Peter, I have considered your issue in point three below and, further to our
discussion, I believe that the issue is addressed in Paragraph 8(d) of the
credit support annex. That paragraph indicates that, upon termination, where
no amounts are payable by Pledgor (the party that has posted collateral) to
Secured Party (the party holding the posted collateral), the Secured Party
will transfer all posted collateral (plus interest if the posted collateral
is cash) to the Pledgor. Therefore, although in your third example Bow
Valley would be required to post a letter of credit for the $15 million, upon
termination ECC would owe the $240 million to Bow Valley and Paragraph 8(d)
would kick in, such that ECC would be required to return the letter of credit
to Bow Valley and pay the $240 million. The mechanism set forth in Paragraph
8(d) clearly makes sense in a multi-transaction situation but doesn't really
make sense in this situation, since, in your third example, ECC could call
for a letter of credit from Bow Valley knowing full well that it will never
be able to actually use it, thereby simply making Bow Valley incur the cost
of posting the letter of credit. However, I think this is a point that we
should leave for the bank to raise, if they are concerned about it.
Practically speaking, I would think that, given these facts, ECC would simply
not call for the letter of credit from Bow Valley in your third example, as
it provides no real protection.
I guess the only other point to be made is that, if the index were to go to a
price of less than $0.25 per GJ, such that the amount owed to Bow Valley
under Swap 1 was reduced from $300 million to less than $15 million, ECC
holding the letter of credit would make sense.
Greg
Enron Capital & Trade Resources
Canada Corp.
From: Peter Keohane 09/20/2000 10:42 AM
To: Greg Johnston/CAL/ECT@ECT, Sara Shackleton/HOU/ECT@ECT, William S
Bradford/HOU/ECT@ECT, Tana Jones/HOU/ECT@ECT
cc: Brian Kerrigan/HOU/ECT@ECT, Soma Ghosh/HOU/ECT@ECT, Derek
Davies/CAL/ECT@ECT, Sharon Crawford/CAL/ECT@ECT
Subject: Alberta PPA Financing
I want to get a handle on how termination payments are handled vis a vis the
collateral obligations, particularly where the Index moves down relative to
the forward price and its effect on Swap 1.
@ $5.00 (assuming $5.00 example forward price) there is no issue. There is
no collateral obligation and Swap #1 settles at $300MM and Swap #3 settles at
$0.
@ $6.00 (assuming $5.00 example forward price) there is $15MM collateral
obligation of ECC to Swapco on Swap #1 and $15MM collateral obligation of RBC
to ECC on Swap #3 each with $45MM collateral threshold, as Swap #1 settles at
$360MM due from ECC to Swapco and Swap #3 settles at $60MM due from RBC to
ECC. This seems to make sense. Swapco has a claim against ECC for $360MM
with Enron Corp. Guarantee and $15MM of collateral. ECC has a claim against
RBC for $60MM with $15MM of collateral.
@ $4.00 (assuming $5.00 example forward price) there is $15MM collateral
obligation of Swapco to ECC on Swap #1 and $15MM collateral obligation of ECC
to RBC on Swap #3 each with $45MM collateral threshold, as Swap #1 settles at
$240MM due from ECC to Swapco and Swap #3 settles at $60MM due from ECC to
RBC. This is where I get lost. Swapco has a claim against ECC for $240MM
with Enron Corp. Guarantee but has given $15MM of collateral when it owes
nothing. How is the collateral applied when it owes nothing. RBC has a
claim against ECC for $60MM with Enron Corp. Guarantee and $15MM of
collateral. This part seems to make sense.
Somebody smarter than me needs to explain.
