Alpha deal could spell end of coal self-bonding

OREANDA-NEWS. July 13, 2016. Alpha Natural Resource's approved Chapter 11 exit plan may be the death knell for controversial state self-bonding programs for coal mine reclamation.

A federal bankruptcy court on 7 July approved Alpha's plan only after the coal producer struck deals with state and federal regulators to resolve its mine cleanup responsibilities and the US Department of Justice (DOJ) lifted its objection. These settlements included the provision that Contura Energy — the group of first-tier lenders that will purchase the majority of Alpha's assets — replace self-bonds for its West Virginia and Wyoming mines with third-party assurances such as commercial surety bonds or letters of credit.

Self-bonding programs allow coal producers to leave a portion of their reclamation obligations uninsured if they meet certain financial criteria. Regulators, lawmakers, and especially environmental groups have been critical of the agreements, arguing that struggling producers will not be able to pay for cleanup and that taxpayers will be stuck with the bill.

The Alpha settlement is "a very positive step forward in securing actual cleanup guarantees, rather than worthless IOUs that Alpha was previously allowed to rely on," WildEarth Guardians climate and energy program director Jeremy Nichols said. "Our hope is that they show similar backbone in engaging Arch and Peabody, which both have far larger self-bonding obligations."

Sierra Club attorney Peter Morgan said he is hopeful that DOJ will use similar negotiating tactics with other coal companies.

Before deciding to lift the objection, DOJ "played a very strong card" by saying that "it was not going to allow the federal cola leases to be transferred until Alpha made sure that it was going to meet its reclamation obligations," Morgan said. "I fully expect and hope that the government is going to use that leverage in the Arch and Peabody cases."

DOJ said that the Alpha deal should "not be viewed as precedential in any way" given the "unique financial circumstances" of each bankruptcy proceeding.

"The facts of each case differ and will be addressed accordingly," the department said today.

St. Louis-based Arch said it is "committed to having the necessary financial assurance" to meet its reclamation liabilities, and that it expects "to have better clarity on the form these assurances will take in the near future."

It is up to individual states to make broader changes to self-bonding programs, according to the Office of Surface Mining, Reclamation and Enforcement (OSMRE), a division in the Interior Department. That agency could only change its federal oversight of state programs after a lengthy rulemaking process, or if US Congress revised the Surface Mining Control and Reclamation Act. OSMRE is taking public comments on a petition from WildEarth Guardians to initiate the rulemaking process, but that would take years.

States, on the other hand, can make changes to their programs "fairly quickly," OSMRE said, which may be the way things are going. "Most people in the regulatory community agree that self-bonding at this point in time is not a very good idea," the agency told Argus.

In West Virginia, Alpha is the only coal operator that has self-bonded liabilities. The company will have to replace self-bonds within 30-180 days of the bankruptcy plan's effective dates, except for "reclamation-only" sites where no coal is being mined — there, self-bonds will be replaced over 10 years, according to the West Virginia Department of Environment Protection.

And "with the downturn in the coal market right now" the state "is not permitting any other companies to self-bond here," the department said today. The Wyoming Department of Environmental Quality did not return a request for comment.

Despite the overall win on self-bonding, environmental groups are worried that Alpha may still be able to skirt some of its responsibilities.

Regulatory agencies "were negotiating with a gun to their heads" because of the enormity of these companies' self-bonded liabilities across the US, and were simply trying to secure an outcome that would be better than a Chapter 7 liquidation, the Sierra Club's Morgan said.

Alpha will continue to operate as a private company focused on reclamation. But the reorganized company will be left with a "toxic mix of high-liability, low-profitability mines," leaving it in "an extremely precarious financial position," according to Morgan.

Nichols from WildEarth Guardians shares these concerns.

"The future of the coal industry is bleak and as much as bonds provide some measure of certainty that reclamation will be completed, there is no complete certainty," Nichols said. "Interior not only needs to ensure adequate bonding, but also start enforcing deadlines around reclamation."

Right now states are focused on recouping whatever they can from bankrupt coal companies, but in the future they will likely try to avoid making the same mistake twice.