When a federal judge approved Alpha Natural Resources’ bankruptcy exit plan two weeks ago, regulators, industry leaders and environmentalists breathed a collective sigh of relief. But while the plan will keep two large coal mines operating and set the stage for a stricter approach to self-bonding, the long-term outlook for Alpha is murkier.
Alpha was the first of three large coal companies operating in Wyoming to file for bankruptcy amid one of the most difficult years for coal in three decades. Arch Coal, which operates the Black Thunder Mine, and Peabody Energy, which runs the North Antelope Rochelle Mine, soon followed.
But as the first company to reach a restructuring agreement with regulators and the courts, Alpha is expected to set a precedent for the other companies. Environmentalist hope Alpha’s plan will change the state’s approach to environmental bonding. State regulators want pragmatic deals that preserve Wyoming jobs. However, in a bearish market with hesitant lenders and federal oversight, widespread uncertainty remains about the viability of Alpha’s financial plan post-bankruptcy.
Days after the bankruptcy plan was approved, the Office of Surface Mining Reclamation and Enforcement decided that Wyoming broke state law in allowing Alpha to self-bond at the Eagle Butte and Belle Ayr mines in a deal made last year with Wyoming’s Department of Environmental Quality.
Companies are required to set aside money for environmental cleanup after mining or drilling. Rather than obtain a third-party bond, some companies engage
in self-bonding, a practice wherein a company’s financial assets are held against the cost of eventual reclamation efforts.
Opponents say the practice puts taxpayers at risk when mining companies like Alpha go bust. But the companies maintain they have enough value in their businesses to cover the eventual cost of cleanup.
Wyoming has allowed more than $2 billion in self-bonding, more than any other coal-producing state.
Last week’s decision by federal regulators pleased some of self-bonding’s biggest opponents in Wyoming.
“It sets the standard,” said Shannon Anderson, a lawyer for the Powder River Basin Resource Council. “Our hope is that Peabody and Arch will be mindful of what OSMRE has said in the case of Alpha.”
A state regulator for Wyoming’s Department of Environmental Quality disagreed. Kyle Wendtland, administrator of the department’s Land Quality Division, responded Friday to the federal regulators’ decision, calling it politically motivated and demanding that it be reconsidered.
At issue is a deal the state department made with Alpha last year. During the bankruptcy, Wyoming and Alpha agreed to make the state a top-priority creditor, if necessary, for $61 million of the company’s $411 million in environmental bonding obligations in the state.
Wendtland said Friday that the state agency made the deal in order to keep the mines operating, save jobs and revenue.
Without a compromise made by the DEQ, the two mines would have shut down and the company would have had to go into liquidation, he said.
A better compromise was to help companies develop a timeline for compliance, Anderson said.
“Since the beginning we’ve tried to send a signal that these very basic legal requirements have to be complied with,” Anderson said. “Bankruptcy can’t just be an excuse to avoid the law.”
Federal officials declined to comment on the Wyoming letter, saying they needed to review it.
Their finding raises the stakes in Alpha’s bankruptcy, depending on whether the bankruptcy exit agreement holds. The agreement is expected to go into effect by the end of July.
Lingering disagreements aside, the emerging Alpha has an uphill battle in the current market, with wary investors, low prices and watchful regulators.
Investors are willing to place small bets on coal, but they are being cautious, said Clark Williams-Derry, an analyst at the Sightline Institute, a Seattle-based nonprofit that supports a transition to renewable fuels.
“The fact that a mediocre coal company is emerging from bankruptcy in the midst of the worst bear market in generations means one thing: Lenders aren’t willing to give much money for the new companies emerging from the Alpha bankruptcy,” he said. “Wall Street mostly has kept its wallets closed to coal. Investors just weren’t willing to spend a bunch of money to recapitalize the company.”
From environmentalists to regulators, coal companies are being watched closely in this time of uncertainty, in a way they weren’t when business was booming.
“A few years ago, no one was paying close attention,” said Chiza Vitta, an analyst for S&P. “Now we are in a situation when bankruptcies are more likely. There is more scrutiny. Mines are closing down. The rubber is meeting the road. The states and the feds want to make sure that cleanup is going to happen.”
According to the bankruptcy agreement, Alpha will emerge as two separate companies. Contura Energy will buy out Alpha’s most lucrative mines, including those in Wyoming. The other company will take the brunt of the low-performing mines and the large reclamation costs in Appalachia.
The success of this strategy depends on strong coal sales, which analysts say won’t happen.
Alpha maintains that Contura, and by extension Wyoming, will be free of the weaker company’s risky debt requirements. That’s good for Wyoming, as analysts are reporting a strong possibility that the Appalachian company will fall back into bankruptcy in a few years.
Based on Alpha’s own projections, available cash for the second company could be as low as $180 million, with only $20 million unencumbered by the end of 2017, according to a report from the investment bank, Cowen and Company.
Investors will likely get their money back after the restructuring, but for both Contura and the new Alpha, projected incomes are too optimistic, according to the Cowen report.
If Alpha’s agreement holds, Wyoming should have Contura operating and employing hundreds of coal miners this summer, but what that company will do for the state’s struggling coal sector, and how long it can withstand low coal prices, is yet to be seen.
The Associated Press contributed to this report.