Client Services / Energy and Derivatives Markets / Energy Trading and Structured Transactions

Energy Trading and Structured Transactions

Structured Commodity and Derivative Hedges

The acquisition, financing and development of power generation assets has seen explosive grown for the past several years, and McDermott’s EDM 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 sponsor’s exposure to commodity price risk, which in turn allows the sponsors to obtain financing.  McDermott has negotiated the documentation packages for such structured hedges and also analyzed the effect of possible future changes in circumstance, such as changes in regulatory regimes, or in nature of products purchased and sold under the hedges (e.g. capacity) and the desire of the project sponsors to divest or refinance individual portions of the over-all hedging package.

Long-term Power Purchase, Tolling Agreements and Off-take Agreements

The EDM 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 extensive experience negotiating and documenting energy management and asset optimization agreements (EMA) for a wide-range of circumstances.  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, securing fuel supply, optimize 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 then 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, energy manager optimizes the operations of the facility.  The EMA would further define how the 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 recievables and payables.  In addition, the EMAs are usually supplemented with ISDA power and gas annexes and other related documentation. 

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 expertise with all these issues to ensure our clients realize their full contract expectations. 

Innovative Credit Support and Collateral Arrangements

Variety of commodities and derivatives trades is only limited by traders imagination.  Clients’ exposure, however, is always quantifiable in terms of currency and the credit support that a counterparty is willing to provide to support a given trade.  McDermott has been successful in identifying instances where clients may face increased exposure as well as designing innovative credit arrangements that allow clients to adequately protect their institutional position and at the same time be flexible enough to remain competitive in the market.  These arrangements utilized traditional credit support mechanisms of the ISDA CSAs, EEI collateral annexes, collateralized guaranties, various forms of letters of credit, security interests in recievables as well as other more innovative techniques, such as, CDS, reverse repos, and others. By working closely with credit departments of major US and non-US investment banks and derivatives traders, our Group remains on the cutting edge of risk management field.

Energy/Commodity/Derivatives Trading Agreements

The EDM group 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, 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 philosophy, 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 EDM 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 in 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:

  • 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.
  • State and federal regulation of the generator restructuring and change of ownership issues, including review of matters regulated by the Federal Energy Regulatory Commission, state commissions, and Securities and Exchange Commission. 
  • 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, and amendments.
  • 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.
  • Documentation and negotiation of equity interest trading including debt instruments, confirmations, assignments, participations, risk participations and warrants
  • Assist regarding internal and external organization, information flow and response to regulatory compliance/certification matters posed by indirect investment in regulated generation assets.
  • Analyze implications for affiliates of the investor involved in energy transactions (including FERC-authorized power marketers as well as transitory stock holdings in energy companies).

Wholesale Power Auctions

Our energy and derivatives markets lawyers 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 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.   State market structure, including renewable portfolio standards, and retail switching and migration policies are also our areas of experience.  Our group also regularly counsels on the impact of 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 impacting 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.

Natural Gas Transaction, Trading & Regulatory Experience

  • Represent clients in prepaid natural gas transactions, including providing advice about US federal tax issues, SALT (state and local tax) issues implicated by physical natural gas transactions, US regulation of physical natural gas transactions, the risks associated with natural gas transportation and storage agreements, the capacity and authority of joint action agencies to enter into such transactions, and the risks associated with the bond indenture.  In addition, we negotiate and draft gas purchase agreements, remarketing agreements and commodity swap documentation.
  • Represented the commodities trading affiliate of a major investment bank in a complex structured natural gas hedging transaction with a Texas-based oil and gas exploration and development company.
  • Represented a special committee of the board of directors of the purchaser of a large and strategically-located natural gas storage facility and related infrastructure and contracts.
  • Represented major refinery in development of natural gas transportation and storage arrangements, including expanded pipelines, in the U.S. and Canada and sales opportunities in U.S. new England markets for 1 BCF of LNG.
  • Developed and negotiated gas-in-storage transactions and addressed regulatory issues related to regulated utility affiliate relationships with storage and pipeline assets.
  • Represented major refinery and energy developer in a $763 million project financing of a joint venture with an LNG provider and shipper to build an LNG facility and deep water terminal in Canada, including an expanding credit facility. 
  • Drafted complex exclusivity, marketing and capacity use agreements for LNG.
  • Drafted and negotiated many multi-year natural gas purchase and sale agreements for one of the largest pipeline companies in the U.S.
  • Prepared, modified and reviewed natural gas master agreements, including NAESB and GISB Base Contracts (U.S. and Canada), the GasEDI (Canada), ISDA Master Agreements with Gas Annex and proprietary (homegrown) masters, and related confirmations and supplements; addressed related tax, insolvency and regulatory issues. 
  • Documented and negotiated scores of structured NG hedging transactions, including financially and physically-settled tolling agreements.
  • Developed and negotiated energy management agreements and natural gas service and supply agreements for wholesale and retail suppliers, and end-users.  Many of these agreements have included innovative and complex supply and pricing arrangements.
  • Developed and negotiated natural gas governmental aggregation master services agreements with put/call and no-cost collar options.
  • Analyzed interstate and intrastate hub, take-or-pay, title transfer and physical exchange agreements utilizing interstate and intrastate storage and LNG facilities.
  • Reviewed and analyzed electronic trading systems for trading natural gas contracts.
  • Represented several gas marketing firms in purchasing or selling portfolios of transactions.

Credit and Collateral Experience

  • Extensive experience negotiating and documenting the collateral packages for complex natural gas and LNG transactions, typically involving payment guarantees, multiple “special” or “synthetic” letters of credit, or first, second or third lien positions.
  • Analyzed credit requirements of inter- and intrastate pipeline and storage service providers.

Natural Gas Regulatory Experience

  • Prepared for several large financial institutions risk memoranda (business risks, legal risks, credit risks, and operational risks) for many major inter-and intra-state pipelines, transportation, storage and various hub services.
  • Represented clients before the Federal Energy Regulatory Commission with respect to all aspects of interstate pipeline tariff, service, rate setting and capacity release rules.
  • Represented a major shipper of gas in a pipeline merger case in the Southern U.S.
  • Litigated key aspects of natural gas transportation and storage allocation and assignment.
  • Advised natural gas marketers and industrial process end-users concerning requests by several natural gas pipelines and storage facilities to modify services, tariffs, rates and imbalance penalties, certifications, capacity assignment and release, and trading practices before FERC, including participation in various Order Nos. 636 and 637, et seq. pipeline compliance filings.

Natural Gas Tax Experience

  • Advised clients regarding the Federal, state and local tax implications of long-term natural gas purchases, including pre-paid transactions.
  • Advised several clients about taxable financings of pre-paid gas supply contracts, including issuance of tax exempt bonds, use of commodity swaps and the ability of the gas supplier or its affiliates to act also as interest rate swap counterparty, underwriter or placement agent, liquidity provider and/or bond holder.
  • Represented the Interstate Natural Gas Association of America (INGAA) with respect to the appropriate tax treatment of an energy derivatives dealer’s customer activities and hedging activities, including congressional lobbying, meeting with the IRS and Treasury, and the formation of business coalitions.
  • Analyzed tax implications of natural gas title transfer rules under various pipeline and storage services.

Contacts

Energy and Derivatives Markets Client Services

McDermott Will & Emery

McDermott Will and Emery