At a 2018 campaign rally in Charleston, West Virginia, U.S. President Donald Trump made this bold declaration: “The coal industry is back.” But nearly two years later, actions seem to be speaking louder than words for the sputtering trade.
Some facing debt of more than $1 billion, at least seven U.S. coal producers, including Houston Energy Co., Murray Energy Corp. and Westmoreland Coal Company, have filed for chapter 11 bankruptcy protection in the past year. According to Bruce Nilles, managing director at the Rocky Mountain Institute, by 2020 coal will be gone from most of the U.S., concentrated in just a few states. He said regulators and customers need to face the “cold, hard economic case” that the steep cost of coal-generated electricity is not sustainable, quite literally.
Here are more grim statistics for the coal industry from the U.S. Energy Information Administration (EIA):
- In 2018, demand for coal dropped to its lowest level in four decades and coal production fell to its second-lowest level since 1978.
- The EIA predicts that 2019 coal production will drop 8%.
- S. steam coal exports face rising competition from Eastern European markets.
- Russia is expected to control a growing share of steam coal trade, prompting a drop in U.S. coal exports in 2020.
- This past April, renewable energy sources like solar and wind power provided more of the nation’s electricity than coal.
- While coal used to power half of all U.S. electricity, it now fuels less than a quarter.
Coal operator bankruptcies typically take one of two forms, chapter 7 liquidation or chapter 11 reorganization.
Under chapter 7, the bankrupt organization essentially ceases to exist. All operations are stopped, the company immediately goes out of business, the company’s executives and officers give up control, and a chapter 7 trustee is appointed. The trustee is tasked with selling off the business’s assets and using the proceeds to pay creditors.
In the case of a coal company, any mines not sold to another company may be abandoned, in which case government mine regulators will be accountable for reclamation of the mined regions (including remediating any long-term pollution issues). Regulators may be able to fund this cleanup by accessing reclamation bonds posted by the bankrupt company when it first received its permit. However, if the amount of the required bond was too small or if the company was allowed to “self-bond,” the regulator will be required to secure the resources to pay for the reclamation from another source – usually the state’s general budget.
A chapter 11 reorganization proceeds much differently, since the bankrupt company is seeking to restructure and continue to operate. However, reorganization is not always successful and when it becomes apparent that the company will not regain its stability, the chapter 11 reorganization is converted to a chapter 7 liquidation. During a chapter 11 reorganization, the company retains control over its assets and seeks approval from the bankruptcy court to make the payments necessary to continue to operate – payroll, utilities and other expenses.
Given consumers’ shift to less expensive and cleaner sources of power, why are coal companies choosing to reorganize under chapter 11 and continue to operate rather than liquidate under chapter 7 and cease to exist?
When a chapter 11 bankruptcy is filed, several important things happen. A bankruptcy estate is created, composed of all the company’s assets, and an “automatic stay” is triggered. The automatic stay immediately stops all litigation involving the debtor, and also prevents the filing of any new lawsuits that could have been brought before the bankruptcy. As the chapter 11 bankruptcy proceeds, the company is required to disclose current assets and liabilities, and creditors have an opportunity to submit their claims for payment.
Under chapter 11, the debtor company has the ability to seek bankruptcy court approval to sell off major assets – free and clear of liens, claims, or interests – for the purpose of generating cash. For a coal operator, this could mean selling a coal mine and all the environmental obligations attached to it. The company is required to operate its business in accordance with applicable state laws, although the bankruptcy court, which likely has little knowledge of environmental law, is in charge of determining whether the company is being compliant, according to one Sierra Club report.
Besides shirking their environmental responsibilities, many bankrupt coal companies have also been able to avoid their obligations to employees by listing retirement pension benefits as liabilities in their chapter 11 bankruptcy reorganization plans. “Now comes the part where workers and their families pay the price for corporate decision-making and governmental actions,” the United Mine Workers of America said in a statement quoted by The Washington Post on October 29.
According to a recent Stanford Law Review article, between 2012 and 2017, four of the largest coal companies in the U.S. succeeded in shedding almost $5.2 billion of environmental and retiree liabilities. Despite the fact that most of these liabilities were backed by federal mandates, the coal companies discharged these regulatory obligations by placing them in underfunded subsidiary companies that were later liquidated, manipulating federal bankruptcy law in a way that the Stanford paper termed “illegal.”
Regardless of Trump’s efforts to revitalize a dying industry, those maneuvers are likely to continue as coal company bankruptcies, which have been filed at a rate of one a month since the beginning of 2012, continue to pile up.