Alpha’s Bankruptcy Reorganization Compromised by Legacy of Reckless Self-Bonding

Self-bonding will continue to haunt the ongoing bankruptcies of other major coal companies like Arch Coal and Peabody Energy. In total, state regulators – with the blessing of federal mine regulators – have allowed $3.86 billion of self-bonded reclamation liabilities.[2] The vast majority of that – over $2.4 billion – is held by companies in bankruptcy.[3] And the total self-bonded liability falls just below the current estimated market cap for all U.S. coal producers of $4.5 billion.[4] Should this house of cards collapse with the liquidation of one or more major coal companies, government regulators would be overwhelmed and unable to carry out the unfunded reclamation on a timeframe that would avoid potentially disastrous consequences for surrounding communities.

This self-bonding-induced threat effectively ties the hands of government regulators participating in the bankruptcies, and prevents them from using the considerable legal leverage at their disposal. In the weeks leading up to the hearing on confirmation of Alpha’s bankruptcy reorganization, lawyers for the U.S. revealed two powerful weapons to oppose Alpha’s proposed plan. First, the U.S. threatened that if Alpha failed to fully fund its total reclamation obligations, the government would block Alpha’s ability to transfer its federal coal leases to the new company being formed by its senior lenders.[5] This would have prevented Alpha from splitting off what the government called its “crown jewel” mines in the Powder River Basin of Wyoming. Second, the U.S. demanded to take depositions of Alpha’s financial experts with the goal of revealing that the financial projections on which the whole reorganization was premised are flimsy and unsubstantiated.

So why didn’t the U.S. use its considerable leverage to block Alpha’s plan or force the banks and hedge funds that make up Alpha’s senior lenders to put up sufficient funds to cover the full reclamation obligations? Because they couldn’t risk tipping Alpha into liquidation and thereby pushing West Virginia into a $240 million hole. The government’s lawyer confirmed the role that this threat played in dictating the final position of the U.S. when he told the bankruptcy court that although the agencies he represents “have concerns,” they ultimately decided that “confirmation of Alpha’s reorganization plan is a better outcome for reclamation, water treatment, and mitigation than might occur under a Chapter 7 liquidation.”

The reclamation compromise that the state and federal regulators ultimately entered into with Alpha is significantly, potentially even fatally, flawed. Earlier in the bankruptcy, Alpha stated that its total reclamation obligation in West Virginia was over $317 million.[6] West Virginia stated that its “own estimate of Alpha’s reclamation and water treatment obligations in the State of West Virginia runs to roughly $1 billion on an undiscounted basis.”[7] The reclamation compromise, however, provides a maximum of $229 million earmarked for reclamation in all of the Appalachia states. Because Alpha has the majority of those reclamation liabilities, it will receive 80% of that, or just over $183 million. This leaves a shortfall of almost $134 million. What’s worse, that total amount won’t be reached until 2025, leaving a much-greater shortfall in the initial years when Alpha will be most vulnerable and likely to return to bankruptcy. And that’s just the funds earmarked for Alpha to carry out the reclamation on its own. Surely, the regulators must have required Alpha to substitute reliable third-party surety bonds for its empty-promise self-bonds? No. Under the terms of the agreement, Alpha is allowed to continue self-bonding at all of its mines that are in reclamation – an amount estimated to be as much as $150 million.[8] The regulators, by agreeing to this compromise, have thus perpetuated the self-bonding threat that forced them to capitulate once already.

Sierra Club, facing similar constraints in the bankruptcy court, also struck a deal with Alpha.[9] At the outset of its bankruptcy, Alpha retained obligations to install pollution treatment systems at multiple mines in West Virginia under the terms of two pre-exiting settlements with Sierra Club and our West Virginia allies resolving Clean Water Act enforcement lawsuits. One of those settlements addressed selenium pollution, and the other conductivity pollution. Alpha has almost completed all of its obligations under the selenium settlement, but was facing costs as high as $150 million to come into compliance with the conductivity settlement. Alpha indicated that it would not be able to satisfy those conductivity obligations, and threatened to ask the bankruptcy court to release it from the terms of the settlement. As a compromise, Sierra Club and our partners agreed to give Alpha a three year extension to its conductivity compliance deadlines. In exchange, Alpha has pledged $7.5 million to go to a new West Virginia non-profit to carry out reforestation and stream restoration projects in West Virginia.[10] Alpha also agreed to give up a 53 million ton coal reserve in southwest Pennsylvania to a non-profit who will ensure that the coal remains in the ground.

Compromise is inherent and often unavoidable in bankruptcy. But such compromise should come only after a party has made its strongest arguments and wielded its most powerful sources of leverage. The U.S. government possessed enormous legal leverage in the Alpha bankruptcy, but ultimately opted not to use that to its full advantage. As a result, Alpha was allowed to emerge from bankruptcy under terms that fail to fully fund its reclamation obligations, and that also allow it to continue evading the requirement that it provide complete and adequate financial assurances to cover the costs of reclamation in the event it again becomes insolvent. This outcome was not the result of poor negotiation by the government’s lawyers in the bankruptcy, but was instead a direct outgrowth of the earlier reckless and short-sighted decisions of West Virginia and federal mine regulators to allow Alpha to rely on hundreds of millions of dollars of empty-promise self-bonding. The federal Office of Surface Mining Reclamation and Enforcement must immediately act to close this self-bonding loophole so that the U.S. never again has to abdicate its central role as a watchdog in these bankruptcy proceedings, and so that no other coal company is allowed to emerge from bankruptcy without fully providing for its reclamation and other environmental obligations.

Photo by Vivian Stockman and SouthWings, courtesy of the Ohio Valley Environmental Coalition.