• Coal company bankruptcies have revealed flaws in existing “self-bonding” programs that have exposed American taxpayers to billions in mine clean up costs
• Regulators have had some success in reducing these risks. The question is whether they will have the same success with Peabody
• Peabody’s own financial projections suggest that it could afford to replace its roughly $1.14 billion in self-bonded liability with proper reclamation bonds. Therefore, regulators should reduce the risk to taxpayers and insist on it.

LONDON January 25, 2017—Peabody Energy Corp. is on the verge of completing a Chapter 11 bankruptcy reorganization that proposes to reduce its outstanding debt by $6.6 billion and raise $1.5 billion in new equity.  It promises to develop a “bonding solution” for its $1.14 billion in “self-bonded” liability but no solution has yet been proposed.

The recent spate of U.S. coal mining company bankruptcies has exposed a flaw in the existing regulatory regime; qualifying companies are allowed to “self-bond” their future liabilities with a pledge to fulfill those obligations.  In bankruptcy, those promises to pay are not worth the paper they are written on.  If the miner cannot pay, the obligations will go unfunded, potentially leaving taxpayers to foot the bill.

Ironically, a history of allowing self-bonding has provided the companies with added ammunition in bankruptcy proceedings; they can now argue that unless self-bonding is permitted post-bankruptcy, they may be forced to liquidate, exposing taxpayers to millions in costs.

Regulators have pushed other reorganized mining companies, Alpha Natural Resources and Arch Coal, to replace their self-bonds with third-party backed reclamation bonds—another source of collateral that the regulators can call upon if the company fails.  But will they do they same for Peabody Energy, whose outstanding self-bonds are roughly equivalent to those of Alpha and Arch, combined?

It remains to be seen, but one key question is whether Peabody could afford to replace its self-bonds.  New research from Carbon Tracker suggests that it could.

“The Office of Surface Mining Reclamation and Enforcement (OSMRE) has acknowledged that the self-bonding program is no longer fit for purpose; regulators should act to protect the taxpaying public and demand that Peabody replace those bonds entirely,” said Rob Schuwerk, Senior Counsel for Carbon Tracker.

There are two primary “costs” to a reclamation bond—the first is a premium payment (typically equivalent to 1%, per annum, of the face value of the bond) and the second is a requirement that the company post collateral that the bond provider can call upon if the miner defaults.  Collateral requirements consider a variety of factors regarding the company and are set at a fraction of the face value of the bond.

While the collateral requirements can vary meaningfully, Carbon Tracker’s analysis suggests that, based on Peabody’s financial projections, it could likely afford to fully replace its self-bonds, particularly if it obtained terms similar to those that a high-leveraged pre-bankruptcy Peabody was able to obtain, and almost certainly if Peabody obtained more favorable terms similar to those that Cloud Peak Energy —its competitor in the Powder River Basin — has recently obtained.

The evidence suggests that Peabody will emerge from bankruptcy as a relatively more viable going concern.  Therefore, the question is what protections will be in place for taxpayers should it find itself in distress again.  Our research concludes that, as with Arch, Peabody could afford to replace its self-bonds.  Therefore, regulators should insist upon it.

“Peabody’s reorganization plans are based on forecasts they deem reasonable and likely to keep the company from returning to bankruptcy.  Those forecasts implicitly suggest that it could afford to replace its self-bonds as well.  What is good for the goose is good for the gander. Regulators should ensure that their citizens are not exposed to a second visit to bankruptcy court,” Schuwerk said.