State and federal regulators are pressing U.S. coal companies to prove that they can pay for the cost of cleaning up after they are finished mining, putting new financial pressure on an industry already facing historic strains.
Regulators even in energy-friendly states such as Wyoming and West Virginia are stepping up oversight on coal companies amid concerns that taxpayers could be left on the hook for expensive and environmentally complicated cleanups if the companies go bankrupt. That has created a political challenge for governors of coal states, who don’t want to be viewed as pushing vital industries into further financial trouble.
“It is tough times in the coal fields right now,” said Harold Ward, acting director of the mining and reclamation division at the West Virginia Department of Environmental Protection. “You hope for them to be successful, but you anticipate the worst.”
Coal producers have been rocked by competition from inexpensive natural gas, tougher environmental rules and a global coal glut that has decimated prices. On Thursday, the Obama administration proposed new mining rules, including a prohibition on mining within 100 feet of streams.
The nation’s three largest publicly listed coal companies— Peabody Energy Corp., Alpha Natural Resources Inc. and Arch Coal Inc.—have seen their cumulative value collapse to below $1 billion from more than $25 billion four years ago.
Alpha is in talks to obtain financing for a potential bankruptcy filing early next month, The Wall Street Journal reported this past week. On Thursday, the New York Stock Exchange suspended trading in Alpha’s stock and said it would begin a process to delist the company.
At issue for regulators is whether coal companies should continue to qualify for a practice known as “self-bonding” to pay for future mine cleanups—essentially using their own finances as insurance—or whether they should be required to post cash or secure outside guarantees to keep mining.
Wyoming, which accounts for about 40% of the nation’s coal output, informed Alpha in May that it has until Aug. 24 to prove it could insure $411 million in future cleanup costs for vast mining operations in the state’s Powder River Basin.
Alpha, of Bristol, Va., has “to show they have the liquidity” to pay for the cleanups, says Keith Guille, a spokesman for the Wyoming Department of Environmental Quality.
“We believe we’re in compliance,” said an Alpha spokesman, adding that the company has filed a court appeal.
Wyoming also recently conducted an annual financial review of Peabody and is assessing Arch’s finances. Both companies are based in St. Louis.
A spokesman for Wyoming Gov. Matt Mead, who has pushed publicly to export the state’s coal to foreign markets, said the Republican remained confident that the industry would respond to market challenges.
Mr. Mead stands by the state’s program allowing mining companies to use their own financing to insure future cleanups, which has been criticized by environmental groups.
“This system works,” a Mead spokesman said.
A spokesman for West Virginia Gov. Earl Ray Tomblin said the Democrat supports the state’s similar program but is confident that regulators will be able to “determine whether any action is necessary” to modify it.
Under a 1977 federal law, coal companies operating in the U.S. must set money aside to pay to restore lands after mines close, by planting trees and grass, burying exposed waste rock and building barriers that protect waterways from contamination.
But in some states, companies with healthy balance sheets don’t have to post cash or obtain a separate reclamation bond, using self-bonding instead. Although the federal government has set minimum standards for self-bonding—a ratio of total liabilities to net worth 2.5 times or less—each state writes its own rules.
As state regulators review whether struggling coal companies should still qualify for that benefit, the federal government “has gathered a team to assist the states to help with any revisions that may be required in their approved state programs,” says Chris Holmes, a spokesman for the federal Office of Surface Mining Reclamation and Enforcement.
As part of a potential sale, Alpha on July 8 issued layoff notices to 292 workers in Virginia and Kentucky.
Peabody recently requalified to use its own finances to cover future cleanups at three mines in Wyoming. But some industry experts said the company, as well as Arch, eventually could face similar requirements from the state as Alpha.
The nation’s largest miner, Peabody lost $787 million last year and racked up more than $2 billion in cleanup liabilities as of the end of the first quarter, according to a securities filing.
“Liabilities associated with final land restoration are fully accounted for within our financial statements,” Peabody said in a statement.
A spokeswoman for Arch said the company has $458 million in cleanup costs insured in Wyoming and that “we have been and continue to believe that we are in compliance.”
Wyoming’s new stance on Alpha is virtually unprecedented in the state, where gaping, surface coal mining operations have helped power the local economy for decades, experts say.
“Typically, the only companies that have had to put up bonding are small companies—and typically those companies are in the oil and gas sector—to avoid fly-by-nighters that leave the state holding the bag,” said Robert Godby, an associate professor at the University of Wyoming and director of the school’s Center for Energy Economics and Public Policy.
West Virginia officials say they are evaluating Alpha’s overall financial condition and aren’t allowing any more companies to use their own finances to insure future mine cleanups.
If Alpha can’t pay, additional cleanup money would be taken from a special state fund, said Jake Glance, a spokesman for the West Virginia Department of Environmental Protection.