The DOE order requiring gas suppliers to supply gas to PG&E expires at 3:00 
a.m. EST on February 7.  In view of the DOE warnings that the order will not 
be extended, PG&E has received permission from the CPUC to grant to certain 
gas suppliers a security interest in certain of its receivables, and a draft 
security agreement and other documents were circulated over the weekend.  
Here is a summary of the proposal and associated risks:

Summary of Proposal:

The security interest will be granted only to those gas suppliers that 
execute the security agreement.  If we don't sign the agreement, we will 
remain unsecured (there are reasons to refuse to sign -- see below).  
PG&E is granting  a security interest in core customer receivables, and will 
also grant a security interest in its natural gas inventory designated for 
core customers if the value of its A/R falls below the amount owed to gas 
suppliers.  PG&E's figures indicate receivables in excess of payables for 
each of October, November, and December, with $491 million in receivables and 
$329 million in payables in December.
However, the security interest is subject to the prior lien of its First 
Mortgage Indenture, under which approximately $3 billion is outstanding (not 
currently in default).  PG&E believes the total collateral available to 
creditors under that Indenture is from $12 to $30 billion, and that creditors 
under that Indenture would be required to "marshal" assets in the event they 
foreclosed on their security (meaning that a court would require those 
creditors, who have ample access to security other than these receivables, 
would be required to go against that other collateral and leave the security 
for the gas suppliers alone).   
U.S. Trust Company will act as collateral agent (essentially, a trustee).
The security interest is in place until April 30 (per the CPUC order); PG&E 
could seek an extension of the CPUC order if necessary.
The collateral secures obligations for future deliveries only (the collateral 
will not secure PG&E's payment obligations for past supplies).
Suppliers executing the security agreement are committing to "negotiate in 
good faith" to sell natural gas to PG&E on "market" terms; a refusal to sell 
to PG&E on market terms presumably places a supplier in default of the 
security agreement, and the supplier would loses the benefit of the 
collateral.
For as long as the security agreement is in force, suppliers executing the 
security agreement are required to waive provisions in their existing supply 
agreements permitting them (i) to suspend performance on account of PG&E's 
failure to demand additional performance assurance, (ii) to demand payment or 
parent company guarantees, (iii) to declare a default under, terminate or 
suspend performance under, its supply agreement in the event of a bankruptcy, 
insolvency, appointment of liquidator, or failure to pay debts as the become 
due (no supplier is required to waive rights with respect to deliveries prior 
to the date of the security agreement).
PG&E will be required to deliver weekly reports on the value of its 
receivables at the end of the preceding week.

Risks:

Essentially, Enron's choice is (A) execute the security agreement, get the 
benefit of the security for future deliveries under existing commitments and 
any new deals we enter into, and subject ourselves to restrictions on our 
ability to refuse new deals or to exercise our rights under existing 
commitments, or (B) refuse to execute the agreement and remain unsecured, yet 
free of the restrictions and limits that the agreement will place upon us.

If we sign the agreement, we will be a secured creditor to the extent of 
PG&E's obligations covered by this agreement.  If not, we will be an 
unsecured creditor, potentially behind all of the suppliers that did sign the 
agreement.  This is assuming that this arrangement survives any bankruptcy of 
PG&E (it's reasonable to assume that it will).
Signing the security agreement does give Enron security for PG&E's payment 
for future deliveries of gas under existing contracts.  Should Enron decide 
to enter into new deals for additional volumes, PG&E's payment obligations 
would also be secured.  However, Enron will be required to negotiate in good 
faith to supply PG&E on market terms; PG&E has stated that this means that 
Enron will have to supply PG&E in a manner consistent with our dealings with 
PG&E over the past year.  This probably requires Enron to enter into new 
deals, and means that Enron will not have complete discretion in deciding 
whether to enter into new deals if Enron wants to keep the benefit of the 
collateral (if Enron refuses to enter into a new deal with PG&E, PG&E may 
have cause to terminate the security agreement as to Enron).  
The security agreement requires Enron to waive certain rights under its 
supplier agreements, including the right to declare a default upon a PG&E 
bankruptcy, as long as the security agreement is in place.  This could limit 
our flexibility to deal with our overall exposure to PG&E across contracts 
and affiliates in the event of a "meltdown".
There can be no guarantee that the courts would require the creditors under 
the First Mortgage Bond to marshal assets; this means that suppliers signing 
the security agreement may still end up subordinated to those creditors.
The security agreement is governed by California law, and suppliers are 
required to submit to the jurisdiction of California courts.  This means any 
dispute under these agreements will be decided by a California judge.

Please call me at X31575 if you have any questions.
  

Travis McCullough
Enron North America Corp.
1400 Smith Street EB 3817
Houston Texas 77002
Phone:  (713) 853-1575
Fax: (713) 646-3490