With coal in crisis, will Virginia be saddled with millions in mine cleanup costs?

As the COVID-19 pandemic accelerates King Coal’s decline, Virginia could be on the hook for millions in cleanup costs if an anticipated wave of bankruptcies destabilizes its bond pool system for managing the risks of company failures. 

One of six states, all in or near the Appalachian basin, that allow coal companies to post partial assurances that they will cover the costs of reclamation if they cease operations, Virginia has known there are vulnerabilities in its system for almost a decade.

“The program has sufficient resources to withstand the forfeiture of one or two smaller permits,” wrote actuaries in a 2012 report commissioned by Virginia’s Department of Mines, Minerals and Energy. “The more significant risk to the Fund is from the exposure to companies with multiple permits and possibly from larger parent companies should they forfeit multiple permits simultaneously.” 

Eight years later, the situation has taken on an added urgency with the continued shrinkage of the coal industry.

“Any state that has a bond pool is at enormous risk and is almost guaranteed to have to find other sources of funds to pay for the reclamation of abandoned coal mines,” said Peter Morgan, an attorney with the Sierra Club who has been tracking Virginia’s bonding program for more than a decade. 

Virginia’s DMME is “concerned” with the system’s stability given the ongoing industry contractions, said Division of Mine Land Reclamation Director Randy Casey in an email to the Mercury, pointing out that “major industry-wide forfeitures would strain any bonding system, not just those in Virginia.”

Fixes, however, won’t be easy. In Virginia, any major alterations to the current system would need to be passed by the General Assembly, and many industry players disagree on the best way to proceed given the belief prevalent among regulators that if coal operators are pushed too far, they will walk away from their permits and leave the public to bear the burden of cleanup.

Still, said Joe Pizarchik, who between 2009 and 2017 served as the longest-running director of the U.S. Office of Surface Mining and Reclamation, the longer state governments and regulators delay in grappling with the problem, “the more severe and dangerous it becomes.”

“Eventually these bond pools are going to fail,” he said. “And when they fail, the state and federal government will probably be sued, and … then the state will have to come up with the money to complete reclamation.”

An insurance system for the states

Since the late 1970s, coal companies have been required under the federal Surface Mining Control and Reclamation Act to guarantee that if they go out of business, the costs of cleaning up the significant damage left in coal mining’s wake, from routine destruction like the removal of topsoil, rock and forest to more severe problems like acid mine drainage and the clogging of waterways by discarded gob, will be covered.

The conventional way of guaranteeing that happens is for a mining company to obtain a bond equal to the full cost of the cleanup, usually from a surety company. If all goes well, once the company has finished mining the land and reclaiming it, the state releases the bond. But if the company fails, it forfeits its bond to the state, which then uses those funds to reclaim the land itself. 

The federal act, however, didn’t mandate full-cost bonding. Instead, Congress allowed individual states to opt for several alternatives. The most notorious was self-bonding, under which a company with a strong track record could simply give the state its word that it was good for the costs without providing any financial assurances at all. 

The idea, said Morgan, was that “there are just some companies that are so big that there is just zero risk that they will ever go bankrupt.”

The other alternative was the bond pool. Favored by the mining industry, this system allowed a company to put up a smaller bond that would partially cover reclamation costs as long as it also paid into a pool of funds that the state could draw from in the event that a mine failed. 

At the time, the system made sense. When SMCRA was passed, said Pizarchik, “we didn’t have the consolidation and the huge monolithic companies that we have now.” In the Appalachian basin, which has long been home to a patchwork of mines — unlike the larger but less numerous operations found in the West — the bond pool seemed to offer a solution that put less pressure on business while spreading risk out. 

Still, there were always cracks. Self-bonding was the largest.

As confidence that some mining companies were in essence “too big to fail” waned, regulators realized the state’s safety net was tenuous at best. When Virginia in 2011 hired Pinnacle Actuarial Resources to assess the soundness of its bonding system, the pool bond fund had a balance of $7.3 million and the state had signed off on $26 million worth of self-bonds associated with mines owned by A&G Coal Corporation, a company controlled by the family of now-West Virginia Gov. Jim Justice. If the company walked away from its permits, Pinnacle warned, Virginia’s bond pool would be wiped out, leaving the state responsible for millions in additional reclamation costs.

The actuaries’ warnings spurred the General Assembly to act. In 2014, the legislature prohibited the issuance of additional self-bonds, although it left Justice’s holdings intact. They would become a bone of contention that continues to this day.

In April 2017, the advisory board that oversees Virginia’s bond pool estimated A&G’s total reclamation liabilities were more than $134 million, making the company “the largest liability to the pool at this time.” DMME regulators have struggled for years to force Justice-owned companies to reclaim their Virginia mine lands without pushing them far enough to forfeit their bonds. 

But self-bonding wasn’t the only problem Pinnacle found  — and the Justice mines weren’t the only threat to the bond pool’s stability. 

One of the most concerning findings of the actuarial study was the fragility of the pool. On paper, the risk seemed to be well spread out among 44 companies holding 219 permits. But in reality, over 70 percent of those permits were controlled by three large parent companies, Pinnacle noted. That changed the risk calculation. 

“We assume that … if a permit holder should reach a point where they can no longer finance further reclamation, the parent company is highly likely to, if not certain to, forfeit its other permits to the Reclamation Fund to complete the reclamation process,” the study concluded. 

One such company was Alpha Natural Resources, then the second-largest coal operator in the U.S. and the holder of 75 permits in Virginia’s bond pool. As part of a “shock loss” test, Pinnacle imagined what would happen if Alpha forfeited all its permits and bonds. The results weren’t pretty: the actuaries calculated that Virginia’s bond pool would be drained in five years and would be $50 million in the red in eight years.

Still, they pointed out, this “highly unlikely, but plausible” event would almost certainly be followed by other coal companies rushing to buy Alpha’s permits and assume its reclamation liabilities. That’s what had always happened before; it had been years since Virginia had seen a bond forfeiture. It’s a point Virginia’s Division of Mine Land Reclamation Director Casey also made, noting that “in previous bankruptcies we saw other companies choosing to take the mines through a permit transfer and therefore taking over reclamation responsibilities.”

But that optimistic outlook, several industry watchers told the Mercury, was more the result of the methodology of an actuarial study, which looks backward to assess risk and uses those patterns to project what will happen in the future. Pinnacle, in fact, prefaced its 2012 report by saying it had “not anticipated any extraordinary changes to the economic, legal, or social environment which might affect the cost and frequency of default.”

“That approach is completely inappropriate” when it comes to the coal mining industry, said Morgan.

Alpha is a good example. In 2015, the “highly unlikely, but plausible” outcome imagined by Pinnacle came to pass when the company filed for bankruptcy, followed the next year by coal giants Arch and Peabody. 

To Pizarchik, far from being a surprise, the failures were predictable: “Alpha was doomed to fail from the day it was formed. It was just a matter of time.”

The ‘harbinger’ of a new era

“Extraordinary changes” would in fact be one of the best ways to describe the landscape of coal over the past decade — never, even in its earliest days, immune to unpredictable cycles of boom and bust. 

From the glut of domestic gas unearthed by the shale revolution to ever-falling prices of renewables and a rising distaste for fossil fuels driven by concerns about climate change, coal is under economic siege. Metallurgical coal, used in steel production, offers a rare bright spot, especially in Virginia, which saw a small boom in mining beginning around 2015. But the thermal coal used in power plants that dominates the industry, said Pizarchik, “is in a market-driven death spiral that is accelerating.”

The coronavirus pandemic has only worsened that spiral. The U.S. Energy Information Administration has forecast that coal will generate only 18 percent of the nation’s electricity this year, down from 24 percent in 2019. And while EIA expects a slight bump in its share of generation in 2021 — rising to 21 percent as the pandemic eases and demand normalizes — use of the fuel continues to trend downward. 

Moody’s Investor Service, in a July comment first reported by E&E News, downgraded the long-term ratings for most U.S. coal companies and called them “highly vulnerable to further downgrades.” 

“While we expect some bounce-back for coal in 2021, the long-term trajectory remains downward and our view is that the coronavirus pandemic will accelerate energy transition around the world,” the firm concluded. 

Those contractions will have serious implications not only for the companies themselves and their workers, but for states like Virginia with bond pools that rely on the robust presence of other companies to make up for the failures of one or two. 

“Pooling makes more sense when the industry is stable and the risk of multiple forfeitures is low,” said a recent report on bonding policies by the Alliance for Appalachia. “However, during a market collapse, such as the coal mining industry is experiencing now, too many bonds being drawn from the pool each year could eventually collapse the fund. Every indication is that the industry will continue its decline. Gambling the future on the current bond pool no longer has promise.”

Forfeitures of bonds tied to the bond pool continue to be low in Virginia, with the last occurring in January 2015 for a permit held by Circle L. Coal. The current fund balance is just over $10 million, with $119 million worth of associated bonds for 151 permits posted. Casey told the Mercury that while “there are concerning ‘what if’ scenarios,” the pool bond system “has been very stable to date — even with the downturn in the coal industry.”

Still, there are clear signs that trouble may be coming. 

Most telling is last summer’s Blackjewel bankruptcy. The abrupt collapse of what was then the nation’s sixth-largest coal company was unusual from the start, with the operation teetering on the edge of Chapter 7 bankruptcy — total liquidation — rather than staying on track for the more standard Chapter 11 bankruptcy pursued by most coal operators to reorganize troubled finances and get them on more solid footing. 

As the case has wound its way through U.S. bankruptcy court, the tortuous proceedings have uncovered ever more evidence that times have changed. For the first time, mining permits being unloaded during bankruptcy have been unable to find a buyer. A letter sent to the bankruptcy court in November 2019 by the firm representing Blackjewel in response to a list of concerns from environmental groups acknowledged that if the company was “unsuccessful” at finding purchasers, “those permits may ‘eventually be abandoned.’” 

In Virginia, a dispute between two operators, Eagle Specialty Materials and Rhino Energy, about who will take control of 22 permits and their associated cleanup liabilities has dragged on for months. (Rhino filed for Chapter 11 bankruptcy on July 22, adding another layer to the already chaotic situation.) In Kentucky, 53 permits remained unsold as of July 9, according to a court filing. 

“This is one of the first big bankruptcies where the company has been very clear that they’re going to be abandoning approximately 50 permits,” said Morgan. “And we’re just going to be seeing more and more of that.”

Blackjewel, which at the time it shuttered employed almost 500 workers in Virginia, held more than $2 million in surety bonds for Virginia’s mines, and a report by DMME to the advisory board that oversees the pool in fall 2019 stated there isn’t “any kind of jeopardy to the Pool” from the bankruptcy. If a related company, Harold Keene Surface, does forfeit its permits, Casey told the board, enough funds should be available to cover needed reclamation.

But the company’s inability to pass on its assets spells trouble for other struggling companies in the pool, signaling that forfeitures may come sooner rather than later. 

“This whole wave of many bankruptcies puts pressure and stress on the entire system,” said Matt Hepler, an environmental scientist with environmental and consumer protection group Appalachian Voices who has worked extensively with reclamation bonding issues throughout the entire Appalachian region. “They were not designed to handle widespread systematic collapse of an industry.”

To Morgan, “Blackjewel is a harbinger, and it’s representative of what I’m calling this next phase of bankruptcies.”

Further exacerbating concerns, Kentucky has warned that even the reclamation bonds Blackjewel had in place at the time of its bankruptcy are insufficient to cover cleanup. A January 13 letter from the state’s Energy and Environment Cabinet told the bankruptcy court that an agency assessment of only 20 percent of the company’s permits found that actual reclamation costs would likely exceed the bond amounts by roughly $38 million “due to current on-the-ground conditions” related to ongoing environmental problems stalled by the slow process of unwinding Blackjewel’s affairs. 

West Virginia officials are also fretting about threats to their own bond pool due to a different wave of mine closures. In March, the state’s Department of Environmental Protection filed a suit against the ERP mining company after it shuttered its operations, leaving behind a string of environmental violations, including rising water levels in a mine that threatened to contaminate the Tygart River that is the source of drinking water for thousands. In its filing, the department acknowledged the state could take ERP’s surety bonds and take over reclamation responsibilities through its bond pool, known as the Special Reclamation Fund, but said that would come with considerable risks. 

Among them? “Potentially bankrupting (ERP’s) principal surety and administratively and financially overwhelming the Special Reclamation Fund, the State’s principal backstop for all revoked and forfeited mine sites in West Virginia.”

Adjusting to a new normal

As the six states that still maintain bond pools grapple with how to keep them on sound footing, Pennsylvania may offer a potential path forward. 

The Keystone State previously operated a pool bond, but in the late 1990s, fearful of the risks it posed to taxpayers, the state initiated a thorough review of its bonding system that found the bond pool was “not adequate to ensure reclamation of forfeited sites.” The review would ultimately lead Pennsylvania the next year to abandon pool bonding entirely, returning to the conventional system of full-cost bonding. 

Pizarchik said other states could follow in Pennsylvania’s footsteps if the political will exists — but at a minimum, “it is in the interest of the governor, the regulators and the state legislature to assess the situation, analyze it and figure out the least painful way to solve the problem and reduce or eliminate the risk.”

The last major review of Virginia’s system was the 2012 Pinnacle report that not only led to the elimination of new self-bonding but pushed the General Assembly to also raise the cap on the bond pool from $2 million to $20 million. The state submitted the proposed changes to the federal Office of Surface Mining Reclamation and Enforcement in 2015, but federal review has dragged: as of July 2020, OSMRE had still not signed off on the amendments. 

In the meantime, other recommendations put forward by Pinnacle — including changing the structure that governs coal tax payments into the pool fund and getting rid of the pool cap entirely to let funds “build up to levels that would cover the largest loss possible from the default of the largest parent in the system” — have stalled. Casey said eliminating the cap wouldn’t be practical: “It could take decades or longer for funds to accumulate at $20 million or more — unless there is a significant increase in coal mining.” And because coal production in Virginia is at a historic low, he said, increasing coal taxes would likely have little impact on the pool bond fund while adding to the financial burdens on coal companies.

Regulators, caught between a rock and a hard place, have focused most of their efforts on keeping mine operators in compliance while trying to avoid spurring forfeitures that would endanger the bond pool. 

“DMME has not requested (getting rid of the bond pool system) nor do we plan to at this point,” said Casey. Besides the historic stability of the pool, he said, “there is also concern that eliminating this fund could actually increase forfeitures due to the high cost of replacement bonds. We want to avoid that.”

Morgan, however, said states could benefit from being more aggressive with companies and preparing to participate more closely in bankruptcy proceedings to ensure that public obligations are considered by judges parsing who is owed what from a bankrupt operation’s estate.

“It’s just past time for the states to open their eyes and realize that these companies are all functionally insolvent,” he said. “And so the question is how much the state can force these companies to put whatever resources they have toward reclamation.”

Federal changes are another possible route. The “National Economic Transition” platform for coalfield communities released this June with the endorsement of 80 groups from coal-dependent areas called for a federal requirement for state regulatory authorities to develop “bond forfeiture contingency plans and response plans” as well as the review of all bonds to ensure they can cover reclamation costs.

With the coal industry continuing to contract, the clock for strengthening protections before a company files for bankruptcy is ticking. And those pressures will only grow, Pizarchik warned.

“We are, I believe,” he said, “going to see more coal companies close, more forfeitures, more bankruptcies and the market is going to continue to shrink.”