A worsening financial crisis for the nation’s biggest coal companies is sparking concerns that U.S. taxpayers could be stuck with hundreds of millions, if not billions, of dollars in cleanup costs across a landscape of shuttered mines stretching from Appalachia to the northern Plains.
Worries about huge liabilities associated with hundreds of polluted mine sites have mounted as Peabody Energy, the world’s largest publicly traded coal company, was forced to appeal to creditors for an extra 30 days to pay its debts. Two of the four other biggest U.S. coal companies have declared bankruptcy in the past six months.
Under a 1977 federal law, coal companies are required to clean up mining sites when they’re shut down. But the industry’s plummeting fortunes have raised questions about whether companies can fulfill their obligations to rehabilitate vast strip mines in Western states – many of which are on federally owned property – as well as mountaintop-removal mining sites in the East.
A number of smaller companies have defaulted or skimped on cleanup obligations, leaving behind abandoned strip mines and denuded mountains. Some are simply eyesores, unhealed scars on the landscape that can be seen for miles. Others are perpetual sources of water pollution, slowly leaking acidic and otherwise toxic wastes into streams and groundwater supplies.
Now coal giants are facing outcomes similar to those experienced by some of the smaller companies. Several are struggling to make payments on debts for ill-timed multibillion-dollar acquisitions of their rivals in recent years. On top of that, they have been financially squeezed by competition from cheap natural gas and declining U.S. and Chinese demand for coal.
The biggest coal companies typically pay third parties to ensure that mine sites are cleaned up in the event of financial hardship. But in recent years, many coal companies have relied on a cheaper technique called “self-bonding,” pledging only their own names and financial wherewithal to guarantee their cleanup obligations.
With mounting losses and debt loads, the companies do not have enough money to pay for all their obligations, and self-bonding is “not worth 1/8the3/8 paper 1/8it’s3/8 written on,” Steve Jakubowski, a bankruptcy lawyer with the firm Robbins, Salomon &Patt, said in an email. In a bankruptcy, where Alpha Natural Resources is now, a judge can decide which creditors are paid and how much – and state and federal governments could be left holding the bag for reclamation costs.
“There is a lot of liability out there and a lot of uncertainty,” said Shannon Anderson, a lawyer with the Power River Basin Resource Council, a Wyoming nonprofit group that supports tougher rules for cleaning up mine sites.
Peabody alone has cleanup obligations of nearly $1.4 billion guaranteed by self-bonding, according to statements filed by the company last year with the Securities and Exchange Commission. Arch Coal and Alpha – the nation’s second- and fourth-largest coal companies – have self-guaranteed liabilities exceeding $485 million and $640 million, respectively, in reclamation costs.
The coal giants are currently in no condition to spend those amounts. Arch and Alpha filed for Chapter 11 bankruptcy protection last year. Peabody stock prices have fallen by more than 97 percent over the past year, and the coal behemoth’s market value at Thursday’s closing price was less than $44.3 million. Barclays Capital said the company’s debt-to-capital ratio was a towering 88 percent.
Bankruptcy restructuring could provide coal companies with a way of escaping obligations to restore land.
It wouldn’t be the first time the federal government covered the costs of corporations’ environmental pollution. Something similar happened during the 2010 General Motors bailout, when the federal government injected money into an independent trust that took on the cleanup of about 60 contaminated sites.
Obama administration officials have voiced concern recently about the reliability of self-bonding agreements for some of the biggest coal operations in the Powder River Basin, an area that straddles the Wyoming and Montana border and contains some of the biggest coal mines in the world. The Interior Department sent a letter last month to Wyoming regulators warning that self-bonding agreements for two of Alpha Coal’s mines had fallen “below the amount necessary to assure that the operator will faithfully comply with all rules and regulations” if the company goes out of business.
In Illinois, environmental groups and industry experts are closely watching three Peabody mines with cleanup obligations of $92 million covered by self-bonding. Howard A. Learner, executive director of the Environmental Law and Policy Center, urged state officials in a blog post to force the troubled company to buy surety bonds to “make sure that our taxpayers aren’t holding the financial bag.” Selling surety bonds is similar to paying insurance premiums to cover the cleanup costs. But it might be too late for Peabody to find anyone interested in taking that risk.
“If state officials don’t step up now, their next step might be standing in line in the federal bankruptcy court to protect Illinois taxpayers,” Learner said.
Jakubowski, the bankruptcy expert, said the coal companies will have a hard time wriggling out of cleanup costs linked to mines that continue to operate, and Anthony Young, an analyst at the Macquarie Group, a global investment banking firm, said he expects that as much as 90 percent of Peabody’s mines, mostly in Wyoming’s Powder River Basin, will continue to operate.
But cleanup costs tied to mines that have shut down or will shut down in bankruptcy – most likely those such as Alpha’s in the Appalachians and Midwest – could end up being billed to taxpayers.
How the big coal companies got to this point is a lesson in hubris and overreach. Alpha bought rival Massey Energy for $7 billion. Arch Coal – whose top executives received $8 million in bonuses the day before filing for bankruptcy, according to a report by Energy and Environment News – bought International Coal for $3.4 billion. Peabody paid $5.1 billion for Macarthur Coal. And Walter Energy bought Western Coal for $3.3 billion.
In 2011, when the merger wave picked up speed, natural gas prices were at a healthy $4 a thousand cubic feet, there was an international commodity boom and China’s economy was speeding ahead. Now commodity prices have slumped, China has slowed and natural gas prices hover around $2 a thousand cubic feet.
“I understand what management was thinking at time,” Young said. “Obviously, they didn’t stress-test their balance sheets. It has cost people their companies and many people their jobs.”
Pavel Molchanov, an energy analyst at the advisory firm Raymond James, said the entire industry is in long-term decline because of efforts to reduce coal use and slow climate change.
“It really is striking that virtually every large U.S. coal producer is bankrupt or on the cusp of bankruptcy,” Molchanov said.
The financial crisis highlights what environmental groups say are deep inadequacies in cleanup requirements for coal companies. Often, activists say, mining companies are simply given a pass after meeting the most rudimentary requirements to cover up open pits with dirt and rock. Some environmental groups are pressing for legislation requiring “contemporaneous reclamation” – forcing mining companies to clean up after each phase of mining rather than waiting for the entire project to be completed.
A report last fall by the Natural Resources Defense Council said barely 10 percent of the 450 square miles of land torn up by mining in Montana, North Dakota and Wyoming met reclamation requirements for final bonding release.
“States are not holding the line on what is required,” said Sharon Buccino, director of the NRDC’s Land and Wildlife Program. “You’re left with a trashed landscape and contaminated water.”
Meanwhile, because of the financial crisis, taxpayers and coal communities face the real possibility that even minimum cleanup requirements will not be met, which Buccino said is “exactly why self-bonding should be limited.”
“We should not have to sacrifice the health of the land and its residents to the financial health of coal companies,” she said.
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