(Reuters) - The U.S. government agreed to a mine clean-up deal that allows coal producer Alpha Natural Resources to exit bankruptcy, despite concerns that Alpha will be unable to fund $400 million in commitments, a government lawyer told a court on Thursday.
The agreement stems from an industry subsidy that allows coal companies to self-insure the environmental costs of mining, called self-bonding, rather than set aside cash or other collateral.
Alpha had about $676 million in self-bonded mine clean-up costs, mostly in Wyoming and West Virginia, when weak coal prices pushed the company into bankruptcy in August, according to securities filings.
Thursday’s agreement was meant to assure that Alpha has the finances to restore mines to their natural setting and clean up polluted streams.
Government lawyer Alan Tenebaum told a U.S. Bankruptcy judge on Thursday that Alpha’s plan “is a better outcome for reclamation and water treatment” than if the company were liquidated.
The Department of Interior said in a statement that the deal will eliminate self-bonds for Alpha’s reclamation obligations and shift toward third-party financial assurance.
Alpha will contribute to the plan over a decade and Tenebaum acknowledged that “the environmental agencies have some concern if this plan will succeed in the long term.”
U.S. Bankruptcy Judge Kevin Huennekens said he would approve Alpha’s plan of reorganization.
Under federal law, coal companies are responsible for spent mines and they typically use cash, bonds or other financing to cover future cleanup costs.
For years, self-bonding has allowed some of the largest coal producers to forego cleanup insurance and use their balance sheet as collateral.
Arch Coal and Peabody Energy, also bankrupt, have roughly $3 billion in future cleanup costs covered by self bonds.
A lawyer for Alpha estimated the company was committing $400 million in agreements with the U.S. agencies and state governments. Funds were also being contributed by the company’s lenders, which are buying Alpha’s choice mines in Wyoming in return for forgiving debt.
The government had threatened to withhold mining permits on federal land because it feared a reorganized Alpha would be too weak financially.
The main sources of funds Under Thursday’s deal include the reorganized Alpha contributing $109 million by 2025 to land reclamation, as well as half of its free cash flow until it has satisfied its clean-up obligations.
Contura Energy Inc, the company created by Alpha’s lenders to buy Wyoming mines, will also contribute $100 million.
Reporting by Tom Hals in Wilmington, Delaware; Additional reporting by Patrick Rucker in Washington.; Editing by David Gregorio