Message-ID: <31066655.1075843919885.JavaMail.evans@thyme> Date: Sat, 16 Sep 2000 03:00:00 -0700 (PDT) From: george.mcclellan@enron.com To: mike.mcconnell@enron.com Subject: Re: Synfuel Cc: jeffrey.shankman@enron.com, jordan.mintz@enron.com, daniel.reck@enron.com, matthew.arnold@enron.com, angie.collins@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: jeffrey.shankman@enron.com, jordan.mintz@enron.com, daniel.reck@enron.com, matthew.arnold@enron.com, angie.collins@enron.com X-From: George McClellan X-To: Mike McConnell X-cc: Jeffrey A Shankman, Jordan Mintz, Daniel Reck, Matthew Arnold, Angie Collins X-bcc: X-Folder: \Mark_McConnell_June2001\Notes Folders\All documents X-Origin: MCCONNELL-M X-FileName: mmcconn.nsf Mike - I think we are doing a good job of isolating ourselves from the direct risk of owning synfuel machines. The equity owners are the ones at risk for any amendments to Section 29 of the tax code. Further, we have identified the "Class A" machines in the market, those with the strongest PLR 's, legal facts, and credit worthy owners, and have concentrated our activities on only those machines. We will be responsible for supplying coal to the machines, a short position we enjoy today with our term sales of equity coal to Florida Powers' synfuel group and traded coal to Sempra, and act as sales agent (obviously with obligations to sell) for the resultant synfuel. The deals we are currently negotiating with AIG and PacifiCorp are even more favorable then our Sempra deal in that we will not be acting as operator of the machines. We also expect to receive mark to market accounting treatment on the new deals. As point of reference we think AIG will be worth about $25 mm and PacifiCorp north of $50 mm. Although we have yet to mtm the Sempra deal, it is worth about $25 mm on a mtm basis. Between the above three deals we have over $100 mm of potential income this year. In addition we will enter into long term short positions with the machines, which will allow us to expand our physical flows, and continue to grow our business. As an example, this year we will deliver about 12 - 15 mm tons of eastern coal. If we successfully conclude the AIG and PacifiCorp deals, we will move an additional 11 - 13 mm tpy of eastern coal. Sempra will add another 2 mm tpy, for a total of 13 - 15 mm tpy. We will be in a position to virtually double our physical flows of eastern coal next year. Synfuel has already had a significant impact on a number of regional markets. Not only do we want to be in the synfuel business, we need to be in the business in order to understand, anticipate, and take advantage of rapidly changing market dynamics. Synfuel represents a significant, fundamental change in the coal business. This changing market will present new opportunities for us to develop and exploit. The key obviously is to be a major player in both the synfuel and underlying coal markets in order to take advantage of the information flows generated by each market. We are already in the process of meeting with international customers about supplying them with synfuel. We have received a favorable reaction from both the international utilities and steel mills. We will gain a significant competitive advantage in the international market by being in a position to offer synfuel not only through Pier IX in Virginia (Sempra), but also through New Orleans (AIG and PacifiCorp - via terminal sites on the Ohio River system). We have asked our regulatory people to stay on top of any activity in Washington, and to date synfuel has not been a significant political issue. Jordan has directed our outside tax people to monitor the IRS' temperature, and their response to any letters they receive regarding synfuel from members of Congress or the industry. The noise in the system has been primarily generated by Arch Coal Co. who are not active in the synfuel market; and the State of West Virginia, who would like to tax the production of synfuel. The tax issue is one we will try to solve by pushing back on the equity. Arch is no match for the combined legal and lobbying capabilities of the large players now in the synfuel business - Florida Power, SCANA, PGE, AIG, Sempra, PacifiCorp, Kentucky Utilities, TECO, Keystone Conemaugh, DQE, Norfolk Southern, Fannie Mae, Drummond, Peabody (Lehman Bros.), Alliance (Chase), Massey (Fluor) and Southern Company Services. In addition Aquila. PSE&G, Duke, CP&L, VEPCO, Santee Cooper and others are working to locate machines at their river terminal and generation sites. I will be in Pittsburgh and West Virginia all of next week. I would like to schedule a meeting time for the group, and I will call in - preferably Monday mid - afternoon or Tuesday late afternoon. Angie will coordinate with everyone to set a convenient time. Thanks, George From: Mike McConnell 09/15/2000 04:18 PM To: George McClellan/HOU/ECT@ECT cc: Subject: Synfuel George, I would like to have a brief (30 minute) meeting about the noise in the political system about synfuel and reaffirm Jordon's viewpoint on Section 29 credits. This is big issue and without this reaffirmation I believe we will have approval issues with RAC and others. I want Jeff and/or I in the meeting. Thanks, mike