Arch Coal will use traditional insurance to guarantee that nearly $400 million in cleanup work eventually happens at its Wyoming mines, according to a restructuring plan approved Tuesday by a federal bankruptcy judge.
The plan moves the coal giant away from self-bonding, a contentious practice that allows companies to forgo traditional insurance for cleanup, backing up their promise to pay for reclamation with their financial strength.
The restructuring plan signals a win for both sides of the self-bonding debate in Wyoming. Arch will emerge from crippling debt with a healthy balance sheet in a coal market that is showing signs of stabilizing. Meanwhile, environmentalists view the plan as another step toward ending self-bonding in the state.
Arch, which operates the Black Thunder mine near Wright, filed for bankruptcy Jan. 11, with about $6 billion in debt. Arch has shed $4.7 billion of what it owed when it filed for Chapter 11, it said in a statement.
“We will emerge as a strong, well-positioned natural resource company with a compelling plan for value creation,” said John W. Eaves, the company’s CEO. “We have accomplished a great deal through the restructuring process and are confident that we have established a solid foundation for long-term success, built on our strong metallurgical and thermal franchises and our core commitment to safety and environmental excellence.”
Arch originally argued that the expense of securing third-party insurance instead of self-bonding would hurt its liquidity upon emergence. But the St. Louis-based company has changed its tune.
“In evaluating surety bond markets, we found that there was more than sufficient capacity available to us, with reasonable rates and collateral requirements,” the company said in a statement Monday. “The fact that the surety markets offered this strong support to us is a clear indication that surety providers have great confidence in the quality of our assets and in our future prospects.”
Self-bonding opponents cheered the decision.
Environmentalists argue that self-bonding puts the taxpayer at risk of picking up the tab if companies go bust, particularly in light of the current coal market. Three of the largest coal companies operating in the state fell into bankruptcy in 2015 and 2016 after they saddled themselves with billions in debt.
The debate is further exacerbated by the uncertain future of coal. The assumption that coal will continue to provide the bulk of U.S. electricity has been undermined by looming federal regulations on emissions and competition from natural gas.
Coal companies maintain the worth of their commodity as a competitive, reliable resource in the country’s energy portfolio, and Wyoming regulators have maintained their right to allow self-bonding under certain circumstances.
Opponents to the practice hoped the bankruptcy exit plan for Alpha Natural Resources, now Contura Energy, approved this summer would set a precedent in the state on the issue of self-bonding. The firm made a similar agreement to replace $411 million in self-bonds when it exited bankruptcy in July, after a federal agency refused to transfer mineral rights to the newly formed company until Alpha/Contura had addressed reclamation obligations. Contura now has $264 million in collateral or surety bonds in the state of Wyoming.
An ideal time
However, emergence from bankruptcy is an ideal time for these companies, which have successfully shed billions in debt, to purchase stronger reclamation bonds, said Shannon Anderson, of the Powder River Basin Resource Council. The council has been outspoken in its opposition to self-bonding.
It does appear that Arch is in a stable position moving forward, said Monica Bonar, an analyst for Fitch Ratings.
That is partly due to a slowly stabilizing market, she said. The company is going to lose cash through 2016, by its own projections. But it’s likely the firm will be able to manage spending going forward and have more flexibility. About half of its coal production into 2017 is already accounted for in contracts, Bonar said.
“They are going to have more cash than debt,” she said. “That sounds like a really easy to believe story that they would generate cash [by] ‘17.”
For environmentalists, Arch’s decision to replace its bonds adds weight to the argument that the practice has had its day.
“It’s good news that the company is committed to do this, and it’s a sign that it’s possible,” Anderson said. “We hope that it sends a signal to Peabody, who’s next.”
Peabody Energy, which operates the North Antelope Rochelle mine near Gillette, filed for bankruptcy in April. Environmentalists are hoping the company will follow Arch and Alpha’s example and reduce or eliminate self-bonds in the state.
The international company has yet to exit its bankruptcy period or waver on its self-bonds.
“The company is continuing to provide assurances to states through a variety of forms including self-bonding, third-party surety bonding, letters of credit and superpriority claims,” said Peabody spokeswoman Beth Sutton. “We are pleased to reach agreement with four states where we self-bond that provides additional security toward our reclamation obligations, and look forward to ongoing discussions regarding Peabody’s reclamation bonding long term.”
The company maintains that its commitment to reclaiming disturbed land is well documented, citing the $560 million the company has paid into the federal Abandoned Mine Lands program, and restoration of 4,700 acres in 2015 alone, according to the company.
The combined bonding amount for all three coal companies in Wyoming is $1.38 billion, much of that unsecured.
An ongoing story
The self-bonding debate is likely to continue.
Federal regulators are attempting to force states away from the practice. Wyoming has so far resisted that pressure.
The Office of Surface Mining Reclamation and Enforcement issued an Aug. 9 advisory for states to limit self-bonding practices given the uncertain coal market and immediately reevaluate the financial solvency of companies currently self-bonded. Though the advisory is not mandatory, it does place pressure on states to comply.
The federal regulators followed up on Aug. 16 with an announcement that they would begin rule making on coal mine bonding, continuing the heated debate over what states are allowed to do.
Wyoming has also been criticized by environmentalists for allowing companies to continue with self-bonding during bankruptcies, citing both federal and state law that maintains a company must have a history of financial solvency to be eligible.
State regulators maintain that they saved jobs and revenue by allowing companies like Arch and Alpha to continue with self-bonds while going through Chapter 11.