NEW YORK--(BUSINESS WIRE)--Tighter self-bonding requirements for distressed coal entities would reduce liquidity and could hasten restructuring, according to Fitch Ratings. We anticipate further restructuring in the coal industry given unsustainably high debt balances over the near term.
Notice by the Wyoming Department of Environmental Quality's Land Quality Division (LQD) that the Alpha Natural Resources (ANR) and its operating affiliate, Alpha Coal West, Inc. no longer qualified for the self-bonding program and that the companies had 90 days to provide substitute bonding could be another blow to distressed coal if not rescinded.
Self-bonding allows an operator or intermediate holding company to provide a promise to pay for reclamation costs up to around 25% of tangible net worth roughly based on ratios of total liabilities to net worth of 2.5 or less and current assets to current liabilities of 1.2 or more. ANR, Arch Coal Inc., and Peabody Energy Corp. have subsidiaries with substantial operations in Wyoming under the self-bonding program despite high financial leverage at the parent level given leveraged acquisitions of metallurgical coal assets at the top of the market. Self-bonding is not available in every U.S. state.
Upstream guarantees of parent debt do not factor into the calculation. Reclamation liabilities would survive with the assets in the event of a reorganization and would likely be classified as an administrative claim.
In states where self-bonding is not available, surety bonds, letters of credit, or other liquid collateral is required. ANR estimates self-bonding by coal companies currently operating in Wyoming to be $2 billion, an amount that could be replaced by other bonding within the 90 days given the depth of the market although it would further reduce liquidity for coal companies whose earnings and cash flows have been hit by weak metallurgical coal prices and high interest expenses over the past three years. Liquidity would get even tighter should other mining districts follow suit.
The Surface Mining Control and Reclamation Act of 1977 established requirements to provide for the cost to reclaim mining operations. In particular, to obtain permits, a bond (including in some cases a self-bond) must be posted to cover future reclamation expenses. Bonding is only released once the permitting office is satisfied that no further reclamation is required and this is generally years after the area has been filled, graded, and re-vegitated.
Reclamation at surface mines is generally more costly but takes place in an ongoing manner as miners backfill, grade, and seed depleted areas while preparing new areas for mining. Asset retirement obligations on balance sheets reflect estimates of future costs to reclaim each mine on a discounted basis over the mine life and bonding requirements in current dollars can be more than twice this amount depending on operations.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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