Elizabeth:

We followed up on our discussions last week regarding the consequences of a 
possible bankruptcy of a municipal counterparty and our ability to terminate 
and liquidate our positions in such event, without regard to the generally 
applicable automatic stay.  Attached is a brief memo discussing this issue.  
The principal points to note are as follows:

(1) Municipalities, if they were to file for bankruptcy, do so under Chapter 
9 of the Bankruptcy Code ("BC")--e.g., Orange County, CA.

(2) The "forward contract" exception to the automatic stay found in Sec. 556 
of the BC presently is not explicitly made applicable to filings pursuant to 
Chapter 9.  As you recall, Sec. 556 allows termination of a forward contract 
because of the commencement of a bankruptcy case notwithstanding the general 
prohibition for termination of executory contracts for such grounds in Sec. 
365.  This appears to have been an oversight when Sec. 556 was added to the 
BC in 1982 (according to the National Bankruptcy Review Commission) and 
probably has not been a "high on the agenda item" to correct due to the fact 
that Chapter 9 bankruptcies are relatively rare.

(3) It appears that the other amendments to the BC dealing with forward 
contracts are applicable to Chapter 9, such as Sec. 362 (b) (6) which allows 
the non-defaulting party to setoff or settle without regards to the stay if 
there is an existing default other than an insolvency event.  Also note that 
Colliers on Bankruptcy, the "Bible" in this area, suggests that one can 
nonetheless make the argument that the forward contract exception can be read 
to apply to Chapter 9 filings under present law (see also the discussion at 
(6) below)--although it is uncertain whether a bankruptcy court would accept 
this argument to effectively write something into the statute.

(4) There currently is pending legislation that has been passed by both the 
House and the Senate (and is now the subject of a joint House/Senate 
Conference Committee) that would make it clear that the forward contract 
exception to the automatic stay shall apply to Chapter 9 bankruptcies.  
Adding Sec. 556 to Sec. 901 (the section delineating which sections are 
applicable to Chapter 9 bankruptcies) is not controversial and should survive 
the joint conference committee since similar provisions exist in both the 
House and Senate bills. These provisions are part of the overall legislation 
making fundamental changes in the BC (that has received a lot of press and 
which is controversial in terms of how it treats individual consumers filing 
for bankruptcy).  Our sense, however, is that the bill will be passed and 
signed by President Bush.

(5) Assuming the amendments to Chapter 9 filings are enacted, under the 
existing bills they would first become effective for bankruptcy cases filed 
after 180 days after the legislation is signed by the President.  Thus, to 
the extent that ENA has existing contracts with municipalities, ENA would be 
permitted to exercise its termination and liquidation rights thereunder 
without regard to the automatic stay as long as the municipal counter party 
does not file within 6 months after the date the legislation is signed.

(6) It is worth noting that the legislative committee reports describing the 
changes provide that Congress is "clarifying" that the forward contract 
provisions of the BC apply to municipal bankruptcies, noting that these 
provisions "by their terms are intended to apply to all proceedings under 
Title 11" (which includes Chapter 9 proceedings).  The Senate Report  goes on 
to say that:  "Although sections...556...provide that they apply in any 
proceeding under the Bankruptcy Code, this subsection makes a technical 
amendment in chapter 9 to clarify the applicability of these provisions."  
(Emphasis added).  Thus, this committee language would appear to support an 
argument that Sec. 556 applies to Chapter 9 bankruptcies under Congress's 
interpretation of existing law--obviously, the hoped for result from ENA's 
standpoint.

(7) For your information, when Orange County, CA, filed for bankruptcy the 
County filed under Chapter 9.  The investment pool that held the derivatives 
and other financial contracts initially also made a separate filing under 
Chapter 9. This filing was dismissed, essentially on the basis the investment 
pool was not eligible for relief under Chapter 9 because it did not qualify 
as a "municipality" and it had not been specifically authorized to file under 
Chapter 9.  The dealers and brokerage houses terminated and liquidated their 
positions shortly after the initial filing, based on their belief that the 
investment pool's use of Chapter 9 was improper.  Their terminations and 
liquidations were not undone.

(8) Lastly, as mentioned above, you should note that even if Sec. 556 is not 
applicable to Chapter 9 filings under existing law, if ENA terminated a power 
contract with a municipality prior to the filing date for a reason other than 
the act of filing a bankruptcy petition (e.g., a bond downgrade; failure to 
post collateral; a cross default; the existence of a condition where the 
counterparty is "unable to pay its debts as they come due," etc.), ENA would 
be permitted to proceed with the liquidation of its position (and it could 
exercise any set off or settlement rights) without regard to the automatic 
stay.

Hopefully, the pending legislation will be passed and the concern as to the 
applicability of Sec. 556 to municipalities will be completely eliminated 
within a relatively short period of time.  In the interim, particularly 
during the upcoming summer (when prices in many locations will be highly 
volatile and certain parties' credit positions could fluctuate rapidly and 
materially in some cases, particularly if they are filling open positions in 
the spot market), it may make sense to alert our credit group to be 
particularly vigilant in their monitoring of the ongoing financial condition 
of our municipal counterparties so that we preserve as much flexibility as 
possible with respect to exercising our termination rights under the 
contracts on account of defaults other than the filing of a bankruptcy 
petition by or against our counterparty.

Please give me (or Carl, 303 291-2630, or Jim, 303 291-2632) a call if you 
want to follow up on any of this.

Thanks.

John


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John Klauberg
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
212 424-8125
jklauber@llgm.com
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