Please read the attached comments regarding the physical contracts.  



Teresa G. Bushman
Enron North America Corp.
1400 Smith Street, EB 3835A
Houston, TX  77002
(713) 853-7895
fax (713) 646-3393
teresa.g.bushman@enron.com


----- Forwarded by Teresa G Bushman/HOU/ECT on 12/21/2000 12:32 PM -----

	rainj@tklaw.com
	12/19/2000 11:16 AM
		 
		 To: nora.dobin@enron.com, Tim.Proffitt@enron.com, Chris.Herron@enron.com, 
Stanley.Farmer@enron.com, Kevin.Liss@enron.com, Teresa.G.Bushman@enron.com, 
mary.cook@enron.com
		 cc: shearerr@tklaw.com, hardiet@tklaw.com
		 Subject: Brazos VPP - Open issues


Tax Issues

I have spoken with my tax partner, T. Hardie, about a couple of issues.
First is whether we should increase the general partner's share from .0001%
to .0025% in order to reduce a possible risk that Brazos VPP Limited
Partnership might somehow not be treated as a partnership for tax purposes.
T. does not feel strongly about this (in part because the consequences
should not be adverse) and, unless Kevin desires otherwise, I think we
should leave the percentage at .0001%.  (Any tax law with respect to the
minimum .0025% level is probably obsolete now that we have "check-the-box"
elections for tax treatment as a partnership.)  Nora advises me that Stan
is fine with this from an accounting perspective.

The second tax issue is whether Agave, as depositor under the Trust
Agreement, can be tax matters partner for the Trust (which will also elect
to be taxed as a partnership).  Since only a partner can be tax matters
partner, it appears that one of the Class B Certificateholders -- i.e.,
Bank of America -- must be the tax matters partner.  The Servicer can of
course assist with preparation of income tax filings.

Balancing Agreement

Attached below is a revised Balancing Agreement, with the changes discussed
on Monday night by Nora, Tim, Teresa, Bob and me.  The principal change is
to add an indemnity section to this Agreement in place of the indemnity we
want to delete from the Participation Agreement that Bracewell Patterson
has prepared.  This indemnity is based on the Term Sheet and is
considerably narrower, but since we did not discuss it specifically, please
review it carefully.  Please pay attention to the note following the
definition of "Servicer Fee" that suggests that the LIBOR breakage costs
and capital adequacy costs be moved to the new indemnity section.  Nora and
I think that this would be more appealing to the Banks, but Stan may prefer
to have this built into the Servicing Fee.

(See attached file: Balancing Agreement Ver 5 from 4.doc)

Physical Sales Contracts

One of our biggest challenges to a quick closing is getting everyone to
agree on some important features of the master gas and oil purchase/sale
agreements.  The term sheet given to the Banks says the following:

     A.   With respect to each Production Payment under which Brazos
     expects to receive deliveries of natural gas in kind, Brazos shall
     enter into a confirmation under the NGPSA with ENA whereby ENA or ERAC
     shall (1) purchase all gas or oil delivered to the Company in kind
     under such Production Payment and (2) pay floating prices for such gas
     or oil.  The floating prices will be swapped into pre-determined fixed
     prices via an Energy Price Swap Agreement.

     B.   Brazos will dedicate to ENA or ERAC all Production Payment gas or
     oil which is delivered under the Production Payments documents.

     C.   The quantities of gas or oil purchased each month shall consist
     of all gas or oilactually delivered in kind to Brazos during such
     month under the Production Payment.  ENA and ERAC will be notified
     monthly in advance of the amount of gas or oil expected to be
     delivered at each delivery point.

     D.   If the actual quantity of Production Payment hydrocarbons
     delivered to Brazos is less than the scheduled quantity of
     hydrocarbons to be delivered (the "Scheduled Volumes"), and the
     producer has not delivered adjustment quantities of Production Payment
     hydrocarbons to satisfy such deficiency, the Servicer (i.e., Agave,
     the new Enron subsidiary guaranteed by Enron Corp.) will make a
     mandatory advance equal to the value of such deficiency at the
     applicable ENA or ERAC price.

     E.   As consideration for the mandatory advance, Brazos will assign to
     the Servicer the right to receive the Adjustment Quantities (or cash)
     that Brazos is entitled to receive under the Production Payment
     documents related to such delivery under the Production Payment.

In analyzing the physical contracts, and all other components of this deal,
it is important to remember that one purpose of the deal is to lock in, for
at least the 97% debt component of the total financing, a cash flow stream
that amortizes the debt over the entire term of each Production Payment.
The pieces of the deal -- the oil and gas accruing to the Production
Payment, the physical sales contracts, and the swaps -- have to fit
together for the entire life of each Production Payment.

It is also important to remember that if there is a mismatch in cash flows,
it will most likely be made up by payments from Enron Corp. under its
guaranty of Agave's mandatory "balancing" advances.  So it behooves Enron,
as well as the Banks, to make sure that the pieces of the deal fit
together.

It therefore seems to me that the physical contracts need to have the
following features:

1.   the physical contracts need to cover all of the production accruing to
each Production Payment during the life of that Production Payment,
including both scheduled quantities and adjustment quantities.  Therefore
there can be no minimum or maximum limits on quantities taken, and the
right to terminate the physical contracts must be limited to a real
melt-down situation.  It is probably misleading to talk about the scheduled
amounts being on a firm basis.

2.   the physical contracts need to match the commodity price swaps that
ENA will be providing for the scheduled amounts of production, with
floating prices for these scheduled amounts that are identical to the
floating swap prices.  Therefore the Contract Prices for the scheduled
amounts of gas need to key off of Inside FERC and the Contract Prices for
the scheduled amounts of oil need to key off of NYMEX WTI, in each case
with any agreed basis differentials.

3.   the physical contracts need to price the adjustment quantities in a
way that causes the adjustment quantities to generate enough cash to repay
Agave/Enron for any mandatory balancing advances.  The way to do this is to
price any deliveries in excess of the scheduled amounts at the Index Prices
contained in the production payment conveyances.  The Index Prices for gas
in the two existing deals are Gas Daily prices and for oil are NYMEX WTI
less differentials.

4.   the physical contracts need to match the timing of the conveyances for
adjustment quantities.  This is daily for gas deliveries and monthly for
oil deliveries.

5.   the physical contracts need to have a cover formula that protects both
ENA/ERAC and Agave/Enron.  The present formula in the Enfolio contract says
that ENA pays the Contract Price for the scheduled quantities that are
delivered and that Brazos pays the product of the shortfall in scheduled
quantities times the positive remainder, if any, of the Index Price minus
the Contract Price.  We need to change this last feature to say that Brazos
pays this remainder, if positive, but that Brazos also gets a credit is
this remainder is negative.  Tim Proffitt can explain the math to anyone
that wants to understand it, but the basic idea is that if there is a
shortfall, Brazos buys gas from ENA at the Index Price to cover the
shortfall and then ENA pays the Contract Price for the full scheduled
amount.

6.   the contracts need to do away with any concept of frequent trading
over the phone.  Each Production Payment should generate only one written
confirmation.

7.   the contracts need to be clear that netting occurs over all
transactions.  This should protect ENA and ERAC against Brazos owing them
money for one Production Payment where production has substantially shut
down and not having the ability to pay.

In light of the above, we also need to consider whether we are better off
starting with the modern Enfolio form that is designed for true commercial
transactions or whether it makes more sense to add the points described
above to the old Cactus form.

John W. Rain
Thompson & Knight L.L.P.
1700 Pacific Ave.
Dallas, Texas 75201
Phone: 214.969.1644 (Dallas)
Phone: 713.653.8887 (Houston)
Fax:       214.880.3150

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 - Balancing Agreement Ver 5 from 4.doc