Coal Bankruptcies Raise Questions over Self-Bonding in the States

Since August 2015, three major coal companies--Alpha Natural Resources, Arch Coal and, most recently, Peabody Energy--have filed for Chapter 11 bankruptcy. In addition to raising questions about potential layoffs, losses in benefits for employees, mine closures and reductions in state tax revenue, these bankruptcies have left state regulators and the public questioning how these bankruptcies will affect the companies’ mine reclamation obligations.

Under the Surface Mining Control and Reclamation Act of 1977, operators are required to reclaim the land affected by their mining operations. To ensure this reclamation is completed, the operator must obtain bonding to provide financial assurance that if the permittee abandons the site or otherwise fails to reclaim the land, there is adequate funding for the regulatory authority to complete the reclamation.

However, SMCRA authorizes states to create programs that allow companies to self-bond, or to act as their own surety by using their own finances as collateral. Of concern amidst the recent bankruptcies is that some states allowed self-bonding for these same mine operators that are now undergoing reorganization, raising questions as to the true adequacy of these bonding arrangements.

A Chapter 11 bankruptcy typically involves the restructuring of the petitioning company. The debtor proposes a plan to the court that will allow the business to continue and will provide for payment to creditors. Creditors in a bankruptcy case are paid according to a system of priority, with creditors having claims that are secured by the company’s assets generally receiving first priority.

This raises questions as to how mine reclamation would occur if a bankruptcy happened. As the U.S. Office of Surface Mining Reclamation and Enforcement recognized in promulgating its self-bonding rules in 1983:

“In the event of bankruptcy, the regulatory authority would probably be in the position of an unsecured creditor. Typically, the regulatory authority would have to go through bankruptcy proceedings to secure payment on the indemnity agreement. Bankruptcy proceedings are often lengthy and involved, and the regulatory authority could have to settle for less than 100% payment on the indemnity agreement. The regulatory authority may be left with insufficient funds to complete the reclamation plan and may have to obtain funds elsewhere to do so.”

In Wyoming, Arch has approximately $486 million in self-bonding obligations to the state, while Alpha has $411 million. While the Wyoming Department of Environmental Quality, or DEQ, recently reached an agreement with both companies in bankruptcy court, this deal gives the department priority status in front of other creditors for only 15 percent of the actual bond amount and allows the companies to complete the bankruptcy process before securing third-party bonds.

The Powder River Basin Resource Council has filed a lawsuit challenging both agreements as unlawful and OSM has expressed concerns that the agreements violate Wyoming’s coal mining laws. OSM expressed similar concerns to the coal mining regulatory authorities in Wyoming, as well as in Colorado and New Mexico, over potential violations of bonding requirements related to the Peabody bankruptcy. While Wyoming believes that the companies are in compliance with the law, the Wyoming DEQ admitted that the significant and swift declines in financial solvency that these companies are experiencing highlights “certain systemic problems with self-bonding.”

Thus, as the coal industry continues to experience hardship, self-bonding will be an issue for state regulatory agencies. According to a survey conducted by the Interstate Mining Compact Commission in 2014, all coal producing states allow companies to self-bond except five – Kansas, Kentucky, Maryland, Montana and Virginia. Virginia’s regulations allowed for self-bonding until June 30, 2014. Ohio is also considering removing self-bonding from its regulations.

Nationwide, more than $3.6 billion in self-bonding obligations exist in nine states. Peabody, Arch and Alpha are responsible for about $2.4 billion, or approximately two-thirds of this amount, putting taxpayers and the public at risk should these companies fail to emerge from bankruptcy or fail to reclaim their mining operations as required. At this point, the bankruptcies have not impacted the companies’ mine reclamation efforts. However, state regulatory authorities will continue to deal with self-bonding adequacy as these bankruptcies unfold and as coal’s role in the nation’s energy climate continues to change.