Message-ID: <1206361.1075855096444.JavaMail.evans@thyme> Date: Wed, 28 Nov 2001 07:39:13 -0800 (PST) From: eric.le@enron.com To: barry.tycholiz@enron.com Subject: FW: One Way vs. Two Way Payments Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: Le Dain, Eric X-To: Tycholiz, Barry X-cc: X-bcc: X-Folder: \Barry_Tycholiz_Jan2002_1\Tycholiz, Barry\Inbox X-Origin: Tycholiz-B X-FileName: btychol (Non-Privileged).pst 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