Distressed Coal—Will The Cycle Ever Turn?

An Introduction to Legal Issues Confronting Coal Companies

Unprecedented Challenges for the Coal Industry

As evidenced by the recent spate of coal mining companies filing for bankruptcy protection (e.g., Alpha Natural Resources Inc., Patriot Coal, Walter Energy Inc., James River Coal Co., Trinity Coal Corp., Americas Energy Co., Clearwater Resources LP and Consolidated Energy), the coal mining industry is facing a period of historic stress. Although coal's preeminence as a fuel source has been declining for more than 150 years, a confluence of recent factors has contributed to a likely unprecedented level of difficulty in this industry. These factors include: (i) increasing competition from energy sources that can be used as an alternative to coal;1 (ii) implementation of new environmental regulations;2 (iii) decreasing global demand for coal caused, in part, by the economic slowdown in China;3 (iv) decreasing institutional investment in the coal industry due to corporate responsibility initiatives relating to environmental concerns;4 and (v) legacy employee and retiree pension and healthcare costs. Considering the forgoing factors, it is not surprising that the price of coal has dropped dramatically, falling more than 70 percent in the past four years.5

However, it may be too soon to write the final obituary for coal mining companies. Coal, even in long-term decline, will almost certainly continue to supply a critical component of the world's energy needs for many years to come. Therefore, there are reasons to be relatively optimistic that distressed coal mining companies can be successfully restructured and possibly even provide interesting investment opportunities. That being said, the futures of coal companies are particularly difficult to predict given the uncertainty as to where the price of coal and commodities in general will be over the next couple of years. Given the challenges surrounding the coal industry, it is particularly important that lenders to and investors in coal companies are familiar with both the common bankruptcy and restructuring issues as well as issues specific to the coal industry, as outlined below.

Specific Employee Health Issues

In addition to the employee and retiree obligations and regulations that need to be considered when dealing with the restructuring of any corporation, coal mining companies are subject to additional healthcare obligations and regulations that may add additional costs to a coal company's restructuring. The Coal Industry Retiree Health Benefits Act of 1992 (the Coal Act) requires most coal companies to contribute to a national health benefit fund which provides financial support to cover certain retired employees' health costs.6 The Federal Mine Safety and Health Act of 1977 (the Black Lung Act) permits certain coal miners affected by pneumoconiosis (black lung disease) to file claims with the Division of Coal Mine Worker's Compensation of the Department of Labor. If the Department of Labor determines that the claim is valid it will attempt to hold the respective coal company responsible. If the company is in bankruptcy, a trust established by the Treasury Department will pay the benefits and costs to the employee and will seek reimbursement from the company's bankruptcy estate.7 Whether or not a court authorizes a coal company to reject or modify its Coal Act and/or Black Lung Act obligations is a fact-driven question that will vary on a case by case basis. 8 Obligations under these statutes can be sizeable and have the potential to dwarf other unsecured claims which may jeopardize a coal company's ability to reorganize. Additionally, these obligations may complicate a restructuring by adding a number of additional constituencies to the process.

Effect of Environmental Regulations on Coal Bankruptcies

Restructuring coal mining companies often gives rise to conflicts between the goals of the Bankruptcy Code and the enforcement of numerous environmental laws which are applicable to these companies. While a key purpose of bankruptcy and restructuring is to provide the debtor company with the opportunity for a fresh start by leaving many of its...