On March 16, a federal judge approved Peabody Energy’s bankruptcy restructuring plan, effectively bringing to a close the last of the recent major coal company bankruptcies. When Peabody filed for bankruptcy in April 2016, nearly half of all coal produced in the United States came from a company that was, or had been, in bankruptcy since 2012. In addition to Peabody, other major coal producers who have recently gone through bankruptcy include Alpha Natural Resources and Arch Coal. A fourth recently-bankrupt company, Patriot Coal, was made up of mines previously spun off from Peabody and Arch.
As the dust settles on this most recent round of coal company bankruptcies, several clear themes have emerged that suggest the future direction for the industry as a whole. These themes can best be understood in the context of the current direction of the United States energy market, in which coal-fired power represents a diminishing share and renewable energy is steadily gaining.
The markets have spoken: Central Appalachia coal is in serious decline
Coal companies with significant holdings in Central Appalachia (eastern Kentucky, Tennessee, Virginia, and West Virginia) took advantage of the bankruptcy process to strip away those operations and refocus on mines in the Powder River Basin and other parts of the west. Mines in Appalachia are more expensive to operate since accessible coal seams have largely been mined out and new science is emerging showing that they produce a massive amount of expensive to treat water pollution. Coal companies now view these mines as high-liability and low-value, and therefore seek to dispose of them.
Patriot Coal was originally formed in 2007 when Peabody divested itself of all of its eastern coal mines. Patriot later acquired some of Arch Coal’s Appalachia mines. When Patriot entered into its most recent bankruptcy in 2015, it sought to either abandon its Central Appalachia mines, or sell them to a company willing to take on the burden of reclaiming these sites. Ultimately, Patriot’s most valuable mines – largely in the Illinois Basin – went to a company formed by its senior lenders, and the Central Appalachia mines were acquired by the non-profit Virginia Conservation Legacy Fund, which has promised to reclaim the sites.
Alpha Natural Resources took a very similar approach in its 2016 bankruptcy. Alpha first tried to sell its Central Appalachia mines, but received no bids; a statement in itself on the lack of market interest in Central Appalachia mines. Eventually, the company opted to split into two. Alpha’s high-value mines – primarily in the Powder River Basin – were transferred to a new company: Contura Energy. The US government described these as Alpha’s “crown jewel assets,” and objected to their being split off because it would leave so little value in the remaining company, particularly given the high pollution treatment and reclamation costs at the Appalachia mines left behind. Ultimately, Alpha struck a deal with state and federal regulators requiring Contura to set aside a fund to be used to address the environmental costs at the Appalachia mines.
The market for US coal, particularly thermal coal, is dwindling. All coal producing regions bear these effects, but nowhere more so than in Central Appalachia. All signs point to this trend continuing, with more companies looking to get out of the region and more Appalachia mines closing.
Self-bonding is too risky and should be discontinued
At the heart of the Surface Mining Act is the requirement that before any mining can begin, a company must provide financial assurances that the site can be fully reclaimed in the event the company goes out of business. Unfortunately, the Act includes a major loophole which allows certain companies to provide a “self-bond” to satisfy this requirement. The self-bond is a meaningless promise that threatens to pass the cost of reclamation on to the government and, more immediately, to local communities.
Going into their bankruptcies, Alpha, Arch, and Peabody all relied heavily on self-bonding. The combined, total self-bonded reclamation liability of the three companies was a staggering $2.4 billion. This gave the companies enormous leverage in negotiating with government regulators, because those regulators were desperate to avoid an outcome where a company opted to liquidate and stick taxpayers with the massive clean-up costs.
The good news is that thanks in large part to the advocacy of Sierra Club and its allies, all of the companies ultimately agreed to replace their self-bonds at mines actively producing coal. (Alpha was allowed to retain some self-bonding at mines in West Virginia where it is already conducting reclamation, and will steadily reduce that amount to zero over the next decade).
Although the total amount of self-bonding in place at coal mines across the country has now been dramatically reduced, the practice remains a part of the Surface Mining Act and regulations. Even the companies who were compelled to replace their self-bonds as a condition of emerging from bankruptcy have signaled that they may seek to use the reckless practice again in the future.
State and federal regulators must learn from these recent bankruptcy experiences and simply end the practice of self-bonding.
Bankruptcy rewards bad leadership
Despite the usual industry rhetoric blaming government regulations, the real cause of the recent major coal company bankruptcies was bad business decisions. Coal company executives misread the volatile international coal market, and overlooked the ongoing trend toward economical clean energy championed by Sierra Club and its allies. In particular, all three of Alpha, Arch, and Peabody loaded themselves with debt in order to purchase new metallurgical coal mines at the absolute peak of the market in 2011. Alpha purchased Massey Energy for $7.1 billion in a debt-financed transaction. Arch Coal took on enormous debt to purchase International Coal Group for $3.4 billion. And Peabody debt-financed its $5.1 billion acquisition of Australian mine operator McArthur Coal. When the price of coal fell almost immediately after these deals were complete, the companies found themselves unable to service their debt and were forced to file for Chapter 11 bankruptcy reorganization.
So what happened to the fearless captains of industry who made the decisions that crippled their companies and wiped out their shareholders? Surely they were shown the door and new leadership brought on? No. They kept their jobs and were richly rewarded both before, during, and after bankruptcy reorganization. Alpha CEO Kevin Cruchfield collected his salary and bonuses through the bankruptcy, and then abandoned the sinking ship and followed Alpha’s most valuable assets to a new position as CEO of Contura Energy. Arch Coal’s CEO John Eaves kept his job through and beyond the company’s bankruptcy. And although Peabody’s CEO Glenn Kellow didn’t join the company until 2013, he oversaw a major decline in the company’s valuation leading into the bankruptcy. All of these executives received significant multi-million dollar salaries and bonuses leading up to the bankruptcies, seven-figure “key employee incentive plan” bonuses during the bankruptcies, and sky-high salaries and stock options as part of the bankruptcy reorganization plans.
Meanwhile, the companies’ workers have been left with slashed pensions and healthcare, and the communities living near the coal mines continue to bear the burden of poisoned air and water.
There are more bankruptcies to come
The tendency of companies to emerge from chapter 11 bankruptcy, falter, and file for bankruptcy again is so common that it has a name: chapter 22. Too often, bankruptcy plans are revealed to have been based on overly-rosy visions of future market conditions and unrealistic promises of cost-cutting. This is particularly true of companies operating in businesses, like coal mining, experiencing structural declines. And sure enough, the reorganization plans for Contura, Arch, and Peabody are rife with unrealistic assumptions about increasing coal production and reduced production costs. If the coal markets experience another rapid decline – such as the one that followed the peak in 2011 and that led to these most recent bankruptcies – it’s likely that one or more of these companies will find itself back in the bankruptcy court.
Even more vulnerable, however, are the companies that took on the low-value high-liability Central Appalachia mines left behind by Alpha and Patriot. The reorganized Alpha – ANR, Inc. – and the Virginia Conservation Legacy Foundation have unsustainable business models that require them to pump millions of dollars into non-producing coal mines that cannot generate sufficient revenue to offset the costs. It now appears to be more a question of “when” rather than “if” these companies will become unsustainable, though this time total liquidation will be a much more likely outcome than another restructuring. Unfortunately, Contura, Arch, and Peabody, appear to have been successful in shielding their comparatively deeper pockets from liability for cleaning up after Alpha and Patriot, meaning that taxpayers and local residents will be the ones left with the burden of the legacy coal mine sites left behind when the companies go bust.
Whether the coal industry and its funders want to admit it or not, coal has passed its peak and will only continue to decline. Over the past two years, over two hundred coal units have retired, and wind and solar dominate new energy production coming online. History will show that these recent coal company bankruptcies were a missed opportunity for funders and regulators to bring investments and policy in line with our new clean energy reality.