Message-ID: <11605517.1075844939849.JavaMail.evans@thyme> Date: Sun, 2 Jul 2000 15:58:00 -0700 (PDT) From: steve.duffy@enron.com To: rbaird@velaw.com Subject: Re: Available Cash for the Fourth Quarter Cc: cpena@velaw.com, stanley_horton@eott.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: cpena@velaw.com, stanley_horton@eott.com X-From: Steve Duffy X-To: "Baird, Bob" X-cc: cpena@velaw.com, stanley_horton@eott.com X-bcc: X-Folder: \Stanley_Horton_1\Notes Folders\All documents X-Origin: HORTON-S X-FileName: shorton.nsf To close the loop on this, I think Lori should review Bob's findings and comment on same once she returns from vacation. SWD "Baird, Bob" 06/30/00 04:10 PM To: "'Horton, Stan'" cc: Steve Duffy/Houston/Eott@Eott, "Pena, Carlos" Subject: Available Cash for the Fourth Quarter CONFIDENTIAL/ATTORNEY-CLIENT PRIVILEGE Stan: I have given considerable thought to the issue you raised in the meeting on June 15 -- that is, whether the amount of Available Cash for the fourth quarter of 1999 could be recomputed so that the issuance of APIs for that quarter could be rescinded. My delay in getting back to you was occasioned by the fact that I went on vacation shortly after that meeting and just returned to work yesterday. The reason the question is worth exploring is this --- Enron Corp. has certain rights under its support agreement with EOTT, and it is entitled to exercise those rights notwithstanding the fact that it also has a fiduciary duty as a controlling shareholder. I approached the question solely as counsel for Enron and from the standpoint of evaluating the merits of any claim that Enron could make that the API issuance should be rescinded. From that standpoint it is no different from asking: if EOTT were dealing with an unrelated third party would that third party have a claim for rescission? Unfortunately, based on the facts as I understand them, I have been unable to formulate a claim that has sufficient merit to be worthy of assertion, as explained below. The computation of Available Cash for any quarter is based on (a) cash receipts and disbursements and (b) increases or reductions in cash reserves, which the General Partner "determines in its reasonable discretion to be necessary or appropriate." Thus, the question is whether there is a basis for recomputing the cash receipts or the reserves for the fourth quarter. Cash Receipts. I would think there may well be a valid claim in a situation in which EOTT made a mistake in its calculations of cash receipts or disbursements, even if that mistake was discovered several months later. It is my understanding, however, that the scrub-down of the books for the fourth quarter turned up only immaterial discrepancies from the amounts that had been calculated for the fourth quarter in mid-February, when the distribution of Available Cash for the quarter was made. Thus, I am aware of no meritorious argument that Enron is entitled to rescission because of EOTT's mistakes in calculating its cash receipts or disbursements for the quarter. That being the case, the only other issue that is worth focusing on is the reserves. Reserves. The only component of the reserves that I am aware of that is large enough to bear scrutiny is the theft-related insurance item. There were no cash receipts from the insurance prior to the distribution, so any claim for rescission must focus on the amount of reserves for the fourth quarter. If the level of reserves was determined in a manner that was not consistent with the "reasonable discretion" standard set forth in the partnership agreement, Enron would have a valid claim for rescission. Presumably had the General Partner known in mid-February that insurance would cover the $3 million loss (other than the $500,000 deductible), it would have reduced reserves by $2.5 million (either by setting aside less in reserves or releasing reserves established in prior quarters), which would have produced $2.5 million of additional Available Cash. In that case there would not have been any APIs required. Is there a basis for a claim that the General Partner did not use "reasonable discretion" when it established the level of reserves? Based on the facts as I understand them, I have been unable to come up with a good argument that the General Partner was not using its "reasonable discretion" in making the determination it made. It is my understanding that, although at the time the General Partner was aware that it had theft insurance, it did not know whether the insurance would cover the entire $3 million loss or merely the $800,000 in fair market value of the product at the time of the theft (less the $500,000 deductible). I also understand that the insurance carrier had not admitted liability at that time, so there was some question whether there would be any insurance proceeds. Thus, it seems it would be very difficult to establish that the General Partner did not use its reasonable discretion. The partnership agreement makes it clear that the amount of Available Cash is to be computed based on (a) actual receipts and disbursements during the quarter and (b) distributions from the operating partnerships and reserves established, or changes in reserves, that in each case occur prior to the "date on which the Partnership makes its distribution of Available Cash in respect of such quarter." Thus, the partnership agreement leaves no room for going back and redoing reserves based on events that occur after the distribution for the quarter. Please call if you have any questions about this analysis or if you think I do not have my facts straight or need additional facts. You can reach me at 713/758-2414. Robert S. Baird Vinson & Elkins L.L.P. One American Center 600 Congress Avenue Austin, Texas 78701-3200 Office phone: 512/495-8451 Fax: 512/236-3210 Home phone: 512/347-8065 Car phone: 512/627-8065 Pager: 1-888-487-2651 Voice mail: 512/495-8696, x8451 Internet: rbaird@velaw.com