Another bit of positive news. It's easier to start at the bottom of the e-mail and read up.
	George, do we have any intelligence on the Carbontronics deal? 

-----Original Message-----
From: Johnson, Christopher P. [mailto:CPJohnson@brobeck.com]
Sent: Tuesday, July 24, 2001 3:54 PM
To: Brownfeld, Gail
Cc: Mcclellan, George; Markel, Gregory A.
Subject: FW: Sempra tax rate


Gail:

Please see below.  We've been after Sempra for some time to produce info re
Sempra Energy's other Section 29 deals, and they have seemed "reluctant" to
produce the info.  I can understand why.  It's a little difficult to argue
that crushing coal disables you from getting tax credits when your corporate
parent is claiming tax credits from precisely that kind of operation.

I'll let you know as soon as we finally get the Carbontronics production out
of Sempra.

CPJ

Christopher P. Johnson
Brobeck, Phleger & Harrison, LLP
1633 Broadway
New York, New York 10019
(212) 237-2558
(212) 586-7878
cpjohnson@brobeck.com


-----Original Message-----
From: Martin, Keith [mailto:kmartin@chadbourne.com] 
Sent: Monday, July 23, 2001 6:43 PM
To: 'Johnson, Christopher P.'
Cc: Markel, Gregory A.; Zeisler, Aaron M.
Subject: RE: Sempra tax rate




Chris,

	Sempra holds its interest in Carbontronics through Sempra Energy
Financial Corporation, its unregulated investment subsidiary.  

	I have lost track of what the projects are doing, but when they were
originally put in service in 1998, the plan was to use as feedstock
"high-moisture, low-sulfur, low-Btu sub-bituminous coal" at two of the
projects, and a mix of coal fines or waste coal blended with whole coal at
the other two -- at least that's what we told the IRS in the ruling
requests.  The IRS ruling allows whole coal.  It says nothing about any size
limit.  

Keith

-----Original Message-----
From: Johnson, Christopher P. [mailto:CPJohnson@brobeck.com]
Sent: Monday, July 23, 2001 4:31 PM
To: 'Martin, Keith'
Cc: Markel, Gregory A.; Zeisler, Aaron M.
Subject: RE: Sempra tax rate


Keith,

You mention below that Sempra wants to sell its interest in Carbontronics.
We learned in April that Sempra itself (as opposed to Sempra's subsidiaries)
has a direct syncoal investment, but we have been trying since then to get
Sempra to identify it for us.  I am assuming Carbontronics is it.  You have
previously described that project as a "crush and glue" project, which would
be a good thing for us, since that is what Sempra's sub is asserting does
not qualify for tax credits.  Do you have any other info re Carbontronics'
operations or Sempra's investment in it?

Thanks,

CPJ

Christopher P. Johnson
Brobeck, Phleger & Harrison, LLP
1633 Broadway
New York, New York 10019
(212) 237-2558
(212) 586-7878
cpjohnson@brobeck.com


-----Original Message-----
From: Martin, Keith [mailto:kmartin@chadbourne.com]
Sent: Friday, July 20, 2001 5:16 PM
To: 'gmarkel@brobeck.com'; 'cpjohnson@brobeck.com'
Subject: Sempra tax rate



Greg and Chris,

	As best we can tell, Sempra is not in a position currently to use
section 29 tax credits.  This is based on the following bits of evidence.

	1. A company cannot claim section 29 tax credits in years when it
pays no taxes or pays them under the alternative minimum tax (rather than
the regular corporate income tax).  

	2. Section 29 credits cannot be carried forward.  A company must use
them or lose them.  The one exception is in a year when the company is on
the alternative minimum tax, the credit turns into a so-called AMT credit
and can be carried forward.  It must be used in that case in the first year
the company comes off the AMT.

	3. It appears from Sempra's 10-K that it was in a net operating loss
position in 2000.  The company shows "current" federal income taxes of -$8
million.  It also shows "deferred" federal income taxes last year of $207
million.  According to Morris Meltzer, tax director at PG&E's unregulated
affiliate, this means that the company had more book income than taxable
income last year.  The deferred tax liability reflects the taxes the company
expects to have to pay in the future as a result of this disparity.

	4. Sempra's 10-Q for the first quarter 2001 shows positive current
tax liability of $74 million.  However, Jack Casey, vice chairman of
Meridian Investments, told me that Sempra expects to be in a net operating
loss position for the year.  Meridian has been hired by Sempra to sell
Sempra's interest in the Carbonronics syncoal facilities.  I asked Casey why
Sempra wants to sell -- is it because it can't use the tax credits or
because it has soured on investing in syncoal projects given all the bad
publicity?  Casey said it cannot use the tax credits.

	In other news, the IRS has not budged on its plan to limit the
capacity of plants to which it issues rulings to absurdly low numbers.  The
industry has complained to the Treasury, and there have been discussions at
senior levels of Treasury and the IRS, but no reports back on where these
internal talks are headed.

	Detroit Edison has a meeting with the IRS on its ruling request next
Tuesday.  The IRS has said it will limit capacity at the DTE facility to
198,000 tons a year.

	I assume you saw the article last Thursday in the Wall Street
Journal about syncoal projects.  It was on the front page.  As far as I can
tell, all proposed sales of syncoal plants in the market are on hold.  This
is a consequence of the Wall Street Journal article and the impasse with the
IRS over capacity.  The industry is starting to think it may have won a
political battle earlier this year at Treasury, but lost the war.  The IRS
bureaucrats will have the final say.

	Joe Makurath, the IRS rulings group chief, said he is getting a
number of FOIA requests for documents about projects on which the IRS has
already ruled.  He said he intends to be liberal in releasing information.
There are rumors that the Wall Street Journal may be one of the
organizations seeking information and may be at work on a followup article.

	The IRS launched an audit of four projects in West Virginia and
Virginia that many people consider to be on the best end of the spectrum.
The projects already have rulings that they qualify for credits.  The IRS
appears to be gathering evidence to argue that they did not get into service
in time to qualify for tax credits or else that the projects failed to
comply with the rulings.  It is sending out big guns from Chicago, and one
agent told the taxpayer that the IRS national office said "don't worry about
expense on this one."

	I will try over the weekend to give you my comments on the
deposition transcripts.  Sorry for the delay.  If you don't find them when
you come in on Monday, they will be first on my to-do list that morning.

Keith




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