(Corrects graphic which incorrectly said Peabody Energy’s use of self-bonds reduced its overall liabilities. Although self bonding may save a company insurance costs, it does not lower its clean-up liability.)
By Patrick Rucker
WASHINGTON, June 4 (Reuters) - Coal giant Peabody Energy has been among the harshest critics of federal energy policies, joining a court challenge to the Obama administration’s new clean air regulations and denouncing its promotion of renewable fuels.
But there is one government program that Peabody has relied on for years: the practice known as “self bonding” that gives coal companies a discount on insuring their clean-up costs in case of bankruptcy.
Now, Reuters has learned that the nation’s leading coal industry regulator is examining the program and whether companies including Peabody still qualify for the break.
The reason: slumping coal prices and declining demand have put industry balance sheets under stress, raising questions about whether Peabody, the world’s largest private coal company, and other coal firms meet the financial criteria to self bond.
“Our team will examine all aspects of bonding and self-bonding,” said Chris Holmes, a spokesman for the Office of Surface Mining Reclamation and Enforcement (OSMRE), part of the U.S. Department of the Interior.
Without government backing, coal companies would have to pay market rates to insure the billions of dollars required to restore old mines and ravaged landscapes back to health.
Peabody, which reported a $787 million loss in 2014, says it remains entitled to use the program, which was conceived under the 1977 Surface Mining Control and Reclamation Act (SMCRA). Peabody had roughly $1.38 billion in clean-up liabilities insured by self-bonding at the end of March.
“Peabody and its various operating subsidiaries meet their U.S. reclamation bonding obligations,” said Vic Svec, a company spokesman.
Those subsidiaries, however, are also under scrutiny from regulators because Peabody is relying on their balance sheets to self-bond as its own finances worsen.
“If a parent company is not fit to self bond, how can the subsidiary qualify? That is something we’re looking at now,” said an OSMRE official who was not authorized to talk about the review.
Regulators have become concerned about the use of self-bonding amid a precipitous decline in the coal industry’s financial health.
The shares of many major coal companies - including Peabody - have fallen by more than 90 percent in the last four years and industry analysts warn that near-term bankruptcies are a real danger.
Last week, coal regulators in Wyoming stripped Alpha Natural Resources, another leading coal company, of its right to self bond after determining that its finances were too weak. Alpha’s right to self bond in West Virginia was frozen after the company’s 2014 securities filings showed it did not meet crucial financial benchmarks.
Alpha says the company expects to persuade state officials that it has not lost the right to self bond.
The stubborn downturn alarms officials concerned about future clean-ups, said Greg Conrad, director of the Interstate Mining Compact Commission which speaks for coal-producing states.
“This is the first time we’ve see this: a downturn in the coal industry raising questions about self bonds,” he said. He added that uncertainty about cleanup costs should not leave “taxpayers being saddled with the bill.”
Self-bonding was conceived in 1977 as part of legislation designed to shield taxpayers from the costs of cleaning up abandoned mines. The program was uncontroversial when coal companies boasted strong balance sheets.
The country’s four largest coal companies - Peabody, Alpha, Arch Coal Inc and Cloud Peak Energy - together have about $2.7 billion in clean-up costs covered by self bonding, according to securities filings and regulators.
No mining company taps the self-bond program more extensively than St. Louis-based Peabody. The company self bonds across the mid-west and mountain states, from Indiana and Illinois to Wyoming, New Mexico, and Colorado.
Federal regulations require a mining company of Peabody’s size to have a strong credit rating or robust balance sheet to qualify for self-bonding.
Specifically, it must have a ratio of total liabilities to net worth of 2.5 times or less, and a ratio of current assets to current liabilities of 1.2 times or greater.
A Reuters review of securities filings found that Peabody failed both those tests at the end of 2014. Arch Coal, the other leading coal company to use affiliates to self bond, failed the liabilities to net worth test.
Arch Western Resources, an affiliate which Arch Coal uses to self-bond, is in compliance with state requirements, said Arch Coal spokeswoman Logan Bonacorsi.
With major credit rating firms categorizing Peabody corporate bonds as “highly speculative,” or ‘junk’, the company has found other ways to qualify for self-bonding.
In many states, Peabody does so through an affiliate, Peabody Investments Corporation.
Financial records are not publicly available for Peabody Investments Corporation, and state mining officials have denied Reuters requests to disclose them.
“Peabody requests its information remain confidential and exempt from the Freedom of Information Act,” said Chris Young of the Illinois Department of Natural Resources.
Officials in Colorado, Wyoming, Indiana and New Mexico also said the company was opposed to publicly disclosing financial data about Peabody Investments Corp.
Peabody Energy says its reliance on affiliate companies is within the rules.
“Where we are self-bonding, the applicant companies are in full compliance with the various state and federal requirements,” said Peabody spokesman Svec.
Compliance may depend on interpretation of self-bond standards, which state that a company may qualify if financial conditions are met “by the applicant or its parent corporation guarantor.”
Some lawyers say that language may have been meant to allow smaller coal companies to lean on the strength of their well-financed parent - but never the other way around.
“It’s hard to see how anyone could say that this arrangement meets either the letter or the intent of the rules,” said Mark Squillace, the former director of the University of Colorado Environmental Law Program.
Reporting By Patrick Rucker; Additional reporting by Dan Burns in New York; editing by Bruce Wallace and Stuart Grudgings