Industry Concerns: Office of Natural Resources Revenues’ Federal Coal Valuation Regulations November 3,

Changes to the Existing Regulations are Unnecessary and Unwise The current system provides stable and very significant tax and royalty revenue to both state and federal governments See later slides for economic data Increased taxes and royalties will reduce investment, lower government (federal and state) royalties and decrease jobs Problems are dealt with through regular and robust audits by ONRR which have not indicated any major underpayments by coal lessees Changes to the existing regulations are not justified as there have been no significant market changes in the last 25 years and markets are even more transparent Though exports have increased, in 2012, less than 3% of federal coal was exported Contrary to media reports, recent reviews and audits have revealed that wholesale changes to the regulations are unnecessary Major changes would result in increased uncertainty for both the agency and lessees 2

ONRR Benchmarks are Designed to Ensure Value is Based on Gross Proceeds to the Lessee From the Sale For any disposition of coal other than a sale pursuant to an arm’s length contract, the value of coal is determined by using the benchmarks contained in 30 CFR Lessees are required to use the first applicable benchmark Benchmark Four is generally applicable to most non-arms length transactions Net-back method of Benchmark 5 is the valuation method of last resort Even under the net-back provision, value is based on the first downstream point at which market price can be reasonably determined Royalty is based on disposition by the lessee, not marketing affiliates Regulations exclude affiliates from the definition of lessee DC Circuit rejected the agency’s attempt to expand the definition of lessee to affiliated market entities in Fina Oil and Chemical Co. v. Norton, 332 F.3d 672 Affiliates are engaged in a separate logistic business, not mining 3

Exported Coal Should Not Be Subject to Different Valuation Requirements Even if an affiliate of the lessee, an entity that provides logistics and marketing services involved in transporting the coal is engaged in a business separate from mining These entities may earn a margin when the coal is sold to the ultimate customer (domestic or international) Most domestic customers send trains to the mine to get coal International customers generally do not want to make the infrastructure investments and rely on traders or lessees’ affiliates to arrange transportation and other logistics Logistics services for international customers involves greater costs and risks Any margin earned downstream is for value added services such as transportation and risks assumed, including demurrage, liquidated damages, loss of product, quality degradation, etc. Fundamentally unfair and illogical to impose different valuation structure on affiliate of lessee and independent traders In both situations value should be based on the value of the coal at the time of the lessee’s disposition of the coal Would be a de facto tax on vertical integration Creates a disincentive to invest in US mining 4

Employment and Economic Benefits from Coal Production on Federal Lands 1 StateImpacts EmploymentOutput ($million) DirectTotalDirectTotal Colorado Montana New Mexico North Dakota Utah Wyoming FY 2012 Data from BLM’s 2013 “A Sound Investment for America”