Power play: Big investment firm escapes Blackjewel ‘unscathed’
Blackjewel’s bankruptcy, at least the public portion, has played out at the Robert C. Byrd U.S. Courthouse in Charleston, West Virginia. (Google street view)
By Andrew Graham, WyoFile.com
Though Wyoming miners and local businesses struggle with unpaid debts and though tens of millions of dollars in state and county revenue could be wiped off the books, not all those owed money by Blackjewel will walk away empty handed.
Riverstone Holdings LLC, an energy investment firm with $39 billion in capital and offices in financial centers around the globe, may be the bankruptcy winner. Blackjewel owed the firm $34 million when it entered bankruptcy, from a loan made to the mining company in July 2017.
Filings in bankruptcy court document how Riverstone maneuvered to protect its interests, propping Blackjewel up with a $5 million loan to prevent the company’s liquidation, then making deals in the bankruptcy auction to recoup its investments. If those deals hold, Riverstone could ultimately walk away from Blackjewel with $40 million, according to court filings.
Riverstone declined to answer emailed questions from WyoFile, including whether the investment firm earned any profit from the bankruptcy.
Other debtors won’t emerge nearly as unscathed. Blackjewel owes Campbell County $37 million in taxes, owes Wyoming $11 million and owes the federal government $60 million in mineral royalties (half of which would have gone back to Wyoming). Then there are smaller but perhaps more hard-hitting losses to miners and businesses.
Workers in Wyoming lost money the company never put into their retirement accounts and some haven’t been paid for their final days working at the mines. Gillette businesses have had to lay off employees and carry unpaid bills that represent significant chunks of their revenue.
Many of those debts could go unpaid, as little remains in the Blackjewel estate to satisfy them. For Wyoming workers, Contura Energy, which got a judge’s initial approval to buy back the Wyoming mines, offered to put future mine profits toward a $5 million fund to make Blackjewel employees whole. But Contura’s intentions for the mines’ futures remain unclear.
Meanwhile, Riverstone “gets out with barely a scratch,” said Clark Williams-Derry, an energy industry finance analyst at the Sightline Institute who has criticized coal companies for using the bankruptcy process to escape obligations to their employees and the environment. “Meanwhile the workers are struggling for their back pay,” Williams-Derry said. “All the mom-and-pop vendors are getting screwed.
“This is fundamentally what the U.S bankruptcy process has become,” he said. “The big banks, private equity companies, hedge funds … they’ve been able to hack the bankruptcy process so that they get paid while everyone else is fighting for scraps.”
Others say the bankruptcy courts are functioning as designed, because the process was never structured to protect workers, tax dollars or environmental cleanup.
“I really feel for these workers that are blindsided by what’s going on,” said Michael Duff, a UW law professor who focuses on bankruptcy and labor laws. “But the reality is that they may have believed that there was some kind of legal superstructure that would protect them and provide fairness, and there’s really not.”
The purpose of bankruptcy courts is to protect the economy, Duff said, by stemming the destruction of wealth in a business’ collapse and reassuring finance companies their investments are protected.
“It’s a very cold-blooded affair,” he said.
The tactics Riverstone used to protect its investments offer a window into that affair, a process increasingly relevant for Wyoming as coal mining declines.
In July 2017, Riverstone made its loan to Blackjewel at a 15% interest rate. The interest rate is high, according to those familiar with energy industry financing, and likely reflective of Blackjewel being seen as a risky investment. In December of that year, Blackjewel acquired the Eagle Butte and Belle Ayr mines from Contura Energy without paying any purchasing price.
Big coal companies see opportunity in operators like former Blackjewel owner and CEO Jeff Hoops to offload mines with hefty financial obligations to workers and environmental cleanup, said Joshua Macey, a visiting assistant professor of law at Cornell University who studies bankruptcy law.
“The coal company that originally incurred the liabilities is no longer responsible for them, and the new company lacks the financial resources to make good on the inherited obligations,” Macey wrote in a paper published in the Stanford Law Review in April, before Blackjewel’s collapse.
“His businesses have begun to exhibit a pattern,” Macey and a coauthor wrote of the company’s former CEO. “Hoops takes over abandoned mines, receives cash from the company that wants to get rid of them, and then fails to actually remediate the environmental problems.”
A lawyer who filed in the bankruptcy court last week to represent Hoops did not respond to a request for comment made Friday.
Hoops was adequately insured so that his company could complete reclamation obligations in Wyoming even if it collapsed, state environmental regulators say. But a citizen oversight board for those regulators delayed transfer of the mine permits. That prevented the transfer of reclamation obligations from Contura to Blackjewel. The delay came after a landowners’ group raised concerns about how thoroughly the Wyoming Department of Environmental Quality had evaluated Hoops and his companies.
Bonding aside, Hoops failed to keep his business afloat. In March 2019, he defaulted on his loan payments to Riverstone, according to an affidavit he filed with the bankruptcy court. He later sought to extend the loan with Riverstone and found the financiers “initially supportive,” according to the affidavit.
“Final terms of an extension were agreed on June 21, 2019, but the amendment was never fully documented or signed,” the affidavit reads. Then Riverstone balked. On June 26, the affidavit claims, Riverstone informed Hoops it wouldn’t extend the loan and expected a payment on July 17.
On July 1, Hoops filed for bankruptcy, sent workers in Wyoming home and shut the doors on the two open-pit mines. State and county agencies had to rush in to secure the properties. In those first few days, as the extent of the wreckage emerged, liquidation of Blackjewel’s assets and reclamation of the mines appeared a real possibility.
Then Riverstone stepped in.
A $5 million lifeline
By July 4, it appeared increasingly likely Blackjewel would have to enter a Chapter 7 bankruptcy and be sold off piece by piece. Riverstone might have still emerged intact. Its $34 million loan was secured and the finance company could seize Blackjewel property to repay itself. The company was likely “first in line” to be repaid, Macey said.
Still, Macey said, it was in the finance company’s interest to avoid Chapter 7. The bankruptcy process is tilted to ensure financing companies can recoup their loans, he said, since miners and other smaller parties would never have the kind of comprehensive legal protections Riverstone wrapped its loan in.
“It’s a hedge fund that knew they would be paid first and didn’t want the entire estate to become valueless,” Macey said.
Part of protecting the firm’s interest apparently lay in ousting Hoops. A condition of the $5 million loan was that the CEO resign from the company, which he did.
Hoops has accused Riverstone of a “hostile takeover,” and said it maneuvered to oust him after he showed them positive projections for the company’s future cashflow.
“IT ALL MADE SENSE NOW AS I GAVE THEM OUR PLANS FOR THE 2ND HALF OF THE YEAR THAT SHOWED CASH FLOW IMPROVING BY $100M AS A RESULT OF THE IMPROVED SHIPMENTS IN THE WEST AND OPERATIONAL CHANGES WE WERE MAKING IN THE EAST,” he wrote in an email to employees on July 4. “BY TAKING THE ACTIONS THEY HAD BEEN TAKING OVER THE PRIOR 6 DAYS THIS EFFECTIVELY MADE THEM OWNERS OF THE COMPANY.”
He then called Riverstone “vulture capitalists.”
“This has been a hostile takeover that I fought every step of the way as I was trying to do the right thing, which would have gotten each one of you paid and we would have all continued working,” Hoops wrote. “Now as I understand they are not going to pay the people for lost wages and are going to do what vulture capitalists do in these situations.”
The company declined to counter Hoops’ claim when approached by WyoFile. In court, lawyers for Riverstone have argued it was trying to save the company and put workers back to work. Whether Hoops turns out to be right about workers getting stiffed in the bankruptcy or not, reporting and court filings have raised significant questions about his financial management and show he let bills large and small go unpaid.
Sale back to Contura
Much of the negotiations in the bankruptcy process unfold behind the scenes. Sales and other financial maneuvers become public only when the parties ask the bankruptcy judge for approval. The judge, in essence, serves as a referee to the wheeling and dealing to try and maintain an orderly restructuring of a company, said Duff.
“Embedded in bankruptcy law is the notion that we’re all better off when businesses can reorganize or at least be dissolved in a coherent way,” he said.
Once it bought time from the threat of immediate liquidation, Riverstone set to work to recoup its money. In this endeavor, the investment firm was greatly aided by the mine permits Contura still held. Those permits kept the company on the hook in Wyoming for around $250 million in reclamation obligations. Like with Riverstone, it was in Contura’s interest to keep the mines operational, at least for now.
Contura had initially offered a bid of just under $21 million to buy the mines back. In the end, the deal was done for nearly $34 million. Of that money, $24 million goes to Riverstone. Another $8 million is devoted to maintaining Blackjewel’s mines while the bankruptcy process continues. Only $1.6 million remains to be divided up by other, unsecured creditors.
Court filings outline how Riverstone pushed Contura’s bid up. Riverstone’s loans allowed the firm possession of equipment at the mines, and the company had assigned equipment at the Wyoming mines a value of $13 million. During the mine auction, it increased the value to $20 million in a filing.
Not every piece of the negotiations that likely followed are captured in court documents. However, a filing outlining auction results said Contura and Riverstone agreed to Contura paying Riverstone $24 million for the equipment.
In a separate deal, two eastern mines were sold to a company called Kopper Glo Mining. Riverstone is to receive royalty payments from the mines that could amount to $16 million over six years.
At the end of the day, the equity firm walks away with $24 million immediately, with the promise of $16 million more. The company’s $34 million loan, and subsequent $5 million, were covered, with $1 million to spare.
The big picture
Contura itself is a product of bankruptcy courts. The company was created as a spinoff from the 2016 bankruptcy of Alpha Natural Resources.
In his Stanford Law Review paper, Macey wrote that both Alpha and Contura followed an emerging pattern in the coal industry. To stay profitable, big coal companies offload mine properties with looming reclamation obligations into companies likely to fail.
Peabody Energy and Arch Coal also used such a strategy, when they created a company called Patriot Coal that took possession of many economically unsound mines carrying significant retirement obligations to employees and reclamation obligations, Macey and coauthor Jackson Salovaara wrote. A miners’ labor union president said the company was “created to fail.” Indeed, Patriot Coal was liquidated in 2015 after its second bankruptcy filing in three years.
Over the two bankruptcies, the company shed hundreds of millions of dollars in environmental obligations, leaving the cleanup of some West Virginia mines uncertain, the Stanford researchers wrote. The company also escaped over $1 billion in healthcare and retirement obligations, they wrote.
Meanwhile, Arch and Peabody held onto their more profitable mines and continued to make money. The two coal giants recently proposed an eyebrow-raising merger of their operations in the Powder River Basin, leaving some coal watchers to wonder if the companies might later look to again split off assets with large reclamation obligations.
To Contura, Blackjewel offered a similar vehicle as Patriot Coal, the researchers wrote. The permit transfer delay fouled that move up. Still, the agreement approved by the bankruptcy judge does not require Contura to maintain Blackjewel’s healthcare or retirement obligations to its workers.
There are a lot of losers in Wyoming from the bankruptcy, even if the mines do reopen, Macey said.
“The miner gets screwed, the environment gets screwed,” Macey said. “Wyoming gets screwed [on unpaid taxes] but it’s kind of their fault. Wyoming has every ability to write tax laws to prevent this from happening.”
Protections for miners are harder to write because of the nature of bankruptcy courts, Macey said. Workers should pursue litigation against companies that have abandoned obligations to them, he said.
Duff, the UW law professor, suggested Wyoming political leaders should be more honest about the risks the state’s largely non-unionized coal miners face from future bankruptcies.
“What would happen if [politicians] simply told workers, ‘look, if they declare bankruptcy there’s not a damn thing you can do about it’?” Duff asked.“‘You come after the secured creditors, that’s it. Forget about any other crap that anyone is telling you.’”
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