Robert L. Sterup RECEIVED Kyle Anne Gray Holland Hart LLP SEP 1 3 2013 401 North 31st Street Lega| Services Office SW3 1500 Montana Dept Of Revenue P.O. Box 639 Billings, MT 59103-0639 Telephone: (406) 252-2166 Fax: (406)252-1669 ATTORNEYS FOR PLAINTIFF MONTANA FIRST JUDICIAL DISTRICT COURT LEWIS AND CLARK COUNTY CLOUD PEAK ENERGY RESOURCES LLC, Cause No. BDV 2012-239 Plaintiff, MEMORANDUM IN v. RESPONSE TO MOTION FOR SUMMARY JUDGMENT COUNT 1 AND IN SUPPORT OF CROSS MOTION FOR SUMMARY JUDGMENT STATE OF MONTANA DEPARTMENT OF REVENUE, Defendant. Plaintiff Cloud Peak Energy Resources LLC respectfully submits this response to summary judgment motion of Defendant State of Montana Department of Revenue ("Department") on Count I of CPE's Amended Complaint, and in support of cross motion for summary judgment. FACTUAL SUMMARY A. Procedural 1. CPE owns and operates the Spring Creek coal mines in Big Horn County, Montana. First Amended Complaint 11 Department's Answer 11 1. 2. During the period 2005-2007, CPE through its predecessors reported, and paid, Montana Coal Severance taxes, Gross Proceeds taxes, and Coal Resource Indemnity Trust taxes (hereinafter collectively "Montana Coal Taxes") on a quarterly basis. FAC 1[ 6; Answer 6. 3. In 2008 the Department initiated an audit of CPE's Montana Coal Tax payments for the period 2005-2007. FAC 117; Answer Deposition of Van Charlton depCPE provided all materials requested ofit by the Department during the audit process. Charlton dep. p. 22, ll. 9-11. Department auditors concluded CPE accurately reported production volumes. Charlton depThe Department had all the information it needed to complete the audit, and was not awaiting any further information from CPE. Charlton dep. p. 40, ll. 4-20. 4. By letter dated March 13, 2012, the Department provided its "Final Division Determination." CPE Exh. A (Dep. Exh. Charlton Dep. p. 38, II. 10-15; p. 47, ll. I 8; FAC Answer 117. In the same month CPE initiated this action seeking judicial review of the Department's March 2012 Final Division Determination. 5. By letter dated June 21, 2012, the Department provided a revised Final Determination (hereinafter the "June 2012 Determination"). CPE Exh. (Dep.Exh.8); Deposition ofLee Baerlocher p. 13, ll. Charlton dep. p. 63, ll. 4-19. By stipulation, CPE amended its Complaint in order too seek judicial review of the June 2012 Determination. 6. By its June 2012 Determination the Department notified CPE of a total assessment in the principal amount of $1,925,074.00. The Department further makes claim for interest in the amount of $1,212,900.00, and penalties in the amount of $231,739.00. CPE Exh. B. The lion's share of disputed tax relates to "non-arms length" sales of coal by CPE, and the Department's imputation of $10.1 million in phantom revenue for the non--ar1ns length sales.' B. Non-Arms Length Sales of Coal 7. Certain of CPE's coal sales during the period 2005-2007 were to affiliated entities, Venture Fuels and Northern Coal Transportation Company CPE has a fifty percent ownership interest in VF. Kim Parrish depwas established to provide logistical services for customers who elect to have coal delivered. Id. VF buys coal from CPE, then sells to customers at a price that includes transportation and other costs. Parrish depNCTC similarly provides transportation and other services when it sells to its customers the coal it buys from CPE.2 Deposition ofJason St. John p. 7, II. 20-24. 8. Because CPE has an ownership interest in VF and NCTC, the coal sales are deemed to be "non-arrns length" (hereinafter By statute, NAL coal sales are subject to "imputation" of revenue under certain specified circumstances. Mont. Code Ann. 15-35-107. The statute is discussed below. 9. By its March 2012 Final Division Determination the Department originally imputed revenues for NAL coal sales under a methodology prescribed by a settlement agreement between CPE's predecessor and the Federal Government 1 Certain components of the Department's assessment -- based on audit findings pertaining to "imputed local sales" and "refining adjustments" -- were not disputed by CPE. The Department's June 2012 Determination also seeks recovery of additional taxes for certain "additives." The additives issue is separately addressed in pending motions. 2 NCTC purchased coal from CPE during the period June -- December 2007, but not at any other times during the audit period 2005-2007. -3- ("Federal Settlement"). Charlton dep. p. 42, ll. 6-21. However, the Federal Settlement expressly provides: Neither Kennecott nor the MMS shall be deemed to have approved, accepted, or consented to any concept, method, theory, principle, or statutory, regulatory or contractual interpretation underlying, or supposedly underlying any of the matters agreed to herein or raised in connection with the issues settled herein. This Settlement Agreement shall have no precedential value and shall not be binding on either party as to any issues, or any time periods, other than those specifically address herein. CPE Exh. (Dep. Exh. 5) 1112. The Department subsequently has withdrawn the March 2012 Final Division Determination. Charlton dep. p. 63 ll. 16-19; Charlton depits June 2012 Determination, the Department imputed revenues for NAL coal sales by CPE during the period 2005-2007. CPE Exh. (Dep. Exh. 9). 11. The methodology employed by the Department in the June 2012 Determination is based exclusively on data from coal sales by CPE. CPE Exh. Baerlocher dep. p. 22, ll. 2-21; Charlton depAflidavit of Jason St. John 4. Specifically, the Department used "invoice log" data provided by CPE, CPE Exh. D, as follows: a. The Department selected certain arms-length contract shipments in a given month to determine a "market" price for that month. Baerlocher dep. p. 25, ll. 2-10. Arms-length shipments were selected for comparison based primarily on tonnage volumes, with some consideration also given to Btu content. Baerlocher dep. p. 25, ll. 12-20; St. John Affi 1T4. 0 For example, for purposes of imputing revenue for an NAL shipment of 43,217 tons to VF in April 2005, the Department selected for comparison three (3) shipments in that month under arms-length contacts. The -4- tonnage volumes for the selected arms-length shipments ranged from 38,836 -- 48,702 tons. See CPE Exh. at p. 2; Baerlocher dep. p. 30, ll. 6. b. Price-per-ton amounts for the selected arms-length shipments were averaged. The Department then compared the simple average arrns-length price-per- ton with the NAL price-per--ton for an NAL shipment in that month. Baerlocher dep. p. 35-36; St. John Afi 114. 0 For example, the three selected arms-length contracts shipped in April 2005 yielded a simple average "market" price-per--ton of $7.84, compared to the NAL shipment to VF in that month at $9.00 per ton. See CPE Exh. atp. 2; Baerlocher dep. p. 30, l. J7--p. 31, l. 3. c. If the simple average arms-length price-per--ton exceeded the NAL price- per-ton the Department calculated positive imputed revenue. CPE Exh. Baerlocher dep. p. 35-36. Where the NAL price exceeded arms-length price, the Department calculated negative imputed revenue. Id; St. John Ajj'. d. The Department netted positive and negative imputed revenue to determine total imputed revenue amounts by month. CPE Exh. Baerlocher dep. p. 35-36; St. John Afi'. 114. For the audit period 2005-2007, the Department determined total imputed revenue in the amount of $10,180,463.00. CPE Exh. at p. 12; St. John Ajf 1l4. 12. The imputed revenue figures represent income amounts the Department contends CPE could have received had CPE sold the coal to arms-length purchasers rather than to VF or NCTC. Baerlocher depdiscussed more fully below, the Department's methodology fails to comply with Montana statute in several critical respects. a. The imputation of revenue is based on a comparison of arms-length and NAL contract shipments in a given month. CPE Exh. Baerlocher dep. p. 47, ll. 6- -5- 13. However, the methodology does incorporate any mechanism for considering the time period in which the contracts under comparison were negotiated. CPE Exh. Baerlocher depSt. John Afi'. 1[10. As a consequence, the Department "compares" market prices from widely disparate time periods. b. The methodology does not include any data from sales of coal by producers other than CPE. Baerlocher dep. p. 21, l. 17--p. 22, l. 1; St. John Afi 1110. The methodology does not include any spot sales or other market data. CPE Exh. Charlton dep. p. 83, ll. 6-20; St. John Afi". 1110. c. The Department's methodology skews the results by placing undue emphasis on anomalous "outlier" contracts, Baerlocher depusing simple rather than weighted averaging, Baerlocher dep. p. 35-36, by limiting comparisons to a single month and by basing the calculations on "total" revenues including amounts attributable to items other than coal. Baerlocher dep23. 14. The methodology employed in the June 2012 Determination has not been used by the Department for any other Montana coal producer. Baerlocher dep. p. 28, l. 4 25; Charlton depThe Department's auditor was unaware of any written Department guidelines for imputing revenue for NAL coal sales. Charlton dep. p. 74, ll. 3-9. The Department representative responsible for the June 2012 Determination conducted internet research but was unable to find anything bearing on the methodology. Baerlocher dep. p. 16, l. I0--p. 17, l. 6. 15. The Department did impute revenues based on comparison of NAL and arms-length contracts of another producer, Decker Coal. The Montana Supreme Court held the Department's methodology failed to comply with Montana statute, as discussed more fully below. The Department did not meaningfully consider the Decker materials at its disposal in its preparation of the June 2012 Determination. Baerlocher dep19. DISCUSSION A. Declaratory Judgment As an alternative to administrative appeal, a taxpayer may elect to seek a declaratory judgment in the District Court. Mont. Code Ann. 15-1406. The statute provides: An aggrieved taxpayer may bring a declaratory judgment action in the district court seeking a declaration that an administrative rule or method or procedure of assessment or imposition or tax adopted or used by the department is illegal or improper; Mont. Code Ann. Section 15-1-406 "was enacted by the legislature to provide an aggrieved taxpayer with an alternative means of challenging the imposition of a tax." Pacific Power Light Co. v. Montana Dep't ofRevenue, 246 Mont. 398, 804 P.2d 397 (1991). Pursuant to ?l5-1-406, a District Court has the authority to declare that a tax "was illegally or unlawfully imposed" without the necessity of first going through the State Tax Appeals Board. Jeflerson v. Big Horn County, 235 Mont.148, 300 Mont. 284 (2000). The Department has not challenged this Court's jurisdiction to issue a declaratory judgment. B. Statutory Framework For NAL Coal Sales Montana statute provides for imputation of coal revenues when a person sells coal under a contract which is not an arm's-length agreement Mont. Code Ann. 15-35-107. When value of coal may be imputed procedure. (1) The department may or shall at the request of the taxpayer impute a value to the coal which approximates market value f.o.b. mine in a case where: . . . a person sells coal under a contract which is not an arm's- length agreement[. Mont. Code Ann. 15-35-107. The Montana Supreme Court has articulated a two-part test for imputation of NAL revenue under the statute: In order to impute a value to coal sales under MCA, DOR must meet a two-part standard: it must determine that the contract price does not represent an arm's-length agreement and that the transaction is less than market value. The two criteria are stated in the conjunctive. Thus, if DOR fails to satisfy either standard, DOR may not impute a value to the coal sales in question. Decker Coal Company v. Department of Revenue, 2000 Mont. 125, 1! 21, 299 Mont. 477, 2 P. 3d 245 (emphasis supplied). The mere fact coal has been sold under NAL contracts does not mean Montana Coal Taxes may be assessed based on imputation of revenues. Rather, it must be shown that the NAL price transaction "is less than market value." Decker 'll 21. If the NAL sale was at market value, then no revenue may be imputed. C. Prevailing Market and Economic Conditions As interpreted by the Montana Supreme Court, a comparison of NAL and arms- length pricing for purposes of imputing revenue requires first and foremost that the comparison be based on market and economic conditions prevailing at the time of the NAL contract negotiation. In Decker Coal the Department sought to impute revenues for the period 1986- 1988 by comparing the producer's NAL s-ales with certain of the producer's arms-length sales. Specifically, the Department compared NAL sales for the period 1986-1988 with arms-length contracts ("ComEd Contract") negotiated years earlier (at prices of $24 -- $28 per ton). The taxpayer contended that the "ComEd Contract was negotiated over a decade earlier under very different market and economic conditions," and further -3- asserted "it had no opportunity, during the period in question, to sell this coal for the $24-$28 per ton prices that DOR has imputed." Reversing a District Court decision affirming the Department's approach, the Montana Supreme Court held that the Montana definition of market value "by its terms requires a determination of what a willing buyer would pay to a willing seller under a contract negotiated under the market and economic conditions prevailing as of 1986-1988." Decker, 1] 30 (emphasis supplied). The Supreme Court explained: Although the above regulation clearly allows consideration of the taxpayer's own sales of ores of like kind and grade, it does not suggest that the taxpayer's own actual sales, regardless of date and price, shall be determinative of current market value. Rather, the regulation is couched in terms of ascertaining a "representative" market. For purposes of resolving the issue under consideration, a "representative" market is one that reflects market value "at the time of the sale." Decker, 41 (emphasis supplied). The Supreme Court held that the imputation must be based on "transactions and bids for coal comparable in quality and in time to the Montana Contracts" and which "took into account both short term (spot market) contracts and long term contracts negotiated in the same time frame as Decker's 1986- 1988 contracts Decker, 11 31 (emphasis supplied). D. Department's Flawed Methodology The Department's June 2012 Determination fails to comply with Montana statute as interpreted in Decker Coal. Undisputed facts establish that the Department's methodology is fatally flawed in several respects. 1. Failure to Consider Prevailing Market and Economic Conditions In Decker Coal the Supreme Court held that a compliant methodology must take into account "both short term (spot market) contracts and long term contracts negotiated in the same time frame as" the NAL contracts at issue. Decker Coal, 1131 (emphasis supplied). While the Department may consider the "taxpayer's own sales of ores of like kind and grade," in so doing "a 'representative' market is one that reflects market value 'at the time ofthe sale."' Decker Coal, (emphasis supplied). Here, the Department's methodology does not incorporate any mechanism for addressing the time of contract negotiation, and does not incorporate any spot sales or other market data. For these reasons alone, the Department's assessment contravenes Montana statute as construed in Decker Coal. The point readily is illustrated. In January 2005 CPE and VF executed NAL contract #918, for coal sales during the period 2005-2007 at $6.50 - $6.95 per ton. CPE Exh. E. In imputing revenue to that single NAL contract, the Department looked to arms-length contracts executed months and years earlier (table below for year 2005). Imputation Arms-Length Arms-length contract Arms-length Contract Date 918 Customer Execution Date February 2005 OTP 745 February 2004 TVA 913 December 2004 XCoal 842C0 July 2004 March 2005 DTE 805 May 2004 Transalta 709 October 2003 May 2005 NIPSCO 384 April 2005 CGH 896 November 2004 ACS 1B August 1995 July 2005 Alliant 312 August 2001 Great River 724 August 2003 OTP 745 February 2004 TVA 913 December 2004 August 2005 Alliant 312 August 2001 DTE 805 May 2004 Sept. 2005 Manitoba 774 March 2004 OTP 745 February 2004 October 2005 Manitoba 774 March 2004 WEPCO 656 April 2003 Nov. 2005 DTE 805 May 2004 St. John Aff '1I5.a; CPE Exh. I. -10- Comparing arms-length prices negotiated in August 2001 -- or October 2003, or February 2004 -- with an NAL contract negotiated in January 2005, is non-compliant with statute as interpreted in Decker Coal. The irrationality of the Department's methodology is underscored by the fact that, for 2006-2007, in imputing revenue under VF contract 918, the Department calculated "market" prices ranging from $8 - $16/ton. Date Of mputation DOR Determined Date of lmputation DOR Determined Market Price Market Price Feb. 2006 9.08 Feb. 2007 8.51 Mar. 2006 10.39 Mar. 2007 11.55 Apr. 2006 10.16 Apr. 2007 9.82 May 2006 12.86 May 2007 11.53 June 2006 13.95 June 2007 11.28 July 2006 10.57 July 2007 9.60 Aug. 2006 8.75 Aug. 2007 9.97 Sep. 2006 16.31 Oct. 2007 10.78 Oct. 2006 11.81 Nov. 2007 10.90 Nov. 2006 9.53 St. John Afi'. 'fl5.b. By its methodology, the Department in effect contends that, in January 2005, CPE could have entered into an arms-length contract under which the buyer agreed to price variations of nearly one hundred percent (from as little as $8.51/ton to as much as A methodology that yields such divergent "market" prices for imputation under the same NAL contract plainly is flawed. Here, as in Decker Coal, the producer "had no opportunity, during the period in question, to sell this coal for the" prices -- as high as $16/ton -- "that DOR has imputed." This fundamental flaw is further underscored by the Department's selection of two (2) arms-length contracts to determine a "market" price in September 2006. -11- Date Coal Shipped Customer Contract Tons Price Per Ton . September 2006 Alliant 950 88,885 $10.77 September 2006 Transalta 1023 109,953 $21.84 CPE Exh. atp. 7; Baerlocher depSt. John Ajf 1l5.c. The Department added the price--per-ton figures ($10.77 $21.84 $32.61) then divided by two to calculate a "market" price of $16.31 per ton. Baerlocher dep. p. 45, ll. 5-22. The Department compared that "market" price to an NAL contract delivery in September 2006, to VF under contract 918, at a price of $6.75 per ton. Based on that price difference the Department imputed additional revenue of nearly one million dollars CPE Exh. atp. 7; Baerlocher depSt. John Aff 1l5.c. In so doing, however, the Department did not consider the fact that one of the arms-length shipments selected for comparison -- the September 2006 shipment to Transalta at $21.84 per ton -- was under a contract negotiated in October 2005, CPE Exh. F, while the NAL shipment to VF was under a contract negotiated in January 2005. CPE Exh. St. John Afi'. 'fl5.c. A review of arms-length contracts negotiated contemporaneously with (two months before and two months after) negotiation of the January 2005 NAL contract between CPE and VF, contract #918, reveals that "market" price as of January 2005 was far less than $16.31 per ton. Date of Customer Price Per Contract Ton Negotiation November 2004 Cedar Falls Utilities 9.00 December 2004 Archer Daniels Midland 8.14 December 2004 Arizona Public Service Company 8.00 December 2004 Tennessee Valley Authority 7.75 January 2005 DTE Coal Services 8.75 January 2005 Southern Montana 9.00 January 2005 University of Minnesota 10.82 March 2005 Alliant Energy 9.50 -- 10.20 March 2005 DTE Coal Services 9.50 March 2005 Manitoba Hydro 9.25 St. John Afi'. 116; CPE Exh. J. -12- In contravention of the unequivocal command of Decker Coal, by making comparisons based on date of shipment, I_1_o_t date of contract negotiation, the Department "compares" contracts negotiated in one time period with contracts negotiated in much different market conditions. By ignoring "time of the sale,'' Decker, 1141, the Department reached a "market" price that drastically exceeds actual arms-length prices in January 2005. Indeed, in seizing upon the shipment to Transalta at $21 .34/ton under an October 2005 contract the Department failed to consider an arms-length sale to Transalta under a more contemporaneously negotiated contract, one dated June 2005, contract 970, at a price of $10.50 per ton, or about half the price of the later (October 2005) contract. Compare CPE Exhs. F, St. John Afi'. The anomalous market conditions as of October 2005 are underscored by the fact CPE entered into another arms-length contract in that month, with Archer Daniels Midland, contract 1024, at a price-per-ton of $21.00. CPE Exh. St. John Afi". As the Montana Supreme Court made clear in Decker Coal, the issue is whether the coal sold under the January 2005 contract between CPE and VF could have been sold to an arms-length buyer at a higher price under a contract negotiated at about the same time (January 2005). Decker, '11 31("long term contracts negotiated in the same time frame as" the NAL contracts). Looking to the September 2006 Shipment to Transalta at $21.84 per ton, under a contract negotiated with Transalta in October 2005, at a time of unusual market conditions, is entirely unresponsive to that issue. In the same vein, comparing an NAL contract negotiated in January 2005 with arms-length contracts executed in 2001 flatly contravenes Montana statute. -13- In sum, by focusing on a tonnage metric limited to month of shipment, the Department wholly failed to follow the mandate of the Montana Supreme Court in Decker Coal, comparison must be based on "short term (spot market) contracts and long term contracts negotiated in the same time frame as" the NAL contracts at issue. Decker Coal, 1} 31. For that reason alone the Department's methodology is illegal and improper. 2. Arbitrary Aid Unpredictable Tonnage Ranges. The Department's "market price" calculations are heavily predicated on tonnage volumes. The Department selected arms-length shipments in a given month of roughly comparable tonnage to NAL shipments in that month in order to make comparison. Baerlocher dep. p. 26, l. 3 22. However, nothing in the Department's methodology allows for prediction of what contracts will be compared in a given month. For example, in comparison with an NAL shipment 43,001 tons in July 2005 the Department selected an arms-length shipment of 72,952 tons, CPE Exh. at p. 3, while in November 2005 the Department compared an NAL shipment of 57,335 tons with an arms-length shipment of 35,001 tons. CPE Exh. at p. 4. Furthermore, arbitrary reliance on comparisons, with no consideration of broader time frames, yields anomalous results. For example, in the September 2006 example addressed above, while the Department's calculation draws on only two "comparable" contracts in imputing revenue for a 97,000 ton shipment to VP (yielding in fact CPE was party to thirty five (35) arms-length contracts within 15,000 tons of 97,000 tons during the period 2005-2007, with twenty seven (27) of those contracts at less than $10.00/ton, and an average price-per-ton of $8.94. St. John Afi'. 117. -14- By basing comparisons on tonnages shipped per month, and ignoring contract negotiation date, the Department subjected the same NAL contract to much different parameters. Returning to NAL contract 918, the shipments under that single contract ranged from 14,000 -- 97,000 tons in a given month. The Department's methodology erroneously endorses a fiction that this single contract is "comparable" to contracts negotiated years earlier, or years later, based solely on the vagaries of tonnage shipped in a given month. In that respect it is difficult not to conclude that the Department's methodology selected for comparison the very highest contract prices. Nothing in the Department's methodology allows for a "smoothing" of anomalous "outlier" contracts. Baerlocher dep. p. 51, ll. 6-24. As a consequence, the methodology yields skewed results. About $2.5 million in imputed revenue as determined by the Department is attributable to the Department's reliance on contracts ranging from $21 - $28 per ton. St. John Afi'. For all of the foregoing reasons, the Department's methodology contravenes the command of Montana statute as interpreted in Decker Coal. 3. Simple Averaging and Total Dollars The "invoice log" data on which the Department relied identified both "coal -- amounts paid for coal alone -- and "total -- which includes amounts paid for additives, Btu adjustments, transportation, and other products or services. Baerlocher deprelying on "total$" the Department effectively seeks to imposing Montana Coal Taxes on revenues unrelated to coal, in contravention of statute. -15- The Department also used simple averaging to calculate a "market price." The Department did not weigh the price--per-ton figures based on tonnage volumes. Simple averaging creates potential for skewing of results. For example: Imputed Revenue for Contract 918 September 2006 Date Contract Tons Tota1$ PPT Coal$ PPT 9/06 950 88,885 957,380 10.77 879,961 9.89 9/06 970 109,953 2,401,822 21.84 2,326,605 21.15 Simple Average 16.89 3,206,566 16.12 Weighted Average 16.31 15.52 Difference PT 0.58 0.60 97,276 tons 0.58 PPT $56,681 additional imputed revenue due to simple averaging 97,276 tons 0.60 PPT $58,635 additional imputed revenue due to simple averaging St. John Affl The effect is even more pronounced in those months in which several arms- length contracts were included in the comparison. E. Erroneous Contentions of the Department The Department errs in apparently suggesting CPE acknowledged revenue imputation is appropriate for all NAL sales. Department Brief at p. 7. CPE sought Department agreement on a method for determining revenue imputation, if any, in compliance with Montana statute and Decker Coal. The Department's methodology itself, putting aside for the moment its fundamental flaws, established that many NAL prices exceeded "market" price, with corresponding imputation of negative revenue. CPE Exh. D. What CPE sought then, andseeks now, is a compliant methodology. The Department fails to properly comprehend the data provided by CPE during a December 2011 meeting. See Department Brief at pp. 8-9. Because the Department erroneously had included certain arms-length contracts in its NAL calculations, CPE also included those contracts in its NAL calculations for the sake of consistency. See CPE Response Request For Admission No. 2. The material provided by CPE included -16.. spot market pricing and other market data. In any event, the Department ultimately elected not to accept any of data provided by CPE at the December 2011 meeting. The Department's suggestion that it performed a "market study" is without support. Department Brief at p. 9. No data other than CPE data was considered, and the Department gave no consideration to time of contract negotiation, the critical feature under Decker Coal. In that respect the Department plainly confuses time of shipment with "time of sale." That coal was shipped in September 2006 does not mean it was sold in September 2006 for purposes of imputation; rather, the relevant inquiry focuses on market and economic conditions at time of contracting. Indeed, it was that error that led to reversal of the Department's assessment in Decker Coal. The same result obtains here. F. Remedv For Illegal And Improper Taxation The facts unequivocally establish that the Department's June 2012 Determination fails to comply with Montana statute. The Court's role under 15-1-406 is to declare the methodology illegal and improper, and to articulate the correct methodology. In so doing the Court need look no further than the express language of the Montana Supreme Court. For purposes of imputing revenues, if any, to CPE's NAL coal sales: The Department may consider the "taxpayer's own sales of ores of like kind and grade." In so doing, a "'representative' market is one that reflects market value 'at the time of the sale.'" The Department must consider "transactions and bids for coal comparable in quality3 and in time to" the NAL contracts at issue, and "which take into account both short 3 Quality is not a metric of significance here, given that virtually all coal from the Spring Creek mine is of substantially similar quality including BTU content. -17- term (spot market) contracts and long term contracts negotiated in the same time frame as NAL contracts." Decker, 31, 41. The Court should so declare. While netting positive and negative imputed revenue is appropriate, broader sample sizes - -quarterly rather than for example -- will yield more consistent outcomes. In addition, the Court should declare that the Department's use of unpredictable tonnage volumes as the primary metric for comparison is arbitrary and improper, and that market price calculations should, to the extent reasonably practicable, be based on weighted averaging, and should incorporate mechanisms for smoothing anomalies. The Court need not undertake a calculation of imputed revenues, if any. Instead, with the Court's declaration in hand, the Department and CPE will be in position to apply the ruling to the facts in order to make the necessary calculations. If material facts are not in dispute, then the Court may rule as a matter of law on cross motions for summary judgment. Mont. R. Civ P. 56. If, however, the Court finds that material facts are disputed, then the Court should issue an Order setting the matter for trial on the merits and associated scheduling deadlines. CONCLUSION For all of the foregoing reasons, the Court should issue a declaratory judgment that the Department's June 2012 Determination is illegal and improper -13- DATED this 12th day of September, 2013. . Sterup Kyle Anne Gray Holland Hart LLP 401 North 31st Street Suite 1500 P.O. Box 639 Billings, MT 59103-0639 ATTORNEYS FOR PLAINTIFF -19- CERTIFICATE OF SERVICE This is to certify that the foregoing was mailed to the following persons by United States mail, postage prepaid on the date herein. Courtney Jenkins Brendan Beatty Montana Department of Revenue P.O. Box 7701 Helena, MT 59604-7701 Dated this 12th day of September, 2013. 6398543_1 -20- Montana Department of Revenue ?%Nfi '9 Dan Bucks Director Brian Schweitzer Governor March 13, 2012 - Certified Return Receipt - Required Kim Parrish, Vice President Tax Cloud Peak Energy inc.' 385 lnterlocken Crescent, Suite 400 Broomfield, CO 80021 RE: Final Division Determination 1) Montana Coal Severance Tax Audit for Years 2005-2007 2-) Montana Coal Gross Proceeds Audit for Years 2005-2007 3) Montana Coal Resource indemnity Trust Tax Audit for the Years 2005-2007 Dear Ms. Parrish: We appreciate your efforts in taking the time to meet with us in our offices on the morning of December 15, 2011. We have reviewed your additional information provided with your explanations which included your December 15, 2011 letter presented to us, and your January 10, 2012 letter. Our final determination is based upon that review and also is based upon your declining to produce additional audit information requested during our December 15, 2011, meeting in Helena. We have found a total revised assessment for the 3 above mentioned coal taxes of -$3,316,290 that includes tax of $1,917,002, penalty of $229,592 and interest of The enclosed worksheets detail the adjustments made for each tax. Adjustments: We still agree with your position on the pass-through revenue as discussed in your letter (item number 7) dated May 25, 2010. Our final revised assessment reflects that change. You will see the 'attached worksheets, by tax for each year. The coal severance tax worksheets show the additional coal revenue per audit with recalculated production taxes deducted. We are not calculating any pass-through audit revenue and a minor exempt revenue issue arises as we calculate the 20 revenue.mt.gov A Toll free 1-866-859-2254 fin Helena. 444-6900) A TDD (406) 444-2830 Our tax calculation includes various revenue components we believe should be included as gross coal revenue for tax purposes. These additional revenues are shown on your Montana tax calculation worksheets. Our reasons for including the additional gross revenue will be discussed under each revenue category. The following additions to your reported gross coal revenue result in additional tax due. The category headings are the same headings shown on your own worksheets. 1) Refining Adiustment Revenue No further discussion is needed. According to your January 10, 201-2, letter, you are in agreement with our position. 2) Local Sales Revenue No further discussion is needed. According to your January 10, 2012, letter, you are in agreement with our position. A 3) Revenue 4) Non-Arms Len th Revenuef rventure Fuels Contract 5) Additional Coal Production Revenue for Northern Coal Transportation Company (NCTC) Operations 6) imputed Non--Taxabie Rovaltv gross coal revenue per audit. in summary, the revenue for adjustment numbers 3-6 are included in the Contract Sales Price (CSP) calculation because all royalties paid on production, no matter how they are calculated must be included for the CSR as stated in Montana law. This means the gross revenue used to determine these royalties must also be included as gross coal revenue for arriving at the CSP. in tum we have made noadjustments to your non- taxable royalty calculation. This assessment is based upon our best information currently available for your non- arms--length arrangements. Our determination is to use or accept the federal royalty calculated additional coal revenue.' You have declined to provide us with additional information to arrive at another tax solution. -Finally we have always been attempting to communicate on a regular basis at an informal level to resolve our audit differences and come to a resolution. if you wish to protest this issue further, you may appeal, within 15 days from the date of this letter, to the Office of Dispute Resolution. The Officeof Dispute Resolution is a unit within the Department of Revenue, which at the request of the taxpayer, may hear taxpayer protests and issue a final department decision. I have 'enclosed form admission that you agree with the assessment. You will forfeit the right to a. hearing at the Office of Dispute Resolution if you fail to submit form APLS102F Further information related to your protest rights can befound in Section 15-1-211, MCA. Please contact me at (406) 444-3584 if you have any questions. Sinc re y, at Van Charlton, Unit Manager Business Tax and Valuation Bureau Business and Income Taxes Division MONTANA I REVENUE - I RSV Notice of Referral to the Office of Dispute Resolution You may use this form to appeal the notice of determinatio made by the Department of Revenue's Business and income Taxes Division. This division issues a notice of final detenn inatlon after receiving a request for informal review of a tax adjustment. You need "to file this form with the Offlce of Dispute Resolution within 15 days of the date on the notice of the division's final determination. For more information about the appeal process, visit the tax appeal process section at revenuemtgov. if you need additional help, call us toil-free at -1-86?-859-2254 (in Helena 444-6900) Monday through Friday. 8 a.m. to 5 p.m. 1. Taxpayer information Name ofTaxpayer(s) or Contact Person . SSN i i. i Address -- FEIN City State Zip Code Spouse's Name (ifjoint liability) Spouse's SSN Telephone Number Fax Number Email Address Tax Type(s) For Tax Period(s) Account Authorization. of Representative if you would like to have another individual represent you during the informal review, please provide the basic information below and attach a completed Power ofAttomey form. You can find the Power ofAttomey form in the downioadable forms section at revenue.mt.gov' or call us toil-free at 1-866-859-2254 (444- 6900 in Helena). Federal Form 2848 is aiso acceptable if the 'Tax Matters" section identifies the Montana tax type, form number and years that the representative is authorized to discuss with the department Name of Representative Telephone Number 3. Basis for Objection As required by law, you need to provide a written explanation of the basis for for infonnal Review (Form APLS101 F) andlor a factual statement for each di below and additional sheets as necessary. Failure to provide an explanation request your objection. Please attach a copy of your Request sputed issue in your written explanation. Use the space of the basis for your objection may resultin denial of your Date of the Business and income Taxes Division's Notice of Determination: The following issues are the basisfor objection: Signature of Taxpayer or Authorized Representative Title Date Spouse's_Signature (if joint liability) Date Please mail this form to Montana Department of Revenue, PO Box 7701, Helena, MT 59604 -7701 or email to Tax Summary Spring Creek Coal Company Decker, Montana Interest Calculated through 03/31/12 Coal Severance Tax Year Tax . Penalty Interest Total 2005 431,408 77,653 335,386 844,448 2006 468,059 9 84,251 311,331 863,640 2007 514,447 55 61,734 281.477 55 857,658 Total 1,413,914 $223,638 928.194 55 2,565,745 Gross Proceeds Tax -Year Tax Penalty Interest - Total 2005 143,621 87,609 231,231 2006 150,619 73,803 224,422 2007 9 171,203 5: 63,345 55 234,549 Total 1; 465,444 - 5; 224,758 :5 590,201 Resource Indemnity Trust (RIT) Year' Tax Penalty Interest Total 2005 11,490 2,068 8,388 19,877 2006 12,459 2,243 7,600 20,059 2007 55 13,696 1,644 55 6,711 :5 20,407 Total 55 37,645 :5 5,954 55 22,699 55 60,343 Total for all Taxes for the years 2005-2007 Tax Type Tax Penalty lnterest Total Severance 1,413,914 $223,638 928.194 9 2,565,745 Gross Proceeds 465.444 - 224,758 690,201 RIT - :5 37,645 55 5.954 9 22,699 60,343 Totals :5 1,917,002 $229,592 91,175,650 3,316,290 Penalty: 13% for 2005 and 2006, 12% for 2007 . 22 mxmaun wsox mama. mmn_mEm:o: 2.3. . maomm mo305: mnazo O02. ooz_n>z< mm2om .88 M20 EMU . . . m..m?.mm.m How $.omm.Sm a LN . . 3m.om.?apomim 9 Emu: 98 a iE.moo.E. ?mm.umm.mo m_mA_o8.$ . 9 9 a_mfi..2 mam 6 m_owm.wfi.um a .e _o.o..-.mfi.mm m.o.Em.% 9 .\.m.mmo.mm a 3.693 9 mo_mG.mm mmziemm a mom.mm.:..m Swfiwmm .3 o. A 8.3 m.m.$.3w.mo a 9 3 8_8m.3 9. w_mom.2 wt 3.9: $0.3 M. 9 9 9 9 m_Bm.mwm.fi 9 mm. 9 w.8o.m8. ._o_omm_mfi .3 m. 9 813 a Snmom a as mam mm 3.93 a 9 $.53 msomm 6 1&3 4. 82 mwmam 9 a a a N853 a ~3.m3. 299 >&:m9m9_ . mxm:9_99 9.99.. 99999.9. 999999399999 9293.999 Oaomm 9.38999 mxo_:m9o: 99.99 3.999 99999 9.99.9 >9EEo:m_ Ucm 99999: >3o::9 929929 002. 90993929 999.. 9.89 9999 999 09.9 929. 03 9999 0.999 9.29. 0999 . 90.39 9.999.999 9.999.999 . 9.999.999. 9.999.999 99.999999 999.999.999.99 999.999.999.99 999.999.999.99 9 99.999.999.99 999.999.999.99 .. 9 999_.999.999999.99 9 999999.99 9 9_999.999.99 9 9.999.999.99 9 9.999.999.99 9 9.999.999.99 9 999999.99 9 9.999.999.99 9 9.999.999.99 9. 9.999.999.99 9 9.999.999.99 9 9.999.999.99 9 9.999.999.99 9 99.99.999.99 9 9.999.999.99 9 99.999.999.99 9 99.99999 9 99.99999 9 99.99999 9 99.99999. 9 999999.99 9 999999.99 9 9.999.999.99 9 9.999.999.99 9 9.999.999.99 9 99.999.999.99 9 9.999.999.99 9 9.999.999.99 9 9.999.99.9.99 9 9.999.999.99 9 99.999.999.99 9 99.999.999.99 999.999.999.99 999.999.999.99 9 99.999.999.99 9 99.999.999.99 9 9.999.999.99 9 .9.999.999.99 9 9.999.999.99 9 9.999.999.99 9. 99.999.999.99 9 9.999.999.99 9 99.99.999.99 9 99.99.999.99 9 9.999.999.99 9. 99.999.999.99 9 999.999 9 999.999 9 999.999 9 999.999 9 999.999 9 99.999 9 99.999 9 99.999 9 99.999 9 99.999 9 99.999 9 99.999 9 99.999 9 99.999 9 999.999 9 999.999 9 999.999 9 999.999 9 999.999 9 999.999 299 .999" . mxmawn wanx _nmn_m_.m_ 9399 _u..oommp.m 99999.2 mxn_=m_o= 9959 3999 .9999 _umE Dam _:9m8m>> .2. 99.99: Uzm m_um_zm_ 9mzom 9999 999 92.9 0.29 9.6 0% 9.9: 0% 399 9.93.999 9.999.999 9.93.999 9.999.999 99.999999 9 99.39.999.99 999.39.999.99 999.999.999.99 999.999.93.99 959.999.93.99 . 9 nl 9 999..999.999,999.99 9 $3999.99 9 9.999.999? 9 i99.999.fi 9 9999.93.99 9 99.99.999.99 9 i99.9t.99 9 299.9999>> 9 9.999.999.? 9 $99,999.99 9 9.999_999.99 9 9.999.9m9..9m 9 9.999.959>> 99.999.999.99 9 99.999.999.99 9 99.9929 9 9899.3 9 9999.99.99. 9 999.9939 9 i9.999.99 9 9 $9999.99 9 9999.39.99 9 9999.39.99. 9 9.999_999.99 9 9.999.999? 9 9.999_999.99 9 9929.93.99 9 9_999.999..99 9 49.999.999.99 9 99.98.9929 999.999.39.99 999.999.93.99 999.999.999.99 93.93.999.99 9 9 9.9999939 9 9999.92.99 9 9.999_999.99 9 99.999.999.99 9 9.39.9939 9 9999.99.99 9 99.999.93.99 9 99.999.999.99 9 99.999.999.99 9 999.999 9 29.9: 9 999.92 9 99.999 9 93.999 9 99.999 9 99.999 9 99.999 9 3.93 9 99.999 9 99.3.9 9 99.999 9 99.999 9 99.999 9 999.93 9 999.999 9 999.93 9 91.999 9 999.93 9 999.999 mnazo O02. O02. omomm vmoommom 88 00330>> mm_mm vane mxmaun 003.39>> wm_mm .58 mm Amx Ucm (R) 3.. Emma" _umE >nEEo:m_ Ucm _=8nomn . >395: Dam '69--9969 99-63-69 9 33.3 .Kw_mN._ 3&8 muazm CO2. O02. omomm mmoommom 88 . . . mm_mm wanm . mama mm Ucm (R) mg. Aux Ea >naEo:m_ Aux Dam 8:33>> Uzo .e9e9<> m_um_zm O02. mwomm mmoommom B3 nosfimon mm_?m Ram . mxmicn 02.52 mm_mm _o:nm mm :33 95 (R) mg. Aux _umE Ucm . 0.5 .25 ambmx 3.: 33? mummufl 3 Now 8.95 Nfimfi amaze 002: <> w..w_mm .Aux _umE 9 mmohmm 0.6. 3.30 . 5 Noam >305: 9.5 .93 mnazm axcma . .88 Oosfimnn mm_mm mxmaun mm3o::n Uta 3.3 SW3 ._.3.mmA Emuom NN3 poem muazm xmmocmom _zom_sz_4< 3:3 oo=?o. wm_mm mica baa" mxmivn _um3o::n 95 9 34.3 ambfi .ao.m8 obmm 9 Im.|.llI.I a $58 9 a 9 mmumm. xm> _3uEma room. mm_mm _3uEmn mow. . momazn 32.3 9 minfifiwom amm_mfi.mS.mm 9 a .. 9. 9 3m.wmm.mw :m_m8.8 $.m8.om ?.mS.3 mm.mAm.mu m:.m.fi.8 2. a 8.93.3 ~$.mmn.mL mimmsm a apooflmm a Smummfi .. 9 Smbmim. %.um.u..mm 0 a 9.898 a a 2. 9 mm.mm,o..wo 9 HEHOPCA ._mm.omm.mm mm._.mS.mm a .?_8w8 . mmo.3m.om 9 m..B.omm.m~ aomouomfi m.umm.oo mambo a - a immbo 3.8 - 2 mumwoo 2. - mambo $8.30 a m.wom.oo a mambo 8N8 o_om._.oo a a_Sm.oo $m.$m.mm .3w_omm.Am m?.oom.8 a . m~.Eo.S .m mm.mmw.H.. a . uom_3m.um .fim_m8..8 a 9 Swami.>> 9 mmumemo a ?m_mma.mm 9 u3.mom.E 3o.mmo.E_ fi.fim.mm 3.89% 9 ?.mom.fi 9 Bo.m.a.fi 9 d.$m.3 mm.m8.E .o.mm.o.:.mm m?.8m.om a m8..$m.d a a mm>. 9 99.jo.9S 9 - a. 9 99999.99 9 99.80.99 9 9 6.3.9 9 - 9 98999.99 9 999.933 9 .m.S_9fl..t 9 .. 9 999.999.: .3952. _.o8_mm_m9 .. 9 9.96.8 9 999.8 9 - 9 9.29.9.99:5 2. 9 9.98.00 9 - 9 9999.99 0 9 9.99.8 9 9.89.99 9 999.8. 9 9.89.8 9 9999.09 9 99.93.99 mm?acm 9 999.9?.99 9 999.99>>? 9 999.9599 9 39.9998 9 m3 9 99.99990 9 o9.o9o.9u 9 .m__9.5.9o 9 99.39.99 9 999_m99;m >E.:uom xm< 9 999.9939 9 92199.94 9 9999.39.99 9 99399.99 9 9.93.9959. 9 39.39.99 9 ..9.9~9.o9 9 ?999.99 9 9 93.9999>> 9.59 meaagioas 9 39.39.99 9 5999.99 9 3.93.99 9 59.93.99 9 999.9399 .3525 9 9.99.9399 9 99.9998 9 99.39.99 9 9 999.9992 9 9 9 $9,399.99 9 999,999.99 9 9..~9o.999.3 9 m9.._3..93.uu 999.999.999.99 9 99.39.999.99 9 99.999.999.99 9 ._n9.999..Em.99 imxmafl mmaa3.o:m_ mow 33? mmnEEo=m_ mmnqEo:m_ Uzo . 429.. >305: Dam 92920 002.. _s_zm do? 9mzom 9>x M999 0.5 M20 930 04.2 . 9.99599 9.999.999 9.999.999 9.93.. .39 3.89.9. 9 9 93.99:: 9 fi9.?.99 9 39999.99 9 999999.99 9 99.999.999.99.9399 9 99.9: .99 9 99.98. 99 9 99.m9o.9.9 9 m99_m99-99 9 9.999.": 9 .99 9 9.9999.>> 9 Nmmowm 9 9.99999 9 99.9.. 9.8 9 9 99.39.99 9 9.99.8 9 99999.9.9.9.93 .8 9 999.9399 9 999. 9.9. .3 9 999.999- 9 ..9o9.98.o9 9 .8.999.~9 9 99.999 .99 9 99.~m9.9< 9 99.~99..9.9 9 999.392 95.9.5 9 99.9.9>> 9.. 9 omhmo 9 . M933 9 9 3.98 9 8.99: 9 9.4.99.9. 9 2.999 9 99. 9 Nu. 9 99.999 9 . 3.99: 9 99.999 9 9.99.999 9 99.999 .9 999.999 9 39.999 9 A 9.. .93 9 999.999 . 23 roman . mxmfiun . Emnw _aoo_m3umo.: Ed. maowm wnonoonm moao=3 95 mnazm owmmx mmzom 39.. w.moo.m._~ $3.8m +m$_mmo a.-m..ao m. 3m.m.R.8 8m.m.R.mo 9 mfibmwoo ?.mom.om :m.mwm..a Amififi w.o8.o.\ m..o.um.8 .9 53.2 a w_8w.8 a ?.oa.8 a wm.au.8 a Emmwa wm.fim-mm a aiomum u8..8u.d m8.m8.E a mumummi 9 fim.mxm.& ?.m8.om 9 :m_Bm.1ojimo a fiwm? $.38 398$ a. 9 in? 3.24 a a mmam 9 She. 3.3 $.34 a Si: n?mfi 9 853 a m3.a$ mnazm z__zm omomm umoommum B8 mama .58 mxmiun W30: am. 02.28. 38 mm flux ax. Ucm . amass>> Hon>>. >305: Uco . momxmo iomxmo . . omufim 2 In .-. .-. mwazo. O02. _s_zm O02. mmomm mmoommum ix B8 . Ooandnn mmfim minm >23 mxmain 00330>> mafia wan>> mm Aux 0.5 (C) mg. _umE >nEEo:m_ Dam 4.03. Ucm 69-6999 3.4% . mvm_zm.owmmx no? mzomm umoommom .83 0033.90>> wmfim V13 mxmacn . Oosnnmon mfimm mm Q3 _-owmu 195 Uca 852.. >305: Gem -69 '$969-$969 69-6969 3. 18 .mwm.omn . amaze O02. _s_zm _z_um_sz:< axcma B8. Oonfimon mama want 25" mxmaun . . noafln. minw mm Dam (R) roam" Aux vmfi Dam 832.. 403. Dam rmommoo .33 5.3 98>> Kano muazo 002.. . xmmocmom _zomz_z:1< <3 mxmaun mm_mm minm um >&:mnmn_ 9 9 9 0:0 (R) 9 reamSnow flimw 98m 3 bow 3&8 . mm> on nmxmaua mmsmacm 88 mom 2.3m mmn?mo=m_ mom mm> 91.5 :3 9.23.2 us! <58 3 _=> nnmfififi 9.3 Saoarnafisu <52 18. 2 P3 9.. :3 . ma: mflun <33 3 run rs Buyer: Otter Tail Power Company. A division of Otter Tail Corporation 1012 Water Plant Road Fergus Falls. MN 56537 Attn: Stacie Hebert Phone: 218-739- 3635 Fax: 21 8439-8629 CONFIRMATION LETTER Kennecott 745 Seller: Kennecott Coal Sales Company Caller Box 3009 (B2717--3009) 505 South Gillette Avenue Gillette. WY 82716 Attn: Matt Levar Phone: 307~687-6028 Fear. 307-687-6009 This Conlinnation Letter ("Confirmation") shall confirm the transaction arranged February 2. 2004. between Otter Tail Power Company a division of Otter Tail Corporation and Kennecott Coal Sales Company ("Kennecott") pursuant to the Master Coal Purchase and Sale Agreement effective December 13. 2001. The terms and conditions of this transaction are as follows: Kennecott to sell and deliver and OTP to purchase and receive. Transaction Type: Product: Base Price: Shipment Period: Quantity: Scheduling: Delivery Point: . Substitution: Physical Coal Sub-Bituminous coal: 9.300 BtuILb. and 0.80 Lbs. Spring creek _?al_emt_lar Year 2004 2005 2006 2007 Base Price per Ton $7.67 $7.85 $8.06 $8.30 July 1. 2004 through December 31. 2007 This is a requirements contract for Hoot Lake Plant with a minimum delivery of 450,000 tons per year for calendar years 2005. 2006. and 2007. OTP shall provide Kennecott a good faith estimate of OTP's annual coal requirements. by month ("Quantity Notification") by October 1 of the year preceding the delivery year. At least thirty (30) days prior to the beginning of each delivery month. OTP shall provide an updated delivery schedule for the remainder of the Contract Year. Kennecott shall use its reasonable efforts to ship the coal under the specified delivery schedule and OTP shall use its reasonable efforts to receive the coal under the specified delivery schedule. Said delivery may only be varied by mutual consent of Buyer and Seller. FOB Raiicar. Spring creek Mine located in Big Horn County. Montana If Spring Creek Mine cannot ship the full requirements of the Hoot Lake Plant. Kennecott will provide a substitution from its Jacobs Ranch Mine. Soda Ash will be added to the Jacobs Ranch coal to increase Sodium percent to CPE--DOR 001678 TVA CONFIRMATION LETTER Kennecott 913 Buyer. Tennessee Valley Authority Seller: Kennecotl Coal Sales Company Fuel Acquisition 8. Supply 11 01 Market Street Chattanooga, TN 37402-2801 Attn: Jack Thompson Phone: 423-751-7188 Fax: 423-751 -3837 Caller Box 3009 (82717-3009) 505 South Gillette Avenue Gillette. WY 82716 Attn: Mike Kelley Phone: 307-685-6121 Fax: 307-687-6009 This Confirmation Letter ("Confirmation") shall confirm the transaction arranged December 8, 2004, between Tennessee Valley Authority and Kennecott Coal Sales Company ("Kennecott") pursuant to the Coal General Terms and Conditions attached to this Confinnation and Additional Provisions. Kennecott Confirmation #913. The terms and conditions of this transaction are as follows: Kennecott to sell and deliver and TVA to purchase and receive. Transaction Type: Base Product: Base Price: Shipment Period: Quantity: Delivery Point: Topsize: Quality: Btu Adjustment: Physical Coal Sub--Biturninous coat: 9.300 BtulLb. and 0.80 Lbs. SO2ImmBtu Calendar Year Base Product Price per Ton 2005 $7.75 January 1. 2005 - December 31 . 2005 All tons to be shipped on a ratable delivery schedule. Calendar Year Tons (to the nearest unit train) 2005 800,000 FOB Railcar, Spring Creek Mine located in Big Horn County. Montana 2" 0" ASTM Coal Quality Specifications QUALITY Typical Reject BtulLb. 9.300 9.000 Lbs. 0.80 0.80 Sodium 8.0 9.0 To reflect the actual heat content of the coal delivered. each quazter the Base Price of coal will be adjusted for any variation from 9.300 BtuILb., using the following formula: - .1- CPE-DOR 001821 Buyer. Xcoal Energy& Resources ORIGINAL CON TION ER 342 Seller: Kennecott Coal Sales Company caller Box 3009 (82717-3009) 7'57 Uoyd Avenue P.0. Box 551 505 South Gillette Avenue Latrobe. 15650 Gillette. WY 82716 Attn: Emie Thrasher Attn: Mike Kelley Phone: 724-520-1636 Phone: 307-685-6121 aac 724-537-6475 Fax: 307-687-6009 This Confirmation Letter ('Confirmation') shall confirm the transaction arranged July 16. 2004, between Xccal Energy Resources ('Xcoal") and Kenneccti Coal Sales Company ("Kennecott') pursuant to the Coal General Terms and Conditions. The terms and conditions of this transaction are as follows: Kennecott to sell and deliver and Xcoai to purchase and receive. Transaction Type: Product: Base Price: Shipment Period: Quantity: Delivery Point: Topsize: Quality: Btu Adjustment: Physical Coal Sub-Bituminous coal; 9.300 BtuILb. and 0.80 Lbs. SOzImmBtu $8.00 per ton of coal -- if said Coal is not shipped outside of the United States. the applicable US Black Lung Tax shall be added to the above stated Base Price. October 1. 2004- December 31.2004 150.000 tons to the nearest unit train FOB Raiicar. Spring Creek Mine located in Big Horn county. Montana 2' ASTM TYPICAL BtulLb. 9.300 Lbs. 0.80 To reflect the actual heat content of the coal delivered. each month the Base Price of coal will be adjusted for any variation from 9.300 BiuILb.. using the following formula: Btu Adjustment Per Ton (53 - 33} BB Where: The Base Price of coal per ton delivered during the month: AR The weighted average 'As-Received' Btu's per pound of the respective coai[s] delivered to Xcoal; and. B3 The Base Btu's per pound of the respective coaI[s] delivered to Xcoal during the month; the BB value =_9.300 CPE-DOR 001999 CONFIEATION LETTER Buyer: DTE Coal Services 414 South Main St.. Suite 200 Ann Arbor, MI 48104 Attn: John Wagner Phone: (734) 887-2109 Fax: (734) 887-2056 Kenrrecott 805 Seller: Kenneoott Coal Sales Company P.0. Box 3009 (82717-3009) 505 S. Gillette Ave. Gillette. WY 82716 Attn: Mike Kelley Phone: (307) 685-6121 Fax: (307) 687-6009 This letter shall confirm the transaction enanged May 14, 2004. between DTE Coal Services and Kennecotl Coal Sales Company ("Kennecott") pursuant to the Master Coat Purchase and Sale Agreement effective May 30. 2002. The tame and conditions of this transaction are as follows: Kennecott to sell and deliver and DTE to purchase' and receive. Transaction Type: Physical Coal Product Sub-Bituminous coal: 9.325 BtuILb. and 0.80 Lbs. S0zImmBtu Shipment Period: July 1. 2004 - December 31. 2005 Quantity: Sh_I:_r_ment Period Tone (to the nearest unit train) JuIy- Decemberzoo-1 8.000 January - December 2005 500.000 Base Price: Shipment Period Price ton July- December 2004 ?57.00 January -- December 2005 ?57.25 Delivery Point: FOB Railcar- Spring Creek Mine located Big Horn County. Montana Quality: Quality Typical Shipment Suspension CPE-DOR 001318 CONFIRMATION LETTER Kennecott 709 Buyer: TransAlta Centralia Generation L.L.C. Seller". Kennecott Coal Sales Company Box 1900 Station Caller Box 3009 (82717--3009) 110 12"' Avenue sw 505 South Gillette Avenue Calgary Alberta T2P 2M1 Gillette, WY 82716 Canada Attn: John Parker Attn: Matt Levar Phone: 403-267-7421 Phone: 307-687-6028 Fax: 403-267-7202 Fax: 307-687-6009 This Confirmation Letter ("Confirmation") shall confirm the transaction arranged October 30. 2003. between TransAlta Centralia Generation L.L.C. ("TransAlta") and Kennecott Coal Sales Company ("Kennecott") pursuant to the Master Coal Purchase and Sale Agreement effective January 1. 2004. The terms and conditions of this transaction are as follows: Kennecott to sell and deliver and TransAlta to purchase and receive. Transaction Type: Physical Coal Product: Sub--Bituminous coal; 9.350 Btu/Lb. and 0.80 Lbs. S02/mmBtu "Shipment Period: Delivery Year Period 2004 Januag 1 . 2004 - December 31. 2004 2005 January 1. 2005 -- December 31. 2005 2006 January 1. 2006 -- December 31. 2006 2007 January 1. 2007 -- December 31. 2007 2008 January 1. 2008 -- December 31. 2008 Quantity: On or before July 1 of the year preceding each Delivery Year. Buyer shall supply written notification to Seller of its good faith preliminary month-by-month nomination (Preliminary Nomination"). Prior to January 1 of each Delivery Year, Buyer shall provide written notification to Seller of its final month-by--month nomination ("Final Nomination"). The Final Nomination shall be within 80% and 120% of the tonnage stated in the Preliminary Nomination for such Delivery Year. All Preliminary Nominations and Final Nominations for each Delivery Year shall fall between the minimum and maximum tonnage amounts provided below for the relevant Delivery Year. The total tonnage actually delivered under the Final Nomination for each Delivery Year shall be rounded to the nearest unit train. Delivery Year Minimum Tons Maximum Tons 2004 600.000 1 .500.000 2005 800.000 1 .500,000 2006 800,000 1.500.000 2007 800.000 1 ,500.000 2008 800.000 1.500.000 CPE-DOR 001772 Phone: 307.685.6110 e-mail: a Fax: 307.685.6259 E-totarylofllew-tr customer service Contact: Marketing . Margaret Brenson, Customer Service Assistant Manager and structured Phone: 307.687.5016 e-mall: Pe ken cottene . on Fax: 307.685.5259 9-tine Available on Direct Trains BTU SO21 mmBTUIPricefton Selected I Sprigtcreek Coal Apr 28, 2005 I9350 .80 Iuss 9.25 1 - Trains confirmed: 384-El'59 I calorific Adjustment: Where: Sulfur Adjustment: The Base Price of the coal delivered will be adjusted in accordance with the following formula to reflect the actual, each month the Base Price of coal would be 502 content of coal delivred during each semi- period. (AR-I-BI) em Adjultment per ton a B. The Base Price of coal per ton delivered during the month; AR The weighted average "As-Received", Btu's per pound of the respective coal(s) delivered to Buyer; and B8 The Base Btu's per pound of the respective coal(s) delivered to Buyer during the month; the 33 value (The above listed Btu) All prlcesfcr Btu adjustments shall be calculated using floating point decimals, with the result being rounded to three decimal places as shown in the following example: sample info: sB=e4oo, $5.00 (case-aaoo) Btu Adjustment per tor: a . $6.00 .0059523809523 $0.036 The Base Price of coal will be adjusted in accordance with the following formula to reflect the actual 502 content of coal delivered during each period. Buyer: Alliant Energy Corporate Services. inc. Agent for IE8 Utilities lnc., Wisconsin Power and Light Company 5/21 LETTER Kennecctt Ailiant 01-05 Kennecott Coal Sales Company 505 South Gillette Ave. Gillette, WY 82716 Seller: interstate Power Company 222 West Washington Ave. PO Box 192 Madison, WI 53701-0192 Attn: Phone: Fax: (603) 252-3141 (608) 283-6954 Kevin Vesperman Atin: Mike Kelley Phone: (307) 687-6121 Fax: (307) 687-6009 This letter sha continn the transaction arranged on August 22. 2001 between Ailiant Energy Corporate Services. Inc. and Kennecott Coal Sales Company ("Kennecott") pursuant to the Master Coal Purchase and Sale Agreement effective January 1, 2001 (the 'Master Agreement"). The terms and conditions of this transaction are as follows: Kennecotl to sell and deliver and Alliant to purchase and receive. Transaction Type: Product 1 Coal Price: Shipment Feriod: Quantity: Deliveryischeduling: Delivery Point: Physical Coal -- 9.350 BtuILb. and .80 Lbs. S02ImmBtu Spring Creek coal Company, LP. located in Big Hom County, Montana The first 450,000 tons shipped each Contract Year will be invoiced at $7.25 per ton. Any Option Tonnage. up to the 250,000 tons, shipped in excess of the 450.000 Base Tonnage will be invoiced at $7.00 per ton. The Coal Price is based on a heat content of 9,350 Btullb. and 0.80 lb. January 1, 2002 through Decernber31. zoos Contract Base Tonnage (1) lua or minus 0 nit in option Tonnagg (21 2002 450,000 tons 250,000 tons 2003 450,000 tons 250,000 tons 2004 450,000 tons 250,000 tons 2005 450,000 tons - nla 2006 450,000 tons nla (1) Base Tonnage is to be shipped on a ratable basis from April through October each Contact Year. (2) Option Tonnage. lfelected. is to be shipped on a ratable basis from January through December during Contract Years 2002, 2003 and 2004. Aliiant shall provide an estimated tonnage schedule by December 1 for the following delivery year. Alliant shall provide quarterly updates, by month. of the tonnage schedule 30 days priorto beginning of each calendar quarter. Any Option Tonnage not taken in a given month or quarter shall be considered expired and no longer available for under this Confirmation (example; ifAillant does not take any Option Tonnae from January to June, then only 125,000 tons of the original 250,000 tons are vaiiable to be shipped as Option Tonnage in the applicable Contract Year under this Confinnation) FOB Railcar, Spring Creek Mina Big Horn County. Montana -1- CPE-DOR 001212 Buyer: P.O. Box 800 Elk River, MN 55330-0800 Attn: Cartyle Sutzer Phone: 763-241-2490 Fax: 763-241-6290 Great River Energy 17845 East Highway 10 CONFIRMATION LETTER Kennecott 724 Seller: Kenneoott Coat Sales Company 505 South Gillette Avenue Gillette. WY 62716 Attn: Matt Levar Phone: 307-687-6028 Fax: 307-687-6009 This Confirmation Letter ('Confirrnation") shall confirm the transaction arranged August 7. 2003, between Great River Energy ("Great River") and Kennecott Coal Sales Company ("Kennecott") pursuant to the Master Coat Purchase and Sale Agreement effective January 12. 2004. The terms and coriditions of this transaction are as follows: Kennecott to selt and deliver and Great River to purchase and receive. Transaction-Type: Product Base Price: Shipment Period: Quantity: Quantity Nomination: Physical Coal Sub-Bituminous coal; 9.350 BtuILb. and 0.80 Lbs. SO-2ImmBtu Price ton January 1.2004 -- December 31. 2009 out ear est bum 2005 2006 2008 2009 A nomination of the total tons for the shipment year is to be provided to Kennecott in writing by Juiy 1 of the year preceding the shipment year. Deliveries for nominated tons shalt be to the nearest unit train. For shipment year 2004, no nomination is DECESSEFY. CPE-DOR 001379 Caller Box 3009 (B2717-3009) CONFIRMATION (S7-O0 7" 3'00 'r KEC 774 Buyer. Manitoba Hydro Seller: Kennecott coal Sales Company P.O. Box 816 505 South Gillette Ave. Winnipeg. MB R3C 2P4 Gillette. WY 82716 Attn: Richard Burelle Attn: Matt Lever Phone: (204) 474- 4-409 Phone: (307) 687-6028 Fax: (204) 474-3179 Far: (307) 637-6009 This letter shall confirm the tranction arranged on March 22. 2004 between Manitoba Hydro ('Manitoba Hydro") and Kennecott Coal Sales Company ('Kennecott") pursuant to the Master Coal Purchase and Sale Agreement effective April 5. 2002 (the 'Master Agreement'). The terms and conditions of this transaction re as follows: Kennecott to sell and deliver and Manitoba Hydro to purchase and receive. Traneaction.Type: Shipment Period: Coal Price: Quantity: Delivery Point: Quality: Btu Adjustrnent: Physiml Goal -- 9.350 BtulLb. and .80 Lbs. SO-2ImmBtu December 1. 2004 through November 30. 2005 U.S. $7.50 per ton Twenty-three (23) unit trains. approximately 276,000 tons. FOB Railcar, Spring Creek Mine Big Hom County. Montana Coal Quality Specifications Section 9.03 - Standard Btu and Sections 6.02 6.04 Sulfur for price adjustments as Reject Limits! set forth below: Non-Conforming Shipment Btullb 9.360 9.000 minimum Lbs. S0;ImmBtu 0.80 120 maximum Sodium 8% 10% maximum To reflect the actual heat content of the Coal delivered. each month the Base Price of Coal will be adjusted for any variation from 9,350 BtuIi..b.. using the followin fonnula: Btu Adjustment Per Ton (AR-BB 1 BB Where: The Base Price of coal per ton delivered during the month: AR The weighted average 'As-Received' Btu's per pound of the respective coaI[s] delivered to Manitoba Hydro; BB The Base Btu's per pound of the respective coal[s] delivered to Manitoba Hydro during the month: the BB value 9.350 All shipment Btu's and weighted average Btu's shall be in zero decimals. All prices for Btu adjustments shall be calculated using floating-point decimals, with the result being rounded to three decimal places as shown in the foilowing example: Sample info: $7.50/ton, B5 9350, AR 9370 Example: Btu adjustment per ton $7.50 9370-9350} 9350 $7.50 002139037 50016042777 50.016 CPE-DOR 001413 CONFIRMATION LETTER Kennecott 656 Buyer Wisconsin Electric Power Company Seller". Kennecott Coal Sales Company 333 West Everett Street, A214 Caller Box 3009 (82717-3009) Mitwaukee, WI 53203 505 S. Gillette Ave. Gillette. WY 82716 Attn: Klaus Mylotta Attn: Matt Levar Phone: (414) 221-2620 Phone: (307) 687-6028 Fax: (414) 221-2683 Fax: (307) 687-6009 This letter shall confirm the transaction arranged April 2, 2003, between Wisconsin Electric Power Company and Kennecott Coal Sales Company pursuant to the Master Coal Purchase and Sale Agreement effective January 1 2004. The terms and conditions of this transaction are as follows: Kennecott to sell and deliver and WEPCO to purchase and receive. Transaction Type: Physical Coal Product: Sub-Bituminous coal: 8.800 BtuILb. and 0.55 Lbs. S02ImmBtu; Sub-Bituminous coal; 9,350 BtulLb. and 0.80 Lbs. Shipment Period: January 1. 2004 through December 31. 2008 Base Price: Quantity000 Nomination: A nomination of the total tons for the delivery year with a breakdown of tons by mine is to be provided to Kennecott by June 1 of the year preceding delivery year. For delivery year 2004. no nomination is necessary. Deliveries for nominated tons or set tons will be to the nearest unit train. Delivery Point: FOB Railcar. Antelope Mine - Converse County, Wyoming Buyer. city of Grand Haven Board of Light and Power 1700 Eaton Drive Grand Haven. Michigan 49417 Min: Annette Allan Phone: 616-846-9200 Fax': 618-846-3114 00 I TKO Kennecott 398 Seller: Kenneoott Energy and Coal Company Caller Box 3009 (82717-3009) 505 South Gillette Avenue Gillette. WY 82716 Attn: Mary Lou Rleley Phone: 307-635-8130 Fax: 307-687-6009 This confirmation Letter ('Confirmation') shall confirm the transaction arranged November 1, 2004 between the city of Grand Haven. Michigan Munlwal Corporation. acting by and through Its Board of Light and Power pursuant to the coal General Terms and Conditions attached hereto. The terms and conditions trmsautlon are as follows: Kenneootl to sell and deliver and Grand Haven to purchase and receive. Transaction Type: Product: Base Price: Period: Dellvery Point: Physical Goal Sub-Bltumlnous coal: Creek Mine, 9.000 BtuI'Lb. and 0.80 Lbs. $21.08 perton ofooel. FOBvesse| at Midwest Energy Resources Company mutuallyagreedtohetween Up to 50,000 tons of I shall be to the Mldwest Energy Resources vessels. FOB Vessel. Midwest Energy Resources company (MERG) located In Superior. Wisconsin Coal Quality Specifications CPE--DOR 001255 fib M5 a CCEUL THIS AGREEMENT is made and entered into this g?f?'day of 5+ 1995, by and between Kennecott Energy Comany, a Delaware corporation, with offices in Gillette, Wyoming, for and on behalf of Spring Creek Coal Company, a Montana corporation (hereinafter together called "Seller"), and American Sugar Conpany, a Minnesota cooperative with offices at 101 North Third Street, Moorhead, Minnesota 56560 ("Buyer"). RECITALS 1; Spring Creek Coal Company and Buyer entered into a Coal Supply.Agreement dated August 1, 1986 ("the 1986 Coal Supply Agreement") relating to the supply of coal to July 31, 1995. 2. Buyer desires to secure a continued coal supply for use in the operation of its sugar factories in East Grand Forks, Moorhead and Crookston, Minnesota, and in Drayton and Hillsboro, North Dakota, and, at its option, at the ProGold Limited Liahility Company ("Progold 46% owned affiliate of Buyer) Wahpeton, North Dakota corn processing factory referred to collectively as the "Sugar Factories"'or individually as a "Sugar Factory," from 1995 for a period of ten (10) years. CPE--DOR 001095 rabble: BB CONFIRMATION LETTER Kennecott 898 Buyer: Cedar Falls Utilities Seller. Kennecott Coal Sales Company Utility Parkway Caller Box 3009 (82717--3009) p,o_ Box 769 505 S. Gillette Ave. CedarFalls. IA 50613 Gillette. WY 82716 Attn: David Rusley A1102 Mali Laval' Phone: 319-268-5300 Phone: 307-687-6028 Fax: 319-268-5319 Fax: 307-687-6009 This Confirmation Letter ('Confirmation') shall confirm the transaction arranged November 29. 2004, between Cedar Falls Utilities and Kennecott Coal Sales Company ("Kennecott") pursuant to the Coal General Terms and Conditions that are attached to this Confirmation. The terms and conditions of this transaction are as follows: Kennecott to sell and deliver and CFU to purchase and receive. Transaction Type: Physical Coal Product Sub-Bituminous coal; 9,350 Btu!Lb. and 0.80 Lbs. Base Price: $9.00 per ton of coal Period: January 1, 2005 through December 31. 2005 Quantity: Three (3) unit trains, Buyer to notify Seller 30 days prior to shipment of each train Delivery Point: FOB Rallcar, Spring Creek Mlne Big Hom County. Montana Quality: TYPCIAL Btu!Lb 9.350 Lbs. 0.80 Btu Adjustment To reflect the actual heat content of the coal delivered. each month the Base Price of coal will be adjusted for any variation from 9.350 BtuILb.. using the following formula: Btu Adjustment Per Ton an (AR -- BB) BB Where: The Base Price of coal per ton delivered during the month; AR The weighted average "As-Received' Btu's per pound of the respective coalls] delivered to and, The Base Btu's per pound of the respective coal[s] delivered to CFU during the month; the BB value 9.350 All shipment Btu's and weighted average Btu's shall be in zero decimals. All prices for Btu adjustments shall be calculated using floating--point decimals, with the result being rounded to three decimal places as shown in the following example: Sample info: $9.00/Ion, B8 9350, AR .9370 Example: Btu adjustment per ton $9.00 9350 $9.00 002139037 CPE-DOR 001240 CONFI ON Kennacottil: 916 Buyer-. Archer Daniels Midland company Seller. Kennacott Energy and coal company 4866 East Farles Parkway Caller Box 3009 (82717-3009) Decatur, IL 62526-5678 505 South Gillette Avenue Gillette. WY 82716 Attn: Bill Matuscak Attn: Mat! Lever Phone: (217) 451-7248 Phone: (307) 887-6028 Fat: (217) 451-2283 Fax: (307) 687-6009 This letter shall confirm the transaction arranged December 7, 2004. between Archer Daniels Midland Company and Kennecott Energy and Coal company ('Kennecott') pursuant to the Coal General Terms and Conditions which are attached to this Confirmation Letter (together the "Agreement'). Kennecctt to sell and deliver and ADM to purchase and receive. Transaction Type: Coal Product. Sub-Bituminous coal; 9.350 BtuILb.. 0.80 Lbs. SO2ImmBtu Base Price: $3.14 per ton of coal Shipment Period: January 1. 2005 - December 31, 2005 Quantity: Approximately 40.000 tons Dellvery Point: FOB Railcar. Spring Creek Mine - Big Horn County. Montana Quality: No reject parameters Quality Adjustments: None IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR. AND EACH OF THE PARTIES WAIVES THE RIGHT TO SEEK INCIDENTAL. CONSEQUENTIAL, OR PUNITIVE DAMAGES UNDER THIS AGREEMENT. Please confirm that the terms and conditions stated herein accurately retlect your understanding at our agreement by slant:-lg and 9 to Leslie Thom at Seller': address. Date: 3 7" 0 Dan la Illdland Company By: . Date: Ken at! and I company . L-Cuintu Br CPE-DOR 001154 kw. LETTER Kehnecott it: 917 Buyer". Arizona Public Senrice Company Seller: Kennecott Coal Sales Company P.O. Box 53999 Caller Box 3009 (82717-3009) Mil Station: 8974 505 South Gillette Avenue Phoenix. AZ 85072-3999 Attn: Matt Reid Phone: 602-250-3109 Fax: 602-250-3628 Gillette. WY 82716 Attn: John Hull Phone: 307-687-6007 Fer: 307-687-6009 This Confirmation Letter ('Confirmation') shall confirm the transaction arranged December 6. 2004, between Arizona Public Service Company (on its own behalf in respect to Units 1. 2 and 3 of the Cholia Generating Station. and as Operating Agent on behalf of Pacllicorp, in 'respect to cholle Urdt 4) and Kennecolt Goal Sales Company ("Ksnnecoti') pursuant to the Master Coal Purchase and Sale Agreementefiectlve January 1. 2004. The terms and conditions of this transaction are as follows. Except as modified hereby in respect to the transaction contemplated in this Confinnation. the terms and conditions of the Master Agreement will continue in full force and effect and will govem the transaction contemplated herein. Kenneoott to sell and deliver and APSC to purchase and receive. Transaction Type: Physical Coal Product: Sub-Bituminous coal: 9.350 BtuILb. and 0.30 Lbs. Base Price: $8.00 per ton of coal Shipment Period: January 1. 2005 through April 30. 2005' 'If the railroad cannot provide the train sets necessary to complete delivery of the full 50,000 tons during the shipment Period. this shall be deemed complete based on the quantity which has been delivered as of April 30. 2005 and shall terminate as of such date without any further obligation to deliver or accept coal of either party. 50,000 tons to the nearest unit train Delivery Point: FOB Railcer. Spring Creek Mine located in Big Horn County. Montana Topelze: 2" 0" AST Quality: Coal Quality Specifications Section 9.03 -- Standard Btu and Sections 6.02 8: 6.04 Sulfur for price adjustments as Rejection Limits! set forth below: Shipment BtuIl..b 9.350 9.000 Lbs. SO2ImmBtu 0.80 1,20 CPE-DOR 001226 CONFIRMATION LETTER TVA Kennecott 913 Buyer: Tennessee Valley Authority Setter: Kennecott Coal Sales Company Fuel Acquisition Supply Caller Box 3009 (82717-3009) 1101 Market Street 505 South Gillette Avenue Chattanooga. TN 37402-2801 Gillette. WY 82716 Attn: Jack Thompson Attn: Mike Kelley Phone: 423-751-7188 Phone: 307-685-6121 Fax: 423-751-3837 Fax: 307-687-6009 This Confirmation Letter ("Confirmation") shall confirm the transaction arranged December 8. 2004. between Tennessee Valley Authority and Kennecott Coal Sales Company ('Kennecott") pursuant to the Coal General Terms and Conditions attached to this Confirmation and Additional Provisions. Kennecott Confirmation #913. The terms and conditions of this transaction are as follows: Kennecott to sell and deliver and TVA to purchase and receive. Transaction Type: Physical Coal Base Product: Sub-Bituminous coal; 9.300 Btu!Lb. and 0.80 Lbs. Base Price: Calendar Year Base Product Priceper Ton 2005 $7.75 Shipment Period: January 1. 2005 -- December 31. 2005 Quantity: All tons to be shipped on a ratable delivery schedule. Calendar Year Tons (to the nearest unit train) 2005 800.000 Delivery Point: FOB Railcar. Spring Creek Mine located in Big Hom County, Montana Topsize: 2" 0" ASTM Quality: Coal Quality Specifications QUALITY Typical Reject Btu/Lb. 9.300 9.000 Lbs. SO2ImmBtu 0.80 0.80 Sodiurn 8.0 9.0 Btu Adjustment: To reflect the actual heat content of the coal delivered. each quarter the Base Price of coal will be adjusted for any variation from 9.300 BtuILb., using the following formula: -1- CPE-DOR 001821 -13/o5 17:41 FAX I t_ i -Energy - @002 nu..r.|ar EUR671 Kannocott Energy company 505 South Gillette Avenue (32716) Post office kc: 3009 Gillette. Wyoming 82717-3009 Phone: 687-6000 Fax: (307) 337-6015 January 12. 2005 John Wagner DTE coal services 414 south Main St, Suite 200 Ann Arbor, Mi 48104 Re: Letter Agreement to carry over 2004 contract tone into 2005 5 Dear John: me later agreement ('Letter Agreement') evidences the intention of Kennecott Goal Sales company and DTE Coal services to allow the 2004 contract quantity that was undeliverable during 2004 to be carried forward into caiandaryear 2006. Both Kenneoott and DTE may be individually referred to herein ea a 'Party' or collectively as 'Parties'. The Parties have entered into a Confirmation Letter effective September 1. 2004. Kerrnaootta contract number for this contract is 872 and DTE's contract number for this contract is 23057. 23.000 tone of coal for contract 23057572 was undeliverabie in. 2004. with regards to the carry over of the 2004 quantity into 2005. the following mine, quantity, price and termlsoheduie have been agreed upon: 1. Mine; Spring Creek Mine 2 23,000 tons to the nearest 30-oar increment 3. Erica: $875 per ton ofcoei 4. The carry over quantity snail be delivered prior to July 1, 2005. All other terms and conditions will remain unchanged; therefore, any 2005 contract commitments shall not be affected by this Letter Agreement Please indicate your acceptance to the above by signing below and taxing book to the attention of the contract Administrator at (307) 887-3009. 5. ACCEPTED AND AGREED TO: coal Salon company on: coal _rvicoa Kenn By: Kelly A. Goagrove Vice President - Marketing. Government Public Affairs I LEGAL rat Antelope Mine - Goiowyo Mine - Condom Mine - Jacobs Fiandr Mine - spring Creek Mine A member qftlur Rio Hula Group Data: CPE-DOR 001324 . 18:47 14562949529 SUUTHERNMT PAGE 62 KENNECDTT HPRKETING - P: ff 7:5 3- I54 layer. sun!-nmuonuullowbaonaiutanl Inlhr. sonar Box sum (32717-zoos; - - an-nu.me271e Am nmmanw Ann: Phone: Puma: moms-3122 Fax: Fax: (4fl)lfl-H2! sauthnm rltunndj - . Trunnulonfruuz Product: anal: 9.338 Bu.IrLh.. 0.73 Lbs. Boglmmatu. 8.24% Sodium 0) . Price: $3.00 par an uf um! mama: Pu-lad: zoos Gmulilr: (50) tom um-wry Palm: FOB Tank - unlunl by Bouihuu Momma n4 no EVENTBHALLEITHER PARW as UABLETOTHE mmea xraarvea THE RIGHT TO SEEK mcuoemw. CONBEQUENTW. on PUNITIVE amuse UNDER ma - 'm-mans: of Imnrnan . Wm "9 CPE-DOR 001749 KEC #923 COAL AGREEMENT 6 DATE: January 17, 2005 SELLER: BUYER: KENNECOTT ENERGY AND COAL COMPANY UNIVERSITY OF MINNESOTA Caller Box 3009 (82717-3009) 2900 University Ave. 505 South Gillette Avenue 3 Kiser Building Gillette, Wyoming, 82716 Crookston, MN 56716 Matt Levar John Magnuson Telephone: (307) 687-6028 Telephone: (218) 281-490 Fax: (307) 687-6009 Fax: SELLER hereby agrees to sell and deliver and BUYER hereby agrees to buy and accept coal of the quantity and quality, at the price and on the terms and conditions as stated in this Agreement: A) QUANTITY: Up to 4,000 tons of coal B) TERM: January 1, 2005 through December 31, 2005 C) RATE OF SHIPMENT: As mutually agreed. D) WEIGHTS TO GOVERN: Certified weights at Source E) ANALYSIS TO GOVERN: Analysis at Source shall govern. F) POINT OF DELIVERY: FOB University of Minnesota unloading facility. G) SOURCE: Spring Creek Mine. l-ll PAYMENT TERMS: $39.86 per net ton. See payment provisions on invoice. ll OTHER INSTRUCTIONS: a Buyer and Seller may mutually agree to extend this Agreement on an annual basis. a Price components: January 1, 2005 - December 2005: Coal $10.82/ton; Oil $2.00/ton; Transportation $27.04/ton Transportation rates are adjusted quarterly based on the GDP FW {see below). The Transportation cost is subject to quarterly adjustment based on the percent change of 70% of the GDP FW most recent quarterly growth rate. The first adjustment would occur effective April 1, 2005. a Side Release application is $16.00 per rail car. Buyer to advise mine in advance of cars to be treated. a The Price is based on coal having a heat content of 9325 100) Btus per pound at the Source. If the weighted average Btu delivered in any calendar year is above 9425 or below 9225, the price per ton for such coal delivered in such calendar year shall be adjusted as follows: Btu Adjustment - 9325! 9325 Where: price per ton during such calendar year CIA weighted average Btu during such calendar year if, in Buyer's reasonable determination, the burning of coal under this Agreement causes Buyer unreasonable operating problems, Buyer may, at its own risk and expense, take a car top sample according to ASTM standards and send it to Spring Creek mine for a separate analysis ("Referee"). if the Referee analysis differs from the original analysis by more than ASTM interlab tolerance standards, the Referee analysis shall govern for Btu adjustment purposes. 9 There will be no other coal quality premium/penalty adjustments of any kind. CPE--DOR 001841 Buyer: Alflant Energy Corporate Services, inc. Agent for interstate Power and Light Company and Wisconsin Power and Light Company CONFIRMATION LETTER Kennecottrii: #950 Seller: Kennecott Energy and Coal Company 505 South Gillette Ave. Gillette. WY 82715 4902 N. Biltmore Lane Madison. WI 53718-2132 Attn: Jim Dalton Phone: (608) 458-3375 Fain (608)458-0137 Attn: John Hull Phone: (307) 687-5007 Fax: (307) 687-6009 This letter shall confirm the transaction arranged on March 22, 2005 between Aliiant Energy Corporate Services, inc. ('Alliant") and Kennecott Energy and Coal Company ('Kenneoott") pursuant to the Master Coal Purchase and Sale Agreement effective January 1. 2001 (the "Master Agreement'). The terms and conditions of this transaction are as follows? Kennecott to sell and deliver and Alliant to purchase and receive. Transaction Type: Product: Shipment Coal Price: Quantity: Delivery Point: 31:: Adjustment- Physical Coal 9.350 Btuli.b. and 0.80 Lbs. Spring Creek Coal Company. LP. located in Big Hom County, Montana April 1, 2005 -- November 30. 2005; Apn'l 1. 2006 - November 30, 2006; April 1. 2007 -- November 30, 2007 coal Price Period .90 10.20 Tons the nearest unit 1 1 Tons are to be shipped on a ratable basis from April through November for each Shipment Period. FOB Railcar. Spring Creek Mine -- Big Horn County, Montana To retiect the actual heat content of he coal delivered, each month the Base Price of coal would be adjusted for any variation from 9.350 Btullb, using the following formula: Btu Adjustment Per Ton (F 3: - BB) BB Where: The Base Price of coal per ton delivered during the month: AR The weighted average 'As--Received' Btu's per pound of the respective coal[s] delivered to Aliiant: and. B3 The Base Btu's per pound of the respective coal[s] delivered to Alliant during the month: the BB value 9.350 Transportation component; value $10.00 CPE-DOR 001219 Buynr: DTE coal Services 414 South Main St. suns 200 Ann Arbor. MI 43104 Attn: Phone: (734) 887-2109 Fax: (734) 887-2055 John Wayne! 6'4 93>" Konnaeott F: 345 Sailarz Kannauoll Coal Sales Company P.0. Box 3% 505 S. Gillette Ava. 82716 Min: Mikakallcy Phone: (307)605-8121 Faac ('DTE')and Kennaeaucoalsalea efiecflvoMay3D.2DOz Tramacfion Type: Product: Shipment Period: Otlirtfitw Base Price: Delivery Poinl: Quality: Btu Adjustment: Sub-Bituminous coal: 9,325 BtuILb. and 0.30 Lbs. Soalmmatu May1. 2005thmugh May 1. 2006 Appmximately 80,000tonstobsdaflvered In $9.50 per ton FOB Raacar- Spting Creek Mine lomiad Big Horn county. Montana --2 -1- as CPE-DOR 001325 Buyer: Manitoba Hydro P.O. Box 816 Winnipeg. MB R3C 2P4 Attn: John Horn Phone: (204) 474- 3563 Fax (204) 474-4972 CONFIR ATION LETTER Kac #2 943 Salter: Kenneoott Coal Sales Company 505 South Gillette Ave. Gillette. WY 82716 Attn: Matt Levar Phone: (307) 687-6028 Fax: (307) 687-6009 This letter shall confirm the transaction arranged on March 18. 2005 between Manitoba Hydro ("Manitoba Hydro") and Kennecott Coal Sales Company ('Kennecott") pursuant to the Master Coal Purchase and Sale Agreement effective April 5, 2002 (the "Master Agreement"). 'The terms and conditions of this transaction are as follows: Kennecott to sell and deliver and Manitoba Hydro to purchase and receive. Transaction Type: Shipment Period: Coat Price: Quantity: Delivery Point: Quality: Btu Adjustment: Physical Coal -- 9.350 BtulLb. and .30 Lbs. SO2ImmBtu December 1, 2005 through November 30. 2006 U.S. $9.25 per ton -- if said Coal is not shipped outside of the United States. the applicable US Black Lung Tax shall be added to the above stated Coal Price. 280,000 tons to the nearest unit train FOB Railcar. Spring Creek Mine - Big Horn County, Montana Coal Quality Specifications Section 9.03 -- Standard Btu and Sections 6.02 6.04 Sulfur for price adjustments as Reject Limits! set forth below: Shipment Btullb 9,350 9,000 minimum Lbs. S0zImmBtu 0.80 't .20 maximum Sodium 8% 1 0% maximum To retiect the actual heat content of the Coal delivered. each month the Base Price of Coal will be adjusted for any variation from 9.350 BtulLb.. using the following formula: Btu Adjustment Par Ton 1 BB Where: The Base Price of coal perton delivered during the month; AR The weighted average 'As-Received' Btu's per pound of the respective coa|[s1 delivered to Manitoba Hydro; B3 The Base Btu's per pound of the respective coal[s] delivered to Manitoba Hydro during the month; the BB value 9.350 All shipment Btu's and weighted average Btu's shall be in zero decimals. All prices for Btu adjustments shall be calculated using fl'oating--point decimals, with the result being rounded to three decimal places as shown In the following example: Sample info: $9.25fion, B8 9350, AR 9370 Example: Btu adjustment per ton 59.25 (9370-9350} 9350 $9.25 002139037 $0.019786092 $0.020 CPE-DOR 001415 -1- MONTANA FIRST JUDICIAL DISTRICT COURT LEWIS AND CLARK COUNTY CLOUD PEAK ENERGY RESOURCES LLC, Plaintiff, Cause No. DV BDV 2012-239 STATE OF MONTANA DEPARTMENT OF REVENUE, Defendant. DEPOSITION OF LEE BAERLOCHER On the 15th day of November, 2012, beginning at 9:00 the deposition of LEE BAERLOCHER, appearing at the instance of Plaintiff, was heard at the Offices of Lesofski Court Reporting, 7 West Sixth Avenue, Helena, Montana, pursuant to the Montana Rules of Civil Procedure, before Lisa R. Lesofski, Registered Professional Reporter, Notary Public. LESOFSKI COURT REPORTING VIDEO CONFERENCING 406-443-2010 Cloud Peak Energy Resources vs. State of Montana Department of Revenue Lee Baerlocher November 15, 2012 audit? Q. How about after that? the informal. discussions? I-4 I-4 steps. b) made? A. Ul 01 '4 10 Mr. Charlton? I-4 Department as a whole. 0) discussions? Page 1 0 changes in the way that he was going about the A. Not during the field work. A. We had discussions about the audit after Q. What do you recall about those A. We discussed the comments that Cloud Peak had mentioned during the informal and what our next steps may or should or if we should have any next Q. What were the comments that Cloud Peak They agreed with some aspects of the audit, they did not agree with using the federal settlement agreement as the basis for the audit figures for the state audit. Q. And you then discussed that with A. Mr. Charlton, Alison Malensek, the Q. What do you recall about those A. I believe sometimes those audits were, Page 12 1 mentioned it makes perfect sense, that's what I 2 would have done. 3 Q. Was anyone else party to this phone callyou recall any other communications, 6 direct communications between yourself and Cloud 7 Peak? 8 A. No, not me that I can recall, outside of 9 the informal conference, correspondence, 10 Q. Prior to your work on the revised 11 assessment that we'reviewed any of the audit work papers? 13 A. Define audit work papers. 14 Q. The work papers compiled by Mr. Charlton 15 during this field work. 16 A. Yeah. 17 Q. Do you recall about when you did that? 18 A. Somewhere in the near future around the, 19 after the informal. 20 Q. Aside from your communications with the 21 Cloud Peak folks and department personnel did you 22 speak with anyone else about the Cloud Peak audit? 23 A. I'm sorry, who? 24 Q. Aside from the folks at Cloud Peak and the 25 department personnel did you speak with anyone else Q. Excluding those what the discussions? we had. 9 Peak? 11 Q. Right. 12 A. Yes. 13 14 15 assessment. Q. Were those telephone A. Uh-huhhim? 22 23 24 25 Page 11 those discussions did involve counsel. do you recall about A. Mostly specifics of the information they had, the contracts, invoices, the information that Q. Aside from the infonnal conference did you have any direct discussions with anyone at Cloud 10 A. Outside the informal conference? Q. What can you tell us about that? A. St. John, I called St. John and he called me a number of times. He wanted backup or 16 explanation of how we arrived at the revised audit conversations? Q. What did he say to you and what did you A. I explained to him how I did the, how the Department had put together the then per audit numbers, explained to him how I had done that and he followed it, started to understand it and then he Page 13 about the Cloud Peak audit? A. 0. Q. I'm showing you what we've marked as Exhibit 7 dated March 13, 2012. Mr. Charlton told us he prepared this particular department final determination. What, if any, role did you play in its preparation? A. Preparation including review, read? Q. Yes. 10 A. I reviewed the letter. 11 Q. Did you make any changes or propose any 12 changes? 13 A. I doubt that I did. I don't recall 14 anything. 15 Q. I'm showing you what we had marked 16 yesterday as Exhibit 8 dated June 21, 2012. What 17 part did you play in preparation of this revised 18 Montana coal production tax audit? 19 A. I was the original author of it. Van 2o helped me with some language, the Department did. 21 Q. Anyone else involved in its preparation 22 aside from you and Van Charlton? 23 A. I might have had legal review it but I 24 don't remember anything. 25 Q. Did you discuss this with anyone at Cloud LESOFSKI COURT REPORTING VIDEO CONFERENCING (3) Pages 10 - 13 406-443-2010 Cloud Peak Energy Resources vs. Lee Baerlocher State of Montana Department of Revenue November 15, 2012 Page 14 Page 16 1 Peak before it went out? 1 the informal meeting, there was ongoing 2 A. That's a good question. I'm not sure if 2 conversations in the Department of how else to apply 3 some of the conversations with St. John would have 3 or search for a value, what we would consider an 4 been prior to sending this or not. 4 arm's length value for the nonarm's length sales. 5 Q. You just don't recall? 5 In March obviously we didn't have any solution to 6 A. I just don't recall the timing. 6 that at that time. I got involved in more research 7 Q. What was the impetus for the issuance of 7 on it and we found another way, which we thought 3 the revised audit in June of 2012? 3 would be good and we hoped that it would be 9 A. Cloud Peak's concerns that they raised in 9 acceptable. the informal. Q. What can you tell us about that? A. They had concerns about us using a federal agreement as our per audit numbers, which was kind of ironic because they used the same federal numbers for the deduction on the state return. Q. What do you mean by that? A. It's the same -- we have a federal royalty deduction on our state return, they used the value, same value that was in those MMS federal settlement agreements. Q. You're referring to a deduction made for federal royalty taxes for purposes of computing Montana taxes? A. Federal royalties. Q. Federal royalties, sorry. And the figures LuWhat sort of research did you conduct? A. Oh, I did Internet searches on coal values, mine prices, I looked at the information that was provided and found out that there was arm's length contracts by the same coal, by the same operator with the same BTU factors or near of it during the same months that was a good way to establish a value for that coal that was nonarm's length. Q. The Intemet research that you conducted, was that reflected anywhere in a file, did you keep hard copies of the results? A. I looked for it in my file. There really wasn't much there, which kind of surprised me. I found out that there really isn't much in the way of comparable coal, you can't use West VirginiaPage 15 that Cloud Peak had used for the royalty deduction were taken from the federal settlement calculations? A. That's my understanding, yes. Q. Did you discuss that with anyone at Cloud Peak? A. Oh, I'm sure we brought it up in the informal. Q. Do you recall what the nature of that discussion was? A. Yeah, they didn't agree. Q. Did they provide any further explanation for their position? A. In their written response and if I remember right they might have brought it up in the informal that they had mentioned that they just simply did not agree to that. Q. The informal conference, I think we saw, was in mid-December of 201 1, does that sound right? A. That sounds right. Q. How does it happen that the March 2012 fmal division determination differs from the June 21, 2012 revised tax audit given that the infonnal conference predated the March 2012 final division determination? A. Well, as I remember, post to the DecemberPage 17 coal, we're talking a hundred dollars a ton plus, sulphur content, BTU factors, Wyoming coal companies didn't seem to supply these places with index or with prices, just didn't find anything. I might have printed something out. I don't know what I did with it, to be honest. Q. Did the Department at that time in 2012 have any pre-existing written guidelines for determining NAL contract values? A. There is a rule that states that whenever possible we should try to use the contracts of the operator. 13 Q. Are you referring to an Administrative 14 Rule? 15 A. Uh-huh. 16 Q. I'm going to show you a copy of 42-25-512. 17 Is that the one you're referring to? 13 A. It's half of it. 19 Q. Okay. What's the other half, if you 20 recall? 21 A. It's under severance tax. 22 Q. Oh, you're right, I printed out the one 23 for gross proceeds tax. Is the severance tax 24 basically the same language, do you recall? 25 A. Yes. LESOF SKI COURT REPORTING VIDEO CONFERENCING (4) Pages 14 - 17 406-443-2010 Cloud Peak Energy Resources vs. Lee Baerlocher State of Montana Department of Revenue November 15, 2012 Page 22 Page 24 1 same hole. 2 Q. Let me show you what we've marked as 3 Exhibit 9. 4 A. Thank you. 5 Q. The first page is an e--mail that you 8 Does that sound right? 9 A. Yeah, it looks about right. 10 Q. And then what I have attached to the 11 exhibit, just for the record, is the same sales 13 the Department's production numbers on it. 6 transmitted sending what we see attached, which is 7 the sales summary pages 1 of 12, 12 pages in length. 12 summary on 8-and-a--half-by~1l paper because that has 1 A. That's correct. 2 Q. I take it you satisfied yourself those were arm's length contracts? A. Yes. Q. The tons column, does that represent tons delivered in April 2005 of these various contracts? A. Yes. Q. And then we see a total dollars and a coal dollars column, what do those represent? A. I can't recall but I remember Alison 11 talking to me about that. Jeez, when was that? I 12 can't recall. It will come to me after I leave 13 here. 10 22 23 24 25 starts at the top of the page. A. Okay. Q. It looks like we see a list of arm's length contracts; is that right? 14 A. Sure. 14 Q. We then see a contract price column, is 15 Q. So we know where that came from. So 15 that a price per ton for that particular sale of 16 referring to the sales summary, 12 pages, is this 16 coal I take it? 17 something that you prepared? 17 A. Under the contract price? 18 A. I prepared parts of it. 13 Q. Yeah. 19 Q. Who else was involved in its preparation? 19 A. Yes. 2 A. Well, all the data that this represents on 20 Q. Do you recall is that based on tons 21 the left side of it is Cloud Peak's data. 21 divided by total dollars or coal dollars? 22 Q. Okay. Who actually put that Cloud Peak 22 A. Total dollars. 23 data into the format that we see her? 23 Q. Total dollars? 24 A. Alison Malensek. 24 A. (Nods head.) 25 Q. Anyone else involved in that process? 25 Q. I'm sorry, is that total dollars? Page 23 Page 25 1 A. I'm not sure. 1 A. Yes. 2 Q. What portions of the sales summary were 2 Q. Now, in the next one, two, three, four, 3 your work product? 3 five, six, seven, eight, nine columns to the right 4 A. I think everything right of coal price or 4 of that we're now talking about your work product, 5 contract price, one of the two. 5 right? 6 Q. Aside from yourself was anyone else 6 A. Yes. 7 involved in preparing or reviewing that work 7 Q. And it looks like you selected some of the 8 product? 8 arm's length contracts and carried them over into 9 A. Van reviewed it. 9 those columns into three different groupings; is 10 Q. Anyone else? 10 that right? 11 A. I don't believe so. 11 A. Yes. 12 Q. About when did you undertake this project 12 Q. How did you go about selecting the arm's 13 that ultimately yielded the sale summary we see 13 length contracts to be carried over into these 14 here? 14 groupings? 15 A. Sometime between - well, sometime prior 15 A. Two ways. I looked at compatible volumes 16 to June 21st. 16 because quantity of volumes weighs heavily in the 17 Q. Do you recall about how long it took? 17 price per ton if you look at some contracts, and 18 A. Maybe a week, a couple weeks maybe. 13 then I looked at quality, which is the BTU factor, 19 Q. Let's find a month and use that as our 19 and compared it to the nonarm's length, so I had the 20 example to work through the chart. Why don't we use 20 exact same coal. 21 the second page of the document, April 2005, it 21 Q. The quality colunm figures that we see 22 here, are those BTU numbers? 23 A. Yes. 24 Q. And volume I take it is a tons figure? 25 A. That's correct. LESOF SKI COURT REPORTING VIDEO CONFERENCING (6) Pages 22 - 25 406-443-2010 Cloud Peak Energy Resources vs. State of Montana Department of Revenue Lee Baerlocher November 15, 2012 Page 26 Q. And quality/quantity is price per ton? A. That's correct. Q. What sort of a range of tonnage volumes did you consider to be comparable? A. When there was very close -- 10,000 tons was kind of the volume amount but if there was ones that were -- if there was a multitude of 38 was my base that I was comparing and I had a whole bunch of 38s I'd just use the 38s. So it was a dynamic between getting comparable volumes with a couple Page 28 Q. Do you recall ever basing the comparables on BTU count irrespective of volume? A. No. Q. Have you ever done this particular exercise for any other coal company audit? A. I've done I mean, we've done comparable prices for coal companies. Q. Have you done it in the fashion that we see here, Exhibit 9? A. I don't think we've had this good of 11 different contracts. 11 information. 12 Q. Did the volume range that you considered 12 Q. How would you have done it for other coal 13 then necessarily change from month to month and 13 companies? 14 grouping to grouping? It sounds like it did. 14 A. Again, we would try to comparables. 15 A. Somewhat, not as much as you would thinkthat? 16 Q. In some months, for example, you might 16 A. We look at our other coal companies that 17 find several contracts within a few thousand tons of 17 file within the state and within Wyoming, maybe 18 the one that you're comparing but in another month 18 similar states if we can some coal that might 19 you might have to go up or down 10 to 15,000 tons to 19 be compatible, 2 find some other comparables? 2 0 Q. Do you recall about how many times you've 21 A. I don't know about 15 but, yeah, that 21 had occasion to do that other than the Cloud Peak 22 would be fair to say. 22 audit? 23 Q. Was there a particular number of 23 A. I meaning the Department? 24 comparables that you endeavored to isolate? 24 Q. Yes. 25 A. Not really, just an opinion, two, three, 25 A. No, I can't recall the specific number. Page 27 Page 29 1 four. If I had more than that, great. 1 Q. In the data that's included in our 2 Q. I take it that also varied from mouth to 2 Exhibit 9 is there anything that reflects the date 3 month, sometimes you might have two, sometimes you 3 when the contract was entered into? 4 might have four, sometimes you might have six? 4 A. Well, that's why I went off comparable 5 A. I don't know if I ever ran into six. I 5 volumes, you have comparable volumes. If you have a 6 would say it hovered around two to four. 6 contract that has, two contracts that sell 30,000 7 Q. How about the interrelationship between 7 tons in one month you're looking probably at a 8 BTU content and volume, which of those did you 8 contract that's a short-term, not a long--term, 9 consider to be more important or were they equally 9 generally a short--term contract and so you get 10 important? 10 compatible contracts where if you have a long-term 11 A. I used them equally. I kicked out ones 11 contract -- and what I've seen, long-term contracts 12 where the BTU factor wasn't what I would say close. 12 generally have, like a large electronic plant will 13 Q. How close did it need to be in order to 13 have larger volumes and those indicate a different 14 make the grade? 14 type of contract at times. 15 A. About 200 BTU. 15 Q. In the table for the arm's length 16 Q. Plus or minus 200 16 contracts we see the customer name, right, correct? 17 A. Yeah, in that area, if I recall. 17 A. Yes. 18 Q. Did you consider as comparables contracts 18 Q. And the contract number in the fourth 19 where the BTU content was very close but the 19 column from the lefi, correct? 20 volumes, the tonnages were not very close? 20 A. That's correct. 21 A. It depends on what you define as 21 Q. Do you recall reviewing the actual 22 particularly close. 22 contracts to determine the date of the contracts as 23 Q. Within plus or minus 10,000, for example? 23 part of your work? 24 A. Again, it wouid have to matter on if I 24 A. I have the date based upon the sales of 25 found some other comparables that were even closer. 25 the coal. }'lin--U-Scriptffi? LESOF SKI COURT REPORTING VIDEO CONFERENCING (7) Pages 26 - 29 406-443-2010 Cloud Peak Energy Resources vs. Lee Baerlocher State of Montana Department of Revenue November 15, 2012 Page 30 Page Right. But in terms of when the contract was negotiated and entered into, was that factored into the table at all? A. Again, that's why I tried to go with comparable volumes. Q. Let's focus on the first grouping for the arm's length contracts for April 2005. It looks like there were three contracts that were carried over to the right; is that correct? A. For the first volume? Q. For the first grouping, yeah. A. Yes. Q. And those range in volume it looks like I reading that correctly? A. Yes. Q. And the prices range from it looks like about 7.68 a ton to 7.94 a ton; is that right? A. That's correct. Q. And then in that column, the price colurrm at the bottom, we see a figure of $7.84, what does that represent? A. The average. Q. How did you come up with the average? A. Three numbers above divided by three. 14 from about 38,000-some tons to 48,000-some tons, am 1 Q. And you've come up with an average price 2 of $8.27 a ton for that grouping; is that correct? 3 A. Uh-huh. . 4 Q. And you've used that to compare to three 5 nonarm's length contracts; is that right? 6 A. Yes. 7 Q. And then moving to the third grouping, 3 you've in this case identified one, two, three, 9 four, five arm's length contracts; is that right? Excuse me, arm's length contracts, did I say nonarm's length? A. Yes. Q. And using those five you've come up with a simple average of $12.22 a ton; is that right? A. No, I did not use five on that one. It looks like I used four. Q. Oh, I see. A. That's one that's got the BTU factor was in my opinion too far from the other one so it was not used. Q. You're looking at fourth on a list there that has a quality figure of 9,159? A. That's correct, which would have been helpful to the company, I'm sure. I haven't done the numbers, but -- I haven't done the numbers it's a simple average, not a weighted average? A. That's correct. Q. We also see under the arm's length contracts a line item total arm's length transactions, do you see that? A. Uh-huh. Q. And it shows a little over a million tons at a little over 8.5 million in total dollars but it looks like there is no averaging of those two numbers, is there, that is, there is no average Page 31 price per ton that it derived fi'om those two numbers in your chart, is there? A. If you're asking is there an average of all the tons sold in April, there isn't. Q. T'hat's whatl was trying to ask. Thank you. So that was not a part of the calculation that you did, correct? A. That's correct. Q. Then, again, focusing on April 2005, if we move over to the second grouping it looks like you've selected two arm's length contracts for that grouping; is that right? A. Uh-huh. Page 33 that obviously, Q. And then if we carry that over to the right there is no figure, there is no dollar figure so that indicates that you chose not to use that one? A. That's right. Q. So the four that you used were 10.35 a ton, 21.32 a ton, 7.54 a ton and 9.69 a ton; is that correct? A. That's right. Q. That yields a simple average of $21.22 a ton? A. Yes. Q. The $21.32 a ton is significantly higher than many of the other per ton prices that we see in that month, is that fair to say? A. Yes. Q. Did you consider or address excluding 19 numbers that significantly deviated from others 20 during the month? 21 A. At that time, no. 22 Q. Did that cause you any concem? 23 A. It was an arm's length price with 24 compatible volumes and compatible quality. 25 Q. Do you have any sense of why that LESOFSKI COURT REPORTING VIDEO CONFERENCING (3) Pages 30 - 33 406-443-2010 Cloud Peak Energy Resources vs. State of Montana Department of Revenue Lee Baerlocher November 15, 2012 Page 34 Page 36 1 particular contract was at a price of $21.32 a ton 1 a negative. Sometimes, as you can see, the nonarm's 2 when the others in this group ranged from about 7 to 2 length contracts were actually higher, I gave credit 3 $10 a ton? 3 to that, then some of the arm's length, and then I 4 A. Not based on the value. 4 came with a total which would be additional 5 Q. Do you recall reviewing that particular 5 revenue. Then I totaled those up into a quarterly 6 contract to make that assessment? 6 total, which would be either, which would be the 7 A. Yes. 7 adjustment for that quarter for those tax types. 8 Q. What do you recall about that? 8 Q. All right, and so working through the 9 A. I reviewed the audit, or the contract, and 9 first, the nonarm's length contracts for April 2005, 10 I didn't see any information that outlined a 10 just by way of example, the quality/quantity value 11 transportation expense on that contract. 11 figure that we see is $238,926, that's for a 12 Q. Then under the arm's length transaction 12 nonarm's length contract of 28,889 tons and I take 13 column there are the nonarm's length transactions 13 it for that one you are using the figure of $8.27 a 14 for the month of April 2005; is that right? 14 ton? 15 A. I'm sorry, where are you? 15 A. If that's what the math comes out to be. 16 Q. It's directly under the roster of arm's 16 My spreadsheet didn't do that. 17 length contracts we see a roster of nonarm's length 17 Q. And from that figure you then subtract the 18 contracts. 18 per return value which represents the price reported 19 A. Thank you. 19 by Cloud Peak of $5.80 a ton for those 28,000 tons, 20 Q. And it looks like they're one, two, three, 20 does that sound right? 21 four, five VF, for Venture Fuels contracts for 2005; 21 A. Could be. I haven't done the math. 22 is that right? 22 Q. The difference in any event would be the 23 A. That's correct. 23 difference between the price per ton that you 24 Q. And as we move over into the three 24 calculated using a simple average of comparable 25 groupings to the right of the contract price column 25 sales and the price per ton that Cloud Peak reported Page 35 Page 37 1 what are you doing there? 1 for the NAL sales, does that sound right? 2 A. I'm pulling the compatible volumes in the 2 A. Can you repeat that for me? 3 same column for the nonarm's length contracts with 3 Q. Yeah, the difference is the difference in 4 the same compatible volumes in the arm's length 4 price per ton, Cloud Peak reported $5.80 per ton, 5 contracts. 5 but for that grouping you came up with $8.27 a ton, 6 Q. And the simple average that you came up 6 a higher price per ton? 7 with for the arm's length contract yielded a range 7 A. I didn't -- it's the difference between 8 from $7.84 a ton to $8.27 a ton to $12.22 a ton, 8 the comparable volumes with comparable BTU with the 9 right? 9 dollar amounts that were paid at the arm's length 10 A. Yes. 10 price compared to comparable volumes, comparable BTU 11 Q. So that's I guess three different market 11 at the arm's length price and a delta of 12 value numbers for April 2005 depending on volume? 12 accumulation of the math on that would be the 13 A. And BTU. 13 additional revenue. 14 Q. Then if we go over to the right there are 14 Q. As you pointed out a moment ago, for two 15 a series of calculations that yield an April 2005 15 of the five in April of 2005 we see negative 16 number of $127,381. Can you explain how you 16 numbers, that is, the delta is actually in 17 performed that calculation? 17 parentheses? 18 A. Yes. I took the per return value -- I 18 A. Yes. 19 took the total dollars and put that in the per 19 Q. And that's because as you determined it 20 return value, so the total dollars per return from 20 the nonarm's length price reported by Cloud Peak was 21 the value of the nonarm's length sale, then took the 21 higher than the arm's length price that you 22 new numbers based upon the averages of the 22 determined? 23 calculation of an arm's length developed from the 23 A. That's correct. 24 arm's length contracts, subtracted the two, came up 24 Q. We've been going for about an hour -- oh, 25 with the delta, which would either be a positive or 25 let me ask this first. The methodology that you LESOFSKI COURT REPORTING VIDEO CONFERENCING (9) Pages 34 - 37 406-443-2010 Cloud Peak Energy Resources vs. Lee Baerlocher State of Montana Department of Revenue November 15, 2012 Page 38 Page 40 1 just described for April 2005, was that used for all 1 the Decker mine and imputed valuations dating to the 2 of the other months that we see in this spreadsheet? 2 1990s? 3 A. I believe so, uh--huh. 3 A. I wasn't the auditorLet's take a short break. 4 natural resource then? I was in the Department when 5 A. That would be great. Thanks. 5 the Decker Coal case decision came down. 6 (Break taken.) 6 Q. Were you involved at all in that Decker 7 Q. (By Mr. Sterup) I'm going to show you 7 audit? 8 Exhibit 23. Can you tell us what that is? 8 A. No. 9 A. These are my notes, if I have the right 9 Q. In the course of preparing the revised 10 time period, which it looks like it, of our informal 10 assessment did you review the Decker decision as far 11 with Cloud Peak. 11 as you can recall? 12 Q. So it looks like that was on December 15, 12 A. I read the Decker coal decision. I can't 13 2011, does that sound right? 13 tell you when the timing was. I've read it a couple 14 A. Yes. 14 times. 15 Q. On page 3 of the exhibit it looks like 15 Q. Do you recall ever going through the 16 your handwriting begins nonarm's length sales, am I 16 Department's archives to try to determine what 17 reading that correctly? 17 materials the Department used and relied on in the 13 A. Yes. 18 Decker case? 19 Q. What did you write immediately below that? 19 A. No, I didn't do that. 20 A. "Five of and it looks like what I 20 Q. Then below that, getting back to page 3 of 21 would have done is I have a common practice of 21 your handwritten notes, it looks like there are 22 iabeling information that's provided to me and then 22 three bullet points, ranges of pricing, usedon't have room on the information 23 duration, agreed that they are nonarm's length 24 that's provided to me I try to explain it there. 24 sales. Did I read that correctly? 25 I'm guessing that would be, that's my MO. 25 A. Uh-huh. Page 39 Page 41 1 Q. And I'm referring actually to the text at 1 Q. Do you recall what that's about? 2 the top of the page immediately below the words 2 A. I'm not sure what ranges of pricing means. 3 nonarm's length sales. What have you written there? 3 Boy, anything that I would be stating on the first 4 A. I'm writing what it says is "Don't view 4 two bullet points would be a guess. The next one 5 settlement agreement as worthy or akin to our state 5 is, sounds like or it looks like there was an 6 law." 6 agreement that some of the, there was some sort of 7 Q. And what's it say below that? 7 nonarm's length sales, there was an agreement at the 3 A. It says "We agree and we will go with the 3 meeting that that did occur. That would be what I 9 actual price." 9 would guess. The first two I really couldn't tell What does that mean? A. If I remember right there was a conversation that stated that Cloud Peak didn't using the federal settlement agreement as the value for the per audit. And I remember me stating, well, that's great if we agree to that then let's get the valuation material for the nonarm's length contracts. Q. Below that it looks like there is a reference to the Decker value case? A. Yeah, Cloud Peak or somebody must have discussed Decker in the conversation. Q. What do you recall about that discussion? A. I don't really recall much about what was said there. Let me think a bit. I can't recall. Q. Were you familiar with the case involving like you. Q. All right, fair enough. I'm showing you Exhibit 25, which is captioned Spring Creek Coal Company List of Invoices. Do you recall having seen this in the course of your work on the revised audit? A. I've seen this going through Van's audit, I've seen it. Q. Do you understand this is material that was provided by Cloud Peak during the audit? A. Yeah. Q. If you would focus on the very first account on the first page, customer ACS contract number 925, going over to the right do you see a total dollars and a coal dollars column? A. Yes. LESOF SKI COURT REPORTING VIDEO CONFERENCING (10) Pages 38 - 41 406-443-2010 Cloud Peak Energy Resources vs. Lee Baerlocher State of Montana Department of Revenue November 15, 2012 Page 42 Page 44 1 Q. And then further to the right of that do 1 Q. And just to pin that down, the first of 2 you see an additive dollars colurrm? 2 the Venture Fuels contracts the tonnage was 43,501 3 A. Yes. 3 tons at a price of $5.85 and you came up with a 4 Q. Does it look like the total dollars is a 4 comparable in that grouping of 9.15; is that right? 5 function of adding together the coal dollars and the 5 A. Okay. 6 additive dollars? 6 Q. Is that correct? 7 A. It looks close. 7 A. It looks like it, uh-huh. 8 Q. Did you come to understand during your 8 Q. And that's based on one, two, three, four 9 course of the work on the revised assessment that 9 arm's length contracts that you selected -- 10 the total dollars figure from the invoice log . Salt River 11 included things like revenues for additives and BTU 11 Project. These aren't color coded, these would be 12 adjustments? 12 colored coded, it would identify that that color is 13 A. That sounds familiar. 13 in purple. If I look into my spreadsheet Salt River 14 Q. Go back to Exhibit Number 9. For purposes 14 Project was identified as a delivery price contract 15 of coming up with the averages on the arm's length 15 and there must have been some information in there 16 comparables that you selected you used the total 16 that stated that there was transportation costs in 17 dollars; is that right? 17 the value, so the 9.15 amount would come from the 13 A. Yeah. 18 7.60, the 9.10 and the 10.76. 19 Q. So that would include revenues for things 19 Q. Yeah, SRP contract of 2793 was 20 like additives in coming up with the averages that 20 disregarded? 21 you then compared with the nonarm's length 21 A. I must have found something in the 22 contracts? 22 contract that I disregarded. But I do remember the 23 A. It looks like it. 23 SRP, Salt River Project, I believe that's what it's 24 Q. Let's take a look at the September 2006, 24 called. 25 it's on page 7 of 12. 25 Q. So for purposes of this first Venture Page 43 Page 45 1 A. I'm sorry, which one? 1 Fuels contract in the amount of 43,501 tons you came 2 Q. Exhibit 9, page with an arm's length comparable per ton price of 3 spreadsheet. For September of '06 you came up with 3 $9.15 correct? 4 a total of $1,073,360, aml reading that 4 A. Yes. 5 correctly? 5 Q. And then for the second Venture Fuels 6 A. I'm sorry, which month? 6 nonarm's length contract that month with a volume of 7 Q. September of '06? 7 a little over 97,000 tons it looks like you came up 8 A. And your dollar amount was. 8 with a comparable arm's length price of $16.31 a 9 Q. 1,073,360. 9 ton; is that right? 10 A. Okay. 10 A. That's rightthe final page of this exhibit 11 Q. That's based on two contracts you selected 12 the total for all three years was $10,180,642; is 12 as comparables? 13 that correct? 13 A. It looks like it. 14 A. That's what it looks like. 14 Q. And the first of those at 88,000 some tons 15 Q. So about 10 percent roughly of that total 15 was 10.77 a ton; is that rightwas attributable to this month of September 2006, about 1 million out of 10 million? A. Looks like it. Q. That's based on the two nonarm's length contracts with Venture Fuels during September of '06; is that right? A. Yes. Q. How do you come up with a million dollars imputed revenue figure for September 2006? A. The same way I did for the other months. 16 A. Yeah. 17 Q. And the second at 109,000 some tons was 18 $28.40 a ton; is that right? 19 A. Yes. 20 Q. And a simple average of those two gives 21 you an arm's length price of 16.31; is that right? 22 A. That's correct. 23 Q. And it looks like if we carry over to the 24 right in the totals column, for that one arm's 25 length contract and using that $16.31 ton price you LESOF SKI COURT REPORTING VIDEO CONFERENCING (11) Pages 42 - 45 406-443-2010 Cloud Peak Energy Resources vs. Lee Baerlocher State of Montana Department of Revenue November 15, 2012 Page 46 Page 48 1 came up with computed revenue of $929,719; am I 1 Q. Isn't that figure about twice as high as 2 reading that correctly? 2 the other comparable during that month of that 3 A. Yeah, that's what it looks like. 3 grouping of $10.77 a ton? 4 Q. So that's about 90 percent of the total 4 A. Is it twice as high or is the other one 5 for the month roughly; is that right? 5 twice as low? 6 A. That what? I'm sorrythis way, is the $21.84 7 Q. The 929,000 imputed revenue for that one 7 figure considerably higher than the other numbers a Venture Fuels contract is about 90 percent of the 8 that we see in the arm's length contracts for 9 total for the month of September 2006? 9 September of 2006? 10 A. Okay. 10 A. Well, let's see here, we've got one, two, 11 Q. That 16.31 a ton figure that you came up 11 three -- you've got a $21, you've got a 16.38, 12 with in that second grouping, the tonnage amounts of 12 you've got a 15, you've got a 21, you've got a 13 88,000 and 109,000, it looks like you went about 13 27.93, you've got a 21.84. Again, you've got a 14 plus or minus 12,000 for purpose of that month's 14 pretty good range here, which is what this study is 15 comparables, is that what it looks like to you? 15 intended to do to get comparable voiumes, comparable 16 A. Yes. 16 BTU. 17 Q. Did you consider reviewing other Cloud 1'7 Q. And the 27.93 I think you indicated was 18 Peak contracts for other time periods that were plus 13 one that you elected not to use, correct? 19 or minus 12,000 of 97,000 tons? 19 A. Yes. 20 A. In the sales summary or in this month or 20 Q. The $21 figure that we see the second from 21 in 21 the top, that's for a sale of $3,496 tons; is that 22 Q. In months, periods other than September of 22 right? 23 2006. 23 A. Say that again? 24 A. I might have. I'd have to look and see 24 Q. Yeah, we're looking at the roster of arm's 25 here. 25 length contracts. Page 47 Page 49 1 Q. It looks like all of the averages that you 1 A. Okay. 2 came up with for purposes of this Exhibit 9 are 2 Q. You noted there was a $21 difference 3 based on figures within the same month. Is that 3 there? 4 fair to say? 4 A. Oh, yes, that's what the volumes say. 5 A. Say that again, please. 5 Q. And if we work down the list we see 6 Q. Yeah, it looks like all of the averages, 6 another one for $21 a ton for SCH, Contract Number 7 all of the comparables that you came up with are 7 1134, and that's for 1,814 tons; is that correct? 8 based on contract sales within the same month, that 8 A. Uh-huh. 9 is, you're doing it month by month? 9 Q. And those were not tonnage volumes that 10 A. Yes. 10 you elected to use for purposes of your comparables 11 Q. You didn't consider doing it quarter by 11 analysis, right? 12 quarter, for example? 12 A. That's correct. 13 A. No. 13 Q. But you did elect to use the sale of 14 Q. Is there a particular reason Why you chose 14 109,953 tons at a price of $21.84 a ton, correct? 15 to do it month by month as opposed to quarter by 15 A. Uh-huh, comparable volume, comparable 16 quarter or year by year or some other time period? 16 value, same hole, same coal. 17 A. There was, for the most part, good data, 17 Q. If we take a look, for example, at July of 13 it was good data for each month. The more defined 18 2006, the roster of arm's length contracts. 19 you can get the timing of it I thought the better. 19 A. Okay. 20 Q. Did you consider the $21.84 a ton figure 20 Q. Do you see a sale to Great River of 34,030 21 to be good data for purposes of coming up with an 21 tons at $7.25 a ton? 22 average price? 22 A. I see a sale to Great River of 84,000 23 A. It was comparable BTU, it was comparable 23 tons. 24 volume so the contract or the instance itself 24 Q. At 7.25 a ton? 25 established itself as a comparable. 25 A. 7.25 a ton. LESOFSKI COURT REPORTING VIDEO CONFERENCING 406-443-2010 (12) Pages 46 - 49 Cloud Peak Energy Resources vs. Lee Baerlocher State of Montana Department of Revenue November 15, 2012 Page 50 Page 52 1 Q. The same month do you see a sale to 1 imputing revenues for nonarm's length contracts to 2 TranAlta of 105,814 tons at $10.77 a ton? 2 determine a price that a willing buyer would paythat the essence of market value? 4 Q. And then if we move ahead to October of 4 MR. BEATTY: I'm going to object, that 5 2006. 5 calls for a legal conclusion as to the legal 6 A. October of 2006? 6 definition of market value. 7 Q. October of '06. '7 Q. (By Mr. Sterup) I'm just asking for your 8 A. Okay. 8 perspectivesale to TransAlta of 9,505 9 A. I've heard willing buyer, willing seller 10 tons at $8.44 a ton? 10 before. 11 A. Okay. 11 Q. For purposes of imputing nonarm's length 12 Q. And then just to close the loop, in 12 revenues are you sort of trying to figure out what 13 November of '06 do you see a sale to MP of 109,144 13 somebody might have paid for the coal if it hadn't 14 tons at $7.87 a ton? 14 been sold to this nonarm's length purchaser? 15 A. Okay. 15 A. So am I trying to do a study outside of 16 Q. In the same month do you see a sale to 16 the purchase and the sales summary here, have I done 17 TransAlta of 106,448 tons at $7.88 a ton? 1'7 thatNo, even simpler than that and my question 19 Q. Within a range of about 12,000 tons at 19 isn't very well phrased. I'm just sort of trying to 20 97,000 we see six sales, five of them ranging from a 20 get at the ultimate objective, is it based on an 21 price of $7 to $8.44 a ton. Looking at that broader 21 assumption, if you will, that if the coal hadn't 22 sample size does that give you some concem that 22 been sold to a nonarm's length customer that it 23 your September sale at $21.84 a ton might be an 23 would have been sold to an arm's length customer, is 24 outlier? 24 that sort of the objective? 25 A. Again, it's an arm's length contract with 25 A. Well, that wasn't our intent of the Page 51 Page 53 1 a contract number with a BTU factor that's 1 informal hearing but we were, you know, we're always 2 comparable and a volume that's comparable. I'm sure 2 trying to get, you know - that's why the statute is 3 if I -- compatible coal, same coal, close BTU, close 3 written the way that it is is that you may impute a 4 volumes, same time period, same company, same 4 value if you have nonarm's length contracts. So 5 producer. 5 ultimately in an audit world in any sort of income 6 Q. Was there anything in your methodology 6 tax, severance tax or any other type of tax you're '7 that allowed you to consider for outliers? 7 looking for the value. 8 A. The outliers would be ones that were not 8 Q. Right. Because the severance tax is 9 in the same BTU factor or the volumes weren't 9 applied to the revenues from the sales of coal 10 comparable. 10 vaguely and generally, right? 11 Q. Well, I think what I'm asking is was there 11 A. Our statute says -- yeah, it's the 12 anything in your methodology that allowed you to 12 percentage rate for the value of the coal. 13 identify contracts where the prices were so 13 Q. Right. And if the producer is selling it 14 significantly at variance with other contracts that 14 in the market to arm's length purchasers then you've 15 they might be considered outliers and, therefore, 15 got pretty good confidence that you're applying the 16 not reliable? 16 severance tax rate to the right revenue numbers, 17 A. I didn't do a study to compare the 17 correct, generally speaking? 18 contracts with, regarding Cloud Peak on -- I took 18 A. If we have -- I'm sorry, if we have an 19 the arm's length prices based upon various 19 arm's length contract. 20 compatible again volumes and BTUs. I didn't do a 20 Q. Right. 21 study to find out whether one contract or another 21 A. At an area, you are establishing that you 22 contract would be, would have precedence over 22 have a value. Now could there be another value for 23 another. This is a peer study on comparable arm's 23 another contract, did they negotiate a better price, 24 length prices. 24 sure, they could have very well for the same coal 25 Q. Okay. Is the objective, by the way, in 25 and our statute says it's the contract sales price LESOFSKI COURT REPORTING VIDEO CONFERENCING (13) Pages 50 - 53 406-443-2010 Cloud Peak Energy Resources vs. Lee Baerlocher State of Montana Department of Revenue November 15, 2012 Page 54 Page 56 and if one contract has a higher amount than another, I mean, you've got to go with what the contract says. Q. Right. And so you're not second guessing, so to speak, or auditing the arm's length contracts to see if in a perfect world the seller could have gotten a better price, you go with the price the seller got generally speaking? A. With our statute the way it is right now that isn't the information Q. I'd like to see if we can identify some of the assumptions used in your methodology and how changing those assumptions might change the calculations. You were looking at month-by-month data, correct? A. Yes. Q. If you were to draw on quarter-by quarter data, for example, would that likely yield more 10 for state audits we would be hard pressed to argue 1o comparables for comparison? 11 an arm's length value if it, in fact, is an arm's 11 A. I'd have to do it, I'd have to get in and 12 length value. 12 do it. 13 Q. But for nonarm's length contracts the 13 Q. Does it seem likely that if you did it 14 concern is that the State will not collect the 14 quarter by quarter you'd probably come up with more 15 appropriate amount of severance tax because the 15 comparables? 16 price paid by the nonarm's length buyer is less than 16 MR. BEATTY: I'm going to object, this 17 the market value, is that generally correct? 17 calls for an awful lot of speculation from the 13 A. I'm sorry, you're going to have to say 18 witness, who has stated that he hasn't had an 19 that again. 19 opportunity to sit down and do that math. 20 Q. Sure. For a nonarm's length contract the 20 Q. (By Mr. Sterup) You can answer. 21 concem is that the revenues coming in on which the 21 A. It could be but then we're at risk of a 22 severance tax is based are too low because the 22 situation are we, you knownonarm's length buyer isn't paying market value? 23 just going to use calendar quarters? I mean, is a 24 A. Our statute says and our rules state that, 24 quarter in, say, for instance, you have a coal 25 our statute says that you will impute a price if the 25 quarter that begins with December, November, Page 55 Page 57 1 nonarm's length, if there is a nonarm's length 1 October, you could have lots of external stimuli and 2 contract. Now, we have -a rule that states that if 2 it could be a very warm, who knows, a very warm 3 it is less than compared to arm's length that you 3 October, November, people aren't using electric 4 will impute. 4 heat, there is a requirement or a demand for more 5 Q. Right, and the objective generally 5 coal, December gets cold so you could have a 6 speaking is to capture the correct amount of 6 December price that could, you know, could very well 7 severance tax based on market values of coal, 7 not reflect or be a good representative of October, 3 correct? 3 November. I mean, there is lots of ways you could 9 A. Yes. 9 slice this up. 10 Q. And so for purposes of the analysis in 10 Q. How often does the taxpayer report to the 11 September of 2006 in coming up with your figures you 11 State for severance tax purposes? 12 felt that a buyer of 97,276 tons would pay a market 12 A. Quarterly. 13 value of $16.31 a ton, fair to say? 13 Q. Does your report, Exhibit Number 9, 14 MR. BEATTY: This has been asked and 14 include quarterly totals? 15 answered over and over again, Rob. 15 A. Based on based on coal prices of 16 MR. STERUP: Yeah, it kind of has. 16 sales, so you'd have sales in October, November, 17 Q. (By Mr. Sterup) My question is, do you 1'7 December, you don't have a, you know, you don't have 18 have reason to think an arm's length purchaser would 18 a pick and choose to use your December price on your 19 actually have paid $16.31 a ton in September of 19 October, November. 20 2006? 20 Q. Would you generally agree that a bigger 21 A. I have reason to believe that an arm's 21 sample size would tend to smooth out anomalies? 22 length purchaser would have purchased coal at 21.84, 22 A. Again, I haven't done that study. 23 $11.19, $27.93, $21general would you agree with that 24 not only reason to believe, that was the information 24 proposition? 25 that was provided to us from Cloud Peak. Now, if 25 A. I can't venture to guess that again iviin-U-Scrip-flit LESOFSKI COURT REPORTING VIDEO CONFERENCING (14) Pages 54 -- 57 406-443-2010 MONTANA FIRST JUDICIAL DISTRICT COURT LEWIS AND CLARK COUNTY CLOUD PEAK ENERGY RESOURCES LLC, Plaintiff, Cause NO . DV BDV 2012-239 STATE OF MONTANA DEPARTMENT OF REVENUE, Defendant. DEPOSITION OF VAN CHARLTON On the 14th day of November, 2012, beginning at 11:00 the deposition of VAN CHARLTON, appearing at the instance of Defendant, was heard at the Offices of Lesofski Court Reporting, 7 West Sixth Avenue, Helena, Montana, pursuant to the Montana Rules of Civil Procedure, before Lisa R. Lesofski, Registered Professional Reporter, Notary Public. LESOFSKI COURT REPORTING VIDEO CONFERENCING 406-443-2010 Cloud Peak Energy Resources vs. Van Charlton State of Montana Department of Revenue November 14, 2012 Page2 Page4 1 APPEARANCES: 1 INDEX(C'ontinuedl 2 2 Marked 3 APPEARING oN BEHALF or THE PLAINTIFF: 3 12 Letter, Druse/Charlton, 5/25/2010, CPE-DOR 002091 74 4 fioannw 1.. ETERUP 4 13 tt ch 1 ttorne a aw 9 SI, 31' C011. 11188 5 Eollandya Hart 5 7/30/2010, CPE-DOR 000063 75 401 North 31st Street, Suite 1500 6 615': 59103 0639 6 14 getter, 10/27/2010, 75 7 1 7 tana - PE-DOR 15 Letter, Druse/Charlton, 11/17/2010, 8 APPEARING ON BEHALF or was DEFENDANT: 8 CPE-DOR 000091 76 9 9 16 getter, ggigigzon/Druse, 12/27/2010, 77 ms! JENK PE-DOR 10 Special Assistant Attorneys General 10 Montana Department of Revenue 1'7 Letter, Charlton/Druae, 12/27/2010, 11 3.5). BoxM7'Ig1 59604 11 CPE-DOR 000109 77 ena, 011 3118 12 12 18 Letter, Druse/Charlton, 1/5/2011 13 13 19 Letter, Charlton/Druse, 3/16/2011, 14 use 14 CPE-DOR 000128 Letter, Parrish/Charlton, 12/15/2011 78 21 Spring Creek Mine 2005 Contract Sales 16 16 Comparison, CPE-DOR 002137 79 17 1'7 22 Not Introduced 13 13 23 Handwritten Note, Cloud Peak, 12/15/2011, CPE-DOR 002035 83 19 19 24 Not Introduced 20 20 25 1: 1 Sp-rin ee (203 an List 21 21 Invoigesf CPE-D012 0gIg?6'83Y 84 22 22 26 Spring Creek Coal Company Coal Severance Tax, Fourth Quarter 2007, 23 23 CPE--DOR 000765 24 24 27 Not Introduced 25 25 28 Spring Creek Customers, CPE-DOR 002175 Page 3 Page 5 1 I . . 1 The followmg proceedings were had and 2 EXAMINATION: Page: 2 testimony taken (Exh1b1ts prev1ously marked. 5 IBITS: Marked: 5 (Witness sworn) 6 1 Spring Creek Coal Comgany Natural Resource Tax Audit, 2 05-2007, 6 7 CPE-DOR 000001 20 7 8 2 Ac1'tP Ad't:called as a w1tness herem, havmg been first duly 3 Rio Tinto Energy America spring 9 swom, was exarruned and test1fied as follows: 10 Creek Coal Mine General Background 10 Information of Operation, 11 CPE-DOR 000907 36 11 EXAMINATION 12 4 A d't Stat ort, - 13 CPE-DOR 000008 36 12 B: STERUR 5 Settlement Agreement and Mutual 13 00 mOmmg' 14 Release, 1/28/2003, CPE-DOR 001041 41 14 A, Good morning 15 6 43 15 Q. Please state your name for the record. ease, - 16 16 A. Van Charlton. 7 Letter, Charlton/Parrish, 3/12/2012, 17 Re: Final Division Determination 47 17 Q. By whom are you employed? 18 8 Lettfir, 18 A. The Montana Department of Revenue. RB: evise 11 B113Tax Audit: 62 19 MR. BEATTY: Rob, can I mterject here? 20 9 Email, Baerlocher/Sterup, 7/15/2012 7 20 Do you want to just do the usual standard REnvmce ?9 I 21 ob_1ect1o11s and 1f we need an ob] ectlon we'll 10 .151 1:3 l:,7302008make 1t, assurmng 1t's somethmg that he 23 3 71 23 doesn't need to not testify to we'll have him 11 Lett Cha It e, 4/29/2010, - - 24 Re: figntanarcoglf Sggruce Tax Audit 24 answer the 0bJeCt10n? 25 73 25 MR. STERUP: Absolutely. That will be LESOFSKI COURT REPORTING VIDEO CONFERENCING (1) Pages 2 - 5 406-443-2010 Cloud Peak Energy Resources vs. Van Charlton State of Montana Department of Revenue November 14, 2012 Page 18 Page 20 1 yourself? 1 other than Cloud Peak to get materials for the audit 2 A. Could you repeat the question? 2 process? 3 Q. Yeah, who at the Department was involved 3 A. No. 4 with the Cloud Peak audit aside from yourself? 4 Q. Let me show you what we have marked as 5 A. No one with the tax. 5 Exhibit 1. Can you tell me what this is? 6 Q. You didn't have any helpers on this 6 A. It looks like a cover page in Book 1 of 5 7 particular audit? 7 of our tax audit of Spring Creek Coal Mine and three 8 A. No. 8 pages showing the table of contents. 9 Q. How about on a review level, who at the 9 Q. And the Spring Creek Coal Company, is that 10 Department reviewed the audit work that you did? 10 the company that was the owner of the mine in 11 A. The bureau chief. 11 question at the time of the audit assessment 2005 12 Q. Mr. Baerlocher? 12 through 2007? 13 A. Yes. 13 A. That was our understanding under the 14 Q. Anyone else? 14 blanket of Kennecott or Rio Tinto. 15 A. I would say no. 15 Q. And if I refer to Cloud Peak as, or Cloud 16 Q. Just to close that loop. Between the date 16 Peak Energy as subsequent owner, the current owner 17 of the engagement and the final assessment 17 of Spring Creek, are we on the same page? 18 Mr. Baerlocher reviewed your work in a supervisory 18 A. That's fine. 19 capacity. Anyone else at the Department with whom 19 Q. This second page is a table of contents. 20 you discussed the ongoing Cloud Peak audit? 20 Does this capture the materials that were compiled 21 A. I'm not sure what you're meaning by the 21 by you during the audit process? 22 final assessment. 22 A. That would be a fair assessment, yes. 23 Q. We're going to get to that in a moment, 23 Q. So we can safely conclude that the 24 but there is a March 2012 document that you sent to 24 materials that we see listed in the table of 25 the company so let's use that for purposes of 25 contents, Books 1 through 5, were all materials that Page 19 Page 21 1 bracketing this particular question. 1 you had available to you during the audit; is that 2 MR. BEATTY: Wait a second. We're going 2 right? 3 to get to that in a moment. Final assessment 3 A. That's correct. 4 isn't actually a term we use so we need to 4 Q. Were there any other materials that you 5 define what you're looking for, whether you're 5 would have used during the audit that aren't on the 6 talking about your determination or your final 6 list? 7 agency decision, which one are you talking 7 A. There may have been that turned out not to 8 about? 3 be pertinent for anything but I don't recall. 9 MR. STERUP: Good clarification. 9 Q. All the pertinent stuff is on the list, or 10 Q. (By Mr. Sterup) Let's go with March 2012. 10 you intended for all the pertinent stuff to be on 11 Do you recall between the time that the engagement 11 the list? 12 began before March 2012 having discussions with 12 A. Yes. 13 anybody else at the Department about the ongoing 13 Q. And it looks like beginning with Book 2 14 audit? 14 then continuing on to Book 3, Book 4 and Book 5 that 15 A. My bureau chief in the normal course of 15 those were materials provided to you by Cloud Peak 16 communication with my supervisor. 16 during the audit? 17 Q. You mentioned the folks at Cloud Peak that 17 A. The best I can say, yes, without looking 18 you spoke to from time to time. Anyone else outside 13 at every line and going back and looking at every 19 of Cloud Peak that you may have discussed the 19 book. 20 ongoing audit with? 20 Q. Sure. But just scanning through the list 21 A. No. 21 for Book 2, 3, 4 and 5, those are the types of 22 Q. Generally did you review any materials in 22 materials you probably got from Cloud Peak, is that 23 performing the audit other than the materials that 23 fair to say, rather than from your own internal 24 you got from Cloud Peak? That's kind of a broad 24 records? 25 question. Do you recall looking to other sources 25 A. Well, some may be our own internal LESOFSKI COURT REPORTING VIDEO CONFERENCING (5) Pages 18 - 21 406-443-2010 Cloud Peak Energy Resources vs. Van Charlton State of Montana Department of Revenue November 14, 2012 Page 22 Page 24 1 documents as far as the tax returns. And anything 1 A. It's part of the process to make sure that 2 else that they may have, that may have accompanied 2 the correct amount of coal, we verify the amount of 3 the tax return in their due process of filing those. 3 production coming out of the mine and how it goes 4 Q. Yeah, that's true, okay. 4 from being mined to being prepared to sell and is 5 A. I can't speak to 4B either, the 5 sold. Not all coal that's produced at a given point 6 walk-through from the company may be theirs. Well, 6 and time may be sold at that point in time so you 7 I guess that's, yeah, that would be fine but it 7 look at production, you look at sales, C, mineral 8 wouldn't be ours, 3 valuation. Contracts can be done in a lot of 9 Q. Did Cloud Peak provide you with all of the 9 different ways, it's just to take a look at how the 10 information that you requested? 10 coal is valued off those invoices. 11 A. To my best recollection, yes. 11 Q. I take it these were steps that you 12 Q. Let me show you Exhibit 2. For the record 12 checked off during the Cloud Peak audit, these are 13 what is Exhibit 2? 13 things that you did? 14 A. As it's headed a state tax audit program 14 A. This is a guidance and based on my 15 for a coal mine audit to help give a general 15 initials it's a, you know, overview process to make 16 overview of steps to help auditors do a field audit. 16 sure that if, to take a look at an audit program and 17 Q. Who prepared this particular document? 17 maybe we missed something and we need to go back and 18 A. I did. 18 make sure that we do our complete job on our audit 19 Q. Are those your initials that we see on the 19 review. 2 0 document? 20 Q. For example, item 8A, that speaks to 21 A. I created the program. 21 production volumes and indicates one of the 22 Q. Okay. 22 objectives is to evaluate controls to ensure correct 23 A. And, yeah, those are my initials. 23 reporting of production volumes; is that right? 24 Q. You're anticipating actually where I was 24 A. That's what it states. 25 headed. The general fonnat is one that you created, 25 Q. And in the case of Cloud Peak did you Page 23 Page 25 1 I take it, for this particular report? 1 satisfy yourself that the company was correctly 2 A. As a general template for a coal audit, 2 reporting production volumes? 3 coal production tax audit, yes. 3 A. I would say yes. 4 Q. And this particular document related to 4 Q. Item B, sales volumes, did you satisfy 5 the Cloud Peak audit is one that you filled out and 5 yourself the company was correctly reporting coal 6 initialed as we see here? 6 quantities sold to purchasers? 7 A. Yes, everything on there looks like my 7 A. We determined that we had issues there 8 handwriting. 8 with sales volumes. 9 Q. I thought that was probably the case. Do 9 Q. With the volumes or with the prices? 10 you recall about when you would have completed the 10 A. I'm not sure how to answer your question. 11 form and initialed off? 11 Local sales weren't reported. 12 A. Somewhere in the process. I can't recallProbably toward the end of the process? 13 A. A refining adjustment wasn't reported and 14 A. The best I can say is somewhere in the 14 it probably dealt both ways, meaning volumetrically 15 process. 15 and value-wise, two issues that the, that we have 16 Q. What's the purpose of this particular 16 agreed to where there was nonreporting. 17 form? 17 Q. Aside from those two issues, the local 18 A. Just to help the auditors in the general 18 sales and the refining adjustments, did you satisfy 19 process of giving guidance and direction on 19 yourself that the volumes being sold had been 20 performing a coal audit. 20 correctly reported? 21 Q. I'd like to direct your attention to items 21 A. As reported at the mine, yes. 22 8A, and that are on page 2 of the exhibit. In 22 Q. And then subsection C, mineral valuation, 23 general what are those items meant to encompass? 23 there is a handwritten note at the bottom, what does 24 A. Number 8? 24 that note say and what is it referring to? 25 Q. Yessays "short-term contracts much easier LESOFSKI COURT REPORTING VIDEO CONFERENCING (6) Pages 22 -- 25 406-443-2010 Cloud Peak Energy Resources vs. Van Charlton State of Montana Department of Revenue November 14, 2012 Page 34 Page 36 1 A. I've got to take a step back. I didn't 1 Q. Do you recall anything more specific about 2 answer for nonarm's length contracts. I thought you 2 how taxpayers do it, be it weighted average of 3 asked me a question about the feds and the state. 3 contracts for a month or a quarter or specific 4 Q. Okay. 4 contracts, is that ringing any bells? 5 A. Not specifically nonarm's length 5 A. I don't recall. Contracts can vary from 6 contracts. 6 one to the other for coal producers. 7 Q. That's helpfiil. So Company with the 7 Q. Let's move on to Exhibit 3. For the 8 state and federal issue that got wrapped up, there 3 record what is Exhibit Number 3? What is Exhibit 3? 9 was no issue in this case regarding nonarm's length 9 A. Rio Tinto Energy America Spring Creek Coal 10 contracts; is that right? 10 Mine General Background Information of Operation. 11 A. I would say yes. 11 This was generated and provided to us from the 12 Q. That is right? 12 company. 13 A. It was nonarm's length contracts. 13 Q. As part of sort of the initial overview of 14 Q. It did address nonarm's length contracts? 14 the company operations? 15 A. No, it did not. 15 A. We generally ask for a walk-through. 16 Q. Okay, sorry. I put the question poorly so 16 Q. I'll show you Exhibit 4. What is this 17 it was difficult to tell if the yes was an 17 particular document? 18 affirmative. All right, so Company we'll put off 18 A. An audit status report. 19 to one side. Any other occasions with taxpayers 19 Q. Who prepared this one? 20 other than Cloud Peak when you've addressed nonarm's 20 A. I did. 21 length contracts and additional revenues from those 21 Q. When was it prepared? 22 contracts for Montana tax purposes? 22 A. At various times based on the dates. 23 A. There have been coal mines that have had 23 Q. Is this something that you sort of fill 24 nonarm's length contracts, yes. 24 out as you're working through the audit process? 25 Q. Have you had occasion during an audit to 25 A. In an informal and finalize it more when Page 35 Page 37 1 impute additional revenues under those NAL 1 we get to a, to the final, you know, an assessment 2 contracts? 2 or communication to the company. 3 A. Myself personally, no. 3 Q. Where did you get this particular format, 4 Q. Have you checked the taxpayer's method for 4 is this something you -- 5 imputing additional revenues under the NAL contracts 5 A. Something that was probably in some pretty 6 as part of your audit work? 6 general form like this that's been used for many 7 A. You would review what was reported per 7 years. 8 return in an arm's length or a nonarm's length 3 Q. You've had occasion to use this on audits 9 contract. 9 other than the Cloud Peak audit over the years? 10 Q. Have you had occasion to audit the 10 A. Yes. 11 methodology used by taxpayers other than Cloud Peak 11 Q. Did you fill out this particular form, 12 for imputing additional revenue for NAL contracts? 12 including pages 1 through 7 attached? 13 A. We have - I have reviewed in coal audits 13 A. Yes. 14 for, coal production tax audits, their method of 14 Q. On the first page we've got a table 15 reporting those nonarm's length sales in other coal 15 halfway down with action, date and name initial, it 16 mines besides Cloud Peak. 16 looks like your name and your initial for the items 17 Q. Does that include reviewing the method by 17 in the table; is that right? 18 which the taxpayer came up with imputed values or 13 A. That's correct. 19 not? Did you come to find out how they did it? 19 Q. Do the actions and the dates that we see 20 A. Yes, we determined how they reported the 2 0 reflected on this table accurately reflect the work 2 1 values they did on the tax returns, yes. 21 done on the Cloud Peak audit, are those reliable 22 Q. What sort of methods have other taxpayers 22 dates? 23 used, how do they do it? 23 A. As best you can recall as you go through 24 A. The same as Cloud Peak, they have a 24 the different action steps, yes. 25 nonarm's length contract that shows some price. 25 Q. So it looks like the field audit was LESOF SKI COURT REPORTING VIDEO CONFERENCING (9) Pages 34 - 37 406-443-201 0 Cloud Peak Energy Resources vs. Van Charlton State of Montana Department of Revenue November 14, 2012 Page 38 Page started in about September of 2008, right? A. Field audit starts September of 2008, correct. 4 Q. And the field audit was finished a few days later, September 19 of 2008, correct? A. That's the date shown, yes. Q. And is that an accurate date as far as you can recall? A. The dates speak for themselves. Q. Then we've got some additional steps leading to a revised assessment sent and do you see in the date column there a final DIV with the date ofMarch 13, 2012? A. Yes, a revised assessment sent 3-13-12. Q. What do the initials DIV stand for? A. Our final division determination. Q. So it looks like the field work was completed sometime in 2008, the final division determination in March of 2012. Is that a fairly typical time line, did this one take longer than usual? A. Every audit varies. I'm not going to say it's atypical. Q. We also see an informal conference date of December 15, 2011. Was that an in-person informal 1 some revised assessments and in March of 2012 you're at the final DIV assessment, correct? A. That's correct. Q. And by the time you get to that March 2012 final DIV I take it you thought you had all of the information you needed to wrap up your audit? A. We provided our final determination to the taxpayer on the audit period, yes. Q. You weren't awaiting any other information at that point? A. Not that I know of. Q. And by that point you had determined some areas where you felt additional amounts were due and owing, fair to say? A. Yes. Q. And by that point you felt you had the information you needed in order to come up with 13 those calculations, fair to say? 19 A. As presented in the final division, yes, 20 determination, yes. 21 Q. Let's take a look at page 5 of 7 of the 22 audit narrative. Let's see, Subsection 3 on that 23 page is headed nonarm's length revenue for Venture 24 Fuels. Do you see that? 25 A. YesPage 39 review, do you recall? A. To the best of my recollection, yes, it was an in-person conference with the Department of Revenue and Cloud Peak representatives. Q. Okay, we'll get back to that in a minute. First let's tum to the audit narrative. Would it be fair to conclude that this was prepared sort of at the end of the audit process, that is, close to the March 2012 final DIV determination? A. I don't know if it was closer to the final division, but it would have been reviewed from my standpoint all the way through the process and written as I thought it need be. Q. All right, so by the time you finished the audit with the final division determination I take it you had concluded you had the information you needed to wrap up the audit'? A. There was other initial preliminary assessments sent before the final division so there was, you know, appeals presented to us and there was numerous discussions with Cloud Peak before the conference or before the final division letter sent in March of '12. Q. Right. You did some initial assessments, had some dialogue with the company, came up with Page 41 1 Q. And that's one of the NAL contract arrangements that you reviewed during the audit process; is that right? A. That's correct. Q. What was your understanding of Venture Fuels, the nature of that entity, what was the nature of Venture Fuels? A. I'm not sure what you mean by the nature. Q. That was a poor question. You make reference here to an ageement between Spring Creek and the MMS. Do you see that? A. I do. 13 Q. That's the federal royalty agreement that 14 we discussed a bit earlier, correct? 15 A. That's correct. 16 Q. I'm showing you Exhibit 5. Is this that 1'7 agreement? 13 A. I believe it is, yes. 19 Q. Was this something that you obtained from 20 Cloud Peak during the audit process? 21 A. We may have, we may not have, I mean, for 22 the tax audit. 1 really can't recall our discussion 23 with, when I was at the audit if we, we gathered 24 these when we were there or not. 25 Q. All right. 11 12 Min-U-Scriptlfi LESOFSKI COURT REPORTING VIDEO CONFERENCING (10) Pages 38 - 41 406-443-20 10 Cloud Peak Energy Resources vs. Van Charlton State of Montana Department of Revenue November 14, 2012 Page 42 Page 44 1 A. We may have. 1 A. Yes. 2 Q. You got it from some source in any event; 2 Q. What was your audit findings? 3 is that right? 3 A. Under heading number two for the years 4 A. Based on the work in the unit and my - 4 2005, 2006 and 2007, the revenues as shown there are 5 yes, that's correct. 5 part of the coal contracts and part of the revenue 6 Q. Take a look at the last page of Exhibit 5, 6 that should have been reported for our production 7 which is captioned at the top Exhibit A. Do you 7 taxes. 8 know what that is? 3 Q. Why did you come to that conclusion? 9 A. My answer is just going to read that under 9 A. Part of the coal contracts. 10 Exhibit A it says "Kennecott Energy Company and the 10 Q. What did you mean by oiling/additives, 11 Minerals Management Service agree to the following 11 what type of material are you talking about? 12 methodology for valuing coal sold to joint venture 12 A. It probably came from a worksheet off of 13 companies of KEC, limited to Venture Fuels and 13 their own, Cloud Peak's, that showed the heading of 14 Venture Energy." 14 oiling/additives. 15 Q. All right. And my question really is to 15 Q. Do you know what sidecar release is? 16 get to whether you actually applied this methodology 16 A. Cars, train cars that side discharge the 17 to data from Cloud Peak, I don't think so, I think 17 coal. 18 you used the numbers that Cloud Peak had computed 13 Q. And we'll get to this in some documents, 19 under this methodology; is that right? 19 but generally are you familiar with something called 20 A. That is correct, in the initial 20 sidecar release that's sprayed on the side of the 2 1 assessments, yes. 21 railcars to prevent coal fi'om freezing, does that 22 Q. So it's not a case where you applied this 22 ring a bell? 23 methodology to raw data to come up with numbers, 23 A. Yes, that was discussed with Cloud Peak. 24 that's not something you did? 24 Q. Did you draw the conclusion that revenues 25 A. That is correct. 25 for sidecar release were subject to severance taxes? Page 43 Page 45 1 Q. Very good. And going back to Exhibit 4, 1 A. Yes. 2 the narrative. I think we go to page Why did you draw that conclusion? 3 audit narrative, Subsection 4, additional coal 3 A. Part of the revenue that's collected for 4 production revenue for NCTC Operations. Do you see 4 the coal contracts. 5 that? 5 Q. It shows up as a revenue line item company's intemal documents; is that right? Do you 7 Q. Was that another category of NAL contracts 7 see a revenue line item for oiling and additives on 8 at Cloud Peak? 8 the company's Cloud Peak's internal documents and 9 A. Yes. 9 that caused you to conclude it was revenue from coal 10 Q. And you came to learn there had been a 10 contracts; is that fair? 11 previous settlement with the MMS regarding those 11 A. And it was billed to the customers, 12 contracts too, correct? 12 correct. 13 A. That is correct. 13 Q. And how about dust suppressants, would 14 Q. And Exhibit 6, is that the NCTC settlement 14 those fall under the same category, do you recall? 15 as best you understand it? 15 A. I would say they fall under the same 16 A. Yes, as best as I understand it. 16 general category. 17 Q. Just so we make a record here, there is a 17 Q. Have you addressed that with any other 18 methodology exhibit to this particular agreement as 18 Montana taxpayers, referring specifically to sidecar 19 well but I take it you didn't apply that methodology 19 release and/or dust suppressants as revenue subject 20 to Cloud Peak data to come up with numbers, right, 20 to tax? 21 you did not do that? 21 A. The dust, yes, sidecar I don't know if 22 A. That is correct. 22 there is any -- I can't recall that specific sidecar 23 Q. Very good. Let's go to page 5 on the 23 discharge from other mines besides Cloud Peak. 24 audit narrative, Item Number 2 is captioned oiling 24 Q. What do you recall about the dust 25 and additives revenue; do you see that? 25 suppressants, how has that been treated, if it has, LESOFSKI COURT REPORTING VIDEO CONFERENCING (11) Pages 42 - 45 406-443-2010 Cloud Peak Energy Resources vs. Van Charlton State of Montana Department of Revenue November 14, 2012 Page 46 Page 48 1 with respect to other taxpayers? 1 supervision under that work? 2 A. We've always consistently said that's part 2 A. Can you direct me to the schedules you 3 of your value for coal production tax purposes. 3 want me to answer for? 4 Q. The 2009 Montana legislature amended the 4 Q. Oh, gosh, all of them. 5 statute in some respects. Did you play any part in 5 A. Yes, I prepared those. 6 that? 6 Q. Is this a fairly typical form of a final '7 A. I'm not sure how to answer played a part. '7 division determination at the end of an audit 3 Q. Did you review an amendment, testify 8 process, is this typically how the audit wraps up 9 before any committees, prepare any materials? 9 through the issuance of a written fmal division 10 A. The best I recall I would have reviewed 10 determination? 11 that piece of legislation. Testifying I don't 12 recall but probably not. 13 Q. What can you tell us about your review of 14 the materials? 15 A. Part of my role during the legislative 16 17 13 may affect our extraction taxes. Q. Do you recall drawing any conclusions 19 about the amendment to the definition of prepared 2 0 for shipment? 21 A. I don't recall any particular conclusion. 22 Q. Did that particular statutory amendment, I 23 take it that did not originate with you, it wasn't 24 your idearecollection of the bill was it was for session is to review all natural resource bills that 11 A. I would say a final division determination 12 13 still having disagreements on issues. 14 Q. By this time you had completed the field 15 work, right? 16 A. Yes. 17 Q. And you've issued some preliminary 18 assessments or determinations, right? 19 A. Yes. 20 Q. You've had some dialogue with the taxpayer 21 about those preliminary determinations, correct? 22 A. That's correct. 23 Q. You've been able to work through at least 24 a couple of the issues but not all of them, right? 25 A. That's correct. like this would be sent out to a taxpayer if we are coal washing. Q. What do you mean by that? A. Lots of different pieces, wordings get put into a bill but the bill was initiated by a, for a company that washes their coal in the state of Montana. Q. Is that Bull Mountain? 8 A. It affected Bull Mountain, that's correct. 9 Q. All right, we've been going a good hour 10 and a half, should we take a break? 11 (Break taken.) 12 Q. (By Mr. Sterup) Showing you Exhibit 7. 13 What is Exhibit 7? 14 A. I would call it our final division 15 determination for the three production taxes to 16 Cloud Peak for 2005 to 2007. 1'7 Q. Who prepared this document? 18 A. I would say I did. I signed it. 19 Q. Anyone else involved in its preparation? 20 A. Probably my bureau chief. 2 1 Q. In preparation or in review or both? 22 A. Probably both. 23 Q. In particular we see some tables attached 24 to the letter. Were those prepared by you sitting 25 at a keyboard or someone acting under your Page 47 1 Q. And at that point you issue this fmal 2 division determination, is that how it works? 3 A. That's correct. 4 Q. And just to sort that out a bit further, 5 6 7 touched upon those earlier but those are matters 8 9 agreement, correct? 10 A. At that point it was determined that they 11 weren't, Cloud Peak wasn't going to disagree with our findings, that's correct. Q. Item Number 3, oiling and additives, that's the issue regarding the sidecar release and dust suppressants we discussed a bit ago, right? A. That's correct. Q. As March 2012 that was still unresolved, right? 19 A. Yes. 20 Q. What position and you'd had an 21 opportunity to discuss that with the folks at Cloud 22 Peak, is that fair to say? 23 A. The oiling additives, yes. 24 Q. What position did they articulate? 25 A. I honestly don't recall any turn to page 2 if you would, Items Number 1 and 2 are headed refining adjustment and local sales, we that as of March of 2012 have been wrapped up by Page 49 Min--U--Script(R) LESOFSKI COURT REPORTING VIDEO CONFERENCING 406-443-2010 (12) Pages 46 -- 49 Cloud Peak Energy Resources vs. State of Montana Department of Revenue Van Charlton November 14, 2012 Page 62 recall? A. Yes. Q. What can you tell us about that? A. Various conversations with Jason St. John dealing with amended returns on issues that we had agreed to and that was a very voluminous process to deal with all those amended returns and make sure the tax was paid, the additional tax that was agreed upon to pay since this was sent out, yes. Q. You're referring to the audit items that had been wrapped up by agreement? A. That's correct. Q. And after the agreement was reached then there was an administerial process of going through and documenting the agreement and getting the taxes paid, that sort of thing? A. Cloud Peak pretty much just sent in amended tax returns with the revenue and it had to be all, we had to make sure it was all correctly done and filed and the taxes paid and the appropriate interest calculated and paid. Q. Was that eventually wrapped up to your satisfaction? A. Yes. Q. Any other discussions, putting aside those Page 64 that was the process that they wanted to go forward with and so they filed a formal appeal to our Exhibit 7. Q. And in response to that appeal by Cloud Peak the Department came up with what we see here as Exhibit Number 8, which is a revised Montana coal production tax audit; is that fair to say? A. Based on the appeal documents that were sent in, yes. Q. My question is why. A. I'm not sure how to answer that question. Q. Are you the right person to answer the question or should that be directed to someone else? I guess what I'm getting at is was this your decision to issue a revised assessment in June? A. It was the Department's decision to do, to send out a revised assessment. Q. What part did you play in that? A. I don't believe I was the ultimate decision maker to make that determination. In my role with, in my direct involvement with the audit I was part of, it was part of the process so, yet, I wasn't the ultimate decision maker to decide to send out this revised assessment in June. Q. The letter is for a signature by U) uh U1 01 on I-4 Page 63 discussions, any other discussions with Cloud Peak after March 13 of 2012 you can recall? A. You know, I don't recall. Q. I'm showing you Exhibit 8. What is Exhibit 8? A. Based on the heading it's a revised Montana coal production tax audit for the three production taxes for the year 2005 through 2007. Q. Did you play any part in preparing this Exhibit 8? A. Yes. Q. What part did you play? A. The drafting of the letter, the preparation of the schedules that are attached here with Exhibit 8. Q. Is Exhibit Number 8 the June 21, 2012 letter intended to replace, as it were, Exhibit Number 7, your March 13, 2012 letter. A. I would say that's a fair assessment, yes. Q. How did that come about? A. Exhibit 7 provided Cloud Peak with an avenue to start, and these are my terms, into our official away from an informal process to a formal process of filing an appeal with the Department of Revenue and they, Cloud Peak, selected or determined In 14 15 16 17 iathmk Page 65 Mr. Baerlocher, was he the ultimate decision maker? A. The time line is a litfle not that clear back at the time of - once an informal appeal starts and depending on how that appeal is presented to us then just as you're here representing your client, we get representation from our legal staff and the road may go in different directions from that point on in appeal. Q. Let me just ask this, with respect to the NAL imputed revenues, in general how do you understand the June 2012 revised assessment differs from the one that you had initially delivered in March of 2012, vaguely and generally what was the difference? MR. BEATTY: I'm going to object, the document speaks for itself compared to the second paragraph. You can answer what you A. The Department determined to take a different direction and iinpute a value based on information that we had available to us over the time period here and based on that imputation then it obviously changed the assessment numbers. Q. (By Mr. Sterup) So no longer is the Department looking to the numbers calculated under LESOFSKI COURT REPORTING VIDEO CONFERENCING (16) Pages 62 - 65 406-443-2010 Cloud Peak Energy Resources vs. Van Charlton State of Montana Department of Revenue November 14, 2012 Page 66 Page 68 1 the is that fair to say? 1 A. That is correct. 2 A. That would be a fair assessment. 2 Q. Very good. Let's go to the next page 3 Q. Instead, the Department has come up with 3 then, which is about 2005 additional FOB mine 4 an imputation based on a different type of 4 revenue for audit by year. Do you have that? 5 calculation; is that fair to sayThat's correct. 6 Q. This differs from the March 2012 page I 7 Q. And my question is why, if you know, was '7 think, is that for the same reason? 8 that decision made, why was that change made? 8 A. It does except for the oiling, the oiling 9 A. Based on the appeal at that point in time 9 10 we believed that if you were, that Cloud Peak didn't 10 Q. All right. But, once again, we're now 11 want to stay with the - I mean, that was the 11 seeing stand-alone figures for some of the 12 argument, so the assessment as of March 13th, 2012 12 categories? 13 that we have full authority under our statute to do 13 A. So that if you carried over the, that 14 our own imputation and see if the taxpayer likes 14 first column, the 327, it would carry back over to 15 that view and that's what we've done. 15 the total revenue, additional revenue on the 16 Q. All right, tum to the coal severance tax 16 severance tax column for the first quarter. 17 2005 page. 1'7 Q. Then actually why don't we just put the 18 A. Can you show me 18 same page from the March 2012 letter against the 19 Q. Yeah. We just looked at a similar page 19 page from the June 2012 letter. 20 from the March 2012 DIV. I guess generally my 20 A. Can you show me the pages here? Okay, so 21 question is how does this differ from the one that 21 you want 2005 from June and the 2005 from the March 22 was attached to the March 2012 page? 22 letter. 23 A. I hope I make this clear, but this is just 23 Q. Let's see, it looks like the imputed local 24 like taking the imputation as we've stated in our 24 sales figures have dropped out by June and that's 25 letter as a stand-alone calculation and so it shows 25 because that issue has been agreed on and wrapped Page 67 Page 69 1 our imputed revenue above and beyond what was 1 up; is that right? 2 reported on the return for those nonarm's length 2 A. Can you ask that question again? 3 sales and the adjusted revenue, for an example that 3 Q. Yeah, the imputed local sales numbers have 4 first quarter of 2005 why you see the 327,851. 4 dropped out? 5 MR. BEATTY: If I may interject real 5 A. That is correct. 6 briefly. 6 Q. Because that issue was wrapped up? 7 (Discussion off the record.) 7 A. That's correct. 8 A. I'm not sure if I fully answered your 8 Q. The imputed revenue NCT sales also have 9 question on that schedule. 9 dropped out, why was that? 10 Q. (By Mr. Sterup) I think you did. Let's 10 A. I built this sheet so the imputation for 11 move to the coal gross proceeds tax page for 2005. 11 the NCTC and what's shown as the nonarm's length is 12 And that differs from the one that we saw in March. 12 all under that nonarm's length nonpiece. 13 Is that for the same reason, is it stand alone? 13 Q. In one category NAL sales? 14 A. It's just standing alone and if you go 14 A. That's correct. 15 back to the 2005 for the total year, about halfway 15 Q. And then if we look at the total figure 16 down the schedule you'll see the contract sales 16 for 2005, for example, in March we saw 1.429 million 17 price of the $1,800,490.05 and I've rounded these 17 for NAL and 1.029 million for NCT, correct? 18 off to the dollar here on the gross proceeds page on 18 A. That is correct. 19 2005. We're just totally standing the imputation on 19 Q. And then by June we're seeing a single 20 its own so you won't see any exempt revenue here 20 aggregate figure of $1.941? million, correct? 21 because it's not the full picture of all the rest of 21 A. That is correct. 22 the revenue that was reported for the quarter. 22 Q. That's based on a difference in 23 Q. And the resource indemnity trust tax pages 23 methodology for computing NAL revenues, correct? 24 that follow, same deal, they're now segregated and 24 A. That is correct. 25 stand-alone figures; is that right? 25 Q. No longer looking at the MMS settlement LESOFSKI COURT REPORTING VIDEO CONFERENCING (17) Pages 66 - 69 406-443-2010 Cloud Peak Energy Resources vs. Van Charlton State of Montana Department of Revenue November 14, 2012 Page 74 Page 76 1 value to coal? 1 through 2007? 2 A. Can you ask that question again? 2 A. For the coal severance tax, yes. 3 Q. Yeah. The statute that you cite here 3 Q. So it looks like you had done some initial 4 refers to the Department imputing a value to coal 4 calculations based on 2005 only and now you're up to 5 where a person sells coal under a contract that's 5 the entire three-year period 2005 through 2007? 6 not an arm's length agreement. My question is, did 6 A. That is correct. 7 or does the Department have any written guidelines that way, is that 8 for doing that? 8 typical? 9 A. We don't have any written guidelines. 9 A. Every audit has its own direction, yet, it 10 Q. I'm showing you Exhibit 12. You mention 10 just worked out this way. I sent out the severance 11 Mr. Druse from Cloud Peak. Does this look like a 11 tax for a quarter in Exhibit 13 and based on the 12 response to your initial assessment? 12 response we probably move forward with making some 13 A. It does. 13 modifications that carried through for the rest of 14 Q. By the way, in item 2 referring to the oil 14 the audit period so it helped the process out. 15 and additives he mentions that sidecar release is a 15 Q. Sort of dip your toe in the water a bit 16 product sprayed on rail cars to prevent coal from 16 and get some more feedback before moving on to the 17 freezing to the rail cars, that is, it's sprayed on 17 entire three-year period? 18 the cars itself, not on the coal. Any reason to 18 A. In this case it's the way it turned out. 19 dispute that factually? 19 Q. I'm showing you Exhibit 15, a November 17, 20 A. That they're spraying the cars, not the 20 2010 letter from Mr. Druse at Cloud Peak. Is this 21 coal? 21 the reaction to the taxpayer's reaction to the 22 Q. Right. 22 preliminary assessmentExhibit 14? 24 Q. As far as you know that's accurate? 24 Q. Yes. 25 A. Yes. 25 A. Yes. Page 75 Page 77 1 Q. And in Items 3 and 4, referring to the NAL 1 Q. I'm showing you Exhibit 16, about a month 2 revenue imputation, it looks like in both categories 2 later in December of 2010. What do we have here? 3 Mr. Druse stated "We ask that the State and CPE 3 A. It looks like the initial assessment for 4 develop a method for valuation of these sales to 4 the coal gross proceeds tax for the audit scope of 5 value these tons at a market price." Do you see 5 2005 to 6 those, do you see that? 6 Q. So by this point you've completed the coal 7 A. I do. 7 severance tax audit preliminary assessment for the 8 Q. We touched upon this a bit earlier but 8 tl1ree--year period and now you're moving on to the 9 just in case this jogs your recollection, do you 9 coal gross proceeds tax audit? 1o recall having discussions with CPE about a specific 10 A. It's just the way the audit flowed. We 11 method for doing that? 11 sent the production tax for the gross proceeds out 12 A. Not a specific method. It was more just a 12 separately from the severance, yes. 13 high level then bring us -- we didn't get any real 13 Q. Just to close that loop, showing you 14 detailed discussions about that. 14 Exhibit 17 dated also December 27, 2010. Is this 15 Q. Let's see, Exhibit 13. 15 the preliminary audit assessment for the resource 16 MR. BEATTY: If we could go off the record 16 indemnity trust tax for that three--year period? 17 for a second. 17 A. Yes. 18 (Break taken.) 18 Q. I take it, by the way, that Exhibit 16 and 19 Q. (By Mr. Sterup) Exhibit 13 dated 19 17 both were prepared by you? 20 July 30th, 2010, what is this document? 20 A. Yes, that is correct. 21 A. Preliminary assessment letter for the coal 21 Q. I'm showing you Exhibit 18 dated 22 severance tax. 22 January 5, 2011. Do you understand this to be the 23 Q. And then showing you Exhibit 14 dated 23 taxpayer's response to the coal gross proceeds tax -24 October 27, 2010, is this another preliminary 24 audit of December 2010? 25 assessment this time for the entire period 2005 25 A. Yes. LESOFSKI COURT REPORTING VIDEO CONFERENCING (19) Pages 74 - 77 406-443-2010 Cloud Peak Energy Resources vs. State of Montana Department of Revenue Van Charlton November 14, 2012 Page 82 Page 84 1 A. I didn't really have any particular 1 I'm showing you Exhibit 25. 2 reaction at the time looking back on it because it 2 MS. JENKINS: You're skipping 24 as well? 3 was just presented to us. So they're their own 3 MR. STERUP: Yeah. 4 documents, they're their own graphs so I don't know 4 Q. (By Mr. Sterup) What is Exhibit 25? 5 how accurate they are, and that's what an informal 5 A. I'm going to call it based on what the 6 discussion is for is to bring their objections to us 6 heading shows, Spring Creek Control Company List of 7 and why I guess they're objecting to our preliminary 7 Invoices looking to the left of the customer's 8 assessment on the nonarm's length sales at that 8 contract numbers, invoice numbers and other 9 point in time. 9 information that may very well reside on an 10 Q. I take it that this is not the type of 10 individual invoice to a customer. It looks like an 11 data that you considered in coming up with the audit 11 invoice log as I would call it for 2007. 12 assessment of March 2012, instead you were looking 12 Q. Is this material provided to you by Cloud 13 at the federal royalty numbers under the MMS 13 Peak, this particular report? 14 settlements, right? 14 A. It very well could have been provided to 15 A. We didn't change our, from our original 15 us as part of our audit, our field audit work. 16 preliminary assessments away from the, of using the 16 Q. In other words, this is not something that 17 figures that were calculated by Spring Creek in 17 your unit prepared as far as you can recall? 18 those agreements showing undervaluation of the 18 A. No, this would have been a Cloud Peak 19 nonarm's length contracts, no. 19 document. 20 Q. By the way, for purposes of imputing a 20 Q. Do you know, by the way, the difference 21 value for nonarm's length contracts under the 21 between total dollars and coal dollars as shown on 22 statute do you understand that at first must be 22 this invoice 10 g? 23 shown those NAL contracts are below market value? 23 A. Please direct me to where you're looking. 24 MR. STERUP: Calls for a legal conclusion, 24 Q. Let's see, the sixth and seventh colunms 25 object. You can answer. 25 over from the left, total dollars is one column, Page 83 Page 85 1 A. The statute speaks for itself. 1 coal dollars is the next column. 2 Q. (By Mr. Sterup) I'm just asking do you 2 A. Based on this worksheet and column, the 3 know one way or another? 3 first row under customer ACS, Contract 925, that 4 A. I could give you my opinion if I have the 4 first invoice, simply looking looks like the total 5 statute in front of me. 5 invoice is showing one figure, the coal figure the way, did you obtain any 6 less and I was looking at what it looks like it's '7 OTC coal pricing data at any time during the audit 7 less by, it's the additive number to the far right 8 process independently? 8 column. 9 A. I'm not sure what you mean by OTC. 9 Q. Very good. I'm showing you Exhibit 26. 10 Q. Over the counter. 10 Is this a form of report provided to you by Cloud 11 A. Could you help define that, over, for me? 11 Peak as opposed to something prepared by your unit? 12 Q. Does that ring a bell? Do you recall 12 A. It's a Cloud Peak generated document, 13 compiling OTC coal sales data during the audit 13 that's correct. 14 process? 14 Q. It looks like there is some checkmarks on 15 MR. BEATTY: I'm going to object, he's 15 the form of report produced to us in discovery. Is 16 asking you to define what OTC is. He can't 16 that some ticking and tying going on as part of the 17 answer that. 17 audit process or not? 18 Q. (By Mr. Sterup) Sorry. Over the counter, 18 A. It could be something that we did from our 19 does that ring a bell? 19 file. It might be something they did. 20 A. I'm not sure what that means. 20 Q. Let me ask you about one specific figure 21 Q. Okay. Let me show you Exhibit 23. I'm 21 here in the first quarter column about a third of 22 skipping 22 for the record. Do you know whose notes 22 the way down we see a price, it looks like it's 23 these are? 23 $6.683; do you see that? 24 A. Not for certain, it's not my handwritingthat case I'll ask somebody else. 25 Q. Do you know what that represents? LESOFSKI COURT REPORTING VIDEO CONFERENCING (21) Pages 82 - 85 406-443-2010 Cloud Peak Energy v. State of Montana KIM PARRISH 1/10/2013 Page 1 DISTRICT COURT, COUNTY OF LEWIS AND CLARK, MONTANA Case No. DEPOSITION OF: KIM PARRISH -- January 10, 2013 CLOUD PEAK ENERGY RESOURCES, LLC, Plaintiff, VS. STATE OF MONTANA DEPARTMENT OF REVENUE, Defendant. PURSUANT TO NOTICE, the deposition of KIM PARRISH was taken on behalf of the Defendant at 555 17th Street, Suite 3200, Denver, Colorado 80202, on January 10, 2013, at 8:49 before Amy L. Bland, Registered Professional Reporter, Certified Shorthand Reporter, and Notary Public within Colorado. scheduling@huntergeist.com HUNTER 1- GEIST, INC. 303.832.5966 I 800.525.8490 - urns-an ll-- 4- Ian u. cloud Peak Energy v. State of Montana KIM PARRISI-I 1/10/2013 Page 10 1 Q. Go ahead. I'm sorry. 2 A. certainly, from a how can I phrase 3 that? I'm familiar with the Venture Fuels partnership 4 and how it transacts its business and the tax and 5 royalty implications thereof. 6 Q. Great. What do they do? 7 A. What do they do? 8 Q. What does Venture Fuels do? 9 A. Venture Fuels is a partnership that we 10 have with a actually, a non--affiliated company. We 11 own 50 percent of Venture Fuels. Venture Fuels was set 12 up to provide logistic services for customers that 13 would prefer to have their coal delivered than to pick 14 it up at the mine site. 15 Q. This is fascinating. I love these cases, 16 because I learn something every day. 17 What exactly is logistic services? When 18 you say "logistic services," could you just tell me 19 what that is? 20 A. In the context of Venture Fuels, that 21 would be setting up the contracts with the rail, 22 sometimes getting the actual engines to run the rail 23 cars, whether we own them or not. 24 Venture Fuels also works with a terminal 25 at the Great Lakes called the MERC terminal, where coal scheduling@huntergeist.com HUNTER GEIST, INC. 303.832.5966 I 800.525.8490 BREE Cloud Peak Energy v. state of Montana KIM PARRISH 1/10/2013 Page 13 1 no money. It was just a title flipper. 2 And I wanted to make sure that we don't 3 have a title flipper here like the pipeline case, which 4 is why I'm asking the question. There's no trick here. 5 I just want to make sure I understand what I'm what 6 we're talking about. 7 A. I would say that there's a good business 8 purpose for the Venture Fuels partnership to exist to 9 benefit its partners. 10 Q. Great. Thank you. So where in this 11 transaction process that Venture Fuels does, buying the 12 coal FOB delivery point, selling it at the other end of 13 the delivery point -- where does -- where does Venture 14 Fuels make a profit in there? 15 A. Well, as I said, I'm not sure it always 16 makes a profit. It takes on a lot of risks and charges 17 the ultimate customer for those risks. Many factors 18 could depend on whether they make money or not, 19 including rail rates, outages at terminals, things like 20 that. 21 Q. Okay. 22 A. But they are a logistics company, one 23 would think, put in place to make profit. 24 Q. So for the dumb farm boy here, there's 25 some sort of surcharge between point.A and point that scheduling@huntergeishcom HUNTER GEIST, me. I Arno-urn an 1: 4-..--. 303.832.5966 I 800.525.8490 Cloud Peak Energy v. State of Montana JASON ST. JOHN 1/10/2013 Page 1 DISTRICT COURT, COUNTY OF LEWIS AND CLARK, MONTANA Case No. DEPOSITION OF: JASON ST. JOHN - January 10, 2013 CLOUD PEAK ENERGY RESOURCES, LLC, Plaintiff, vs. STATE OF MONTANA DEPARTMENT OF REVENUE, Defendant. PURSUANT TO NOTICE, the deposition of JASON ST. JOHN was taken on behalf of the Defendant at 555 17th Street, Suite 3200, Denver, Colorado 80202, on January 10, 2013, at 10:04 before Amy L. Bland, Registered Professional Reporter, Certified Shorthand Reporter, and Notary Public within Colorado. scheduling@huntergeist.com HUNTER GEIST, INC. 303.832.5966 I 800.525.8490 LIAcloud Peak Energy V. State of Montana JASON ST. JOHN 1/10/2013 Page 7 1 A. I would define a non--arm's--length sale as 2 a sale to an affiliated company. 3 Q. Okay. And what do you mean by affiliated? 4 A. A company that's under common ownership. 5 Q. With Cloud Peak Energy. 6 A. With Cloud Peak Energy, either wholly or 7 partially. 8 Q. Okay. And how many such affiliated 9 entities does Cloud Peak have, if you know? 10 A. Does Cloud Peak have? I don't have an 11 exact count. I would say it's in the ballpark of 20. 12 Q. 20? Okay. All right. And could you give 13 me your understanding of what Venture Fuels does? 14 A. Venture Fuels sells coal. It sells coal 15 at primarily at from the MERC terminal, which is 16 on the Great Lakes. 17 Q. Okay. Would you agree with Ms. Parrish's 18 discussion of Venture Fuels as a logistical service? 19 A. Yes. 20 Q. Okay. What about 21 A. NCTC has a very similar business model. 22 Q. Okay. 23 A. It's also a seller of coal away from the 24 mine. 25 Q. Okay. And we can agree both of those scheduIing@huntergeist.com HUNTER GEIST, INC. 303.832.5966 I 800.525.8490 A-an an-an