Wyoming lawmakers are considering a new option for coal mine reclamation bonding that could reduce risk for the state in the event of insolvency. Both environmental and industry advocates have identified advantages to the proposal, which could also help the financially troubled industry.
Officials from the Wyoming Department of Environmental Quality presented a conceptual model of an “assigned trust” to the Legislature’s Joint Minerals, Business, and Economic Development Committee on June 24.
The DEQ’s Land Quality Division holds $2.7 billion in total reclamation bond instruments. Of that, $2 billion is related to coal activity. About 99% of the $2 billion is held in surety and self-bond. Those liabilities — $1.7 billion in surety and $271 million in self-bond — are considered a risk to the state.
With the coal industry facing unprecedented difficulties, the DEQ developed the first-of-its-kind concept to diversify its portfolio of reclamation bonds.
“As you diversify your portfolio, you reduce risk,” Kyle Wendtland, Land Quality Division administrator, said in an interview. “If we have everything in one surety bucket or all one junk bond bucket or all one letter of credit market, when one thing fails, it can affect a lot of different companies. Whereas if we have that risk spread out against all of those different options, it lowers that overall risk and liability risk to everybody as a whole.”
Coal companies in the conceptual model would put a cash payment down and then make annual payments into the assigned trust. After 10 years, the reclamation bond obligation would be fully backed by cash rather than a surety bond. A mining company could wean itself off of making payments to a surety company, then after its reclamation obligation is fulfilled, it would no longer need surety coverage.
“And then it becomes an asset, because it’s no longer a bond obligation on the mine itself, it’s actually an asset for the mine that could be transferred if the business transfers,” said Kimber Wichmann, the DEQ’s Management Services administrator who also oversees bonding activity for the agency. “That’s huge to any company.”
Members of the Wyoming Mining Association have expressed support for the idea, WMA director Travis Deti told the committee. He said the time is right for the assigned trust concept. There’s uncertainty in the surety market, Deti said. A growing list of banks, insurance companies and other financial institutions have pledged not to back fossil fuels. An assigned trust option, Deti said, will likely provide financial flexibility for an industry struggling to meet federal obligations in an increasingly bruising market for Wyoming’s thermal coal.
Deti also pointed to a proposed Interior Department rule that seeks to “update the fees, rents, royalties, and bonding requirements related to development and production” — an assumed increase in the burden on industry. Apart from a more workable reclamation bonding tool, Deti said the WMA also wants relief — or at least certainty — in fees, rents and royalties.
The assigned trust, he said, would be “another tool in the toolbox.
“I think it’s a good concept, and I think it’s appropriate to look at coal first,” Deti said. “But we would like to see this concept eventually extended to all of our other industries. And it’s good for the state. It gives the state some security, it’s good for the industry.”
The assigned trust is a “novel” concept in the realm of the Surface Mining Control and Reclamation Act of 1977, which established rules for surface coal mining in the West, said Shannon Anderson of the Powder River Basin Resource Council. Her landowners’ advocacy organization “supported the state exploring this option,” she said.
“Generally we agree with the need to bankruptcy-proof reclamation funding,” Anderson said.
How it works
The state’s land division has four financial instruments for reclamation: self-bond, surety bond, securities in lieu of bond and cash. Of those, self-bonding has the lowest cost to the companies, but the highest risk to the state. Only one coal company, Kiewit Corporation for its Buckskin Mine, is currently self-bonded in Wyoming. The next lowest cost to companies is the surety bond instrument, which represents the second highest risk to the state.
Most bonds in the U.S. are in the form of legal promises issued by a third-party, known as a surety company. These surety bonds are meant to be binding legal promises of payment if the mining company fails to complete reclamation. The surety companies pay regulators, then pursue the mining company for their losses.
The problem for Wyoming with surety bonds, Anderson said, is that in the event of major mine abandonment, it’s possible the reclamation obligations would exceed certain surety companies’ assets. With nearly $4 billion of reclamation not yet completed in Western surface mines, surety companies’ underwritten bonds total value is “dozens or hundreds of millions of dollars,” according to a Western Organization of Resource Councils report.
Self-bonds are essentially guarantees that companies have the money to reclaim mines. In the event a company that is self-bonded goes bankrupt, there are no money or assets pledged to fund reclamation.
On the industry side, surety bonds have their downsides. Surety bonds not only require a premium be paid annually, but also collateral that can be a cash balance or physical assets. It’s a cost that the DEQ’s Wichmann said never reduces the bond risk. The costs in premiums and collateral required can vary year-to-year and never go away.
Surety use has increased following a state revamp of self-bonding regulations in 2019 that required formerly self-bonded companies to use another financial reclamation instrument. This means more companies are paying that premium to a surety that likely has collateral attached as well.
Creating an assigned trust option would provide the state with more security in the form of cash, while also easing the financial burden on mining companies to meet their reclamation obligations, according to the DEQ.
Under DEQ’s conceptual model, Wyoming coal companies would collectively deposit $1 billion — half the current total coal mine reclamation liability — in cash to initiate a trust.
Each mining company would then make an annual 5% cash payment, which “should be a significant decrease, especially from any surety payment,” Wichmann said. An interest rate of 2.5% would compound annually. In the eighth year, the trust balance combining the payments and interest should exceed the $2 billion bond obligation. Wichmann estimates that cash payments from operators would exceed $2 billion in 10 years, ceasing the need for further payments.
The cash for reclamation would be immediately available to the state in the event of forfeiture. With the state holding the funds as custodian, Wichmann said, “it seems more shielded from bankruptcy proceedings from our experience.” It would also draw business to Wyoming, she said, because it turns what is traditionally a liability obligation into an asset.
On the industry side, the payment applies directly to the bond obligation — something not offered by the current instruments. Operators would have a known annual payment that’s predictable, ending when the bond obligation is met. Additionally, establishing the trust would free up around $2 billion in the surety market and improve the financial stability of the industry as a whole.
To implement the proposal, the DEQ would go through a rulemaking process and lawmakers would consider a bill, likely to establish and manage an account and allow the state to accrue interest, Wendtland told lawmakers. From conception to reality, he said, could take three to four years.
Should self-bonding persist?
The cost of doing business for coal right now is “not sustainable,” the mining association’s Deti told lawmakers. Production was down roughly 20% in 2020 due to COVID-19 and other factors, Deti said. While there’s currently a 6.5% uptick, it’s a sector that will be in trouble without “some relief.
“I think it’s appropriate for this committee to consider a decrease in the severance tax for service coal at some point in time in the near future,” Deti said.
Coal has declined precipitously since its 2008 peak. Lawmakers in 2020 allowed programs aimed at helping Wyoming’s struggling coal industry escape austerity measures unscathed in hopes to reverse the decline. Another measure passed during the 2021 session that made it more difficult to retire coal-fired power plants in the state.
The Powder River Basin has shed nearly 35% of its coal production and hundreds of jobs over the past decade, including a devastating bankruptcy by Blackjewel in 2019 that saw two Wyoming mines close. The mines resumed operations months later, but the events left local governments and creditors unpaid and workers shaken. Arch announced plans in February to speed up the closure of the Coal Creek Mine and reduce operations at the Black Thunder Mine.
For the Powder River Basin Resource Council, the industry’s decline necessitates a conversation not about tax relief, but about eliminating self-bonding, Anderson said during her public comment to the committee.
“We would ask that as you’re looking at bonding in the state, to phase out self-bonding completely as an option,” Anderson said. “It’s really important to look at it now, because we don’t want to backslide to a position where more companies go back to self-bonding. And while that may be less likely under the new DEQ rules, until self-bonding is completely off the table, there’s still significant risk from the practice in Wyoming.”
Advocacy groups have claimed that while coal mines in the Powder River Basin have a better environmental track record than other regions, environmental and health risks still exist. Wendtland maintains that Wyoming has been successful in its reclamation efforts, pointing to the Dave Johnston mine land, now home to grazing lands, and the Glenrock and Rolling Hills Wind Farm.
The May 2019 overhaul of bond rules was designed to ensure Wyoming taxpayers would not be left on the hook for mine reclamation in the event of insolvency. Under the new rules, even companies with the highest credit ratings can only self-bond for up to 75% of the total obligation. Many states have completely eliminated self-bonding as an option.
Wendtland said he thinks it’s “interesting” to hear calls for the elimination of self-bonding as an instrument in Wyoming.
“At the time when we passed those bond rules, we had various environmental groups in the state that actually supported that change, so I find it interesting now that it might have changed,” he said.
The PRBRC supported the rule changes when they were proposed, Anderson said, but only because it was an improvement to prior regulations.
“We’ve always been against self-bonding 100%,” Anderson said. “We support the state rules because they are better and they’ve limited self-bonding, but they do not eliminate self-bonding.”
Industry pushed back against the bond rule changes implemented in 2019, with Deti saying during a March 2018 hearing that, “the standards can’t be set so high that no one can use it,” according to the Casper Star Tribune.
This story is supported by a grant through Wyoming’s Established Program to Stimulate Competitive Research (EPSCoR) and the National Science Foundation.