Mark, Rob Milnthorp has asked me to consider whether there is an artful way 
under our Master Agreements that upon certain occurrences we could elevate 
our exposure from unsecured to secured, particularly in circumstances where, 
for whatever reason, we have not received letters of credit or other 
collateral.  My thought is to insert a clause in our Master Agreements in the 
nature of a "floating charge".

The problem with this concept is that it may be resisted within the 
industry.  For example, certain counterparties, i.e. a financial institution 
or a near-financial institution, such as a bank, a brokerage, a trading 
institution, etc., would not likely be willing to provide us with security 
over their assets.  In general, counterparties will also have concerns with 
granting security over their assets, particularly as that security may have 
restricting consequences for their treasury/banking relationships and 
covenants, and/or on their ability to conduct business, including disposing 
of assets which may then require our consent.  In addition, it would likely 
be necessary to introduce this concept on a bilateral basis, such that it 
would also be binding on us in similar circumstances.  (Counterparties could 
go so far as requiring this concept in our Enron Corp. guarantees.)

For example, in the natural gas business in Canada at least, older form 
marketing agreements and agreements used by gas aggregators with gas 
producers used "reserved dedication" covenants, whereby reserves were 
dedicated to a particular contract.  These covenants did not, however, create 
security, to avoid the complicating issues addressed above.  To the extent 
that the reserves were not available, the marketer/aggregator could have a 
claim, on an unsecured basis, for breach of covenant, but was not in a 
secured position.  I do not believe we want to go to this type of concept.

However, we may be able to think of some creative way whereby the 
counterparty is free to deal with us (and we are free to deal with them) on 
an unsecured basis, subject to our standard collateralization requirements, 
but also provide that upon the occurrence of a particularly serious event, 
such as a Material Adverse Change, a Triggering Event, an Event of Default, 
etc., the security automatically takes place.  We would need to consider 
whether such a "prospective" security interest could be made to work and be 
enforceable.

I have discussed this concept on a preliminary basis with Rob Milnthorp and 
Mungo Hardwicke-Brown of the Blake firm to see if we could create a 
relatively simple clause to be inserted into our Master Agreements which 
artfully deals with this issue.  In essence, the idea would be to get 
ourselves in a position of being one step ahead of all of the unsecured 
creditors in the event there is an insolvency.

Would you please let me know whether you think this is a worthwhile project 
or whether we have considered such a thing in the past in Houston.  As noted 
above, the clause would have to be one that could be "sold" to counterparties 
and be acceptable to us on a bilateral basis (and that may well not be 
possible).  If you believe that it is a worthwhile project, I will continue 
to work with Mungo Hardwicke-Brown to see if we can come up with something.  
If you do not believe that it is a worthwhile project or have considered this 
idea in the past and found it to be unworkable, please let me know, and we 
will not work on it further.

Regards,
Peter