SNL Financial, Wednesday, March 09, 2016 4:15 PM ET
By Taylor Kuykendall
Concerns about coal companies' ability to self-bond their environmental reclamation obligations are spreading with the latest battleground being staged by groups in New Mexico.
A news release from the group New Energy Economy said it is warning the state of "risky" coal mine cleanup bonds. The groups are specifically targeting
Bowie Resource Partners LP over self-bonding on mines the company is in the process of purchasing from Peabody Energy Corp.
"Given the frequency of bankruptcy of coal companies it would be crazy to allow this one to self-bond," said Mariel Nanasi, executive director of New Energy Economy. "It is we, the taxpayers of New Mexico, who will suffer when and if Bowie goes bankrupt, because we will be left holding the bag for clean-up costs. Bankruptcies have become a likelihood rather than an obscure possibility."
The groups point to settlements between companies and states over their environmental liabilities in their critique of self-bonding that have resulted in lower bonding obligations. The groups, a collection of environmental and other types of organizations, worry that Bowie may seek a "hybrid" bond that includes self-bonding alongside other financial assurances.
In a letter to New Mexico regulators, the groups wrote that they do not have access to Bowie's application for self-bonding and, therefore, cannot assess the risk to taxpayers and the state treasury. The letter also says extra scrutiny should be used because Bowie and Peabody have indicated that Bowie is in need of a third-party investor to complete the acquisition of Peabody mines. The groups argue that if the company needs a third-party financier for the acquisition, it should not be allowed to guarantee its own reclamation obligations without surety bonds.
Peabody recently issued securities filings stating that its auditors may be forced to issue a going concern paragraph in an upcoming filing if it is unable to finish a transaction with Bowie.
Peabody declined to comment beyond its recent securities filings. Officials with Bowie and New Mexico's environmental regulatory department did not immediately respond to a request for comment.
The news comes as Democratic Sens. Maria Cantwell of Washington and Dick Durbin of Illinois have made a public call for the U.S. Government Accountability Office to investigate the process of self-bonding. According to a joint news release issued March 8, companies operating coal mines under federal mining regulations have posted an aggregate of $3.6 billion of self-bonds across multiple states and are now at risk of bankruptcy.
"Once market conditions do decline, self-bonding has the perverse outcome of discouraging a shift to a stronger form of financial assurance because the shift would occur at the weakest financial moment for the firm," a letter requesting a GAO investigation states. "This precise dynamic is occurring today with coal mining companies."
The letter said coal companies are often lacking in diversified lines of business that would otherwise dilute the risk of a market downturn. It also warned that federal and state regulators are being asked to step out of their core competency when required to provide the financial analysis necessary for determining eligibility to self-bond.