EFET-TOE Joint Workshop Warsaw, 13 th May Petra Hirsch Director and Counsel

Transcription

1 EFET-TOE Joint Workshop Warsaw, 13 th May 2014 European Federation of Energy Traders Petra Hirsch Director and Counsel Citigroup Global Markets Limited EFET Gas Master Agreement An essential tool to trade gas in the Polish wholesale sector

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3 Agenda Physical Commodities Trading Agreements The EFET Gas Master Agreement why use it? A Quick Canter through the EFET Gas Master Agreement The Gas Appendices Q&A

4 The Challenge: Finding the right agreement for each type of transaction EFET Gas and EFET Power cover continental gas, power and emissions ISDA covers a wide scope of financial products, including commodities IETA offers standard documentation for spot and forward emissions trades Both ISDA and EFET Master Agreements allow parties to collateralise their exposure by adding a CSA

5 The ISDA Master Agreement Physical Power Annex Grid Trade Master Agreement (GTMA) Annex North American Power Annex ISDA MASTER AGREEMENT 2005 Commodity Definitions Physical Gas Annex European Gas Annex (NBP and ZBT*) North American Gas Annex Physical Emissions Annex EU Emissions Allowance Annex US Emissions Allowance Annex Schedule Confirmations Physical Coal Annex Global Physical Coal Annex *out of date

6 Physical Commodity Trading Agreements Power UK GTMA Gas and Power (Emissions) EFET Master Agreements Bespoke IETA Emissions now mainly used for spot LNG Master SCoTA Coal Precious Metals Lease Precious Metals

7 The EFET Master Agreement Credit Support Annex EFET GENERAL AGREEMENT EFET Individual PRISMA Gas Capacity Contract Emissions Allowance Annex Power Election Sheet Confirmation Gas TTF (Netherlands) ZBT (Belgium) NBP (UK) PSV (Italy) PEG (France) Austrian VTP Gaspool (Germany) PSV (Italy) UK Beach Polish VP Appendix

8 The EFET Gas Master Agreement it could be used here.

9 The EFET Gas Master Agreement but for the time being is used mainly here

10 Advantages of the EFET Master Agreement Standardisation Ensures smooth operational processes and avoids back to back risks; allows for speedy negotiations and high volume trading Credit Protection Credit clauses allow parties to monitor each other s creditworthiness over time Insolvency Protection Close-out netting and single agreement character to avoid cherry picking by liquidator.this Agreement and all Individual Contracts form a single agreement and Parties would not enter into Individual Contracts if this was not the case Legal certainty Endorsed by EFET Legal Committee and supported by legal opinions in various jurisdictions

11 3 Concluding and Confirming Individual Contracts The contract can be concluded in any form of communication Contracts can be concluded in any form of communications Contract becomes legally binding from the time the commercial terms are agreed Confirmation merely documents an agreed transaction; standard confirmation templates Many companies send Confirmation for each transaction (regardless of whether they are Seller or Buyer); electronic matching for flow deals common 3.4: Only very few companies maintain authorised trader lists (administratively too burdensome)

12 4 Primary Obligations Delivery and Acceptance Seller Obligation to Schedule and deliver the Contract Quantity at the Delivery Point Buyer Obligation to Schedule and accept the Contract Quantity at the Delivery Point

13 5 Options Provides for definition of simple Put and Call option Premium payable on 5 th Business Day unless otherwise agreed If Option is exercised verbally it requires confirmation in writing No automatic exercise

14 6 Delivery, Measurement, Transportation and Risk Seller represents that it has right to transfer to Buyer full entitlement to the gas, free and clear of encumbrances Measurement of gas in accordance with nomination and allocation arrangements at the Delivery Point Seller bears risk and bears all costs up to the Delivery Point, Buyer at and from the Delivery Point

15 7 Risk and Force Majeure An event beyond reasonable control of Party claiming Force Majeure that it could not reasonably have avoided or overcome makes it impossible for the claiming party to perform its delivery or acceptance obligations

16 7 Force Majeure Interruption or curtailment of gas flows as a result of Transportation Failure 2 legs: Beyond the reasonable control of the party claiming FM Beyond reasonable control of TSO which could not reasonably have been avoided or overcome by it and which makes it impossible for TSO to fulfil its obligations (delivery and acceptance of Gas)

17 7 Force Majeure Planned and unplanned Maintenance is included in Force Majeure unless the maintenance has been notified prior to entering into the Individual Contract Obligation to notify and mitigate effects of Force Majeure Long Term Force Majeure -> Walk-away! 3 months Z x 90/365 1 year and 50% of contracted quantity EFET Gas Force Majeure standard is generally not amended in order to avoid back to back risks!

18 8 Remedies for Failure to Deliver and Accept Failure to deliver (Contract Price Market Price) x Default Quantity + incremental transportation costs and other reasonable and verifiable costs and charges incurred by Buyer Failure to Accept (Contract Price Market Price) x Default Quantity + incremental transportation costs and other reasonable and verifiable costs and charges incurred by Seller Payment in accordance with th of M + 1 or 10 days following receipt of invoice, whichever is later

19 8a Off-Spec Gas Seller to ensure that Natural Gas conforms to Transportation Requirements Delivery of Off-spec Gas constitutes Underdelivery Indemnity against direct loss, damage and expense resulting from Off-Spec gas (unlimited)

20 9 Suspension of Delivery or Acceptance Suspension right only available if a) failure to pay or b) failure by Credit Support Provider to provide, replace or increase guarantee 3 Business Days prior notice required Non-defaulting Party s right to a) Suspension of delivery or acceptance of Natural Gas and b) Withhold payments owed to Defaulting Party

21 10 Termination for Material Reason If Material Reason with respect to a Party has occurred and is continuing, the other Party may terminate the Agreement by giving the other Party notice Notice of Termination for Material Reason orally or in writing if confirmed in writing within 2 Business Days. Notice MUST specify the reason for termination Termination to be effective at terminating party s choice on any day between day on which termination notice has been received and 20 days after such day Automatic Early Termination in the event of Insolvency required by some jurisdictions -> Early Termination Date for all Individual Contract occurs immediately and automatically

22 10 Material Reasons EFET Gas Material Reasons 1. Non Performance 2. Cross Default and Acceleration 3. Winding up Insolvency Attachment Applicable Party or Situation Party and Credit Support Provider Party, Credit Support Provider or Controlling Party Party and Credit Support Provider Notes Failure of a party or its credit support provider to make a payment, to deliver any performance assurance or to perform any other material obligation under: (i) the EFET; or (ii) any credit support document; or (iii) any performance assurance provision. Covers: (i) any payment default related to borrowed money above threshold amount; and (ii) the failure of a party, Credit Support Provider or Controlling Party to make one or more payments in an aggregate amount (individually or collectively) of not less than the threshold amount - Jurisdiction specific wording may be required - Covers: (i) Dissolution; (ii) (iii) (iv) (v) Inability to pay debts; General assignment or composition; Insolvency proceeding are instated against party or Credit Support Provider; Appointment of administration; 4. Failure to Deliver or Accept 5. Representation or Warranty Party Party and Credit Support Provider (vi) Secures party takes possession of all/substantially all assets of party or Credit Support Provider. Covers the failure to deliver or accept (for more than 7 consecutive days or for more than 7 days in aggregate within a period of 60 days) Triggered by misrepresentation made by a party in the EFET or by its Credit Support Provider in the Credit Support Document

23 10 Termination for Material Reason INSOLVENCY EVENT: Law of the incorporation of counterparty applies not law chosen to govern Agreement Close-out netting enforceable? EFET provides up to date netting opinions TERMINATION AMOUNT: Calculation in accordance with 11 Gains (Losses + Costs) No replacement transaction required

24 Close-Out Netting - a reminder _ Close-out netting is process by which, following an early termination of the Agreement: open transactions between two parties are terminated; each terminated transaction is valued; and all the termination values, together with any unpaid amounts, are reduced to a single net amount owed by one party to the other. Not to be confused with payment netting Regulators require written, independent legal opinions in jurisdictions where banks seek to satisfy capital requirements based on net exposure to counterparties under master agreements (ISDA, EFET) The standard for financial institutions is generally a high degree of legal certainty that close-out netting is enforceable; if standard not satisfied, accounting must be done on a gross basis Reduces Credit Risk can reduce exposure in close-out as exposed only up to the net amount of mutual obligations can reduce collateral-posting requirements by netting collateral requirements across agreements Expands Credit Lines Reduces Regulatory Capital Requirements regulators are willing to require a lower amount of capital to cover transactions if netting arrangements are in place

25 14 Taxes 14 Tax All taxes up to the Delivery Point for account of Seller, at and after Delivery Point for account of Buyer New Tax: termination if taxed party is unable to pass on or parties fail to allocate All payments without withholding or deduction unless required by law Payer s obligation to gross-up

26 16 Credit Support 17 Performance Assurance Parties may on Effective Date or upon entering into Individual Contract agree on Credit Support (PCG, bank guarantee, cash etc. ); Credit Support Annex If a Material Adverse Change in respect of other Party has occurred (subjective standard but good faith) the other Party has the right to request Performance Assurance Material Adverse Change: EFET provides for defined list of events (see next slide) but some parties expand list (e.g. add ISDA like language) Letter of Credit, cash or other security reasonably acceptable to other Party

27 17 Material Adverse Change EFET Gas Material Adverse Change 1. Credit rating downgrade or withdrawal Applicable Party or Situation Party, Credit Support Provider (other than a bank) or Controlling Party - Below elected rating(s) Notes 2. Credit rating downgrade or withdrawal Credit Support Provider that is a bank - Below elected rating(s) 3. Breach of financial ratios 4. Decline in Tangible Net Worth 5. Expiry or termination of Credit Support Document or Performance Assurance Party, Credit Support Provider (other than a bank) or Controlling Party Party, Credit Support Provider (other than a bank) or Controlling Party (i) Expiry or termination of Credit Support Document or Performance Assurance; or Financial covenants include: (i) EBIT to interest (ii) Fund from Operations (iii) Total debt to total capitalisation Tangible Net Worth the sum of all paid-up shareholder contributions to the share capital account or any other capital account of the applicable party and any accumulated earnings less any accumulated retained losses and intangible assets including, but limited to, goodwill (ii) (iii) if either is due to expire or terminate within an elected time period; or the failing or ceasing of a Credit Support Document to be in full force or effect (other than in accordance with its terms or the

28 17 Material Adverse Change (Continued) EFET Gas Material Adverse Change 6. Failure or repudiation of Performance Assurance or Credit Support Document 7. Failure or repudiation of Control and Profit Transfer Agreement Applicable Party or Situation Credit Support Provider, Performance Assurance Provider or the other party Controlling party of the other party Notes 8. Impaired ability to perform under the Agreement, Credit Support Document or Control and Profit Transfer Agreement Party, Credit Support Provider (other than a bank) or Controlling Party Subjective test (In the reasonable and good faith opinion of the other party); 9. Amalgamation/merger Party or its Credit Support Provider Covers amalgamation, merger, transfers all or substantially all its assets or reorganises into another entity and any of these events leads to: (A) creditworthiness of the party, Credit Support Provider or any successor entity becoming materially weaker; or (B) successor entity failing to assume all obligations; or (C) benefits of Credit Support Document ceasing or failing to extend to performance by the successor entity

29 19 Assignment Neither Party has right to assign its rights and/or transfer its obligations to a third party without prior consent. Consent not to be unreasonably withheld Election: Assignment to Affiliate without consent if a) Of the same creditworthiness and b) Is incorporated in the same jurisdiction

30 21 Representations and Warranties POWER TO EXECUTE PRINCIPAL NO INSOLVENCY ACTING FOR ITS OWN ACCOUNT ENTITY DULY ORGANISED LICENCES, GOVERNMENTAL AND REGULATORY APPROVALs PRINCIPAL LINE OF BUSUINESS

31 22 Applicable Law and Jurisdiction Option A: English Law and Arbitration at London Court of International Arbitration Option B: German Law and Arbitration at German Institution of Arbitration Some parties agree on ordinary courts e.g. English courts If other law applied prior legal review required!

32 Gas Appendices for Virtual Trading Points TTF (Netherlands)- currently being revised ZBT (Belgium) NBP (UK) PSV (Italy) PEG (France) Austrian VTP Gaspool (Germany) UK Beach Polish VP Appendix

33 Questions and Answers HOW..? WHY..? THANK YOU FOR YOUR ATTENTION!