Re: ECP Sub Notes

See below - I believe the amount that falls out of the books will be my
entire discounted proceeds. I am awaiting a call back on this but it looks
like schedule E will be the best way to go.
---------------------- Forwarded by Georgeanne Hodges/HOU/ECT on 12/08/2000
04:20 PM ---------------------------

Enron North America Corp.

From: David Leboe 12/05/2000 10:35 AM

To: Michael S Galvan/HOU/ECT@ECT
cc: Hope Vargas/HOU/ECT@ECT, Roger Ondreko/HOU/ECT@ECT, Georgeanne
Hodges/HOU/ECT@ECT
Subject: Re: ECP Sub Notes

Current plan is to sell the proceeds (in the money Swap received from El
Paso) to Condor. Primary issue relates to gain recognition.

The concern is that we are receiving and "in the money" NYMEX swap in return
for the Notes. The transaction would be considered a nonmonetary exchange
pursuant to APB 29 (since we are not receiving cash). Any gain under APB 29
is deferred until cash is received (in excess of basis). If the Notes were
accounted for under FV, we could "fair value" the Notes immediately preceding
the transaction and mitigate gain deferral under APB 29.

To the contrary, if the Notes are Accrual, any gain on the disposition ($5
million) would be deferred as of 12/31/00 (since we cannot take a gain on an
accrual asset prior to the transfer/sale to Condor).

So the $5 million dollar question at hand is whether we can build an argument
that the Notes should have been FV'd to begin with.

I believe our arguements in the past (for Accrual treatment) were weak and AA
did not challenge at the time we adopted FV acctg for Structured Credit
investments. I think we should push the issue with AA and argue that the
Note should have been marked to begin with.

If we cannot successfully argue for FV treatment of the Note currently,
Condor would be entitled to a gain on the NYMEX swap once Global Finance
monetizes the swap in 1Q 01 via a seperate QSPE transaction.

Basic issue is 4Q Gain vs. 1Q 01 gain for ENA.

Let me know what you think.

Thanks.

Michael S Galvan
12/05/2000 10:17 AM
To: David Leboe/HOU/ECT@ECT
cc: Hope Vargas/HOU/ECT@ECT
Subject: Re: ECP Sub Notes

If you're referring to the debt originally with ECM (approx $158MM), then
you're correct, it's in the Accrual book. Regarding AA's question, how would
the sale be impacted if fair value vs accrual ?

Enron North America Corp.

From: David Leboe 12/05/2000 08:36 AM

To: Hope Vargas/HOU/ECT@ECT, Michael S Galvan/HOU/ECT@ECT
cc: Roger Ondreko/HOU/ECT@ECT
Subject: ECP Sub Notes

Are these notes in the Fair Value book or the Accrual book?

If I recall correctly, they are in the Accrual book.

If so, can we build an arguement that they should have been in the Fair Value
book, but for some unforseen reason, they were included in the Accrual Book?

As you may or may not be aware, we are trying to sell ECP to El Paso by the
end of the year. One of the issues AA has brought up is whether our current
treatment of the sub notes is Accrual or Fair Value.

Please advise.

Thanks.