This story is the third part in the series Patriot Coal: An American Bankruptcy. To begin reading the story from the beginning, jump back to the first part, Take Warning.
In the late 2000s, Peabody Energy was shifting its focus to international energy markets, particularly in East Asia, and was buying up coal mining properties in Australia. The company was a dominant player in the Powder River Basin in Montana and Wyoming where low-sulfur coal was suddenly in demand because of tightening emissions regulations. In the eastern United States, however, labor costs were high and the amount of easily accessible coal was dwindling.
Patriot was born on Oct. 31, 2007, stitched together from Peabody’s eastern holdings and union mines, and loaded with up to 45 percent of Peabody’s legacy liabilities—obligations to miners, retirees and environmental cleanup.
Peabody CEO Gregory H. Boyce in November called the spin-off a “key element in transforming our business portfolio.” The company’s CFO trumpeted the advantages of a spin-off: “Our retiree, healthcare liability and related expense will be reduced by about 40 percent. Workers compensation liability will be cut nearly 90 percent… In total, our legacy liabilities, expenses and cash flows will be nearly cut in half.”
The move was viewed differently by the United Mine Workers of America, the coal miners’ union.
Cecil E. Roberts has been president of the UMWA since 1995. A sixth-generation miner from Cabin Creek, West Virginia, he is famous for his fiery tirades against what he perceives as the injustices generated by the industry. He described the arrangement between Peabody and Patriot as akin to parents handing their 18-year old children the mortgage on the day they graduate high school.
“As they went out the door, their obligations on their balance sheet were reduced dramatically, making Peabody Energy a much more lucrative company,” he said.
Patriot became the second-largest coal company in the Central Appalachian region at the time of its creation, containing 13 percent of Peabody’s assets, 40 percent of its liabilities and all its union mines save one—an operation on the Navajo nation in Arizona. About 61 percent of the miners at Patriot were represented by the UMWA. Across the industry, the union represented and continues to represent about one-third of all working miners.
Patriot began trading on the New York Stock Exchange under the symbol PCX on Nov. 1, 2007 at an initial price of $15 a share. Peabody shareholders received one share in Patriot Coal for every 10 shares of Peabody Energy they owned. The spin off included eight company-operated mines, interest in several other mines, eight coal preparation facilities and 1.2 billion tons of proven and probable coal reserves.
Patriot reported revenues of approximately $1 billion. Its assets totaled $1.2 billion in 2007 while retiree healthcare liabilities amounted to $603.4 million.
In 2008, Patriot purchased Magnum Coal—which had been spun-off from Arch Coal in 2005—for $709 million in stock. Like Patriot, Magnum also had substantial obligations to its retirees. Patriot healthcare liabilities zoomed to $1.1 billion at the end of 2008, an increase of nearly $500 million, representing obligations to some 2,300 retired employees, according to SEC filings and press reports.
Retiree healthcare liabilities now represented more than a third of Patriot’s total liabilities of $2.8 billion and two-thirds of its total revenues of $1.6 billion.
Patriot’s losses started mounting. After earning profits of $126 million in 2008 and $140 million in 2009, it began hemorrhaging money due to falling demand and rising costs. In 2010, it recorded a loss of $104 million; in 2011, a loss of $145 million. In the first half of 2012, it lost $430 million. In its 2011 annual report, management pinned the company’s troubles on “low natural gas prices, mild weather and weaker international and domestic economies.”
Just after 5 p.m. on July 9, 2012, Patriot announced it was filing for Chapter 11 Bankruptcy in the Southern District of New York, despite having no operations there. The following day, its stock was de-listed from the New York Stock Exchange. It had been trading at $1 to $2 per share.
The company, which had been selling most of its coal to electricity producers in the U.S. and abroad, couldn’t service its debt due to collapsing prices and increased regulations. In 2010, Patriot was also hit with a judgement requiring it to pay for selenium water pollution associated with mountaintop removal mining sites in West Virginia. The company estimated the cost to be $400 million over 30 years.
Retired coal miners and their families, concerned about what Patriot’s bankruptcy case would mean for their pensions and health benefits, sent hundreds of letters to U.S. Bankruptcy Judge Shelley Chapman asking her to move the case out of New York and to a court house nearer to the coal fields where the people most directly affected lived.
“Hundreds of hand-written letters have been received by the Court from ‘the people whose hands mine the Debtors’ coal’ and their widows and children,” Judge Chapman wrote in her decision moving the case to St. Louis. “Many of them enclosed family pictures, or lists of ailments and medications. Some of them asked for a personal response. All of them were respectful, and compelling.”
According to UMWA General Counsel Grant Crandall, the union saw a unique threat emerging in the Patriot case. The petition to move the case out of New York was part of a broader strategy to focus attention on the concerns of the retirees.
“In an extractive industry, you have bankruptcies all the time,” said Crandall. “But to have one where somebody’s challenging the ability of people to get pensions and retiree healthcare, that’s a different animal. So, we took it seriously and mobilized the membership.”
Thousands of UMWA members marched on Peabody’s headquarters in St. Louis and on Charleston, West Virginia, where Patriot had offices. Union demonstrators were arrested in Charleston and St. Louis.
As the pressure increased, the company became more candid. In April 2013, Patriot CEO Bennett K. Hatfield told the State Journal, West Virginia’s leading business publication, that he agreed with the UMWA’s claim that Peabody had set up Patriot to fail. He concluded this even back when he was an executive at competing coal companies such as International Coal Group.
“Frankly, as a competitor, we looked at that and said, ‘how could that work?’ It looks like a bad balance here—too many liabilities and not enough assets,” Hatfield said. “I think it’s a fair assessment. It’s one of the areas where I frankly agree with many of the things [UMWA President] Cecil Roberts has said. Something doesn’t quite smell right here.”
On May 29, 2013, U.S. Bankruptcy Judge Kathy A. Surratt-States—the judge assigned the case upon its transfer to St. Louis—ruled that Patriot could reject its collective bargaining agreement with the UMWA and change the agreements it had made regarding retiree benefits.
“Was debtor Patriot Coal Corporation created to fail? Maybe not. Maybe,” Judge Surratt-States wrote in a 102-page ruling. “Maybe the executive team at debtor Patriot Coal Corporation’s inception thought the liabilities were manageable and thus the reality of debtor’s bankruptcy was more attributed to unwarranted optimism about future prospects.”
Delbert Richie participated in a march on the Bankruptcy Court the day Judge Surratt-States made the ruling. He stuck an American flag in the ground in front of the court house to show his defiance. “I was madder than hell,” he said.
In August 2013, the union reached a $300 million settlement with Peabody Energy, according to Crandall. The money went toward funding healthcare for 22,000 people, including retirees from Peabody, Patriot, and Arch Coal and their dependents.
Peabody Energy did not respond to a request for comment. The company has always contended that claims it set Patriot up to fail are false and has often pointed to Patriot’s initial success as proof of this assertion. Those who have looked closely at this issue have questioned whether Patriot, as overloaded with liabilities as it was, could withstand a normal market downturn in a competitive boom and bust industry. The year 2015 tested this contention not only for Patriot but for the entire energy sector.
Half of all public company bankruptcies in 2015 and 2016 were from the energy industry, a sector that traditionally accounts for between 2-15 percent of all bankruptcies, according to BankruptcyData. While these bankruptcies included natural gas and even renewable energy companies, coal was hit particularly hard, with several of the industry’s largest operators filing for bankruptcy, beginning with Alabama-based Xinergy Corp. in April 2015, followed by Patriot, Walter Energy, Alpha Natural Resources, Arch Coal, and finally Peabody Energy in April 2016.
Patriot filed for bankruptcy protection for the second time on May 12 in Richmond, Virginia. This time, there was little hope that it could continue to operate as a stand-alone entity. The company, which had come under the control of bond-holders in 2013, said it was in “active negotiations” to sell itself under the supervision of the court. Blackhawk Mining LLC, a young company that had grown rapidly through acquisitions, emerged as a potential purchaser.
Blackhawk, which had no union mining operations, didn’t want to have anything to do with Patriot’s obligation to pay into the UMWA’s pension plan. Blackhawk made it known that its bid was contingent on being able to avoid any liabilities associated with the plan. The union challenged Patriot’s bankruptcy plan calling it “deja vu all over again.”
In early July, Patriot sought court approval for $6.3 million in employee bonuses, with potentially $3.5 million scheduled to go to top management. The bonuses were approved later that month.
As the summer waned, the UMWA marched on Patriot’s headquarters and the company announced that its creditors would get back 80 percent of the money they had invested. Dan Kane, the secretary treasurer of UMWA District 17, told the Charleston Gazette that the “bankruptcy laws need to get tossed out and rewritten. The CEOs, investors and lawyers all get paid. But the workers get sent away with cents on the dollar or nothing.”
On August 31, declaring it was “out of options,” Patriot filed a motion to reject its collective bargaining agreement with the union.
On October 20, a few days after the sale to Blackhawk was approved, Patriot and the UMWA filed a lawsuit accusing Peabody of trying to renege on its agreement to pay approximately $145 million in retiree benefits as part of a 2013 settlement in the first Patriot bankruptcy. The UMWA was ultimately able to recover the money, though it was not enough to cover the full amount of the benefits.
Patriot emerged from the Chapter 11 process on Oct. 28, 2015, having sold its assets to Blackhawk and the Virginia Conservation Legacy Fund, a newly formed nonprofit that sought to offset coal’s environmental impacts.
If Peabody had created Patriot as a gambit to absolve themselves of millions of dollars in legacy obligations to Richie and his fellow miners, then it wasn’t enough to overcome other kinds of financial pressures. The company was unable to service the $10.1 billion in debt it had incurred, mostly for its expansion into Australia. Like Peabody, many of the companies that went bankrupt in the 2015-16 period had loaded up on debt in the late 2000s to make expensive acquisitions when coal prices were high. When the price of coal tumbled, especially met coal, the house of cards came down with it. According to Roberts, “If the price of metallurgical coal had stayed as high as say $125 or up to $130 [per ton], you’d never have seen a bankruptcy. And at one time it was two and a half times that.”
Patriot was the first in a wave of bankruptcies that crashed over coal country. Peabody was the last. The two companies bookended one of the sharpest periods of turmoil in the industry in recent memory, leaving a great deal of uncertainty in their wake.
Daniel Flatley (@daniel_flatley) is a West Virginia native and a former Marine. He covered politics and government at a newspaper in upstate New York before attending the Columbia University Graduate School of Journalism, from which he will graduate in May 2017.