Coal companies are required by U.S. regulations to rehabilitate the environment at depleted mines using cash, private financing or self bonds, a government program that allows companies to use their balance sheets as collateral and provides government backing for rehabilitation costs.

Kentucky-based Bowie, which is owned by private equity investors, has asked to self-bond at mines it bought from Peabody Energy Corp (>> Peabody Energy Corporation) last month.

Self bonds save coal companies money by trimming insurance costs, but the program could also leave taxpayers with a cleanup bill if a miner goes bankrupt.

Coal operator Alpha Natural Resources Inc (>> Alpha Natural Resources, Inc.) left behind more than $670 million in self-bond liabilities when it filed for bankruptcy in August.

More than $360 million in liabilities at the Bowie mines are covered by Peabody's self bonds, and state officials say they are reluctant to extend those to Bowie.

“We said we'd have a hard time supporting (self bonds),” said Ginny Brannon, director of the Colorado Division of Reclamation Mining and Safety.

In New Mexico, officials said they would reserve judgment until a formal application has been filed.

Bowie did not respond to requests for comment.

If state officials deny Bowie a self bond, the company faces costly insurance.

New Mexico may demand a surety bond to guarantee roughly $360 million in future cleanup work. That could cost more than $6 million annually and require in excess of 90 percent collateral, analysts estimate.

Weak global demand and pollution controls have dented the coal sector in recent years. Leading companies like Peabody, Alpha and Arch Coal (>> Arch Coal Inc) are also heavily indebted after buyouts inked in 2011 when the coal market was stronger.

Investors expect Arch Coal, the second-largest coal producer, will soon be pushed to bankruptcy since it delayed a $90 million interest payment this week. [L1N1440NT]

Across the country, taxpayers could face $3.6 billion in liabilities if more coal companies fail and "it is a big issue," Secretary of the Interior Sally Jewell told Congress last week.

(Reporting By Patrick Rucker, Editing by Soyoung Kim and Cynthia Osterman)

By Patrick Rucker