The recent bankruptcy of Colorado-based Westmoreland Coal Company offers powerful insight into the bleak future for thermal coal mining in the United States, particularly in the Powder River Basin of Wyoming and Montana.
To begin with, Westmoreland’s business relied exclusively on thermal coal production, particularly at mines that sell to a single power plant. The ongoing decline of the thermal coal industry left the company with few options. Westmoreland didn’t go down without swinging, leaving the brunt of its assaults directed at Westmoreland’s hardworking employees. But even as the company aggressively stripped health care and retirement benefits from its miners, it offered bonuses to a group of its executives. Finally, Westmoreland’s efforts to off-load one of its troubled operations – the Kemmerer Mine in Wyoming – hit a major snag when the proposed buyer was unable to reach terms with any reclamation surety bond provider, which suggests that the surety industry is finally recognizing it’s dealing with a doomed industry.
Westmoreland’s failure shows that thermal coal mining is no longer an economically viable industry and makes clear the importance of preparing for a future without it.
The most significant factor setting Westmoreland apart from the many major coal companies that preceded it into bankruptcy was its exclusive focus on producing thermal coal (used to generate electricity) as opposed to metallurgical coal (used in steel making). Westmoreland was so focused on thermal coal production, in fact, that many of its mines, including its largest operations, operated on the “mine-mouth” model, meaning that each mine was co-located with a power plant that served as its sole customer. Westmoreland’s fate as a company was therefore inextricably tied to the demand for coal-fired energy. Westmoreland acknowledged this outdated reliance on coal-burning power plants in its initial bankruptcy filings, citing competition from “nuclear energy, gas-fired generation, hydropower, petroleum, solar, and wind” as a major driver of its financial difficulties.
Ultimately, an ad-hoc group of Westmoreland’s secured lenders used the bankruptcy process to cherry-pick the handful of mines with the smallest liabilities while passing off additional deadweight operations to other companies. These lenders knew that they would never see a positive return on their investments in Westmoreland, and were just trying to minimize their losses. The lender groups identified a small group of “core assets” to acquire in exchange for releasing the company from its debt obligations: the Rosebud mine in Montana, San Juan mine in New Mexico, Haystack mine in Wyoming, and Absaloka mine in Montana. The fact that these are the company’s “crown jewels” is in itself a damning statement on the grim future facing coal-burning power plants and the thermal coal mines that supply them. Of these mines, only three produce coal, and each of those serves a single power plant that is winding down operations and is slated to close within the next few years.
The Rosebud mine serves the four-unit Colstrip power plant, which is scheduled to close two units in 2022, and the remaining two units in 2027. A recent effort to prop up the Colstrip plant through a bailout failed in the Montana legislature. The San Juan mine serves the San Juan power plant, which has already closed two units and is expected to shutter the remaining two units in 2022. The smaller Absaloka mine serves the Sherco plant in Minnesota, which is retiring two of its three units in 2022. The Haystack mine has not produced any coal for several years. These mines lack ready access to the broader coal market, and do not appear to be cost-competitive. They are unlikely, therefore, to continue operations after they lose their customers.
Whereas the previous three major mine operator bankruptcies – of Alpha Natural Resources, Arch Coal, and Peabody Energy – resulted largely from the failure of those companies to service the debt they had acquired in purchasing additional metallurgical coal mines, Westmoreland’s was a much more straightforward case of falling revenues and increasing costs. This also meant that Westmoreland faced a more difficult task in bankruptcy. Rather than use Chapter 11 to shed unsecured debt or convert debt into equity, Westmoreland had to cut expenses and trim operations.
Westmoreland’s choice to place the burden on its workers and retirees is the sort of short-sighted decision typical of declining industries.
Westmoreland’s choice to persist in a shrinking and outmoded industry meant that to survive – even in a diminished form – it had to slash costs. Unfortunately, rather than ask its investors or its executives to make these sacrifices, Westmoreland chose to shift the burden to those least-responsible for the company’s problems: its workers.
Whereas the mine operators in the previous bankruptcies were generally able to honor their commitments to workers and to retirees, Westmoreland made clear early on that its bankruptcy plan rested on reneging on its longstanding obligations to its workers and retirees. Although dozens of retired miners sent impassioned letters to the bankruptcy judge pleading for the pension and health benefits they worked for, the court ultimately signed off on Westmoreland’s plan to default on its obligations for $334.5 million in retiree medical benefits and $21.8 million in black lung benefits.
The court also allowed Westmoreland to freeze its pension plan, though the obligations to current participants will be assumed by the ad-hoc group of the company’s senior secured lenders who will operate certain of Westmoreland’s mines going forward. Those lenders also offered the fig leaf of a $6 million commitment for retiree benefits. Representatives of the miners’ unions estimate that the fund will be exhausted within a year. At the same time, Westmoreland secured permission from the bankruptcy court to pay $1.5 million worth of quarterly “retention bonuses” to a set of non-union executive employees. Those bonuses failed even to serve their intended purpose, however, as Westmoreland’s CFO still fled the company in the middle of the bankruptcy.
Surety bond companies have seen the industry’s downward trajectory, and are demanding additional protections that mine operators can’t afford.
One of the most significant obstacles to Westmoreland’s emergence from bankruptcy was the company’s difficulty in offloading its additional high-liability mines. In particular, Westmoreland sought buyers for two coal mine complexes in Ohio, and for the Kemmerer Mine in Wyoming.
The Ohio mines sell coal to a single customer, AEP, but the current coal supply contract only runs through 2019 and Westmoreland acknowledged that it does not expect the contract to be renewed. In fact, Westmoreland revealed in bankruptcy filings that its Ohio mines were only expected to generate revenue in 2019. Many of the Ohio mines are already in reclamation, and some have water pollution problems that will require long-term treatment. For these reasons, the initial sole bidder for those mines proposed a deal under which Westmoreland would pay him $20 million to take the mines and assume the reclamation liabilities. The bidder, Charles Ungurean,originally opened the mines before selling them to Westmoreland for $64 million in 2015. Eventually, a competing bid was submitted for the mines and Ungurean ultimately emerged as the successful bidder with an offer to pay about $2.5 million. In just four years, therefore, the mines have declined in value by between $60 million and $80 million.
The bidder who inserted himself into the Ohio mine sale was initially selected as the winning bidder for the Kemmerer Mine in Wyoming, though that sale also fell through in the end. Tom Clarke, a former healthcare executive from Virginia who began purchasing distressed coal properties out of bankruptcy in 2015, offered a total of $7.5 million in cash for Kemmerer, with a promise to pay more than $200 million in the future. Clarke’s bid was complicated by existing outstanding violations at his West Virginia coal mines, and his difficulty finding a surety bond company willing to provide the reclamation bonds required by law. That last obstacle proved impossible to overcome. After multiple rounds of offers and counter offers, Clarke was unable to secure a reclamation bond because he could not come up with sufficient collateral to satisfy the bond provider. Surety bond providers are now demanding additional collateral because the risk of default is increasing. The Kemmerer mine primarily serves the nearby Naughton power plant, and one of the Naughton plant’s three units was shut down in 2019. The other two units are scheduled to close by 2029, but the plant’s owners recently announced that they are developing plans to shut down the entire Naughton facility in 2022. Kemmerer will now be sold to a group of Westmoreland Resource Partners’ secured lenders.
Sierra Club will continue to monitor coal mine operators, and coal mine operator bankruptcies, as the industry stumbles towards its inevitable end. In the Westmoreland bankruptcy, Sierra Club’s participation ensured that the company would not use the proceeding to weaken or strip away environmental protections. This included securing commitments that the new owners of the San Juan mine would carry out the reclamation obligations required under an existing settlement. Sierra Club also acted to protect the public’s right to participate in administrative actions under the Clean Water Act and Surface Mining Act related to the company’s mines throughout Westmoreland’s bankruptcy.