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Enron Mail |
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.
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