Energy Trading and Structured Transactions
Structured Commodity and Derivative Hedges
The acquisition, financing and development of power generation assets saw explosive growth over the past several years, and McDermott’s Energy & Commodities Advisory Practice Group has been involved in some of the largest and most complex structured hedges supporting this activity, including the Texas Genco, Astoria, La Paloma, Moss Landing, Arlington and Griffith transactions. McDermott’s clients, including the energy marketing affiliates of top investment and commercial banks, provide project sponsors with physically or financially settled power or gas hedges that mitigate the sponsors’ exposure to commodity price risk on both fuel (input) and power (output), which in turn allows the sponsors to obtain financing. McDermott has negotiated the documentation packages for such structured hedges and has also analyzed the effect of possible future changes in circumstances that could have detrimental effects on these long-term deals. For example, changes in regulatory regimes or in the nature of products purchased and sold under the hedges (e.g., capacity) may severely affect the cash flow of these projects, which may in turn lead the project sponsors to divest or refinance portions of the project or the overall hedging package.
Long-term Power Purchase, Tolling Agreements and Off-take Agreements
The energy and commodities advisory group has extensive experience structuring and negotiating a wide array of arrangements that power project owners use to reduce their exposure to commodity prices, including long-term power purchase agreements, off-take agreements, tolling agreements, and physical and financial hedges. In a power purchase agreement, the project owner is responsible for its own fuel supply and sells power from the facility to the buyer. In a tolling agreement, the buyer supplies the fuel and receives the resulting power output of the facility—in effect, buying the service of converting fuel into electric energy. McDermott has negotiated a number of variations on this theme, including tolling agreements that provide for a mixture of financial and physical settlement.
Energy Management and Asset Optimization Agreements
McDermott has a wide range of experience negotiating and documenting energy management and asset optimization agreements (EMAs). Asset owners, local distribution companies and others increasingly look to outsource risk management, fuel supply, optimization and operational needs to take advantage of economies of scale and expertise. For example, many merchant generators are now owned by financial investors that need outside expertise to manage the generating facilities, secure fuel supply, and optimize the transportation and transmission rights, as well as hedge associated risks. Typically, an electric generating facility receives supplies of gas to produce power and then sells the power into an ISO system or to end users. Energy managers contract to supply gas to the facility and, concurrently, to market the power in the most efficient way, acting either as a principal or as an agent vis-à-vis the asset owner—in other words, the energy manager optimizes the operations of the facility. The EMA would further define how compensation for the energy manager would work in relation to the spark-spread realized. If the energy manager acts as a principal, the EMA is usually supported by a credit arrangement, since there is a mismatch in the timing of the gas and power receivables and payables. In addition, the EMAs are usually supplemented with ISDA power and gas annexes and other related documentation. McDermott has represented both facility owners and energy managers in negotiating and documenting these complex relationships.
Similarly, more and more natural gas local distribution companies look to outsource supply management and transportation optimization. In these arrangements, a gas marketer may be engaged to procure supply and manage storage and transportation rights.
These agreements implicate important regulatory issues governing ISO operations, tariff filings, and transmission and transportation. They also raise significant credit concerns. McDermott has experience with all these issues to help ensure our clients realize their full contract expectations.
Innovative Credit Support and Collateral Arrangements
The variety of commodities and derivatives trades is only limited by traders’ imagination. A client’s exposure, however, is always quantifiable in terms of the risk to its balance sheet, on the one hand, and the credit support that a counterparty is willing to provide, on the other hand. McDermott has been successful in identifying instances in which clients may face increased exposure, as well as in designing innovative credit arrangements that allow clients to adequately protect their institutional positions while maintaining the flexibility required to remain competitive in the market. These arrangements have utilized traditional credit support mechanisms of the ISDA credit support annexes, EEI collateral annexes, collateralized guaranties, various forms of letters of credit, and security interests in receivables, as well as other more innovative techniques such as CDS, reverse repos and others. By working closely with credit departments of major U.S. and non-U.S. investment banks and derivatives traders, our group remains on the cutting edge of the risk-management field.
Energy/Commodity/Derivatives Trading Agreements
Our energy practice has significant experience in drafting and negotiating master commodity trading agreements and related documentation for over-the-counter physically and financially settled transactions, including ISDA agreements (with and without physical product annexes), EEIs, NAESBs, GasEDIs, “homegrown” master agreements and long-form confirmations, and for all types of commodities, including electricity, natural gas, coal, oil, emissions allowances, renewable energy certificates and agricultural products. We assist our clients in drafting trading documentation templates, advise them on market practices and manage negotiation projects with numerous counterparties. We make it our practice to learn our clients' trading strategies, regulatory philosophies, risk management procedures, credit policies and documentation preferences. We provide our clients with practical, timely legal advice and training that helps them manage legal risks and capitalize on business opportunities.
The energy and commodities group also has extensive experience in the field of municipal commodity transactions and regularly advises clients regarding the unique risks associated with executing swaps, forwards, forward delivery agreements and other hedging arrangements with municipal and governmental entities.
Distressed and Special Situation Energy Asset Trading
McDermott has advised financial institutions considering becoming equity and debt holders in distressed and special situation power generation asset restructuring efforts throughout the United States, including projects such as MACH Gen, La Paloma, Entegra, Liberty, Lake Road, Boston Gen, Metcalf, Milford, Southaven, Granite Ridge, Desert Power and Cottonwood Energy. Building on this experience, McDermott assists current lenders and their agents, new potential debt/equity holders and their downstream trading counterparties, managing members and energy management service providers regarding the following:
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Due diligence of business assumptions and structure, including review of federal and state regulatory, federal/state and local tax, corporate and finance, environmental, bankruptcy, and energy trading/commodities matters
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State and federal regulation of generator restructuring and change of ownership issues
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Development and negotiation of transaction structure and documentation, including, for example, review of the LLC agreement, master restructuring agreements, and old and new credit agreements
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Administration of current lender, agent or managing member duties and rights under credit documents, documentation of any equity restructuring, and matters related to regulatory, corporate, financing, bankruptcy and tax
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Documentation and negotiation of equity interest trading, including debt instruments, confirmations, assignments, participations, risk participations and warrants
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Assistance regarding internal and external organization, information flow and responses to regulatory compliance/certification matters posed by indirect investment in regulated generation assets
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Analysis of implications for affiliates of the investor involved in energy transactions, including FERC-authorized power marketers as well as transitory stock holdings in energy companies
The lawyers of the energy and commodities advisory team provide advice regarding all major, standard offer/default service wholesale power solicitations, including electronic web-based declining clock auctions in New Jersey and Illinois; state-wide request for proposals in Maryland, Delaware and the District of Columbia; bilateral requests for proposals in Connecticut, New Hampshire and Rhode Island; and hybrid solicitations in states such as Ohio and Maine.
Because we participate in working groups, formal comments proceedings and administrative litigations regarding auction market design and implementation with government regulators, we understand your business objectives in the context of the current regulatory environment and offer advice grounded in real-world knowledge. Our lawyers negotiate with regulatory agencies to offer clients advice in matters involving power solicitation rules, bidder qualification and bidding rules, governing master agreements, bi-lateral agreements, and credit requirements and support.
In the area of wholesale power market structure and requirements, we provide counsel on ancillary services, capacity markets and renewable credit trading. We have experience in state market structures, including renewable portfolio standards, and retail switching and migration policies. Our group also regularly counsels on the effects of the bankruptcy of the utility counterparty regarding its wholesale power supply contract obligations resulting from default/standard offer power solicitations. We negotiate renewable credit and generation agreements as part of wholesale “all requirements” product obligations.
We also offer a variety of legislative services to protect your energy-related services and products. We monitor and advise regarding the politics and legislative initiatives affecting wholesale power auction solicitations and results. Members of our team regularly advise clients on the enforceability of legislative initiatives to cap retail rate recovery regarding utility wholesale power cost obligations
