500 likes | 625 Views
Power Marketing Transactions. Using Master Contracts To Mitigate Risk. Newport Beach California April 19, 2001. Let’s Make a Deal: How Standardized Contracts Control Trading & Transactions. Advantages of Master Contract. Facilitates trading of commonly understood products
E N D
Power Marketing Transactions Using Master Contracts To Mitigate Risk Newport Beach California April 19, 2001
Let’s Make a Deal:How Standardized ContractsControl Trading & Transactions
Advantages of Master Contract • Facilitates trading of commonly understood products • Provides umbrella documentation for all transactions between each pair of trading counterparties • Permits flexibility- allows for changes in circumstances and transactions specifics
Advantages of Master Contract • Permits the focus of trading to be upon price, quantity, duration, and delivery point
Master Contract Process • Both parties have streamlined market-based FERC Tariffs w/o substantive terms and conditions • Parties have negotiated Master Contract w/o changing base terms and conditions assigning default performance, legal and credit risks • Parties have negotiated cover sheet and optional provisions
Cover Sheet • Notifications • Authorized FERC tariffs • Optional confirmation process • Acceleration of damages • Cross defaults • Choice of credit protection mechanisms • Optional provisions incorporated
Collateral Annex Incorporation of outstanding transactions New taxes Change in law/other events Regulatory outs Jurisdiction, process, and waiver of jury trial Arbitration Agency provisions Market disruptions Extended set-off provisions Cross-terminations Add’l suspension of performance, termination Optional Provisions
Trading and Transactions • Oral Trading • Binding oral transactions • Commercial Terms of Transaction • Products • Price • Delivery Point • Duration • Clearly defined written confirmation process
Transaction Chain Tansaction A Transaction B Transaction C Source Power Marketer #1 Power Marketer #2 Utility #1 Transaction D Transaction E Transaction F Utility #2 Power Marketer #3 Sink
Formation of a Trade Party A Party B Oral TransactionBinding -Product -Writing not required -Price unless stated -Delivery -Time Phone Phone 3 Days 3 Days Seller Sends Confirm BuyerSends Confirm No Seller & Buyer Sends Confirm Confirm No Confirm Sent or Received 2 Days 2 Days Recipient Signs Confirm Seller Doesn’t Object Buyer Objects Buyer Doesn’t Object Seller Objects Binding Confirmation (Sec. 2.4 Option)
Standard Products • Problem: • Products vary from region to region • Products vary in degrees of “Firmness” • Products are the result of changing regulatory requirements • Mismatch of performance and risk expectations by parties
Standard Products • Solution: • Precise and consistent product definitions • Each party’s obligations identified • Degree of “Firmness” specified • Special conditions for excused non-performance identified • Relationship to general force majeure identified
Non-firm Unit firm System firm Firm with liquidated damages Into delivery point Firm with noforce majeure Increasing performance obligations on both parties Schedule P Products
Non-Firm Product Deliver and receive Fail to deliver or receive forany reason or no reason Non-performance for anyreason or no reason excused Payment Failure to pay
Unit Firm Product Generating unitnot operating Generating unit operating Liquidated damages Deliver and receive Force majeure event Full or partial generating unit outage Failure to pay Payment Performance excused
System Firm Productt Identified System’s Generation and Purchased Power Seller’sforce majeure event Pre-existingsystem reliabilityand reserve requirements Identified system’s integrity orstability Deliver/receiveat identified system’ssource Deliver & receive Other party’s default Native load/firm service obligation Performance excused without liability Payment Failure to pay Failure to pay Payment
Firm With Liquidated Damages Claimed Force Majeure Event Deliver & Receive Transmission to Seller’s Point of Delivery Performance Excused Not Timely Scheduled Non-firm Transmission Curtailed Firm Transmission Curtailed Due to Force Majeure Event Liquidated Damages Failure To pay Payment Plus other Factors
EXAMPLE #1 DP&L “Into” Product e BUYER AND SELLER BOTH PURCHASE FIRM AND BUYER’S FIRM GETS CUT. e Firm NIPSCO Firm Cinergy X Wabash Valley AEP LG&E Assumptions: 1. Seller sells 50 MW for delivery “Into Cinergy, Seller’s Daily Choice” 2. Seller preschedules day-ahead by 11:00 a.m. CPT by notifying Buyer of source and designated interface, DP&L. Seller purchases Firm transmission from source in DP&L to DP&L/Cinergy interface. 3. Buyer puts in request for Firm transmission within 30 minutes of Seller’s notification and request is accepted and purchased by Buyer. Entergy is sinking in Cinergy. Hypothetical: On delivery day, Cinergy cuts Buyer’s Firm transmission. Results: Seller must move to another interface (either on Cinergy’s border (NIPSCO, LG&E, AEP. . .) or in Cinergy’s control area (Wabash) at which Buyer can receive energy such that energy can sink in Cinergy. Seller can require Buyer to purchase Non-Firm transmission (or Firm, if available). Each party will be responsible for any additional transmission costs incurred to reschedule to another delivery point since cut is due to loss of Firm transmission (Definition 3A(iv)). If Seller cannot reschedule and deliver, Seller will owe LDs to Buyer on Seller’s failure to deliver. (Section 3A). Same Result If: 1. Seller’s generation gets cut (except Seller pays all additional transmission costs). 2. Seller’s Firm transmission gets cut (Seller and Buyer each pay their own additional costs). 3. Seller’s Non-Firm transmission gets cut (except Seller pays all additional transmission costs).
EXAMPLE #2 DP&L “Into” Product BUYER PURCHASES NON-FIRM THOUGH FIRM WAS AVAILABLE, AND NON-FIRM GETS CUT. e e Firm NIPSCO Non-Firm Cinergy X Wabash Valley LG&E AEP Assumptions: 1. Seller sells 50 MW for delivery “Into Cinergy, Seller’s Daily Choice” 2. Seller preschedules day-ahead by 11:00 a.m. CPT by notifying Buyer of source and designated interface, DP&L. Seller purchases Firm transmission from source in DP&L to DP&L/Cinergy interface. 3. Buyer puts in request for Firm transmission within 30 minutes of Seller’s notification and receives response that Firm is available. Buyer purchases Non-Firm instead. Entergy is sinking in Cinergy. Hypothetical: On delivery day, Cinergy cuts Buyer’s Non-Firm transmission. Results: Seller’s obligation was met and Seller has no obligation to attempt to deliver to another interface. Curtailment was due to quality of transmission utilized by Buyer. Buyer will owe LDs to Seller on failure to receive (Definition Section 3C). Same Result If: 1. Following Seller’s notification of the Designated Interface, Buyer fails to make a Timely Request for Firm transmission (Definition Section 3D). 2. Following Seller’s notification of the Designated Interface, Buyer makes a Timely Request for Firm transmission, but fails within 15 minutes of receiving the transmission provider’s notice of rejection to notify Seller of same (Definition Section 3D).
EXAMPLE #3 DP&L BUYER IS ATTEMPTING TO BRING PRODUCT OUTSIDE OF TRANSMISSION SYSTEM BORDER, AND PATH IS CUT. e e Non-Firm NIPSCO Firm LG&E Cinergy Firm X Wabash Valley AEP Assumptions: 1. Seller sells 50 MW for delivery “Into Cinergy, Seller’s Daily Choice” 2. Seller preschedules day-ahead by 11:00 a.m. CPT by notifying Buyer of source and designated interface, DP&L. Seller purchases Non-Firm transmission from source in DP&L to DP&L/Cinergy interface. 3. Buyer puts in request for Firm transmission from Cinergy within 30 minutes of Seller’s notification and request is accepted and purchased by Buyer. Buyer allso secures Firm transmission from LG&E to sink energy in LG&E. Hypothetical: On delivery day, LG&E cuts Buyer’s path because of the Non-Firm transmission purchased upstream by Seller. Results: Seller’s obligation was met, and Seller has no obligation to attempt to deliver to another interface. The scheduled delivery was interrupted as a result of Buyer’s attempted delivery of the Product beyond Cinergy. Buyer will owe LDs to Seller on Buyer’s failure to receive (Definition Section 4A).
Firm with No Force Majeure Product Delivered and received Liquidated damages Failure to pay Payment
Firm with No Force Majeure Product Delivered and received Liquidated damages Failure to pay Payment
Optional Products ERCOT CAISO Western Firm UCC
When The Deal Does Not Go Down Performance Obligations, Damages, Excuses for Non-Performance
Obligations & Deliveries • Seller’s obligations • Deliver specified quantity to delivery point • Arrange transmission to delivery point • Pay costs associated with delivery • Buyer’s obligations • Receive product at delivery point • Arrange transmission at and away from delivery point • Pay agreed transaction price
Liquidated Damages Seller’s Unexcused Failure to Perform Buyer’s Unexcused Failure to Perform Replacement Price - Contract Price if positive Contract Price - Sales Price if positive Option for payment in 5 days • Sales Price • Commercially reasonable manner • Resale of product at delivery point • Option: market price at delivery point • Book out upstream considered resale of product • Reduced by additional, incidental and transmission costs • Excludes penalties • Not required to utilize seller’s generation or market positions/options • Contract Price • US $ Amount • Specified in Transaction • Replacement Price • Commercially reasonable manner • Purchase of replacement product at delivery point • Option: market price at delivery point • Book out downstream considered as replacement product • Includes additional costs, including transmission costs to delivery point • Excludes penalties • Not required to utilize buyer’s generation or market positions/options Payment Process
Claimed Force Majeure Events Event that prevents performance and cannot be avoided or overcome, not anticipated, not within reasonable control or result of negligence Excludes loss of Buyer’s markets, uneconomic resale, loss of Seller’s supply, ability to sell at higher price Transmission Provider Interruption Contracted For Non-Firm Transmission Product Definition can Alter Affect of Event Contracted for Firm Transmission Unexcused Failure To Perform Force Majeure Event Excusing Performance Interruption due to Force Majeure Other Factors and circumstancesestablish performance was prevented
Remedies for Failure to Deliver/Receive Example 1. Party A agrees to sell Party B 50MWh/h for Peak Hours on the next weekday for delivery at PJM Western Hub. The Product is Unit Firm and Party A fails to deliver because Party A's generation source is forced out. Outcome: No damages payable. There is no unexcused failure to perform. In this case the Product sold is Unit Firm, and by definition, the obligation to deliver Unit Firm Product is excused by forced outage of the relevant generation asset.
Remedies for Failure to Deliver/Receive Example 2. Party A agrees to sell Party B the same 50MWh/h for Peak Hours on the next weekday for delivery at PJM Western Hub. The Product is Firm (LD) and Party A fails to deliver because Party A is prevented from doing so by Force Majeure. Outcome: No damages payable. Because Party A's performance was prevented by Force Majeure, there is no unexcused failure to perform.
Remedies for Failure to Deliver/Receive Example 3. Yesterday, Party A agreed to sell Party B 50 MWh/h for Peak Hours today. The delivery point is COB, and price is $30/MWh. The Product is Firm (No Force Majeure) and Party A fails to deliver. Party A has no excuse (e.g., Party B's failure to perform). Today's price for the Product at the delivery point exceeded $30. Outcome: Party B's options are as follows: 1. Acting in a commercially reasonably manner, buy replacement Product at COB and receive from Party A the excess of (a) the purchase price of such replacement Product, (plus reasonably incurred costs and transmission costs to COB, if any), expressed in US$, over (b) $30/MWh x 50 MWh/h x 16h.
Remedies for Failure to Deliver/Receive Example 3 (contd.) OR 2. Acting in a commercially reasonably manner, determine the market price of replacement Product at COB and receive from Party A an amount determined by reference to such market price, as follows: Assume that MW Daily Market Report's Weighted Average Index for COB deliveries today is $32.69/MWh; the amount receivable from Party A is the excess of (a) $32.69/MWh x 50 MWh/h x 16h, over (b) $30/MWh x 50 MWh/h x 16h.
Remedies for Failure to Deliver/Receive Example 3 (contd.) Party B is entitled to receive this amount: (a) whether it covers or not (b) if it determines the market price in a commercially reasonable manner, i.e., not the published high or low (c) if the market price determined is for a financial firm product, delivered at or adjusted to the delivery point (d) even if it declines to produce replacement Product using its own generation assets that could have been employed to produce replacement Product.
Remedies for Failure to Deliver/Receive Example 4. Party A agreed to sell Party B 50MWh/h for Peak Hours for the month of November, 1999 for delivery into Cinergy, at a price of $30/MWh. Party B opts for non-firm transmission, suffers an interruption on November 17, and as a result Party A cannot and does not deliver on November 17. On November 17, the price on November 17 for the Product balance of the month of November is $28. Outcome: Since, in accordance with the definition of "Into" Product, Party B is deemed to have failed to receive the Product, Party A's options are as follows: 1. Acting in a commercially reasonable manner, resell the Product and receive from Party B an amount equal to the Contract Price less the sales proceeds (reduced by reasonably incurred costs and additional transmission changes, if any). Assuming a net resale price of $28, the amount receivable from Party B would be ($30 MWh-$28 MWh) x 50 MWh/h x 16 h/day x 9 days.
Remedies for Failure to Deliver/Receive Example 4 (Contd.) OR 2. Acting in a commercially reasonable manner, determine the market price of the Product for the balance of the month of November, e.g. from MW Daily's Market Report, and receive from Party B an amount determined as above, but using the market price instead of the net sales proceeds. Party A is entitled to receive this amount: (a) whether or not the Product was actually resold (b) ) as long as the market price was determined in a commercially reasonable manner, taking into account relevant available market data (c) even if Party A held a trading position (e.g., a put) that would have entitled it to sell the Product at a price in excess of the Contract Price, and elected not to use its trading position to eliminate the loss caused by Party B's failure to receive
Show Me The Money Transaction Payment & Credit Protection
Payment and Transaction Netting • Payment Netting • Significantly reduces exposure to counterparty • Discharge offsetting payment obligations or credits due each party on the same date • One party pays net amount due other party • Transaction Netting • Deliver net difference in quantities owed • Implemented by separate agreement
Payment Netting Mutual debts and payments due on same date Summation of mutual payments, liquidated damages, option premiums, interest, credits due--exclude performance assurance and guaranty amounts No mutual obligations-- Pay when due If event of default or notice given in writing, include in netting the amount of performance assurance Party owing greater amount pays net amount when due
Transaction Netting Bilateral outstanding transactions between same parties, by subsequent agreement, may be offset Amount of energy owed a party offset by energy owed to counterparty Single transaction contract for net energy delivered and received Offsetting transactions terminated Payment netting
Credit Protection • Effective and reciprocal “real-time” credit terms • Adequate assurances of performance and/or collateral thresholds may be required • Subjective vs. objective criteria • Parties identify required financial information and/or collateral requirements on Cover Sheet • Clearly identified events of default (including creditworthiness events of default)
Credit Protection • Initial creditworthiness due diligence • Credit limit determination, posted collateral or guarantees • Ongoing monitoring of counterparty creditworthiness • Current period analysis • Exposure using mark-to-market calculation (Termination Payment) • Forward period exposure analysis
Financial Information(8.1 & 8.2(a)) • Public information concerning counterparty • Public information concerning designated affiliates • Customized information • Information not publicly available or difficult to obtain
Credit Assurances(8.1 & 8.2(b)) • Permits Party to demand performance assurance if Party becomes insecure as to its counterparty’s performance. • Subjective • Performance assurance is collateral in the form of cash, letter(s) of credit, or other acceptable security
Collateral Threshold(8.1 & 8.2(c)) • Party may request counterparty to post performance assurance if hypothetical Termination Payment exceeds certain threshold specified on Cover Sheet
Downgrade Event(8.1 & 8.2(d)) • Party can demand performance assurance if a credit rating agency lowers counterparty or some designated entity’s rating below a level selected on cover sheet
Margin Computation Termination Payment (Party A’s actual exposure) $ 5,452,000 Party B’s Independent Amount $ 5,000,000 TOTAL EXPOSURE $10,452,000 Party B’s Collateral Threshold ($10,000,000) Collateral Already Posted ($ 0) Party B’s Rounding Amount ($ 100,000) NEW PERFORMANCE ASSURANCE $ 500,000
Major Meltdowns and Events of Default Protection from Catastrophic Counterparty Defaults
Credit-related Events of Default • Credit support defaults • When a party fails to satisfy creditworthiness requirements of Master Contract (e.g. failure to post performance assurance) • Cross defaults • Specification that counterparty’s or other designated entity’s (i.e. guarantor) default on an obligation for borrowed money becomes event of default under Master Agreement
Credit-related Events of Default • Guaranator defaults when Party’s guarantor: • Breaches a representation or warranty • Fails to make a payment or otherwise fails to perform • Becomes bankrupt • Permits guaranty not to be in full force • Repudiates or challenges validity of guaranty
Other Events of Default • Non-payment • Bankruptcy • False representations • Failure to perform material covenant • Failure to assume all obligations after a merger or asset transfer
Default Remedies • Temporary suspension of performance • Early termination and winding down trading relationships • Termination payments • Liquidation and net-out (close-out netting) of all transactions • Closeout set-off rights