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Enron Mail |
The DOE order requiring gas suppliers to supply gas to PG&E expires at 3:00
a.m. EST on February 7. In view of the DOE warnings that the order will not be extended, PG&E has received permission from the CPUC to grant to certain gas suppliers a security interest in certain of its receivables, and a draft security agreement and other documents were circulated over the weekend. Here is a summary of the proposal and associated risks: Summary of Proposal: The security interest will be granted only to those gas suppliers that execute the security agreement. If we don't sign the agreement, we will remain unsecured (there are reasons to refuse to sign -- see below). PG&E is granting a security interest in core customer receivables, and will also grant a security interest in its natural gas inventory designated for core customers if the value of its A/R falls below the amount owed to gas suppliers. PG&E's figures indicate receivables in excess of payables for each of October, November, and December, with $491 million in receivables and $329 million in payables in December. However, the security interest is subject to the prior lien of its First Mortgage Indenture, under which approximately $3 billion is outstanding (not currently in default). PG&E believes the total collateral available to creditors under that Indenture is from $12 to $30 billion, and that creditors under that Indenture would be required to "marshal" assets in the event they foreclosed on their security (meaning that a court would require those creditors, who have ample access to security other than these receivables, would be required to go against that other collateral and leave the security for the gas suppliers alone). U.S. Trust Company will act as collateral agent (essentially, a trustee). The security interest is in place until April 30 (per the CPUC order); PG&E could seek an extension of the CPUC order if necessary. The collateral secures obligations for future deliveries only (the collateral will not secure PG&E's payment obligations for past supplies). Suppliers executing the security agreement are committing to "negotiate in good faith" to sell natural gas to PG&E on "market" terms; a refusal to sell to PG&E on market terms presumably places a supplier in default of the security agreement, and the supplier would loses the benefit of the collateral. For as long as the security agreement is in force, suppliers executing the security agreement are required to waive provisions in their existing supply agreements permitting them (i) to suspend performance on account of PG&E's failure to demand additional performance assurance, (ii) to demand payment or parent company guarantees, (iii) to declare a default under, terminate or suspend performance under, its supply agreement in the event of a bankruptcy, insolvency, appointment of liquidator, or failure to pay debts as the become due (no supplier is required to waive rights with respect to deliveries prior to the date of the security agreement). PG&E will be required to deliver weekly reports on the value of its receivables at the end of the preceding week. Risks: Essentially, Enron's choice is (A) execute the security agreement, get the benefit of the security for future deliveries under existing commitments and any new deals we enter into, and subject ourselves to restrictions on our ability to refuse new deals or to exercise our rights under existing commitments, or (B) refuse to execute the agreement and remain unsecured, yet free of the restrictions and limits that the agreement will place upon us. If we sign the agreement, we will be a secured creditor to the extent of PG&E's obligations covered by this agreement. If not, we will be an unsecured creditor, potentially behind all of the suppliers that did sign the agreement. This is assuming that this arrangement survives any bankruptcy of PG&E (it's reasonable to assume that it will). Signing the security agreement does give Enron security for PG&E's payment for future deliveries of gas under existing contracts. Should Enron decide to enter into new deals for additional volumes, PG&E's payment obligations would also be secured. However, Enron will be required to negotiate in good faith to supply PG&E on market terms; PG&E has stated that this means that Enron will have to supply PG&E in a manner consistent with our dealings with PG&E over the past year. This probably requires Enron to enter into new deals, and means that Enron will not have complete discretion in deciding whether to enter into new deals if Enron wants to keep the benefit of the collateral (if Enron refuses to enter into a new deal with PG&E, PG&E may have cause to terminate the security agreement as to Enron). The security agreement requires Enron to waive certain rights under its supplier agreements, including the right to declare a default upon a PG&E bankruptcy, as long as the security agreement is in place. This could limit our flexibility to deal with our overall exposure to PG&E across contracts and affiliates in the event of a "meltdown". There can be no guarantee that the courts would require the creditors under the First Mortgage Bond to marshal assets; this means that suppliers signing the security agreement may still end up subordinated to those creditors. The security agreement is governed by California law, and suppliers are required to submit to the jurisdiction of California courts. This means any dispute under these agreements will be decided by a California judge. Please call me at X31575 if you have any questions. Travis McCullough Enron North America Corp. 1400 Smith Street EB 3817 Houston Texas 77002 Phone: (713) 853-1575 Fax: (713) 646-3490
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