Message-ID: <17057670.1075855248392.JavaMail.evans@thyme> Date: Wed, 1 Aug 2001 12:18:24 -0700 (PDT) From: sheila.tweed@enron.com To: e..jones@enron.com, kay.mann@enron.com Subject: FW: Mandatory Setoff Language for Inclusion in all EWS Trading Contracts Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: Tweed, Sheila X-To: Jones, Karen E. , Mann, Kay X-cc: X-bcc: X-Folder: \Kay_Mann_Jan2002\Mann, Kay\Policy manual and United Way X-Origin: Mann-K X-FileName: kmann (Non-Privileged).pst [Tweed, Sheila] We should make sure that this finds it's way into the Lega= l Policy binder.=20 Original Message----- From: =09Elbertson, Janette On Behalf Of Haedicke, Mark E. Sent:=09Thursday, July 12, 2001 9:58 AM To:=09Evans, Mark (London Legal); Boyd, Justin; Simons, Paul; Von Bock Und = Polach, Marcus; Aronowitz, Alan; Bishop, Larry; Blaine, Michelle; Boyd, Jus= tin; Brownfeld, Gail; Bruce, Robert; Bushman, Teresa G.; Calo, Andrea; Caro= lan, Dominic; Cash, Michelle; Clark, Barton; Collins Jr., Harry M.; Cook, M= ary; Corbet, Nancy; Crady, Ned E.; Daniels, Eddy; Davis, Angela; Del vecchi= o, Peter; Dickson, Stacy E.; Dieball, Scott; Edison, Andrew; Engeldorf, Ros= eann; Evans, Mark; Gaffney, Chris; George, Robert H.; Gray, Barbara N.; Gre= enberg, Mark; Gresham, Wayne; Hall, Steve C.; Hansen, Leslie; Hendry, Brent= ; Hodge, Jeffrey T.; Johnston, Greg; Jones, Karen E.; Keohane, Peter; Koehl= er, Anne C.; Lee, Matthias; Leite, Francisco Pinto; Lindeman, Cheryl; Lunds= trom, Bruce; Lyons, Dan; Mann, Kay; McBride, Jane; McCarrel, Steven; McCull= ough, Travis; Mellencamp, Lisa; Minns, David; Moore, Janet H.; Murphy, Harl= an; Murray, Julia; Nelson, Cheryl; Nemec, Gerald; Nettelton, Marcus; Nissan= , Limor; Novak, John; Pais, Randy; Portz, David; Powell, Mark; Rasmussen, D= ale; Rivera, Coralina; Robison, Michael A.; Rogers, Daniel R.; Rosell, Mart= in; Sager, Elizabeth; Sanders, Richard B.; Sayre, Frank; Schuler, Lance; Sc= hwartzenburg, John; Shackleton, Sara; Sharp, Vicki; Simons, Paul; Sole III,= Carlos; St. Clair, Carol; Stoler, Lou; Taylor, Mark A; Tweed, Sheila; Van = Hooser, Steve; Viverito, John; Von Bock Und Polach, Marcus; Yoder, Christia= n Subject:=09Mandatory Setoff Language for Inclusion in all EWS Trading Contr= acts One of the most important credit tools available to help Enron Wholesale Se= rvices (EWS) manage counterparty credit risk is setoff rights. This is par= ticularly true as our trading business is expanding to include numerous com= modity lines, including gas, power, coal, steel, pulp and paper, each of wh= ich may be traded under different masters with a single counterparty. This= complexity is further increased as a result of EWS using multiple affiliat= ed entities to trade the various commodities. Absent express contractual s= etoff rights, EWS may be unable to setoff exposures under different master = contracts. =09A team of EWS lawyers has been working to assemble setoff language that = will substantially enhance EWS's credit position with counterparties with w= hom we trade multiple commodities. This setoff language, which is set fort= h below, must be in all EWS trading form contracts. Similarly, when negoti= ating on third party paper, we should request that this additional setoff l= anguage be added. MANDATORY SETOFF LANGUAGE FOR=20 EWS TRADING CONTRACTS =09(A) Upon the designation or deemed designation of an Early Termination D= ate, the Non-Defaulting Party ("X") may, at its option and in its discretio= n, setoff, against any amounts Owed to the Defaulting Party ("Y") by X or a= ny Affiliate of X under this Agreement or under any other agreement(s), ins= trument(s) or undertaking(s), any amounts Owed by Y to X or any of X's Affi= liates under this Agreement or under any other agreement(s), instrument(s) = or undertaking(s). The obligations of Y and X under this Agreement in resp= ect of such amounts shall be deemed satisfied and discharged to the extent = of any such setoff exercised by X and/or X's Affiliates. X will give Y not= ice of any setoff effected under this section as soon as practicable after = the setoff is effected provided that failure to give such notice shall not = affect the validity of the setoff. For purposes of this Section __, "Owed"= shall mean any amounts owed or otherwise accrued and payable (regardless o= f whether such amounts have been or could be invoiced) as of the Early Term= ination Date. =09 =09Amounts subject to the setoff permitted in this Section __ may be conver= ted by X into any currency in which any obligation Owed is denominated at t= he rate of exchange at which X, acting in a reasonable manner and in good f= aith, would be able to purchase the relevant amount of the currency being c= onverted. If an obligation is unascertained, X may in good faith estimate t= hat obligation and setoff in respect of the estimate, subject to the releva= nt party accounting to the other when the obligation is ascertained. Nothi= ng in this Section __shall be effective to create a charge or other securit= y interest except as may be provided under applicable law. This setoff pr= ovision shall be without prejudice and in addition to any right of setoff, = netting, off-set, combination of accounts, counterclaim, lien or other righ= t to which any party is at any time otherwise entitled (whether by operatio= n of law, contract or otherwise). Each of the parties represent and acknow= ledge that the rights set forth in this Section __ are an integral part of = the agreement between the parties and that without such rights the parties = would not be willing to enter into Transactions. The parties further ackno= wledge that each is executing this Agreement on behalf of itself as princip= al and, with respect to this Section ___, as agent on behalf of its Affilia= tes, which Affiliates shall receive the benefits of this Section __ and oth= erwise be bound as if such Affiliates had directly signed this Agreement as= it relates to Section ___. =09(B) Notwithstanding any provision to the contrary contained in this Agre= ement, the Non-Defaulting Party shall not be required to pay to the Default= ing Party any amount under Section __ until the Non-Defaulting Party receiv= es confirmation satisfactory to it in its reasonable discretion (which may = include an opinion of its counsel) that all other obligations of any kind w= hatsoever of the Defaulting Party to make any payments to the Non-Defaultin= g Party or any of its Affiliates under this Agreement or under any other ag= reement(s), instrument(s) or undertaking(s), which are Owed as of the Early= Termination Date have been fully and finally satisfied. =09This new setoff language will provide EWS the right to setoff amounts du= e and owing as of the Early Termination Date (but does not include future p= ayments) between the counterparty and EWS and its affiliates (triangular se= toff) after the designation of an Early Termination Date. This language ha= s been reviewed by U.S. bankruptcy counsel, and is appropriate under U.S. l= aws for commodity transactions with U.S.-based counterparties. Each group = will need to review this language with their local counsel in each jurisdic= tion in which EWS trades in order to ensure enforceability. In addition, = prior to introducing this language into your forms, changes will be require= d to terminology and/or to include terminations resulting from events other= than Events of Default (e.g. "Affected Party" under ISDA). Finally, when = incorporating this setoff language into the EWS trading forms, please be aw= are that this language is not intended to override the payment netting term= s (monthly netting of receivables) or the close-out netting procedures (app= licable upon the designation of an Event of Default), both of which should = remain in the trading forms. Rather, this language is only intended to add= setoff rights to all EWS trading forms. When incorporating this setoff la= nguage into your trading forms, you will need to review the forms to determ= ine if there are any references to setoff or other similar concepts that wi= ll need to be overridden and/or coordinated. Finally, in order to assist a= ll lawyers in negotiating these setoff provisions, we are in the process of= preparing a brief explanation of how this setoff works and why it is mutua= lly beneficial to EWS and our counterparties, which explanation you will be= able to share with your counterparties. This explanation will be distribut= ed shortly. =09If you have any questions, please contact me at 713-853-6544 or Elizabet= h Sager at 713-853-6349.