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Cleaning America’s Dirtiest Coal Company


To reach the active section of the Long Pole mine in Pike County, Ky., you board a mantrip, a low-slung, rail-riding vehicle, and trundle down a gentle underground slope for a mile or so. You recline almost flat, because this is “low coal”; the mine roof is only 42 inches high. “Keep that hard hat on your head,” Kenny Hunt, Long Pole’s superintendent, instructs. “If it falls off, remember—do not raise up.”

When you disembark you scuttle around crab-like in damp muck, conscious of the emergency oxygen supply dangling from the belt of your borrowed blue coveralls. Around the corner, an elongated mechanical beast called a continuous miner noisily gnaws at a coal seam interlaced with sandstone. The continuous miner excretes the coal-and-rock mixture onto a shuttle car, which transports it to a wide conveyor belt running to the surface. Half a dozen beams from helmet-mounted lanterns slice the subterranean gloom. “Is this just the prettiest coal mine you ever seen?” Hunt asks.

It might well be, but you wouldn’t necessarily expect the owner of the gritty operation to show it off. On June 1, Alpha Natural Resources (ANR), based in Abingdon, a town of 8,000 in southwestern Virginia near the Tennessee border, acquired Long Pole and 84 other mines from Massey Energy, a company notorious for putting workers at risk and despoiling the Appalachian landscape. Fourteen months earlier, 29 men died in a fiery explosion at Massey’s Upper Big Branch mine in Raleigh County, W. Va. West Virginia’s investigation blamed the conflagration on a Massey “culture in which wrongdoing became acceptable, where deviation became the norm.”

The industry’s most lethal disaster in four decades thrust Massey into the headlines as a model of dysfunction—and made it vulnerable to Alpha’s acquisitive ambition. Now, Alpha promises a new day. “We’re going to run right,” Chief Executive Officer Kevin S. Crutchfield declared at a ceremony in Boone County, W. Va., marking the completion of the $7.1 billion takeover. “We’re going to lead by example.”

It remains to be seen what kind of prize Alpha, a nine-year-old company initially financed by a private equity firm based in Greenwich, Conn., has won with the Massey merger. After Upper Big Branch, government inspectors are looking hard at Massey’s old operations. The FBI is probing for potential criminal infractions. Alpha also has inherited lawsuits filed by shareholders, widows, and injury victims.

Investors punished Alpha’s stock on Aug. 4, when the company reported a second-quarter loss of $56.4 million, which it attributed to takeover expenses. In the 12 weeks since the Massey deal closed, Alpha shares have dropped 39 percent. Globally, coal stocks have fallen 19 percent in a jittery broader market.

There is plenty of reason for investors to be nervous about Alpha and Appalachian coal more generally. Mining in the region faces increasing regulation, declining reserves, and rising production costs. Environmentalists routinely cast the industry as one of the chief antagonists in the fight against global warming. Burning coal contributes a third of the nation’s climate-changing gas emissions, as well as millions of tons a year of contaminants harmful to human health. New York Mayor Michael R. Bloomberg, the founder of Bloomberg LP, which publishes this magazine, announced in late July that his personal philanthropy would donate $50 million to a Sierra Club campaign to close coal-fueled power plants.

And yet coal still provides nearly half the country’s electricity. Demanding an imminent end to its use without a ready replacement is beckoning economic calamity. Congress has debated climate legislation that would create incentives to diminish reliance on coal and petroleum; that bill died last year on Capitol Hill. Expansion of nuclear power, already stalled by safety concerns, suffered another blow in March, when an earthquake-spurred tsunami created a reactor crisis in Japan. New deep-drilling technology is making available vast additional supplies of inexpensive natural gas. But for another decade or more, coal’s prominence as an American energy source will persist.

Executives at Alpha are well aware that, beyond the U.S., the global energy market favors them. The country’s third-largest coal miner by revenue (behind Peabody Energy (BTU) and Consol Energy (CNX) ), Alpha employs 14,000 people and runs 150 mines across Virginia, West Virginia, Kentucky, Pennsylvania, and Wyoming. The Massey purchase made Alpha the largest American producer of “met coal,” a vital ingredient in the manufacturing of steel. Higher-quality metallurgical coal yields brawnier profit margins than thermal coal used to generate electricity. Demand from China, India, and the rest of Asia has driven met coal prices to near-record levels, exceeding $300 a ton for the most potent varieties. Alpha boasts that it has the capacity to ship nearly 30 million tons of coal overseas this year, more than any U.S. rival. While the Massey deal was blamed for Alpha’s surprising second-quarter loss, it also contributed to a 58 percent jump in revenue, to $1.6 billion.

“Even people around here don’t really know that much about Alpha, and they’re curious where this company came from and how it grew so fast,” says J. Davitt McAteer of Shepherdstown, W. Va. He headed the federal Mine Safety and Health Administration during the Clinton Presidency. “You’d think with global warming and regulatory uncertainty, Appalachian coal isn’t where you’d put your money, especially with the added burden of Massey’s reputation. Clearly, these guys at Alpha think they know better.”

 

Appalachian miners load coal because their daddies did. It’s also the only job they know where a high school graduate can earn $60,000 or $70,000 a year with time off in the fall to stalk whitetail deer and two weeks in the summer to take the family to Myrtle Beach, S.C. Miners form a patriotic brotherhood. “When I left for work every day, I used to say to my two kids—they’re grown now—‘Well, I’m off to move the country forward,’” says Stanley Stewart.

A solidly built man with a graying goatee, Stewart, 55, has been called “Goose” for so long no one recalls why. He worked for Massey for 15 years after the company bought out his previous employer. On the afternoon of Apr. 5, 2010, Stewart and his second-shift crew were rolling into Upper Big Branch when they saw a blinding white light. Seconds later he felt a spooky burst of air from within the tunnel. This wasn’t good.

“Get out of here, boys!” Stewart shouted.

The air movement escalated to hurricane force. Steel tools took flight.

“Outside is not very far,” Stewart bellowed. “You got to get there!”

When they stumbled into the mid-afternoon sunlight, his younger co-workers asked Stewart, “What do you think, Goose, was that a roof-fall?”

“That was no roof-fall, boys,” he answered. “The mine blew up.”

Stewart describes the horror at Upper Big Branch while sitting in the well-appointed Charleston (W. Va.) office of his lawyer. “Twenty-nine of my brothers didn’t make it out,” he says. “There was Pee Wee, Smiley, and the rest.” He goes silent for a moment.

The Upper Big Branch disaster culminated an era of intensifying controversy over Stewart’s employer, Massey Energy. Started in 1916 as a coal brokerage in Richmond, Va., Massey evolved into production in the 1970s under the founder’s grandson, E. Morgan Massey. Donald L. Blankenship joined the company in 1982 as an accountant. From a family of modest means, Blankenship had worked summers in mines as a college student. He gained attention at Massey in 1984, when he led a successful antiunion campaign marked by violence on both sides. The strife helped Massey shake off the United Mine Workers of America and contributed to the erosion of the union’s influence throughout Appalachia.

Blankenship shrewdly engineered the purchase of large reserves of met coal in the late 1980s and ’90s. Prices were low at the time because of the collapse of the U.S. steel industry; met coal gained value as Asian economies expanded. In 1992, Blankenship became Massey’s chairman and chief executive. Under his leadership from 2000 to 2010, the company grew from 3,000 employees and a market capitalization of $758 million to 7,000 employees and a market cap of $3.5 billion.

Blankenship pushed relentlessly for more production and lower costs. As a result, worker safety suffered, according to a May 2011 investigative report the safety expert Davitt McAteer wrote at the request of the West Virginia governor’s office. From 2000 through 2010, “no United States coal company had a worse fatality record than Massey Energy,” which reported 54 deaths in its mines, including Upper Big Branch, McAteer noted. Blankenship, 61, protested in congressional testimony last year that in terms of mine safety, Massey was “about average.” That “just wasn’t true,” McAteer wrote. Based on fatalities per ton of coal produced, Massey was the worst. Federal fines of $49.9 million were proposed during the decade (such fines are routinely disputed), more than any rival.

“Don Blankenship is a smart, tough businessman, but under him Massey repeatedly put miners at worse risk than other companies,” McAteer says in an interview. Blankenship’s lawyer, William W. Taylor III, did not respond to requests for comment from his client. Eighteen ex-Massey executives, including Blankenship, have invoked their Fifth Amendment right against self-incrimination and declined to cooperate with investigators, according to the McAteer report. The Justice Dept. has indicted two former Massey employees on charges related to obstructing inquiries into mine safety; the probe is ongoing.

Upper Big Branch, McAteer says, resulted from a malfunctioning ventilation system, which allowed volatile methane to collect deep in the mine. Poorly maintained automatic water sprays attached to mining machinery didn’t extinguish sparks that ignited the methane. And, he adds, uncontrolled coal dust fueled a fireball that hurtled through miles of underground tunnels. “This thing could have been prevented. No doubt,” he says.

Goose Stewart agrees. The miner recalls telling his wife as far back as 2009 that Upper Big Branch was “a ticking time bomb.” Like a lot of Massey employees, he was looking for a new job; the company’s turnover rate hovered at about 20 percent. Inspectors, Stewart says, repeatedly shut down portions of Upper Big Branch because of inadequate ventilation. “Management never fully addressed the issue,” he claims. “They would fix it just good enough to fool the inspectors and get us back to loading coal. … That’s just the Massey way.”

 

Alpha sent 100 mine-rescue workers to Upper Big Branch to help search for survivors. Three weeks later, Michael J. Quillen, chairman of Alpha’s board, traveled to Blankenship’s office in Belfry, Ky., on a different sort of mission. Massey’s stock had dropped 18 percent. Quillen suggested a takeover. Blankenship refused.

Alpha persisted. In July 2010, Kevin Crutchfield, the CEO, realized that he and Blankenship were attending the same function at West Virginia’s famous Greenbrier Resort in White Sulphur Springs. Crutchfield telephoned his counterpart’s hotel room. Blankenship couldn’t find time to meet.

To appreciate Alpha’s incessant urge to merge, one has to understand its genesis in the mind of William E. Macaulay. A billionaire private equity baron in Greenwich, Conn., Macaulay, 65, photographs rare birds in his spare time and avoids the limelight. (He declined to comment for this story.) His investment firm, First Reserve, specializes in bolting together down-on-their-luck energy companies and selling off the results at a profit.

In late 2002, Macaulay and his lieutenants noticed a gap between depressed coal prices and rising natural gas rates, according to Managing Director Alex T. Krueger, who helped lead the project. Exploiting the anomaly, they invested $85 million to gain control of Appalachian mining operations from the likes of Pittston Coal, American Metals & Coal International, and El Paso Corp. (EP) The financial engineers gave their creation the anodyne name Alpha Natural Resources and continued to add assets. Quillen, Crutchfield, and other executives who had worked at the constituent parts participated in shaping Alpha and were retained to run the reformulated empire.

Macaulay’s bet paid off. Coal prices rose in 2004, and First Reserve took profits in a public offering of stock. By early 2006, First Reserve had cashed out completely in a second offering; the firm says it reaped a stunning combined gain of $675 million for its buyout-fund investors. All told during this period, First Reserve enjoyed a $1.5 billion return on $240 million in four mining investments, including Alpha.

After Alpha in 2009 acquired another First Reserve-financed company, Baltimore-based Foundation Coal, it was hungry again. Maneuvering in private, Crutchfield made a written buyout proposal to Massey last August representing a 20 percent premium over its stock price at the time. Again, Blankenship balked. Meanwhile, in a series of media appearances, he lambasted federal mining inspectors as intrusive and dismissed his company’s safety violations as just “a normal part of the mining process.”

In October, the Wall Street Journal reported Massey takeover rumors, reviving the company’s stock and prompting the Massey board to seek out competing offers from Arch Coal, steelmaker ArcelorMittal (MT), and WuSan International Steel. Ultimately, only Arch showed serious interest. As winter approached, the Massey board overcame its historical reluctance to challenge Blankenship and pushed him out. The company eased his departure with $86 million in deferred pay, severance, pension, and other benefits, according to an analysis of federal filings done by Cypress Associates, a New York investment bank hired by lawyers representing some of the families of victims of Upper Big Branch.

With Blankenship removed, Alpha bested Arch in late January on the strength of a final bid of 1.025 Alpha shares plus $10 cash for each Massey share. The price represented $69.33 per Massey share—a 25 percent premium at the time and an even more impressive 27 percent premium over Massey’s stock price the day before the explosion at Upper Big Branch. Don Blankenship’s ultimate display of stubbornness forced Alpha to pay a generous bounty for Massey.

 

In appearance and manner, Kevin Crutchfield, 50, presents himself as a sort of anti-Blankenship: cheerful, open, and, at times, self-deprecating. At present, he has reason for humility. “We uncovered some things after the transaction,” he concedes during an interview.

Massey’s sales book contained more below-market contracts than Alpha’s due diligence had revealed, Crutchfield says. Some of Massey’s met coal contracts are locked in at prices more than 50 percent below the benchmark contract during the second quarter. The discrepancy will cost Alpha millions of dollars until the old obligations are fulfilled.

More challenging still are several Massey mines that for years have bled cash because of high operating costs. Closing them down will take two to three years, as the company shifts personnel and equipment to more profitable sites, Crutchfield says. Massey, in other words, suffered from flawed management beyond the realm of miner safety.

Crutchfield plays his imperfect hand with an unperturbed countenance. “I am steadfast in my belief that the strategic rationale [for the acquisition] is still there,” he says. During a deflating post-merger quarterly earnings call on Aug. 4, though, he conceded, “It’s going to take a Herculean effort on the part of a lot of people.” He stressed that he is not looking to lay off miners and in fact plans to hire up to 400 more.

Replacing dud contracts and shutting unprofitable mines eventually will boost the bottom line, Crutchfield says. By reducing Massey’s employee turnover to Alpha’s historic rate in the low single digits, the company will cut training costs and improve productivity, he vows. Savings expected from merging transportation, coal processing, and marketing operations look even more promising than anticipated.

Dressed in sharply creased chinos and an open-necked lavender dress shirt, Crutchfield seems happier discussing the inculcation of former Massey workers into Alpha’s “Running Right” program. The fundamental principle of Running Right is that protecting miners and producing coal are mutually reinforcing. That’s a different message from the one Blankenship sent in a 2005 internal memo widely interpreted as embracing an either-or perspective on safety and productivity. “If any of you have been asked by your group presidents, your supervisors, engineers or anyone else to do anything other than run coal,” Blankenship wrote, “you need to ignore them and run coal. This memo is necessary only because we seem not to understand that coal pays the bills.”

“I can assure you I will not be sending any memos like that,” Crutchfield says.

Only nine of his top 54 managers are Massey holdovers, he explains. Out of 7,000 former Massey employees, 5,500 already have been through Running Right classroom training. The program’s central tool is an observation card that workers are encouraged to submit anonymously to note problematic practices or conditions. Alpha’s 18-person Running Right staff says it collects 15,000 cards a month, all of which are reviewed in weekly Employee Improvement Groups at mine sites.

Running Right took shape after two separate fatalities at Alpha’s Brooks Run Mining subsidiary in March and April 2004. During the decade of the 2000s, Alpha had a middling record on mine deaths: sixth out of the 10 largest coal producers, according to a study by American University’s Investigative Reporting Workshop published in November 2010. In an encouraging trend since 2007, Alpha’s rate of “nonfatal days lost” per 200,000 hours worked, a common industry measure, has fallen 33 percent. “We are not perfect by any means,” Crutchfield says, “but we are making progress.”

That progress, as well as the inevitable hazards of mining, are evident at Long Pole, the former Massey mine in Pike County, Ky. The walls and ceilings of the tunnels from which coal has already been removed appear milky white. “That’s the rock dust—pulverized limestone—that keeps the combustible coal dust down,” explains Mine Superintendent Kenny Hunt, 46. “I’ve got a two-man crew does nothing but rock dust.” One of the main findings of the McAteer report is that Upper Big Branch lacked thorough rock dusting.

Similarly, the ventilation that was found wanting at Upper Big Branch is plentiful at Long Pole. Driven by a huge fan constantly running just outside the mine, air flows around us, steady and cool. (The mine Alpha selects for my underground jaunt doesn’t have any methane seepage.)

On an August afternoon, a dozen of the mine’s 43 hourly workers and salaried supervisors are standing in a muddy-floored meeting room for the weekly Employee Improvement Group. Workers take turns attending these meetings to minimize disruption.

Superintendent Hunt leads a discussion of the past week’s sole “reportable accident”: Third-shift foreman Larry Conley momentarily lost his hard hat and struck his head on a steel “chain hanger” extending from the mine roof. After receiving first aid for a four-inch laceration, he was transported to a hospital where doctors closed the gash with 16 staples. Conley returned to work the next morning, though he remains restricted to above-ground tasks. Unnecessary chain hangers have been cut down, Hunt reports.

The EIG meeting covers a total of 29 safety-and-observation cards; each is read aloud and briefly debated. Changes from last week’s cards are announced: overhead lights repaired, hazardous stray timbers removed, mantrip track ties replaced. “We all seen things before that needed fixing; we just didn’t necessarily say anything,” Hunt tells me. “That’s just the way it was. Now it’s changing.”

After Upper Big Branch, they have to change. On this day, two federal mine inspectors are poking around at Long Pole.

Miners say conditions are improving. “I don’t want to say anything bad about Massey; they paid my salary and gave me opportunities,” says electrician Lonnie Tackett. “But under Mr. Blankenship, we just knew that it was all about production, and nothing else. The attitude is different now.”

 

Despite the optimistic emanations from Alpha’s rank and file, an embattled feeling pervades the entire coal industry, from top management to miner-trainee. While Crutchfield steers clear of public vituperation, his views on regulation and environmentalism don’t differ substantively from Blankenship’s, who said in 2009 that the idea that politicians “care more about coal-miner safety than we do is as silly as global warming.” In our interview, Crutchfield describes a series of Obama Administration clean-air initiatives intended to hasten the closure of older coal-fired power plants as a “great train wreck,” one that will drive up electricity prices and put blue-collar Americans out of work. “There’s this ideology out there called ‘green,’” he says with undisguised distaste. “It’s this big amorphous thing—green. … People are for that until they understand what it means for them personally and the costs associated with it. Then, it’s like, ‘Ah, not so much.’”

Like the rest of the coal industry, Alpha opposed the cap-and-trade climate legislation that passed the House of Representatives in 2009 but died last year in the Senate. Crutchfield derides such approaches to curbing consumption of fossil fuels as government “attempting to pick winners and losers” among various sources of energy.

On the other hand, and with no admission of irony, Alpha favors increased federal subsidies for carbon capture and storage. CCS is an experimental technology aimed at reducing greenhouse gas emissions by burying carbon dioxide deep underground. “Clean coal,” a notion heavily promoted by the industry, would depend on the feasibility of CCS, or something like it. Yet without rules and incentives such as those that would have come with the failed cap-and-trade bill, commercial-scale CCS has stalled.

Coal-mining companies such as Alpha face problems outside Washington, too. In Appalachia, the industry must confront spreading opposition to mountaintop removal: a form of surface mining that involves lopping off wooded peaks so that the coal beneath can be dynamited out more efficiently and profitably. Mountaintop removal accounts for a small fraction of Alpha’s output, though the precise proportion is difficult to ascertain because of definitional disputes. In the past several years, environmentalists have succeeded in highlighting the method as an emblem of coal industry rapaciousness. According to the Natural Resources Defense Council, an environmental advocacy group, the combination with Massey will make Alpha by far the country’s most prolific U.S. mountaintop miner.

Like other types of surface mining, mountaintop operations scar the landscape. They also result in the filling of surrounding valleys and streams with large volumes of rubble, which critics say threaten wildlife and contaminate drinking water. Studies published this year by researchers at West Virginia University suggest that people living close to mountaintop sites suffer a disproportionate rate of serious diseases. The National Mining Assn. contests these findings, saying the authors used unreliable data and overlooked certain causes of health problems unrelated to coal.

Crutchfield acknowledges that “like any project mid-stride, mountaintop removal is not the prettiest thing you ever laid eyes on.” By the same token, neither is the construction of a mall or a residential subdivision. Alpha, he continues, goes to great lengths to restore all of its surface sites, either by replanting trees or making good use of flattened ridges—by, for example, donating land for housing or schools.

Alpha takes me by helicopter and on foot to former surface mines that have been reforested or developed. As a staff pilot zooms over hollows and ridges in southern West Virginia, Jonathan B. Wood, vice-president for government and external affairs, says over the intercom, “I defy you to tell me which areas were mined and reclaimed, and which were never mined.” And from several hundred feet in the air, it’s true: In most cases, I can’t tell the difference.

Elsewhere, though, heavy yellow machines patrol the denuded terrain of active mines. The aesthetic damage is stark. It takes at least 10 years to reforest a mining site, Wood estimates. The NRDC says that 500 Appalachian mountaintops have been removed since the 1960s—a steep cost of industrialism.

It’s a price worth paying, according to Alpha. “If you look around, you see that there isn’t much economic activity out here, apart from coal and the redevelopment that takes place in the wake of mining,” Wood says.

Back at corporate headquarters, Crutchfield warns that new guidelines for mountaintop removal the Environmental Protection Agency has issued this year are so stringent on matters such as stream water purity that the permitting process has essentially stopped. The CEO views this regulation as a “potshot at coal … just a convenient starting point for something that’s bigger”—namely, an attempt to suppress all coal excavation. The EPA says it reviews mining permits on a case-by-case basis.

Whether or not Crutchfield’s conspiracy theory is correct, Alpha will not slow mountaintop removal anytime soon, he says. The company has in hand permits covering controversial mountaintop projects for about another three years. In this sense, the Massey legacy lives on.

 

Coal, at least in the short term, will continue to be a grimy business shot through with compromise. Alpha has vowed to balance its drive for growth with the need to improve workplace safety and demonstrate environmental stewardship. Whether they like it or not, the company’s critics will have to accept some of the unavoidable costs that come with a dangerous and dirty but economically essential industry.

Goose Stewart, meanwhile, will never go back down in a coal mine. “After what I been through and what I seen,” he says, “I’d be like a caged animal going crazy down there.” He collects workers’ compensation and hopes his Upper Big Branch lawsuit yields a substantial recovery. Still, he wants to see Alpha, and the rest of the industry, thrive. “It’s jobs and the American way of life,” Stewart says. “I hope Alpha is what they say they are.”

So does Joshua D. Smith, a 24-year-old continuous-miner operator at Long Pole. He has distinguished himself as a vigorous participant in the Running Right safety-review process. Like many miners, he doesn’t conceal a suspicion that senior executives may not keep their promises. He reserves even greater suspicion, though, for those who question the wisdom of continued reliance on coal mining.

“People who don’t live around here say we should shut down coal and get jobs someplace else,” Smith says. “What they don’t understand is that my family lives here. I grew up here. I love to hunt and be outdoors. This is where I want to be, and coal can be a good life, if it’s done the right way.”

Barrett_190
Barrett is an assistant managing editor and senior writer at Bloomberg Businessweek. His new book, Law of the Jungle, tells the story of the Chevron oil pollution case in Ecuador.

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Companies Mentioned

  • ANR
    (Alpha Natural Resources Inc)
    • $2.06 USD
    • -0.07
    • -3.63%
  • BTU
    (Peabody Energy Corp)
    • $10.34 USD
    • -0.01
    • -0.1%
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