For more than a century-and-a-half, the forests, streams, and hollows of the Appalachian Mountains have been scraped and gashed to unearth their heart of rich black coal. These lumps of hydrocarbons historically played a vital role in America’s electricity mix, accounting for a third of the country’s energy production as recently as 2008.
But over the past decade, a devastating combination of forces has pummeled the industry, from cheap natural gas and the falling cost of renewables to growing public pressure to respond to the climate crisis. U.S. coal production has dropped 40 percent since its peak 12 years ago, and the commodity accounted for only 14 percent of the country’s electricity generation last year.
With the coronavirus pandemic now stalling energy demand, coal production has dropped about 26 percent in the past 12 months alone, perhaps ringing the death knell for coal as an energy source in America.
“The pandemic has even further depressed the use of energy, and oil prices have collapsed, making it even more difficult to compete,” said Ohio Coal Association president Mike Cope, who estimated a strong industry would need to provide a third of the country’s energy. “Nothing really to cheer about in the coal industry these days.”
Hit with another wave of bankruptcies, King Coal is on its deathbed. But even as it fades away, the industry could land a final, painful blow to communities and the environment in Appalachia.
An investigation by DeSmog has found that several key financial instruments meant to guarantee environmental cleanup have been pushed to the brink of insolvency, potentially leaving taxpayers on the hook for hundreds of millions — if not billions — of dollars in reclamation costs.
Even as coal companies go bankrupt and walk away, a federal law passed in 1977 created an ostensibly fail-safe system to fund future cleanups: Mining companies put up millions of dollars in security deposits intended to pay for reclaiming individual mines. These funds, called bonds, usually come as surety policies, which are provided by insurance companies and guarantee a third party will fill pits, seal shafts, and mitigate water and air pollution.
But DeSmog has found that the bonding system now faces dangerous levels of risk. The large insurance companies that once wrote surety policies are fleeing the industry, allowing a few insurance providers to take on much more liability than they can handle. If enough coal companies go under, it will set off a chain reaction, taking these insurance companies down with them.
As a last line of defense to protect taxpayers, coal companies in six Appalachian and Midwestern states also pay into shared pots of money meant to backstop cleanup costs. But the amount of money companies are mandated to pay into these funds has been vastly under-calculated, and these bond pools are also facing insolvency.
Bond pools are a vestige of “a different industry,” explained Matt Hepler, a Virginia-based organizer and scientist with Appalachian Voices, a nonprofit that advocates for communities and the environment in coal country. “They were designed when coal was booming. They were not designed to handle an industry-wide collapse.”
Precarious bond pools, already inadequate bonds, and surety providers playing a risky game are a dangerous combination.
“It’s a house of cards,” Hepler said.
The twilight of the coal barons
As coal companies go bankrupt and production drops, under-capitalized companies are scavenging what’s left. In West Virginia, that’s the story of nursing home operator-turned-mining magnate Tom Clarke, who arrived on the scene after coal had already begun its free fall.
The heart of Clarke’s plan was to acquire nearly worthless Central Appalachian coal mines from companies seeking to shed liability, such as bankrupt Patriot Coal in 2015, and sell the remaining coal to pay for environmental cleanup.
From the beginning, he operated on a razor’s edge, with barely enough staff and cash. His companies were regularly out of compliance with state and federal environment laws.
Earlier this year, a Clarke-run company called ERP Environmental Fund laid off all its employees and effectively abandoned its mines, including more than 100 permits. At its peak in 2015, ERP had 217 full-time employees, a number that had dropped to 65 by last year, according to data from the U.S. Mine Safety and Health Administration.
With ERP’s collapse, the Mountain State now faces the possibility of shouldering more than $100 million in cleanup costs.
Clarke did not respond to multiple requests for comment.
In late March, the West Virginia Department of Environmental Protection petitioned the courts to place ERP into receivership, meaning a judge would appoint an agent to manage the failed company.
A spokesperson for the department declined to comment.
The agency’s court filings have painted a picture of shirked responsibilities. Division of Mining and Reclamation Director Harold Ward stated in one document that “without immediate and decisive action” the mess left at ERP’s mines would “threaten imminent and identifiable harm to the environment and the public health and safety.”
The Martinka mine, an ERP site in northern West Virginia, represents that looming disaster. According to regulators, it costs nearly $900,000 annually to pump and treat polluted water draining from the mine. But ERP was only sporadically maintaining its pumps. The deteriorating situation compelled West Virginia to step in earlier this year and begin paying for pump maintenance on behalf of ERP, or else risk the system failing to contain the pollution.
“This would result in contaminated water discharging into the receiving stream that is the source of drinking water for thousands of West Virginians within a matter of weeks if not days,” Ward stated in the agency’s court filings, further warning that all the company’s mines in West Virginia could deteriorate to Martinka’s level.
The state environment department “stands poised at the precipice” of having to wipe out ERP’s permits, tap into its bonds, and fall back on West Virginia’s bond pool, according to its court filings. This could result in “financially overwhelming the Special Reclamation Fund, the State’s principal backstop for all revoked and forfeited mine sites in West Virginia.”
According to a January 2019 report prepared by the state board overseeing West Virginia’s bond pool, the fund was worth $61.6 million, and a related fund focused on water pollution held $112.4 million.
It’s impossible to know exactly how much coal mine cleanup and water treatment will cost across West Virginia, although the state estimates that reclaiming its abandoned coal mines could come with a bill of $1.8 billion. This is on top of hundreds of millions, if not billions, of dollars in costs associated with active and recently closed mines, including those owned by ERP.
According to the board’s 2019 report, these funds were adequate to cover the projected cost of mine cleanup, and the state didn’t need to increase fees assessed on the industry to top up those pots of money.
But regulators now admit that a single company’s demise might wipe out the entire bond pool.
West Virginia’s not alone
The other five states with bond pools — Virginia, Kentucky, Ohio, Indiana, and Maryland — aren’t in much better shape.
“It seems like each state right now has its own actor that is jeopardizing its bond pool in Appalachia,” Hepler said.
West Virginia Gov. Jim Justice and his family own companies that hold 39 coal mine permits in Virginia, most sitting idle and pockmarking ridges along the border with Kentucky. They’ve racked up about 800 violations since 2012 for regulatory noncompliance ranging from water pollution to insufficient monitoring, according to documents provided by the state’s Department of Mines, Minerals, and Energy.
While the fund has about $10 million backing cleanup at more than 43,000 acres of disturbed land, a 2017 report from the state found that mines belonging to one of the Justice family’s companies would cost $134 million to reclaim, a sum almost entirely guaranteed by the bond pool. A recent, conservative analysis by Hepler found that this dollar figure had likely dropped but still left the pool backing more than $100 million. Justice’s spokespeople did not respond to requests for comment.
In Kentucky, the bankruptcy of two companies formerly run by coal baron Jeff Hoops, Blackjewel and Revelation Energy — which inspired 2019’s “No pay, we stay!” protests — threaten the state’s roughly $50 million bond pool.
In January and February, the Kentucky Cabinet of Energy and Environment wrote to the bankruptcy court, alleging that the companies flouted their cleanup duties and stopped paying their bond pool fees. Analyzing just 20 percent of the firms’ permits, the state found that their bonds combined would be $38 million short of covering reclamation even on that fraction.
Phone numbers associated with Hoops, Blackjewel, and Revelation Energy have been disconnected, and the bankruptcy attorney for the companies didn’t respond to requests for comment.
Josh Macey, a Cornell Law School assistant professor who has researched coal bankruptcies, said mine bosses who are willing to take on liabilities and be hit with myriad violations represent the latter days of a dying industry. “It’s almost a misnomer to call the things they have ‘assets,’” he said, “because that suggests that they have value.”
If companies go bankrupt, they won’t immediately saddle taxpayers with the full value of their cleanup costs because remaining profitable assets would be sold. But if even a fraction of the cleanup bill lands with the state, it will drown these bond pools, DeSmog’s analysis of state records found.
In Ohio, the state’s worst-case projections are already becoming reality.
For years, state-commissioned reports have shown that it would take more than 150 years to build up enough financial reserves to handle its largest mining company going belly-up. That operator, Murray Energy, is already in bankruptcy protection, with more than $200 million in environmental liabilities backed by the fund. An attorney for Murray Energy declined to comment.
Ohio’s bond pool guarantees about $545 million in coal mine cleanup costs, according to a 2019 actuarial report, but is only worth $22.2 million.
“It’s a self-fulfilling prophecy,” said Cope from the Ohio Coal Association. “As there’s less coal mined, there’s less money to put into these funds. If there’s a catastrophic bankruptcy, the fund will not be able to handle it.”
One state west, Indiana regulators failed — in 2017 and again in 2018 — in their attempts to raise fees on active coal companies to mitigate their bond pool’s financial shortfall. As of December, Indiana’s fund sat around $1.4 million, only 7 percent of the roughly $19.1 million worth of cleanup costs it backs.
In Maryland, a failing company handed its mines to the state, causing the bond pool to plummet from about $725,000 in 2018 to below $100,000 now. Jay Apperson, spokesperson for the state’s Department of the Environment, said that because the state’s per-acre bonding rates are among the highest in the region, it is less reliant on its bond pool to fund cleanups.
The 1977 law governing coal mining leaves ultimate authority with federal regulators, however. A spokesperson from the Office of Surface Mining Reclamation and Enforcement, or OSMRE — the federal coal regulator — said the agency “is aware of the current financial difficulties,” but declined to answer any questions about its own inaction on the issue.
Regulators ignored warning signs of an insurance bubble
The insurance companies that back coal mine surety bonds have taken on more liability than they can handle, said Bob Mooney, who spent two decades as a coal regulator with both OSMRE and the state of Ohio.
“The bonds are sort of immaterial because a lot of the surety companies will go under,” he said. “So, even though there’s a bond, there’s not.”
In rare cases over the past several decades, surety providers themselves have gone bankrupt, throwing turmoil into the system.
But the use of surety bonds has increased in recent years. A 2018 report from the Government Accountability Office, the investigative arm of Congress, found that 76 percent of the more than $10 billion in coal cleanup bonds are held as sureties.
Over the past five years, that liability has been dangerously consolidated in an ever-shrinking number of insurance companies. Fewer than a half-dozen insurers now actively issue surety policies, according to Macey and others within the surety industry.
“Given how few surety companies remain active, there’s obviously a risk that they’re not financially capable of performing,” Macey said.
That potential has become a reality, according to a surety broker who has worked with the coal industry for years and requested anonymity to speak candidly about contracts between coal mining companies and surety providers. The broker explained that major insurance companies, such as Zurich Insurance Group and Travelers Casualty and Surety Company of America, are extracting themselves from the coal surety market.
Walking away is an easy decision for large insurance providers, the broker said, because these bonds represent only a small percentage of their business. While the law doesn’t allow insurers to simply cancel surety policies, some companies now ask for high levels of collateral from coal companies to properly reflect the risk.
“They don’t win business on their rates,” the broker said of how insurance companies attract mining clients. “They win business by the amount of collateral they require.”
This incentive system helped create a race to the bottom, with smaller insurance firms gobbling up large amounts of coal business. Insurance providers make quick money on premiums but, if faced with their coal customers going under, they may topple in a manner similar to the failure of the subprime mortgage bundles that helped kick off the 2008 recession.
Indemnity National Insurance Company is the poster child for this system.
The firm accepts high levels of liability from risky coal miners, including in the ERP case in West Virginia. State officials said that if they tried to use the company’s sureties for cleanup, which is how the system is meant to work, the move could end up “potentially bankrupting the Defendant’s principal surety,” Indemnity.
A 2016 press release from KEWA Financial, Indemnity’s parent company, described KEWA as a mining-focused reinsurer that “has identified a unique opportunity to build a low-risk environmental surety business in an industry perceived to be high-risk.”
But their risk is far from low.
Indemnity backs about $125 million in surety bonds for ERP, as well as $400 million worth of policies with companies currently or formerly associated with Hoops, the Kentucky coal magnate. This is according to data from West Virginia, Kentucky, and Virginia regulators, gathered in recent months by the Appalachian Citizens’ Law Center and Appalachian Voices and shared with DeSmog.
Indemnity guarantees more than $900 million in coal surety bonds for 38 companies across the three states.
“If Indemnity National goes in the tank — with the number of bonds they have with these other companies — these other companies are not going to be able to replace them. They’re just not,” the surety broker said.
That worst-case scenario would push the coal industry into unprecedented territory and would leave hundreds of millions of dollars in cleanup liability unprotected.
“The bonding companies were never making an assessment of what their risk was,” said Pat McGinley, a West Virginia University law professor with more than 40 years’ experience dealing with the coal industry. “So, they were backing bonds far beyond their ability to pay if there was a bankruptcy.”
Representatives of Indemnity and its associated entities — Cumberland Surety and KEWA Financial, which is partly registered in Barbados, an offshore tax haven — did not respond to calls and emails requesting comment.
The warning signs were there
The fall of ERP in West Virginia has helped expose a potential surety bubble, but warning signs were laid at the feet of state and federal regulators years ago.
When an insurance provider called Frontier Insurance Company lost its listing with the U.S. Treasury in 2000, OSMRE and regulators in West Virginia and elsewhere around Appalachia had to scramble to find other providers to pick up its surety policies.
Ten years later, Travelers, a large surety provider, wrote to OSMRE, telling the agency that severely insufficient bonds spelled trouble for surety providers and states. “They also pose a risk to those state programs with bond pools with the possibility of draining or even bankrupting state bond pools in the event of default,” the company wrote.
By 2013, staff at OSMRE seemed to have gotten the message loud and clear, as an agency higher-up’s presentation at a mining conference warned that there was already a “lack of diversity in the surety industry: too few companies holding all the bonds.”
Regulators still have the legal authority to demand that coal companies fork over adequate bonds and that insurance companies only accept risk they can handle. But further stressing the remnants of the coal industry could push more companies into bankruptcy, making it even more likely that no one will properly clean up and shut down these mines.
“Who pays? The damaged environment? The communities that are blighted by unreclaimed mine sites?” McGinley said. “It’s the end of the road, so where’s the money coming from? This was all foreseeable.”