FW: One Way vs. Two Way Payments

Here it is.

-----Original Message-----
From: =09Johnston, Greg =20
Sent:=09Wednesday, November 07, 2001 9:48 AM
To:=09Le Dain, Eric
Subject:=09One Way vs. Two Way Payments

I have reviewed the master physical gas agreements for the 10 counterpartie=
s (excluding trading companies) at the top of the exposure list to determin=
e whether the contracts contemplate one-way or two-way payments.

1. Petro Canada Oil & Gas - One Way
2. Canadian Natural Resources - Two Way
3. Marathon Canada Limited - One Way
4. Husky Oil Operations Limited - One Way
5. Murphy Canada Exploration Company - One Way
6. Encal Energy Ltd. - One Way
7. Talisman Energy Inc. - One Way
8. Premstar Energy Canada Ltd. - Two Way
9. Rio Alto Exploration Ltd. - One Way
10. Sunoco Inc. - Two Way

The basic operation of a one way payment provision is that, if the defaulti=
ng party has a net in-the-money position based upon the Early Termination D=
amages calculation, the Early Termination Damages are deemed to be zero and=
the non-defaulting party is not required to pay that amount to the default=
ing party (the defaulting party's position is wiped out). However, we woul=
d still be entitled, prior to default, to call for collateral where a count=
erparty's out-of-the money position is in excess of its collateral threshol=
d, which would provide us with security to ensure the counterparty continue=
s to pay. In addition, if the counterparty failed to post such collateral,=
they would be in default, we could terminate the contract and, as the non-=
defaulting party, we would be in a position to realize on our in-the-money =
position. If, after we received the collateral, we were then to become ins=
olvent or otherwise default under the master, the counterparty could termin=
ate the contract, our mark-to-market position would be wiped out and we wou=
ld be required to return any unused collateral.

The operation of a two way payment provision is that the early termination =
damages are calculated by the non-defaulting party and whoever has a net in=
-the-money position based upon such calculation is owed the termination pay=
ment, regardless of whether such party is the defaulting or non-defaulting =
party. In other words, unlike a one way payment, if the defaulting party h=
as a net in-the-money position upon termination of the contract, the non-de=
faulting party will be required to pay that amount to the defaulting party.=
Therefore, if we were to become insolvent or otherwise default under a ma=
ster and we had a net in-the-money position under that master, the counterp=
arty could terminate the contract but we would still be owed our mark-to-ma=
rket position. The other point to consider in the situation where there is=
a two way payment provision is that, of the three counterparty masters abo=
ve that contain two way payments, all three also contain cherry picking lan=
guage that, upon the occurrence of an event of default other than insolvenc=
y, allows the non-defaulting counterparty to pick and choose which transact=
ions to terminate. In other words, the counterparty need not terminate all=
transactions, which could effect the amount otherwise owed to the defaulti=
ng party. Even with cherry-picking, upon the occurrence of an insolvency, =
all transactions are deemed to terminate, so cherry picking would not be a =
factor.

You had also asked whether the failure by a party to call for collateral wh=
en it is entitled to under a contract would have an impact on the ability o=
f such party to collect on a termination payment owed to it upon terminatio=
n of the contract. Other than the fact that the failure to call for collat=
eral may mean that we do not hold credit support that would be usable to of=
fset a termination payment owing if the party obligated to pay fails to pay=
, the right to call for collateral is just that, a right and not an obligat=
ion, and the failure to call for collateral does not colour the right of th=
e party owed the termination payment to require it be paid.

Let me know if you need anything further with respect to this matter.

Greg