Sara, I think the credit issues that I was going to have to address with 
Russell have been resolved in that it looks like Russell is just going to do 
a margin call on this counterparty (North Coast Energy).  However, I think 
these issues could come up again with other counterparties, and I think it 
might be beneficial to have a general meeting with credit to establish some 
guidelines (especially since there are so many new people in credit).

The issue, basically, is alternative ways of gaining comfort if we want to 
forego a margin call -- the North Coast situation is a good example.   North 
Coast started as a simple ISDA amendment to raise the collateral threshold so 
that we wouldn't have to margin call.  Russell (as he has on another deal) 
asked to provide that North Coast's substantial debt to its parent company be 
subordinated to us.  As we were considering this arrangement, North Coast's 
counsel called to tell us that they had just signed up a big bank line that 
they used to pay off the intercompany debt.  He told us that the bank 
syndicate had also agreed, essentially, to let Enron share secured creditor 
status with the bank group -- on the same debt priority level -- for up to $5 
million on a pari passu basis.  But I think Russell felt that North Coast had 
gotten over leveraged, and so it looks like he's going to do a margin call.

I have tried to impress upon Russell that gaining debt priority -- whether 
through an intercompany subordination agreement or pursuant to an arrangement 
described above -- is not a simple thing to effect legally.  Obviously, on 
this particular deal, we've got too much on our plates in-house to spend time 
reviewing the 82-page loan agreement, negotiating intercreditor documents, 
and doing due diligence on the liens.   I did tell Russell that if North 
Coast was willing to pay for outside counsel to do this for us, then I would 
have to ask you or Mark Taylor if we could go this route (we never made this 
offer to the counterparty).

It seems to me that there is a lot of potential for these situations to come 
up again.  I would think that the rise in gas prices has resulted in a lot of 
exposures, and for business relationship purposes, we like to consider 
alternatives to margin call if the counterparty can come up with another way 
to give us comfort (this afternoon I got a call from one of our marketers who 
was rather irate about the North Coast margin call).  If we are going to be 
considering alternatives like subordination or secured creditor status, I 
think it would be a good idea if we impressed upon everybody in credit that 
these arrangements are not achieved as easily as they are conceived, and that 
they will have to engage in a bit of cost-benefit analysis, and consider the 
logistics involved, before agreeing to these arrangements.

Let me know what you think. -- Bob




Robert E. Bruce
Senior Counsel
Enron North America Corp.
T (713) 345-7780
F (713) 646-3393
robert.bruce@enron.com