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Statement of Reasons to require further rehabilitation bonds from the Latrobe Valley coal mines

The Hazelwood Mine Fire Inquiry Report: Victorian Government Implementation Plan, June 2016 (Government Plan) sets out a three-staged process to assess and review the rehabilitation bonds for the three Latrobe Valley coal mines, as follows:

Mine Stage 1 - Total bond by 30 June 2016 Stage 2 - Total bond by 31 December 2016 Stage 3 - Total bond by mid-2017 (P80*)

Hazelwood

$36.7 million

$73.4 million

Based on liability assessments to be prepared by an independent expert

Yallourn

$34.25 million

$68.5 million

Loy Yang

$56 million

$112 million

* P80 is the level where there is an 80% chance that the costs will be this amount or lower

The purpose of a rehabilitation bond is to cover the costs of rehabilitation should any mine operator default on its obligations to rehabilitate its mine. The Hazelwood Mine Fire Inquiry Report 2015/2016 Volume IV – Mine Rehabilitation (Inquiry report) found that there was a significant gap between the then existing rehabilitation bonds and the higher self-assessed rehabilitation liabilities.

Stage 1 and 2 rehabilitation bond assessments have been completed and bond increases have occurred for all three Latrobe Valley coal mines. The Government currently holds rehabilitation bonds as per the Stage 2 amounts above.

Stage 3 committed to undertake independent rehabilitation liability estimates for all three mines. This was undertaken by AECOM and finalised in April 2017. The rehabilitation liability assessments were conducted using the methodology specified by the Minister for Resources on 28 December 2016. It is a probabilistic methodology that takes into consideration risk and uncertainty and is comprised of a rehabilitation base cost and rehabilitation risk cost.  

The rehabilitation liabilities estimated by AECOM for the department are significantly higher than the current rehabilitation bonds.

As part of the assessment and review of the proposed Stage 3 further rehabilitation bonds, the Minister for Resources consulted the Latrobe Valley coal mines and the Latrobe City Council.

The Minister for Resources' consideration of the sufficiency of the rehabilitation bond for each Latrobe Valley coal mine included:

  • The current amounts of the rehabilitation bonds of the Latrobe Valley coal mines
  • The findings of the Hazelwood Mine Fire Inquiry Report 2015/2016 Volume IV – Mine Rehabilitation (Inquiry report)
  • The rehabilitation liabilities estimated by AECOM in 2017 for the Department of Economic Development, Jobs, Transport and Resources (the department)
  • The revised Rehabilitation Bond Policy
  • The comments provided by each of the Latrobe Valley coal mines regarding the Stage 3 proposed further rehabilitation bonds.

The rehabilitation liability assessments provided the basis for the Minister's consideration of an appropriate rehabilitation bond. The Rehabilitation Bond Policy recommended a confidence interval of P80 for the setting of the rehabilitation bond, as per below:

Mine Rehabilitation liability estimated for the department (including risk costs) P80
Hazelwood $289 million
Yallourn $148 million
Loy Yang $154 million

The revised Rehabilitation Bond Policy has considered matters which were raised by the Latrobe Valley coal mines. The Policy includes the following key principles:

  • Rehabilitation bonds will be based on the independently applied liability assessment framework applying a confidence level of P80
  • Liabilities will be independently assessed no less than every five years
  • Rehabilitation bonds will reflect the full value of the liability assessment, with provisions for discounts based on progressive milestones set out in an approved Work Plan
  • Rehabilitation bonds must be provided in the form of a bank guarantee that meets conditions approved by the Minister for Resources
  • The Government will also consider rehabilitation bonds in a hybrid form, where the bank guarantee is complemented by a portion of the bond in the form of a parent company guarantee.  This approach would only be considered where the parent company guarantee meets stipulated conditions.

The Latrobe Valley coal mines provided the following comments to the Minister for Resources on the proposed Stage 3 rehabilitation bonds:

  • In general supported the rationale and use of the P80 confidence level and supported the rehabilitation liability estimate methodology
  • In some cases considered the 20 percent limitation for a parent company guarantee to be unnecessary and the credit rating required to be able to use a parent company guarantee is unnecessarily high

The Department notes that it is a community and Government expectation that the State is fully assured against the full costs of rehabilitating the Latrobe Valley mines. Accepting a parent company guarantee for greater than 20 per cent of the bond would result in an unacceptable transfer of risk from the mine to the State. The rehabilitation liability assessments show that the rehabilitation liabilities are significantly higher than the rehabilitation bonds currently held.

Considering all of the above information, the Minister for Resources determined that each of the rehabilitation bonds of the Latrobe Valley coal mines is insufficient and further rehabilitation bonds from each of the Latrobe Valley coal mines are required (aligned with Stage 3 in the Government Plan):

Mine Current bond amount Further bond amount required Total revised bond (P80)
Hazelwood $73.4 million $215.6 million $289 million
Yallourn $68.5 million $79.5 million $148 million
Loy Yang $112 million $42 million $154 million