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that quarter could be rescinded.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rescinded.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