eei master power purchase & sale agreement drafting committee optional provisions to eei master...

EEI Master Power Purchase & Sale Agreement Drafting Committee

Optional Provisions to

EEI Master Power Purchase & Sale Agreement

remarks of

Dickson C. Chin*

2006 APPA LEGAL SEMINAR

October 10, 2006Cambridge, Massachusetts

*Associate, Jones Day, New York, New York, and Member of Public Power Subcommittee, EEI Master Power Purchase & Sale Agreement Drafting Committee

2

Principal Features of Optional Provisions

• Financial Performance Measures• establish conditions under which

performance assurance will be transferred• Purchased Power Clause

• applies to Governmental Entities or Public Power Systems with an effective statute, ordinance or similar mechanism permitting the recovery of purchased power costs in retail rates

3

Structure of Optional Provisions

Structure: Optional Provisions and Related Definitions

• Amends EEI Collateral Annex• Insert Optional Provisions as “Other

Changes” under Paragraph 10 to EEI Collateral Annex

• To be used in conjunction with Schedule M

4

Financial Performance Measures

• Optional Provisions amend the EEI Collateral Annex to allow parties to• select one or more applicable Financial

Performance Measure(s) or create customized Financial Performance Measures

• establish the governing ratio(s) or limit(s) outside of which one or more designated Collateral Thresholds would apply

5


• EEI Collateral Annex:• Secures the obligations of a party under the

EEI Master Agreement• Sets forth the conditions under which a party

would be required to transfer performance assurance in the form of cash, letters of credit or other property

• Collateral Threshold establishes amount of unsecured credit extended to a party under the EEI Collateral Annex

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• Optional Provisions applies to either Buyer or Seller (or both), andcontemplates a check-the-box and fill-in-the-box approach


Check if Selected

Financial Performance MeasureSpecified Party

Standard(s)Party A Collateral

Threshold(s)

Days of Cash on Hand> _______________

> _______________

< _______________

$ _______________

$ _______________

$0 (zero)

Fixed Charge Coverage Ratio> _______________

> _______________

< _______________

$ _______________

$ _______________

$0 (zero)

Interest Coverage Ratio> _______________

> _______________

< _______________

$ _______________

$ _______________

$0 (zero)

Quick Ratio> _______________

> _______________

< _______________

$ _______________

$ _______________

$0 (zero)

Tangible Net Worth> _______________

> _______________

< _______________

$ _______________

$ _______________

$0 (zero)

Total Debt to Total Capitalization Ratio

> _______________

> _______________

< _______________

$ _______________

$ _______________

$0 (zero)

Other: _______________> _______________

> _______________

< _______________

$ _______________

$ _______________

$0 (zero)

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• Example of using Financial Performance Measure to margin

Check if

SelectedFinancial Performance Measure

Specified Party

Standard(s)

Party A Collateral

Threshold(s)

Days of Cash

on hand

> 60

> 30

< 30

$ 30 million

$ 15 million

$0 (zero)

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• Days of Cash on Hand• Fixed Charge Coverage Ratio• Interest Coverage Ratio• Quick Ratio

• Tangible Net Worth• Total Debt to Total Capitalization

Ratio• Other (parties to specify)

• Financial Performance Measures that may be selected and made applicable to a Specified Party

• “Specified Party” means a Party or, to the extent that such Party has a Guarantor, its Guarantor, together with, in either case, its consolidated subsidiaries as determined in accordance with GAAP

9


• “Days of Cash on Hand” means with respect to a Specified Party, the ratio of (a) unrestricted cash and cash equivalents as of the last date of the Measurement Period to (b) the sum of Operating Expenses and Fixed Charges for the Measurement Period divided by the number of days in the Measurement Period

10


• “Fixed Charge Coverage Ratio” means, with respect to a Specified Party, the ratio of (a) EBITDA for the Measurement Period less the aggregate amount actually paid by such Specified Party during such period on account of Capital Expenditures to (b) Fixed Charges for the Measurement Period

11


• “Interest Coverage Ratio” means, with respect to a Specified Party, the ratio of (a) EBITDA for the Measurement Period to (b) Interest Expense for the Measurement Period

12


• “Quick Ratio” means, with respect to a Specified Party, the ratio of (a) Quick Assets as of the last date of a Measurement Period to (b) current liabilities of such Specified Party as of the last date of a Measurement Period

13


• “Tangible Net Worth” means, for any Measurement Period with respect to a Specified Party, the Equity of such Specified Party as of the last date of the Measurement Period minus the intangible assets of such Specified Party as of the last date of the Measurement Period minus the restricted assets of such Specified Party as of the last date of the Measurement Period

14


• “Total Debt to Total Capitalization Ratio” means, with respect to a Specified Party, the ratio of (a) Total Debt as of the last date of the Measurement Period to (b) Total Capitalization as of the last date of the Measurement Period

15


• Other (parties to specify)

16


• Key Considerations and Observations

• Definitions to Financial Performance Measures

• Measurement Period

• Compliance Reporting

• Readjustment of Standards for Financial Performance Measures

17


• Definitions incorporated into Financial Performance Measures

• tied to financial statements of Specified Party

• Intended to be customized (i.e., not “one-size fits all”)

18


• Measurement Period

• historical financial information or pro forma financial information of Specified Party

• or, potentially, some combination of both

19


• Compliance Reporting• Compliance Reports to be delivered by a party

– after the end of each period specified by parties

– after notice from the other party (but not more than once in any month)

– after Collateral Event or event or circumstance that would result in a Material Adverse Effect on Specified Party

20


• Readjustment of Standards for Financial Performance Measures (outside of which one or more Collateral thresholds would apply)• Frequency and triggering events for

readjustments are under consideration by EEI Public Power Subcommittee

21

Purchased Power Clause

• Optional Provisions apply to Governmental Entities or Public Power Systems with an effective statute, ordinance or similar mechanism permitting the recovery of purchased power costs in retail rates

22


• “Purchased Power Clause” means a statute, ordinance, rule, regulation or rate schedule applicable to the Governmental Entity or Public Power System that is a load serving entity and that provides for an automatic and unlimited adjustment to its retail rates to cover all of its Purchased Power Costs

• “Purchased Power Costs” means the cost of acquiring electric capacity, energy, ancillary services or other products related thereto, including without limitation the cost of Products purchased under the EEI Agreement (including without limitation any costs arising under Articles Four or Five of EEI Agreement)

23


• Governmental Entity or Public Power System• represents and warrants that the Purchased

Power Clause is in full force and effect• will provide legal opinion on validity and

effectiveness of Purchased Power Clause upon request

24


• Governmental Entity or Public Power System will• establish retail rates at levels sufficient to cover

all of its Purchased Power Costs pursuant to Purchased Power Clause

25


• Governmental Entity or Public Power System will use best efforts • to maintain effectiveness of Purchased Power Clause

and levels at which retail rates are established to cover Purchased Power Costs

• to defend any challenges to – effectiveness of Purchased Power Clause– levels at which retail rates have been established to

cover Purchased Power Costs– any efforts to seek any refunds in respect of any

amounts recovered or authorized to be recovered to cover Purchased Power Costs

26


• “Collateral Event” means (i) any change to a Purchased Power Clause applicable to the Governmental Entity or Public Power System that limits or disallows or could be reasonably expected to limit or disallow its automatic recovery in retail rates of all of its Purchased Power Costs, or any event or circumstance that results or could be reasonably expected to result in any refund in respect of any amounts recovered or authorized to be recovered by the Governmental Entity or Public Power System to cover such Purchased Power Costs; or (ii) any event or circumstance that results or could reasonably be expected to result in a reduction of [_____________] percent ([___])% or more of the aggregate native retail load in any of the Governmental Entity or Public Power System’s rate classes as of the Effective Date

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• Consequences of Collateral Event under consideration by EEI Public Power Subcommittee• Results in

– Collateral Threshold becoming zero? (i.e., no unsecured credit)

– Event of Default?– Other?

28

Optional Provisions

• Next steps

eei master power purchase & sale agreement drafting committee optional provisions to eei master...

Documents

performance assurance

eei collateral annexto

eei master agreementsets

public power systems

committeeoptional provisions

form of cash

unrestricted cash

cash equivalents