T-D Morgan Stanley Prepay - Funding/Margining Implications

I am preparing a more complete assessment of the entire transactions, but I'd
like to articulate one potentially critical point (that Treasa and I were
just discussing).

Problem:
If we are to confirm the price risk management component (leg) of the
transaction (WTI swap) under the existing Morgan Stanley Capital Group Inc.,
please be aware that Morgan Stanley would have the contractual right to
margin Enron for any positive incremental MTM value associated with this
trade. The contract contains a collateral threshold of $15MM; however, our
current exposure is approximately $130MM out-of-the-money with Enron
currently posting in excess of $110MM in cash and L/Cs. Consequently, any
incremental MTM in Morgan Stanley's favor would require the posting of margin
in that amount. For example, for the transaction contemplated, a $5 decline
in the forward price curve would equate to incremental margin requirement of
$80MM (assuming 16MM Bbl volume).

From a credit management standpoint, I have no objections. However, the
potentially significant margining requirements may undermine the funding
objective of your structure.

Solution:
One solution would be to confirm this trade under the above-referenced master
trading contract (not an ISDA), but exclude this transaction for margining
purposes. Both parties would retain setoff rights; and since our existing
positions are grossly out-of-the-money, it is very unlikely that Enron would
incur any incremental credit risk due to the transaction.

Rod