Preventing disaster

Associated Press

CHEYENNE, Wyo.

As more coal companies file for bankruptcy, it’s increasingly likely that taxpayers will be stuck with the very high costs of preventing abandoned mines from becoming environmental disasters.

The question is not if, but when, where and how many more coal mines will close as the industry declines, analysts say. Many mines already operate at a loss, and there’s not enough money in the fuel anymore to enable their owners to keep their promises to clean up the land.

“It’s sort of a situation where nobody, really, is going to end up looking good,” said James Stevenson, director of North American coal for analyst firm IHS. “The states have, I think, a significant risk – the federal government does as well.”

This reclamation crisis looms because of a practice called self-bonding, which allows coal companies to promise to eventually cover the cost of cleaning up abandoned mines without first setting aside the necessary money.

Because of self-bonding, billions of dollars in legally required reclamation funding exist only as IOUs, without dedicated assets or bonds backed by third-party investors.

Nationwide, self-bonding in the coal-mining industry tops $3.3 billion. That includes $2.3 billion in IOUs that the three biggest bankrupt coal companies – Alpha Natural Resources, Arch Coal and Peabody – owe in five states, according to an Associated Press analysis of bonding obligations in the top 16 coal-mining states.

The dilemma for state and federal regulators got even bleaker when the nation’s largest coal producer, Peabody, filed for Chapter 11 protection from its creditors in April. Peabody alone holds more than $1.1 billion in self-bonding obligations for mines in Illinois, Indiana, New Mexico and Wyoming, where its North Antelope Rochelle mine produces almost 12 percent of the nation’s coal.

With several major U.S. coal producers filing for Chapter 11 over the past two years, the issue will play an important part in shaping coal’s future. Mines in Appalachia are particularly likely to close as the industry consolidates around a smaller number of still-profitable mines out West, Stevenson said.

In Richmond, Va., Judge Kevin R. Huennekens is considering Alpha’s proposal to transfer its “crown jewel” mines in Wyoming to creditors and close its unprofitable mines in West Virginia. Alpha’s self-bonding obligations total $410 million in Wyoming and $243 million in West Virginia.

The company’s plan would leave a reorganized Alpha without a reliable profit stream to address reclamation in West Virginia, the state’s attorneys told the judge in April.

An Alpha spokesman didn’t return a request to comment, while spokespeople for Arch and Peabody emphasized their companies’ commitment to reclamation that occurs as part of day-to-day coal-mining operations. Peabody is in talks with states about freeing up as much as $200 million to cover the company’s self-bonding obligations during reorganization, spokeswoman Beth Sutton said.

Many American utilities will need coal to generate power for decades to come, but low prices for natural gas and increasingly cheaper renewable energy have driven down coal’s share of the nation’s electricity portfolio from half to about a third in the past decade. Coal’s prospects are so grim that major lenders, including JPMorgan Chase, Bank of America, Citigroup, Morgan Stanley and Wells Fargo no longer plan to finance new coal mines or coal-fired power plants.

“Lender fatigue is probably at an all-time high,” said Monica Bonar, senior director at Fitch Ratings.

The 1977 Surface Mining and Reclamation Act enabled companies to open strip mines on the condition that assets be set aside to contain any pollution and return the mines to something resembling the pre-existing landscape. But companies with debts no greater than 2.5 times their net worth were allowed to avoid tying up capital by “self-bonding” instead.

Self-bonding has grown to represent more than a third of the industry’s cleanup costs. With several companies now in bankruptcy, states have reached agreements to secure pennies on the dollar for reclamation should Chapter 11 reorganization proceed to Chapter 7 liquidation.