Exclusive: U.S. examining coal cleanup program for shortfalls

BALTIMORE (Reuters) - The federal government is examining whether struggling U.S. coal companies still qualify for an exemption that allows them to avoid having to fully insure against billion-dollar mine cleanup costs, the top regulator for the mining industry said on Monday.

Coal is excavated at the Jim Bridger Mine, outside Point of the Rocks, Wyoming March 14, 2014. REUTERS/Jim Urquhart

Within the last several weeks, federal officials have begun to scrutinize the “self-bonding” programs that allow financially qualified mining companies to leave part of their potential clean-up costs uninsured, said Joseph Pizarchik, director of the Office of Surface Mining Reclamation and Enforcement (OSMRE).

Coal states regulate mining operations - including the federal self-bonding program - on a day-to-day basis but federal officials may step in if not enough is done to guarantee cleanup work, or “reclamation”.

Industry and legal experts say many U.S. coal companies would struggle to pay for full coverage against cleanup costs and lifting the exemption could push them closer to bankruptcies.

“The state regulatory authority, with our help, should be doing their job to make sure (mining companies) have the assets to complete reclamation,” Pizarchik told Reuters at a mining conference in Baltimore.

Coal companies are required to have financial assurance or cash on hand to protect taxpayers from the costs of cleaning up abandoned mines and reclaiming damaged land in the case of bankruptcy. But self-bonding has allowed the most financially fit coal companies to leave a share of their total liabilities uncovered.

Four of the nation’s largest coal producers - Peabody Energy Corp, Arch Coal Inc, Cloud Peak Energy Inc and Alpha Natural Resources Inc - are all making use of the self-bond program.

All of those companies have seen their share price plummet in recent years as the industry has been battered by an abundance of natural gas, environmental regulations and a weak export market.

Officials from Peabody Energy, Arch Coal, Cloud Peak and Alpha Natural Resources have all said that they abide by self-bonding rules.

“Peabody and its various operating subsidiaries meet their U.S. reclamation bonding obligations,” company spokesman Vic Svec said.

If pushed to bankruptcy, those coal companies could leave behind more than $2 billion in cleanup liabilities and no clear custodian to cover the costs, other than state or federal agencies, according to industry officials.

It would be difficult for cash-strapped mining companies to acquire surety bonds or offer collateral to backstop current reclamation obligations, said Robert Duke, chief counsel for the Surety & Fidelity Association of America.

“Losing the qualification to self-bond and turning to the corporate surety market is uncharted territory,” said Duke.

Regulators may be caught in a dilemma since enforcing self-bonding rules could just add another costly burden to a struggling industry.

“If the regulator demands more financial assurances in whatever form, it might just push a coal company past the brink,” said William T. Gorton, a mining lawyer with Stites & Harbison in Lexington, Kentucky.

Regulators in West Virginia said early this month they are examining whether a leading mining company, Alpha Natural Resources, still qualifies to leave $262 million in cleanup insurance uncovered.

The federal investigation will mirror that work and examine whether coal companies are still entitled to the benefits of the program in western states like Wyoming, officials said.

The federal probe is at an early stage and Pizarchik said he did not want to prejudice his agency’s review but OSMRE may take over a state mining agency that is deemed to be failing.

“It could end up potentially with a federal takeover,” he said.

Regulators must give the self-bond program a hard look since an abuse could leave taxpayers with a costly hit, said Greg Conrad, director of the Interstate Mining Compact Commission, which sponsored Monday’s conference.

“One of the key elements of (federal mining law) is to hold mine operators responsible and avoid taxpayers being saddled with the bill,” said Conrad, whose independent agency is a voice for state coal programs.

“This is a big deal because it’s the first instance of this coming to the foreground: a downturn in the coal industry raising questions about self-bonds.”

Reporting By Patrick Rucker; Editing by Bruce Wallace and Sandra Maler