Mechanics of Early Termination and Liquidation

1. 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 1900Houston, Texas 77010(713) 752-4315cenochs@jw.com

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 ProcessClose out Process: Summary Suspend Withhold Payments Setoff Notice of Payment Event of Default Calculate Settlement Amounts Net-Out Notice Terminate Dispute Resolution Suspend Performance 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 • 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 Why would a party choose to take no action?

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