Conservationist Coal Company

Conservationist Coal Company: No Longer An Oxymoron Law360, New York (April 11, 2016, 1:52 PM ET) -- A new entrant has appeared in the embattled coal mining sector, and is buying up bankrupt coal mines that no one else wants. The controversial strategy is gaining momentum and may shed some light on how coal states like West Virginia could implement the federal Clean Power Plan, should it ultimately prevail in the courts.

Last year, Walter Energy, Patriot Coal, Xinergy and Alpha Natural Resources all filed for bankruptcy. Arch Coal sought Chapter 11 protection in January and, Peabody Energy has signaled it may be next. When coal companies prepare for bankruptcy, they take a hard look at their mine portfolios to assess the value of each mine complex. The value of available coal and other Hayden S. Baker assets at each complex is set off by the projected cost of reclaiming the land and fulfilling any long-term water treatment or other environmental obligations.

The resulting difference is a rough approximation of the value of each complex. (The actual analysis is far more complicated as both the assets and liabilities are tied to individual permits and any given complex may have dozens, or even hundreds, of mining and water discharge permits. Moreover, under the federal Surface Mining Control and Reclamation Act and its state corollaries, governmental authorities can effectively hold parent or other affiliated companies responsible for reclamation liabilities even if not Jeffrey R. Gleit themselves directly liable.) At the end of this analysis, some mines will have value and others will be underwater — it will cost more to reclaim the mine than the available coal is worth.

Having estimated the value of each mine, coal companies in financial distress need to make the decision to restructure around all of their mines or, in the alternative, seek to sell off some — or even all — of their mining assets through a section 363 sale process. At the beginning of the industry downturn, there were generally buyers for coal mines. For particular low-value mines, some coal company buyers might have agreed to take a mine without paying for it — essentially just agreeing to perform the outstanding reclamation. Even underwater mines could be bundled together with profitable mines to facilitate a sale. As the coal sector slumped further into bankruptcy, however, there simply were no buyers for some mine complexes, which brings us to August of last year.

A New Market Entrant Turned Heads

Patriot Coal filed for bankruptcy in May 2015 and subsequently reached a deal to sell most of its assets to Blackhawk Mining but it had found no buyer for two of its mines in West Virginia. In August, a new entrant — the Virginia Conservation Legacy Fund — stepped in to take control of those two mines together with 149 mining permits. As part of the deal, VCLF set up an affiliated company, ERP Compliant Fuels LLC, and assumed roughly $400 million in environmental and other liabilities.

VCLF was founded by Tom Clarke, the president of a health care company and noted environmentalist. Why is an environmentalist health care executive buying coal mines? While some were still scratching their heads, Clarke did it again. In December, affiliates of VCLF acquired the last two coal mines of Cliffs Natural Resources. And earlier this year, VCLF affiliates acquired the remaining U.S. assets of Walter Energy for $1.

VCLF Bets on Strategy to Couple Reforestation Carbon Credits with Coal

VCLF plans to offset the emissions from burning its coal by planting trees and bundling its coal sales with carbon credits earned through reforestation. The carbon credits are supposed to account for up to 30 percent of the associated carbon emissions.

While VCLF’s strategy has met resistance from environmentalists and industry alike, its biggest challenge still lies ahead. To grow demand for its carbon “compliant coal,” VCLF appears to be looking to the federal Clean Power Plan, the Obama administration’s signature greenhouse-gas emission reduction strategy. As written, the Clean Power Plan does not authorize coal plants to reduce their emissions through offsets earned by planting trees elsewhere. However, it does contemplate a multistate trading system, and VCLF reportedly plans to lobby for reforestation offsets to be incorporated into any compliance trading program.

Perhaps putting a damper on VCLF’s potential plans, on Feb. 9, the U.S. Supreme Court put the brakes on the Clean Power Plan, thereby putting off the September 2016 deadline for submitting state plans or requesting extensions.

On the other hand, the stay may allow VCLF time to play a very persuasive card: if its “compliant coal” strategy fails, there is — by definition — no next buyer for these coal mines and the sureties, workers and state will have no choice but to face the consequences of idling the remaining mines, completing reclamation and fulfilling long-term water treatment obligations. As VCLF amasses still more reclamation liabilities, the consequences of its failure grow, as does its ability to influence West Virginia and other coal states as they design their strategies for complying with the Clean Power Plan.

VCLF’s strategy seems to be working. At his January 2016 State of the State address, West Virginia Gov. Earl Ray Tomblin specifically expressed his gratitude toward Clarke and VCLF for “helping us develop new and innovative ideas to include in the state’s Clean Power Plan submission.” Speaking before the U.S. Supreme Court stayed the Clean Power Plan, Tomblin indicated “we anticipate our final plan may include ideas such as reforestation”.

VCLF Will Need to Solve Impediment to Using Out-of-Sector Offsets

Forestry based carbon credits are certainly not new. Indeed they are recognized to varying degrees under both the California and Regional Greenhouse Gas Initiative frameworks. The Clean Power Plan,

however, requires emission reductions from the power sector itself. In response to early calls by Kentucky and Georgia to credit reforestation initiatives under the Clean Power Plan, the U.S. Environmental Protection Agency reportedly replied: “[T]he EPA did not propose that out-of-sector greenhouse gas offsets could be used by states to comply with the Clean Power Plan because these programs do not reduce emissions coming from power plant smokestacks.”

This resistance to allowing out-of-sector offsets arises from concern that regulation beyond the power sector falls outside of the EPA’s authority under the Clean Air Act, and that use of such offsets would leave the Clean Power Plan more vulnerable to judicial attack. West Virginia, however, now has a strong interest in seeing “compliant coal” recognized as a lower-emission fuel source. Based on comments filed by Kentucky and Georgia, those states too may embrace a reforestation compliance strategy if some narrow use of out-of-sector offsets is allowed.

As widely reported, in the wake of the Supreme Court’s stay of the Clean Power Plan, compliance planning among many of the opposing states — including West Virginia — has ground to a halt. Nonetheless, the stay provides an opportunity for ambitious and concerned players like Clarke to assemble their best strategies and position themselves to help state regulators if and when the time comes to design innovative and efficient compliance plans that are tailored to the specific needs of their state.

—By Hayden S. Baker and Jeffrey R. Gleit, Sullivan & Worcester LLP

Hayden Baker is a partner in the corporate and environment and natural resources groups, and Jeffrey Gleit is a partner in the bankruptcy and restructuring group at Sullivan & Worcester in New York.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.