  SEQ CHAPTER \h \r 1 

	

Project No.: 0172.04.005.120

	

DISTRIBUTION

Page _1_ of  _3_

	

Project Name: 304m – Coal Mining Detailed Study

	

TELEPHONE CALL RECORD

	  Outgoing Call	

Date: 07/25/2007

	

Time: 2:15 PM



	

Company Name: PA Department of Environmental Protection	

Contact Name:   Joe Pizarchik

Phone No.:  717-787-5103



	

Name:  Cal Franz and Nyssa Schloyer	



	

GENERAL SUBJECT :  Performance Bond Laws, Liability, and Costs
Associated with Acid Mine Drainage



	

TOPICS DISCUSSED AND ACTION TAKEN

Wednesday, July 25, 2007 at 2:15 pm, we called Mr. Joe Pizarchik of the
Pennsylvania Department of Environmental Protection (PA DEP) to discuss:
PA’s reclamation bond program, operator liability, post mining
liability, bond forfeiture, and reclamation costs associated with Acid
Mine Drainage.

What is the liability of the operator once the mine closed but AMD
starts after bond release?

Do you have problems going after operators after the fact (e.g.,
spinning off shell companies that are dissolved after mining is finished
leaving no entity with responsibility)?

We have seen companies with permits and discharges who saw costs getting
high so parent company spun off, and that particular entity went
bankrupt; another case where principals bailed out and that company was
overwhelmed by cost, and did not have adequate assets to provide for
reclamation.

Sometimes a company appears to set up related company and diverts assets
out of company liable for discharges.  PA is exploring the possibility
of prosecuting one company for fraudulent transfer of assets in order to
avoid liability.  One partnership not actively mining coal diverted
assets to trust for relatives; PA is trying to convince them that they
need to put up the appropriate money to take care of discharges.  Does
not know of any specific incidences of AMD starting after mine and
operator closed, so no responsible entity existed, but its possible that
may have occurred years ago and he is not familiar.

He can think of 4 cases where this is an issue, but can’t really
characterize it relative to all mines; haven’t examined it with enough
detail to characterize whether just a few operators or not. Certainly
not isolated incidents but doesn’t have numbers or percentages.

As long as companies mine coal they will figure out a way to treat the
discharges in the time period; the problem is making sure that after
they finish there is money in place.

If a company forfeits a permit they are out of coal mining nationwide.

Sole proprietors are the ones that are going to go out of business from
bonding or treatment costs.

PA working on getting sites permitted with active treatment or
additional bonds posted.  Used to have an alternate bonding system;
switched to full cost bonding and also working to get sites with
discharges appropriately bonded or to set up trust funds; its an ongoing
process, but they’ve had a fair amount of success with it. 4-5 years
ago they estimated PA had 270 treatment facilities and 400 discharges
for 128 different operators.  They’ve currently finalized agreements
with 68 operators for 169 treatment facilities and 244 discharges; 40
operators have entered agreements to post additional bonds of
$108million, 14 fully funded trusts of $44 million; 11 or so more
entered consent orders, which when fully funded will be $44 million.

Probably 1-2 dozen incidences where mining company lost resources with
no money left to provide for liability.  To say that it’s a majority
would be questionable. 

PA has a rule making currently in process: under former alternate
bonding system for surface coal miners, operator paid a per acre
reclamation fee for every area permitted of $50 to $100 (in addition to
alternate bond).  Didn’t generate the income necessary to make up
difference between bond amounts and reclamation cost; clear system was
doomed to collapse so PA went to full cost bonding.  PA currently trying
to eliminate the per acre reclamation fee in this rule making, plus
other amendments required under federal surface mining (note: after this
teleconference, PA lost court decision allowing them to eliminate this
fee).

Regulations state that if AMD is a probable consequence of mining, that
permit will not be issued; how probable?  The operator has to
demonstrate and PADEP find no potential pollution to waters of
commonwealth: any evidence of discharge – then no permit issued.  The
burden of proof is on the applicant to show that no evidence exists.  A
number of ways to prove: primary way to demonstrate is to do a certain
amount of testing, and through core boring analysis and analysis of
overburden, look for toxic rocks and alkalinity to prevent discharge –
if conditions not met then permit application is denied.  PADEP has
worked with various scientists to develop modeling tools.  Science has
evolved since the early ‘90s when most mines end up with discharge. 
More currently down to less than 1-2 percent of permits resulting in
discharges, and those discharges are more mild in nature, lower flow,
metals and not acidic, easily treatable.  

Biggest AMD problems left over from last century – it’s really a
legacy issue.  Science is still not perfect in predicting AMD, but
biggest problem is from last century.

Was there was a big jump in forfeiture rates when state went to full
cost bonding?

No, for a couple of reasons:  looking at change in bonding system, PA
was concerned that new bond amount would lead to more forfeitures and
make situation worse.  Department and PA worked with the industry and
general assembly.  Based on historic rate of 10% of forfeiture and
current number of operators, to keep companies from having to go out of
business from not being able to afford bonds, general assembly
appropriated $7 million to underwrite bonds for additional amount up to
$70million.  Some operators went ahead and got bonds from sureties or
collateral bonds, others purchased from state: $63 million in liability
from state.  Program prevented increase in bond forfeiture.  Also
somewhat fortunate because an increase in coal prices helped companies
avoid financial difficulty.

Current rate of forfeiture fluctuates wildly over last 10 years; reasons
are complicated.  Doesn’t know the current rate of forfeiture but
it’s been fairly stable lately; still sees some jumps.

Was forfeiture related to AMD treatment costs?

Not aware of whether analysis is available regarding reasons for
forfeiture.  Can think of some cases where forfeiture related to AMD,
but can’t really say overall; no data available.  Bars and Tucker: big
company closure directly attributable to AMD. Al Hamilton bankruptcy for
AMD – trust set up for most of treatment. C&J Coal Company thinks
closed because of water treatment costs.

A large percentage of forfeitures are probably due to water costs,
sometimes a combination of both water and land.  We would need to look
at sites: approximately 100 primacy bond forfeiture sites.  Ratio of
land liability versus water liability hasn’t been tracked, but thinks
it is fairly high.  He doesn’t have any numbers on manganese costs and
contribution to forfeiture.  Treating manganese discharge is an issue;
often times this significantly increases the cost of treatment, and
sometimes even doubles cost of treating. This has probably contributed
to forfeiture in a number of instances.  Mine operators do not let them
into financial details, and some things are so intertwined, and
companies long gone, that there’s no way to determine contributions of
manganese to forfeiture.

There was difficulty for operators getting bonds even prior to full cost
bonding.  Initially state didn’t have much experience in how to
calculate net present value of bond or trust fund to pay for treatment. 
Surface mines can’t get bond released until they’ve completed
reclamation.  PA was holding a couple hundred million dollars in bonds
for several operators because of this, and the bond market was
tightening up.  Sureties didn’t want on water liability forever; for 5
years mining permit only a couple of sureties are writing in PA. Some
operators left PA with no hopes of getting bond released.

PA started to figure out how to calculate net present value of bond or
trust fund to pay for future treatment costs, so now PA could put
pressure on operator to appropriately fund future treatment costs. 
Operators started to see potential for bond release.  Bond market
started loosening in the last 4-5 years due to figuring out how to
calculate bonds and trust funds appropriately, and maybe a combination
of other factors too.

Based on methodology and state law, if bond forfeited goes to state
treasury and earns state treasurer low interest rate; that means net
present value of bond is higher than net present value of trust.  With
trust, operator is allowed a more aggressive investment strategy; trust
fund amount was less than bond amount – maybe only half as much. 
Operators agreed to put up additional bonds/trusts.  

Permits last for 5 years: assume worst case scenario of permit
forfeiture on last day; calculate net present value over 6 years to last
day of 6th year, to determine bond amount to treat into perpetuity.  At
end of 5th year revisit and recalculate whether additional bonds are
required to be posted. 

Pattern of mine ownership: most are corporations – some are still mom
and pops.  One pattern prevalent throughout industry – most companies
are set up not to retain assets: one company owns coal, a 2nd applies
for the permit, a 3rd mines the coal using equipment leased from a 4th
company; but same 2 or 3 principals for all 4 companies.  Its set up
this way to insulate from liabilities; it spreads out assets and makes
assets easier to take out so that there aren’t a lot of assets to deal
with: that’s the reason to have a good bonding program.  

Sureties are reluctant to bond mining companies that aren’t large and
openly traded, because they cannot accurately predict financial
stability out more than a couple of years.  

Under PA law, the company with permit and company operating site are
liable for AMD.  Its almost impossible to pierce the corporate veil and
go after shareholders and officers individually, and its difficult to
impose personal liability.  

You do not need to show any knowledge of mining to get a permit, just
need to have no record of other forfeiture, a mining license, and no
connections to other bad actors.  Don’t need assets to begin with; no
need to demonstrate financial wherewithal to mine, just need the
resources to put up the bond

Need to return call by         /         at/between         and        
.	Signature:	 

