On Monday, January 11^th, Arch Coal Inc. officially filed for Chapter 11 bankruptcy, after months of speculation about the company’s high debt load. Arch joins other coal companies that have declared bankruptcy over the last year including Walter Energy and Alpha Natural Resources. At the end of the third quarter, Arch’s debt amounted to $5.1 billion. The company plans to eliminate $4.5 billion in debt through reorganization.

Arch is also responsible for $640 million in reclamation bonds – which “guarantee” the company’s ability to pay for the clean-up (reclamation) of its mines. Reclamation costs are bonded in the form of:

• surety bonds – agreements by a surety or insurance company to compensate the regulatory authority for the costs of any outstanding reclamation work not performed by the coal mine operator,
• collateral bonds – bonds backed by the market value of assets owned by the coal producer that must confer to the regulatory authority a first right to the value of the assets in any bankruptcy proceeding to cover reclamation costs, and
• self-bonds – guarantees secured only by finances of the coal operator that are deemed sufficiently healthy to cover the costs of reclamation at a later time.

Self-bonds are concerning for taxpayers because if a self-bonded coal company is unable to cover the cost of reclamation, such as in cases of substantial debt or bankruptcy (like Arch’s situation), there is no requirement that a company’s promise to pay for such costs in the form of a self-bond will get any higher priority than the claims of other creditors. Self-bonding liabilities could be left uncovered, therefore, and the federal government could be left with the cost of cleaning up coal companies’ messes.

More than $450 million of Arch’s reclamation bonds are self-bonds – for which it claims to be eligible through its affiliate Arch Western Resources, even though the parent company’s 2014 securities filings show its own financials fail to meet the Office of Surface Mining Reclamation Enforcement (OSMRE)’s eligibility requirements. Taxpayers could be on the hook for that total if the federal government does not receive a “first right” or “superpriority claim” for reclamation costs in Arch’s bankruptcy proceedings. On Tuesday January 12^th, Arch requested to prioritize only $75 million of its self-bonding obligations during the proceedings. If this request is granted, the financial burden of covering the rest of Arch’s $450 million in self-bonds falls onto the federal government.

When Alpha Natural Resources declared bankruptcy last year, the West Virginia Department of Environmental Protection (DEP) decided that the company’s weak financial position disqualified it from eligibility for self-bonding. Alpha was ordered by the DEP to reduce its reclamation costs covered by self-bonding, and the two parties reached a deal that $24 million in self-bonds would receive a “superpriority” claim in the company’s bankruptcy proceedings – a mere 4% of its $646 million total in self-bonds. The uncertainty of how the rest of Alpha’s self-bonding costs will be covered, as well as what will happen to Arch’s self-bonds, poses a serious risk to taxpayers.

The Department of the Interior (DOI) and OSMRE should update self-bonding eligibility requirements and stop letting coal companies escape their financial obligations.

To learn more, read our fact sheet on self-bonding.