EXHIBIT 99.1
ANNEX A
COLLATERAL ANNEX
TO MASTER NETTING, SETOFF, AND SECURITY AGREEMENT
This Annex A Collateral Annex to Master Netting, Setoff, and Security
Agreement (this "Collateral Annex"), supplements, forms a part of, and is
subject to, the Master Netting, Setoff, and Security Agreement, dated November
14, 2001 (the "Agreement") among Enron Group and Counterparty Group. Capitalized
terms used in this Collateral Annex but not defined herein shall have the
meanings given such terms in the Agreement.
Paragraph 1. Definitions.
For purposes of this Collateral Annex, the following terms have the
respective definitions set forth below. References to Paragraphs are to this
Collateral Annex unless otherwise expressly stated.
"Aggregate Exposure" means, on any Calculation Date, the aggregate
Exposures of all members of a Group determined pursuant to Paragraph 3 of this
Collateral Annex.
"Debtor in Bankruptcy" means any entity, if such entity (i) files a
petition or otherwise commences, authorizes or acquiesces in the commencement of
a proceeding or cause of action under any bankruptcy, insolvency,
reorganization, debt restructuring, liquidation or similar law, or has any such
petition filed or commenced against it, (ii) makes an assignment or any general
arrangement for the benefit of creditors, (iii) otherwise becomes bankrupt or
insolvent (however evidenced), (iv) has a liquidator, administrator, receiver,
trustee, conservator or similar official appointed with respect to it or any
substantial portion of its property or assets, or (v) is generally unable to pay
its debts as they fall due.
"Calculation Date" means any Business Day on which a Party chooses or is
requested by any other Party to make the determinations referred to in
Paragraphs 3, 4, 5 or 8 of this Collateral Annex.
"Cash" means U.S. dollars held by or on behalf of a Group as Performance
Assurance hereunder.
"Collateral Administrator" means, with respect to Enron Group, Enron
North America Corp., and with respect to Counterparty Group, Calpine Energy
Services, L.P., which Collateral Administrators may be changed from time to time
by providing written notice to the other Group.
"Collateral Requirement" shall have the meaning attributed to it in
Paragraph 3(b).
"Counterparty Group's Aggregate Exposure" shall have the meaning
attributed to it in Paragraph 3(a).
"Credit Rating" means with respect to a Group, or its Guarantor, as the
case may be, or other entity, on any date of determination, the respective
ratings then assigned to Enron Corp.'s or Calpine Corporation's, as the case may
be, senior unsecured long-term debt or deposit obligations (not supported by
third party credit enhancement) by S&P, Moody's or the other specified rating
agency or agencies.
"Credit Rating Event" shall have the meaning attributed to it in
Paragraph 6(a)(iv)(A).
"Custodian" means the agent for a Group acting with respect to
Performance Assurance Transferred to such Group in accordance herewith.
"Downgraded Group" shall have the meaning attributed to it in Paragraph
6(a)(iv)(A).
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"Drawing Event" means any of the events set forth in Paragraphs 6(b)(iv)
and (v).
"Eligible Collateral" means collateral in the form of Cash or Letter of
Credit or as otherwise agreed to in writing by the Parties.
"Enron Group's Aggregate Exposure" shall have the meaning attributed to
it in Paragraph 3(a).
"Federal Funds Effective Rate" means the rate for that day opposite the
caption "Federal Funds (Effective)" as set forth in the weekly statistical
release designated as H.15(519), or any successor publication, published by the
Board of Governors of the Federal Reserve System.
"Interest Amount" means with respect to an Interest Period, the
aggregate sum of the amount of interest calculated for each day in that Interest
Period on the principal amount of Cash held by Secured Group on that day,
determined by Secured Group for each such day as follows: (a) the amount of Cash
held on that day; multiplied by (b) the Interest Rate for that day, divided by
(c) 365 or 366, as the case may be in accordance with the number of days in the
year for which the Interest Amount is being determined.
"Interest Period" means the period from (and including) the last
Business Day on which an Interest Amount was Transferred by Secured Group (or if
no Interest Amount has yet been Transferred, the Business Day on which Cash was
Transferred to such Secured Group) to (but excluding) the Business Day on which
the current Interest Amount is to be Transferred.
"Interest Rate" means the Federal Funds Effective Rate as from time to
time in effect.
"Letter of Credit" means an irrevocable, transferable, standby letter of
credit, issued by a major U.S. commercial bank or the U.S. branch office of a
foreign bank, in either case, with a Credit Rating of at least (a) "A-" by S&P
and "A3" by Moody's, if such entity is rated by both S&P and Moody's or (b) "A-"
by S&P or "A3" by Moody's, if such entity is rated by either S&P or Moody's but
not both, substantially in the form set forth in Schedule 1 attached hereto,
with such changes to the terms in that form as the issuing bank may require and
as may be acceptable to the beneficiary thereof.
"Letter of Credit Default" means with respect to an outstanding Letter
of Credit, the occurrence of any of the following events: (a) the issuer of such
Letter of Credit shall fail to maintain a Credit Rating of at least (i) "A-" by
S&P or "A3" by Moody's, if such issuer is rated by both S&P and Moody's, (ii)
"A-" by S&P, if such issuer is rated only by S&P, or (iii) "A3" by Moody's, if
such issuer is rated only by Moody's; (b) the issuer of the Letter of Credit
shall fail to comply with or perform its obligations under such Letter of
Credit; (c) the issuer of such Letter of Credit shall disaffirm, disclaim,
repudiate or reject, in whole or in part, or challenge the validity of, such
Letter of Credit; (d) such Letter of Credit shall expire or terminate, or shall
fail or cease to be in full force and effect at any time during the term of the
Agreement, in any such case without replacement; or (e) the issuer of such
Letter of Credit shall become a Debtor in Bankruptcy; provided, no Letter of
Credit Default shall occur in any event with respect to a Letter of Credit after
the time such Letter of Credit is required to be canceled or returned to a Group
or the issuer thereof in accordance with the terms of this Collateral Annex.
"Material Adverse Change" for Enron Group means the respective Credit
Ratings then assigned to Enron Corp. by S&P or Moody's agencies falls below BB
from S&P or Ba2 from Moody's or if Enron Corp. is not rated by either S&P or
Moody's and, for Counterparty Group, the respective Credit Ratings then assigned
to Calpine Corporation by S&P or Moody's agencies falls below BB from S&P and
Ba2 from Moody's or if Calpine Corporation is not rated by either S&P or
Moody's.
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"Minimum Transfer Amount" means, with respect to Enron Group, $250,000,
and with respect to Counterparty Group, $250,000.
"Moody's means Xxxxx'x Investors Service, Inc. or its successor.
"Net Exposure" shall have the meaning attributed to it in Paragraph
3(a).
"Notification Time" means 10:00 a.m. New York Time on any Business Day.
"Performance Assurance" means all Eligible Collateral and all proceeds
thereof that have been Transferred to or received by a Group hereunder and not
subsequently Transferred in return to the other Group or otherwise received by
the other Group. Any Interest Amount or portion thereof not Transferred pursuant
to Paragraph 6(a)(v) and any Cash received and held by a Group after drawing on
any Letter of Credit will constitute Performance Assurance in the form of Cash.
"Pledging Group" shall have the meaning attributed to it in Paragraph
3(a).
"Posted Collateral" means the value of any Eligible Collateral
previously Transferred to Secured Group.
"Qualified Institution" means a commercial bank or trust company
organized under the laws of the United States or a political subdivision
thereof, with a Credit Rating of at least (a) "A-" by S&P and "A3" by Moody's,
if such entity is rated by both S&P and Moody's or (b) "A-" by S&P or "A3" by
Moody's, if such entity is rated by either S&P or Moody's but not both, and
having a capital and surplus of at least $1,000,000,000.
"Reference Market-maker" means a leading dealer in the relevant market
selected by the Group determining its Exposure in good faith from among dealers
which are not Parties to this Agreement or Affiliates of a Party to this
Agreement and which satisfy all the criteria that such Group applies generally
at the time in deciding whether to offer or to make an extension of credit.
"Rounding Amount" means, with respect to Enron Group, $100,000, and with
respect to Counterparty Group, $100,000.
"S&P" means the Standard & Poor's Rating Group (a division of
XxXxxx-Xxxx, Inc.) or its successor.
"Secured Group" shall have the meaning attributed to it in Paragraph
3(a).
"Transfer" means, with respect to any Performance Assurance or Interest
Amount, and in accordance with the instructions of the Group entitled thereto:
(a) in the case of Cash, payment or delivery by wire transfer of immediately
available funds into one or more bank accounts specified by the recipient; (b)
in the case of Letters of Credit, delivery of the Letter of Credit or an
amendment thereto to the recipient; and (c) in the case of any other type of
Performance Assurance, as agreed to in writing by the Parties.
"Valuation Percentage" means, (i) with respect to Cash, 100%, (ii) with
respect to Letters of Credit, 100% unless either (a) a Letter of Credit Default
shall apply with respect to such Letter of Credit, or (b) 10 or fewer Business
Days remain prior to the expiration of such Letter of Credit, in which case the
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Valuation Percentage with respect to such Letter of Credit shall be zero (0),
and (iii) with respect to any other Eligible Collateral agreed upon by the
Parties, the percentage established by the Parties.
"Value" means with respect to Eligible Collateral that is Cash, the
Valuation Percentage of the face amount thereof, and with respect to any Letter
of Credit, the Valuation Percentage times the stated amount then available under
the Letter of Credit to be unconditionally withdrawn.
Paragraph 2. Grant of Security Interest.
As security for the prompt and complete payment and performance of all
Obligations of Pledging Group, each member of Pledging Group hereby pledges,
assigns, conveys, and transfers to each member of Secured Group, and hereby
grants to Secured Group and each member thereof a present and continuing first
priority security interest in and to, and a general first lien upon and right of
Setoff against, (a) all Performance Assurance which has been or may in the
future be Transferred to, or received by, Secured Group, any member thereof
and/or its Custodian, and all dividends, interest, and other proceeds from time
to time received, receivable, or otherwise distributed in respect of, or in
exchange for, any or all of the foregoing and (b) all right, title, and interest
any member of Pledging Group has in any Obligations of any member of Secured
Group to any member of Pledging Group, together with all contract rights in
respect of such Obligations, other than any Final Settlement Amount payable by
Secured Group to Pledging Group. Each member of Pledging Group agrees to take
such action as Secured Group reasonably requests in order to perfect Secured
Group's and its members' continuing security interest in, lien on, and right of
Setoff against such Performance Assurance and grants authority to Secured
Group's Collateral Administrator to file financing statements or take such other
actions necessary to perfect the foregoing interests.
Paragraph 3. Calculations of the Collateral Requirement.
(a) On any Calculation Date, (i) the Exposure for each Enron Party under
each Underlying Master Agreement shall be calculated and (ii) the Exposure for
each Counterparty Party under each Underlying Master Agreement shall be
calculated. The Exposures of each Enron Party to each Counterparty Party under
each Underlying Master Agreement shall be aggregated to determine the "Enron
Group's Aggregate Exposure" to Counterparty Group. The Exposures of each
Counterparty Party to each Enron Party under each Underlying Master Agreement
shall be aggregated to determine the "Counterparty Group's Aggregate Exposure"
to Enron Group. The Group having the greater Aggregate Exposure at any time
("Secured Group") shall be deemed to have a "Net Exposure" to the other Group
("Pledging Group") equal to the difference between Secured Group's Aggregate
Exposure and Pledging Group's Aggregate Exposure.
(b) The "Collateral Requirement" for Pledging Group means the
determination by Secured Group of (i) subject to Paragraph 3(c), Secured Group's
Net Exposure minus (ii) the sum of:
(A) Pledging Group's Exposure Threshold; plus
(B) Posted Collateral.
(c) Whenever Pledging Group's Exposure Threshold is zero (0) on account
of the occurrence of a Material Adverse Change or Default with respect to
Pledging Group, then the amount in Paragraph 3(b) shall equal 125% of Secured
Group's Net Exposure.
Paragraph 4. Delivery of Performance Assurance.
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On any Calculation Date on which (a) no Default or Potential Event of
Default has occurred and is continuing with respect to Secured Group, (b) no
Underlying Master Agreements Close-Out has occurred or been designated as a
result of a Default with respect to Secured Group, and (c) Pledging Group's
Collateral Requirement equals or exceeds its Minimum Transfer Amount, then
Secured Group may demand that Pledging Group Transfer to Secured Group, and
Pledging Group shall, after receiving such notice from Secured Group, Transfer,
or cause to be Transferred to Secured Group, Performance Assurance for the
benefit of Secured Group, in an amount and with a Value at least equal to
Pledging Group's Collateral Requirement. The amount of Performance Assurance
required to be Transferred hereunder shall be rounded up to the nearest integral
multiple of the Rounding Amount. Unless otherwise agreed in writing by the
Parties, Performance Assurance demanded of Pledging Group on or before the
Notification Time on a Business Day shall be Transferred by the close of
business on the next Business Day, and if demanded after the Notification Time
on a Business Day shall be Transferred by the close of business on the second
following Business Day. Any Letter of Credit shall be delivered to such address
as Secured Group shall specify and any such demand made by Secured Group
pursuant to this Paragraph 4 shall specify account information for the account
to which Performance Assurance in the form of Cash shall be delivered.
Paragraph 5. Reduction and Substitution of Performance Assurance.
(a) On any Business Day (but no more frequently than weekly with respect
to Letters of Credit and daily with respect to Cash), if Posted Collateral
exceeds Secured Group's Exposure to Pledging Group minus Pledging Group's
Exposure Threshold, Pledging Group may request a reduction in the amount of
Performance Assurance previously Transferred by Pledging Group for the benefit
of Secured Group in an amount equal to such excess; provided, however, that
Secured Group shall not be required to effect a reduction in Performance
Assurance if a Default or Potential Event of Default with respect to Pledging
Group shall have occurred and be continuing, or an Underlying Master Agreements
Close-Out shall have occurred or been designated as a result of a Default with
respect to Pledging Group. A permitted reduction in Performance Assurance may be
effected by the Transfer of Cash to Pledging Group or the reduction of the
amount of an outstanding Letter of Credit previously issued for the benefit of
Secured Group. Pledging Group shall have the right to specify the means of
effecting the reduction in Performance Assurance. In all cases, the cost and
expense of reducing Performance Assurance (including, without limitation, the
reasonable costs, expenses, and attorneys' fees of Secured Group) shall be borne
by Pledging Group. Unless otherwise agreed in writing by the Parties, if
Pledging Group's reduction demand is made on or before the Notification Time on
a Business Day, then Secured Group shall have one Business Day to effect a
permitted reduction in Performance Assurance if such reduction is to be effected
by the return of Cash to Pledging Group, and if made after the Notification Time
on a Business Day, then Secured Group shall have two Business Days to effect
such a permitted reduction by return of Cash. If a permitted reduction in
Performance Assurance is to be effected by a reduction in the amount of an
outstanding Letter of Credit previously issued for the benefit of Secured Group,
Secured Group shall not unreasonably withhold its consent to a commensurate
reduction in the amount of such Letter of Credit and shall promptly take such
action as is reasonably necessary to effectuate such reduction.
(b) Unless (i) a Default or Potential Event of Default with respect to
Pledging Group shall have occurred and be continuing or (ii) an Underlying
Master Agreements Close-Out has occurred or been designated as a result of a
Default with respect to Pledging Group, Pledging Group may substitute
Performance Assurance for other existing Performance Assurance of equal Value
upon one Business Day's written notice, provided such notice is given on or
before the Notification Time, and upon two Business Days' written notice, if
such notice is given after the Notification Time, to Secured Group; provided, if
such substitute Performance Assurance is of a type not otherwise approved by
this Collateral Annex, then Secured Group must consent to such substitution.
Upon the Transfer to Secured Group of
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the substitute Performance Assurance, Secured Group shall Transfer the relevant
replaced Performance Assurance to Pledging Group. Notwithstanding anything
herein to the contrary, no such substitution shall be permitted unless (i) the
substitute Performance Assurance is Transferred simultaneously or has been
Transferred to Secured Group prior to the release of the Performance Assurance
to be returned to Pledging Group and, in either case, the security interest in,
and general first lien upon, such substituted Performance Assurance granted
pursuant hereto in favor of Secured Group shall have been perfected as required
by applicable law and shall constitute a first priority perfected security
interest therein and general first lien thereon, and (ii) after giving effect to
such substitution, the Value of such substitute Performance Assurance shall
equal the greater of Pledging Group's Collateral Requirement or Pledging Group's
Minimum Transfer Amount. Each substitution of Performance Assurance shall
constitute a reaffirmation by Pledging Group that the substituted Performance
Assurance shall be subject to and governed by the terms and conditions of this
Collateral Annex, including, without limitation, the security interest in,
general first lien on and right of offset against, such substituted Performance
Assurance granted pursuant hereto in favor of Secured Group pursuant to
Paragraph 2.
(c) The Transfer of any Performance Assurance by Secured Group in
accordance with this Paragraph 5 shall be deemed a release by Secured Group of
its security interest, general first lien and right of offset granted pursuant
to Paragraph 2 hereof only with respect to such returned Performance Assurance.
In connection with each Transfer of any Performance Assurance pursuant to this
Paragraph 5, Pledging Group will, upon request of Secured Group, execute a
receipt showing the Performance Assurance Transferred to it.
(d) Any Transfer of or receipt for Performance Assurance effected by a
Custodian in accordance herewith for Secured Group shall satisfy the obligation
of Secured Group in respect thereof.
Paragraph 6. Administration of Performance Assurance.
(a) Cash. Performance Assurance provided in the form of Cash to Secured
Group shall be subject to the following provisions.
(i) Enron Group and its Custodian will be entitled to hold Cash pursuant
hereto provided the following conditions applicable to it are satisfied.
(A) Enron Group is not in Default and a Material Adverse Change has not
occurred with respect to Enron Group.
(B) Cash may be held only in the following jurisdictions: Any
jurisdiction within the United States.
(C) The Custodian is a Qualified Institution approved by Counterparty
Group (which approval shall not be unreasonably withheld). The Custodian
shall hold the Cash in a segregated, safekeeping or custody account
within the Custodian with the title of such account indicating that the
property contained therein is being held as Cash for the ownership of
Counterparty Group, subject to the security interest of Enron Group.
(ii) Counterparty Group and its Custodian will be entitled to hold Cash
pursuant hereto provided the following conditions applicable to it are
satisfied.
(A) Counterparty Group is not in Default and a Material Adverse Change
has not occurred with respect to Counterparty Group.
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(B) Cash may be held only in the following jurisdictions: Any
jurisdiction within the United States.
(C) The Custodian is a Qualified Institution approved by Enron Group
(which approval shall not be unreasonably withheld). The Custodian shall
hold the Cash in a segregated, safekeeping or custody account within the
Custodian with the title of such account indicating that the property
contained therein is being held as Cash for the ownership of Enron
Group, subject to the security interest of Counterparty Group.
(iii) If a Group is entitled to hold Cash, then it will be entitled to
hold Cash or to appoint a Custodian to hold Cash for it provided that the
conditions for holding Cash that are set forth above for such Group and its
Custodian are satisfied. If such Group is not entitled to hold Cash, then the
provisions of Paragraph 6(a)(iv)(A) shall not apply with respect to such Group
and Cash shall be held in a Qualified Institution. Upon notice by Secured Group
to Pledging Group of the appointment of a Custodian, Pledging Group's
obligations to make any Transfer will be discharged by making the Transfer to
that Custodian. The holding of Cash by a Custodian will be deemed to be the
holding of Cash by Secured Group for which the Custodian is acting. If Secured
Group or its Custodian fails to satisfy any conditions for holding Cash as set
forth above or if Secured Group is not entitled to hold Cash at any time, then
Secured Group will Transfer, or cause its Custodian to Transfer, the Cash to a
Qualified Institution, with the Group not eligible to hold Cash being considered
the Downgraded Group (as defined below). Secured Group will be liable for the
acts or omissions of its Custodian to the same extent that Secured Group would
be liable hereunder for its own acts or omissions.
(iv) The following provisions concerning use of Cash shall apply.
(A) Notwithstanding the provisions of applicable law, if no Default has
occurred and is continuing with respect to Secured Group and no
Underlying Master Agreements Close-Out has occurred or been designated
as a result of a Default with respect to Secured Group, then Secured
Group shall have the right to sell, pledge, rehypothecate, assign,
invest, use, commingle or otherwise use in its business any Cash that it
holds as Performance Assurance hereunder, free from any claim or right
of any nature whatsoever of Pledging Group, including any equity or
right of redemption by Pledging Group; provided, if a Group or its
Custodian is not eligible to hold Cash pursuant to this Paragraph 6(a)
(such Group shall be the "Downgraded Group" and the event that caused it
or its Custodian to be ineligible to hold Cash shall be a "Credit Rating
Event") then the provisions of Paragraph 6(a)(iv)(B) shall apply.
(B) The provisions of Paragraph 6(a)(iv)(A) will not apply with respect
to the Downgraded Group. The Downgraded Group shall be required to
deliver (or cause to be delivered) not later than the close of business
on the next Business Day following such Credit Rating Event all Cash in
its possession or held on its behalf to a Qualified Institution approved
by the non-Downgraded Group (which approval shall not be unreasonably
withheld), to a segregated, safekeeping or custody account (the
"Collateral Account") within such Qualified Institution with the title
of the account indicating that the property contained therein is being
held as Cash for the Downgraded Group. The Qualified Institution shall
serve as Custodian with respect to the Cash in the Collateral Account,
and shall hold such Cash in accordance with the terms of this Collateral
Annex and for the security interest of the Downgraded Group and, subject
to such security interest, for the ownership of the non-Downgraded
Group. The Qualified Institution holding the Cash will invest and
reinvest or procure the investment and reinvestment of the Cash in
accordance with the written instructions of Pledging Group, subject to
the approval of such instructions by the Downgraded Group (which
approval shall not be unreasonably withheld),
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provided that the Qualified Institution shall not be required to so
invest or reinvest or procure such investment or reinvestment if an
Event of Default or Potential Event of Default with respect to Pledging
Group shall have occurred and be continuing. The Downgraded Group shall
have no responsibility for any losses resulting from any investment or
reinvestment effected in accordance with Pledging Group's instructions.
(v) So long as no Default or Potential Event of Default with respect to
Pledging Group has occurred and is continuing, and no Underlying Master
Agreements Close-Out has occurred or been designated as the result of a Default
with respect to Pledging Group, and to the extent that an obligation to Transfer
Performance Assurance would not be created or increased by the Transfer, in the
event that Secured Group is holding Cash, Secured Group will Transfer to
Pledging Group, in lieu of any interest or other amounts paid or deemed to have
been paid with respect to such Cash (all of which may be retained by Secured
Group), the Interest Amount. Pledging Group shall invoice Secured Group monthly
setting forth the calculation of the Interest Amount due, and Secured Group
shall make payment thereof by the later of the third Business Day of the first
month after the last month to which such invoice relates or the third Business
Day after the day on which such invoice is received. On or after the occurrence
of a Potential Event of Default or a Default with respect to Pledging Group or
an Underlying Master Agreements Close-Out as a result of a Default with respect
to Pledging Group, Secured Group shall retain any such Interest Amount as
additional Performance Assurance hereunder until the obligations of Pledging
Group under the Agreement have been satisfied in the case of an Underlying
Master Agreements Close-Out or for so long as such Default is continuing in the
case of a Default.
(b) Letters of Credit. Performance Assurance provided in the form of a
Letter of Credit shall be subject to the following provisions.
(i) Unless otherwise agreed to in writing by the Parties, each Letter of
Credit shall be maintained for the benefit of Secured Group. Pledging Group
shall (A) renew or cause the renewal of each outstanding Letter of Credit on a
timely basis as provided in the relevant Letter of Credit, (B) if the bank that
issued an outstanding Letter of Credit has indicated its intent not to renew
such Letter of Credit, provide either a substitute Letter of Credit or other
Eligible Collateral, in each case at least ten Business Days prior to the
expiration of the outstanding Letter of Credit, and (C) if a bank issuing a
Letter of Credit shall fail to honor Secured Group's properly documented request
to draw on an outstanding Letter of Credit, provide for the benefit of Secured
Group either a substitute Letter of Credit that is issued by a bank acceptable
to Secured Group or other Eligible Collateral, in each case within one Business
Day after such refusal.
(ii) As one method of providing Performance Assurance, Pledging Group
may increase the amount of an outstanding Letter of Credit or establish one or
more additional Letters of Credit.
(iii) Upon the occurrence of a Letter of Credit Default, Pledging Group
agrees to deliver to Secured Group either a substitute Letter of Credit or other
Eligible Collateral, in each case on or before the first Business Day after the
occurrence thereof (or the fifth Business Day after the occurrence thereof if
only clause (a) under the definition of Letter of Credit Default applies).
(iv) Upon or at any time after the occurrence of (A) a Default with
respect to Pledging Group, (B) a failure by the Pledging Group to renew a Letter
of Credit within the time period set forth in this Agreement, or (C) if an Early
Termination Date has occurred or been designated under an Underlying Master
Agreement as a result of a Default with respect to Pledging Group, then Secured
Group may draw up to the entire, undrawn portion of any outstanding Letter of
Credit upon submission to the bank issuing such Letter of Credit of one or more
certificates specifying that such Default or Early Termination Date resulting
from such Default has occurred and is continuing. Cash proceeds received from
drawing upon
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the Letter of Credit shall be deemed Performance Assurance as security for
Pledging Group's Obligations to Secured Group and Secured Group shall have the
rights and remedies set forth herein with respect to such Cash proceeds.
(v) Upon or at any time after the occurrence of an Early Termination
Date under an Underlying Master Agreement occasioned for any reason other than a
Default and the failure of the relevant member of Pledging Group to make all
payments due and owing to the relevant member of Secured Group in accordance
with the terms of the Underlying Master Agreement, then Secured Group may draw
on any outstanding Letter of Credit in an amount equal to the amount owing to
its relevant member upon submission to the bank issuing such Letter of Credit of
one or more certificates specifying that such Early Termination Date occurred
and the amount owing.
(vi) In all cases, notwithstanding Secured Group's receipt of Cash under
any Letter of Credit, Pledging Group shall remain liable for any failure to
Transfer sufficient Performance Assurance or for any amounts owing to Secured
Group and remaining unpaid after the application of the amounts so drawn by
Secured Group. In all cases, the costs and expenses (including, without
limitation, to the reasonable costs, expenses, and attorneys' fees of Secured
Group) of establishing, renewing, substituting, canceling, and increasing the
amount of a Letter of Credit shall be borne by Pledging Group.
(c) Care of Performance Assurance. Beyond the exercise of reasonable
care in the custody thereof, Secured Group shall have no duty as to any
Performance Assurance in its possession or control or in the possession or
control of any Custodian or any income thereon or as to the preservation of
rights against prior parties or any other rights pertaining thereto. Secured
Group shall be deemed to have exercised reasonable care in the custody and
preservation of the Performance Assurance in its possession, and/or in the
possession of its Custodian, if the Performance Assurance is accorded treatment
substantially equal to that which it accords its own property, and shall not be
liable or responsible for any loss or damage to any of the Performance
Assurance, or for any diminution in the value thereof, by reason of the act or
omission of any Custodian selected by Secured Group in good faith except to the
extent such loss or damage is the result of such Custodian's willful misconduct
or negligence. Unless held by a Custodian and subject to Paragraph 6(a)(iv)(A),
Secured Group shall at all times retain possession or control of any Performance
Assurance delivered to it. The holding of Performance Assurance by a Custodian
for the benefit of Secured Group shall be deemed to be the holding and
possession of such Performance Assurance by Secured Group for the purpose of
perfecting the security interest in the Performance Assurance. Except as
otherwise provided in paragraph 6(a)(iv), nothing in this Collateral Annex shall
be construed as requiring Secured Group to select a Custodian for the keeping of
Performance Assurance for its benefit.
(d) Collateral Administrator. The Collateral Administrator for each
Group shall act on behalf of its Group in connection with the performance of all
duties and the exercise of all rights in respect of Collateral and Performance
Assurance under the Agreement. Each Counterparty Party does hereby appoint the
Collateral Administrator for Counterparty Group as its Collateral Administrator
hereunder and ratifies and confirms any and all acts of such Collateral
Administrator as its own. Each Enron Party does hereby appoint the Collateral
Administrator for Enron Group as its Collateral Administrator hereunder and
ratifies and confirms any and all acts of such Collateral Administrator as its
own. The performance of such rights and duties by the Collateral Administrator
for each Group shall satisfy the obligations of, and be deemed to effect the
rights of, each member of the relevant Group.
(e) Default. For purposes of Section 2(a)(iii) of the Agreement insofar
as same pertains to covenants set forth in this Collateral Annex, a Default will
exist if: (i) with respect to any required Transfer of Eligible Collateral or
Interest Amount, as applicable, the failure to Transfer continues for two
Business Days after notice of failure has been given to the applicable Group;
(ii) with respect to
9
restrictions set forth in Paragraph 6(a)(iv), the failure to comply continues
for five Business Days after notice of failure has been given to the applicable
Group; and (iii) with respect to all covenants set forth in this Collateral
Annex other than those set forth in the foregoing clauses (i) and (ii), the
failure to comply continues for 2 Business Days after notice of failure has been
given to the applicable Group.
Paragraph 7. Exercise of Rights Against Performance Assurance.
(a) In the event that (i) a Default with respect to Pledging Group has
occurred and is continuing, (ii) a failure by the Pledging Group to renew a
Letter of Credit within the time period set forth in this Agreement, or (iii) an
Underlying Master Agreements Close-Out has occurred or been designated as a
result of a Default or failure to renew a Letter of Credit with respect to
Pledging Group, Secured Group may exercise any one or more of the rights and
remedies provided under the Agreement, including, without limitation, this
Collateral Annex, or as otherwise available under applicable law. Without
limiting the foregoing, if at any time (i) a Default with respect to Pledging
Group has occurred and is continuing, (ii) a failure by the Pledging Group to
renew a Letter of Credit within the time period set forth in this Agreement or
(iii) or an Underlying Master Agreements Close-Out has occurred or been
designated as a result of a Default or a failure to renew a Letter of Credit
with respect to Pledging Group, then Secured Group may, in its sole discretion,
exercise any one or more of the following rights and remedies:
(A) all rights and remedies available to a secured party under the
uniform commercial code of the jurisdiction in which the Performance
Assurance is being held and any other applicable jurisdiction and other
applicable laws with respect to the Performance Assurance held by or for
the benefit of Secured Group;
(B) the right to Setoff any Performance Assurance held by or for the
benefit of Secured Group against and in satisfaction of any amount
payable by Pledging Group in respect of any of its Obligations;
(C) the right to draw on any outstanding Letter of Credit issued for its
benefit; and/or
(D) the right to liquidate any Performance Assurance held by or for the
benefit of Secured Group through one or more public or private sales or
other dispositions with such notice, if any, as may be required by
applicable law, free from any claim or right of any nature whatsoever of
Pledging Group, including any right of equity or redemption by Pledging
Group (with Secured Group having the right to purchase any or all of the
Performance Assurance to be sold) and to apply the proceeds from the
liquidation of such Performance Assurance to and in satisfaction of any
amount payable by Pledging Group in respect of any of its Obligations in
such order as Secured Group may elect.
(b) Pledging Group hereby irrevocably constitutes and appoints the
Collateral Administrator for Secured Group and any officer or agent thereof,
with full power of substitution, as Pledging Group's true and lawful
attorney-in-fact with full irrevocable power and authority to act in the name,
place and stead of Pledging Group, or any member thereof, or in the name of
Secured Group, or any member thereof, from time to time in such Collateral
Administrator's discretion, for the purpose of taking any and all action and
executing and delivering any and all documents or instruments which may be
necessary or desirable to accomplish the purposes of Paragraph 7(a).
(c) For the avoidance of doubt, it is hereby acknowledged that Secured
Group shall be under no obligation to prioritize the order with respect to which
it exercises any one or more of its rights and remedies provided under the
Agreement, including, without limitation, this Collateral Annex, or as
10
otherwise available under applicable law. Pledging Group shall in all events
remain liable to Secured Group for any amount payable by Pledging Group in
respect of any of its Obligations remaining unpaid after any such liquidation,
application and set off.
(d) If at any time (i) a Default with respect to Secured Group has
occurred and is continuing or (ii) an Underlying Master Agreements Close-Out has
occurred or been designated as a result of a Default with respect to Secured
Group and a Default with respect to the Pledging Group has not occurred, then:
(A) Secured Group will be obligated immediately to Transfer all
Performance Assurance, including any Letter of Credit, and the Interest
Amount, if any, to Pledging Group, or in respect of any Letter of Credit
to the issuer thereof;
(B) Pledging Group may do any one or more of the following: (1) exercise
any of the rights and remedies of a pledgor with respect to the
Performance Assurance, including any such rights and remedies under law
then in effect; (2) to the extent that the Performance Assurance or the
Interest Amount is not Transferred to Pledging Group as required in (A)
above, Setoff amounts payable to Secured Group against the Performance
Assurance (other than Letters of Credit) held by Secured Group or to the
extent its rights to Setoff are not exercised, withhold payment of any
remaining amounts payable by Pledging Group, up to the value of any
remaining Performance Assurance held by Secured Group, until the
Performance Assurance is Transferred to Pledging Group; and (3) exercise
rights and remedies available to Pledging Group under the terms of any
Letter of Credit; and
(C) Secured Group shall be prohibited from drawing on any Letter of
Credit that has been posted by Pledging Group for its benefit.
Paragraph 8. Disputed Calculations
(a) If Pledging Group shall dispute the amount of Performance Assurance
requested by Secured Group and such dispute relates to the amount of the Net
Exposure claimed by Secured Group, then Pledging Group shall (i) notify Secured
Group of the existence and nature of the dispute not later than the Notification
Time on the first Business Day following the date that the demand for
Performance Assurance is made by Secured Group, and (ii) provide Performance
Assurance to or for the benefit of Secured Group in an amount equal to Pledging
Group's own estimate, made in good faith and in a commercially reasonable
manner, of its Collateral Requirement. If Secured Group shall dispute the amount
of Performance Assurance to be reduced by Secured Group and such dispute relates
to the amount of the Net Exposure claimed by Secured Group, then Secured Group
shall (i) notify Pledging Group of the existence and nature of the dispute not
later than the Notification Time on the first Business Day following the date
that the demand to reduce Performance Assurance is made by Pledging Group, and
(ii) effect the reduction of Performance Assurance to or for the benefit of
Pledging Group in an amount equal to Secured Group's own estimate, made in good
faith and in a commercially reasonable manner, of Pledging Group's Collateral.
(b) In all such cases, the Parties thereafter shall promptly consult
with each other in order to reconcile the two conflicting amounts. If the
Parties have not been able to resolve their dispute on or before the first
Business Day following the date that the demand was made, then Secured Group
shall recalculate its Net Exposure by requesting quotations from two Reference
Market-makers for the purpose of recalculating the Exposure of each Transaction
in respect of which the Parties disagree (taking the arithmetic average of those
obtained to obtain the average Exposure). Secured Group shall forthwith inform
Pledging Group of the results of such recalculation in reasonable detail.
Performance Assurance
11
shall thereupon be provided, returned, or reduced, if necessary, on the next
Business Day in accordance with the results of such recalculation.
Paragraph 9. Covenants; Representations and Warranties; Miscellaneous.
(a) Pledging Group will execute and deliver to Secured Group (and to the
extent permitted by applicable law, Pledging Group hereby authorizes Secured
Group to execute and deliver, in the name of Pledging Group or otherwise) such
financing statements, assignments and other documents and do such other things
relating to the Performance Assurance and the security interest granted under
this Collateral Annex, including, without limitation, any action Secured Group
may deem necessary or appropriate to perfect or maintain perfection of its
security interest in the Performance Assurance, and Pledging Group shall pay all
costs relating to its delivery of Performance Assurance and the maintenance and
perfection of the security interest therein.
(b) On each day on which Performance Assurance is held by Secured Group
and/or its Custodian under the Agreement, including, without limitation, this
Collateral Annex, Pledging Group hereby represents and warrants that:
(i) Pledging Group has good title to and is the sole owner of such
Performance Assurance, and the execution, delivery and performance of the
covenants and agreements of the Agreement, including, without limitation, this
Collateral Annex, do not result in the creation or imposition of any lien or
security interest upon any of its assets or properties, including, without
limitation, the Performance Assurance, other than the security interests and
liens created under the Agreement;
(ii) upon the Transfer of Performance Assurance by Pledging Group to
Secured Group and/or its Custodian, Secured Group shall have a valid and
perfected first priority continuing security interest therein, free of any
liens, claims or encumbrances, except those liens, security interests, claims or
encumbrances arising by operation of law that are given priority over a
perfected security interest;
(iii) Secured Group has a valid and perfected first priority continuing
security interest in the Performance Assurance, free of any liens, claims or
encumbrances, except those liens, claims or encumbrances arising by operation of
law that are given priority over a perfected security interest; and
(iv) it is not and will not become a party to or otherwise be bound by
any agreement, other than the Agreement, which restricts in any manner the
rights of any present or future holder of any of the Performance Assurance with
respect hereto.
(c) The Agreement, including, without limitation, this Collateral Annex,
has been and is made solely for the benefit of the Parties and their permitted
successors and assigns, and no other person, partnership, association,
corporation or other entity shall acquire or have any right under or by virtue
hereof.
(d) Pledging Group shall pay on request and indemnify Secured Group
against any taxes (including, without limitation, any applicable transfer taxes
and stamp, registration or other documentary taxes), assessments, or charges
that may become payable by reason of the security interests, general first lien
and right of offset granted under, or the execution, delivery, performance or
enforcement of, the Agreement, including, without limitation, this Collateral
Annex, as well as any penalties with respect thereto (including, without
limitation costs and reasonable fees and disbursements of counsel). Each member
of Pledging Group agrees to pay Secured Group for all reasonable expenses
(including without limitation, court costs and reasonable fees and disbursements
of counsel) incurred by it in connection with
12
the enforcement of, or suing for or collecting any amounts payable by it under,
the Agreement, including, without limitation, this Collateral Annex.
(e) No failure or delay by either Group hereto in exercising any right,
power, privilege, or remedy hereunder shall operate as a waiver thereof.
(f) The headings in the Collateral Annex are for convenience of
reference only, and shall not affect the meaning or construction of any
provision thereof.
13
SCHEDULE 1 TO COLLATERAL ANNEX
IRREVOCABLE STANDBY LETTER OF CREDIT FORMAT
DATE OF ISSUANCE: _______________
[Address]
Re: Credit No. _______________
We hereby establish our Irrevocable Transferable Standby Letter of
Credit in your favor for the account of _______________________ (the "Account
Group"), for the aggregate amount not exceeding ______________________ United
States Dollars ($___________), available to you at sight upon demand at our
counters at (Location) on or before the expiration hereof against presentation
to us of one or more of the following statements, dated and signed by [Enron
North America Corp.] [COUNTERPARTY COLLATERAL ADMINISTRATOR]:
1. "A Default (as defined in the Master Netting, Setoff, and Security
Agreement dated as of ________ among ______________, as the same may be
amended (the "Master Agreement")) has occurred and is continuing with
respect to the Account Group or any member of the Account Group under the
Master Agreement and no Default has occurred and is continuing with respect
to the beneficiary of this Letter of Credit or any other member of its Group
(as defined in the Master Agreement). Wherefore, the undersigned does hereby
demand payment of $_________________"; or
2. "An Underlying Master Agreements Close-Out (as defined in the Master
Netting, Setoff, and Security Agreement dated as of ________ among
______________, as the same may be amended (the "Master Agreement")) has
occurred or been designated as a result of a Default with respect to Account
Group or any member of the Account Group under the Master Agreement and no
Default has occurred and is continuing with respect to the beneficiary of
this Letter of Credit or any other member of its Group (as defined in the
Master Agreement). Wherefore, the undersigned does hereby demand payment of
the entire undrawn amount of the Letter of Credit"; and
3. "An Early Termination Date under an Underlying Master Agreement (as
defined in the Master Netting, Setoff, and Security Agreement dated as of
________ among ______________, as the same may be amended (the "Master
Agreement")) occasioned by reason other than a Default (as defined in the
Master Agreement) has occurred and the Account Group or any member of the
Account Group has failed to make all payments due and owing to beneficiary
of this Letter of Credit or any other member of its Group (as defined in the
Master Agreement). Wherefore, the undersigned does hereby demand payment of
$__________________."
The amount which may be drawn by you under this Letter of Credit shall
be automatically reduced by the amount of any drawings paid through the Issuing
Bank referencing this Letter of Credit No. ____. Partial drawings are permitted
hereunder.
We hereby agree with you that documents drawn under and in compliance
with the terms of this Letter of Credit shall be duly honored upon presentation
as specified.
This Letter of Credit shall be governed by the Uniform Customs and
Practice for Documentary Credits, 1993 Revision, International Chamber of
Commerce Publication No. 500 (the "UCP"), except to
14
the extent that the terms hereof are inconsistent with the provisions of the
UCP, including but not limited to Articles 13(b) and 17 of the UCP, in which
case the terms of this Letter of Credit shall govern.
With respect to Article 13(b) of the UCP, the Issuing Bank shall have a
reasonable amount of time, not to exceed three (3) banking days following the
date of its receipt of documents from the beneficiary, to examine the documents
and determine whether to take up or refuse the documents and to inform the
beneficiary accordingly.
In the event of an Act of God, riot, civil commotion, insurrection, war
or any other cause beyond our control that interrupts our business and causes
the place for presentation of this Letter of Credit to be closed for business on
the last day for presentation, the expiry date of this Letter of Credit will be
automatically extended without amendment to a date thirty (30) calendar days
after the place for presentation reopens for business.
This Letter of Credit is transferable, and we hereby consent to such
transfer, but otherwise may not be amended, changed or modified without the
express written consent of the beneficiary, the Issuing Bank and the Account
Group.
[BANK SIGNATURE]
15
