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.
1401 McKinney, Suite 1900
Houston, Texas 77010
(713) 752-4315
cenochs@jw.com
1
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
2
Summary of Early Termination Process
Close out Process: Summary
Suspend
Withhold
Payments
Event of
Default
Terminate
Notice
Suspend
Performance
Setoff
Calculate
Settlement Amounts
Net-Out
Notice of
Payment
Dispute
Resolution
Do Nothing
3
Events of Default - § 5.1
(a) 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
4
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
5
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
6
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
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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
8
Termination - § 5.2
• On Early Termination Date
– Calculate Settlement Amount
– If impracticable or illegal to terminate on ETD,
terminate as soon as practicable
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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
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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
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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, NonDefaulting Party or any of their respective Affiliates
•
Option C: neither Option A nor Option B applies
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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
13
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.
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Other Agreements
• Setoff → reduce exposure
– Cross – product
– Cross – affiliate
• Cross Default
– Debt
– Trade agreements
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