Eight retired and active members of the United Mine Workers of America (UMWA) and the union itself filed a federal class action suit Oct. 23 in the U.S. District Court for the Southern District of West Virginia seeking to hold Peabody Energy (NYSE: BTU) and Arch Coal (NYSE: ACI) responsible for benefit plan contributions of bankrupt Patriot Coal.
Patriot Coal sought Chapter 11 protection on July 9 at the U.S. Bankruptcy Court for the Southern District of New York. Patriot was formed through three major parts, two of which were former unionized subsidiaries of Peabody Energy and Arch Coal. The third major segment was non-unionized mines in southern West Virginia at one point controlled by coal operator Chris Cline.
The UMWA said in an Oct. 24 statement that the lawsuit asks the court to “enter judgment against Defendants declaring that Defendants are obligated to maintain funding of the Plaintiffs’ benefit plans.”
The suit was filed on behalf of more than 10,000 retirees and active workers whose health care and pension benefits Peabody and Arch transferred to Patriot. The suit maintains that Peabody and Arch “planned to transfer (their) employees and benefit plan obligations to Patriot for the purpose of depriving (their) employees and retired employees of their welfare and retiree benefits.” This is illegal under the Employee Retirement and Income Securities Act (ERISA), the union noted.
“Peabody and Arch established separate spin-off companies, which have become today’s Patriot Coal, with the publicly stated intention of getting rid of their obligations to the retirees who gave a lifetime of service to those companies,” said UMWA President Cecil Roberts. “The companies bragged about getting those liabilities off their balance sheets.”
Roberts added: “And as people with long experience in the coal industry, they knew that the cyclical nature of the industry would inevitably lead to Patriot’s inability to pay for those liabilities. It was a company set up to fail. But under the law, that does not relieve Peabody and Arch of their obligation to these retirees, their spouses and their widows.”
Lawsuit traces history of Patriot’s UMWA obligations
The lawsuit noted: “On October 31, 2007, Peabody Energy, the ultimate corporate owner of Peabody Holding and its subsidiaries, contributed portions of its Eastern U.S. mining operations to a newly-formed subsidiary known as Patriot in exchange for shares of Patriot common stock. Among the assets contributed to Patriot was Peabody Energy’s ownership interest in Affinity Mining, Colony Bay Coal, Eastern Associated Coal, Martinka Coal Company, Mountain View Coal Company, Heritage Coal (formerly Peabody Coal Company) Pine Ridge Coal Company, Sterling Smokeless Coal Company, Rivers Edge Mining and Yankeetown Dock. Each of these entities had been covered by successive collective bargaining agreements with the UMWA that provided lifetime health care benefits to miners, retirees and their dependents.”
The lawsuit said that with the spin-off by Peabody of Patriot in 2007, the two companies reached several agreements, two of which were entitled a “Coal Act Liabilities Assumption Agreement” and an “NBCWA Individual Employer Plan Liabilities Assumption Agreement.”
- In the Coal Act Liabilities Assumption Agreement, Peabody Holding acknowledged that it would remain a “related person” to Patriot, and therefore remained liable for the provision of health care benefits to retirees under the federal Coal Act. The agreement provided further that Patriot would administer Coal Act plans and the delivery of Coal Act benefits. Peabody Holding indemnified Patriot against any claims arising out of a failure of Peabody to timely meet its Coal Act obligations, said the lawsuit.
- In the NBCWA Individual Employer Plan Liabilities Assumption Agreement, Peabody Holding agreed to assume Patriot’s liabilities for provision of retiree healthcare for certain retirees and dependents of Peabody Coal (now Heritage Coal) who had a vested right to receive benefits under the applicable collective bargaining agreements as of Dec, 31, 2006, and had retired prior to that date, the lawsuit said. Peabody Holding guaranteed payment of this obligation and indemnified Patriot against any failure by Peabody Holding to meet its obligations under the agreement.
“Without Peabody’s assumption of these healthcare obligations, Patriot would have shown a negative net worth on its pro forma financial statements, which would have both jeopardized the intended tax-free nature of the distribution of Patriot’s shares to the shareholders of Peabody Energy and constituted an obvious fraud on Peabody’s creditors,” the UMWA lawsuit said. “Upon information and belief, in order to make Patriot appear solvent at the time of the spin-off, Peabody Energy assumed $615.8 million dollars of retiree healthcare and other liabilities, while transferring $557 million in retiree healthcare liabilities to Patriot. As of Dec 31, 2011, the present value of the retiree healthcare obligations Peabody assumed at the time of the spin-off was $697 million.”
The lawsuit noted that when Patriot in July entered bankruptcy protection, Patriot official Mark Schroeder in part blamed “unsustainable labor-related legacy liabilities” for the need for bankruptcy court protection.
As of Jan. 1, 2011, the lawsuit said that Patriot provided health care benefits for the following approximate numbers of employees, retirees, and their dependents, associated with former Peabody subsidiaries: 1,010 active employees; 518 employees whose employment had terminated but whose right to benefits had vested; 2,243 retirees; 167 surviving spouses; 1,852 dependent spouses; and 246 dependent children. As of Jan. 1, 2012, the estimated value of the postretirement benefit obligations for UMWA-represented employees covered by Patriot who are associated with former Peabody subsidiaries was approximately $898.7m, comprised of $534m for retirees and $364.7m for active employees.
Arch divested its unionized companies last decade to another party
Subsidiaries of Arch Coal or its predecessors have been signatory to various national labor agreements, the lawsuit said. Effective at the end of 2005, Arch sold 100% of the stock of three subsidiaries – Hobet Mining, Apogee Coal and Catenary Coal Co. – and their associated mining operations and coal reserves in Central Appalachia to Magnum Coal in return for a minority share in the company. Magnum had been created just two months earlier. ArcLight Capital Partners LLC, through its hedge funds, was a majority stockholder of Magnum Coal, which in part was made up of the former Cline operations. Patriot then acquired Magnum Coal in 2008. Arch Coal stated explicitly in 2005 that getting UMWA obligations off its balance sheet was a key reason to do that deal with ArcLight, the lawsuit noted.
As of Jan. 1, 2011, the lawsuit said Patriot provided healthcare benefits the following estimated numbers of employees, retirees, and their dependents, associated former Arch and Magnum subsidiaries: 410 active employees; 172 employees whose employment had terminated but whose right to benefits had vested; 1,672 retirees; 494 surviving spouses; 1,377 dependent spouses; and 194 dependent children. As of Jan. 1, 2012, the estimated value of the postretirement benefit obligations for UMWA-represented employees covered by Patriot who are associated with former Magnum subsidiaries was about $505.9m, comprised of $377.8m for retirees and $128.1m for active employees.
On Oct. 18, 2012, under questioning from UMWA retirees, a Patriot representative refused to assure the continuation of health care benefits to its retirees, including those retirees who last worked for Peabody or Arch, essentially confirming the stated purpose of reducing its healthcare expenses so that it may successfully reorganize, the lawsuit claimed.
“Patriot has further stated that if it is not allowed to dramatically reduce its expenditures for retiree healthcare expenses, it will remain insolvent and be forced to liquidate,” the lawsuit said. “Though the spin-off of Patriot became effective October 3, 2007 and that of Magnum on January 1, 2006, the injury to Peabody and Arch’s former employees did not become apparent until the bankruptcy proceedings in 2012, when Patriot proclaimed its intention to reduce healthcare costs and benefits. Consequently, Plaintiffs could not have discovered their injury until at least July 9, 2012. Defendants’ wrongful actions have resulted in the imminent reduction or elimination altogether of promised healthcare benefits to Plaintiffs. Although Peabody and Arch are bound to commitments to provide lifetime healthcare to their respective former employees, their wrongful and discriminatory actions in spinning-off their unionized subsidiaries will result in the reduction or elimination of those promised benefits without injunctive relief.”
Neither Peabody nor Arch had issued any public statements about this lawsuit as of the morning of Oct. 25. Peabody Chairman and CEO Greg Boyce, during an Oct. 22 earnings call, just before the lawsuit was filed, was asked about any rebound effects of the Patriot bankruptcy on Peabody.
Said Boyce: “When Patriot was spun off, it was a viable enterprise that went out, did mergers, organized their own bank credit lines, went through all of the things that a stand-alone business would do. The liabilities that the union is talking about were liabilities that Patriot had and, as far as I know, are continuing to get paid. [W]e had two components. [A]s we’ve disclosed in our 10-K, we’ve got a potential liability related to black lung, although Patriot did arrange letters of credit with the government for those and continues to make those payments. And then we had entered into a contract to pay some of the liabilities for some of the retirees, a group of retirees, for Patriot that is still in place, and we still make those payments today. So I think we’re going to hear a lot of noise. That’s probably to be expected.” But he said Peabody’s liabilities in this matter have already been fully disclosed.
Arch in its Aug. 9 Form 10-Q filing at the SEC said about guarantees it has offered to Patriot: “The Company has agreed to continue to provide surety bonds and letters of credit for obligations, primarily reclamation, of [Magnum Coal] related to the properties the Company sold to Magnum on December 31, 2005. Patriot Coal Corporation (‘Patriot Coal’) acquired Magnum in July 2008. The surety bonding amounts are mandated by the state and are not directly related to the estimated cost to reclaim the properties. At June 30, 2012, the Company had $35.3 million of surety bonds remaining related to properties sold to Magnum, however Patriot Coal has posted letters of credit of $16.7 million in the Company’s favor.”
The Arch Form 10-Q added: “Magnum would have acquired a contract to supply coal through 2017 to a customer that had not consented to the contract’s assignment from the Company to Magnum. The Company has committed to purchase coal from Magnum to supply to the customer at the same price the customer is charged for the sale. Under the coal supply contract, as amended, Magnum has the ability to buy out of its monthly obligations under the contract at prices that are predetermined for the remainder of the agreement. Additionally, a predecessor of the Company entered into a guarantee for the delivery of coal under a contract assigned to Magnum. If Magnum is unable to supply the coal for these coal sales contracts or pay the buy out amount if elected, and if the guarantee is enforceable, then the Company may be required to fulfill Magnum’s delivery or payment obligations. The maximum financial impact to the Company if required to fulfill Magnum’s obligations over the term of these contracts would be approximately $70.0 million as of June 30, 2012.”
The Form 10-Q noted Patriot’s July 9 bankruptcy filing. “Patriot has the expectation of continuing to serve customers, after receiving a commitment of debtor-in-possession financing,” Arch said. “At this time, the Company does not believe that it is probable that it would have to purchase replacement coal, and, accordingly, no losses have been recorded in the consolidated financial statements as of June 30, 2012.”