U.S. coal miner says sales practice being probed was permitted

WASHINGTON Thu Feb 14, 2013 12:20pm EST

WASHINGTON (Reuters) - A coal producer at the center of a U.S. Interior Department investigation into whether miners and traders skirted royalty payments on lucrative exports to Asia says the government agency gave the green light for such practices in 2009.

Cloud Peak Energy Inc CEO Colin Marshall said in a letter to Interior Secretary Ken Salazar that sales through affiliates that helped it and other companies avoid royalty payments had been cleared by Interior, adding that the miners have been open about their trading practices.

"Cloud Peak Energy clearly delineated ... our views on the appropriateness of continuing the existing royalty valuation system and structure," Marshall said in the letter, noting that it was in response to a recent Reuters article.

The clearance from the department was delivered through a PowerPoint presentation in 2009, Marshall wrote, when officials also cited a 2003 case involving natural gas sales as an example of how coal royalties should be treated.

Last week, Salazar announced the investigation, telling lawmakers in a letter that Interior would aim to determine whether miners on federal land wrongly cleared their sales through sister companies to dodge royalty payments.

The Interior Department had no comment on Marshall's letter, which was sent in January and seen by Reuters.

Using affiliates to handle coal exports stands to cost taxpayers hundreds of millions of dollars in forgone royalties in coming years if miners fulfill their plans to ship more of the fuel from the Powder River Basin of eastern Montana and Wyoming to coal-hungry Asian markets, the Reuters investigation found.

By moving their sales through affiliated brokers, coal companies can clear royalties at a low price and actually collect more than that value when prices in Asia climb.

Salazar said that one clue to a royalty shortfall would be if miners gain more from a coal sale than what they claim the fuel was worth.

U.S. taxpayers are due a 12.5 percent royalty on coal sales from federal land.

Interior officials will, Salazar wrote, "aggressively pursue any company found in violation of the laws and regulations related to the valuation of federal coal."

Arch Coal Inc and Peabody Energy Corp, two other dominant miners in the Powder River Basin, declined to comment on the investigation.

Cloud Peak's insistence that broker sales are permitted, and how that meshes with Interior's reading of its own royalty rules, could frame the dispute over how large the royalty payments to the government will be on Asian coal sales that the industry hopes will soar in coming years.

GUIDANCE FROM INTERIOR

Interior's Office of Natural Resources Revenue (ONRR), the steward of federal royalties, routinely instructs mining and drilling interests how to best interpret the rules.

One court ruling cited in a 116-page Interior presentation on regulations, which has been seen by Reuters, led Cloud Peak to value coal for royalties using a broad range of benchmarks such as prices in the domestic market, Marshall wrote.

Cloud Peak and the Interior Department did not reply to several requests for comment on royalty payments or the presentation, which is available via the ONRR website.

Coal exports from Montana increased more than sixfold to more than 13 million tons in the three years since that ONRR presentation, according to the Energy Information Administration.

And those sales have been profitable.

In 2011, less than 5 percent of Cloud Peak's coal production was shipped to Asia but that accounted for nearly 19 percent of total revenue or about $290 million.

In May 2011, Interior proposed new royalty rules that might have closed off the gains from affiliated sales and Cloud Peak defended the status quo in comments to regulators at that time, Marshall wrote.

The company made a similar defense of the existing royalty rules at a meeting with regulators in October 2011 that was led by ONRR Director Gregory Gould, according to a transcript.

The Interior Department has not finalized those rules.

Interior's message to the industry over royalties would be important to settling any dispute but the case cited in the Cloud Peak letter is not comparable, said Peter Appel, a former Justice Department attorney who has reviewed coal and gas rules.

In the letter, Cloud Peak says Interior guided it to a federal court decision (Fina Oil and Chemicals Co. v. Norton) that shielded a natural gas supplier from paying royalties on fuel it received from producers.

"But it appears that many of these transactions in the coal market are structured differently than the marketing agreements in the gas market," said Appel, who prosecuted cases for the Justice Department's Environment and Natural Resources Division and teaches at the University of Georgia School of Law.

Senator Ron Wyden, chairman of the Energy and Natural Resources Committee, said the coal industry's reading of the existing rules is troubling.

"This should have set off warning lights," Wyden said on Monday. "And it makes the case for a thorough investigation."

Wyden, a Democrat, and Senator Lisa Murkowski, the senior Republican on the committee, last month called for an investigation into coal royalties.

"We are going to monitor this very closely," said Wyden, who expressed satisfaction with the rigor of the investigation proposed by Salazar. "This is a taxpayer issue, first and foremost. It is critical that taxpayers get every penny due."

(Reporting by Patrick Rucker; Editing by Ros Krasny, Martin Howell and Doina Chiacu)

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