One of the most important credit tools available to help Enron Wholesale Services (EWS) manage counterparty credit risk is setoff rights.  This is particularly true as our trading business is expanding to include numerous commodity lines, including gas, power, coal, steel, pulp and paper, each of which may be traded under different masters with a single counterparty.  This complexity is further increased as a result of EWS using multiple affiliated entities to trade the various commodities.  Absent express contractual setoff rights, EWS may be unable to setoff exposures under different master contracts.

	A team of EWS lawyers has been working to assemble setoff language that will substantially enhance EWS's credit position with counterparties with whom we trade multiple commodities.  This setoff language, which is set forth below, must be in all EWS trading form contracts.  Similarly, when negotiating on third party paper, we should request that this additional setoff language be added.


MANDATORY SETOFF LANGUAGE FOR 
EWS TRADING CONTRACTS

	(A) Upon the designation or deemed designation of an Early Termination Date, the Non-Defaulting Party ("X") may, at its option and in its discretion, setoff, against any amounts Owed to the Defaulting Party ("Y") by X or any Affiliate of X under this Agreement or under any other agreement(s), instrument(s) or undertaking(s), any amounts Owed by Y to X or any of X's Affiliates under this Agreement or under any other agreement(s), instrument(s) or undertaking(s).  The obligations of Y and X under this Agreement in respect of such amounts shall be deemed satisfied and discharged to the extent of any such setoff exercised by X and/or X's Affiliates.  X will give Y notice of any setoff effected under this section as soon as practicable after the setoff is effected provided that failure to give such notice shall not affect the validity of the setoff.  For purposes of this Section __, "Owed" shall mean any amounts owed or otherwise accrued and payable (regardless of whether such amounts have been or could be invoiced) as of the Early Termination Date.  	

	Amounts subject to the setoff permitted in this Section __ may be converted by X into any currency in which any obligation Owed is denominated at the rate of exchange at which X, acting in a reasonable manner and in good faith, would be able to purchase the relevant amount of the currency being converted. If an obligation is unascertained, X may in good faith estimate that obligation and setoff in respect of the estimate, subject to the relevant party accounting to the other when the obligation is ascertained.  Nothing in this Section __shall be effective to create a charge or other security interest except as may be provided under applicable law.   This setoff provision shall be without prejudice and in addition to any right of setoff, netting, off-set, combination of accounts, counterclaim, lien or other right to which any party is at any time otherwise entitled (whether by operation of law, contract or otherwise).  Each of the parties represent and acknowledge that the rights set forth in this Section __ are an integral part of the agreement between the parties and that without such rights the parties would not be willing to enter into Transactions.  The parties further acknowledge that each is executing this Agreement on behalf of itself as principal and, with respect to this Section ___, as agent on behalf of its Affiliates, which Affiliates shall receive the benefits of this Section __ and otherwise be bound as if such Affiliates had directly signed this Agreement as it relates to Section ___.

	(B) Notwithstanding any provision to the contrary contained in this Agreement, the Non-Defaulting Party shall not be required to pay to the Defaulting Party any amount under Section __ until the Non-Defaulting Party receives confirmation satisfactory to it in its reasonable discretion (which may include an opinion of its counsel) that all other obligations of any kind whatsoever of the Defaulting Party to make any payments to the Non-Defaulting Party or any of its Affiliates under this Agreement or under any other agreement(s), instrument(s) or undertaking(s), which are Owed as of the Early Termination Date have been fully and finally satisfied.

	This new setoff language will provide EWS the right to setoff amounts due and owing as of the Early Termination Date (but does not include future payments) between the counterparty and EWS and its affiliates (triangular setoff) after the designation of an Early Termination Date.  This language has been reviewed by U.S. bankruptcy counsel, and is appropriate under U.S. laws for commodity transactions with U.S.-based counterparties.  Each group will need to review this language with their local counsel in each jurisdiction in which EWS trades in order to ensure enforceability.   In addition, prior to introducing this language into your forms, changes will be required to terminology and/or to include terminations resulting from events other than Events of Default (e.g. "Affected Party" under ISDA).  Finally, when incorporating this setoff language into the EWS trading forms, please be aware that this language is not intended to override the payment netting terms (monthly netting of receivables) or the close-out netting procedures (applicable upon the designation of an Event of Default), both of which should remain in the trading forms.  Rather, this language is only intended to add setoff rights to all EWS trading forms.  When incorporating this setoff language into your trading forms, you will need to review the forms to determine if there are any references to setoff or other similar concepts that will need to be overridden and/or coordinated.  Finally, in order to assist all lawyers in negotiating these setoff provisions, we are in the process of preparing a brief explanation of how this setoff works and why it is mutually beneficial to EWS and our counterparties, which explanation you will be able to share with your counterparties. This explanation will be distributed shortly.

	If you have any questions, please contact me at 713-853-6544 or Elizabeth Sager at 713-853-6349.