Analysis: Westmoreland bankruptcy shows county vulnerability

Westmoreland Coal Company’s filing for Chapter 11 bankruptcy last week could leave Lincoln County holding the bag for millions in unpaid taxes — making them the latest Wyoming community caught between lenders and a delinquent energy company.

According to remarks the Lincoln County treasurer made to a conservation group in May — when the company first publicly mentioned bankruptcy — Westmoreland Coal owes the county somewhere between $9 million and $11 million in ad valorem taxes levied on mineral production.

Lincoln County officials say they remain optimistic about the future of the Kemmerer Mine where far more than tax revenue is at stake for Kemmerer and Lincoln County. At least 300 area jobs hang in the balance. But Lincoln County’s situation again highlights a weakness in the laws that leave county governments vulnerable when trying to collect ad valorem taxes from busted energy companies, even as lawmakers eye reforms.  

Mineral companies pay ad valorem taxes to the county once a year, not monthly as they do with state severance taxes. The lag between mineral extraction and tax payment can be 18 months, according to reform advocates. With large coal mines, the back taxes quickly soar into the millions of dollars, giving companies a break on their monthly balance sheets but creating significant risk for the counties. Most of the tax revenues are budgeted for public schools.

What’s more, when oil, gas and coal companies go into bankruptcy, banks and creditors have a higher priority to collect money owed than do county governments.

The millions owed Lincoln County is the second example in recent history of a coal company bankruptcy threatening large sums for Wyoming’s cash-strapped counties. Alpha Coal’s 2015 bankruptcy put $19 million in unpaid taxes to Campbell County on the line. The county ultimately spent nearly $1 million on bankruptcy lawyers to secure the funds, and left $4.4 million behind in order to avoid further legal entanglement, according to Campbell County Deputy Attorney Carol Seeger.

Still, Lincoln County officials are hopeful that Westmoreland’s Kemmerer-area mine will stay operational and the company will stay current on its taxes as the bankruptcy proceeds.

“The only thing that we’ve been told is that business will go on as usual,” said Lincoln County Commission Chairman Robert King.

The county commissioners had not made any decisions on how and whether it would need to get involved in bankruptcy proceedings to pursue the ad valorem taxes it’s owed, King said. “We just don’t have a good handle on it right now,” he said.

Lincoln County Treasurer Jerry Greenfield directed WyoFile to a coal company representative for information about how the company would pay ad valorem taxes during its bankruptcy. The representative did not respond to voicemails seeking comment on Monday.

There are signs in Westmoreland’s bankruptcy filings that it intends to continue paying taxes, fees and royalties, said Shannon Anderson, a lawyer with the Powder River Basin Resource Council, which has advocated for ad valorem tax reform. But Anderson also noted the inherent uncertainty for Lincoln County as its biggest taxpayer enters the murky world of bankruptcy court. If the bankruptcy becomes contentious, Lincoln County could find itself at the back of the collections line and squared off against the interests of large financial institutions seeking to recoup debts.

“During a bankruptcy everything is up for grabs,” Anderson said.

While Lincoln County officials wait and watch, and while the coal industry continues to face ever-tightening markets, state lawmakers are eying ways to rewrite laws so counties don’t get hung out to dry. One proponent of reform, Rep. Eric Barlow (R-Gillette) called Westmoreland’s bankruptcy and the risk to county coffers “a deja vu moment” for Wyoming.

“There’s an ongoing theme here, folks,” Barlow said.

Monthly payments for state but not counties

In May, Lincoln County treasurer Jerry Greenfield told the Powder River Basin Resource Council that Westmoreland Coal pays an average of $9 million a year in ad valorem taxes, according to a report by the organization, but that if the company declared bankruptcy at that time the county could be chasing $11 million. In phone interviews on Friday and Monday, he declined to provide an exact figure, though the county assessor has published Westmoreland’s annual assessed value for each of the last three years — it is $151,492,564 for 2018.

Through July, the company’s production on the year was valued at $74.2 million, according to the Wyoming Department of Revenue’s Mineral Tax Division. Lincoln County’s ad valorem taxes and state severance taxes are roughly the same amount according to Mineral Tax Division Administrator Craig Grenvik — around 7 percent of that $74.2 million. That puts the amount owed for 2018 so far at more than $5 million.

Unlike Lincoln County, Wyoming collects its severance taxes each month and is up to date on its tax collection as the company enters bankruptcy.

Warnings from Campbell County

Officials in Lincoln County don’t have to look far for an example of the pitfalls they now face. When Alpha Coal entered bankruptcy proceedings in 2015, Campbell County hired attorneys and went to court.

“We settled it,” while losing $4.4. million, Seeger, the Campbell County attorney said. “Because there were uncertainties about whether or not we would be successful and obviously there is a cost to litigating and who knows how long it would play out.”  

Wyoming’s tax law put Campbell County in a vulnerable negotiating position from the bankruptcy’s onset, Seeger said.

If a person takes out a bank loan to buy a house and then goes bankrupt, the property taxes owed on the house would take priority to any claims from the bank trying to recoup its loan. That’s not the case with mineral companies in Wyoming, where the bank has a higher-priority lien for its loan than the county does for its tax.

“It mattered quite a bit,” Seeger said, “because of course a big reason why these mines are going into bankruptcy is because they’re carrying heavy debt.” Energy companies have also argued assets sold during bankruptcy proceeding do not carry associated tax liens. Alpha Coal attempted to do that as the company sold its mines to a new subsidiary company it had created, according to Seeger.

In 2016, Barlow and Sen. Ogden Driskill (R-Devil’s Tower) brought a bill informed by Campbell County’s woes to the Legislature. The bill attempted to shore up counties’ weak positions by making tax liens a priority and ensuring they could not be wiped out in a sale.

The Wyoming Banking Association opposed the legislation. The bankers argued changing the statute would devalue the collateral a bank has on a loan. Banks often recoup their loans by selling off the assets of a mineral company when it defaults. If the bill had passed, the property taxes would come off the top, leaving fewer assets for the banks to collect. 

“I would rather see the lenders share some responsibility on whether or not they pay their taxes,” Seeger said.

Ultimately, the bill died. Senate President Eli Bebout (R-Riverton) sided with the bankers, and did not introduce the bill to the Senate floor, though it had soared through the House with a 54-6 vote.

“It doesn’t seem like there’s a legislative will yet to change that dynamic,” Barlow said.

Reached by phone on Monday, Bebout said he maintains his position. The problem counties wind up in comes from the delay in paying taxes, which lets a company default with a large built up tax debt, he said. He prefers a legislative fix that would shorten the payment cycle for ad valorem taxes rather than one giving the counties an edge over lenders in bankruptcy proceedings.

The statute change proposed in 2016 would make lending more difficult for small oil and gas operators and the lenders that back them, he said.

“There’s gotta be a better way to do it than hurt to 95 percent to try to collect from 5 percent,” he said. “We should do all we can to collect taxes,” Bebout said. “The flip side of that is we can’t really interfere with the private sector.”

Bebout is an oil and gas operator himself, but said the legislation would not affect his own business because he does not borrow money. Responsible operators already put their ad valorem tax money in escrow accounts to await payment, he said, though he allowed it was possible those accounts could still become vulnerable to lenders in a bankruptcy proceeding.

Legislation on the table

Last year Barlow helped pass a bill that would allow counties to reimburse themselves for attorney fees accrued pursuing tax money before that money is redistributed to schools and other public fund recipients. This year, the Joint Revenue Committee has been studying ad valorem taxes in the run up to the 2018 legislative session.

In September, the committee voted to sponsor a bill that would make ad valorem tax collection a monthly event, cutting out the 18-month lag, according to a report from Wyoming Public Radio. The lawmakers chose not to bring bills dealing with lien priority, or a bill that would ensure tax debt couldn’t be erased via a bankruptcy sale, according to the report.

Though the more-frequent-payment idea has support even from skeptics like Bebout, there are concerns as well. Bebout would like to see lawmakers consider a quarterly payment schedule, particularly for smaller companies, he said.

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There have also been worries about companies’ ability to suddenly pay up their ad valorem taxes once the statute change goes into effect. The bill being considered now offers a ten-percent discount to companies that settle their tax bills at once, said House Revenue Committee Chairman Mike Madden (R-Buffalo).

Both Madden and his cochairman, Sen. Ray Peterson (R-Cowley) are leaving the Legislature at the end of this year. The two men have been proponents for ad valorem tax reform for some time, Barlow said. Their departure could hurt the legislation’s chances of success this session.

Barlow anticipates calls for statute changes could increase if county commissions and school boards feel an increasing pinch from defaulting energy companies, he said. Wyoming counties faced $55 million in delinquent mineral production taxes between 2006-2016, according to the Powder River Basin Resource Council’s report.

“We’re going to see more of these,” Barlow said of Alpha and Westmoreland’s bankruptcies. “Unfortunately the energy businesses can be a volatile business. There’s a lot of churn and a lot of turnover.”