION 2.0 POLICY OVERVIEW 3.0 RESPONSIBILITIES 3.1 Risk Oversight Committee 3.2 Financial Planning and Risk Manager 3.3 BWP Trading Group 3.4 City Attorney s Office 4.0 CREDIT EVALUATION/SET-UP/MONITORING STEPS 4.1 Initial Counterparty Request 4.2 Credit Scoring 4.3 Creditworthiness Determination 4.4 Temporary Credit Approval 4.5 Credit Line Assignment or Denial 4.6 Master Agreements Execution Netting-Close Out Provision Set-Off Provision 4.7 On-Going Financial Strength Monitoring 4.8 Daily Credit Reports 4.9 Credit Remedies and Mitigation Techniques Market Mitigation Parental Guaranties Irrevocable Standby Letter of Credit Margining Pre-payment 4.10 Re-Evaluations APPENDICES 1 COUNTERPARTY CREDIT EVALUATION METHODOLOGY AND CREDIT LINE MODEL 2 CREDIT LIMIT REQUEST FORM 3 CREDIT APPROVAL DOCUMENT 4 TRANSACTIONAL/TEMPORARY APPROVAL FORM 5 CREDIT LIMIT EXCEPTION REPORT 6 - WSPP GUARANTY Page 2 of 23

3 EXHIBIT B - 3 BURBANK WATER AND POWER CREDIT RISK POLICY 1.0 INTRODUCTION The purpose of s (BWP) credit risk policy is to establish a consistent process whereby the credit risk of future financial loss due to counterparty physical or financial non-performance is significantly diminished for energy purchases and/or sales. This objective will be accomplished by a pre-contract qualification and renewal review process for all energy suppliers and/or purchasers in combination with effective on-going monitoring systems and established limits. Any energy transaction conducted by BWP will be governed by this Credit Risk Policy. 2.0 POLICY OVERVIEW In general, all energy suppliers and/or purchasers will be subject to a financial review in accordance with BWP standards for determination of creditworthiness. Evaluation of a counterparty s financial health and its ability to deliver its product or to pay is crucial. Such review procedures prior to contract execution are designed to protect BWP from undue exposure to losses that could arise from an insolvent counterparty not being able to pay for energy that they have purchased or to cover replacement costs incurred for term contracts that have positive economic value in relation to current market prices. A credit review cannot be viewed as the only mechanism to prevent any and all losses, but it can help identify those counterparties where performance has been a problem in the past or may present a problem in the future. Established limits combined with proper monitoring systems will help enable BWP to effectively mitigate possible losses due to counterparty insolvency. 3.0 RESPONSIBILITIES 3.1 Risk Oversight Committee The Risk Oversight Committee (ROC) will approve all credit policies developed by the Financial Planning and Risk Manager. The ROC will review the ongoing work of the Financial Planning and Risk Manager and the credit exposures faced by BWP on a monthly basis. The ROC will determine the desired reports for distribution to members on an ongoing basis to allow performance of their oversight function, but the reports that might be deemed appropriate for review include: summaries of credit exposures on a monthly basis lists of all approved counterparties Page 3 of 23

4 EXHIBIT B - 4 status reports on credit requests and annual renewals summaries of all credit actions taken by the Financial Planning and Risk Manager during the period under review, including limits approved, renewed, declined, cancelled and amended, temporary approvals granted, and limit overages lists of any legal documentation required by the terms of the credit approval but still outstanding, with an indication as to whether trading has begun The ROC will be informed, in writing by the Financial Planning and Risk Manager, any time there is a change in regards to the procedures of marking-to-market or any other material enhancement of the policies and procedures. This reporting will be conducted at the first ROC meeting following the change. If the change is substantial, and defines a significant result, the subject will be discussed by the ROC prior to the modification taking place. 3.2 Financial Planning and Risk Manager The Financial Planning and Risk Manager will work with the BWP staff for the submission of credit policies and procedures to the ROC and maintains the accountability for initial and ongoing counterparty credit approval within ROC approved guidelines. This manager will work closely with management, the traders and the operations staff in the development and maintenance of appropriate trading relationships. The Financial Planning and Risk Manager will monitor the credit exposures created through the trading of approved energy and derivative products, and ensure that BWP does not incur inappropriate credit exposure. The responsibilities of the Financial Planning and Risk Manager include, but are not limited to: Approval of counterparties with which BWP may trade energy and/or energy derivative products within ROC guidelines and with the CFO s signature Obtaining needed counterparty information to conduct evaluations Determining if counterparty qualifies for credit extension For qualifying counterparties, extending external and internal credit limits within approved ROC credit model Conducting annual reviews of previously approved counterparties Extending temporary credit lines Daily on-going monitoring of real-time counterparty credit strength Monitoring of credit exposures created by the trading of energy and/or energy derivative products Page 4 of 23

5 EXHIBIT B - 5 Executing credit mitigation techniques as needed Maintaining credit files Overseeing the credit portfolio of BWP, including the summary reporting of exposures, trading exceptions and limit excesses to senior management in accordance with the standards established by the ROC Coordinating legal documentation appropriate for each counterparty Preparing daily accounts receivable and accounts payable report Assisting with counterparty financial information gathering Overseeing the development of the systems necessary to support the above activities. 3.3 BWP Trading Group The BWP Trading Group initiates the credit evaluation procedure by requesting approval of identified trading partners. In addition, this department serves as the market front line for BWP in the acquisition of timely and pertinent counterparty information. Traders primary duties include: Submitting counterparty credit requests to the Financial Planning and Risk Manager Monitoring trade activity for compliance to limits Keeping abreast of market trade talk and communicating knowledge to the Financial Planning and Risk Manager. 3.4 City Attorney s Office This office maintains the accountability for supporting the Financial Planning and Risk Manager in counterparty agreement negotiations and documentation. The City Attorney s office will be responsible for the following: Evaluation and approval of all counterparty credit documentation Assistance in negotiating all counterparty contractual obligations. 4.0 CREDIT EVALUATION/SET-UP/MONITORING STEPS Page 5 of 23

6 EXHIBIT B A trader will complete a Credit Limit Request Form and submit it to the Financial Planning and Risk Manager for analysis. 2. The Financial Planning and Risk Manager will either obtain or request from the prospective counterparty the necessary information to complete the credit scoring process. 3. A determination by the Financial Planning and Risk Manager will be made regarding whether or not credit will be extended. 4. A temporary credit approval will be established if appropriate while the Financial Planning and Risk Manager formalizes the agreements needed and credit lines applicable to the given counterparty. 5. The Financial Planning and Risk Manager will determine various credit limits to be imposed including but not limited to the amount and tenure of transactions within ROC approved guidelines. 6. The Financial Planning and Risk Manager, in conjunction with the City Attorney s office, will attempt to execute the appropriate Master Agreement with the newly approved counterparty. 7. On-going monitoring of counterparty business conditions will be conducted by Traders and the Financial Planning and Risk Manager through publications and trade talk. 8. Daily credit reports will be monitored by the Financial Planning and Risk Manager to determine if limit breaches exist. 9. Mitigation techniques will be used by the Financial Planning and Risk Manager as needed in order to rectify credit limit breaches such as securing guarantees, letter of credit, and/or weekly payments. 10. At least annually, and more often if needed, approved counterparties will be reevaluated to determine if limits should be adjusted. 4.1 Initial Counterparty Request When seeking out the best transactions to fit BWP s needs, a trader will start the credit evaluation process by filling out a Credit Limit Request Form (Appendix 2) for identified prospective counterparties. Information needed for this form includes basic information on the counterparty like address and primary contacts and more transaction specific information like products to be traded and sought-after size and tenure trading limits. Once completed, this form is forwarded to the Financial Planning and Risk Manager for a thorough analysis of the counterparty s ability to meet its contractual obligations. Page 6 of 23

7 EXHIBIT B Credit Scoring The Financial Planning and Risk Manager will utilize internal and external resources to acquire pertinent information on the prospective counterparty. Any data that cannot be found through these means will be requested directly from the counterparty. The Financial Planning and Risk Manager will utilize guidelines such as the counterparty s credit report, annual report, and financial ratios to complete a scoring evaluation. Details of this methodology can be found in the Counterparty Credit Evaluation Methodology and Credit Line Model description (Appendix 1). Information obtained during the credit evaluation by the Financial Planning and Risk Manager will become a permanent part of the supplier/customer file. This process will allow for the upfront identification of companies that have had past credit problems or are a potential credit risk. 4.3 Creditworthiness Determination The Financial Planning and Risk Manager is responsible for issuing a Credit Approval Document (Appendix 3) that compiles valuable data such as the background and history of the counterparty, and important financial ratios, in addition to current market news that may indicate potential strengths or liabilities of the identified counterparty. 4.4 Temporary Credit Approval Because of the length of time that may be required to complete a Credit Approval Document, the Financial Planning and Risk Manager should perform a cursory overview of the applicable counterparties and extend a temporary line of credit. The temporary credit line should be based upon the senior unsecured debt rating and established business practices of the individual counterparty and documented on the Temporary Approval Form (Appendix 4). In the event the counterparty has no credit rating and/or established business history temporary credit may be denied. 4.5 Credit Line Assignment or Denial After review of the counterparty s credit standing, the Financial Planning and Risk Manager will establish a specific line of credit for the counterparty based on the results and in line with the ROC approved credit model. The CFO will provide a signature verifying the approval and associated limits for each approved counterparty. At any time the CFO, the Financial Planning and Risk Manager, Traders, or members of the ROC has the ability to lower the credit line of a counterparty based upon current relevant information. In the event an identified counterparty falls into a category of high risk, credit remedies as discussed in the Credit Remedies section (Section 4.9) may be utilized to mitigate risk so that potential business may continue with that given counterparty. Page 7 of 23

8 EXHIBIT B - 8 The Financial Planning and Risk Manager may advise, from time to time, against entering into a contract or transaction with a potential supplier/purchaser usually for one of the following reasons: Poor credit due to bankruptcy, tax or other liens, judgments, or significant payment delinquencies Problematic ratios regarding the firm's liquidity and ability to meet its obligations Marginal credit customer, new business with no history, shell corporation with no assets, or numerous recent UCC filings Non-existent or worthless parental guaranty. Unless a credit enhancement vehicle as described in the Credit Remedies section below (Section 4.9) is obtained from the supplier/purchaser, the contract will be rejected. In addition, if a supplier or purchaser s credit deteriorates during the contract period (usually discovered as a result of a material change in financial status), the Financial Planning and Risk Manager will be requested to obtain a credit enhancement vehicle from the customer. If a credit enhancement can not be obtained, all trading with that counterparty will be halted with the exception of short-term energy trading as defined below. A material change in financial status or event that could cause a material change may be, but is not limited to the following: A downgrade to a below investment grade rating of senior unsecured debt by a major rating agency A two step decline in the credit rating from one of the rating agencies Being placed on a credit watch list with negative implication by a major rating agency if senior unsecured debt does not have an investment grade rating Insolvency Any investigation by a federal agency such as the SEC Filing of a material lawsuit that could adversely impact current or future financial results A restatement of the counterparty s financial results. The trading department will have the authority to buy from a denied counterparty short-term energy (not to exceed a 24 hour same-day schedule) provided that the notional value of energy purchased for that day does not exceed $400,000 and as long as that counterparty for a short-term transaction is approved by the CFO or his designee. 4.6 Master Agreements Execution To establish a legal basis for counterparty transactions, the Financial Planning and Risk Manager will work with the City Attorney s office and attempt to enter into master agreements with each of its trading counterparties found to be creditworthy. Contingent on the trading format and the associated commodity, different agreements will be sought as needed. For exchange-traded energy transactions, accounts will be established that allow BWP to receive financial protection from the New York Mercantile Exchange (NYMEX) Clearing members or other regulated exchanges providing energy hedging tools. For Over-the-Counter (OTC) Page 8 of 23

9 EXHIBIT B - 9 financial transactions, International Swaps Derivatives Agreements (ISDA) will be established. For physical power transactions and physical gas transactions, Western Systems Power Pool (WSPP) and GISB agreements will be signed respectively. The integrity of NYMEX trades offers BWP financial protection because the clearinghouse safeguards against default. Credit risk associated with exchange-traded instruments is almost nonexistent because the collective clearing membership of regulated exchanges guarantees financial performance of all transactions. The ISDA Master Agreement is the authoritative contract widely used by industry participants. It has established international contractual standards governing privately negotiated derivatives transactions that reduce legal uncertainty and allow for reduction of credit risk through netting of contractual obligations. The Agreement may be used to document a wide variety of derivative transactions. The WSPP Master Agreement is a commercially oriented, power purchase and sale agreement incorporating precisely defined, commonly traded products, trading practices, and legal terms. Applying standard terms to each transaction helps to reduce the business risks in wholesale electricity trading by establishing certainty as to the reciprocal rights and obligations of each trading partner. GISB model agreements are available for short-term purchases and sales of physical natural gas, operational balancing agreements, day trades, funds transfer agency agreements and trading partner agreements. Accepted as the natural gas industry standard, these agreements also allow for risk reduction by establishing certainty as to the reciprocal rights and obligations of each counterparty. In addition to the formal master agreements listed above, BWP may enter into customized bilateral agreements which detail the standard trading and legal terms applicable to the transactional activity between BWP and the designated counterparty. The City Attorney s office must review and approve such agreement prior to execution. There may be instances where traditional counterparties to energy transactions refuse or do not have the staff in place to execute an ISDA, WSPP, GISB, bi-lateral or special provision agreements. In these cases, specific approval by the ROC must be obtained with written documentation noting all pertinent information Netting/Closeout Provision Netting provisions allow counterparties to owe each other the net rather than gross amounts involved in a series of transactions. For example, if BWP buys power from a counterparty and also sells them power, the final transaction will take both aspects into consideration and pay the difference between the two. The non-defaulting party may also closeout of any existing positions and include this balance in the netting calculation. This provision can eliminate a large amount of downside potential associated with counterparties that default. Page 9 of 23

10 EXHIBIT B - 10 If a counterparty were to go out of business, BWP s exposure to that circumstance is capped at the difference of what each party owes the other. If netting is not in place, the non-defaulting counterparty will be forced to pay the amount owed the failed counterparty and then make a subsequent claim (which may or may not be granted) for outstanding monies owed Set-Off Provision Set-Off can be viewed in simple terms as netting among different governing agreements. For instance, BWP may be transacting both electricity and natural gas with the same counterparty under two different governing agreements. Set-Off allows for amounts owed or received under both agreements to be netted against each other. 4.7 On-Going Financial Strength Monitoring Initial credit scoring is useful, but to insure that approved counterparties maintain the financial strength demonstrated at time of approval and to assure approved counterparty credit exposure limits are not exceeded, monitoring and reporting systems will be implemented. The Financial Planning and Risk Manager will be responsible for reviewing on an on-going basis the credit rating status of approved counterparties. In addition, the Financial Planning and Risk Manager will follow business news reports on approved counterparties for any potential information that may indicate a decline in creditworthiness. The Financial Planning and Risk Manager will also work in close contact with the Trading Group to stay abreast of any current negative supplemental information gained from direct contact within the energy industry. When financial status has been downgraded or alarming events related to the counterparty have occurred, ECC, Power Resource Planning, the Financial Planning and Risk Manager, the CFO and the ROC will be advised so that a decision can be made on how to handle any outstanding transactions with the given counterparty. 4.8 Daily Credit Reports The Financial Planning and Risk Manager will mark BWP s current transactions to market and monitor this exposure in conjunction with counterparty accounts receivable on a daily basis for potential credit line or margin threshold limit violations. Reports identifying the exposure levels with each active counterparty will be generated and forwarded to traders for review. When limits have been exceeded, the Financial Planning and Risk Manager will create a Credit Limit Exception Report (Appendix 5), which will be forwarded to members of the ROC along with the action taken in order to mitigate the identified risk exposure. 4.9 Credit Remedies and Mitigation Techniques The following credit remedy techniques may be used to support weak credit or to rectify limit breaches. The purpose of these mechanisms is to provide BWP with protection in the event a customer is unable or unwilling to pay their bills. The City Attorney s office or outside counsel Page 10 of 23

11 EXHIBIT B - 11 will evaluate and approve all documents used for credit mitigation. Credit enhancements will take one of the following forms: Market Mitigation Market Mitigation Parental Corporate Guaranty Standby Irrevocable Letter of Credit Margin Arrangement Pre-Payment The Financial Planning and Risk Manager may require the trading group from time to time to buy or sell energy with a particular counterparty in order to reduce exposure. These purchases or sales can only be accomplished if a netting/closeout agreement has been executed between BWP and the counterparty Parental Guaranties In cases where an applicant is a subsidiary of another entity and would like to utilize the consolidated financial statements and other relevant information of its parent for obtaining credit, a signed corporate guaranty is required (see Appendix 6). Through this financial instrument the parent company guarantees either all or some of the amount of liabilities of the subsidiary. Applicants will have an opportunity to utilize corporate guaranties if the following conditions are met: The applicant is affiliated with a Guarantor that meets the financial standards set forth in this policy The form and substance of the corporate guaranty are acceptable to BWP, including guidelines such as the following: o All relevant financial statements should be provided o Any material change in financial condition should be reported in writing to BWP within 3 days o The guaranty should be of a duration 2 months greater than the longest transaction o The guaranty may only be terminated upon full satisfaction of counterparty s obligations o If certain events transpire in which the guarantor s financial condition deteriorates, then a substitute form of assurance acceptable to BWP must be put into place The guaranty should be accompanied by a statement signed by the Secretary of the Corporation of the Guarantor verifying the corporation is authorized to guaranty the obligations of its subsidiaries The credit line extended will not exceed the amount of the parental guaranty Irrevocable Standby Letter of Credit Page 11 of 23

12 EXHIBIT B - 12 Standby letters of credit are straightforward to use and substitute the issuer s credit for that of the purchaser/supplier. Financial institutions issue letters of credit. In the event a customer fails to pay, the letter of credit accompanied by a demand for payment is presented to the issuing financial institution. The credit line extended will not exceed the Letter of Credit amount Margining Margining is a method that will allow financial protection against portfolio exposure over an agreed upon threshold limit between counterparties. Once this threshold has been exceeded, the counterparty will be required to submit to an escrow account on behalf of BWP, cash or cash equivalent, the differential between the agreed upon margin threshold and the exceeded amount. This provision protects BWP from potential default on accounts receivable as well as marked-to-market exposure Pre-Payment Pre-payment would allow BWP to receive payment prior to making delivery of energy sold. A written agreement that has been approved by the City Attorney s office should be executed prior to this type of arrangement Re-Evaluations 1. At a minimum of an annual basis, the Financial Planning and Risk Manager will conduct updated evaluations on current counterparties to verify their credit is still in good standing. 2. The Financial Planning and Risk Manager will conduct research and request updated business and financial information from the counterparty. 3. When all necessary information for the review has been gathered the Financial Planning and Risk Manager will issue a recommendation. 4. If there has been a significant decline in the creditworthiness of a customer, the Financial Planning and Risk Manager will communicate the need for a credit enhancement to the counterparty prior to any subsequent trade activity. Companies should be monitored on a continual basis to ensure that credit risk is not deteriorating, as described above in the Monitoring Section of this policy (Section 4.7). Page 12 of 23

13 EXHIBIT B - 13 APPENDIX 1 COUNTERPARTY CREDIT EVALUATION METHODOLOGY AND CREDIT LINE MODEL Company Evaluation Methodology Short-term energy trading under WSPP Companies will be graded based on the following methodology. The short-term, long-term outside credit ratings and outlook used will be the lower of either the Moody s or the Standard & Poor s rating. If the short-term rating is not available, long-term rating will be used. Criteria Points Short-term outside credit ratings 45 Long-term outside credit ratings 20 Ratings outlook 5 Financial performance (see ratios listed below) 30 Total 100 The Financial performance ratios utilized in this evaluation include: Quick/Ratio a measure of the ability to meet current liabilities (excludes inventory) Current Ratio - a measure of the ability to meet current liabilities (includes inventory) Debt to Capital an indication of the reliance on debt financing Interest Expense Coverage a measure of the number of times a firm s interest is covered by earnings Net Cash Margin a representation of how efficiently a company is generating cash. Each benchmark has a 0 to 6 point scale and will be measured on financial best practices as well as how the company has performed over time. If the counterparty s performance on the given ratio is not above (or below in the case of Debt/Capital) the highest benchmark level, a time evaluation will be conducted. If the company s current quarter measurement has shown movement against good performance as compared the same quarter from the previous year, one point will be deducted. Similarly, if the current quarter has shown a negative trend as compared to the same quarter 2 years prior, a point will be deducted. Exceptions When financial information is not publicly accessible, the outside credit rating will still form the base for the evaluation. A more qualitative versus quantitative analysis will be applied. The entity s size, business strategies, diversification, etc. are all factors that will have to be weighed and used in determining the appropriate risk classification for the Credit Line Extension table. Page 13 of 23

14 EXHIBIT B - 14 In the event an outside credit rating is not available, the Financial Planning and Risk Manager will gather as much information as possible on the prospective company including the qualitative factors such as the entity s size, business strategies, diversification, etc. in addition to any financial data that can be obtained for a presentation to the ROC on which risk classification is deemed proper for the Credit Line Extension table. In some instances, credit mitigation remedies such as Letters of Credit or parental guaranties may be necessary to approve a credit line extension. Credit Line Extension Model Evaluation of individual company ratings, based on financial risk, will be determined by the model detailed as follows and will be assigned the associated credit line range. The approved credit limit will not exceed three or 3% of the Intangible Net Worth (even if the scoring method yields a higher dollar credit limit). SCORE RISK LEVEL INDIVIDUAL COMPANY CREDIT LINE LIMIT* Low Risk $3,000,000 - $6,000,000 TENURE (Up to) ARBITRAGE NOTIONAL VALUE LIMIT 5 Years $25,000,000 AGGREGATE CATEGORY CREDIT LINE LIMIT** None Required Moderate Risk Moderate to High Risk 0-25 High Risk $500,000 - $3,000,000 Up to $500,000 Short-Term Purchases Or Credit Enhancement 4 Years $10,000,000 6 Months $5,000,000 1 Day $400,000 $15,000,000 $5,000,000 0 * Credit Line Limits are defined as current Mark-to-Market exposure plus up to 60 days of energy sales not billed yet (adjusting for any Netting or Set-off agreements in place). Mark-to-Market exposure captures all energy transactions beyond 60 days. ** The Aggregate Category Credit Line Limit is defined as the total Credit Line Limit for all counterparties classified in that particular risk category. Contracts may be negotiated with companies falling into one of the first three categories. However, transactions with these companies will also be limited based upon the amount of risk associated with each transaction. Transaction risk categories are determined by and can only be adjusted by the ROC. No transactional activity will be permitted with High-Risk companies unless special enhancement provisions are acquired. Page 14 of 23

15 EXHIBIT B - 15 Longer-term energy trading under the ISDA and NAESB The ISDA and NAESB will be used mainly for natural gas hedging purposes. Threshold and Security Threshold, as specified in Paragraph 13 of the ISDA agreement and Credit Support Addendum of the NAESB agreement, is the marked-to-market of the outstanding volume of natural gas not delivered yet. The following table shows the maximum exposures allowed under this policy: Moody s Standard & Poor s Threshold Aaa AAA $ 25 million Aa1 to Aa3 AA+ to AA- 20 million A1 to A3 A+ to A- 15 million Baa1 BBB+ 10 million Baa2 BBB 5 million Baa3 and lower or unrated BBB- and lower or unrated Zero (0) Page 15 of 23

16 EXHIBIT B - 16 APPENDIX 2 CREDIT LIMIT REQUEST FORM This form must be completed in its entirety in order for the request to be processed by the Financial Planning and Risk Manager. Date of Request: Request Made by: Name of Proposed Counterparty: Address: Street: City: State: Zip Code: Limit Request (circle one) New Increase Decrease Products to be Traded (circle all that apply): Size of Trading Limit: Size of Arbitrage Notional Value Limit: Tenure of Trading Limit: Prompt Forward Options Swaps Counterparty Trading Contacts: Real Time: Day-Ahead: Firm: Name: Phone: Fax: Counterparty Credit Contacts: Accounts Payable: Accounts Receiveable: Name: Phone: Fax: Signature of Requestor Page 16 of 23

17 EXHIBIT B - 17 APPENDIX 3 CREDIT APPROVAL DOCUMENT Name of Counterparty: Ultimate Parent: Address: Request Date: Reference Number: Review Date: Request Prepared by: Principal Counterparty Contacts (with Telephone and Fax Numbers): Trading: Credit: Operations: Notional Notional New/ Value Value Product Existing/ Limit Limit Limit Limit Type Increase Requested Approved Tenure Requested Approved Documentation Requirements: Documents to be reviewed by: Special Conditions of Credit Approval: Comments on Trading Relationship: Page 17 of 23

18 EXHIBIT B - 18 Credit Approval Document, Page 2 Name of Counterparty: Date: Background and History of the Counterparty: Financial Analysis: Final Score: Recommendation: Approved by CFO or General Manager: Date: Page 18 of 23

19 EXHIBIT B - 19 APPENDIX 4 TRANSACTIONAL / TEMPORARY APPROVAL FORM Name of Counterparty: Date: (Circle One) Transactional Approval Limit Approval Type of Transaction / Limit: Amount: Duration: Date of Anticipated Approval through Regular Credit Process: Financial Statements in House? Y N Follow up required: To be done by: Required Documents signed and in house: Y N Follow up required: To be done by: Additional Comments or Conditions Approved by: Date: Note: This form is to be completed and submitted to Trading Department by the Financial Planning and Risk Manager within 3 days of receiving the Credit Limit Request Form. Page 19 of 23

20 EXHIBIT B - 20 APPENDIX 5 CREDIT LIMIT EXCEPTION REPORT Name of Counterparty: Date: Counterparty Credit Limit: Current Amount: Reason for Breach: Action Taken: Completed by: Approved by: Date: Note: This form is to be completed and submitted to the ROC by the Financial Planning and Risk Manager at the end of the next business day following the breach of Credit Limit. Page 20 of 23

21 EXHIBIT B - 21 APPENDIX 6 GUARANTY AGREEMENT This Guaranty Agreement (this Guaranty ), dated, as of [ [ ], a [ ] corporation ( Guarantor ). ], 2003, is made and entered into by WITNESSETH: WHEREAS, [ ] (the Company ) may enter into transactions involving power sales under the Western Systems Power Pool ( WSPP Agreement ) and related confirmation agreements (collectively Agreements ) with the City of Burbank, California ( Guaranteed Party ); and WHEREAS, Guarantor will directly or indirectly benefit from the Agreements. NOW THEREFORE, in consideration of the Guaranteed Party agreeing to conduct business with Company, Guarantor hereby covenants and agrees as follows: 1. GUARANTY. Subject to the provisions hereof, Guarantor hereby irrevocably and unconditionally guarantees the timely payment when due of the obligations of Company (the Obligations ) to the Guaranteed Party in accordance with the Agreements. If Company fails to pay any Obligations, Guarantor shall promptly pay to the Guaranteed Party no later than the next Business Day (as defined in the WSPP Agreement), after notification, the amount due in the same currency and manner provided for in the Agreements. This Guaranty shall constitute a guarantee of payment and not of collection. Guarantor shall have no right of subrogation with respect to any payments it makes under this Guaranty until all of the Obligations of Company to the Guaranteed Party are paid in full. The liability of Guarantor under the Guaranty shall be subject to the following: (a) Guarantor s liability hereunder shall be and is specifically limited to payments expressly required to be made in accordance with the Agreements (even if such payments are deemed to be damages) and, except to the extent specifically provided in the Agreements, in no event shall Guarantor be subject hereunder to consequential, exemplary, equitable, loss of profits, punitive, tort, or any other even if such fees together with the payments exceed the cap in Section 1(b), damages, costs, except that Guarantor shall be required to pay reasonable attorney fees. [ ]. (b) The aggregate liability of the Guarantor shall not exceed [ ] Million U.S. Dollars 2. DEMANDS AND NOTICE. If Company fails or refuses to pay any Obligations, the Guaranteed Party may make a demand upon Guarantor (hereinafter referred to as a Payment Demand ). A Payment Demand shall be in writing and shall reasonably and briefly specify in what manner and what amount Company has failed to pay and an explanation of why such payment is due, with a specific statement that the Guaranteed Party is calling upon Guarantor to pay under this Guaranty. A Payment Demand satisfying the foregoing requirements shall be deemed sufficient notice to Guarantor that it must pay the Obligations. A single written Payment Demand shall be effective as to any specific default during the continuance of such default, until Company or Guarantor has cured such default, and additional Payment Demands concerning such default shall not be required until such default is cured. 3. REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants that: Page 21 of 23

22 EXHIBIT B - 22 (a) it is a corporation duly organized and validly existing under the laws of the State of [ ] and has the corporate power and authority to execute, deliver and carry out the terms and provisions of this Guaranty; (b) no authorization, approval, consent or order of, or registration or filing with, any court or other governmental body having jurisdiction over Guarantor is required on the part of Guarantor for the execution and delivery of this Guaranty; and (c) this Guaranty constitutes a valid and legally binding agreement of Guarantor enforceable against Guarantor in accordance with its terms, except as the enforceability of this Guaranty may be limited by the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors rights generally and by general principles of equity. 4. EFFECT OF BANKRUPTCY BY COMPANY. The Guarantor s obligation to pay under this Guaranty shall not be affected in any way by the institution with respect to the Company of a bankruptcy, reorganization, moratorium or similar insolvency proceeding or other relief under any bankruptcy or insolvency law affecting creditor s rights or a petition for the Company s winding-up or liquidation. 5. AMENDMENT. No term or provision of this Guaranty shall be amended, modified, altered, waived, or supplemented except in a writing signed by the Guarantor and Guaranteed Party hereto. 6. WAIVERS. Guarantor hereby waives (a) notice of acceptance of this Guaranty; (b) presentment and demand concerning the liabilities of Guarantor, except as expressly hereinabove set forth; and (c) any right to require that any action or proceeding be brought against Company or any other person, or except as expressly hereinabove set forth, to require that the Guaranteed Party seek enforcement of any performance against Company or any other person, prior to any action against Guarantor under the terms hereof. Except as to applicable statutes of limitation, no delay of the Guaranteed Party in the exercise of, or failure to exercise, any rights hereunder shall operate as a waiver of such rights, a waiver of any other rights or a release of Guarantor from any obligations hereunder. Guarantor consents to the renewal, compromise, extension, acceleration or other changes in the time of payment of or other changes in the terms of the Obligations, or any part thereof or any changes or modifications to the terms of the Agreements. Guarantor may terminate this Guaranty by providing written notice of such termination to the Guaranteed Party and upon the effectiveness of such termination, Guarantor shall have no further liability hereunder, except as provided in the last sentence of this paragraph. No such termination shall be effective until fifteen (15) Business Days after receipt by the Guaranteed Party of such termination notice. No such termination shall affect Guarantor s liability with respect to any obligations arising under any transaction entered into prior to the time the termination is effective, which transaction shall remain guaranteed pursuant to the terms of this Guaranty. 7. ASSIGNMENT. The Guarantor shall not assign this Guaranty without the express written consent of the Guaranteed Party. The Guaranteed Party shall be entitled to assign its rights under this Agreement in its sole discretion. 8. NOTICE. Any Payment Demand, to the Guaranteed Party or the Guarantor notice, request, instruction, correspondence or other document to be given hereunder by any party to another (herein collectively called Notice ) shall be in writing and delivered personally or mailed by certified mail, postage prepaid and return receipt requested, or by telegram or telecopier, as follows: To Guaranteed Party Attn: Page 22 of 23

23 EXHIBIT B - 23 Fax No.: ( ) To Guarantor: Attn: Fax No.: ( ) Notice given by personal delivery or mail shall be effective upon actual receipt. Notice given by telegram or telecopier shall be effective upon actual receipt if received during the recipient s normal business hours, or at the beginning of the recipient s next business day after receipt if not received during the recipient s normal business hours. All Notices by telegram or telecopier shall be confirmed promptly after transmission in writing by certified mail or personal delivery. Any party may change any address to which Notice is to be given to it by giving notice as provided above of such change of address. 9. MISCELLANEOUS. THIS GUARANTY SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. This Guaranty shall be binding upon Guarantor, its successors and assigns and inure to the benefit of and be enforceable by the Guaranteed Party, its successors and assigns. The Guaranty embodies the entire agreement and understanding between Guarantor and the Guaranteed Party and supersedes all prior agreements and understandings relating to the subject matter hereof. The headings in this Guaranty are for purposes of reference only, and shall not affect the meaning hereof. This Guaranty may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. EXECUTED as of the day and year first above written. [ ] By: Name: Title: Page 23 of 23