[vc_row][vc_column][vc_column_text]Coal behemoth Blackjewel, LLC—a name not known widely outside the coal industry, but which until recently stood as one of the largest coal companies in the US by sales volume—imploded in spectacular fashion last week. In the wee hours of July 1, Blackjewel made an emergency bankruptcy filing. Later in the day, the company closed its two giant operations in the Powder River Basin in Wyoming, sending hundreds of workers home even as paychecks started bouncing. After the company made two unsuccessful attempts to secure temporary financing, one investment group agreed to pony up $5 million on the condition that the company’s CEO and all family members resign immediately.
The bankruptcy seemed to take many in the coal world by surprise, but the signs of financial distress have been evident to anyone who cared to look. The company’s CEO, Jeff Hoops, has admitted that he specialized in taking over financially struggling mines. The previous owner of its Wyoming mines actually paid Blackjewel more than $20 million to take them over, provided that the new owners take responsibility for cleanup. And the company had a dismal safety and environmental record, racking up dozens of violations of the Clean Water Act and mining laws, and nearly $1 million in fines and penalties from mine safety regulators.
Meanwhile, Blackjewel acquired a reputation for not paying its bills, particularly tax bills. According to a bankruptcy filing, the company owes $60 million in unpaid royalties to the federal government; $37 million in taxes to Campbell County, Wyoming; $11 million in back taxes to the state of Wyoming; $6 million to the state of Kentucky; $1.6 million to Virginia; $2.2 million to the federal Office of Surface Mining; and well over $100 million more to equipment manufacturers, local vendors, and other creditors.
Evidence presented at a bankruptcy hearing last week only reinforced the idea that Blackjewel suffered from almost unbelievably incompetent management. Below, I’ve listed seven bombshells revealed at a bankruptcy hearing that took place last week.
Bombshell #1: The Hoops coal empire has been tight on cash since 2013. Hoops himself may be well-off. He’s building a $30 million resort, comically named The Grand Patrician, complete with a 3,500-seat arena modeled after a Roman Coliseum. But the companies Hoops runs have been living hand-to-mouth for years.
Here’s how Hoops himself described the situation, in testimony before a West Virginia bankruptcy court:[/vc_column_text][vc_column_text]
Mr. Barrett, Creditor’s Attorney: “Is it fair to say that over the last year, Blackjewel has experienced a significant cash crunch?”
Jeff Hoops: “Really, sir, since 2013, Revelation Energy and then since 2017 when Blackjewel was formed, no question cash flow has been very tight. We reviewed that every other Friday with your client providing detailed cash flow statements. So yes, that should not be a surprise to you or him.”
[/vc_column_text][vc_column_text]The fact that Hoops’s companies have been short on cash, even as they racked up hundreds of millions of dollars in unpaid bills, leaves only two options: business failure or fraud. Either Hoops’s coal mining empire was spending more than it was taking in, or someone was siphoning money out of the company. Or perhaps both.
Bombshell #2: Hoops didn’t have a handle on the financial performance of his mines. At the beginning of 2019, Blackjewel changed its accounting software. Shockingly, the new system left Hoops with literally no way of tracking the financial performance of individual mines.[/vc_column_text][vc_column_text]
Mr. Barrett, Creditor’s Attorney: “So sitting here today you couldn’t tell us if a particular mine operated on a cash flow positive or cash flow negative basis?”
Jeff Hoops: “Sir, each mine is really kind of unique. And it’s really based on what we do track and (we) are able to track production and key performance indicators. And based on those indicators and my 45 years’ experience in the mines, I have a pretty good understanding of whether a mine is successful or not. And so that’s the way, unfortunately, I’ve been managing for the last six months because our system hasn’t been able to give us the details.”
[/vc_column_text][vc_column_text]This strikes me as almost inconceivable incompetence. Hoops knew that his operations were bleeding cash. But he had literally no way of figuring out which operations were losing money, or how much. For the six months leading up to his bankruptcy Hoops was flying blind, running his business by gut feel rather than actual analysis.
Bombshell #3: Hoops did nothing to prepare for his company for bankruptcy. Hoops knew that he had tight cash flow and growing debts. Yet it never seemed to dawn on him that he was sliding towards insolvency. He didn’t consult with bankruptcy lawyers or professional restructuring advisors until a few days before his business imploded. Even as his cash flow problems worsened, Hoops promised his workers that their jobs were safe. He hoped for the best, but didn’t bother preparing for the worst.
Bombshell #4: Hoops regularly transferred money between Blackjewel and other accounts he controlled. Hoops’s bankruptcy testimony describes $79 million in transfers between Blackjewel and other bank accounts he controls, including personal accounts. All told, Hoops says that he transferred $45 million into the company, and $34 million out of it—meaning that, by Hoops’s accounting, Blackjewel still owed him $11 million. Many of the transfers seemed suspicious: he would sometimes transfer money into and out of Blackjewel on the same day, presumably to prevent specific checks from bouncing. (A lawyer for a key lender described Hoops’s actions as “check kiting.”)
Bombshell #5: Hoops’s loans to Blackjewel violated the company’s credit agreements. Blackjewel’s contracts with its key lender prohibited the company from taking on additional debt. Hoops said that the creditors knew of the transfers, yet he never got a written waiver approving them:[/vc_column_text][vc_column_text]
Mr. Barrett, Creditor’s Attorney: “There is no signed written agreement between. . . Blackjewel and Riverstone permitting these advances, is there?”
Jeff Hoops: “There is no signed document, that is correct. There’s just written email correspondence between us acknowledging that this was occurring and that we were going to put an agreement in place and actually had started the process of putting the agreement in place.”
Mr. Barrett, Creditor’s Attorney: “Fine, but it was never signed, correct?”
Jeff Hoops: “No sir.”
[/vc_column_text][vc_column_text]Bombshell #6: The payments from Blackjewel to Hoops may be “unwound” in bankruptcy. Hoops seemed to think that any “repayments” of “loans” were just a normal part of Blackjewel’s day-to-day operations. But any competent bankruptcy lawyer could have told him otherwise. In the year before a company declares bankruptcy, payments by a company to an insider—such as the CEO and board chair, two positions held by Hoops—are a no-no. They’re called “preference actions,” meaning that Hoops preferred to pay off his own loans before paying off any other creditors. So in theory, Blackjewel’s creditors could try to claw back up to $34 million in transfers that Hoops made from Blackjewel to his private accounts.
Bombshell #7: Hoops credited the BLM for being “accommodating.” When it filed for bankruptcy, Blackjewel owed the US Bureau of Land Management $60 million in unpaid royalties for coal mined on federal land. Rather than calling Hoops’s company to account, the BLM put the company on a payment plan that allowed it to continue mining—something that Hoops said was unthinkable for a private land company.[/vc_column_text][vc_column_text]
Fred Westfall, US Attorney: “What I’m asking and what I’m asking you to agree with is, before the payment plan was entered into, you knew that you had an obligation, that Blackjewel and you as CEO, that there was an obligation to pay those royalties, but that was not done?”
Jeff Hoops: “I think it’s important to understand how the BLM works compared to. . . private land companies. Typically private land companies, if you don’t pay your royalty, they’ll give you 10 days to cure your lease. And if you don’t cure that lease, they terminate the lease and you have to operate elsewhere. The BLM is very accommodating. …When you can’t make your payments, if you communicate with them, they’ll work with you and set up a 60-month payment plan. And that is what we’ve been doing.”
Fred Westfall, US Attorney: “Before that payment plan was entered into, you had over $60 million in royalties that were unpaid, is that correct?”
Jeff Hoops: “We’ve been entering into payment plans for quite some time.”
[/vc_column_text][vc_column_text]As it turned out, the BLM’s leniency on royalty payments backfired for everyone. To keep its mines open during bankruptcy, Blackjewel desperately needed a loan, and Hoops himself was the only lender who was willing to inject money into the company on short notice.
But Hoops wasn’t willing to make an emergency loan unless the court could guarantee that his loans would be paid back before other debtors, including the BLM itself. The US Attorney objected to Hoops’s demands. Those objections contributed to the judge’s rejection of the loan, which in turn sent the company and its workers spinning into financial chaos.
The final analysis. Hoops’s business reputation is in tatters. Most of his workers have been sent home, and he’s left a legacy of hundreds of millions of dollars of debt that may never be repaid. And court testimony suggests that Hoops displayed almost unfathomable business incompetence, capped by an attempt to strong-arm the bankruptcy court into retroactively approving a huge pile of financial mistakes. The idea that Jeff Hoops didn’t see his financial collapse coming is almost unfathomable. I can’t say it any better than US Attorney Fred Westfall: Blackjewel was in a position requiring “emergency relief only because they’ve created the emergency.”[/vc_column_text][vc_column_text]
Fred Westfall, US Attorney: “It’s hard to believe again, they only found out about this at the last minute. And I don’t infer from the government’s perspective, there’s not adequate protection for the government going forward. And especially for the Department of Interior, Internal Revenue Service, MSHA, Office of Surface Mining, who all have substantial amounts that are owed to them by the debtor. So at this point, I can understand the debtor’s situation. They kind of created their own problems with, with the calamitous situation dealing with lack of security at the mine and the fire. I can’t, it’s hard for me to fathom that as business people they would not have taken action to prevent. . . those things before they started to shut down. Most mines do that on a routine basis. And again, we’re in a, we’re in this position for this emergency relief only because they’ve created the emergency.”
[/vc_column_text][vc_column_text]Clark Williams-Derry is the director of energy finance at Sightline. He focuses on US and global and energy markets and his recent research covers the financial and fiscal implications of “self-bonding” for coal mine reclamation; the financial viability of West Coast coal export projects; Pacific Rim coal market dynamics; greenhouse gas accounting for coal export projects; issues emerging from coal industry bankruptcies; and the interactions between federal coal leasing policy and coal exports. To contact Clark or for media requests, contact Sightline Communications Manager Anne Christnovich.[/vc_column_text][/vc_column][/vc_row]
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