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