1. Mechanics of Early Termination and Liquidation
2008 EEI MASTER AGREEMENT TRAINING SESSION
November 19-20, 2008
Crown Plaza Hotel
Houston, Texas
Mechanics of Early Termination and Liquidation
CRAIG R. ENOCHS Jackson Walker L.L.P McKinney, Suite 1900 Houston, Texas (713)

2. Overview Events of Default Suspension Option Early Termination Date
Calculation of Settlement Amounts
Net Out
Setoff
Notice of Termination Payment
Disputes with Respect to Termination Payment
Other Agreements

3. Summary of Early Termination Process Close out Process: Summary
Suspend
Withhold Payments
Setoff
Notice of Payment
Event of Default
Calculate Settlement Amounts
Terminate
Notice
Net-Out
Suspend Performance
Dispute Resolution
Do Nothing

4. Events of Default - § 5.1
Failure to pay if not cured within 3 Business Days after written notice
(b) Representation or warranty is false or misleading in any material respect when made or when deemed made or repeated
(c) Failure to perform any material covenant or obligation in the EEI if not remedied within 3 Business Days after written notice
(d) Bankruptcy
(e) Failure to satisfy credit requirements of the Agreement
(f) Failure to assume the EEI upon merger or consolidation
(g) Cross default (if elected on Cover Sheet)
(h) Guarantor commits (a), (b), (d), guaranty fails, or guarantor repudiates the guaranty

5. Bankruptcy File a petition for bankruptcy
Otherwise commence, authorize, or acquiesce in the commencement of a proceeding or cause of action under any bankruptcy, insolvency, reorganization or similar law
Have any such petition filed or commenced against it
Make an assignment or any general arrangement for the benefit of creditors
Otherwise become bankrupt or insolvent (however evidenced)
Have a liquidation, administrator, receiver, trustee, conservator or similar official appointed with respect to it or any substantial portion of its property or assets, or
Become unable to pay its debts as they fall due.
* Note – No cure period for involuntary bankruptcy

6. Events of Default - Suspension of Performance - § 5.7
If an Event of Default or Potential Event of Default occurs, the NDP may suspend performance under any or all transactions
Effective upon written notice to DP
Suspension may not exceed 10 NERC Business Days with respect to any single transaction unless an Early Termination Date has been declared

7. Events of Default - Do Nothing
Why would a party choose to take no action?
If it had no outstanding transactions with the DP
If the NDP would owe the Termination Payment
If it believed the DP would cure the default with no lasting harm to either party
If it did not wish to end the trading relationship
If it wanted to use the threat of action as leverage for better terms

8. Events of Default - Termination - § 5.2
Event of Default must have occurred and be continuing
All amounts owed are accelerated
Designate Early Termination Date (“ETD”)
Notice of ETD must be given, effective no earlier than day received and no later then 20 days after notice is effective
Withhold payments due to DP
Suspend performance

9. Termination - § 5.2 On Early Termination Date
Calculate Settlement Amount
If impracticable or illegal to terminate on ETD, terminate as soon as practicable

10. Calculation of Settlement Amount - § 5.2
Non-Defaulting Party liquidates transactions
Commercially reasonable manner
Calculate Gains and Losses:
Gains: present value of the Non-Defaulting Party’s economic benefit in terminating the transaction(s)
Losses: present value of Non-Defaulting Party’s economic loss in terminating the transaction(s)
Includes Non-Defaulting Party’s Costs:
Costs: brokerage fees, commissions and other third-party costs for terminating hedges or entering into replacement transactions, plus attorneys’ fees
Transactions that Cannot Be Terminated?
Commercially impracticable or restricted by law

11. Net Out of Settlement Amounts - § 5.3
Non-Defaulting Party nets:
Settlement Amounts due to Defaulting Party, plus
Collateral held by Non-Defaulting Party, plus
All other amounts due to Defaulting Party
Against:
Settlement Amounts due to Non-Defaulting Party, plus
All other amounts due to Non-Defaulting Party
= Single Liquidated Amount (“Termination Payment”)
Two-Way Payment – can be owed by either Defaulting or Non-Defaulting Party

12. Closeout Setoff - § 5.6
Setoff Options elected by Parties on Cover Sheet
Non-Defaulting Party sets off amounts owed against Termination Payment
Option A: cross-agreement setoff; bilateral
Amounts due and owing by Defaulting Party to Non-Defaulting Party under any other agreements
Option B: cross-affiliate setoff; triangular or rectangular
Amounts due and owing by Defaulting Party or its Affiliates to Non-Defaulting Party or its Affiliates under any other agreement between Defaulting Party, Non-Defaulting Party or any of their respective Affiliates
Option C: neither Option A nor Option B applies

13. Notice of Payment - § 5.4
Amount of Termination Payment sent by Non-Defaulting Party as soon as reasonably practicable after liquidation
Written statement explaining “in reasonable detail” the calculation of the Termination Payment
Termination Payment due by the Party owing such amount within 2 Business Days after notice is effective

14. Disputes With Respect to Termination Payment - § 5.5
Defaulting Party must send notice of dispute within 2 Business Days after receiving notice of Termination Payment
Detailed written explanation of the basis for the dispute
If Defaulting Party owes the Termination Payment, must first transfer Performance Assurance in the amount of the Termination Payment.

15. Other Agreements Setoff → reduce exposure Cross – product
Cross – affiliate
Cross Default
Debt
Trade agreements