I spent a few hours reading the amended 10-Q that Calpine filed today for the 3 months and 9 months ending 9/30/2001.
The 10-Q concepts of “OCI” and the magnitude of the hedging gains and losses are intimidating.
The 10-Q revealed the magnitude of Calpine’s commitments to buy turbines:
Capital Expenditures -- During the third quarter of 2001, the Company entered into commitments for 12 steam turbine generators from Siemens Westinghouse, one steam turbine generator from Fuji and three combustion turbine generators from Siemens Westinghouse. The above brought the total number of combustion and steam turbines on order to 320 with an approximate value of $9.7 billion, which includes turbines delivered to projects under construction.
Also, some short-sellers have speculated [i.e., spread rumors directly or via their “friends”] that CPN has substantial exposure in the Enron bankruptcy. These short sellers claim that amounts CPN owes the Enron bankruptcy estate CANNOT be offset against the amounts that Enron owes Calpine. A few excerpts from the Amended 10-Q---
For the three and nine months ended September 30, 2001, $767.9 million or 26.3%, and $1,329.8 million or 22.7%, of the Company's revenue was with Enron subsidiaries, primarily Enron Power Marketing, Inc. ("EPMI") and Enron North America Corp. …The Company, primarily CES, purchases significant amounts of fuel and power from ENA and EPMI, giving rise to current accounts payable and open contract fair value positions. These purchases must be included in an overall understanding of the Company's Enron exposure. For the three months ended September 30, 2001, CES had fuel and power purchases from ENA and EPMI of $905.3 million. For the nine months ended September 30, 2001, CES had fuel and power purchases from ENA and EPMI of $1,358.7 million. The sales to and purchases from various Enron subsidiaries are mostly hedging and optimization transactions, and in most cases the purchases and sales are not related and should not be netted to try to gauge the profitability of transactions with Enron subsidiaries.
On November 14, 2001, CES, ENA and EPMI entered into a Master Netting, Setoff and Security Agreement (the "Netting Agreement"). The Netting Agreement permits CES, on the one hand, and ENA and EPMI, on the other hand, to set off amounts owed to each other under an ISDA Master Agreement between CES and ENA, an Enfolio Master Firm Purchase/Sale Agreement between CES and ENA and a Master Energy Purchase/Sale Agreement between CES and EPMI (in each case, after giving effect to the netting provisions contained in each of these agreements). Pursuant to the Netting Agreement, Enron's bankruptcy constituted an event of default, and CES effected an early termination of the ISDA Master Agreement, the Enfolio Master Agreement and the Master Energy Agreement on December 10, 2001. CES is presently determining its losses, damages, attorneys' fees and other expenses arising from the default by Enron and its affiliates, as it is entitled to do pursuant to the underlying documents. The Company expects that there will be a net amount payable to ENA pursuant to these agreements after giving effect to the Netting Agreement, and thus that there will be no net credit exposure to Enron and its affiliates arising from these transactions…..
The Company believes that the Netting Agreement is enforceable in accordance with its terms, based upon the following analysis, although there can be no assurance in this regard. Section 553 of the Bankruptcy Code preserves the right of a creditor who owes a debt to the debtor to offset that debt against a debt owed by the debtor to the creditor, to the extent that such a right was in existence between the parties prior to the bankruptcy. Setoff rights will be preserved in bankruptcy, in general, where four conditions are met: (1) the creditor has a claim against the debtor that arose before the bankruptcy case was filed (a pre-petition claim); (2) the creditor owes a debt to the debtor that also arose pre-petition; (3) the claim and debt are mutual, meaning that the identical entities or individual parties must each owe the other a debt in the same capacity; and (4) the claim and debt are each valid and enforceable.
The Bankruptcy Code expressly permits the non-debtor party to certain types of contracts, such as swap contracts and forward contracts, to terminate and liquidate the contracts after the commencement of a bankruptcy case as the result of a bankruptcy default. Section 556 provides, among other things, that the contractual right of a forward contract merchant to cause the liquidation of a forward contract pursuant to a bankruptcy termination clause will not be stayed, avoided or otherwise limited by operation of any provision of the Bankruptcy Code or by the order of any court in any proceeding under the Bankruptcy Code. Similarly, Section 560 provides, among other things, that the contractual right of any swap participant to cause the termination of a swap agreement pursuant to a bankruptcy termination clause or to offset or net out any termination values or payment amounts under or in connection with a swap agreement shall not be stayed, avoided or otherwise limited by operation of any provision of the Bankruptcy Code or by order of a court or administrative agency in any proceeding under the Bankruptcy Code. Section 362(b)(6) of the Bankruptcy Code authorizes the setoff of any mutual debts and claims arising from forward contracts and securities contracts between a debtor and a non-debtor, and 362(b)(17) of any mutual debts arising from one or more swap agreements between a debtor and a non-debtor. Finally, "swap agreement" is defined by Section 101(53B)(C) of the Bankruptcy Code to include any master agreement relating to derivative instruments of the nature identified in that section (which includes commodity derivatives).
The Company believes that the netting of debts and claims across the underlying master agreements and the transactions entered into pursuant to the master agreements, as provided for in the Netting Agreement, is entitled to the benefits of the provisions of the Bankruptcy Code summarized above although there can be no assurance in this regard. This conclusion is based not only on the language of the relevant statutory provisions, but also the policy underlying their adoption, which was to preserve the ability of counterparties to derivative contracts to immediately net and close out their contracts in the event of a bankruptcy. This is viewed as a beneficial way to mitigate systemic risk that could otherwise arise in a bankruptcy where the presence of the automatic stay, as well as the bankruptcy trustee's broad equitable powers with respect to executory contracts, would cast significant doubt upon the ongoing enforceability of derivative transactions. Separate and apart from these special protections provided by the Bankruptcy Code for forward contracts and swap agreements, the Netting Agreement and the netting provisions of the underlying master agreements are formal written agreements that would in any event be enforceable. The setoffs made by CES are often referred to as "triangular setoffs". A triangular setoff is one where A seeks to offset an obligation it owes to B against a debt that B owes to C. Here, a triangular setoff is one where CES seeks to set off an obligation it owes to ENA against a debt that EPMI owes to CES or, put another way, one where CES seeks to require the Enron entities to aggregate their debts and claims for setoff purposes. While the strict mutuality of Section 553 of the Bankruptcy Code is not present, if the parties all agree in a pre-petition contract that a setoff may be taken between A, B and C, then the agreement may be enforced in bankruptcy to the extent that it is enforceable under applicable nonbankruptcy law. This exception is limited, however, to cases where there is a formal pre-petition contract, such as the Netting Agreement.
In addition to the written Netting Agreement, for nearly a year prior to the bankruptcy filing by Enron and certain of its affiliates, CES and the Enron entities offset and netted debts and claims under all of the forward contracts and swap agreements among the parties pursuant to an oral agreement that was relied upon. It is established that the "formal contract" required to establish the right of setoff under the Bankruptcy Code need not be in writing, so long as there is sufficient evidence indicating a definite understanding or agreement between the debtor and the corporation seeking a setoff.
In assessing its exposure to Enron subsidiaries and affiliates, the Company analyzes its accounts receivable and accounts payable balances on contracts that have already settled and also the fair value (mark to market value) of the contracts that have not settled…. |
