The sudden bankruptcy filing of Revelation Energy and its subsidiary Blackjewel on July 1 marked the beginning of Phase 2 of coal mine operator bankruptcies. This shift was confirmed just a few weeks later with the bankruptcy filing of Blackhawk Mining. Whereas the Phase 1 bankruptcies that began in 2015—including, in particular, the bankruptcies of Alpha Natural Resources, Arch Coal, and Peabody Energy—consisted primarily of balance-sheet reshufflings but no direct mine closures, the Phase 2 bankruptcies will be marked by massive layoffs and the repudiation of reclamation obligations.
And it is the very thing that allowed Phase 1 debtors to avoid mine abandonments that created the conditions for the Phase 2 bankruptcies. Mine operators like Revelation that acquired distressed mines out of the Phase 1 bankruptcies, and thereby allowed the Phase 1 debtors to move those liabilities off of their books and emerge from bankruptcy, have run out of resources and are now bankrupt themselves. That means we’re going to begin seeing liquidations and mine abandonments on a broad scale, with devastating effects on workers and communities.
Each of the major Phase 1 bankruptcies was facilitated, to some extent, by a transaction that involved one or more smaller operators acquiring mines that carried with them high liabilities and underfunded obligations. These liabilities include pension, healthcare, black lung, and reclamation obligations.Â
Alpha Natural Resources’ plan to emerge from bankruptcy (or at least the plan of its secured lenders) was to split the company in two. As described in bankruptcy court documents, newly formed Contura Energy would consist of the company’s “crown jewel” mines: enormous Powder River Basin thermal coal mines and a portfolio of steel-making coal mines in Appalachia. The reorganized Alpha would be left with the scraps. The major objections to that bankruptcy plan were arguments that Alpha would be underfunded and unable to satisfy all of the assumed liabilities.
The plan was ultimately approved as the “least bad” option, but objections from Appalachia state regulators persisted, including over how Alpha would secure third-party reclamation bonds to replace its inadequate self-bonding. Alpha eventually solved that problem by transferring 280 permits to Lexington Coal Company, together with cash payments that would eventually total $316 million, in July 2017. The cash was supposed to allow Lexington to complete reclamation at the mines. More surprising was the announcement that followed not long after in December 2017 that Contura would also divest itself of some of those “crown jewels” it had acquired.
Following reductions in demand for Powder River Basin thermal coal, Contura transferred its only mines in the region—the massive Eagle Butte and Belle Ayr mines—to Blackjewel, a subsidiary of Revelation Energy. Blackjewel paid essentially nothing for the mines, with the value to Contura coming from the avoided reclamation costs as well as tax benefits. Having succeeded in shedding it deadweight mines, Alpha and Contura re-merged in 2018.Â
Peabody and Arch had both, several years prior to their bankruptcy filings, transferred high-liability mines to Patriot Coal Corporation, which had been spun off from Peabody. The absence of any high-liability mines on their balance sheets allowed Peabody and Arch to complete rapid debt-to-equity bankruptcy turnarounds that didn’t involve any mine sales and that left the companies’ operations essentially unchanged post-bankruptcy. When Patriot itself filed for bankruptcy in 2015, the major question hanging over the proceedings was what would become of the liabilities it had inherited from Peabody and Arch. Initially, it looked like Patriot would have to resort to abandonment and repudiation.
One of Patriot’s secured lenders had formed a new company, Blackhawk Mining, to strip away the company’s valuable steel-making coal mines. Patriot then filed a proposed plan that would lead to the remaining mines being transferred to a liquidating trust. But at the last minute, new companies formed by healthcare executive and mining-neophyte Tom Clarke—VCLF and ERP—stepped in to acquire those mines and their significant reclamation and water-treatment obligations.Â
At the start of 2019, therefore, Alpha, Arch, and Peabody enjoyed the benefits of having shed both debt and liabilities through their bankruptcies and the immediate aftermaths. The companies that assumed those liabilities, however, have all struggled. The web of close interrelationships among these companies also suggests that we may see a cascade of further bankruptcies in the near future.
Lexington Coal Company, Revelation Energy/ Blackjewel, Tom Clarke’s VCLF and ERP companies, and Blackhawk Mining have all shown signs of significant financial distress. Revelation Energy/ Blackjewel (which acquired Alpha/Contura’s PRB mines) is already in bankruptcy and shares a common owner with Lexington Coal Company (which acquired Alpha/Contura’s high-liability Appalachia mines): Jeff Hoops. Hoops’s business model appears to consist primarily of the high-risk practice of acquiring mines out of bankruptcy.
Prior to the Contura transaction, the majority of Revelation’s mines had come out of the 2014 Keystone Industries bankruptcy. Prior to taking Alpha’s high-liability mines, Lexington had been formed to acquire mines out of the 2004 Horizon Natural Resources bankruptcy. Bankruptcy filings also reveal that Hoops has been in the habit of transferring funds between Revelation and Lexington. It’s hard to imagine that a Lexington Coal bankruptcy won’t follow Revelation in the near future.Â
The bankruptcy of Blackhawk—which acquired the valuable steel-making mines from the Patriot bankruptcy—bodes very poorly for the future of Tom Clarke’s VCLF and ERP companies, which acquired Patriot’s high-liability assets. Even considering that Blackhawk appears well-positioned to continue operating post-bankruptcy, the fact that the company that acquired the higher-value mines couldn’t avoid bankruptcy clearly demonstrates the dire position of the companies that assumed the liabilities.
And indeed, all signs point to an imminent bankruptcy filing from Tom Clarke’s VCLF and ERP companies. Like Hoops, Clarke has tried to make a business out of acquiring mines for cheap out of bankruptcy. Following the Patriot transaction, Clarke acquired a series of coal and iron mines out of bankruptcy, and made additional unsuccessful bids in other bankruptcies, including that of Westmoreland Coal. Clarke has admitted in court that he can no longer make certain payments that he assumed as part of his acquisition of the Patriot mines.
Clarke’s attempted Westmoreland acquisition was held up when surety bond providers and other funders questioned whether he would have the assets to complete the permit transfers. When Clarke inevitably files for bankruptcy for his companies, it’s extremely unlikely that any other operator will be willing to assume those mines and their liabilities.
The Phase 2 bankruptcies will have particularly devastating effects on coal miners and on the communities near the mines. Unlike the mines at issue in all other recent significant mine operator bankruptcies, Revelation/ Blackjewel’s mines were shuttered immediately upon the bankruptcy filing.
Workers have still not received their last paychecks, and some wages were even pulled back out of miners’ bank accounts. Some of those miners have already accepted employment at other mines, which makes the prospect of seeing Revelation/ Blackjewel’s mines reopened even less likely. Revelation/Blackjewel has also admitted that it is delinquent on certain worker benefits, including mandatory retirement account contributions.
When the Phase 2 debtors fail to find buyers for certain of their mines, which is almost certain, those mines will be abandoned. The Surface Mining Control and Reclamation Act (“SMCRA”) was supposed to minimize or eliminate the risk to communities posed by such abandonments by requiring mine operators to post bonds sufficient to cover the costs of reclamation. Upon abandonment, state or federal regulators may foreclose on such bonds and use the funds to clean up the mines.
But states have gone out of their way to minimize the burden of bonding on mine operators, with the result that neighboring communities and state taxpayers must now bear the burden. In particular, West Virginia, Virginia, and Kentucky all allow some form of “pool bonding,” wherein mine operators pay into a common fund that may be used by the state to fund reclamation. But each state’s bond pool is far smaller than the actual reclamation liability, because the states have been too slow to recognize the sector-wide decline of the mining industry.
The result is that a single mine operator bankruptcy could wipe out each state’s entire bond pool, and multiple simultaneous bankruptcies would completely deplete those funds.
States will then have to turn to other sources of funds, such as taxes, to cover those costs. Or they can try to avoid meeting their reclamation responsibilities, in violation of SMCRA and at great risk to the communities near the abandoned mine sites. States have also set themselves and their citizens up for massive problems from unreclaimed mines by failing to require prompt reclamation of mines that have stopped producing coal. Instead, state regulators have allowed dozens—if not hundreds—of coal mines across Appalachia to sit idle and unreclaimed while their owners wait in vain for coal prices to rebound.
Those mines, and their liabilities, are the ones most likely to be abandoned first.
Alpha, Arch, and Peabody only managed to emerge from their respective bankruptcies thanks to the willingness of companies like Revelation to take big bets on high-liability mines. Those bets have now been revealed to be colossal mistakes, thanks to falling coal prices and high reclamation costs. But we won’t see a replay of Phase 1, because we’ve already reached the bottom of the mine operator food chain, and there’s no one left to whom mine liabilities can be passed. It now turns out that Alpha, Arch, and Peabody did not succeed in avoiding major miner layoffs or abandoned coal mines; they just delayed them. But time hass run out and a reckoning has arrived for the coal industry and, unfortunately, for those caught in its blast radius.