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The rise and demise of West Virginia’s Hobet coal mine

Hobet coal mine

The Hobet coal mine was started in 1974 by a man named Fil Nutter. In 1977, he sold the mine to Ashland Oil of Kentucky after federal reclamation regulations were passed. Reuters image.

Hobet coal mine a case study of a once-rich industry in decline

By Patrick Rucker

ALKOL, West Virginia, Aug 5 (Reuters) – On the day Victor Clark retired after 26 years at the Hobet coal mine, the bosses called him to the office for a surprise.

His wife, daughter, and sons Rocky and Tony, both miners, turned out for ice-cream, pop and a farewell toast for a man who had been at the West Virginia strip mine since the beginning. “You felt appreciated,” Clark, 87, remembered of that day in January 1990.

When son Tony left the same mine in 2012, there was no fuss. “They had my job posted before I was out the door,” Tony said.

In a generation, the Hobet mine transformed from a small, founder-run operation to a company cheered in three different incarnations by Wall Street and twice bankrupt – a twisting path mirroring the fortunes of a U.S. coal industry whose output is at its lowest level in decades. Operating 25 miles south of Charleston in the belly of West Virginia, Hobet is a case study of a once-rich industry in decline.

Coal supporters blame competition from natural gas, weak demand from China and government pollution controls they call a “war on coal.” All those forces hampered an industry where the largest investor-owned companies are mired in bankruptcy.

Yet there’s something more to the coal story and the fall of industry behemoths. Like the onetime family-run Hobet mine, the coal sector transformed from a blue collar bastion known for dirty, dangerous work to one noted for its dizzying mode of buy and sell.

Some coal insiders believe the industry’s quest for fast profits through corporate maneuvers brought peril, not promise. As companies sought new investments, they shed union mines and left worker benefits in jeopardy. Those same companies piled up debt as they acquired rivals.

Bob Murray, an outspoken coal baron who founded Murray Energy, believes a drive for short-term profits pushed publicly-traded companies to the brink.

“I watched it go on and shook my head,” Murray said. “Everyone was shoving liabilities to someone else.”

As a privately held company, Murray Energy did not face the same investor pressure for quick returns. Still, the industry’s larger challenges are testing the Ohio miner. Murray Energy said last month it may be forced to lay off thousands of miners.

Those cutbacks have some asking whether any coal company can survive this industry-rattling decline.

Since last year, Arch Coal, Peabody Energy and Patriot Coal have all gone bankrupt. Each was tethered, at one point or another, to the Hobet mine – a site with a history shaped by mining advances, near disasters, striking workers and market swings.

Investors applauded for years before those industry leaders reached the edge. Patriot Coal shares soared in the first years after it took hold of union mines once controlled by Arch and Peabody. Wall Street helped leading companies acquire rivals in a 2011 buyout binge that crashed a few years later.

Arch Coal and Peabody Energy declined to discuss past business deals for this story. The companies have previously said critics are misguided in second-guessing deals in hindsight. When Arch sold the Hobet mine to a private equity firm in 2005, the buyer was “a strong, well-capitalized” entity, the company said.

Hobet coal mine

Clean up of toxic runoff from the Hobet coal mine could take decades. Reuters image.

Today, Hobet is owned by a conservation group and no longer producing coal. The mine is a scene of rubble and retaining ponds where sycamore, pine and cedar forests once stood. Toxic runoff must be steered clear of tributaries that feed the Ohio River. A decades-long cleanup awaits.

There’s uncertainty, too, for miners.

For Andrew Adkins it’s a matter of leukemia medicine costing $1,200 a month. He could die without his pills, yet the health care plan for Adkins and about 800 other retired Hobet miners and their families expires at year’s end. Miners who went on strike in the 1990s to protect their health plan said they never expected this.

“They’re doing away with everything we were promised,” said Adkins, a Vietnam veteran who relies on the low cost and open access of his health plan. Adkins, 71, is eligible for Medicare, but that carries its own costs and limitations.

For mining families in West Virginia and beyond, a blur of Wall Street deals altered the industry’s decades-old pledge to mining communities.

DAWN OF A COAL MINE

Ph: 432-978-5096 Website: www.mapleleafmarketinginc.com Email: miket@mapleleafmarketinginc.com

Ph: 432-978-5096 Website: www.mapleleafmarketinginc.com 

The Hobet mine was born in 1974 under a man named Fil Nutter – part of a West Virginia prospecting family that controlled a construction company, limestone pit and small-time coal mines.

Nutter was a “typical coal operator” of the era with the charm and hustle needed to thrive in the mountains, said Homer Toler, an early employee. “He liked to party, get drunk and worked his ass off,” Toler said.

When a land speculator named Granville Lee “Jimmy” Linville acquired the right to a forested plot 25 miles south of Charleston, Nutter brought the financing and connections. They went into business together.

Underground mines were joined by strip mines: workers blasting, or ‘shooting,’ the surface until they reached coal and then pushed everything else down the mountainside.

“Shoot and shove,” in common parlance. The method left behind poisoned streams and peaks sheared in half.

Nutter, who died in 2009, knew the brutality of coal mining. One brother was killed in a bulldozer accident at a strip mine, and the Hobet workforce was shaped by defiance.

Just a few summits from the Hobet mine stands Blair Mountain, site of a bloody scene in 1921, where at least 10,000 miners stood down strikebreakers, sheriffs and coal bosses.

“If you owned a mine in this area, it was going to be union,” said Wayne Chambers, founding member of the United Mine Workers of America local at Hobet.

Hobet grew from a hill and valley called Dog Hollow. Soon one shift became two. Streetlights were installed so laborers could work around the clock to fulfill a contract with a power plant in the state capital, Charleston.

The less than 90,000 tons of coal produced in 1975 ballooned to nearly a half-million tons by 1978. Some miners say they dared believe Jimmy Linville’s prophecy: “Men, you’ll retire from this job.”

A NEW EARTH MOVER

In the coal patch that stretches from southern West Virginia to central Pennsylvania, miners must pull countless loads of worthless rubble out of the ground before reaching the precious black rock. Hauling that waste, or “spoil,” is a costly concern.

Nutter had a method that satisfied West Virginia officials, but then Congress set national standards with the Surface Mining Control and Reclamation Act of 1977. Mining companies were to take more care with spoil and restore vanished mountains to their “approximate original contour.”

New rules meant higher costs. The year the law was passed, Nutter sold out to Ashland Oil of Kentucky. The new operator attacked the problem of spoil with an audacious piece of equipment.

It was a dragline: a towering crane-and-bucket that could carry in one scoop what several dump trucks might haul.

The dragline came in pieces and took 18 months to assemble. The contraption grew to a 20-story tower and slung a giant bucket from a half-mile of steel cable.

At first sight, miners feared the dragline might end their jobs. But the mammoth machine is probably what kept Hobet running through market ups and downs over the years, those same workers say.

In 1984, the first full year of operating the dragline, Hobet produced 1.8 million tons of coal. That was more than double previous output, according to data from the Mine Safety and Health Administration.

Jobs were abundant, with over 200 miners, and spirits were high. Workers and bosses fraternized at the Hobet cookout each summer, the families fishing and tossing horseshoes.

In these flush times, miners were unafraid to strike.

From May until nearly Christmas in 1993, workers were off the job to protect their health plan. “We won that one. We won them all,” recalled former miner Adkins.

In the end, though, the health and pension plans at Hobet were difficult to sustain. Pensions had defined benefits, which relied on a share of miner wages going to pay retirees. Layoffs and cutbacks to the workforce could upend that model.

The Hobet health plan had uncommonly low deductibles.

“We took smaller pensions, smaller hourly wages to protect our health insurance,” said Ronald ‘Yogi’ Pauley, a United Mine Workers leader at the Hobet mine for 30 years.

Former managers agree the health plans were exceptional.

“These would have been called ‘Cadillac’ health plans,” said Ken Woodring, who started as a Hobet mine manager in the 1970s and retired as an Arch executive in 2004. “They were manageable when health costs were low in the 1960s and 1970s. But those costs kept rising.”

DEBT AND PROMISES

The fate of miners was closely tied to a changeable coal market known for long winning and losing streaks.

In September 1995, as Hurricane Opal crashed through the Gulf of Mexico, fear of a natural gas shortage drove coal prices higher.

Within months, utilities burned through coal inventories until they reached lows not seen since Fil Nutter put his claim on Dog Hollow.

Steady, reliable coal was proving itself again. Investors liked the turnaround story and Ashland helped conceive Arch Coal as a shareholder-owned company in July 1997. Hobet was now under Arch Coal’s corporate umbrella.

In the era of answering to Wall Street, Woodring said, mining knowledge could take a backseat to marketing. It was important that executives be comfortable with investors, analysts and stock pickers.

Steven Leer, 45 at the time, had helped market Valvoline motor oil for Ashland before leading the coal division. When Arch Coal was formed, Leer was tapped as chief executive and paid in Wall Street fashion, with bonuses, country club memberships and other perks. Much of his compensation was tied to the company’s performance. If the share price climbed, Leer could redeem stock options for cash.

Leer did not respond to interview requests.

Deals were one way to get investors’ attention, and Leer’s first big acquisition in 1998 was emblematic of a borrow-and-buy growth strategy.

Arch used more than a billion dollars in debt to take hold of new leases and rival operations in the West. Further deals would anchor the company in Wyoming’s Powder River Basin. There, union power was weak and mines had vast reserves of low-sulfur coal in demand under new pollution controls.

Still, Arch Coal had promises to keep at Hobet and other eastern mines where current and former workers were owed hundreds of millions of dollars in benefits. These were “onerous” liabilities, credit rating agency Standard and Poor’s reported.

Arch Coal could not shift its miner liabilities, so it tried to control them. With bigger machinery and longer hours, the Hobet mine could boost output without hiring more miners.

After five years under Arch, Hobet was producing a record 5 million tons of coal, according to government data. That was 1.5 million tons more than Ashland produced in its last year of management.

Production was up but the culture became more focused on the bottom line, some former miners say.

Hobet managers summoned to Arch’s St. Louis headquarters came back describing cost-savings and “the Arch Way” of management that kept a steady eye on spending, said Ronnie Vance, a Hobet manager.

In Novembers past, Ashland had tolerated deer season when more than 15 percent of the workforce sought an absence. No more.

COAL CRUSH

Coal fever spread through the 2000s. Asian demand rose with the economy and natural gas output was flat, keeping up demand for coal.

Amid record revenue, one cost remained a blot on the Arch Coal balance sheet: more than $400 million in miner health and pension costs.

By 2005, investor hunger for coal had spread beyond Wall Street. ArcLight Capital Partners, a Boston private equity group, wanted a toehold in the coal business and Arch Coal found a way out of some stubborn costs.

ArcLight bought Hobet and three other West Virginia mines and named the new enterprise Magnum Coal. The deal included the miner health and pension plans.

The welfare of thousands of miner families was no longer tied to the deep-pocketed Arch Coal. Miners fretted about their private equity bosses and the sector’s reputation for flipping companies for investors.

Could Magnum shoulder miner health and welfare plans? Miners had to wait and see. “The union leadership told us there was nothing we could do,” said labor leader Pauley.

The Magnum transaction “clears the decks” for more growth, Leer told analysts on a conference call in January 2006. Arch shares climbed 3.6 percent.

In 2007, Leer took a $10 million payout – his biggest in a career with Arch Coal that earned him more than $40 million, a Reuters review of securities filings found.

WALL STREET AND COAL

Peabody Energy, the nation’s largest coal company, conceived Patriot Coal in 2007 to house its union mines and about $750 million in worker liabilities. Eventually, Patriot Coal bought Magnum Coal.

By 2011, rising coal prices ignited a new spree of deals. This time coal companies borrowed big for industry-shaping buyouts.

Alpha Natural Resources acquired Massey Energy for $7.1 billion in 2011. In December, Peabody Energy acquired MacArthur Coal of Australia for $5.1 billion. Arch Coal bought rival International Coal Group in May for $3.4 billion, with Leer envisioning a “coal franchise poised for growth.”

In the end, the deals were poorly timed. Asian coal demand was tapering, and the new drilling technique of hydraulic fracturing, or fracking, pushed natural gas prices to 10-year lows.

Alpha Natural Resources declined to comment on the 2011 deals.

Mike Quillen, who founded Alpha in 2002, believes coal executives erred by trying to keep up with the steady rhythms of Wall Street.

“Debt will kill you in the coal business,” said Quillen, who stepped down as Alpha’s chairman in 2012. “And it’s cyclical. But everybody just got caught up in the idea that high coal prices would go on forever.”

The industry paid for that misjudgment.

Alpha Natural Resources filed for bankruptcy in August 2015; a federal judge in July approved its plan to exit bankruptcy. Peabody Energy filed for bankruptcy in April 2016. Arch Coal, which filed for bankruptcy in January 2016, suffered cost overruns at its Leer Mine of West Virginia, named after its executive.

“If it weren’t for those deals, these companies would be solvent,” said John Hanou, an independent coal industry analyst who helped lead market research at Wood Mackenzie and Hill & Associates in Annapolis, Maryland.

Quillen said that’s not so clear-cut. “Everything is negative for the industry right now. There’s no way of knowing how long any company might have survived,” he said.

The coal industry will come through this downturn smaller and with fewer publicly-owned companies, he said. “But I don’t think the major acquisitions were the single catalyst.”

TOXIC LEGACY

Today the remnants of decline are visible at the Hobet mine.

The weathered piles of spoil and valley fills are leaching selenium, a healthful nutrient in trace amounts but a toxin in larger doses. A 2008 study, presented in federal court, found deformed fish and warned of catastrophe, requiring a cleanup.

Patriot Coal, the last major operator at the Hobet mine, outlined more than $400 million in pollution liabilities after its first bankruptcy in 2012. At the same time, miners learned their health benefits would vanish.

The company-sponsored policy relied on cash from coal operators that are now bankrupt and so those contributions are due to end.

When Patriot went bankrupt again last year, the company was sold in pieces.

West Virginia Gov. Earl Ray Tomblin has said he hopes the Hobet site will be fit for commercial development. But there are no concrete plans yet.

On the land where the dragline first trod, there’s a slurry impoundment rather than the wildlife habitat promised by executives in the original permit. This summer, the dragline will be idled.

(Editing by Ronnie Greene)

Posted in: Energy News

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