Mark and Greg,  

FYI, below is an update from John Nowlan on Q3 issues surrounding the crude and products P&L.  I thought you would find this informative as to what is going on.  Mike

3rd Quarter update
Recent steps taken to manage crude and products
As you are aware the big changes this year have come from breaking the various businesses into their respective area and giving the lead to managing the business to a specific individual e.g. J. Goughary - Gasoline, C. Mahoney - Distillates, N. Clarke - Resid, S. Bland - Petchems, B. White and D. Schroeder - Crude.  This was done to give more business focus and ensure as we build the mid marketing and origination groups we have the right trading structure.  As for origination and mid marketing we have been very successful building out the USA org and now will be looking to add some talent in Europe.  Origination likewise we have been successful in the crude and products area with Randy's team.  On the petchem side, I have been interviewing extensively over the past week and hope to have one very strong addition for Doug, Tim O'Neal, and two very highly rated associates coming from EBS. As for the trading itself, I imposed trading limits on all traders 3 weeks ago and, as will be addressed next, we are not losing much if any money on our daily trading rather the losses are coming from primarily one huge structured position.  Lastly, we have been quite aggressive in divesting of any individuals, which were not helping us to achieve the goals, which we have set forth.  Bill Briggs, Phil Clifford and Andrea Hauser will all be leaving the group.

3rd Quarter loss explanation
Losses to date:  $40.23 million
$30.79 is in the ERAC book (i.e. Don's big P+ and Nymex swap position)
?	$23.34 is due to Vega, Theta and Gammas
Vega:  $4.30
Theta:  $16.72
Gamma:  $2.30
?	$5.2 due to curve shift
$5.2 million in distillates
?	$1.3 million we discovered in a mis -marked curve when Bill Briggs was terminated.
?	$5.52 million is curve shift (inventories we are holding globally in a falling market)

P+ issues and management
Two key problems:
1.	Correlation marked on the Cal 02 is still too low, we need to raise this correlation.
2.	Nymex option position, which was put in the book to hedge the P+ position, is too large and mis -marked, i.e. the market is 3.20 and we are marked at 2.85.
Solutions and steps forward:
We have $15 million to correct some of this problem and that was getting done late last week.  Don has been talking to Koch and BP in restructuring the P+ book and moving a portion of the CAL 01 and early 02 position out as far as 03 so we have smaller, more manageable positions.  Ideally over the next week we hope to get the book to a position where the theta bleed goes from $270k/day down to around $100k/day.  This is worth $5.1 million a month to us.  Lastly, once we get through the next few months a significant piece of our exposure rolls off.

In summary, the "day trading" the group has done has been steady in a very choppy market; it is the ERAC structure, which is tainting us.  It would be useful to you if Rob, Don and I got together with you to go over all the specifics some time this week, as it is difficult to handle by Email.

John Nowlan