United States Department of the Interior

OFFICE OF SURFACE MINING
RECLAMATION AND ENFORCEMENT
Washington, D.C. 20240

OSMRE Policy Advisory: Self-Bonding

Introduction

When Congress enacted the Surface Mining Control and Reclamation Act of 1977 (SMCRA), it
identified several purposes for the new law that would help achieve important public interest and
environmental goals. Among those purposes were to: establish a nationwide program to protect
society and the environment from the adverse effects of coal mining operations; assure the rights
of surface landowners are fully protected from such operations; assure that coal mining is
conducted so as to protect the environment; and, wherever necessary, exercise the full reach of
Federal constitutional powers to insure the protection of the public interest through effective
control of surface coal mining operations. 30 U.S.C. § 1202 (a), (b), (d), and (m).

Congress established the Office of Surface Mining Reclamation and Enforcement (OSMRE) to
administer the program established by SMCRA for controlling coal mining and to adopt such
regulations as necessary to carry out the purposes and provisions of SMCRA. 30 U.S.C.
§ 121 l(a), (c)(l), (2). OSMRE is also charged with assisting the states in the development of
coal mining regulatory programs that meet the minimum standards of SMCRA and to also reflect
local requirements. 30 U.S.C. §§ 1202(g), 1211 (c)(9). Twenty-four states have coal mining
regulatory programs approved by OSMRE. These states have the primary responsibility to
implement their approved programs and regulate coal mining within their boundaries subject to
OSMRE oversight. OSMRE and the states that have federally approved regulatory coal
programs work together to achieve the goals of SMCRA.

 Natural resources regulators in the United States have long recognized the importance of
requiring financial assurance for reclamation where natural resources extraction occurs. Posted
cash or collateral assurance instruments provide a guarantee that an area disturbed by extraction
activities will be reclaimed in the event that the operator does not or cannot fulfill its reclamation
obligations. Financial assurance is particularly important to ensure reclamation obligations
continue to be met should an operator file for bankruptcy. Some state regulatory authorities have
allowed companies, under certain circumstances, to meet their financial assurance obligations
through "self-bonds," i.e., legally binding corporate promises that do not rely upon a third party
surety or collateralized instruments.

Historically, approximately ninety percent of the coal produced each year in the United States
has been used to generate electricity. The U.S. Energy Information Administration (EIA)
reported 24 gigawatts of coal-powered electric generating capacity was retired between 2013­
2015. An additional 31 gigawatts has been announced for retirement in 2016, which does not
include the unexpected power plant closures that have also been announced this year. The EIA
has reported the announced retirement of several more gigawatts of coal-powered electric
generating capacity each year through 2021.

In the past several months, three of the largest coal mine operators in the nation have filed for
Chapter 11 protection under the U.S. Bankruptcy Code, and it is highly likely additional coal
companies will seek bankruptcy protection. Like many companies in the natural resources
extraction sector, these coal companies were not sufficiently diversified to adjust to the recent
market downturn. These same three companies had held approximately 2 billion dollars of
unsecured or non-collateralized self-bonds that various states with federally approved SMCRA
regulatory programs previously accepted to guarantee reclamation of land disturbed by coal
mining. The bankruptcy filings confirm the existence of significant issues about the future
financial abilities of coal companies and how they will meet future reclamation obligations.

Some states have recognized the gravity of the situation and are taking action. Colorado has
stopped accepting new self-bonds. Virginia is advancing the necessary process to amend its
program to remove self-bonding. We understand that other states are working with coal
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 companies to replace self-bonds with surety bonds or collateral bonds that are legally sufficient
to assure the completion of the reclamation plan if the work had to be performed by the
regulatory authority in the event of forfeiture. Given these challenges and the attendant threats to
the public health, safety, and the environment, this policy guidance is intended to promote
appropriate regulatory action and adequate financial assurances.

SMCRA allows state regulatory authorities to accept self-bonds as a matter of discretion; it does
not require them to do so. State regulatory authorities that have regularly accepted self-bonds
may have done so in the past simply because they found that a mining company or its corporate
guarantor met minimum eligibility criteria. However, today's market, recent bankruptcy filings,
and the projected significant further reduction in the market for coal, raise serious questions
related to the use of self-bonding as a tool to adequately protect the public interest and achieve
the goals of SMCRA. Therefore, regulatory authorities should exercise caution before allowing
any company to self-bond.

Under SMCRA and its implementing regulations, mine operators, even if they meet applicable
eligibility criteria, are not entitled to self-bond; the regulatory authorities have discretion about
whether to accept self-bonding. Regulatory authorities should exercise that discretion by
considering whether it is at all appropriate to allow any self-bonds under current conditions,
particularly given current market conditions and the anticipated reduction in future coal demand.
In light of current circumstances, including the significant risks of allowing mine operators and
permittees to self-bond, OSMRE provides the following policy advisory on self-bonding under
SMCRA.

SMCRA Bonding Requirements

After a coal mining and reclamation permit application has been approved by the state regulatory
authority, but before the permit is issued, section 509(a) of SMCRA requires that the applicant
must file a reclamation bond with the state regulatory authority to ensure the faithful
performance of all of the requirements ofSMCRA and the permit. 30 U.S.C. § 1259(a). The
amount of the bond must be sufficient to enable the state regulatory authority to complete the

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 reclamation requirements of the approved permit in the event of forfeiture, or if the operator
were to otherwise default on its legal obligations for reclamation. The reclamation bond must be
provided to the regulatory authority before the mining permit can be issued and must be in place
while coal mining and reclamation occurs.

Section 509(c) and (d) of SMCRA provide flexibility in allowing the regulatory authority to
accept, at its discretion, different types of financial assurance instruments: including corporate
surety bonds, collateral bonds (cash, certificates of deposit, etc.), self-bonds, or alternative
bonding systems. 30 U.S.C. § 1259(c), (d).

Under section 509(c) of SMCRA and OSMRE's implementing regulations at 30 C.F.R. § 800.23,
self-bonds are legally binding corporate promises without separate surety or collateral that a
regulatory authority may accept from permittees who meet certain financial tests. Applicants or
their proposed corporate guarantor must, among other things, demonstrate a history of financial
solvency and establish that they have been in continuous operation for a minimum period. 30
U.S.C. § 1259(c). The regulations require the permittee to satisfy certain financial tests to be
eligible for self-bonding. 30 C.F.R. § 800.23. SMCRA also allows states to establish alternative
bonding systems that meet the objectives of the reclamation bond requirements. 30 U.S.C. §
1259(c). State regulatory programs vary as to the financial instruments that they deem
acceptable.

OSMRE Policy

In accordance with OSMRE's responsibility to assist the states in achieving proper
implementation of their state regulatory programs under SMCRA, OSMRE will more closely
review instances in which states accept self-bonds for mining operations to ensure that the mine
operators and corporate guarantors have the financial strength to qualify for self-bonding.
OSMRE also provides states the following guidance to assist states with their bonding decisions:

Self-Bonding Advisory #1: Each approved regulatory authority has primary responsibility to
implement its approved program to protect society, surface landowners, and the environment
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 from the adverse effects of coal mining and to ensure coal is mined in compliance with all
requirements of the permit and the coal mining laws, including bonding. To ensure bonding
requirements are being met, and in accordance with OSMRE and federally approved state
bonding regulations, regulatory authorities that had elected to accept self-bonds should
immediately assess whether companies that are currently self-bonded remain eligible by making
a thorough inquiry into the company's financial health utilizing all the tools at their disposal and
all pertinent information available. Where a parent or non-parent corporate guarantee is made,
the same inquiry into the financial health of the guarantor should be made. In conducting this
review, regulatory authorities should read federal and state regulations broadly to make an
exhaustive, proactive inquiry into whether any company that is currently self-bonded remains
eligible. If the regulatory authority determines that a currently self-bonded coal mine operator is
no longer eligible to self-bond or may soon become ineligible to self-bond, the regulatory
authority should exercise its authority to require those operators to replace any self-bonds with
surety bonds or collateral bonds as those terms are defined in 30 C.F.R. § 800.5(a) and (b).
Furthermore, due to the aforementioned issues and industry uncertainties, regulatory authorities
are urged to be proactive and pursue an orderly replacement of existing self-bonds.

Self-Bonding Advisory #2: Under SMCRA and OSMRE's implementing regulations, while
each approved regulatory authority may choose to accept self-bonds from applicants that meet
the eligibility requirements, whether to accept a self-bond is a matter within the regulatory
authority's discretion. Given the current conditions of the coal market, the announced retirement
of a significant amount of coal-fired power plants this year, the forecasted retirements of coal­
fired power plants through 2021, and the approximately $2 billion in self-bonded obligations
previously held by just three companies now in, or recently emerged from, bankruptcy, each
regulatory authority should exercise its discretion and not accept new or additional self-bonds for
any permit until coal production and consumption market conditions reach equilibrium, events
which are not likely to occur until at least 2021.

Self-Bonding Advisory #3: Among other things, Section 509(c) of SMCRA requires an
applicant for self-bonding to demonstrate a history of financial solvency and continuous
operation to the satisfaction of the regulatory authority. 30 U.S.C. § 1259(c). The federal
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 regulations at 30 C.F.R. § 800.23 further require the applicant to submit financial statements to
provide a showing of financial health. This demonstration of financial solvency and continuous
operation must be sufficient to satisfy the regulatory authority that the reclamation plan will be
completed and the self-bonded entity will remain solvent for the duration of the surface coal
mining and reclamation operation and for a period coincident with the operator's responsibility
for revegetation requirements in section 515 of SMCRA, 30 U.S.C. § 1265. With respect to the
continuous operation requirement, in situations where a bankruptcy reorganization plan has
resulted in the creation of a new company, the new company would need to be in existence for at
least five years, as required by 30 C.F.R. § 800.23(b)(2), before it would be eligible for self­
bonding. In evaluating the financial solvency requirement, a regulatory authority should always
evaluate the present and future financial circumstances of every applicant. This includes
carefully evaluating the financial information of a company that is likely to file for, has filed for,
or has emerged from, bankruptcy to determine whether it meets the self-bonding criteria. A
bankruptcy filing by a permittee, applicant, parent corporation guarantor, or other corporate
guarantor, or related entity suggests that there may be serious factual issues as to the company's
ability to meet the financial tests in 30 C.F.R. § 800.23(b)(3) and (4). Therefore, prior to
approving any self-bond applications (see Self-Bonding Advisory #2), regulatory authorities
should document how the permittee, applicant, parent corporation, guarantor, or related entity
meets all the self-bonding criteria.

~·
OhCiPiZfilCllik

Director

~

August 5, 2016
Date

cc: Regional Directors
Field Office Directors

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