ELPC's Learner talks self-bonding liabilities following Peabody bankruptcy

With Peabody Energy Corp. filing for bankruptcy earlier this month, how are states and regulators working to recover the mine reclamation costs associated with self-bonding by the company? During today's OnPoint, Howard Learner, president of the Environmental Law and Policy Center, discusses next steps for state and federal regulators as Peabody's bankruptcy proceedings progress.


Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. With me today is Howard Learner, president of the Environmental Law and Policy Center. Howard, thank you so much for coming back on the show. It's nice to see you.

Howard Learner: Good to join you this morning.

Monica Trauzzi: Howard, Peabody Energy recently filed for bankruptcy, raising questions about the liabilities associated with self-bonding. Explain what self-bonding is and how the company used it.

Howard Learner: Well, King Coal is increasingly in bankruptcy court, and it's because management made some bad decisions. Peabody bet that coal demand would go up and that coal prices would go up, and that's not what's happened. Coal is getting outcompeted by natural gas. Energy efficiency is holding down demand and saving businesses and people money. And wind power is coming into the market. When Peabody's stock price was in the $70s a few years ago, Peabody said to state regulars basically, "Trust us. Allow us to self-bond, rather than buy surety bonds or set aside trust funds to do the mine reclamation and environmental cleanup that we're required to do under law." Peabody said, "We make a promise to pay off our balance sheet." Now when Peabody was a billion-dollar company and its stock price was in the $70s, you can make an economic case. Today Peabody's in bankruptcy. Peabody promised to pay about $1.4 billion in Illinois, Indiana, Colorado, New Mexico and Wyoming for its mine reclamation and environmental cleanup activities, and now Peabody's in a bankruptcy court. The public has an interest in making sure that taxpayers aren't left holding the bag for Peabody's environmental responsibilities.

Monica Trauzzi: So that then raises the question, because Peabody has a large footprint in the Midwest, where you work --

Howard Learner: Peabody does.

Monica Trauzzi: Particularly in Illinois and Indiana, how does the bankruptcy filing affect a state's ability to pursue that money, and what happens to mine reclamation costs now?

Howard Learner: Right. Well, first of all, the governors of those states and their departments of natural resources are looking at it and saying they should've stepped up a while ago, and we asked them to do that. They will presumably be in the bankruptcy court along with the environmental and conservation groups saying, "This responsibility -- the $260 million for Illinois and Indiana mine reclamation and environmental cleanup costs -- needs to be taken care of." It's a requirement of federal law. It's not waivable. And that ought to come, if you will, off the top in order for Peabody and its mines to continue operating, before we're dealing with making profitable somebody who speculated in distressed debt three months ago, buying it at 32 cents on a dollar and looking to make a profit.

Monica Trauzzi: And Peabody has signaled it intends to continue to work with regulators on its mine reclamation obligations. I mean, do you -- are you hopeful that those costs will be recovered?

Howard Learner: We're hopeful, and they need to be. Peabody has said they'll work with regulators, but look what's happened. Peabody has worked with regulators for years, but we now have the self-bonding problem. It's time to look at Peabody quite differently. Peabody is in bankruptcy. Peabody's not a healthy company. It's not a company that has a large, billion-dollar asset base. It should no longer be allowed to self-bond, and it should do what most other companies do. That is, post surety bonds or otherwise have independent trust funds so that there's an assurance that their environmental cleanup responsibilities are taken care of. But all this occurs in the transformation of the energy market. Peabody's management made a bet that coal demand would go up in the United States and China and that coal prices would go up. Well, as we know, shale gas and natural gas is outcompeting coal, energy efficiency is holding down demand, and look what happened a couple weeks ago. Utilities in Michigan and Indiana closed down 2,000 megawatts of coal plants, while MidAmerican Energy in Iowa announced it's going to build 2,000 new megawatts of wind power. So Peabody's going to have to do business in a different way as is the rest of the coal industry.

Monica Trauzzi: So ultimately do you believe that Peabody misread the market or misled investors when it gave its growth projections?

Howard Learner: You know, I'll leave to the securities attorneys to discern whether in, you know, hundreds of pages of SEC filings Peabody told the truth but it was sort of buried away, fudged the truth, or left out the truth. I mean, there'll probably be some litigation on that; we're not a party to that. Clearly Peabody's management just made the wrong bet, and they made the wrong bet as it was clear that the market was changing. Peabody's management seemed to believe that natural gas prices were going to keep going up and they haven't, and that demand for electricity would keep going up.

So here's what needs to happen going forward. First of all, we need to make sure that when it comes to the mines in the Midwest and the Western states that there is real money put behind the mine reclamation and the environmental cleanup responsibilities. No more self-bonding. And in the bankruptcy reorganization proceedings, that environmental responsibility has to be taken care of. Secondly, the Department of Interior and our federal officials need to step in and say that under SMCRA the states have been allowed to do the self-bonding, but we've learned the lesson now. Let's not repeat this again. The federal agency should come in and tell the states, "That doesn't work anymore. No more self-bonding." And finally we need to make sure that coal miners and people in coal communities are transitioned as the world is changing. Those are some of the steps we need to do going forward.

Monica Trauzzi: There are lots of moving parts there and --

Howard Learner: Yeah, there still are.

Monica Trauzzi: Certainly a lot of debating and controversy. But I thank you for coming on the show.

Howard Learner: You're welcome. Glad to join you.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

[End of Audio]



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