No Collateral Needed for Cleanup in Some States Despite Mine Bankruptcies

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By Tripp Baltz, Stephen Joyce and Stephen Lee

Several states are still willing to let mines operate without putting up collateral for land cleanup even though three of the country’s biggest coal companies only recently emerged from bankruptcy.

Their plans could get a boost from the Trump administration, which has repeatedly shown a willingness to appease the ailing coal sector. And financial analysts predict that at least one major company will return to the controversial practice of self-bonding within 18 months.

Self-bonding is a financial mechanism that lets coal companies mine without setting aside money to reclaim the land once they’re finished mining. Instead, the companies are allowed to move forward by demonstrating that they have enough money in their own coffers to pay for reclamation.

But that approach has broken down, as three of the sector’s biggest players—Alpha Natural Resources Holdings Inc., Arch Coal Inc. and Peabody Energy Corp.—have filed for bankruptcy. Each of the companies agreed to cut back its use of self-bonding in its bankruptcy agreement.

Many States Still Saying Yes

“Hopefully, what states are learning from Peabody and from the earlier coal company bankruptcies involving self-funding is that it’s not wise to allow self-funding for reclamation obligations,” Margrethe Kearney, staff attorney at the Environmental Law & Policy Center in Grand Rapids, Mich., told Bloomberg BNA. “It’s an inherently volatile market. Things change more quickly than can be responded to by state regulators.”

Yet across the nation, state regulators said they don’t intend to rule out self-bonding, even though federal law allows them to.

Wyoming, by far the biggest coal-producing state in the nation, “still has an appetite for self-bonding,” Kyle Wendtland, administrator of the Wyoming Department of Environmental Quality’s Land Quality Division, told Bloomberg BNA.

“We don’t want to limit our ability to have companies use different financial instruments,” Wendtland said. “We don’t want to say arbitrarily that one instrument is better over another. Each one of these situations is different.”

No Plans to Change in Wyoming, Pennsylvania

The Wyoming DEQ has come under criticism from environmental groups for being overly accommodating of the coal industry. Responding to those critiques, Wendtland said the department has “made decisions based on rules and regulations, and has not strayed from that.”

In Pennsylvania, another state that allows self-bonding, the state Department of Environmental Protection “does not have any plans to change how our bonding program works,” said Neil Shader, the DEP’s press secretary.

Shader added that the DEP “is constantly reassessing bonds at coal mines to ensure that adequate financial assurance is in place.” For example, he said the department recently reviewed bituminous surface mines to evaluate the adequacy of bonds related to the backfilling of mine pits.

Arkansas, Indiana to Stay the Course

Arkansas, too, “will continue to use the current criteria for self-bonding of surface coal mining operations until the federal regulations are changed,” Kelly Robinson, a spokeswoman for the state Department of Environmental Quality, told Bloomberg BNA.

And in Indiana, state regulators said they’re “happy with the outcome of the self-bonding issue and the current status of the mining permits, as they are all secured by either surety bonds or the bond pool,” Corey Elliot, a spokesman for state Attorney General Curtis Hill, told Bloomberg BNA in an email.

“Self-bonding is not a policy. It’s law—both state and federal,” Phil Bloom, a spokesman for the Indiana Department of Natural Resources, told Bloomberg BNA. Any change would have to come from one of those legislative bodies, Bloom said.

Officials in West Virginia, the second-biggest coal state in the U.S., didn’t respond to emailed requests for comment. The state’s new governor, Jim Justice, is himself a coal baron, however, and few industry watchers expect the state to toughen its stance.

Iffy Financials Raise Concerns

Even more worrisome to environmentalists is the strong likelihood that at least one of the Big Three coal companies will again find the prospect of self-bonding too tantalizing to resist.

As the coal market tightens—driven by decreasing demand both at home and abroad, which will lead to falling coal prices—the competition among Alpha, Arch and Peabody will intensify, possibly forcing all three to return to the far-more permissive terms that self-bonding provides, said Sheldon Stone, a financial analyst who specializes in the coal market at Amherst Partners.

The ability of the Big Three to create cash flow without eventually resorting to self-bonding “is not great,” Stone told Bloomberg BNA.

He further predicted that one of the three coal giants would return to self-bonding within 18 months. Alpha, in Stone’s view, is the likeliest candidate to move first.

Too Tantalizing to Resist?

“They’re undercapitalized and a majority of their holdings are in the eastern U.S., as opposed to the Powder River Basin,” Stone said. “And the coal that is probably going to add to the longevity of any coal company is the coal coming out of the Powder River Basin.”Peabody’s financial outlook, meanwhile, is threatened by the possible closure of the Navajo Generating Station coal-fired plant in Arizona, a major Peabody customer. The current lease on the power plant expires at the end of 2019, although it could remain open if another leaseholder steps in.

Although the three companies agreed to cut back on self-bonding, none has sworn off it altogether.

Last July, Alpha said it would stop self-bonding at its most productive mines, including ones in Wyoming, Pennsylvania, West Virginia and Virginia, though it was allowed to continue self-bonding in West Virginia up to $140 million. Three months later, Alpha agreed to drop self-bonding in the Powder River Basin. Earlier this month, Peabody said it would seek outside bonds for future coal mine reclamation, but left open the possibility of self-bonding in the future.

Trump Effect Expected

At the federal level, President Donald Trump is likely to cancel a rulemaking begun under the Obama administration that would tighten the self-bonding rules (RIN:1029-AC73).

The Office of Surface Mining Reclamation and Enforcement, which administers the self-bonding program, declined to comment.

At least one state, however, said it is moving decisively away from self-bonding.

“I can’t speak for other states, but we’re trending away from self-bonding,” Ginny Brannon, director of the Division of Reclamation, Mining and Safety at the Colorado Department of Natural Resources, told Bloomberg BNA. “We do not have it for any of our coal companies.”

Under federal law, the department has the discretion to allow or disallow self-bonding, Brannon said. “The law says we ‘may’ accept self-bonding, as opposed to ‘shall,’” she said. The state’s recent practice has been to “shy away from it,” she said.

“Self-bonding is probably your least secure form of financial assurance, as opposed to a third-party guarantor,” Brannon said.

Colorado Turns the Page

Just two days before filing for bankruptcy in April 2016, Peabody provided the state with $26 million in corporate securities for its operations. Peabody operates Twentymile Mine in Routt County, Colo., one of the largest underground mines in the U.S., and four smaller mines.

At the time, Brannon told Bloomberg BNA that the corporate sureties “provide protection to Colorado” and assurance that reclamation will be completed at the five facilities. Her division returned the self-bonds to Peabody Investments Corp., she said.

“They sent us the third-party sureties on a Monday in April, and two days later they filed Chapter 11,” she said. “Now they are 100 percent not self-bonded.”Tri-State Generation & Transmission Association, a utility that conducts some coal mining operations, is the only such company with self-bonds in Colorado, according to Brannon.

But the division’s position with Tri-State is different than with coal mining companies. “You don’t often see utilities going under and people’s lights going out,” Brannon said. “They do have other partners.”

Measured Steps

Other states also stressed to Bloomberg BNA the precautions they’ve been taking with self-bonding. For example, New Mexico required Peabody to reduce its self-bonding before the company filed for bankruptcy, state Energy, Minerals and Natural Resources Department spokeswoman Beth Wojahn said.

The state took that action because of its belief that “a diverse portfolio gives more flexibility in case financial assurance is needed to be called on,” Wojahn told Bloomberg BNA.

Peabody met specific tests to reduce risk, and before, during and after its bankruptcy, the company provided New Mexico with financial assurances in case reclamation was required to be performed by the state, according to Wojahn.

Even in Wyoming, Peabody has gone to 100 percent corporate sureties for its mining operations, leaving the the state “in the best position we can be,” said Shannon Anderson, staff attorney for the Powder River Basin Resource Council.

Wendtland of the Wyoming DEQ said in 2017 and 2018, the department will be modernizing its rules governing self-bonding and other land quality programs, which have not been updated since 1980. The rules will “reflect the financial markets of today” and may provide more stringent requirements for self-bonding than the state has at present.

Trucks as Collateral?

Still, the question of whether the era of self-bonding is ending in the states “is not as easy as one would think,” Anderson said. While Alpha, Arch and Peabody have all committed to commercial bonding as a part of their emerging from bankruptcy, other companies are still using self-bonding, she said.

For example, Contura Energy, which took over Alpha’s mines in Wyoming after the latter company emerged from bankruptcy in July 2016, uses a financial instrument called a collateralized self-bond, which means its self bonding is backed up by equipment, machinery and other property in lieu of cash, according to Anderson.

The environmental group has filed an objection with the state Department of Environmental Quality over the collaterized bonds, which represents roughly 40 percent of the company’s financial assurances, Anderson said.

“We have a lot of concerns about that, given the collateral for these bonds is a bunch of mining trucks,” she said. “If you are a company that is having financial difficulty, the chances are your mining equipment is not going to be worth very much if it has to be liquidated.

“The state could be left owning a bunch of Caterpillars,” Anderson continued. “You can’t dump that kind of equipment on the market and expect to get very much value. Every mining company already has its own equipment, and some of it is decades old. There would be very little interest in companies buying that equipment unless they’re getting it for a really good deal, which means the state is not going to get its value.”

Mining Sector Stands Firm

Not surprisingly, the industry continues to defend the self-bonding mechanism.

“I think offering options is good for coal operators,” Phillip Gonet, Illinois Coal Association president, told Bloomberg BNA.

“Self-bond has been available as a guarantee for many years, and we are not aware of any incident of forfeiture or a third party such as a regulatory agency having to reclaim land that was self-bonded,” Bruce Stevens, Indiana Coal Council president, told Bloomberg BNA in an email.

But Kearney, the Environmental Law & Policy Center attorney, said in the wake of the Peabody bankruptcy, her organization is discussing with Midwestern state government officials whether self-bonding continues to be an appropriate financing mechanism for reclamation efforts.

“I’m hoping these cases cause states to reconsider whether they allow self-bonding going forward,” Kearney said.

To contact the reporters on this story: Tripp Baltz in Denver at abaltz@bna.com; Stephen Joyce in Chicago at sjoyce@bna.com; Stephen Lee in Washington at stephenlee@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com

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