Kevin Barrett of Bailey & Glasser featured in New York Times article related to Coal Clean Up Bill

Regulators Fear $1 Billion Coal Cleanup Bill

Regulators are wrangling with bankrupt coal companies to set aside enough money to clean up Appalachia’s polluted rivers and mountains so that taxpayers are not stuck with the $1 billion bill.

The regulators worry that coal companies will use the bankruptcy courts to pay off their debts to banks and hedge funds, while leaving behind some of their environmental cleanup obligations.

The industry asserts that its cleanup plans — which include turning defunct mines back into countryside — are comprehensive and well funded. But some officials say those plans could prove unrealistic and falter as demand for coal remains weak.

The latest battle is over Alpha Natural Resources, once a high-flying coal company that borrowed hundreds of millions when the coal market was booming but imploded in the face of competition from cheaper natural gas and tougher environmental regulations.

West Virginia faces perhaps the greatest fallout from the flood of coal bankruptcies that have hit the courts in the last year because many of its mines are scheduled to close and will require extensive cleanup. The state took the unusual approach of hiring a seasoned bankruptcy lawyer from New York who grew up in West Virginia to represent its Department of Environmental Protection in the Alpha case.

“The goal is to make sure the coal companies clean up the mess when they leave,” said the lawyer, Kevin W. Barrett of Bailey & Glasser, who was named a special assistant attorney general for West Virginia and is taking the lead on the Alpha case.

Regulators and environmental groups in Appalachia have tangled with coal companies for decades over their mining practices, particularly mountaintop removal mining, which involves removing mountain summits to extract coal.

But in the bankruptcy cases, West Virginia has been pressuring the industry’s lenders to share more of the responsibility for mine reclamation and water remediation, arguing that they exert great influence, if not outright control in some cases, over the bankrupt mining companies.

Still, figuring out who holds the industry’s debt can involve a cat-and-mouse game. Earlier this year, Alpha denied knowing the identity, or the holdings, of its so-called first-lien lenders, which are in line to be paid before many other creditors, according to a court filing.

So Mr. Barrett subpoenaed Citicorp, the agent for the first-lien lenders in the case, asking for the names.

It took Citi more than 30 days to respond to the state’s subpoena, the court filing shows. When the list of lenders arrived, it read like a who’s who of leading investment firms — including two big hedge funds, Highbridge Capital Management and a unit of Davidson Kempner.

Mr. Barrett promptly subpoenaed these firms too, asking how their plans to buy Alpha’s most valuable assets in the Powder River Basin of Wyoming would help pay to clean up the mines left behind in West Virginia.

Alpha’s current plan on the table would commit at least $209 million for reclamations and water treatment in five states: Illinois, Kentucky, Tennessee, Virginia and West Virginia. But Mr. Barrett worries that the cash is insufficient and that any additional contributions depend on future coal sales, which show little sign of recovery.

“There are a lot of questions whether that will even cover the costs,” said Mr. Barrett, a former lawyer at Weil Gotshal & Manges who grew up hearing the rumble of coal trains through his town in West Virginia.

Kevin Barrett is a lawyer who was hired to try to make sure taxpayers are not left holding the bag. Credit Karsten Moran for The New York Times

Alpha insists it will make good on all its environmental obligations. The company has continued to perform reclamations even as its cash dwindles in bankruptcy. In a court filing, Alpha said it could “achieve a resolution that will assure the states that the debtors perform their reclamation obligations.”

An Alpha spokesman declined to comment beyond the court filings, saying that the reorganization plan was not yet complete. Representatives for Citi and the investment firms also declined to comment.

Many hedge funds bought the coal industry’s debt — which totaled roughly $50 billion in 2014 — at a discount and stand to profit if the value of their bonds increases. Many of these debt holders have liens on the company’s operating cash and other assets, often giving them tremendous sway over how the money gets spent.

In the case of Patriot Coal, another large mining company that declared bankruptcy last year, West Virginia sought to hold its hedge fund lenders directly liable for mine reclamation.

“The lenders are in the driver’s seat,” said Shannon Anderson, a staff lawyer at the Powder River Basin Resource Council, a conservation group in Wyoming, where Alpha operates large surface mines.

In 2011, Alpha borrowed heavily to acquire Massey Energy as that company was reeling from an explosion that killed 29 miners at its Upper Big Branch mine in West Virginia. When the coal market collapsed, Alpha was squeezed by its debt load and filed for bankruptcy last August.

While several coal companies have emerged from bankruptcy in recent months and continued to operate, state officials have expressed concerns that those companies could soon end up back in bankruptcy if the coal market does not improve. If that happens, they say, the companies will probably have to liquidate, leaving little money to fund reclamations and clean up polluted water.

That concern is behind the urgent pleadings of environmentalists and even insurers that the coal companies be required to set aside more cash for environmental issues before they are allowed to emerge from bankruptcy.

“Bankruptcy courts need to hold strong and not let financial institutions pocket the money and leave a huge part of Appalachia out to dry,” said Peter Morgan, a lawyer for the Sierra Club, which has filed legal objections to Alpha’s plan.

The coal industry has a history of shunting its obligations — so much so that Congress has created a specific law aimed at preventing the industry from walking away.

The Surface Mining Control and Reclamation Act of 1977 requires coal companies to purchase bonds — effectively, insurance policies — that can be used to pay for reclamation if the companies are insolvent.

But in the past, regulators in states like West Virginia and Wyoming had allowed coal companies — particularly the giant mining ones — to “self-bond,” which meant that they had only to promise to pay for reclamation work, but not to actually post bonds.

The company is still negotiating with state regulators over reclamations before a court hearing expected early next month.

In West Virginia, Alpha’s plan is to purchase bonds or offer other collateral to replace most of its $240 million in self-bonds. But about $100 million will remain self-bonded, according to a person briefed on the matter.

In Wyoming, Alpha officials “anticipate” replacing all of the roughly $400 million in self-bonds with surety bonds or other collateral, according to a court filing last month.

“It is a step in the right direction,’’ Ms. Anderson, the Powder River Basin Resource Council lawyer, said. “But we would like to see more certainty.”

A version of this article appears in print on June 7, 2016, on page A1 of the New York edition with the headline: $1 Billion Coal Cleanup, but Who Gets the Bill?.

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