Here it is.

 -----Original Message-----
From: 	Johnston, Greg  
Sent:	Wednesday, November 07, 2001 9:48 AM
To:	Le Dain, Eric
Subject:	One Way vs. Two Way Payments

I have reviewed the master physical gas agreements for the 10 counterparties (excluding trading companies) at the top of the exposure list to determine whether the contracts contemplate one-way or two-way payments.

1.  Petro Canada Oil & Gas - One Way
2.  Canadian Natural Resources - Two Way
3.  Marathon Canada Limited - One Way
4.  Husky Oil Operations Limited - One Way
5.  Murphy Canada Exploration Company - One Way
6.  Encal Energy Ltd. - One Way
7.  Talisman Energy Inc. - One Way
8.  Premstar Energy Canada Ltd. - Two Way
9.  Rio Alto Exploration Ltd. - One Way
10.  Sunoco Inc. - Two Way

The basic operation of a one way payment provision is that, if the defaulting party has a net in-the-money position based upon the Early Termination Damages calculation, the Early Termination Damages are deemed to be zero and the non-defaulting party is not required to pay that amount to the defaulting party (the defaulting party's position is wiped out).  However, we would still be entitled, prior to default, to call for collateral where a counterparty's out-of-the money position is in excess of its collateral threshold, which would provide us with security to ensure the counterparty continues to pay.  In addition, if the counterparty failed to post such collateral, they would be in default, we could terminate the contract and, as the non-defaulting party, we would be in a position to realize on our in-the-money position.  If, after we received the collateral, we were then to become insolvent or otherwise default under the master, the counterparty could terminate the contract, our mark-to-market position would be wiped out and we would be required to return any unused collateral.

The operation of a two way payment provision is that the early termination damages are calculated by the non-defaulting party and whoever has a net in-the-money position based upon such calculation is owed the termination payment, regardless of whether such party is the defaulting or non-defaulting party.  In other words, unlike a one way payment, if the defaulting party has a net in-the-money position upon termination of the contract, the non-defaulting party will be required to pay that amount to the defaulting party.  Therefore, if we were to become insolvent or otherwise default under a master and we had a net in-the-money position under that master, the counterparty could terminate the contract but we would still be owed our mark-to-market position.  The other point to consider in the situation where there is a two way payment provision is that, of the three counterparty masters above that contain two way payments, all three also contain cherry picking language that, upon the occurrence of an event of default other than insolvency, allows the non-defaulting counterparty to pick and choose which transactions to terminate.  In other words, the counterparty need not terminate all transactions, which could effect the amount otherwise owed to the defaulting party.  Even with cherry-picking, upon the occurrence of an insolvency, all transactions are deemed to terminate, so cherry picking would not be a factor.

You had also asked whether the failure by a party to call for collateral when it is entitled to under a contract would have an impact on the ability of such party to collect on a termination payment owed to it upon termination of the contract.  Other than the fact that the failure to call for collateral may mean that we do not hold credit support that would be usable to offset a termination payment owing if the party obligated to pay fails to pay, the right to call for collateral is just that, a right and not an obligation, and the failure to call for collateral does not colour the right of the party owed the termination payment to require it be paid.

Let me know if you need anything further with respect to this matter.

Greg