Daily Financial Call Option
INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, INC. MASTER AGREEMENT
TRANSACTION CONFIRMATION
DAILY FINANCIAL CALL OPTION
BETWEEN
[Click here to enter Counterparty.] and Southern California Edison Company
This confirmation letter (“Confirmation ”) confirms the terms and conditions of the Daily Financial Call Option transaction (“Transaction”) between [Counterparty] (“Floating Amount Payer”) and Southern California Edison Company (“Premium Payer” or “SCE”) dated as of [Date] (“Trade Date”) in accordance with and subject to the terms and provisions of the ISDA Master Agreement between [Counterparty] and SCE dated as of [Date], together with the Schedule (“Schedule”) thereto (the ISDA Master Agreement and the Schedule are collectively referred to herein as the “Master Agreement”), and the ISDA Credit Support Annex, including Paragraph 13 thereto (collectively, “CSA”) to the Master Agreement, under the following terms and conditions. The Master Agreement and the CSA are collectively referred to herein as the “ISDA Agreement.” Capitalized terms used but not otherwise defined in this Confirmation shall have the meanings ascribed to them in the ISDA Agreement or the Tariff. In the event of any conflict or inconsistency between this Confirmation and the ISDA Agreement, this Confirmation shall control for the purposes of this Transaction.
ARTICLE 1
COMMERCIAL TERMS
1.0 Product Information
Floating Amount Payer: [Counterparty] / Premium Payer: SCEProduct: / Daily Financial Call Option
Floating Price: / Integrated Forward Market Day Ahead Price for SP15_EZGTH for each applicable hour as published by the CAISO on the CAISO website.
Notional Quantity: / [MW quantity]
Unit: / MW
Option Type: / Call Option
Option Premium:
($/kW-mo) / $[Option Premium]
Strike Heat Rate:
(MMBtu/MWh) / [Heat Rate]
Term: / The “Term” of this Transaction shall commence upon the Trade Date and shall continue until the later of (a) the expiration of the Exercise Period or (b) the date the parties’ obligations under this Confirmation have been satisfied.
Exercise Period: / For each applicable day of the relevant Exercise Period Interval from [Start Exercise Date] through [End Exercise Date] unless terminated earlier in accordance with the terms of the ISDA Agreement.
Exercise Period Interval: / 6x16 standard on-peak: HE07-22 Monday through Saturday during the Exercise Period, excluding NERC Holidays
Exercise Date: / Each day during the Exercise Period.
1.1 Option Exercise
Exercise Procedure: Automatic Exercise
Cash Settlement: Applicable
1.2 Definitions
For purposes of this Confirmation, the following definitions apply:
“CAISO” means the California Independent System Operator, a state chartered, nonprofit, public benefit corporation that controls certain transmission facilities of all Participating Transmission Owners and dispatches certain electric generation units and loads, or any successor entity performing the same functions.
“Forward Price Assessment” means quotations solicited or obtained in good faith from regularly published and widely-distributed forward price assessments from a broker that is independent of and unaffiliated with either party and who is actively participating in markets for this Transaction.
“Gas Index” shall be the index price (expressed in $/MMBtu) for the applicable day published by Platts Gas Daily (in the internet publication currently accessed through www.platts.com) in the table entitled “Daily Price Survey” under the subsection heading “Citygates” for the “SoCal Gas, city-gate” listing in the “Midpoint” index column. Notwithstanding [Part 5(e)(iv)] of the Schedule, if any determination by the California Public Utilities Commission (“CPUC”) that significantly affects the Southern California Gas Company (“SoCalGas”) system, and the Gas Index ceases to be published, or either party reasonably believes that the Gas Index is substantially changed so that it does not adequately reflect the balance of economic benefits and burdens that the parties agreed to, then either party may provide the other with notice to such effect and the parties shall negotiate in good faith to determine an alternative method or methods for determining the Gas Index in order to maintain the balance of economic benefits and burdens that the parties agreed to with respect to the Gas Index as of the Trade Date. Any substitute index or indices must be recognized in the industry as a measure of the average of the aggregate daily prices for gas delivered to the various receipt points into the SoCalGas system. If the parties are unable to agree on a successor market, index or methodology within 30 days of the date of the notice, the dispute resolution procedures of [Part 5(d)] of the Schedule shall apply.
“Integrated Forward Market” or “IFM” has the meaning specified in the Tariff.
“NERC Holidays” means “Additional Off-peak Days” as defined by NERC on the NERC website at http://www.nerc.com.
“Participating Transmission Owners” has the meaning specified in the Tariff.
“Shape” has the meaning set forth in Appendix 1 of this Confirmation.
“Shaped Price” has the meaning set forth in Appendix 1 of this Confirmation.
“Tariff” means the tariff and protocol provisions, including Operating Procedures, as amended or supplemented from time to time, of the CAISO.
Article 2
Compensation
2.0 Details of Fixed / Floating Amount
(a) Fixed Amount: For each Exercise Date,
(i) The “Fixed Price” is the product of the following:
(1) Strike Heat Rate and
(2) The Gas Index.
(ii) The “Fixed Amount” is the product of the following:
(1) Fixed Price,
(2) The number of hours within the Exercise Period Interval for such day, and
(3) The Notional Quantity.
(b) Floating Amount: For each Exercise Date the “Floating Amount” shall be the product of the following:
(i) The simple average of the Floating Prices for the applicable Exercise Period Interval for such day,
(ii) The number of hours within the Exercise Period Interval for such day, and
(iii) The Notional Quantity.
(c) Cash Settlement
Calculation Period: Each calendar month (whole or partial) during the Exercise Period.
Cash Settlement For each Exercise Date when the Floating Amount is greater than the Fixed Amount, the
Amount: Cash Settlement Amount will be the difference between the Floating Amount and the Fixed Amount; otherwise $0.00.
Monthly Cash The Monthly Cash Settlement Amount shall be equal to the sum of all Cash Settlement
Settlement Amount: Amounts for the applicable Calculation Period during the Exercise Period.
Payment Date: An invoice must be rendered as set forth in [Part 4(q)] of the Schedule. Payment of each Monthly Cash Settlement Amount, if any, by the Floating Amount Payer shall be made by the later of (a) two Local Business Days after receipt of an invoice and (b) ten Local Business Days after all applicable Relevant Prices are determinable for all Exercise Dates in a Calculation Period.
2.1 Monthly Option Premium Payment
The Monthly Option Premium Payment amount for the Product shall be payable, in advance of the applicable month. Floating Amount Payer shall invoice Premium Payer no later than the twentieth (20th) day of the preceding month during the Exercise Period for the applicable monthly premium. Upon receipt of such invoice, Premium Payer shall pay such monthly premium no later than two (2) Local Business Days prior to the beginning of the applicable month. Payment for invoices submitted by Floating Amount Payer after the twentieth (20th) day of the preceding month shall be due within ten (10) Local Business Days of receipt.
The Monthly Option Premium Payment for the Product shall be:
Monthly Option Premium Payment Table ($/Month)
Contract Month / 2011 / 2012 / 2013 / 2014Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2.2 Corrections to Published Prices
Notwithstanding anything to the contrary in the ISDA Agreement, Section 7.3 of the Commodity Definitions will be modified as follows with respect to this Transaction only: (1) in the first sentence, “within 30 calendar days (or 90 calendar days in connection with a Weather Index Derivative Transaction)” shall be deleted and replaced with “within twelve (12) months”.
Article 3
SPECIAL TERMS AND CONDITIONS
3.0 Mark-to-Market
Notwithstanding anything in Paragraph 13(b)(iv)(B) of the CSA to the contrary, for purposes of this Transaction only on any Valuation Date, the parties shall calculate the Exposure of this Transaction by taking the sum of the present values for each remaining (full or partial) month of the Term using the equation below:
Exposure = MAX[(( MVt,i - MVo,i) - PRi), 0]
Where:
MVt,i = [(Pt,i - Gt,i x HRi) x Qi] x CFt
MVo,i = [(Po,i - Go,i x HRi) x Qi] x CFo - 7 days
And:
Variable / Description / Unitsn / The number of forward months included in the mark-to-market calculation.
i / A forward month. For the balance of the month of the Valuation Date, i=0. For the month following the month of the Valuation Date, i=1, etc.
Pt,i / The midpoint of the arithmetic mean of at least three (3) Forward Price Assessments for SP15 on-peak for the relevant forward month i on the Valuation Date. In the event a Forward Price Assessment cannot be obtained for a forward period on the Valuation Date, then the applicable monthly Shaped Price shall be used. / $/MWh
Po,i / The midpoint of the arithmetic mean of at least three (3) Forward Price Assessments for SP15 on-peak for the relevant forward month i on the Trade Date. In the event a Forward Price Assessment cannot be obtained for a forward period on the Trade Date, then the applicable monthly Shaped Price shall be used. / $/MWh
Gt,i / The midpoint of the arithmetic mean of at least three (3) Forward Price Assessments for NYMEX Southern California Gas Citygate natural gas (i.e., closing price for NYMEX Henry Hub + Henry Hub to SoCal Citygate Basis) for the relevant forward month i on the Valuation Date. If no such assessment is available on the Valuation Date, then a proxy value of NYMEX Southern California Border natural gas plus SoCalGas Schedule No. G-RPA rate G-RPA1 (“Rate G-RPA1” (i.e., closing price for NYMEX Henry Hub + Henry Hub to SoCal Border Basis plus Rate G-RPA1 per MMBtu) for the relevant forward month i shall apply. In the event a Forward Price Assessment cannot be obtained for a forward period on the Valuation Date, then the Forward Price Assessment for the relevant calendar month of the last available year shall be used. / $/MMBtu
Go,i / The midpoint of the arithmetic mean of at least three (3) Forward Price Assessments for NYMEX Southern California Gas Citygate natural gas (i.e., closing price for NYMEX Henry Hub + Henry Hub to SoCal Citygate Basis) for the relevant forward month i on the Trade Date. If no such assessment is available on the Trade Date, then a proxy value of
NYMEX Southern California Border natural gas plus Rate G-RPA1 (i.e., closing price for NYMEX Henry Hub + Henry Hub to SoCal Border Basis plus Rate G-RPA1 per MMBtu) for the relevant forward month i shall apply. In the event a Forward Price Assessment cannot be obtained for a forward period on the Trade Date, then the Forward Price Assessment for the relevant calendar month of the last available year shall be used. / $/MMBtu
HRi / The Strike Heat Rate. / MMBtu/MWh
PRi / Option Premium Payment for the relevant forward month. / $/month
Qi / The Notional Quantity multiplied by the hours remaining under the Transaction for the relevant forward month. / MWh/month
CFt / The capacity factor on the Valuation Date, determined by dividing the power price (Pt,i) by the natural gas price (Gt,i) for the relevant forward months, to generate a market heat rate (“MHR”) curve and calculating what percent of the relevant forward months the Strike Heat Rate (“SHR”) is below the MHR. This is formulaically equal to the quotient of (a) the number of months SHR<MHR and (b) the total remaining months subject to the mark-to-market calculation. At no time shall the CF be below 10%. / %
CFo – 7 days / The capacity factor, on [TBD], determined by dividing the power price (Po-7 days,i) by the natural gas price (Go- 7 days,i) for the relevant forward months, to generate a market heat rate (“MHR”) curve and calculating what percent of the relevant forward months the Strike Heat Rate (“SHR”) is below the MHR. This is formulaically equal to the quotient of (a) the number of months SHR<MHR and (b) the total remaining months subject to the mark-to-market calculation. At no time shall the CF be below 10%. / %
For present value purposes, the discount rate should use the appropriate yield curve using U.S. Treasury constant maturities securities as posted by the Federal Reserve in their H.15 daily update at the following address: http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.html.
3.1 Credit Terms
For purposes of calculating a party’s Exposure pursuant to the CSA, if the Floating Amount Payer has Exposure to SCE in respect of this Transaction, then the amount of Exposure for this Transaction is deemed to be zero dollars ($0).
Notwithstanding anything to the contrary contained in the CSA or this Confirmation, the parties shall determine the Close-out Amount for this Transaction in accordance with the Master Agreement.
ACKNOWLEDGED AND AGREED TO AS OF [ ______], 2010
[Counterparty] Southern California Edison Company
By: By:
Name: Name:
Title: Title:
Date: Date:
Appendix 1
Shaped Price Calculation
1 Shape Calculation
(a) “Shape” shall be the ratio, expressed as a percentage, of a Forward Price Assessment of (i) the price of power for a calendar quarter to the price of power for the calendar year that such quarter falls within, or (ii) the price of power for a month to the price of power for the quarter that such month falls within.
(b) There are four quarterly Shapes (for the first through fourth calendar quarters) and twelve monthly Shapes (for the months of January through December) in every calendar year.
1. For purposes of determining the applicable quarterly Shape, an annual price is calculated as the simple average of the four quarterly prices within the last available year.
For example, the first quarter Shape is calculated using the formula below:
Shape Q1 = P Q1 / Average (P Q1 + P Q2 + P Q3 + P Q4)
2. For purposes of determining the applicable monthly Shape, a quarterly price is calculated as the simple average of the three monthly prices within the applicable quarter.