Re: Synfuel

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