Two representatives of noteholders for Patriot Coal and related companies in bankruptcy want to separate management of Patriot’s money-losing unionized assets and its ostensibly more promising non-union assets.
Aurelius Capital Management LP and Knighthead Capital Management LLC, on behalf of certain funds and accounts that they manage or advise and that hold a substantial amount of certain Patriot Coal notes asked the court on March 28 for an order directing the appointment of a Chapter 11 trustee to control the estates of those cebtors (called the “Non-Obligor Debtors”) that are not signatories to collective-bargaining or retiree-healthcare agreements with the United Mine Workers of America (UMWA) union.
Patriot recently filed an acrimonious plan with the court, which is still pending, to slash its UMWA obligations in an effort to cut expenses and emerge from bankruptcy.
Patriot Coal, a major producer in West Virginia and western Kentucky, sought Chapter 11 protection in July 2012. Its case is currently pending at the U.S. Bankruptcy Court for the Eastern District of Missouri after a late-2012 transfer from a court in New York.
Since the July 2012 Chapter 11 filings, the cases have focused almost exclusively on a dispute between the debtors and the UMWA over obligations that some debtors have to current and retired union members, said the two capital management companies. “That dispute came to a head two weeks ago, when the Debtors filed a motion to abrogate collective bargaining agreements with the UMWA, modify obligations to union retirees, and implement replacement proposals of their own that the UMWA has thus far rejected,” they added.
“Lost in the acrimony between the Debtors and the UMWA, however, is a single, undisputable fact: Of the ninety-nine Debtors in this jointly administered action, only thirteen actually have obligations to the UMWA or union retirees (the ‘Obligor Debtors’),” the capital companies said. “Patriot and its other eighty-five Debtor subsidiaries (collectively, the ‘Non-Obligor Debtors’) have no such obligations, nor do they guarantee union liabilities held by anyone else. To be sure, the Non-Obligor Debtors do have obligations to other, non-union creditors—foremost amongst them, the Noteholders here.”
Companies say non-union assets shouldn’t be sacrificed to meet union obligations
The debtors’ recent proposals to the UMWA are built on a plan to satisfy union liabilities with the assets of the Non-Obligor Debtors, which have no obligations to the UMWA, the companies argued. “Worse, the plans do so without providing the Non-Obligor Debtors any value in return,” they added. “The proposals are a clear breach of the fiduciary duties owed to the Non-Obligor Debtors—breaches that will severely prejudice their creditors, such as the Noteholders, which bargained for and received obligations from Patriot and guarantees from the remaining Non-Obligor Debtors that the UMWA did not.”
Compounding the problem, Patriot Coal’s management has spent nine months negotiating with the UMWA about these ostensibly illegal proposals, which are based on the faulty premise that the Non-Obligor Debtors actually owe union benefits, the capital companies added. “The proposals could never be the basis for a confirmable plan of reorganization. In the meantime, the Debtors move inexorably towards liquidation—a fate the Non-Union Debtors need not meet. Having no obligations to the UMWA, the Non-Obligor Debtors (including Patriot itself) should be able to emerge from bankruptcy expeditiously. Their failure to have done so already is solely a function of the company’s inability and unwillingness to meet its fiduciary duties—and presages that the company will give short-shrift to the due process of interested parties in the plan process as well.”
Only by appointing a trustee can the court ensure that the estates of the Non-Obligor Debtors are managed in the best interests of their own actual creditors, which is a fundamental tenet of Chapter 11 reorganization, the capital companies argued. “Indeed, under black letter law the appointment of a trustee is required when acompany is unable to fulfill its duties to creditors,” they said. “That requirement is all the more urgent here, where the debtors-in-possession are actively harming the creditor interests of eighty six of its Debtors (i.e., the Non-Obligor Debtors) for the benefit of creditor interests in just thirteen of the Debtors (i.e., the Obligor Debtors). Only a trustee can set true the course and do so before liquidation.”
Patriot’s current management has made it clear that they will not hesitate to sacrifice the welfare of their creditors—to whom they owe fiduciary duties—for the benefit of the Obligor Debtors’ creditors—to whom they do not, the companies said. “Indeed, no better example could be imagined than the Termination Motion, which seeks to encumber the Non-Obligor Debtors with up to a billion dollars of Obligor debt for nothing in return. And, time is of the essence: As Patriot itself acknowledges, its only source of funding is set to expire, and it faces a substantial prospect of liquidation.”
Their March 28 motion carries with it an April 16 objection deadline and an April 23 hearing date on the motion.
About 40% of Patriot employees represented by the UMWA
As of the end of 2012, Patriot had about 4,100 employees. Approximately 40% of those employees were represented by the UMWA. The unionized employees work at various sites in Appalachia and at the Highland complex in western Kentucky. In the third quarter of 2011, certain subsidiaries signed new agreements with the UMWA, which were effective July 1, 2011, and generally extend through December 2016. The new agreements are substantially the same as the National Bituminous Coal Wage Agreement negotiated in mid-2011 between the Bituminous Coal Operators’ Assn. and the UMWA.
Patriot Coal holds many former UMWA obligations of Peabody Energy (NYSE: BTU), which spun off Patriot in an IPO last decade, and Arch Coal (NYSE: ACI), which divested unionized assets in Central Appalachia that Patriot later acquired in a buy of Magnum Coal.
As of the end of 2012, Patriot had eight active mining complexes located in Boone, Lincoln, Logan, Kanawha, and Raleigh counties in southern West Virginia. In northern West Virginia, it had one mining complex (the Federal No. 2 longwall mine) located in Monongalia County. During 2012, it closed one mining complex in southern West Virginia and converted certain contractor-operated mines to company-operated mines. Also during 2012, it reduced production at certain thermal and metallurgical coal mines in response to decreased market demand. In West Virginia, it sold 18.5 million tons of coal in 2012.
As of the end of 2012, Patriot had two active mining complexes located in Union and Henderson counties in western Kentucky. During 2012, it closed one western Kentucky mining complex called Bluegrass. In this region, it sold 6.4 million tons of coal in 2012.
In 2012, Patriot’s coal was sold to 54 electricity generating, industrial, steel producing and coke producing plants in nine countries, including the U.S., the company noted in its Feb. 22 annual Form 10-K report.
Patriot witness says UMWA obligations a killer in current poor coal market
Slammed by a combination of a slumping coal market and high coal production costs, Patriot Coal needs to cut its UMA-related costs to stay competitive and successfully emerge from Chapter 11 bankruptcy protection, said Patriot in March 14 filings at its bankruptcy court. Among the officials filing supporting testimony on March 14 at the court in its bid to cut UMWA-related costs was Seth Schwartz of consulting firm Energy Ventures Analysis, who laid out the current conditions that put Patriot into Chapter 11 and endanger its emergence if its costs can’t be cut.
“The coal market has been in a sharp contraction since 2008,” Schwartz wrote. “Appalachian coal production fell by 14.4% from 2008 to 2011 and fell another 12.6% in 2012. The cause of the decline in the thermal coal market is principally reduced generation from coal-fired power plants, which have retired due to new federal regulations and are burning less coal due to competition from lower-priced natural gas. The metallurgical coal market also fell sharply in 2012 because of weak demand, coupled with increased competition in the international market from growing supplies from Australia and other countries.”
Due to the fall in demand for Appalachian coal, production has been cut and the highest-cost mines are being closed. “To the extent demand for thermal coal remains, it fluctuates with changes in the weather, the economy and the market price for natural gas (itself a volatile commodity),” Schwartz added. “Customers are now reluctant to enter into long-term coal contracts because they cannot predict their coal consumption with any certainty. The entire coal market has thus become more volatile and less predictable in recent years.”
Due to the terms of their labor agreements, companies with union operations have much higher costs per ton than non-union producers. These costs are in the form of higher wages and benefits as well as lower productivity due to more restrictive work rules, Schwartz said. Patriot’s labor costs per hour worked are between 32% and 197% higher at its mines where labor is represented by the UMWA than at its comparable operations where hourly labor is non-union. Additionally, the proportion of Patriot’s labor that is represented by the UMWA is very high relative to that of other coal companies. For instance, Patriot is the only coal producer that operates with UMWA-represented employees in two of its four market segments (Illinois Basin and Central Appalachia thermal coal).
Coal production in the regions where Patriot competes has rapidly changed to non-union operations, and there are few remaining producers subject to labor contracts, Schwartz wrote. “Patriot will need to have a cost structure that is competitive in the industry to survive, especially in a new era with shrinking coal demand and increased volatility in the coal markets,” he added. “The thermal coal market has been fundamentally altered due to the development of low-cost natural gas. The metallurgical coal market is under pressure from new supply in other countries. Coal sales in both markets have shifted from long-term contracts to a majority of sales being made on a short-term basis. Coal producers must adapt to survive in these new markets. They will not be able to rely on the steady shipment rates of long-term contracts and produce steady monthly volumes to meet steady customer demand.”