exv10w81



 





Exhibit 10.81




Execution Copy — 9/20/06




OPERATING AGREEMENT




     This Operating Agreement (this “Agreement”), dated as of September 20, 2006 (the
“Effective Date”), is made and entered into between Pacific Summit Energy LLC, a Delaware
Limited Liability Company (“Supplier”), and Commerce Energy, Inc., a California corporation
(“Buyer”). Buyer and Supplier are each a “Party” and, collectively, are the
“Parties.”



RECITALS




     WHEREAS, Supplier is a natural gas supplier marketing natural gas to third parties;



     AND WHEREAS, Buyer is in the business of providing natural gas to retail customers in
California, Nevada, Florida, Kentucky, and Texas (collectively, the “Supplied States”);



     AND WHEREAS, Buyer desires to purchase natural gas supply from Supplier pursuant to a series
of supply Transaction Confirmations governed by the NAESB Agreement dated January 1, 2006
(“Master Agreement”) executed by the Parties;



     AND WHEREAS, Supplier desires to supply Buyer with natural gas that Buyer will supply to
Designated Customers (defined below);



     AND WHEREAS, Supplier and Buyer have entered into the Lockbox Agreement (defined below);



     AND WHEREAS, Supplier, Buyer and Wachovia Bank NA have entered into the Security Agreement (as
defined below);



     AND WHEREAS, Supplier desires to extend certain trade credit to Buyer in accordance with the
terms of this Agreement, the Master Agreement, the Security Agreement, the Lockbox Agreement and
the Transaction Confirmations;



     AND WHEREAS, simultaneously upon execution of this Agreement, Buyer has agreed to provide
Supplier with certain collateral in accordance with the Security Agreement and the Lockbox
Agreement, and Buyer will provide Supplier with additional collateral in accordance with the terms
of this Agreement, in order to secure repayment of any amounts Buyer currently owes, or may
hereinafter owe, to Supplier in connection with any natural gas purchased by Buyer for resale to
the Designated Customers.



     NOW, THEREFORE, in consideration of the following mutual covenants, agreements, and
obligations, the Parties agree as follows:



ARTICLE 1

DEFINITIONS




          1.1 Definitions incorporated by reference from other Agreements. All initially
capitalized terms not otherwise defined below or herein shall have the meanings set forth in the
Lockbox Agreement or the Security Agreement executed between the Parties.




 









 








     “Customer Term Contract” means any contract, agreement, letter of understanding,
service tariff, or billing arrangement between Buyer and a Designated Customer for retail sale of
natural gas provided to Buyer by Supplier and any rights, contract, agreement, letter of
understanding, service tariff, or billing arrangement, if any, between Buyer and a Designated
Customer which have been sold and assigned by HESCO to Buyer pursuant to the Asset Purchase
Agreement dated as of September 20, 2006 by and among HESCO relating to the sale of any natural gas
delivered on or after September 1, 2006.



     “Designated Customers” means the customers of Buyer in the Supplied States that are
listed on Exhibit A attached hereto, as such Exhibit A may be amended from time to time by written
agreement of Buyer and Supplier.



     “HESCO” means Houston Energy Services Company.



     “Insured Designated Customers” means the Designated Customers listed under Section A
of Exhibit A.



     “Supplied States Delivery Point(s)” means the delivery point for all natural gas
provided hereunder to Customers in the Supplied States shall be the natural gas pools under which
the Customers are delivered gas.



     “Local Distribution Company” or “LDC” means the incumbent utility in each of
the Supplied States behind which Buyer has Designated Customers.



     “Novated Contracts, “means the supply contracts and transportation agreements listed
on Exhibit B that Supplier has agreed to assume from HESCO.



     “Uninsured Designated Customers” means the Designated Customers listed under Section B
of Exhibit A.



ARTICLE 2

PURCHASE AND SALE OF NATURAL GAS




          2.1 Supply.




               (a) Subject to the terms and conditions of this Agreement, Supplier shall sell to Buyer,
natural gas pursuant to the terms of the Master Sales Agreement for the purpose of enabling Buyer
to resell such natural gas to the Designated Customers. The terms of this Agreement shall apply to
any Transaction Confirmation relating to Buyer’s purchase of natural gas intended for resale to the
Designated Customers. Buyer and Supplier agree to reference the terms of this Agreement on such
Transaction Confirmations. Buyer agrees to resell
all natural gas purchased from Supplier pursuant to such Transaction Confirmations only to the
Designated Customers.



               (b) Buyer shall purchase exclusively from Supplier all of Buyer’s requirements of natural gas
for supply to the Designated Customers.



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               (c) On the condition that Buyer complies with its obligation under Section 3.3, Supplier shall
schedule and nominate natural gas quantities with the appropriate LDC’s and pipelines in the
Supplied States in quantities necessary to supply Buyer’s demand for natural gas to the Designated
Customers.



               (d) Simultaneously upon execution of this Agreement, Supplier has entered into certain
transaction confirmations to acquire natural gas from HESCO, copies of which are attached hereto as
Exhibit C (“HESCO September Orders”). Pursuant to Transaction Confirmations
attached hereto as Exhibit D (“Buyer September Orders”), Supplier has agreed to
sell, and Buyer has agreed to purchase, all of the natural gas Supplier is obligated to purchase
from HESCO pursuant to such HESCO September Orders for the purpose of supplying such natural gas to
Designated Customers during the month of September.



               (e) Simultaneously upon execution of this Agreement, Supplier has entered into the Novated
Contracts with HESCO and HESCO’s suppliers (“HESCO Suppliers”) pursuant to which Supplier
has agreed to assume HESCO’s rights and obligations to acquire natural gas from such HESCO
Suppliers in accordance with the terms of the Novated Contracts.



          2.2 Pricing.




               (a) Subject to Section 2.2(b) and 2.2(c), Supplier and Buyer agree that Buyer’s contract price
payable by Buyer shall be determined in accordance with the Transaction Confirmations, Buyer and
Supplier agree to set contract prices according to market prices as set forth in the Transaction
Confirmations. If Buyer believes any pricing proposal made by Supplier is not in accordance with
competitive market prices (as determined by competing offers in the market by other alternative
suppliers at that time) for similar size and types of customers, Supplier will use commercially
reasonable efforts to purchase natural gas from alternative sources identified by Buyer in order to
supply natural gas to Buyer at more competitive pricing. If Buyer believes Supplier is still
unable to offer competitive pricing, Buyer may provide Supplier with written notice requesting that
Buyer and Supplier have their representatives meet within five (5) business days to formulate an
alternative approach to obtain more competitive pricing. If the Buyer and Supplier are unable to
reach an alternative approach to obtain more competitive pricing, then either party may request a
resolution procedure as described in Section 5.4.



               (b) Supplier agrees to deliver all natural gas that Supplier acquires pursuant to the HESCO
September Orders to Buyer under the Buyer September Orders at contract prices payable by Buyer that
are $0.03 per MMBTu greater than the contract prices at which Supplier acquires such natural gas
from HESCO.



               (c) Supplier agrees to deliver to Buyer all natural gas that Supplier acquires pursuant to the
agreements assigned to Supplier under the Novated Contracts (to the
extent such agreements contain fixed pricing commitments by HESCO Suppliers as of the date
hereof) at a contract price that is $0.03 per MMBTu greater than the contract price payable by
Supplier to the HESCO Suppliers.



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               (d) The $0.03 per MMBTu margin applicable to Supplier’s resale of natural gas pursuant to
Section 2.2(b) and 2.2(c) shall not apply to, or in any way constitute a limitation on, the prices
Buyer and Supplier may mutually agree upon with respect to other Transaction Confirmations.



ARTICLE 3

SECURITY AND PAYMENT TERMS




          3.1 Payment Terms. Buyer shall pay the contract price for any natural gas acquired
from Supplier for resale to a Designated Customer on the 25th day of the calendar month immediately
following the month Buyer is obligated to accept delivery of such natural gas pursuant to the terms
of the Master Agreement and the applicable Transaction Confirmation, provided, however, that if a
“Specified Event of Default” (as such term is defined in the Security Agreement) has occurred and
is continuing, Buyer shall pay the full contract price on a cash in advance basis prior to any
further delivery of natural gas by Supplier.




          3.2 Security. As a condition to supplying Buyer with any natural gas under the terms
of this Agreement, the Master Agreement or any Transaction Confirmation, Buyer agrees to provide
Supplier with the following collateral support to secure repayment of any and all amounts owed by
Buyer to Supplier whether now owing or hereinafter arising in accordance with the terms of the
Security Agreement (“Collateral Support”). The Collateral Support ‘provided by Buyer to Suppler
shall constitute a Credit Support Obligations of the Buyer under the Master Agreement.




               (a) Credit Insurance Policy. Buyer has purchased an accounts receivable policy from
AIG (attached hereto as Exhibit E) (“AIG Policy”) for the purpose of insuring the
payment of Buyer’s receivables by the Insured Designated Customers. Buyer shall name Supplier as a
beneficiary under the AIG Policy. Buyer shall maintain this policy in good standing until such
time that Buyer and Supplier both agree otherwise. Buyer and Supplier shall meet at least once
every ninety (90) days to evaluate the AIG Policy. Any changes to the AIG Policy are subject to
Supplier’s approval. Buyer shall be responsible for the payment for all costs for maintaining the
AIG Policy. Buyer agrees that it will not extend any credit to an Insured Designated Customer that
exceeds the applicable credit limit coverage for such Insured Designated Customer under the AIG
Policy. Buyer agrees that the total amount owed to Buyer by the Uninsured Designated Customers
will not exceed 20% of the total amount owed to Buyer by all Designated Customers.



               (b) Revenues Deposited into Lockbox Account. Simultaneously upon execution of this
Agreement, Buyer and Supplier have entered into a Blocked Account Control Agreement (with lockbox
services) (“Lockbox Agreement”) a copy of which is attached hereto as Exhibit F.
Buyer shall deposit or cause to be deposited by each Designated Customer, into a
lockbox account (“Lockbox Account”), any and all amounts owed to Buyer arising from or
relating to Buyer’s sale of natural gas to Designated Customers.



               (c) Security Agreement. Simultaneously upon execution of this Agreement, Buyer and
Supplier have entered into a Security Agreement a copy of which is



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attached hereto as Exhibit
G (“Security Agreement”) pursuant to which Buyer has agreed (1) to grant Supplier a
security interest over all of Buyer’s right, title and interest to (A) any; and all receivables now
owing or hereinafter owed to Buyer by any and all Designated Customers for supply deliveries by
Supplier to Buyer for resale to Designated Customers, (B) the proceeds of the AIG Credit Insurance
Policy and (C) any amounts deposited in the Lockbox Account, and (2) to maintain a minimum cash
deposit in the Lockbox Account, or post a letter of credit in lieu thereof, in accordance with
Section 6(g) of the Security Agreement.



          3.3 Additional Security. Supplier and Buyer agree to meet at least once every 30 days
to discuss any increase or decrease to the Collateral Support. Without limiting Supplier’s rights
under Section 10.1 of the Master Agreement, Supplier shall be entitled to request additional
security beyond the Collateral Support in the event of (a) any increase in credit defaults of
Designated Customers, (b) any increase in the number of Designated Customers, (c) any increase in
demand by Designated Customers, (d) any bankruptcy of a Designated Customer, (e) any reduction in
the aggregate available coverage under the AIG Policy, whether resulting from the payment of any
claims under such policy or otherwise, (f) any Insured Designated Customer owing Buyer an amount
exceeding the credit limit coverage for such Insured Designed Customer under the AIG Policy,
(g) any deterioration of Buyer’s creditworthiness or material adverse change to the Buyer’s
financial or business performance or prospects, (h) any increase in the mark to market risk of
Buyer not covered by the AIG Policy, or (i) any Specified Event of Default. Buyer shall be
entitled to request a reduction of the Collateral Support in the event of (1) any decrease in
credit defaults of Designated Customers, (2) any decrease in the number of Designated Customers,
(c) any decrease in demand by Designated Customers, (3) any increase in the aggregate available
coverage under the AIG Policy, whether resulting from the payment of any claims under such policy
or otherwise, (4) any improvement in Buyer’s creditworthiness or material improvement in the
Buyer’s financial or business performance or prospects, or (5) any decrease in the mark to market
risk of Buyer.




ARTICLE 4

OPERATING ISSUES




          4.1 Operational Assurances. Buyer agrees: (i) to require each Designated Customer to
send invoiced payments to a Lockbox Account as required under the Security Agreement and Blocked
Account Agreement, (ii) to cooperate with Supplier in determining a process for Supplier’s receipt
of Designated Customer credit data, (iii) to provide Supplier with reasonable access to Buyer’s
financial information, (iv) to request the Designated Customers to agree upon an assignment
provision acceptable to Supplier, (v) to provide Supplier with information from time to time
regarding the payment history of Designated Customers, the aging of receivables owed to Buyer by
the Designated Customers, and the Designated Customers’ compliance with Buyer’s instructions to
make payment to the Lockbox, and (vi) to allow Supplier to review/approve Buyer’s general credit
policies and procedures.




          4.2 Designated Customer Data. Subject to any applicable legal restrictions Buyer
agrees to provide Supplier with relevant data necessary to assist Supplier in forecasting the
natural gas demands of the Designated Customers, including, without limitation, current and
historical usage data, payment and credit history, Dun & Bradstreet number, AIG insurance
evaluation data and reports, plus other data reasonably necessary. Prior to each bid week relating



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to the supply of gas for a particular calendar month, Buyer will supply supplier with the relevant
data for analyzing the aggregate retail natural gas load for the Designated Customers, taking into
account, among other things, historical usage, weather conditions and other system conditions, to
forecast the anticipated retail customer demand. Except as otherwise specifically authorized by
Customers or required by applicable law, regulation, or court order, the Parties shall maintain, in
confidence, all such Designated Customer data.




          4.3 Buyer’s Performance of Contracts with Designated Customers. Buyer shall provide
all of the services and perform all of its obligations under the Customer Term Contracts in
accordance with: (i) the terms of the Customer Term Contracts, (ii) all regulations applicable to a
natural gas supplier in the Supplied States, (iii) any applicable provisions of the relevant
governing tariff(s), and (iv) the provisions of this Agreement. Furthermore, Buyer shall issue all
invoices to Designated Customers with respect to natural gas delivered in any particular calendar
month no later than the 10th day of the immediately following calendar month. Buyer shall promptly
advise Supplier in writing if Buyer is unable for any reason to issue invoices to Designated
Customers on a timely basis.




ARTICLE 5

MISCELLANEOUS ISSUES




          5.1 Confidentiality. The terms of this Agreement, including the Transaction(s)
hereunder, are confidential and are not to be disclosed to any third Party without the prior
written consent of the non-disclosing Party except to the extent disclosure may be required by law,
regulation or judicial or administrative order.




          5.2 Governing Law. This Agreement is to be construed under the laws of the State of
California, without regard to any choice of law rules that would otherwise require the application
of the laws of another state. State and federal courts situated in the State of California shall
have exclusive jurisdiction to resolve any disputes with respect to this Agreement. Each Party
irrevocably consents to the jurisdiction described above for any actions, suits or proceedings
arising out of or relating to this Agreement. The party does not prevail in any such action, suit
or proceeding shall indemnify the prevailing party against any legal fees and expenses incurred by
the prevailing party in connection with such action, suit or proceeding.




          5.3 Conflicting Terms. In the event of any conflict between the terms of this
Agreement and the terms of the Master Agreement or a particular Transaction Confirmation, the terms
of the Master Agreement or the terms of the Transaction Confirmation shall control and be governed
by the terms of the Master Agreement. Without limiting the generality of the foregoing, and
notwithstanding anything to the contrary in Section 3.3 of this Agreement, Buyer reserves all of
its rights to request additional assurances of performance to Supplier in accordance with Section
10.1 of the Master Agreement. In the event of any conflict between the
terms of this Agreement and any provision of Security Agreement or Blocked Account Agreement,
the terms of Security Agreement or Blocked Account Agreement control.




          5.4 Pricing Dispute Resolution. The Parties agree to seek to resolve any dispute
relating to Section 2.2(a) concerning contract pricing pursuant to good faith business
negotiations. In the event of such a dispute, the aggrieved Party shall promptly identify in



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writing the nature of the outstanding dispute in sufficient detail so as to allow the other Party
to respond to the issue. Each Party agrees to (a) set a time and place for a face-to-face meeting
between a senior representative of each Party within 5 business days of written notice of the
dispute, (b) identify in writing its own position on the dispute, and (c) propose a resolution of
the dispute. The Parties agree to hold no fewer than one meeting within the time frame required
above in this Section 5.4 and to meet for at least a total of two hours at the face-to-face meeting
to discuss their respective positions and explore a contractual resolution of the dispute.




          5.5 No Waiver. No waiver at any time by any Party hereto of its rights with respect
to the other Party or with respect to any matter arising in connection with this Agreement shall be
considered a waiver with respect to any subsequent default whether of a like kind or different in
nature.




          5.6 Assignment. Neither Party may assign this Agreement or any right or obligation
under this Agreement without the prior written consent of the other Party, which consent shall not
be unreasonably withheld or delayed.




          5.7 Severability. If any provision of this Agreement is held invalid or
unenforceable, all other provisions shall not be affected.




          5.8 Counterparts. This Agreement may be executed in any number of counterparts and
each executed counterpart shall have the same force and effect as an original instrument.




          5.9 Term. This Agreement shall have an initial term of twenty four (24) months from
the date of execution by both Parties (“Initial Term”) and shall automatically renew each
year on the date of execution after the Initial Term for an additional term of twelve (12) months
(“Subsequent Term”). At any time during the Initial Term, Supplier may terminate this
Agreement upon 90 days’ written notice to Buyer if Buyer fails to provide Supplier with adequate
assurances of performance in accordance with Section 10.1 of the Master Agreement. After the
Initial Term, this Agreement can be terminated by either party upon 90 days’ written notice to the
other Party; provided, however, that such termination shall not affect or excuse the performance
of-either Party-underway provision of this Agreement that by its terms survives any such
termination, and, provided further, that this Agreement and any other documents executed and
delivered hereunder shall remain in effect with respect to any Transaction Confirmation(s) entered
into prior to the effective date of such termination until both Parties have fulfilled all of their
obligations with respect to such Transaction Confirmation or such Transaction Confirmation has
expired, cancelled, completed by its own terms, or has been novated.




          5.10 Termination. In addition to any other rights or remedies of Supplier under the
Master Agreement, the Security Agreement, the Lockbox Agreement or any Transaction
Confirmation, Supplier shall be entitled to terminate this Agreement upon a “Specified Event
of Default” as such term is defined in the Security Agreement.




          5.11 Entire Agreement. This Agreement, including the exhibits hereto, the Master
Agreement, the Security Agreement, the Lockbox Agreement and the Transaction Confirmations, contain
the Parties’ entire agreement relating to the subject matter hereof and



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supersedes any other
agreements, written or oral, between the Parties concerning such subject matter. No amendment or
alteration to this Agreement shall be effective unless in writing and signed by the Parties.




          5.12 Taxes. All sales and use taxes applicable to the transactions relating to this
Agreement, the Security Agreement, the Master Agreement and the Transaction Confirmations will be
the responsibility of and paid for by Buyer




          5.13 Notices. Any notice required or given pursuant to this Agreement (“Notice”)
shall be in writing and delivered by means of private overnight delivery, or by facsimile
transmission, addressed as follows:



To Supplier:



Pacific Summit Energy LLC

4675 MacArthur Court, Suite 1170

Newport Beach, CA 92660

Attn: Mr. RanDe Patterson

Phone No.: (949) 777-3203

Fax No.: (949) 777-3230



To Buyer:



Commerce Energy, Inc.

600 Anton Blvd., Suite 2000

Costa Mesa, CA 92626

Attn: General Counsel

Phone No.: (714) 259 2593

Fax No.: (714) 481-6589




     IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed as of the date
first above written.



	 	 	 	 	 	 	 	 	 
	PACIFIC SUMMIT ENERGY, LLC	 	COMMERCE ENERGY, INC.	 	 
	 
	 	 	 	 	 	 	 	 
	By:

	 	/s/ Brian Mock	 	By:	 	/s/ Steven S. Boss	 	 
	Name:

	 	 

Brian Mock
	 	Name:
	 	 

Steven S. Boss
	 	 
	 

	 	 	 	 	 	 	 	 
	Title:

	 	President	 	Title:
	 	Chief Executive Officer	 	 
	 

	 	 	 	 	 	 	 	 






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