As the coal industry faces declining demand and struggles to recover from several “ill-timed multibillion-dollar acquisitions,” it becomes increasingly likely that taxpayers will be on the hook for exorbitant environmental cleanup costs.
Three of the top four coal mining titans have filed for Chapter 11 bankruptcy, meaning the companies may continue operations, and have the potential to emerge from bankruptcy relatively functional and without paying their federally-mandated environmental cleanup tabs, which often amount to hundreds of millions of dollars. The costs may fall upon taxpayers because many of the former mining sites were on federal property.
Perhaps what is worse is that state governments should have seen it coming. In 1977, Congress passed the Surface Mining Control and Reclamation Act, requiring coal companies to purchase bonds that would pay for environmental cleanup if companies became insolvent. But in recent years, several states have allowed mining titans like Peabody Energy, Arch Coal, and Alpha Natural Resources to “self bond,” which is as good as a “wink and a promise… that when the time comes, [companies] will be good for it.”
Now the companies are not “good for it.” Arch Coal, the second largest U.S. coal producer owes $485.5 million in environmental cleanup costs, but reported being $6 billion in debt in its January bankruptcy filings. The company was allowed to self-bond in September 2015, with financials that would push the company into bankruptcy only four months later.
In bankruptcy, hedge funds are in the driver seat, with the state, taxpayers, and employees strapped securely in the back. Hedge funds gained control by buying bonds when prices fell. In 2013, hedge funds purchased Walter Energy, Inc. bonds for as low as 40 cents on the dollar. In return, these debt holders receive liens on the company’s operating cash and assets, and have great influence on how money is spent, but are not held liable for cleanup costs.
While bankruptcy judges control which creditors are paid and the size of the payout, taxpayers are not necessarily in good hands. In January, Judge Kevin R. Huennekens of the U.S. Bankruptcy Court in Richmond, Va., approved up to $12 million in bonuses for Alpha executives. The grant was given behind closed doors, and “over the objections of a federal bankruptcy watchdog, mineworkers’ union and related benefit funds.”
Judge Huennekens said executives have their “work cut out for them” but that he is “rooting for them so they can lift every constituency in this case.” Alpha’s attorney concurred, saying, “It is time to send [executives] a message. The message is: We appreciate your hard work. We’d like you to continue to work hard to bring this case to a conclusion.”
On July 26, Alpha emerged from bankruptcy essentially unharmed, proclaiming itself a “smaller, privately held company,” “better positioned to satisfy its environmental responsibilities.” It will continue to operate 18 of its 50 mines and 18 of it 20 preparation plants in Virginia and West Virginia. The settlement plan allowing for this rebirth gave creditors control of several mines in exchange for debt forgiveness, and required the company agree to pay $7.5 million for land and water conservation work. The company will pay off the amount in increments, with $1.3 million payable upon finalization of the bankruptcy plan, and $6.2 million to be paid over the following two years. When these payments are complete, the company will have paid 1.17% of the $640 million cleanup cost it self-bonded.
The result in Alpha’s case may not be the last of its kind. NPR reported, “Three-quarters of Wyoming’s cleanup costs are self-bonded. In Colorado, North Dakota, Indiana and Texas — in each state — it’s more than half.”
The coal industry has seen, and will likely continue to see, a decrease in demand due to national and international energy programs. In April, coal accounted for only thirty percent of U.S. electricity generation. The Obama Administration’s Clean Power Plan, which takes effect in 2022, could further reduce coal demand by twenty percent. Coal from Wyoming’s Powder River Basin, where 40 percent of U.S. coal is mined has already fallen to $9.35 per ton, or less than half a penny per pound.
Rachel Raimondi is a third year law student at Wake Forest University School of Law. She holds a Bachelor of Arts in Communication from the University at Buffalo. Upon graduation, she intends to practice transactional law.