When Coal Companies Go Bankrupt, Who Cleans Up the Mess?

Editor’s note: This three-part story is adapted from blogs written by Appalachian Voices staff members Erin Savage, Matt Hepler and Willie Dodson, and were first published online on the Appalachian Voices Front Porch Blog

Part 1: Bankrupt Coal Companies Dodge Liability

By Erin Savage, Central Appalachian Program Manager for Appalachian Voices

On July 1, Blackjewel and Revelation Energy announced the companies were entering Chapter 11 bankruptcy. The news was notable for a number of reasons — mines shut down immediately, workers had paychecks retroactively withdrawn from accounts, and Jeff Hoops, the founder and leader of the companies, was forced out within days.

In the past, bankrupt companies have reorganized and transferred mines to other companies. But they have generally kept productive mines active‚ allowing employees to keep their jobs through the bankruptcy process.

This is changing. In July, David Roberts of Vox wrote, “As the industry contracts, it’s a game of hot potato, as failing mines get passed around to increasingly fly-by-night companies that extract a little value before passing them along or going under.” Blackjewel and Revelation have attempted to reorganize, shedding debt and liability by auctioning off mine permits to other companies. This has been only moderately successful so far.

Jeffrey Hoops is a well-known figure in the Central Appalachian coal industry, founding several large Central Appalachian coal companies, including Revelation Energy in 2008. He ventured into the western coal market when one of his companies, Blackjewel, acquired Belle Ayr and Eagle Butte mines from Contura Energy in late 2017. These mines were already subject to one bankruptcy proceeding when Alpha Natural Resources declared bankruptcy in 2015. Alpha’s stakeholders formed Contura, which took on the Wyoming mines, once referred to as the company’s “crown jewels.” But within two years, Contura “gifted” these mines to Hoops by paying Blackjewel $21 million to take the mines, in an attempt to shed liability for reclaiming the sites. Now, Blackjewel is the one that is bankrupt.

The bankrupt companies owe hundreds of millions of dollars. Reporting from watchdog network Little Sis estimates that the companies owe Appalachian employees more than $11 million in back wages in addition to roughly $33 million to investment group Riverstone Holdings and $23 million to equipment company Caterpillar. Blackjewel and related companies also owe $60 million in mining royalties to the federal government and somewhere between $10 and $19 million to the Internal Revenue Service.

State and local governments have also filed claims. In Appalachia, the Kentucky Department of Revenue claims nearly $20 million, the Kentucky State Treasurer filed for more than $6 million, the West Virginia State Tax Department seeks $10.5 million, Virginia Department of Taxation claims $1.7 million, and Virginia’s Buchanan County Treasurer seeks nearly $3 million, among others.

Even former CEO Jeff Hoops, who is currently building a $30 million luxury resort that includes a replica of the Roman Coliseum, is asking for money from his former companies. He filed claims for $11 million in an undocumented loan that he says he gave Blackjewel, and another $11.2 million that he claims is owed to other companies owned by him or or his wife.

So what does all this debt mean for Blackjewel and Revelation mines in Central Appalachia moving forward? According to data from state mining agencies and the U.S. Office of Surface Mining Reclamation and Enforcement, Revelation Energy, Blackjewel and their related companies have about 300 permits in Central Appalachia. One mine site may require multiple adjacent permits and a permit may be anything from a haul road to a 1,000-acre surface mine, so it is almost impossible to identify a specific number of mines. Of these permits, 213 are in East Kentucky, 72 are in Virginia, 12 are in West Virginia and two are in Tennessee.

In a July 25 court hearing, an attorney for Blackjewel stated the bankruptcy would convert to Chapter 7 liquidation following the auction. This could result in bond forfeiture of numerous permits, which means the companies would forfeit their reclamation bonds and leave the state to clean up the mine sites and any related water pollution problems. The auction occurred in early August, but the negotiated sales are still being finalized by the court. In the meantime, the Virginia Department of Mines, Minerals and Energy has initiated bond forfeiture at several mines held by the bankrupt companies.

On Oct. 3, a federal bankruptcy court approved the sale of the Belle Ayr and Eagle Butte mines in Wyoming to Contura Energy, which is passing them along to Eagle Specialty Minerals, an affiliate of FM Coal. The deal also solidified arrangements to pay former Blackjewel miners who were owed back pay. The deal awaited approval by the U.S. Department of Interior at press time.

Contura held the Wyoming permits before Blackjewel took over in 2017. But the transfer was never completed, so Contura still holds the reclamation liability for those mines. In mid-September, Contura proposed a plan where it would take over the permits and then transfer the property — along with $90 million in cash — to Eagle Specialty Minerals. In exchange, Eagle would operate the mines and assume responsibility for $237 million in reclamation liability and related collateral. The OSMRE made several concessions as part of the negotiations, including agreeing to not hold Contura liable for any violations that occur at the mines before Eagle Specialty Minerals begins operating the sites.

Earlier that week, the bankruptcy court had approved the sale of the Pax surface mine in West Virginia to Contura, and Blackjewel had requested approval for a private sale of six Kentucky coal mines and related permits to Black Mountain Resources, LLC. On Sept. 17, the bankruptcy court approved Kopper Glo Mining’s purchase of 63 mining permits owned by Blackjewel — 34 permits in Kentucky and 29 permits in Virginia.

These mine permits being purchased out of bankruptcy represent the next transaction in the game of hot potato as these new permit-holders attempt to make a profit. But 199 permits across Central Appalachia have not been considered for sales. The majority, 161, are in Kentucky.

According to state inspection records, there are more than 8,000 unreclaimed acres on the unsold permits in Kentucky, and more than 900 unreclaimed acres in Virginia. Luckily, all but one of the unsold permits in Virginia are covered by full-cost surety bonds, meaning that a third-party company provides the full estimated cost of reclamation. That amount is supposed to be directly available for reclamation if the company abandons the permit, forfeiting the bond. In Kentucky, the unsold permits are covered in part by a third-party surety bond, and also participate in a bond pool, which would be available to cover any shortfalls in the reclamation cost.

It is difficult to determine actual reclamation liability, as reclamation costs vary by amount of land disturbed, type of mining and water pollution issues, among other factors. Presumably, the third-party bonds should represent the full expected cost of reclamation, at least for the Virginia mines, but bonding programs across Appalachia have been chronically underfunded.

OSMRE reviewed Virginia’s bonding system in 2011 and found that the federal agency’s average bond calculations were 26 percent higher than those determined by the Virginia Department of Mines, Minerals and Energy. In 2012, OSMRE ordered Kentucky to address chronic underfunding issues in its bonding program. The state addressed the shortfall by instituting the bond pool, which currently holds about $46 million. If the states are still underestimating the real cost of reclamation, that could mean that sites don’t get cleaned up, or it could put taxpayers at risk of paying the difference.

In part two, we examine problems stemming from two mine sites, which illustrate some of the safety risks and environmental damages behind the numbers and dollar figures.

Part 2: Acid Mine Drainage in Kentucky

By Matt Hepler, Environmental Scientist for Appalachian Voices

To understand the situation the state could face in cleaning up mine permits liquidated by bankruptcy, travel to the Daniel Boone National Forest in McCreary County, Ky., where Copperas Fork and its tributaries often run a bright orange due to acid mine drainage originating from the mined land upstream owned by Revelation Energy.

For the past few years, volunteers Teri Blanton and Joanne Hill have been testing water quality at Copperas Fork through The Alliance for Appalachia’s Appalachian Citizens Enforcement Project, which facilitates water quality testing of public waterways below coal sites. Following some initial water testing, Hill and Blanton informed the Kentucky Energy and Environmental Cabinet’s Department for Natural Resources of the acid mine drainage problem in the creek.

Acid mine drainage forms when sulfur compounds in shales and coal such as pyrite are exposed to oxygen and water, beginning a series of chemical reactions that create sulfuric acid and lower the water’s pH, or measure of acidity. As the sulfuric acid travels downstream, the pH level rises and it picks up trace amounts of metals like iron, manganese and aluminum from the rocks. When the pH rises above 3.5, ferric iron precipitates out of the solution, giving the water a characteristic yellow and orange color. Once these acidic seeps begin they can last for decades, causing environmental harm and saddling local residents with unhealthy, contaminated water.

Federal mining law gives citizens the option to go with an inspector on a mine site inspection that results from their complaint. On May 1, I joined Blanton and Hill to accompany a mine inspector onto the two permits that make up Revelation’s Greenwood processing facility. During the inspection, they saw several sets of ponds with the characteristic orange color of acid mine drainage. Those ponds were not discharging at that time, and the inspector stated that Revelation was pumping the ponds into an upper reservoir to form a closed loop and prevent water from leaving the site.

This system does not treat the acid mine drainage — it only prevents contaminated water from flowing off-site. But it complies with the law, as water needs to flow into public waterways before it is subject to water pollution regulations. The pumps are designed to stop the ponds from overflowing and releasing acid mine drainage into the streams below. It was obvious from the spillway of pond 13 that this had happened in the past.

Though Blanton, Hill and I had tested the creek’s water quality downstream on public land, the inspectors would not permit us to take water samples on the mine site. Instead, a hydrologist sampled locations on the mine site at our request. However, despite filing a Freedom of Information Act request in May, we have not obtained the information the hydrologist collected.

On July 1, a couple months after the inspection, Revelation Energy and its affiliate Blackjewel declared Chapter 11 bankruptcy and workers were suddenly laid off.

Three weeks later, the creek was more orange than usual. I conducted follow-up water testing in the national forest, and Blanton called the inspector again. The inspector found that the pumps were no longer operating and that Revelation was discharging polluted water from their ponds into tributaries of Copperas Fork. He issued four cessation orders to the company, citing significant, imminent environmental damages. Independent lab testing of our stream samples also showed unacceptable levels of manganese and pH.

This year wasn’t the first time that Blanton and Hill reached out to Kentucky officials about acid mine drainage near the old Greenwood coal-washing facility. Hill explains that they initially contacted state regulators about orange runoff leaving the site in 2016, but an inspector who visited the area disagreed and said the polluted water was within the permit boundaries.

Hill is frustrated that regulators did not act after their first complaint in 2016.

“Why didn’t they try and do this then and we might could be working on doing something [to fix it] already?” she says.

Now, it is unclear what impact these cessation orders will have on the site, as Revelation is still in the middle of its bankruptcy proceedings. Still, this acid mine drainage violation highlights several concerns related to reclamation, bonding and bankruptcy.

The Kentucky Outlook

One possibility is that more mine permits held by Blackjewel, Revelation and their related companies could go into bond forfeiture.

In a court document filed in early August, Indemnity National Insurance, a surety company that holds $115 million of the bankrupt companies’ reclamation bonds, objected to the sale of some of Revelation’s assets. Indemnity National stated that the environmental liabilities — in this case thousands of acres of unreclaimed mined land — were treated as if they had zero value when the sale was considered, and that state regulatory authorities could be on the hook for hundreds of millions of dollars.

“At the end of the auction,” the court document states, “the Debtors had sold mining operations in the East with bonded liability of approximately $45 million and had failed to sell mining operations with bonded liability of approximately $220 million.”

The bankruptcy auction ended with no purchasers for the two permits at the Greenwood coal processing facility, and it is unclear what happens next. The two Greenwood permits are bonded by Lexon Insurance Company at just under $3 million.

Still, bonding does not always cover the cost of reclamation liabilities. A 2017 report from the Office of Surface Mining Reclamation and Enforcement found that Kentucky’s bonds only covered a little more than 50 percent of the actual costs associated with mined land reclamation. In January 2018, OSMRE approved some changes to strengthen Kentucky’s bonding programs — but it did not approve of the state’s approach to determining the cost of long-term treatment of mine drainage.

Kentucky bases its bond amounts on an assumption of what 20 years of water treatment would cost, but the federal agency found that the state did not demonstrate that the 20-year benchmark would be adequate to protect water quality. For example, in Tennessee, where the mine reclamation program is federally managed, the agency maintains a separate fund for water quality issues like acid mine drainage based on an assumption of 75 years of water quality treatment. OSMRE wrote that the law does not “provide any exceptions to the requirement to post a bond that is fully adequate to cover the cost of reclamation, including water treatment.”

Kentucky does not have a federally approved long-term water treatment plan in case places like the Greenwood processing plant surrender their bonds. This process, known as bond forfeiture, occurs when regulators seize monetary resources provided by a company in order to fund reclamation when the mine operator fails to perform such work itself, either through bankruptcy or neglect.

A 2018 report from The Alliance for Appalachia outlines that Kentucky and other Central Appalachian states have insufficient bonding mechanisms to deal with the declining coal economy and widespread bankruptcies of many mines at once.

“I am very concerned about this bankruptcy and the impacts it will have on the streams and wildlife in the Daniel Boone National Forest,” Joanne Hill says. For now, she and Teri Blanton will keep watch over Copperas Fork and wait and see how the bankruptcy affects cleanup.

Part 3: Bond Forfeiture in Virginia

By Willie Dodson, Central Appalachian Field Coordinator for Appalachian Voices

In Southwest Virginia, bond forfeiture is underway for several of the bankrupt companies’ permits. Bond forfeiture is the most severe enforcement action available to mining regulators, and it is extremely rare.

On Aug. 1, Virginia’s Department of Mines, Minerals and Energy initiated bond forfeiture on four coal mining permits held by bankrupt Revelation Energy and its affiliate Blackjewel. On Aug. 12, the DMME initiated forfeiture on a fifth Revelation permit. Of these five mining permits, only one was being purchased by another coal company as of press time in early October. The other four appeared headed for liquidation under Chapter 7 bankruptcy.

The permits currently in question are all located in Buchanan County, Va., and each has arrived at forfeiture after a history of unabated environmental damage, a failure to reclaim mined areas, or both. Runoff and debris from the Aily Branch surface mine in particular has caused serious impacts to Dismal Creek and adjacent property dating back to 2014. The most recent incident of this sort occurred on Aug. 13.

Aily Branch Mine

“This sort of thing has happened at least five times,” says Bobby Mitchell, whose property abuts the Aily Branch mine. “We just had a short period of rain this time, but a big wave of water came down off the mountain. One other time the water coming off the mountain was so loud it woke up my dad, who really couldn’t even hear too well. We had logs, big rocks, and mud all over our property that time.”

Appalachian Voices, the nonprofit organization that publishes this newspaper, became aware of community complaints around the Aily Branch mine in 2017 and visited the area to discuss local residents’ concerns. After the most recent washout affecting Mitchell’s property, he lodged a complaint with the DMME and called Appalachian Voices for support. At this point, I visited Mitchell’s property to survey the damage, and then asked the DMME for permission to conduct a citizen inspection at the Aily Branch permit. This inspection was granted, and on Aug. 27, I visited the site with two state mine inspectors.

During the inspection, I saw a large area of barren dirt and rock along a steep slope, graded down into the hollow above the Mitchells’ home. Below this unreclaimed slope, ditches intended to catch sediment and control runoff were full of mud and rock to the point that they did not function. As a result, the earthen berm on the downslope side of one ditch had burst through, allowing a torrent of mud and debris to rush down the mountainside, rutting out a headwater tributary to Dismal Creek and accumulating in the Mitchells’ yard. Another sediment pond had overflowed, damaging the mine’s access road.

In response to the incident, the DMME issued two notices of violation to Revelation for failure to control sediment, and one for failure to maintain a haul road. But with Revelation bankrupt and workers shut out, there is no one on-site to remedy the situation.

These violations also occurred two weeks after the DMME had already initiated bond forfeiture on the mine, a move supposedly more extreme than simple notices of violations, but in reality proving to be equally impotent in the face of this particularly chaotic bankruptcy.

Bad Bonding Practices

When dealing with chronic violators, the DMME and other regulators have typically entered into, and often continually renewed, compliance agreements — compromise plans where companies promise regulators to eventually fix problems on a relaxed timeline. These compliance agreements and extensions often occur well before the specter of bond forfeiture enters the picture.

Why would regulators make a habit of kicking the can down the road like this? The strongest incentive is the fear that bonding amounts may be insufficient, and the forfeiture of bonds could require states to assume the massive liabilities associated with mine cleanup without the necessary resources to do so.

There are several ways coal companies skirt the requirement to post bonds that are adequate to fully fund mounting reclamation needs across the region.

Most egregious is the practice of self-bonding, by which a mine operator simply swears that they are capable of handling the cost of reclamation, without any actual transfer of cash into a secured account, and regulators agree based on the company’s current financial health. Virginia outlawed this practice in 2016, but self-bonds are still in effect for 20 permits in the state that are held by the family of West Virginia Gov. Jim Justice.

Pool-bonding is when a company posts only a portion of a mine’s estimated cost of reclamation into a pooled fund with other companies, on the assumption that while some bond forfeitures may occur, the total fund will remain solvent — a premise that is refuted in The Alliance for Appalachia’s 2018 report, as well as a 2012 study funded by the state of Virginia. There are many pool-bonded mines in Virginia, including four permits held by Revelation.

The specific permits involved in the current Blackjewel and Revelation bond forfeitures are all bonded at the full cost of reclamation work — or at least what the DMME estimates that cost to be. For the Aily Branch mine, that figure is $10,747,600. These bonds are also backed up by sureties, which are insurance policies guaranteeing the payment of a debt.

The long history of violations on the Aily Branch permit provided the state of Virginia with ample cause to initiate bond forfeiture at an earlier stage when Revelation at least presented itself as financially sound. Instead, regulators allowed the company a lenient compliance schedule, which has now extended into the company’s bankruptcy.

This should be a cautionary tale for the DMME and Virginia Gov. Ralph Northam, as other companies — notably, but not limited to, those associated with West Virginia Gov. Jim Justice — are currently on the same path towards insolvency. If, and quite possibly when, permits are revoked for Gov. Justice’s family’s self-bonded mines, the DMME would assume $195 million in cleanup costs with no funds to perform the necessary work.

Mystery Timeline

The DMME gave Revelation and Blackjewel, as well as their surety providers Indemnity National Insurance Company and Lexon Insurance Company, 30 days from the initiation of bond forfeitures to request a hearing reviewing the forfeiture decisions. The surety companies have requested a meeting to discern if they would like to take on reclamation of the permits in question or simply release the bond to the DMME. The agency is not considering this meeting to be a request for a formal hearing — such a hearing would allow a surety company, or permittee, to contest a forfeiture decision.

This meeting between the DMME, Indemnity National and Lexon has not yet been scheduled and will not be open to the public. According to DMME spokesperson Tarah Kesterson, the forfeitures are on hold until the meeting takes place and there is no deadline for the finalization of a coal mine bond forfeiture anywhere in Virginia regulations.

This means the forfeitures are essentially on hold indefinitely. While Appalachian Voices is not aware of any statute regarding a meeting like this, Virginia law states that a “request for a hearing will not operate as a stay of the forfeiture decision.” Ultimately, DMME may allow Indemnity National and Lexon to directly assume the responsibility of remediating violations and completing reclamation for these permits, or it may finalize the forfeitures and contract out the necessary work itself.

One of these five permits, though not the one above the Mitchells’ home, is being purchased by Rhino Resource Partners, LP. The permit transfer was not complete at press time.

“The bond forfeiture goes away with the transfer but the company is responsible for correcting the violations that led to that forfeiture,” the DMME’s Tarah Kesterson wrote in an email. “We do give the new company a grace period to do the work. In some cases, the new company may want to change the reclamation and mining plan in the permit and that would require them to go through the permit revision process.”

At this point it is not clear who will perform the needed work at the remaining sites, or when. In the meantime, a vast expanse of bare dirt and rock sits up a steep slope from Bobby Mitchell’s home.

“If we get a real hard storm, it could be really dangerous,” says Mitchell. “Not only could it flood the property, but it could actually hurt someone. I’d just like to see the mountain repaired all the way up. That’s the only thing that’s gonna really stop the problems we’ve been having.”

For updates on these sites and how these bankruptcies affect mine cleanup in the region, follow Appalachian Voices’ Front Porch Blog at appvoices.org/blog.