Digging Up a Mountain of Debt
For the first time in more than 30 years, the federal government has decided to hold off on authorizing new leases for coal mining on federal land. It will undertake a review to see whether taxpayers are getting a fair deal, while assessing the program’s environmental costs.
This welcome news is long overdue. Taxpayers have already lost out on $30 billion in revenue due to the undervaluation of coal mined from land belonging to the federal government. On top of that, Washington will soon be stuck monitoring and dealing with a growing number of abandoned coal mines.
This kind of obligation is becoming a bigger headache due to the string of bankruptcies rippling through the coal industry.
Arch Coal, the second-largest U.S. coal company, just filed for bankruptcy, joining 26 other companies since 2009. Energy experts tend to blame competition from cheaper natural gas and increasingly strict environmental regulations. But there are other factors at play.
Chief among them: These companies are suffocating under a mountain of debt.
How many credit cards can you juggle? How much of your home can you borrow against? Eventually, debt catches up with companies just as it will catch up with you.
Coal companies pushed it to the limit, all the while having taxpayers as a backstop. According to McKinsey & Company, the U.S. coal industry’s total liabilities were almost $100 billion by the end of 2014. It costs the industry almost $10 billion a year to service these liabilities. With U.S. coal prices falling as production declines, it’s not hard to see why they’re going bankrupt.
Coal’s excessive debt loads have created a vicious cycle: Companies are keeping money-losing mines open because it costs more in the short term to close them. That is, until the company files for bankruptcy—leaving taxpayers holding the bag. The feds are already working to clean up some 500,000 hazardous mining sites.
Federal law requires coal companies to post a reclamation bond (that is, insurance) to ensure funds are available to clean up a mine if the company can’t. But one of the options for reclamation bonds is a “self-bond,” which the company posts itself.
It’s as bad as it sounds.
If a company is deemed to be in good financial health, it can avoid putting up collateral or cash as insurance altogether. Now, with coal companies going bankrupt, these self-bonds have become taxpayer liabilities.
Alpha Natural Resources, for example, filed for bankruptcy last August, leaving taxpayers to cover more than $670 million in self-bonded liabilities. Arch Coal has $459 million in self-bonds and has asked the bankruptcy court to stick taxpayers with most of it.
Some of the problems with self-bonding are pretty obvious: The same circumstances that leave a company unable to pay for its own cleanup costs—things like becoming unprofitable—can also make them untouchable for private insurers.
Others are less apparent. When a reclamation liability is bonded, general accounting rules allow the related liability to be carried “off balance sheet.” That is, the potential cost of cleanup doesn’t reduce shareholder equity or increase the debt-to-equity ratio of the company.
In other words, a coal company’s self-bonding financial promises don’t count against its ability to qualify for more self-bonding promises.
For example, if Peabody Energy—the largest coal company in the United States—counted its own self-bonding liabilities, it would no longer qualify. Peabody, which posted a third-quarter loss in 2015 of more than $300 million, currently has $1.4 billion in self-bonding in place.
Private rating agencies should be the ones assessing the credit-worthiness of companies. At a minimum, companies shouldn’t be able to self-bond unless they have an investment-grade bond rating, and the overall percentage of reclamation liabilities that can be self-bonded should be capped.
Better yet, just do away with self-bonding completely. The sooner the feds take this crutch away from coal companies, the better it will be for taxpayers.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.