State regulators looking more closely at $1 billion of future mining restoration obligations at Energy Future Holdings

NPR’s State Impact reported this morning that Energy Future Holdings (formerly TXU) has “self-bonded” approximately $1 billion for future mining restoration in Texas in lieu of real cash bonds. Click here to hear the entire story.

In the transcript of the story it discusses the main concerns of Public Citizen and Sierra Club who have been investigating this issue for the past six months.

At the heart of the two groups’ (Public Citizen and Sierra Club) concern is what’s called “self-bonding.” Under federal law, mining companies must post bonds as a form of insurance to cover the cost of reclamation in case the companies run into financial trouble. Instead of using an outside company to provide the bonds, mining operators in Texas are allowed to self-bond. Some coal states don’t accept self-bonding.

Texas has approved Luminant Mining’s self-bonding. The self-bond’s “third party guarantor” is a sister company, Luminant Generation. It’s the power plant company that burns the coal from Luminant Mining.

The environmentalists say they’re worried that those power plant assets might also be claimed by other creditors, jeopardizing the funds Texas might recover to pay for reclamation.

Luminant’s parent company, Energy Future Holdings, has explained in annual reports to the United States Securities and Exchange Commission that the company faces creditworthiness requirements for different regulators in Texas, among them the Railroad Commission. For years,  the reports said that “we believe we will have adequate liquidity to satisfy such requirements” or “we believe we would have adequate liquidity capacity and/or financing capacity to satisfy such requirements.”

But then, in a 2012 report, that line disappeared.

“It was the smoking gun,” said Public Citizen’s Smitty Smith.

On page 100 of EFH’s 2008 10K filing, page 100 of EFH’s 2009 10K filing, page 98 of EFH’s 2010 10K filing, and page 93 of EFH’s 2011 10K filing, the following appears

The RRC has rules in place to assure that parties can meet their mining reclamation obligations, including through self-bonding when appropriate. If Luminant Generation Company LLC (a subsidiary of TCEH) does not continue to meet the self-bonding requirements as applied by the RRC, TCEH may be required to post cash, letter of credit or other tangible assets as collateral support in an amount currently estimated to be approximately $xxx (from a low of $600 million in 2008 to a high of 990 million in 2011) million. The actual amount (if required) could vary depending upon numerous factors, including the amount of Luminant Generation Company LLC’s self-bond accepted by the RRC and the level of mining reclamation obligations. . . .

In the event that any or all of the additional collateral requirements discussed above are triggered, we believe we would have adequate liquidity and/or financing capacity to satisfy such requirements.

On page 85 of EFH’s 2012 10K filing, only

The RRC has rules in place to assure that parties can meet their mining reclamation obligations, including through self-bonding when appropriate. If Luminant Generation Company LLC (a subsidiary of TCEH) does not continue to meet the self-bonding requirements as applied by the RRC, TCEH may be required to post cash, letter of credit or other tangible assets as collateral support in an amount currently estimated to be approximately $850 million to $1.1 billion. The actual amount (if required) could vary depending upon numerous factors, including the amount of Luminant Generation Company LLC’s self-bond accepted by the RRC and the level of mining reclamation obligations. . . .

appears, the followup statement, found in the previous 4 years 10K filings is conspicuously missing.

In the event that any or all of the additional collateral requirements discussed above are triggered, we believe we would have adequate liquidity and/or financing capacity to satisfy such requirements.

NPR’s story goes on to say “a media liaison for Energy Future Holdings, Allan Koenig, would not comment specifically about the line that disappeared.”  But that was followed up by an email from the company saying, “We fully satisfy the bonding requirements of the Railroad Commission of Texas for our coal mines, which means that our reclamation obligations are guaranteed.”

Well, yes they do satisfy the bonding requirements allowed by the RRC and their obligations are guaranteed by Luminant Generation, but it is all the same company and still at risk if the assets of the company, should a reorganization occur, be found insufficient to meet the bond amount currently estimated at $850 million to $1.1 billion.  EFH is telling the Railroad Commission ‘Trust us, we’re good for it’ even though the company debt is rated as junk status by the financial ratings agencies like Standard and Poor’s. What EFH is doing is like a family getting a second mortgage on a house and losing their jobs.  How can Texas regulators have any confidence that the assets of Luminant Generation will be protected from the bankruptcy process and available to cover future mining reclamation costs?

In a memo from the Railroad Commission (RRC) to Luminant Mining Company regarding Docket No C12-0006-SC-46-E, on the Oak Hill Mine application for replacement bond, it appears Luminant reassured the RRC that in their 2012 3rd quarter filing EFH’s liquidity amount (at that time) was $3.8B and that amount would be sufficient to cover all obligations including Luminant Minings reclamation needs.  However, we don’t know that this will still be the case 3 to 12 months from now should EFH file for bankruptcy.

We believe the RRC and Texas would be best served by requiring a more secure form of bonding for reclamation needs.