(Adds quotes from CEO and energy think tank)
By Tracy Rucinski
March 6 (Reuters) - U.S. coal miner Peabody Energy Corp said on Monday it has agreed to set aside collateral to cover future mine cleanup costs as part of its bankruptcy reorganization plan, ending its controversial use of "self-bonds."
For decades the largest U.S. coal companies have used a federal practice known as "self-bonding," which exempts companies from posting bonds or other securities to cover the cost of returning mined land to its natural state, as required by law.
Concerns over how Peabody, the world's largest private-sector coal miner, would finance about $1 billion in self-bonds when it emerges from bankruptcy protection had led a series of complaints over its reorganization plan.
Under a deal announced on Monday, Peabody said it had arranged for $1.26 billion in third-party bonds and $14.5 million in a state bond pool in Indiana, one of the states where it held self-bonds, to fully satisfy its financing requirements.
"This is an important step to protect taxpayers and the environment. It was the right thing to do. It's also another example of how credit markets and banks seem to be more willing to open up their books to coal companies," said Clark Williams-Derry of Sightline Institute, a climate and energy think tank.
A year ago, a slump in coal prices had driven some of the largest U.S. coal companies into bankruptcy. Peabody had warned that the financial strain of having to replace all of its self-bonds would eat into its liquidity.
Today, a spike in demand from China and a more favorable outlook under President Donald Trump have provided a short-term boost for the industry.
Peabody will seek U.S. Bankruptcy Court approval in St. Louis next week for a plan to cut more than $5 billion in debt and exit Chapter 11 in April. The third-party bonds for mine cleanups will become available upon bankruptcy emergence.
Peabody also holds self-bonds in Wyoming, New Mexico and Illinois. It announced a temporary financing deal with the four states in July to cover a portion of the risk that it will walk away from mine cleanup obligations while in bankruptcy.
Rival Arch Coal Inc and Alpha Natural Resources also replaced their self-bonds on active mines when they exited bankruptcy last year.
In a statement, Peabody Chief Executive Officer Glenn Kellow said he was pleased with the bonding solution but left the door open to using self-bonds again in the future, should circumstances warrant. (Reporting by Tracy Rucinski in Chicago; Writing by Tom Hals; Editing by Lisa Shumaker)