As the Appalachian coal industry continues a long-predicted decline, serious concerns are mounting among labor unions, citizens groups and regulators that financially troubled producers could try to abandon their obligations to fund miners’ pensions and health care benefits and try to escape from their commitments to reclaim mine sites and clean up polluted streams.
Last week, the United Mine Workers union warned that that is exactly what Patriot Coal hopes to do with its proposal to sell certain assets — those without large debts to union benefit funds or more significant long-term pollution liabilities — as part of a restructuring plan being considered in U.S. Bankruptcy Court.
UMW lawyers said the move would give the buyer, Kentucky-based Blackhawk Mining LLC, Patriot’s “most valuable assets.” Left behind would be less-valuable properties, perhaps without the ability to fund “significant and unwanted obligations” to reclaim land, pay injured workers, pay retirement and health care and employ miners working under a union contract, the lawyers said.
“The losers in this scheme would be the miners who generated profits over the years and the taxpayers of the state of West Virginia, the Commonwealth of Kentucky and the United States, who ultimately pay for the reclamation of the environment and the income replacement for injured and breathless miners,” UMW lawyers said in a court filing opposing Patriot’s proposal.
While union officials and others were already growing increasingly worried about the implications of Patriot’s bankruptcy plans, they were hit last week with another, not-unexpected blow, when Alpha Natural Resources filed for bankruptcy court protection so it could try to reorganize.
Alpha’s bankruptcy filings provided a long list of the sorts of “legacy liabilities” that coal producers face: more than $680 million in reclamation obligations; $160 million in water-treatment costs; more than $158 million in black lung benefits; and $600 million of debt to the UMW’s pension plan.
In a vivid illustration of the liabilities that coal companies can leave behind, Alpha said reclamation and worker liabilities for 80 mines it has closed since 2011 already amount to more than $175 million a year.
Philip Cavatoni, Alpha’s executive vice president and chief financial officer, told the bankruptcy court that the company’s restructuring would allow Alpha to emerge with “an appropriately de-leveraged balance sheet.” Among other things, Cavatoni said that being forced to immediately post $400 million to cover Alpha’s Powder River Basin reclamation liabilities — something Wyoming state officials have demanded — would “be detrimental” to its restructuring efforts.
While Alpha officials have not yet announced their specific reorganization plans, and said in court filings that they are “not commencing an immediate sale process for their assets,” UMW President Cecil Roberts cautioned in a prepared statement issued the day of the bankruptcy filing that he expects an effort to “pay off the big banks and other Wall Street investors at the expense of workers, retirees and their communities.”
Trying to hold coal companies accountable for long-term liabilities to workers and the environment is hardly a new issue.
Some of the UMW’s most difficult struggles in the past 30 years have been over retiree pension and health care benefits. Escaping nationwide benefit plans, part of the UMW’s longstanding national contract, was part of what drove bitter strikes against A.T. Massey Coal and Pittston Coal in the 1980s.
Those struggles led to passage in 1992 of the Coal Act. That law was aimed at forcing mine operators and former mine operators to maintain payments for miner benefits, but it proved to be only a short-term fix. UMW officials and some coalfield politicians have warned in more recent years that some action was needed to protect the union pension plan.
In West Virginia, state regulators have never forced mine operators to post bonds or otherwise obtain insurance that would cover the full cost of land reclamation or water treatment at their mines. Instead, operators post bonds in smaller amounts, or they “self bond” by showing regulators they are financially healthy.
A “bond pool” or “special reclamation fund,” which also includes money from a reclamation tax on all mine operators, is used by Department of Environmental Protection’s Office of Special Reclamation to clean up mine sites that are abandoned since passage of the 1977 federal strip-mining law. That bond pool itself has, for years, struggled with maintaining enough funds to pay to clean up mines left to the state’s supervision when companies go belly-up.
Coal production forecasts project that West Virginia output will continue to decline, driven down by competition from inexpensive natural gas, depletion of quality reserves in the Southern part of the state, competition from other coal basins and from renewable power, and tougher standards to protect the environment and fight climate change.
A new “consensus” coal forecast, prepared by Marshall University’s Center for Business and Economic Research based on an averaging of other projections, estimates that West Virginia production will decline through 2017 and then remain fairly stable through 2021, and then fall again, to 97 million tons produced, in 2035. That’s compared to 112 million tons last year. And the projection does not consider any potential impact of government restrictions on greenhouse gas emissions.
In its bankruptcy case, Alpha said the macroeconomic challenges facing the coal industry have been “compounded by the promulgation of new environmental regulations,” and stricter enforcement of existing federal and state regulations affecting the coal and electrical power industries.
Alpha also described the pressures that forced it into Chapter 11 as things that came up after its June 2011 acquisition of Massey Energy Co. However, a recent analysis by the Natural Resources Defense Council argued that companies like Alpha are suffering, at least in part, because they made “bad bets” with transactions like the Massey acquisition, believing that the coal market was going to boom.
When the Alpha-Massey deal was finalized, state political leaders praised the move as a way to revitalize West Virginia’s coal industry in the wake of the deaths of 29 miners at Massey’s Upper Big Branch Mine a little more than a year earlier.
Just after last week’s bankruptcy filing, Alpha CEO Kevin Crutchfield wrote a Gazette-Mail commentary to reassure readers that Alpha officials “value the relationships we have forged in the communities where our affiliated employees live and work, raise their children, worship and contribute their own time and energy to local causes and events.”
“We believe restructuring is the best option at this time for our organization, and we fully intend to emerge from this process as an agile company, with a diversified resource base and better positioned for the future,” Crutchfield wrote.
Most analysts, and even top industry officials, see what’s happening now in the mining business as a more fundamental, structural change. Crutchfield told the bankruptcy court, “The U.S. coal industry as currently structured is unsustainable.”
Analysts see the recent production declines, especially in central Appalachia, as unlikely to significantly rebound, an outcome that brings new urgency to the longstanding problems facing worker benefit and environmental reclamation programs. Less coal production not only means less funding for tonnage-based mine cleanup taxes, but it also puts companies at risk of broader financial failures that threaten such programs.
Last week, a preliminary U.S. Office of Surface Mining analysis found that roughly 41 percent of the outstanding mining permits from the West Virginia DEP are held by a company whose parent corporation is in bankruptcy. In April, local OSM field office director Roger Calhoun urged the DEP to take a closer look at the coal industry downturn and its impact on the reclamation program, especially given increased attention now being given to previously ignored water pollution problems, such as discharges of toxic selenium.
“I’ve been here 36 years, and there has never been 41 percent of the permits in bankruptcy,” said Lewis Halstead, a deputy director of the DEP’s Division of Mining and Reclamation. Halstead said DEP officials are closely examining bankruptcy cases, especially those involving Patriot and Alpha, the companies with the biggest presence in West Virginia.
“We’ve got a whole lot of lawyers looking at this,” Halstead said. “We’re concerned.”
John Morgan, a Kentucky mining engineer who serves on an advisory council that monitors that state’s special reclamation fund, said the council needs to modify the approach its actuary takes in estimating if the fund has adequate money. The council uses the actuarial report to make recommendations to lawmakers about the level at which to set the special reclamation tax that helps fund the pooled reclamation bond system.
Morgan argues that current studies, using historic bankruptcy and permit-bond forfeiture rates, might no longer accurately project what’s going to happen in the coal industry, now or in the future.
“The dynamics have changed,” Morgan said. “We’ve reached a tipping point where the industry is changing. It’s not going to be the same industry going forward.”
Like the mine workers union, citizens groups have been closely following the Patriot bankruptcy, the company’s second Chapter 11 restructuring in three years.
Under Patriot’s current restructuring proposal, Blackhawk Mining’s purchase of Patriot assets would not include operations like Patriot’s Federal No. 2 Mine in Monongalia County. Federal No. 2, a former Peabody Coal operation with more than 460 employees, is one of the union’s major remaining mines in West Virginia. Blackhawk also would not be buying Patriot’s unionized Hobet 21 mountaintop-removal complex or the company’s large surface-mining sites in Logan County, operations with significant Clean Water Act obligations to clean up stream pollution.
In its bankruptcy court filings, Patriot explained that it faces “unsustainable further legacy and other non-operating liabilities.” Obligations to retirees, estimated at “tens of millions [of dollars] a year,” have “become unsustainable,” Patriot said. Patriot listed a $233 million reclamation liability and said it already has spent $77 million on new water treatment at Hobet 21.
“The debtors’ Retiree Obligations, as they currently exist, have become unsustainable,” Patriot’s bankruptcy lawyers told the court. “The debtors already spend tens of millions a year in Retiree Obligations and that spending is expected to rise further.”
Ron Pauley, a UMW representative to West Virginia’s special reclamation fund advisory council, cautioned last week that a site like Hobet 21 isn’t going to be something that Patriot can easily sell to another coal producer, given its water pollution and UMW liabilities.
“It’s going to be hard to find a buyer for that,” Pauley said. “It’s probably going to be forfeited, before it’s said and done.”
Michael Becher, a lawyer with Appalachian Mountain Advocates, agreed.
“There are significant new water liabilities associated with those mines,” said Becher, whose group has filed numerous lawsuits seeking to force mine operators to implement more comprehensive water pollution treatment. “Those costs are somewhat different than what has been dealt with in the past.”
Last week, concern about the coal industry’s legacy liabilities reached the White House, when President Obama announced his administration’s final rule to require reductions in greenhouse gas emissions from coal-fired power plants. Obama, responding to expected criticism from the coal industry and regional political leaders, touted his administration’s effort to provide $5 billion in economic aid to coalfield communities.
“They will claim this is a ‘war on coal’ to scare up votes, even as they ignore my plan to actually invest in revitalizing coal country and supporting health care and retirement for coal miners and their families and retraining those workers for better-paying jobs and healthier jobs,” Obama said. “Communities across America have been losing coal jobs for decades. I want to work with Congress to help them, not to use them as a political football. Partisan press releases aren’t going to help those families.”
The administration’s “Power Plus Plan” would, among other things, provide $3.9 billion over 10 years to protect health and retirement benefits for retired coal miners and their families. The initiative also proposes $1 billion in new spending over the next five years to help clean up abandoned strip mines.
Jason Walsh, a senior White House policy adviser who helped develop the administration’s coalfields initiative, said during a visit to West Virginia in June, “We are only going to build a sustainable economic future for these areas, if we build a foundation to address the legacy costs of the coal industry.”
Reach Ken Ward Jr. at email@example.com, 304-348-1702 or follow @kenwardjr on Twitter.