Reclamation Bonds for
Coal Mining Operations
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Overview: Reclamation Bonds for Coal Mining Operations |
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The Surface Mining Law requires that, as a prerequisite for obtaining a coal mining permit, a person must post a reclamation bond to ensure that the regulatory authority will have funds to reclaim the site if the permittee fails to complete the reclamation plan approved in the permit.
The Office of Surface Mining regulations recognize three major categories of reclamation bonds: corporate surety bonds, collateral bonds (cash; certificates of deposit; first-lien interests in real estate; letters of credit; federal, state, or municipal bonds; and investment-grade securities), and self bonds (legally binding corporate promises without separate surety or collateral, available only to permittees who meet certain financial tests). State regulatory programs generally recognize the same three categories, although the programs vary somewhat in terms of which financial instruments are acceptable. A few states also have exercised their discretion to exclude the self-bond option.
To remain qualified under the Office of Surface Mining's self-bonding rules, self-bonded permittees must maintain a tangible net worth of at least $10 million, possess fixed assets in the U.S. of at least $20 million, and either meet certain financial ratios or have an "A" or higher bond rating.
Collateral posted as bond must be owned solely by the permittee, be free of all liens, and be valued at current market value not face value. The regulatory authority reduces the market value of collateral by a margin sufficient to cover the regulatory authority's cost to liquidate the collateral in the event funds are needed for reclamation.
Subject to regulatory authority approval, a permittee may post any combination of bond types and instruments recognized under the applicable regulatory program provided the total sum equals the required reclamation bond amount at all times.
Each regulatory authority must prescribe and furnish forms for filing reclamation bonds. These forms differ for each type of bond. Each form must meet the requirements of the applicable regulatory program [for Office of Surface Mining regulatory program requirements see 30 CFR Part 800 ], standard contract law, property law, the Uniform Commercial Code, banking law, and surety law. The providers of the bonds (surety companies and banks) are subject to the laws of their regulators: State insurance commissioners, State banking examiners, and the Comptroller of the Currency.
Some bond instruments such as certificates of deposit are negotiable instruments that need to be secured. All bonding documents need to be systematically filed and protected. Therefore, the Office of Surface Mining and state offices secure bond instruments in locked filing cabinets, vaults, or fireproof safes to protect them from loss, theft, or fire. Regulatory authorities use computer databases to track the status of the bonds they are holding.
Reclamation performance bonds are posted to cover all operations during the term of the permit. Prior to permit issuance, the permittee must post a bond to cover one of the following areas:
The regulatory authority must approve cumulative and incremental bond schedules should the permittee select one of those options. Under either a cumulative or an incremental bond schedule, the permittee must post additional bond before affecting lands in succeeding increments or additional lands in accordance with the approved cumulative schedule.
Reclamation bonds are financial instruments with unique attributes and requirements. Some instruments are the pledged assets of a mining company (cash, real estate, government securities), some are guarantees of a permittee's performance (surety bonds), and some are instruments that provide evidence of a deposit of cash (certificates of deposit) or the existence of a line of credit (letters of credit). All bonds must be payable to, or pledged to, the regulatory authority. When the federal government owns either the surface or coal on lands within the permit area, the bond must be payable jointly to both the state and Office of Surface Mining in situations in which the state is the regulatory authority for those lands. In situations such as permit areas on Indian lands where the Office of Surface Mining is the regulatory authority, all bonds must be payable to the Office of Surface Mining.
A permittee wishing to post a corporate surety bond or letter of credit must obtain one from a surety company or bank respectively. A surety company must be licensed in the state where the operation is located. The bank must be organized to do business in the United States. The decision to issue a surety bond or letter of credit will be based on the surety company's or bank's analysis of the permittee's credit rating, experience, and net worth. Some surety companies and banks require full or partial collateral from the permittee and a contract or indemnity agreement. These agreements require the permittee to reimburse the bank or surety company for any forfeited amount the bank or surety company paid to the regulatory authority. The permittee also pays an annual premium or fee to the surety company or bank. Unlike the premium for an insurance policy, the premium for a surety bond is not based on the risk of a claim being filed. Instead, the premium consists of a percentage of the bond amount. The Surety Association of America recommends average premium rates to the surety industry. The annual fee that the permittee pays for a letter of credit is based on a percentage of the letter of credit amount. Letters of credit must be irrevocable during their terms. Surety bonds must be noncancellable during their terms, except for coverage on undisturbed land with the regulatory authority's prior approval of the cancellation.
When a surety company writes a surety bond it guarantees the mining company's performance of reclamation. If the permittee does not reclaim the site, the surety company must pay the bond sum to the regulatory authority. The regulatory authority may allow the surety to perform the reclamation in lieu of paying the bond amount. However, the surety must comply with all reclamation requirements of the approved permit and regulatory program, including the revegetation responsibility period. Corporate surety bonds posted to meet the Surface Mining Law bonding requirements at Section 509 are noncancellable, even for the failure to pay premiums or bankruptcy of the permittee.
In some instances, surety bonds have been issued by individuals fraudulently posing as representatives of legitimate surety companies. To avoid fraud, the surety industry encourages regulatory authorities to verify the bond with the home office of the surety company and to use the Surety Association of America's Obligee's Guide, which can be viewed or downloaded. When mining Federal property (leased federal coal or land in federal surface ownership), corporate surety bonds may only be accepted from surety companies that are listed in the U.S. Department of the Treasury's Circular 570, which is updated annually on July 1 and can be viewed and downloaded through the Internet.
According to a survey that the Office of Surface Mining conducted in 1995, approximately 75 percent of the bonds posted for coal mining operations were corporate surety bonds. Small operations with bond amounts in the tens of thousands of dollars tend to use certificates of deposit and other assets. Bond amounts in excess of tens or hundreds of millions of dollars are typically in the form of corporate surety bonds, letters of credit or self-bonds. As of 1995, the Office of Surface Mining and state regulatory authorities held approximately $5 billion in reclamation bonds for coal mining operations.
The regulatory authority establishes the minimum amount of bond required, based upon the permittee's estimate of reclamation costs and the regulatory authority's independent analysis of the amount that would be necessary for a third party to complete the reclamation plan in the event of bond forfeiture. The bond amount generally reflects reclamation costs at the projected point of maximum reclamation liability (usually the point of maximum disturbance) within the permit area or an initial increment of that area. Prior to disturbing new acreage, the permittee must post additional bond. In addition, the regulatory authority must require the permittee to post additional bond whenever the cost of future reclamation increases. As the permittee completes phases of reclamation, the permittee may apply for partial bond release.
In lieu of requiring permittees to post a bond covering the entire estimated cost of completing the approved reclamation plan, some states authorize or require permittees to participate in an alternative bonding system, which is commonly known as a "bond pool." Under these systems, the permittee normally posts a conventional bond [surety bond, letter of credit, etc.] for an amount determined by multiplying the number of acres in the permit area by a flat per-acre assessment, which may vary depending on the type and site-specific characteristics of the planned mining operation. In addition, the permittee generally must pay a tonnage fee as coal is mined or an annual acreage fee. These funds are used to reclaim any site for which a participant in the alternative bonding system fails to complete all reclamation obligations. Under the Office of Surface Mining regulations, all alternative bonding systems must provide a significant economic incentive for the permittee to comply with reclamation requirements and they must ensure that the regulatory authority has adequate resources to complete the reclamation plan for any sites that may be in default at any time.
After a mining company has met all the reclamation requirements of the approved permit and regulatory program, the regulatory authority may release the reclamation bond. The permittee may apply for release of the bond on all or part of the permit or increment as reclamation is completed. The regulations recognize three discrete phases of reclamation for purposes of bond release. Phase I includes backfilling, regrading, and drainage control. Phase II occurs after topsoil replacement and establishment of revegetation. Phase III requires meeting the revegetation success standards and follows completion of the revegetation responsibility period, provided the site remains in compliance with all other applicable reclamation requirements.
OSM provides technical training both in the legal and administrative aspects of bonding and in the calculation of reclamation bond amounts. For information and schedules, contact the Office of Surface Mining National Technical Training Program, 1951 Constitution Ave., N.W., Room 210-SIB, Washington, D.C. 20240, Phone (202) 208-2769. On-site technical assistance is also available from the Office of Technology Transfer at the Western Regional Coordinating Center in Denver, Colorado.
For technical assistance with the legal and administrative aspects of reclamation bonding, including questions about bond forms, please contact the following Office of Surface Mining staff:
For technical assistance with the calculation of reclamation bond amounts, please contact one of the following Office of Surface Mining staff persons: