US coal companies have been going bankrupt. In their desperate efforts to survive, they have been doing some pretty shady things.

Vox has covered some of those shady maneuvers (see here, here, and here), but a new story out of West Virginia might take the cake for sheer chutzpah and shamelessness. In this case, at least according to state regulators, shady may have crossed over into outright fraud.

Among other things, this case casts some light on Donald Trump’s ludicrous promise to bring back lost coal jobs. Here’s a coal company who went into bankruptcy, ditched most of its obligations to workers and the environment, assembled a new company out of the only valuable assets left — and still couldn’t convince regulators it would be a viable concern without cooking the books.

TL;DR

Here’s the short version: Last year, Kingsport, Tennessee-based Alpha Natural Resources (one of the big three US coal companies, along with Peabody and Arch) declared bankruptcy. In its bankruptcy settlement, it was permitted to ditch a bunch of its pension and mine-cleanup obligations and spin off its best remaining assets into a new company called Contura Energy. Six Alpha executives promptly hopped over to Contura.

The settlement was premised on the idea that Alpha, emerging from bankruptcy, would be a viable company, with cash flow sufficient to cover its remaining obligations. Just one problem. Three months later, Alpha executives revealed that they had overlooked $100 million in outstanding debts and obligations in their filing. Whoops.

The West Virginia Department of Environmental Protection (DEP) is furious. In a short but potent written objection sent to the court on November 15, the DEP said it never would have made the deal it made with Alpha if the $100 million had been disclosed beforehand. It is reserving its right to deny Contura and its executives any new coal mining permits, anywhere. And it is suing the company for fraud.

(The executives in question say “the projections were never intended to be a guaranty,” the criticism is “irresponsible,” and both companies will still, despite what everyone else seems to expect for the coal industry, prosper.)

To really understand how distasteful all of this is, however, requires a bit of context. If you want the full version, read reporter Taylor Kuykendall’s stories on SNL Energy here, here, and here, and Ken Ward Jr. (the dean of coal reporting) here. The abbreviated version is below.

US coal companies made bad bets

The US coal industry is a wreck. “Since April 2011, the group of 13 U.S. coal producers has lost more than 92 percent of its value,” writes SNL Energy, “with the companies’ combined market capitalization falling from $62.5 billion to $4.59 billion amid historically weak coal market conditions.”

“Weak market conditions,” however, makes it sound like the companies are all victims. It’s true that there are external factors at work — cheap natural gas, tighter pollution regulations — but it’s also true that coal’s collapse is partly self-inflicted. Coal company executives made some terrible bets.

Around 2011, they went on a buying spree, eating up other companies in anticipation of a forever-booming overseas market in metallurgical coal (used for making steel). In the process, they took on an enormous amount of debt.

Shortly thereafter, the met coal market went bust.

At the same time, the US market for thermal coal (used to generate electricity) was declining. Meanwhile, the debt from all those acquisitions was crushing.

They bet big, and they lost. And so all three of the big three have declared bankruptcy — some multiple times. NRDC tells the full story, with charts, here.

Bankruptcy is like celebrity rehab for corporations

Don’t feel too bad for those executives, though. They won’t be the ones to suffer. In fact, they’re maneuvering to profit from the disaster.

You see, when American companies go bankrupt, they don’t die. They just “restructure.” That is a process whereby the stuff burdening the company — like, say, pension and retiree obligations, or environmental cleanup obligations, or various other debts — gets jettisoned and the remaining valuable assets either are retained or spun off into a new company (a company with none, or far fewer, of those pesky obligations and debts).

Executives have to go through a few years of tough work, and investors sometimes take a haircut, but in the end, they emerge with a stripped-down, more competitive company, often able to write a new, stingier contract with a workers union, or find nonunion work.

In corporate America, bankruptcy is less like a failure than a spa retreat. A juice cleanse, if you will.

So who covers all those debts and obligations? You do. State and federal taxpayers. Or no one does, in which case they are “covered” by economic hardship for workers and retirees.

To make it work, coal companies have to pretend coal is coming back

The only way this process works for coal companies is if they can convince bankruptcy judges that they are facing temporary difficulties, that restructuring will position them to succeed going forward.

This is getting increasingly tricky, since most analysts now agree that the US coal industry, as currently structured, is unsustainable. There are "too many companies," Tom Sanzillo of the Institute for Energy Economics and Financial Analysis told me, "selling too much coal to too few customers."

So coal companies have to make it look like the coal market will tick back up, or at least stabilize. And they have to make their newly stripped-down companies appear so stripped down that they can survive even in a more inclement environment, which means they have to ditch as many obligations as possible. (See Ward Jr. on growing concerns that billions in “legacy liabilities” will be left behind as the coal market tanks.)

Alpha executives appear to have pulled one over on bankruptcy court

Usually this involves implausibly rosy market projections based on predictions that natural gas prices will rise. Alpha, it seems, went a step further. To make the post-bankruptcy Alpha appear viable to the court, it overstated its cash flow by, in DEP’s words, “a whopping $100 million.”

By way of comparison, these same executives forecasted cash flows of only $146 million over the entire 4.5-year projection period.

A few months later, in a financial disclosure, the company revealed its oversight. DEP noticed, noticed pretty hard. Its statement to the court is really worth reading — it’s only a few pages, and it contains language more piquant than one usually reads from state bureaucrats.

According to DEP, the $100 million has nothing to do with the new company failing to meet projections. Instead, it was the omission of debts and obligations that were plain to see (“the debtors had all the necessary information at their disposal”).

Here is the key passage, where DEP effectively accuses executives of fraud (emphasis mine):

Under all the circumstances, it is hard to imagine that a shortfall of this nature and order of magnitude was just a mistake. But, here, even more damning, the debtors’ senior management sat on both sides on these very issues and stood to benefit uniquely from consummation of the plan and the DEP settlement. During the pendency of the chapter 11 cases, the debtors’ senior management jockeyed for positions at Contura and then assumed those positions immediately upon consummation of the plan. But as the debtors’ senior mangement and the individuals ultimately responsible for producing the projections, they knew (or certainly had every reason to know) precisely what taxes, payroll, royalties and payables the debtors had already incurred and would become due, especially just weeks in the future. They also knew (or certainly had every reason to know) precisely what the Contura agreement required and would obligate the reorganized debtors to pay. The conclusion thus seems almost inescapable that the debtors’ senior mangement knew about but did not disclose those impending “unaccounted-for” expenditures to ensure consummation of the debtors’ Contura sale and chapter 11 plan for their own benefit and to secure the releases of environmental liability from DEP (and other regulatory agencies) they so desired. [

Here’s what DEP is charging, in simpler language: Alpha executives knew their company was tanking. So they convinced regulators to let them create a new company, Contura, with all the still-valuable parts of Alpha. Then they defected to the shiny new company.

To pull it off, they had to convince regulators that the left-behind company, Alpha, would still be viable and able to cover its remaining environmental obligations. They had to make Alpha’s cash flow look good. And they did … by leaving $100 million out of the picture.

And get this: They wrote into the bankruptcy agreement that the executives who defected to Contura could not be held liable if Alpha goes belly up.

Time will tell if coal executives have gone too far

If executives had told the truth, DEP would never have approved the deal — it says the $100 million shortfall “seriously threatens the reorganized debtors' viability and ability to perform their legal obligations to bond and reclaim their remaining mine sites.” With no DEP deal, Alpha could very well have died in bankruptcy court and been sold off to pay those obligations.

But executives “overlooked” $100 million.

So the people who gave their lives to the coal mines in the expectation of getting a steady pension in retirement will likely get screwed (again). Coal workers may get screwed (again), with new, stingier contracts and fewer benefits. West Virginia ecosystems will get screwed (again), as the state comes up short on cleanup costs. And taxpayers will get screwed (again), by having to cover the company’s obligations.

The executives, however, will get a fresh start, their bad bets forgiven, with big salaries and a streamlined company.

Maybe. Coal execs may have pushed DEP (not exactly known for being hostile to industry) too far this time. If the agency denies Contura and its executives permits to go on mining, it might signal that there is a floor, a limit to how long regulators will allow coal companies to stay alive by sucking blood from their host body, the people and landscapes of Appalachia.