374 Meridian Parke Lane, Suite C Greenwood, IN 46142 Phone: (317) 889-5760 Fax: (309) 807-2301 John E. Wade, ACAS, MAAA JWade@PinnacleActuaries.com May 29, 2012 Mr. Gregory F. Baker Reclamation Program Manager Commonwealth of Virginia Department of Mines, Minerals, and Energy 3405 Mountain Empire Road Big Stone Gap, VA 24219 Re: Commonwealth of Virginia, Coal Surface Mining Reclamation Fund – Actuarial Report Dear Mr. Baker: Enclosed is our final report on the actuarial study of the Virginia Coal Surface Mining Reclamation Fund as of June 30, 2011. If you have any questions, or require anything further please call me at (317) 8895760. Thank you for your assistance in our analysis and allowing Pinnacle to provide the actuarial study supporting this report. Sincerely, John E. Wade, ACAS, MAAA Senior Consulting Actuary Cc: Paul Vendetti, Pinnacle Actuarial Resources www.pinnacleactuaries.com Commonwealth of Virginia Department of Mines, Minerals and Energy Division of Mined Land Reclamation Virginia Coal Surface Mining Reclamation Fund Audit/Actuarial Analysis Pinnacle Actuarial Resources, Inc. 374 Meridian Parke Lane, Suite C Greenwood, IN 46142 PINNACLE ACTUARIAL RESOURCES, INC Commonwealth of Virginia Department of Mines, Minerals and Energy Division of Mined Land Reclamation Table of Contents  Purpose ......................................................................................................................................................... 3  Distribution and Use .................................................................................................................................... 3  Reliances and Limitations ........................................................................................................................... 4  Actuarial Qualifications to Issue Report ..................................................................................................... 5  Virginia Reclamation Fund Background ................................................................................................... 6  Summary of Findings .................................................................................................................................. 7  REVENUE ................................................................................................................................................. 7  CURRENT PERMITS COVERED BY RECLAMATION FUND ............................................................... 8  Underlying Security Type...................................................................................................................... 8  Self-Bonded Permits.............................................................................................................................. 9  ACTUARIAL ESTIMATE OF FUTURE LIABILITIES ............................................................................. 9  Recognition of Underlying Security .................................................................................................... 10  Projected Future Costs – Table 2 ....................................................................................................... 11  Projected Future Revenues – Table 3 ................................................................................................. 12  Current Bond Participants and Underlying Exposure - Table 4 ........................................................ 13  Permits by Security Type and Mining Status - Table 5 ....................................................................... 14  Permits by Security Type and Mining Status - Table 6 ....................................................................... 14  Projected Permit Release Rates - Table 7 .......................................................................................... 15  Forfeiture Rates - Table 8 ................................................................................................................... 16  Additional Adjustment Factors to Forfeiture Rates - Table 9............................................................. 16  Projected Reclamation Costs per Acre - Table 10 .............................................................................. 17  Projected Investment Rates - Table 11 ............................................................................................... 17  Shock Loss – Tables 1.1, 2.2, 3.1, and 3.2 .......................................................................................... 17  Conclusion .......................................................................................................................................... 19  2 PINNACLE ACTUARIAL RESOURCES, INC Commonwealth of Virginia Department of Mines, Minerals and Energy Division of Mined Land Reclamation Purpose Pinnacle Actuarial Resources Inc. (Pinnacle) has been retained by the Department of Mines, Minerals and Energy’s Division of Mined Land Reclamation of the Commonwealth of Virginia to review the financial soundness of the Virginia Coal Surface Mining Reclamation Fund (Reclamation Fund or Fund). Oversight of the Reclamation Fund is the responsibility of the Coal Surface Mining Reclamation Fund Advisory Board (RFAB, Advisory Board or Board). Distribution and Use This report and conclusions contained herein are being provided to the Coal Surface Mining Reclamation Fund Advisory Board for its use in connection with our actuarial analysis of the current and estimated future Fund’s liability in comparison with the current and estimated future assets. This report has been prepared to support the Advisory Board in complying with the Virginia legislation which established the Board as the advisory oversight organization with respect to the Fund. We understand that copies of this report may be provided to the state auditors and other regulatory authorities along with other parties in compliance with Virginia’s open records policies. Permission is hereby granted for this distribution on the condition that the entire report, including all exhibits, is distributed rather than any excerpt. These third parties should recognize that the furnishing of this report is not a substitute for their own due diligence and should place no reliance on this report or the data contained herein that would result in the creation of any duty or liability by Pinnacle to the third party. The attached appendices in support of our findings are an integral part of this report. These sections have been prepared so they document our actuarial assumptions and judgments. Judgments about the conclusions drawn in this report should be made only after considering the 3 PINNACLE ACTUARIAL RESOURCES, INC report in its entirety. We remain available to answer any questions that may arise regarding this report. We assume that the user of this report will seek such explanation on any matter in question. Our conclusions are predicated on a number of assumptions as to future conditions and events. Those assumptions, which are documented in subsequent sections of this report, must be understood in order to place our conclusions in their appropriate context. In addition, our work is subject to inherent limitations, which are also further outlined and discussed later in this report. Reliances and Limitations We have prepared this report in conformity with its intended use by persons technically competent in the areas addressed and for the stated purposes only. Judgments as to conclusions, methods, and data contained in this report should be made only after studying the report in its entirety. Furthermore, we are available to explain any matter presented herein, and it is assumed that the user of this report will seek such explanation as to any matter in question. We have relied upon data and information supplied by members of the Division of Mined Land Reclamation staff. There is a limitation upon the accuracy of these estimates in that there is an inherent uncertainty in any actuarial estimate of future costs. This uncertainty is due to the fact that the ultimate liability for claims is subject to the outcome of events yet to occur, e.g., the likelihood of permit holders running into financial difficulty and default, the size and cost of reclamation, changes in the standards of reclamation and desired speed of reclamation. While there are no standard techniques for which to develop estimates for these specific issues, in our judgment, we have employed techniques and assumptions that are appropriate and the conclusions presented herein are reasonable, given the information currently available. However, it should be recognized that future loss emergence will likely deviate, perhaps materially, from our estimates. 4 PINNACLE ACTUARIAL RESOURCES, INC We have relied on the data provided without independent audit or verification on the part of Pinnacle to develop our estimates of potential future reclamation cost. We also worked with the Division of Mined Land Reclamation staff to understand the operation of the Fund, the reclamation process and the underlying data provided but only to the extent such information may have affected our analysis. We have not anticipated any extraordinary changes to the economic, legal, or social environment which might affect the cost and frequency of default. Our estimates are provided net of underlying performance security (also known as performance bonds or bonds). We have made no attempt to evaluate the quality of security provided. Should such providers be unable to fulfill their obligations, the Fund would be responsible for this additional reclamation cost. The RFAB may wish to consider a requirement that performance bonds only be considered if purchased from companies rated A- or higher by a rating agency. Please note that for the purposes of this report, the Virginia specific data was provided as of November 15, 2011. Further reliances and limitations are contained in the subsequent text, and in the exhibits accompanying the text. Actuarial Qualifications to Issue Report The Commonwealth of Virginia’s Department of Mines, Minerals and Energy’s Division of Mined Land Reclamation has retained Pinnacle Actuarial Resources, Inc to perform an actuarial valuation of the Virginia Coal Surface Mining Reclamation Fund. John E. Wade, ACAS, MAAA, Senior Consulting Actuary, is a member of the American Academy of Actuaries and meet its Qualification Standards of Actuaries Issuing Statement of Actuarial Opinion in the United States to render the actuarial opinion contained here. This valuation has been conducted in accordance with generally accepted actuarial principles and practices. The actuarial assumptions and methods employed in the measurement of the liability 5 PINNACLE ACTUARIAL RESOURCES, INC have been selected by Pinnacle Actuarial Resources, Inc. after consultation with the staff of the Division of Mined Land Reclamation. The results shown in this report are reasonable actuarial results. However, a different set of results could also be considered reasonable actuarial results. The reason for this is that actuarial standards of practice describe a “central estimate” for each assumption, rather than a single best-estimate value. Thus, reasonable results differing from those presented in this report could have been developed by selecting different points within the best-estimate ranges for various assumptions. Virginia Reclamation Fund Background The Virginia Reclamation Fund was established by the Virginia Legislature in the middle of the 1980s to assist Virginia coal operators with a method to promote financial assurances to the Commonwealth. The Fund is administered within the Virginia Department of Mines, Minerals and Energy (DMME), Division of Mined Land Reclamation (DMLR) and is designed to provide funding, if necessary, to reclaim and restore land at previously mined sites. The programs are funded through coal taxes, investment income, and other minor, miscellaneous sources of income. The Fund is overseen by the Coal Surface Mining Reclamation Fund Advisory Board. The Board and the DMME-DMLR seek actuarial services in connection with the review of the programs’ fiscal soundness. 6 PINNACLE ACTUARIAL RESOURCES, INC Summary of Findings Based upon our analysis further explained in more detail below and with the accompanying exhibits, we find that although the Reclamation Fund program has not experienced a single permit forfeiture in many years, there remains the possibility that a forfeiture could occur. Similar to a loss from a tornado or hurricane, the probability of a single forfeiture is relatively small. But if a permit forfeiture should occur, the financial cost to the Fund will be significant. With the current Fund balance of $7.3 million, the program has sufficient resources to withstand the forfeiture of one or two smaller permits. The more significant risk to the Fund is from the exposure to companies with multiple permits and possibly from larger parent companies should they forfeit multiple permits simultaneously. Table 1.1 provides a cash flow projection over the next 18 years on a nominal basis. This is the period of time that the current permits covered by the Reclamation Fund are anticipated to be provided reclamation protection by the Reclamation Fund. REVENUE  The Virginia Reclamation Fund has four sources of income to support the activities of the Fund. These sources are: 1. Entrance Fees 2. Reclamation Fund Tax Revenue 3. Civil Penalties 4. Investment Income Each time a New Permit, Acreage Amendment or CSMO Renewal is issued and is allowed to participate in the Reclamation Fund, the permit holder must pay a one-time Entrance Fee. The Reclamation Fund collects a Reclamation Fund Tax per ton of coal extracted from a permit’s site the first four quarters following initial coal production. In fiscal year 2011, the Fund received $77,586 in Tax proceeds. 7 PINNACLE ACTUARIAL RESOURCES, INC The Fund Balance is invested by the Commonwealth of Virginia as part of the General Fund. The Fund receives an investment return allocation on a quarterly basis. The interest income of the Fund in fiscal year 2011 was $98,746. As of June 30, 2011, the Fund Balance was $7,283,946. This fund balance is available to pay the Administration costs of running the fund as well as any future reclamation costs from forfeited sites.  CURRENT PERMITS COVERED BY RECLAMATION FUND  As of June 30, 2011, the Virginia Reclamation Fund provided excess reclamation coverage for a total of 219 Coal Mine related permits. The following table provides a summary of the distribution of the permits based on Permit Type and Permit Status. Surface Underground Other Permits Total Virginia Reclamation Fund as of June 30, 2011 Closed No Closed with Active Permits Reclamation Reclamation 90 1 23 42 2 15 33 1 12 165 4 50 Total 114 59 46 219 The majority of the permits covered by the Virginia Reclamation Fund are controlled by four Parent Corporations. Of all the 219 permits, 167 permits are controlled by the four largest parent companies. Table 4.2 provides additional details. Underlying Security Type  The Virginia Reclamation Fund allows a number of types of security to be posted to cover the required amount of underlying financial security in the event of permit forfeiture. This security will be used to provide the initial funding for reclamation efforts at the permits site. These security types include: 1. Surety Bond provided by recognized Surety/Insurance company 2. Letter of Credit 3. Certificate of Deposit 4. Cash held by Virginia Department of Mines, Minerals and Energy 5. "Self – Bonding". 8 PINNACLE ACTUARIAL RESOURCES, INC A majority of the permits are covered by surety or surety plus one or more of the other first four items. Of the permits in the Reclamation Fund, 185 are exclusively covered by surety companies. Self­Bonded Permits  There are 19 permits with some form of "Self – Bonding" as part of the underlying funding available for reclamation before the Reclamation Fund would need to provide additional funding for reclamation efforts. The issues related to these permits with "Self – Bonding" will be explored further later in this report.  ACTUARIAL ESTIMATE OF FUTURE LIABILITIES  The approach used to estimate the potential long-term viability of the Reclamation Fund is based upon two main components: 1. the probability of a permit or group of permits forfeiting 2. the cost of reclamation should a permit or group of permits forfeit. This approach is commonly referred to as a frequency and severity analysis where the frequency is the probability of forfeiture and the severity is the cost of reclamation. The coverage provided by the Reclamation Fund to permit holders could be categorized as low frequency and high severity. Since there have been no permits forfeited to the Reclamation Fund in the past 13 years, there is no recent history on which to base the probability of forfeiture upon. Our estimates of future forfeitures are based upon information from other sources such as other states and financial rating agencies. Unlike operating permits issued to companies not included in the Reclamation Fund that require "Full Cost Bonding" where the required bond is determined based upon the estimate of the funds required to perform reclamation in the event of a forfeiture, the permits included in the Reclamation Fund do not require, and thus do not record, an estimate of the cost of reclamation should the permit holder become financially unable to undertake the reclamation process and thus, forfeits the permit to the Fund. Therefore, there is no direct data for which to estimate the 9 PINNACLE ACTUARIAL RESOURCES, INC second component of our approach. We have relied upon data from the "Full Cost" permits and data from the reclamation funds in other states. We have separated the data into three categories based upon the type of permit: 1. Surface Mines 2. Underground Mines 3. Other Permit Type such as Preparation Plants, haul roads, tipples, etc. We have also recognized the fact that permits may have some areas where the reclamation process is already underway. This process is commonly known as “contemporaneous reclamation”. This recognition is important in two respects. The first is the cost of reclamation efforts on acres which have achieved Phase 1 release or Phase 2 release will be much less than the reclamation cost of acres where reclamation process has not yet begun. Secondly, the number of years before those acres can achieve Phase 3 or final release is much shorter than the number of years anticipated required to achieve release for acreage currently extracting coal with no current reclamation efforts. Recognition of Underlying Security  In the case of permit forfeiture, the Reclamation Fund would have access to the available underlying security provided by surety companies, certificates of deposit, letters of credit and cash deposited with the Commonwealth. For permits with underlying security of these types, we have adjusted the potential reclamation cost to recognize that this additional funding will be available in addition to the funds required from the Reclamation Fund. In the case of permits in the "Self – Bonding" category, there would be no underlying funds available should a permit forfeit prior to the completion of the reclamation process. For these permits, the exposure to the Reclamation Fund is any remaining reclamation cost. We understand that new permits issued in Virginia will not have this option available. We encourage movement away from this option in a sense of equity to the other Reclamation Fund participants as well as to limit the exposure to the Fund. We recommend that any new increments on existing permits with the "Self – Bonding" option be required to provide other sources of financial security. 10 PINNACLE ACTUARIAL RESOURCES, INC If forfeiture by the holder of these permits occur, the Reclamation Fund would be responsible for an estimated additional $26.6 million over and above the amounts that the Reclamation Fund would normally be requested to cover. The underlying security by type and amounts are summarized in Table 1.2.  Projected Future Costs – Table 2   Table 2.1 provides a summary of the projected forfeiture costs and administrative expenses for each of the next 20 years. Tables 2.2a through 2.2d provide a summary of the projected forfeiture costs over the next 18 years. We have provided projections based upon the average reclamation costs from the full bonding estimates for the permits in Virginia that are not part of the Reclamation Fund, the reclamation costs recently experienced in West Virginia and the estimated reclamation costs in Ohio that are based upon engineer estimates of reclamation costs. Projected amounts are trended 4.0 percent annually to reflect expected increases in goods and services associated with the reclamation activities. Table 2.3 displays the projected Administrative Expenses associated with the operation of the Reclamation Fund. From 1997 through 2008, the administrative expenses were $18,400 annually. In 2009, the expenses in this category increased to $41,700 per year. The expenses have remained at that level through 2011. In our projections, we assume that this increased level will continue into the future. We have also increased these costs through the use on a 1.5 percent inflation rate for 2013 and subsequent years. The 1.5 percent reflects expected increases in salaries. To reflect the fact that some of the current permits will leave the Reclamation Fund through release or forfeiture, we adjust the future administration expenses based upon a ratio of the projected acres (Table 3.4) in the Fund by year divided by the current number of acres in the system.     11 PINNACLE ACTUARIAL RESOURCES, INC Projected Future Revenues – Table 3  Table 3.1 provides a summary of the projected revenues anticipated to be generated from the permits currently included in the Reclamation Fund over the expected duration of these permits in the Fund. Using assumptions explained and documented later, we anticipate this activity will continue through 2029. As part of our analysis in projecting the number and cost of future permit forfeitures, we also develop an estimate of the funds that should be available from the underlying security – bonds, certificates of deposit, letters of credit, etc. Table 3.2 calculates the anticipated bond forfeiture revenue shown in Table 3.1, column (1). Table 3.3 provides a summary of the historic revenues of the Virginia Reclamation Fund from 1997 through 2011. The sources of income to the Fund include:  Entrance Fees  Reclamation Fund Tax proceeds  Civil Penalties  Interest Income    12 PINNACLE ACTUARIAL RESOURCES, INC Current Bond Participants and Underlying Exposure ­ Table 4  From the information provided to Pinnacle by the Division of Mined Land Reclamation, we provide a summary of the various data used as part of our analysis. Table 4.1 provides a summary of the number of permits in the Reclamation Fund that are held by each company. This exhibit also provides a summary of the currently posted security that would be called, in the event of forfeiture, prior to any dollars being required from the Reclamation Fund to cover reclamation costs. The 219 Bond permits are held by 44 companies. Since many of these permit holding companies are subsidiaries of larger corporations, in Table 4.2 we provide the bond and permit number distribution summarized at the Parent Company Level. There are 42 individually owned and operated; representing 19.2 percent of the permits in the Reclamation Fund. Over 70 percent of the permits are “controlled” by three large parent companies. This fact is important if forfeitures are in any way correlated at the parent level. We assume that there is strong correlation of forfeiture at the permitted company level, whereby if a permit holder should reach a point where they can no longer finance further reclamation, the parent company is highly likely to, if not certain to, forfeit its other permits to the Reclamation Fund to complete the reclamation process. 13 PINNACLE ACTUARIAL RESOURCES, INC Permits by Security Type and Mining Status ­ Table 5   In Table 5, we provide a summary of the permits by mining status and underlying security. Of note are the 16 Self-Bonded permits and the 3 permits with some level of self-bonding. These permits are important to the Reclamation Fund and our analysis in that they increase the amount of risk – potential cost to the Fund – beyond the level of risk from the other permits. In the case of forfeiture of one of the self-bonded permits, the Fund would be responsible for the complete (or nearly so) reclamation costs. The other permits are providing some type of underlying financial security that would be available to the Division of Mine Land Reclamation and the Fund in the event of forfeiture. For permitted acres prior to achievement of Phase 1 Release, the underlying security is $3,000 per permitted acre. The underlying security required is reduced to $1,200 per acre for acres achieving Phase 1 Release and to $450 upon achievement of Phase 2 Release. The increased “risk” assumed by the Reclamation Fund has not been reflected in an increased coal tax rate. By using the amount of security required of the other permits detailed above, we estimate the increased exposure to the Fund from these permits is approximately $26.6 million. This estimate is not intended to be a reflection of the financial stability of the permit holder but only a measurement of the private security typically available but not in this case. Permits by Security Type and Mining Status ­ Table 6   In Table 6, we provide summaries of the number of acres and the number of permits issued in each of the fiscal years from 1983 through 2011. The summaries show the information by type of permit and the current status of the permit. This detailed information is utilized in the determination of the expected number of acres to be released or forfeited over the projection period of our analysis.     14 PINNACLE ACTUARIAL RESOURCES, INC Projected Permit Release Rates ­ Table 7   In order to project the future expected number of forfeited acres, we need to also project the number of acres that are permitted at any point in time. Table 7 provides our assumptions with respect to achievement of Phase 3 or final release. In Table 7.1, we provide the assumptions for active mining permits. For active permits with acres currently actively mining coal, we assume that there is an 18 year period of time until these permits are fully released. To reflect that there may be some active permits at the end of the mining process, the first release is projected to occur 7 years from now with more releases obtained in each of the succeeding 11 years. These active permits may also have some acreage which has been Phase 1 released. We assume that the first acres to achieve full release will occur 4 years from now and spreads over the next three years. Similarly, there are acres in these permits that have achieved Phase 2 release. We assumed that final release will occur at over the next 3 years. Table 7.2 provides the assumptions for permits that are no longer actively mining coal but have not yet begun the reclamation process. We have assumed that the first acres will achieve full release 7 years from now and the achievement of full release will be accomplished over the next 6 years. As expected this release time horizon is faster than the permits that are still actively mining. We have not listed assumptions for any acres that might have previously achieved phase release, but the definition of this category would suggest that these assumptions are not required. Finally, we have a set of assumptions for the permits that are closed and have a significant amount of reclamation completed. In our review of the data, we found that these permits included only acreage that had achieved Phase 2 release. 15 PINNACLE ACTUARIAL RESOURCES, INC Forfeiture Rates ­ Table 8  Due to the recent great experience in the Virginia Reclamation Fund program, we do not have any information upon which to develop expected forfeiture rates for the projection of future forfeitures in Virginia. Therefore, we have utilized the forfeiture rates experienced in the neighboring state of West Virginia as a starting point. To attempt to better reflect the difference in the programs, we have applied a judgmentally selected 10 percent adjustment factor to the West Virginia forfeiture rates to generate the lower anticipated Virginia forfeiture rates. Thus, the starting forfeiture expectations in Virginia are 0.125 percent for surface mine operations (1.25 acres per 1,000 acres forfeited in any one year), 0.05 percent for underground mining operations (0.5 acres per 1,000 permitted acres are expected to forfeited in any year) and 0.04 percent for other permit types (0.4 acres per 1,000 permitted acres are expected to forfeited in any year). Additional Adjustment Factors to Forfeiture Rates ­ Table 9   In addition to the standard forfeiture rates, there are a few adjustment factors that have been applied in the West Virginia analysis that we are also including in this analysis. In order to similarly follow the West Virginia approach, we include the following adjustments in Table 9:  Mine Status (Table 9.1) – We reflect the fact that the probability of forfeiture declines as the reclamation process moves from active mining to reclamation and on to final release.  Permits Status (Table 9.2) – We make an adjustment to the final factor to reflect that the cost of Phase 1 and Phase 2 released acreage is much less than the cost associated with land that has not had any reclamation activity.  Security Size (Table 9.3) – The size of a security on a permit is felt to be indirectly related to the probability of future forfeiture. The involvement of a private bonding/insurance company in the review of the financial stability of the permit holder, especially in larger bonds, is one possible benefit to the Fund. The availability of larger deposits can act similar to the bond and are usually more costly to the permit holder. Also, the smaller permitted sites (“Mom and Pop” operations) have historically had higher rates of forfeiture. The security for the permit holders is summarized on Table 4.1. We have applied the factors at the permit level rather than the permit holder level. 16 PINNACLE ACTUARIAL RESOURCES, INC   Projected Reclamation Costs per Acre ­ Table 10  Once we have developed a positive estimate of the probability of forfeiture, we need to apply the probability times the number of acres still in-force (covered by the Fund) and the average reclamation cost of an acre. We apply both the forfeiture rates and the average reclamation costs at the permit type level. From data provided by Greg Baker of the Division of Mined Land Reclamation, we obtained the required performance security (bond, deposits, etc.) for the Virginia permits that are not participating in the Reclamation Fund program. The average required security per acre and permit type is shown on Table 10. From the West Virginia and Ohio analyses recently performed by Pinnacle, we provide the average costs anticipated in those states. Projected Investment Rates ­ Table 11   In order to project the future investment income in the Fund, we have utilized investment rates that are based upon the recent returns available through United States Treasuries. Table 11 displays these investment rates. The figures in bold are the actual returns quoted by the US Treasury while the other figures have been interpolated. Shock Loss – Tables 1.1, 2.2, 3.1, and 3.2   One test of financial soundness is the ability of the Reclamation Fund to withstand a shock loss. We tested the Fund by generating the hypothetical loss if a large parent company (Alpha) were to go into default. Under this test we assumed that all Alpha mining activities would stop and the all mined areas would have to be reclaimed. We also assumed that all Alpha bonds would be forfeited. Under this scenario, reclamation costs would go up by about $85 million, as shown in Table 2.2a, Shock Loss. We spread the reclamation costs over an 8 year period and applied a slight cost inflation factor, bringing the total reclamation cost to about $99 million. 17 PINNACLE ACTUARIAL RESOURCES, INC If Alpha were to forfeit all permits today, however, they would also forfeit all bonds. This amounts to an additional $41 million coming into the system (Table 3.2a Shock Loss). For purposes of our analysis we assumed these funds would be immediately available. The net results of the shock loss are shown in Table 1.1 Shock Loss Summary. Running all the income and costs through our model, we see that the tested shock loss would cause the Fund balance to drop below zero in the fifth year. By the eighth year the Fund would be at a negative $50 million balance, assuming all reclamation costs were paid. Of course, there are other things to consider should such an event occur. The likelihood for another entity or entities to take over Alpha’s forfeited operations is quite high. The Commonwealth would possibly broker deals for such an occurrence. The Commonwealth might also pass additional taxes unto the industry, either as permanent taxes or short term special assessments, to cover the shortfall. The concept of testing the system with a shock loss is to see what it would take to keep the system viable under a worst case (highly unlikely, but plausible) scenario. This information is useful as one considers what level of a Fund Balance is necessary to cover the unlikely scenario depicted. A possible alternative to build up the Fund balance to be able to cover a shock loss such as described above, or even a portion of the loss generated, would be to change the Coal Tax structure. Currently the tax is collected only for the first four quarters of a new permit’s mining operation. If the four quarter restriction were removed and an annual, ongoing, tax were adopted, the Reclamation Fund balance would begin to accumulate to higher levels at a pace dependent upon the tax rate and the coal production rate. In Table 3.1b we display a twenty year time horizon of collecting an annual tax of 3.5 cents per ton of coal extracted. This tax, along with the associated interest income, would generate $12 - $13 million dollars in twenty years, assuming an annual coal production of 20 million tons. In the example described above, it would take twenty years to cover about a fourth of the anticipated shock loss, or eighty years to cover the entire loss. However, when one considers the likelihood of a shock loss of this nature occurring and the ability of the Commonwealth to 18 PINNACLE ACTUARIAL RESOURCES, INC mitigate the impacts of the loss through tax assessments and developing deals for other companies to take over the stressed operations, a much smaller Fund balance would help balance the Commonwealth’s desire for financial stability, not create an undue burden on the industry, and satisfy its own risk appetite. At this stage in the review of the Reclamation Fund’s financial soundness, we recommend that the Commonwealth pursue removing the restriction of collecting the tax revenues for the first four quarters and collect the tax revenues for the life of the mining operation. The Commonwealth might consider adopting a uniform tax rate, but the simplest approach may be just to remove the time limitation on the applicability of the tax. The Commonwealth would also have to change the language throughout its code to allow for the same, including the overall Fund balance caps that are embedded in the language. At this time Pinnacle would not recommend changing the Reclamation Fund Entrance Fee. Conclusion   Pinnacle offers up the following recommendations: Pinnacle recommends movement away from the Self–Bonding option in a sense of equity to the other Reclamation Fund participants as well as to limit the exposure to the Fund. We recommend that any new increments on existing permits with the Self–Bonding option be required to provide other sources of financial security. Pinnacle recommends removing the Fund balance caps, allowing the Fund to build up to levels that would cover the largest loss possible from the default of the largest parent in the system. As this will take many years to get to such a level, Pinnacle recommends just removing the caps at this time. Caps can be revisited once the Fund balances start to approach desired levels. Pinnacle recommends changing the Coal Tax structure, removing the limitation of only collecting the tax on the first four quarters of operation, and replacing it with collecting the tax for all time periods of operation. 19 PINNACLE ACTUARIAL RESOURCES, INC Pinnacle recommends no changes to the Coal Tax rates, other than the time period they apply. Pinnacle recommends no changes to the Reclamation Fund Entrance Fees at this time. Pinnacle recommends that the Reclamation Fund undergo periodic financial soundness reviews to consider and adjust the Fund’s operating plan parameters as appropriate taking into consideration recent historic and projected future economic conditions. 20 PINNACLE ACTUARIAL RESOURCES, INC Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 1.1 Summary Fiscal Year Ending 6/30 Expenditures (1) Revenues (2) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 147,122 151,427 153,190 151,159 151,077 150,729 150,414 139,015 126,830 114,972 103,522 92,387 33,044 28,201 23,289 6,802 4,704 2,443 231,153 181,856 131,064 129,793 127,645 125,223 122,648 116,368 110,017 103,721 97,599 91,704 86,203 81,003 75,823 70,704 65,597 60,443 Total 1,730,326 2,008,563 Footnotes: (1) (2) (3) Projected Fund Balance (3) 7,283,946 7,367,977 7,398,406 7,376,279 7,354,913 7,331,481 7,305,974 7,278,208 7,255,561 7,238,748 7,227,497 7,221,575 7,220,892 7,274,051 7,326,853 7,379,388 7,443,290 7,504,182 7,562,183 Table 2.1 Col (3) Table 3.1 Col (5) Prior Col (3) + (Col (2) ‐ Col (1)) PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 1 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 1.2  Underlying Security Security Type Available Collateral (1) Self Only Collateral (2) Surety Surety and Cash Surety, Cash, and Letter of Credit Surety, CD, and Letter of Credit Letter of Credit Certificate of Deposit Self Bonding Self Bonding and Surety Self Bonding, Surety and Cash 124,810,075 607,000 367,400 388,100 634,000 384,100 23,438,025 3,659,400 2,421,600 0 0 0 0 0 0 23,438,025 1,768,200 1,368,000 Total Self Bonding Percent All Other Securities Percent 156,709,700 26,574,225 16.96% 83.04% Footnotes: (1) (2) Client Data Client Data PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 2 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 2.1 Expenditures Fiscal Year Ending 6/30 Reclamation (1) Administrative (2) Total (3) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 105,422 110,524 114,463 115,809 119,793 123,911 128,167 122,109 115,159 107,726 99,527 90,461 32,249 27,928 23,214 6,786 4,702 2,443 41,700 40,903 38,728 35,350 31,284 26,818 22,247 16,906 11,671 7,246 3,995 1,926 795 273 75 15 2 0 0 147,122 151,427 153,190 151,159 151,077 150,729 150,414 139,015 126,830 114,972 103,522 92,387 33,044 28,201 23,289 6,802 4,704 2,443 Total 1,450,392 279,934 1,730,326 Footnotes: (1) (2) (3) Table 2.2a Col (2) Table 2.3 Col (1) Col (1) + Col (2) PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 3 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 2.2a Reclamation Expenditures Selected Fiscal Year Nominal Inflated at 4% Ending 6/30 (1) (2) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 103,374 104,209 103,772 100,955 100,411 99,868 99,326 90,991 82,511 74,217 65,931 57,620 19,752 16,447 13,145 3,695 2,462 1,230 105,422 110,524 114,463 115,809 119,793 123,911 128,167 122,109 115,159 107,726 99,527 90,461 32,249 27,928 23,214 6,786 4,702 2,443 Total 1,139,916 1,450,392 Footnotes: (1) (2) Based on Table 2.2b, Table 2.2c, Table 2.2d Col (1) x 4% inflation PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 4 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 2.2b Reclamation Expenditures Based upon Virginia Average Cost Fiscal Year Nominal Inflated at 4% Ending 6/30 (1) (2) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 103,374 104,209 103,772 100,955 100,411 99,868 99,326 90,991 82,511 74,217 65,931 57,620 19,752 16,447 13,145 3,695 2,462 1,230 105,422 110,524 114,463 115,809 119,793 123,911 128,167 122,109 115,159 107,726 99,527 90,461 32,249 27,928 23,214 6,786 4,702 2,443 Total 1,139,916 1,450,392 Footnotes: (1) (2) See Report for Details Col (1) x 4% inflation PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 5 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 2.2c Reclamation Expenditures Based Upon West Virginia Average Cost Fiscal Year Nominal Inflated at 4% Ending 6/30 (1) (2) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 74,413 75,053 74,794 72,752 72,353 71,953 71,554 65,551 59,438 53,465 47,496 41,509 14,230 11,849 9,470 2,662 1,774 886 75,887 79,601 82,499 83,457 86,319 89,276 92,332 87,969 82,956 77,604 71,698 65,167 23,233 20,120 16,724 4,889 3,388 1,760 Total 821,202 1,044,879 Footnotes: (1) (2) See Report for Details Col (1) x 4% inflation PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 6 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 2.2d Reclamation Expenditures Based Upon Ohio Average Cost Fiscal Year Nominal Inflated at 4% Ending 6/30 (1) (2) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 156,035 157,196 156,454 152,272 151,476 150,681 149,887 137,308 124,518 112,000 99,494 86,954 29,806 24,819 19,837 5,576 3,715 1,856 159,125 166,722 172,572 174,678 180,715 186,957 193,411 184,267 173,786 162,568 150,193 136,512 48,666 42,144 35,031 10,240 7,095 3,686 Total 1,719,883 2,188,367 Footnotes: (1) (2) See Report for Details Col (1) x 4% inflation PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 7 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 2.3 Administrative Expenditures Fiscal Year Ending 6/30 Dollars (1) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 41,700 40,903 38,728 35,350 31,284 26,818 22,247 16,906 11,671 7,246 3,995 1,926 795 273 75 15 2 0 Total 279,934 Footnotes: (1) Client data inflated 1.5% x  Table 3.4 Acreage Projections Col (5) PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 8 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 3.1 Revenues Fiscal Year Ending 6/30 Bond Forfeiture (1) Coal Tax (2) Civil Penalties (3) Interest Income (4) Total (5) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 51,331 51,729 51,479 51,298 50,623 49,949 49,276 45,141 41,009 36,881 32,757 28,637 24,522 20,410 16,303 12,219 8,141 4,067 100,083 50,041 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 6,889 6,757 6,398 5,840 5,168 4,430 3,675 2,793 1,928 1,197 660 318 131 45 12 3 0 0 72,850 73,328 73,187 72,655 71,854 70,843 69,697 68,434 67,080 65,643 64,182 62,749 61,550 60,547 59,508 58,481 57,455 56,377 231,153 181,856 131,064 129,793 127,645 125,223 122,648 116,368 110,017 103,721 97,599 91,704 86,203 81,003 75,823 70,704 65,597 60,443 Total 625,773 150,124 46,245 1,186,421 2,008,563 Footnotes: (1) (2) (3) (4) (5) Table 3.2a Col (8) Table 3.3 Row (6) for 2012; 50% for 2013 Table 3.3 Row (6) for 2012 x Table 3.4 Acreage Projections Col (5); trended 1.5% for projected years Table 1.1 Prior Col (3) + [0.5 x (sum(Col (1) through Col (3)) ‐ Table 1.1 Col (1)] x Table 11 Col (2) Sum of Col (1) through Col (4) Note: additional entrance fees are NOT considered PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 9 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Fiscal Year Ending 6/30 Active (1) Table 3.2a Bond Forfeiture Revenues ‐ Total Forfeited Acres Forfeited Bond Amounts Phase 1 Release Phase 2 Release Active Phase 1 Release Phase 2 Release (2) (3) (4) (5) (6) Total (7) Adjusted for Self Bonded (8) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 19.50 19.77 19.77 19.81 19.80 19.79 19.78 18.12 16.46 14.80 13.15 11.50 9.84 8.19 6.54 4.90 3.27 1.63 1.96 1.96 1.96 1.96 1.31 0.65 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.12 1.41 0.71 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 58,504 59,303 59,321 59,421 59,394 59,366 59,339 54,359 49,383 44,412 39,446 34,485 29,529 24,578 19,632 14,715 9,803 4,897 2,355 2,354 2,353 2,352 1,567 783 0 0 0 0 0 0 0 0 0 0 0 0 953 635 317 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 61,813 62,293 61,991 61,773 60,961 60,149 59,339 54,359 49,383 44,412 39,446 34,485 29,529 24,578 19,632 14,715 9,803 4,897 51,331 51,729 51,479 51,298 50,623 49,949 49,276 45,141 41,009 36,881 32,757 28,637 24,522 20,410 16,303 12,219 8,141 4,067 Total 246.63 9.80 4.23 739,888 11,765 1,906 753,558 625,773 Footnotes: (1) (2) (3) (4) (5) (6) (7) (8) Sum of Tables 3.2b through 3.2d Col (1) Sum of Tables 3.2b through 3.2d Col (2) Sum of Tables 3.2b through 3.2d Col (3) Col (1) x 3,000 Col (2) x 3,000 x Factor of 0.40 From Table 9.2 Col (1) Col (3) x 3,000 x Factor of 0.15 From Table 9.2 Col (1) Sum of Col (4) through Col (6) Col (7) x Table 1.2 Col (2) All Other Securities Percent PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 10 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Fiscal Year Ending 6/30 Active (1) Table 3.2b Bond Forfeiture Revenues ‐ Active Forfeited Acres Forfeited Bond Amounts Phase 1 Release Phase 2 Release Active Phase 1 Release Phase 2 Release (2) (3) (4) (5) (6) Total (7) Adjusted for Self Bonded (8) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 19.44 19.70 19.71 19.74 19.73 19.72 19.72 18.06 16.41 14.76 13.12 11.47 9.83 8.18 6.54 4.90 3.27 1.63 1.96 1.96 1.96 1.96 1.31 0.65 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.64 0.43 0.21 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 58,311 59,110 59,127 59,228 59,201 59,173 59,146 54,190 49,238 44,292 39,350 34,413 29,481 24,554 19,632 14,715 9,803 4,897 2,355 2,354 2,353 2,352 1,567 783 0 0 0 0 0 0 0 0 0 0 0 0 288 192 96 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 60,954 61,656 61,576 61,580 60,768 59,956 59,146 54,190 49,238 44,292 39,350 34,413 29,481 24,554 19,632 14,715 9,803 4,897 50,618 51,201 51,134 51,138 50,463 49,789 49,116 45,001 40,889 36,781 32,677 28,577 24,482 20,390 16,303 12,219 8,141 4,067 Total 245.95 9.80 1.28 737,861 11,765 575 750,201 622,985 Footnotes: (1) (2) (3) (4) (5) (6) (7) (8) Client data x Table 8 Client data x Table 8 Client data x Table 8 Col (1) x 3,000 Col (2) x 3,000 x Factor of 0.40 From Table 9.2 Col (1) Col (3) x 3,000 x Factor of 0.15 From Table 9.2 Col (1) Sum of Col (4) through Col (6) Col (7) x Table 1.2 Col (2) All Other Securities Percent PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 11 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Fiscal Year Ending 6/30 Active (1) Table 3.2c Bond Forfeiture Revenues ‐ Closed No Reclamation Forfeited Acres Forfeited Bond Amounts Phase 1 Release Phase 2 Release Active Phase 1 Release Phase 2 Release (2) (3) (4) (5) (6) Total (7) Adjusted for Self Bonded (8) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.05 0.04 0.03 0.02 0.02 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 193 193 193 193 193 193 193 169 145 120 96 72 48 24 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 193 193 193 193 193 193 193 169 145 120 96 72 48 24 0 0 0 0 161 161 160 160 160 160 160 140 120 100 80 60 40 20 0 0 0 0 Total 0.68 0.00 0.00 2,027 0 0 2,027 1,683 Footnotes: (1) (2) (3) (4) (5) (6) (7) (8) Client data x Table 8 Client data x Table 8 Client data x Table 8 Col (1) x 3,000 Col (2) x 3,000 x Factor of 0.40 From Table 9.2 Col (1) Col (3) x 3,000 x Factor of 0.15 From Table 9.2 Col (1) Sum of Col (4) through Col (6) Col (7) x Table 1.2 Col (2) All Other Securities Percent PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 12 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Fiscal Year Ending 6/30 Active (1) Table 3.2d Bond Forfeiture Revenues ‐ Closed With Reclamation Forfeited Acres Forfeited Bond Amounts Phase 1 Release Phase 2 Release Active Phase 1 Release Phase 2 Release (2) (3) (4) (5) (6) Total (7) Adjusted for Self Bonded (8) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.48 0.99 0.49 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 665 443 221 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 665 443 221 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 553 368 184 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total 0.00 0.00 2.96 0 0 1,330 1,330 1,105 Footnotes: (1) (2) (3) (4) (5) (6) (7) (8) Client data x Table 8 Client data x Table 8 Client data x Table 8 Col (1) x 3,000 Col (2) x 3,000 x Factor of 0.40 From Table 9.2 Col (1) Col (3) x 3,000 x Factor of 0.15 From Table 9.2 Col (1) Sum of Col (4) through Col (6) Col (7) x Table 1.2 Col (2) All Other Securities Percent PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 13 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 3.3 Historical Revenues Fiscal Year Ending 6/30 Entrance Fee (1) Coal Tax (2) Civil Penalties (3) Interest Income (4) Total (5) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 38,000 37,000 81,000 51,000 41,000 29,000 52,000 76,000 51,000 52,000 40,000 38,000 60,000 49,000 34,000 57,549 62,229 94,218 113,276 161,913 152,874 91,206 152,466 154,038 80,181 47,208 83,934 119,996 52,569 77,586 570 407 3,191 0 0 8,138 0 0 0 0 1,150 0 0 89,876 0 151,678 216,970 220,825 256,818 285,050 212,626 183,841 90,413 140,831 194,709 285,982 170,152 338,655 91,805 98,746 247,798 316,606 399,234 421,094 487,962 402,639 327,047 318,880 345,869 326,890 374,340 292,086 518,652 283,251 210,332 Total 691,000 1,443,695 102,762 2,787,424 5,024,881 (6)  Selected 2012 (7)  Selected Trend Footnotes: (1) (2) (3) (4) (5) (6) (7) 100,083 6,889 1.5% Client data Client data Client data Client data Sum of Col (1) through Col (4) Selected based on historical data Selected based on historical data PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 14 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Fiscal Year Ending 6/30 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Footnotes: (1) (2) (3) (4) (5) Table 3.4 Acreage Projections Projected Acreage of Permits Issued On or Before June 30, 2011 All Permit Types Combined Acreage of In Force Permits Acreage of Forfeited Permits Acreage of Released Permits End of Year In Force Acreage (1) (2) (3) (4) 57,504 57,504 55,571 53,640 51,712 50,139 48,566 46,997 43,052 39,111 35,173 31,239 27,309 23,382 19,458 15,538 11,647 7,760 3,877 0 24 23 22 22 21 20 20 18 16 15 13 11 10 8 7 5 3 2 0 1,909 1,908 1,906 1,552 1,551 1,549 3,925 3,923 3,921 3,919 3,918 3,916 3,914 3,912 3,885 3,882 3,880 3,875 57,504 55,571 53,640 51,712 50,139 48,566 46,997 43,052 39,111 35,173 31,239 27,309 23,382 19,458 15,538 11,647 7,760 3,877 0 Percent In Force (5) 100% 97% 93% 90% 87% 84% 82% 75% 68% 61% 54% 47% 41% 34% 27% 20% 13% 7% Projected, based on client data Col (1) x Table 8 Col (1) x Table 7.1 through Table 7.3 Col (1) ‐ Col (2) ‐ Col (3) Col (1) / Col (1) year 2011 PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 15 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 4.1 Permit Company Permit Company Currently Posted Security (1) Number of Permits (2) Red River Coal Paramont Coal The Black Diamond A & G Coal Twin Star Knox Creek Coal Clintwood Elkhorn Maggard Branch Coal Sigmon Coal Norton Coal Nine Mile Spur The Banner Meadow Branch Coal Cumberland River Coal Harold Keene Coal Hobcaw Coal Patrick Coal Mid‐Vol Coal Pigeon Creek Processing Nally & Hamilton Enterprises Meg‐Lynn Land Lone Mountain Processing Wellmore Energy Ambrose Branch Coal Coal Technology International Baden Reclamation Virginia Fuel Alliance Coal Cat Coal True Energy Fuels K. M. H. Energy Highwall Mining Caliber Energy Cane Patch Mining Equinor Airway Resources Roaring Fork Mining Mill Branch Coal Clintwood TTC Commonwealth Mining Commonwealth Tipple Corbin Mining Double l Coal Dickenson‐Russell Coal 26,320,700 23,231,000 6,427,800 30,476,625 7,370,200 4,448,000 9,626,400 1,143,200 10,148,875 3,902,700 9,233,100 2,081,400 766,400 6,828,700 1,419,000 403,200 288,600 2,746,000 1,213,000 1,187,900 1,030,000 393,000 326,300 313,400 201,600 1,698,000 1,136,000 733,000 312,000 288,000 150,600 123,000 102,200 100,000 100,000 100,000 75,900 63,000 60,600 40,200 40,100 40,000 10,000 10,000 25 25 25 22 12 11 10 10 8 8 6 6 4 3 3 3 3 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Total 156,709,700 219 Footnotes: (1) (2) Client data Client data PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 16 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 4.2 Parent Company Parent Company Currently Posted Security (1) Alpha Natural Resources Wellmore Coal Southern Coal TECO Coal Arch Coal Jewell Resources BKF Solutions Xinergy of Virginia Individually Owned 49,240,900 13,026,800 44,138,600 9,626,400 7,221,700 1,419,000 201,600 288,000 31,546,700 75 44 38 10 5 3 2 1 41 Total 156,709,700 219 Footnotes: (1) (2) Number of Permits (2) Client data Client data PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 17 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 5 Number of Permits by Mine Status and Underlying Security Security Type Active (1) Closed no Reclamation (2) Closed with Reclamation (3) Total (4) Surety Surety and Cash Surety, Cash, and Letter of Credit Surety, CD, and Letter of Credit Letter of Credit Certificate of Deposit Self Bonding Self Bonding and Surety Self Bonding, Surety and Cash 137 3 1 1 2 3 15 2 1 3 1 0 0 0 0 0 0 0 45 0 0 1 1 2 1 0 0 185 4 1 2 3 5 16 2 1 Total 165 4 50 219 Footnotes: (1) (2) (3) (4) Client data Client data Client data Sum of Col (1) through Col (3) PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 18 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 6.1a Number of Permits by Mine Status and Year of Issuance ‐ Surface Issue Year Active (1) Closed no Reclamation (2) Closed with Reclamation (3) Total (4) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 8 6 3 3 0 0 2 0 1 2 2 2 0 0 3 2 6 7 4 2 8 5 2 5 7 6 3 0 1 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 0 0 2 0 1 1 1 1 2 0 4 1 3 2 0 0 1 0 0 0 0 0 8 6 3 4 1 1 4 0 1 4 2 3 1 1 4 4 6 11 5 5 10 5 2 6 7 6 3 0 1 Total 90 1 23 114 Footnotes: (1) (2) (3) (4) Client data Client data Client data Sum of Col (1) through Col (3) PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 19 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 6.1b Number of Acres by Mine Status and Year of Issuance ‐ Surface Issue Year Active (1) Closed no Reclamation (2) Closed with Reclamation (3) Total (4) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 3,531 1,107 910 2,485 0 0 346 0 126 792 2,658 1,113 0 0 1,659 477 1,906 5,458 2,584 916 3,862 3,791 294 3,551 2,808 1,728 470 0 61 0 0 0 0 0 0 148 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 274 12 66 29 0 0 175 0 68 100 242 49 265 0 592 73 1,276 215 0 0 11 0 0 0 0 0 3,531 1,107 910 2,759 12 66 523 0 126 967 2,658 1,181 100 242 1,708 742 1,906 6,051 2,656 2,192 4,077 3,791 294 3,562 2,808 1,728 470 0 61 Total 42,635 148 3,446 46,229 Footnotes: (1) (2) (3) (4) Client data.  Maximum of Disturbed or Bonded Acres. Client data.  Maximum of Disturbed or Bonded Acres. Client data.  Maximum of Disturbed or Bonded Acres. Sum of Col (1) through Col (3) PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 20 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 6.2a Number of Permits by Mine Status and Year of Issuance ‐ Underground Issue Year Active (1) Closed no Reclamation (2) Closed with Reclamation (3) Total (4) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 5 2 1 1 1 0 1 1 0 1 0 0 1 3 2 2 0 0 2 3 2 3 3 3 0 0 2 2 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 0 0 0 6 1 1 2 1 1 0 0 0 0 0 0 0 0 0 0 1 2 0 0 0 0 0 0 0 0 0 0 0 11 3 2 3 2 1 1 1 0 1 0 0 1 3 2 2 1 2 4 3 2 3 3 3 0 0 2 2 1 Total 42 2 15 59 Footnotes: (1) (2) (3) (4) Client data Client data Client data Sum of Col (1) through Col (3) PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 21 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 6.2b Number of Acres by Mine Status and Year of Issuance ‐ Underground Issue Year Active (1) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 385 104 5 50 17 0 16 1,201 0 8 0 0 4 965 162 596 0 0 1,108 36 28 65 153 77 0 0 107 30 27 Total 5,143 Footnotes: (1) (2) (3) (4) Closed no Reclamation (2) Closed with Reclamation (3) Total (4) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 22 0 0 0 0 0 0 0 0 0 0 60 17 50 28 8 4 0 0 0 0 0 0 0 0 0 0 12 101 0 0 0 0 0 0 0 0 0 0 0 445 121 55 78 25 4 16 1,201 0 8 0 0 4 965 162 596 12 101 1,130 36 28 65 153 77 0 0 107 30 27 22 280 5,445 Client data.  Maximum of Disturbed or Bonded Acres. Client data.  Maximum of Disturbed or Bonded Acres. Client data.  Maximum of Disturbed or Bonded Acres. Sum of Col (1) through Col (3) PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 22 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 6.3a Number of Permits by Mine Status and Year of Issuance ‐ Other Issue Year Active (1) Closed no Reclamation (2) Closed with Reclamation (3) Total (4) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 19 1 2 2 1 0 1 0 0 0 1 1 0 0 0 1 0 0 2 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 7 0 0 0 0 3 1 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 26 1 2 2 1 4 2 0 0 0 1 1 0 0 0 1 0 0 2 1 0 2 0 0 0 0 0 0 0 Total 33 1 12 46 Footnotes: (1) (2) (3) (4) Client data Client data Client data Sum of Col (1) through Col (3) PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 23 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 6.3b Number of Acres by Mine Status and Year of Issuance ‐ Other Issue Year Active (1) Closed no Reclamation (2) Closed with Reclamation (3) Total (4) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2,800 241 400 211 657 0 14 0 0 0 93 221 0 0 0 11 0 0 720 0 0 75 0 0 0 0 0 0 0 0 0 0 0 0 32 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 245 0 0 0 0 74 11 0 0 0 0 0 0 0 0 0 0 0 0 25 0 0 0 0 0 0 0 0 0 3,045 241 400 211 657 106 25 0 0 0 93 221 0 0 0 11 0 0 720 25 0 75 0 0 0 0 0 0 0 Total 5,443 32 355 5,830 Footnotes: (1) (2) (3) (4) Client data.  Maximum of Disturbed or Bonded Acres. Client data.  Maximum of Disturbed or Bonded Acres. Client data.  Maximum of Disturbed or Bonded Acres. Sum of Col (1) through Col (3) PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 24 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 6.4a Number of Permits by Mine Status and Year of Issuance ‐ All Permits Issue Year Active (1) Closed no Reclamation (2) Closed with Reclamation (3) Total (4) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 32 9 6 6 2 0 4 1 1 3 3 3 1 3 5 5 6 7 8 5 10 10 5 8 7 6 5 2 2 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 0 0 0 13 1 1 3 2 5 2 0 0 2 0 1 1 1 1 2 1 6 1 4 2 0 0 1 0 0 0 0 0 45 10 7 9 4 6 7 1 1 5 3 4 2 4 6 7 7 13 11 9 12 10 5 9 7 6 5 2 2 Total 165 4 50 219 Footnotes: (1) (2) (3) (4) Sum of Tables 6.1a through 6.3a Col (1) Sum of Tables 6.1a through 6.3a Col (2) Sum of Tables 6.1a through 6.3a Col (3) Sum of Col (1) through Col (3) PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 25 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 6.4b Number of Acres by Mine Status and Year of Issuance ‐ Total Issue Year 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total Footnotes: (1) (2) (3) (4) Active (1) Closed no Reclamation (2) 6,716 1,452 1,315 2,746 674 0 376 1,201 126 800 2,751 1,334 4 965 1,822 1,084 1,906 5,458 4,411 952 3,890 3,931 447 3,628 2,808 1,728 577 30 88 53,221 0 0 0 0 0 32 148 0 0 0 0 0 0 0 0 0 0 0 22 0 0 0 0 0 0 0 0 0 0 202 Closed with Reclamation (3) 305 17 50 302 20 144 40 0 0 175 0 68 100 242 49 265 12 693 73 1,301 215 0 0 11 0 0 0 0 0 4,081 Total (4) 7,021 1,469 1,365 3,048 694 176 565 1,201 126 975 2,751 1,402 104 1,207 1,871 1,349 1,917 6,151 4,506 2,253 4,104 3,931 447 3,639 2,808 1,728 577 30 88 57,504 Sum of Tables 6.1b through 6.3b Col (1) Sum of Tables 6.1b through 6.3b Col (2) Sum of Tables 6.1b through 6.3b Col (3) Sum of Col (1) through Col (3) PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 26 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 7.1 Release Rates for Active Permits Year Since Issuance Active (1) Phase 1 Released (2) Phase 2 Released (3) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 8.33% 9.09% 10.00% 11.11% 12.50% 14.29% 16.67% 20.00% 25.00% 33.33% 50.00% 100.00% 0.00% 0.00% 0.00% 33.33% 50.00% 100.00% 33.33% 50.00% 100.00% Footnotes: (1) (2) (3) Selection Selection Selection PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 27 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 7.2 Release Rates for Closed without Reclamation Permits Year Since Issuance Closed (1) Phase 1 Released (2) Phase 2 Released (3) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 12.50% 14.29% 16.67% 20.00% 25.00% 33.33% 50.00% 100.00% 0.00% 0.00% 0.00% 33.33% 50.00% 100.00% 33.33% 50.00% 100.00% Footnotes: (1) (2) (3) Selection Selection Selection PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 28 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 7.3 Release Rates for Closed with Reclamation Permits Year Since Issuance Active (1) Phase 1 Released (2) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Footnotes: (1) (2) (3) Phase 2 Released (3) 33.33% 50.00% 100.00% Selection Selection Selection PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 29 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 8 Forfeiture Rates Year Since Issuance Surface (1) Underground (2) Other (3) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20+ 0.000% 0.000% 0.000% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.000% 0.000% 0.000% 0.050% 0.050% 0.050% 0.050% 0.050% 0.050% 0.050% 0.050% 0.050% 0.050% 0.050% 0.050% 0.050% 0.050% 0.050% 0.050% 0.050% 0.000% 0.000% 0.000% 0.040% 0.040% 0.040% 0.040% 0.040% 0.040% 0.040% 0.040% 0.040% 0.040% 0.040% 0.040% 0.040% 0.040% 0.040% 0.040% 0.040% Footnotes: (1) (2) (3) Selection Selection Selection PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 30 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 9.1 Adjustment Factors for Mine Status Mine Status Factor (1) Active Closed no Reclamation Closed with Reclamation 1.00 0.80 0.67 Footnotes: (1) Selection PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 31 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 9.2 Adjustment Factors for Permit Status Permit Status Factor (1) Active Phase 1 Released Phase 2 Released 1.00 0.40 0.15 Footnotes: (1) Selection PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 32 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 9.3 Adjustment Factors for Size of Bond Permit Status Factor (1) Less than $10,000 Between $10,000 and $100,0000 Above $100,000 2.50 1.00 0.38 Footnotes: (1) Selection PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 33 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 10 Average Reclamation Cost Per Acre State Virginia West Virginia Ohio State Footnotes: Virginia: West Virginia: Ohio: Surface 4,519.89 2,898.24 7,217.71 Underground 11,259.74 13,259.83 8,899.96 Other 9,659.80 9,575.60 14,035.29 Client Data West Virginia Mine Reclamation Analysis Ohio Mine Reclamation Analysis PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 34 of 35 Virginia Department of Mines, Minerals and Energy Coal Surface Mining Reclamation Fund Table 11 Projected Investment Rates Based on US Treasury Returns in Fall 2011 Fiscal Year Investment Return (%) Discount Factors Ending 6/30 (1) (2) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 Footnotes: (1) (2) 0.125 0.188 0.250 0.625 1.000 1.188 1.375 1.625 1.875 2.125 2.206 2.288 2.369 2.450 2.531 2.613 2.694 2.775 2.856 2.938 3.019 3.100 3.181 3.263 3.344 3.425 3.506 3.588 3.669 3.750 99.938% 99.813% 99.564% 99.130% 98.332% 97.268% 96.037% 94.618% 92.991% 91.168% 89.235% 87.274% 85.289% 83.282% 81.258% 79.221% 77.173% 75.119% 73.062% 71.005% 68.952% 66.905% 64.868% 62.843% 60.833% 58.842% 56.871% 54.923% 53.000% 51.104% Based on US Treasury Returns in Fall 2011; Returns not  in Bold are interpolated from US Treasury Rates Based on Col (1) PINNACLE ACTUARIAL RESOURCES, INC Exhibit Page 35 of 35