Now I know why God made lawyers!  Below is Kevin Liss' latest analysis.  His 
main thesis is that there is a huge return available to the company that will 
take the tax risk.  We just have to find that company.

--Dan

---------------------- Forwarded by Daniel Reck/HOU/ECT on 10/31/2000 04:07 
PM ---------------------------


Kevin Liss@ENRON
10/31/2000 02:24 PM
To: Daniel Reck/HOU/ECT@ECT, Tim Proffitt/HOU/ECT@ECT
cc: Stephen H Douglas/HOU/ECT@ECT 
Subject: The Way Forward

Dan, in response to your question yesterday, it should still be possible to 
get a structural ruling from the IRS along the lines that Deutschebank (DB) 
had contemplated.  In that respect, last week's IRS announcement leaves 
things unchanged.

That's the good news.  However, in light of last week's IRS announcement, DB 
is unlikely to be able to get the new ruling that they desired confirming 
Pacificorp's existing letter rulings, which they have told us was critical to 
them.  It would appear then that the Pacificorp deal is a non-starter from 
their perspective, at least based upon the present plan of operations.  Tim, 
is it at all possible that DB would be willing to drop their demand about 
going back for a confirming letter ruling as long as the Pacificorp 
facilities are processing at least some percentage of coal fines with their 
run-of-mine coal, consistently with their existing rulings?  I doubt it, but 
if not, we need to know so that we can move on and think about other ways to 
do a coal deal with Pacificorp.  I believe that Pacificorp still needs to 
unload their facilities, and they may still be able to leverage off of their 
existing rulings, which are still valid and have not been revoked by the IRS. 

Without a deal with DB, what are our options now?   

First, it is important to recognize that we still have options.  The IRS has 
not killed synfuel.  There has not been any change in the substantive law.  
Last week's announcement was just that -- an announcement of the IRS's point 
of view.  The news is that the IRS is getting out of the business of issuing 
private letter rulings to private taxpayers in the synfuel business, which 
has been an important source of comfort to many investors, but not 
necessarily vital.  Deals get done all the time without the benefit of having 
a private letter ruling from the IRS (generally in reliance on an opinion of 
outside counsel).  We just need to think in terms of what the landscape looks 
like in the absence of getting a new ruling.

One approach would be to follow through with our plans for Pacificorp's 
facilties, meaning we would relocate them, and continue running run-of-mine 
coal, the IRS be damned, and just find an equity player with a greater risk 
profile than Pacificorp.  In short, we would need companies who are willing 
to rely on Pacificorp's existing rulings, period (along with an appropriate 
indemnity).   It seems to me that if the price is right, someone ought to be 
willing to step up.   While the risk is now greater, the potential returns 
are potentially mind-blowing, and an equity player ought to be able to get an 
opinion of outside counsel vouching for the viability of the credits, 
notwithstanding the IRS' current view of the law.  It seems to me that this 
is the only approach that makes sense.

Alternatively, Pacificorp's facilities could revert back to being a pure coal 
fine processing facilities in an atttempt to conform with the IRS's recent 
announcement.  The IRS announcement implicitly endorses facilities that 
process "waste coal fines," so such facilities could still qualify for new 
private letter rulings.  The IRS announcement defines the term "waste coal 
fines" very vaguely, not specifying either the coal size, or what it is that 
makes coal fines properly viewed as "waste" coal fines.  If you think in 
lawyerly terms and try to deconstruct the literal language they use in their 
announcement, I can envision that Enron could synthetically create "waste" 
coal fines by rewriting some of our coal supply contracts with utility 
customers to provide for the sale of only coal of 3/4 inches or greater, 
resulting in a residual category of "unwanted" coal that we could separately 
market to synfuel plants as "waste" coal fines.  In other words, they could 
be fairly described as "waste" insofar as another coal customer specifically 
excluded it from their contract.  In addition, the IRS announcement does not 
require a waste coal fine processing facility to pelletize its output, as 
some commontators had feared, which is a helpful development because the 
pelletizing process would be a tremendous drag on capacity.  

However, there are real difficulties with this approach.  First, the relevant 
language in the IRS announcement defining "waste coal fines" is not real 
statutory law.  It is basically just an IRS policy statement, meaning that we 
cannot bind the IRS to it.  So the opportunity for gamesmanship over the 
IRS's choice of language is much more limited than it would be if this were 
statutory law.  Also, Price Manford has reported to me that what the IRS 
really has in mind in terms of what is acceptable to them as bonafide waste 
fines is fines from true waste ponds.  Even if the taxpayer can argue over 
the meaning of the term "waste" fines, the IRS can stick to their 
understanding of the term, at least for the sake of deciding whether to issue 
a new ruling.  In short, the IRS may not be willing to give a new ruling 
based on a coal fines facility that does not process the truly 3 or 4% waste 
fines incidental to mining operations.  If you are not going to be able to 
get a new ruling anyway, what's the point of going back to being a coal fine 
processing facility?

But there is another more fundamental problem to the latter approach.  
Pacificorp already has good private letter rulings that bless coal fines 
generally (i.e., not merely "waste" coal fines) as well as run-of-mine coal.  
Why would anyone want to go back to the IRS to get a new ruling that is more 
restrictive than the ones that they already have?  That is truly putting 
value at risk.  

In my view, the best deal for Pacificorp would be to market their existing 
rulings as essentially "above market" rulings, insofar as they go farther 
than the IRS currently allows, giving them a competitive advantage over other 
synfuel operators who never got a ruling.  It seems to me that if they can be 
persuaded to lower their price expectations in light of the new landscape, 
since a new equity player is going to have to bear real risk, then we may 
still have an opportunity to do a synfuel deal.  

Kevin Liss
x58601