Patriot Coal says it's not trying to destroy its union miners' pension and health care benefits. It just wants to bring them into line with those at nonunion mines to keep the company from being at a competitive disadvantage.
It also says it is looking at "causes of action in the future" against Peabody Energy and Arch Coal, two companies that formerly owned Patriot mines and saddled it with high legacy costs that helped lead to its proceedings in bankruptcy court.
And in all that, the United Mine Workers of America's description of what Patriot is doing to emerge from bankruptcy is not accurate, the company says.
A rally in Charleston
Monday, the United Mine Workers of America – thousands of them – showed up in Charleston to protest the potential threat to benefits earned from years in the coal mines.
At issue, specifically, is the bankruptcy of Patriot Coal. Barely five years old, Patriot was formed largely from a spinoff of mostly Appalachian and mostly union assets of Peabody Energy. Later, Magnum Coal, an Arch Coal subsidiary, was purchased by Patriot Coal.
The UMWA says its members and the obligations that came with them, were unfairly transferred into Patriot, an entity doomed to fail. The union says this is to the benefit of Peabody Energy, which has largely enjoyed relative success in modern coal markets. Now, in bankruptcy proceedings, Patriot is proposing to reject collective bargaining agreements made with union employees, terminate retiree benefits and implement others proposed terms related to its bankruptcy.
"This is a crime," said UMWA President Cecil Roberts. "We've been robbed, tricked and lied to. This cannot stand – and with thousands of us from all over the country marching today and keeping us this fight tomorrow, it will not stand."
Patriot says their efforts have been mischaracterized.
"Patriot's proposal to the UMWA does not aim to ‘throw out' the collective bargaining agreements," a fact sheet from Patriot states. "In fact, Patriot is seeking to modify union employees' wages and benefits so that they are in line with the regional labor markets and with non-represented workers who do the same jobs at other Patriot operations."
The union's fight has been on multiple fronts – Monday's protest centered on Patriot, with thousands arriving at the company's Charleston headquarters. Other protests have centered on Peabody Energy and its headquarters in St. Louis.
"Patriot doesn't have to go down this road," Roberts said. "We can help Patriot solve its problems, with a solution that keeps the promises made to retired miners, and provides decent pay, benefits and working conditions to active miners. Patriot's problems are not rooted in competition with other coal companies. They're rooted in not having the assets to pay Peabody's and Arch's bills in a coal market that is on a downswing."
Patriot's claim is that without eliminating about $150 million per year in obligations to unionized workforce and retirees, it will not be able to meet the requirements necessary to emerge from bankruptcy and protect more than 4,000 current coal mining jobs.
So, what exactly is Patriot proposing? Could the UMWA and Peabody share a common interest in pursuing Peabody and Arch for legacy obligations?
Burden to bear
Obligations to the union have caused a number of problems for Patriot. The company says in a memorandum of law for a motion to reject collective bargaining and modify retiree benefits that its union operations cost the company hourly labor costs 90 percent higher than other operations, health care coverage with no employee contributions to premiums, de minimis co-pays and free mail-order prescription drugs. Union miners, Patriot wrote, enjoy perks of up to 47 days of paid time off per year.
"Patriot employs more than 1,200 non-union miners willing to work for market wages and benefits," the filing states. "If Patriot is to survive, its UMWA-represented employees must do the same."
Health care and pensions present a similar problem for the company. Present retiree health care obligations exceed $1.6 billion. While Patriot employs 1,650 union employees, the five-year-old company provides retiree health care benefits to about 8,100 individual under collective bargaining agreements and 2,300 individuals under federal statutes.
"Patriot has incurred well over a billion dollars in healthcare obligations for its UMWA retirees," the document states. "… As a result of the spin-off from Peabody and the acquisition of Magnum, Patriot became responsible for liabilities relating to thousands of former employees and retirees of Peabody, Magnum and Arch who retired prior to the formation of Patriot. For that reason, Patriot currently pays healthcare benefits for five times the number of retirees and dependents than UMWA-represented employees."
The health care benefits Patriot pays out to UMWA employees are spread out in numerous programs and totaled about $83 million in total in 2012.
"In aggregate, the present value of the UMWA healthcare liabilities was estimated to be approximately $1.6 billion as of December 31, 2012."
Those health care costs, Patriot wrote, are expected to increase in coming years.
Patriot's net loss has more than quintupled over the past year, from $139.1 million in 2011 to $730.6 million in 2012, the filing states. At Patriot's Appalachian operations, union mines had a 20 percent greater cost per hours worked. At surface mines, UMWA mines had a 50 percent higher cost per hour worked.
In attempt to make costs savings necessary to come out of bankruptcy the company has already made a number of changes. It has reduced thermal and metallurgical coal production, reduced planned capital expenditures, discontinued contractors, eliminated unprofitable contracts, sold surplus assets, reduced overhead and made several reductions and modifications of its non-unionized workforce.
"The coal industry is highly competitive and Patriot is uniquely poorly positioned to compete with its peers," the March 14 filing states. "For example, Patriot's per-employee labor costs are up to 90 percent higher in its union mines than in its non-union mines. Patriot's workforce is 41 percent unionized, which is one of the highest rates among major U.S. coal companies. By contrast, Peabody's workforce is 21 percent unionized, Alpha's is 11 percent unionized, Arch's is 3 percent unionized and James River has no union members."
The UMWA has expressed dissatisfaction with Patriot's proposal. So what exactly is Patriot proposing to emerge out of bankruptcy?
Section 1113 and Section 1114 of bankruptcy law detail, respectively, the process for rejecting collective bargaining agreements and modifying retirement agreements. The UMWA, by statute, has a right to be a party to such negotiations.
The fourth proposal rejected by the UMWA would offer annual savings of about $75 million per year and seek to "level the playing field between Patriot and its well-capitalized competitors" that employ less union labor. Patriot says the proposals are in line with not only market standards but what the union has previously approved for other operations.
"The proposals are consistent with – and even more generous than – the compensation level of Patriot's more than 1,200 non-union employees who perform exactly the same jobs as the UMWA-represented miners," Patriot wrote in its filing to the court. "Indeed, the UMWA itself recognized this reality by recently agreeing to a collective bargaining agreement with Patriot's Gateway Eagle Coal Company, LLC, that is more closely aligned with Patriot's non-union benefit scale and contains many of the changes reflected in the proposals."
Patriot stated that the UMWA's acknowledgment that collective bargaining at Eagle was acceptable means that the company's proposal is at least "fair and equitable" in light of the bankruptcy.
"Lifetime health insurance with no employee premium, free mail-order prescription drugs, and a $240 out-of-pocket maximum per family is unaffordable," the filing states.
Patriot says it acknowledges that the proposal it has made "will impose a very real hardship on unionized employees and retirees" who negotiated for those benefits, many with other companies. The applicable sections of bankruptcy law however, means both parties must consider the "tragic alternative" of liquidation, loss of all jobs and inability to provide benefits to any employee.
The potential that the UMWA could "damage the company with debilitating strikes," coupled with other factors, Patriot warns, mean without approval of their proposal, the company may consider selling some or all of Patriot's assets.
As part of its proposal, Patriot outlines several changes to collective bargaining agreements. The wages and benefits, Patriot wrote, are consistent or better than wages and benefits provided to non-union employees.
Among the changes are elimination or reduction of scheduled wage increases and reduction of wages for union employees, including adjustments to shift-differential payments and adjustments to overtime and other premium pay. Patriot also proposes to withdraw from the 1974 Pension Plan contributions, elimination of a 20-year service payment, elimination of retiree bonus plan contributions and elimination of New Inexperienced Miner Payments.
Under the proposal, Patriot would make contributions equal to 6 percent of gross hourly wages to a 401(k) or similar plan.
Further, the company would reduce the number of holidays, vacation days and sick days per year. Under current agreements, a miner can take off up to 47 days per year. A more stringent attendance policy would also be enforced.
Health care under the National Bituminous Coal Wage Agreement would also be eliminated and replaced with a 90/10 Plan the company described as "still-generous, but less costly." Extended health care after a layoff would be significantly reduced, and the company would cease to pay into the 1993 Benefit Trust Contributions.
The precise amount saved by elimination of the individual initiatives was redacted from the filing.
The remaining $75 million Patriot said it needs to cut would come from establishment of a Voluntary Employee Beneficiary Association, or VEBA. Those who receive benefits under Coal Act would not be affected.
A VEBA reimburses members for money spent on medical treatment or directly pays premiums and would be operated independently of Patriot. Under the proposal, it would be established by July 2013 with a $15 million lump sum payment from Patriot, also granting the UMWA an unsecured claim against Patriot's estate. Further contributions would be made through a profit-sharing plan established by Patriot.
"In light of this funding, the VEBA can provide meaningful benefits to Patriot's retirees, including valuable access to group coverage and premium support," Patriot states. "While Patriot no longer can afford the cost of retiree healthcare, it will do everything possible to establish a vehicle that will enable its retirees to receive meaningful healthcare benefits over the long term."
Patriot, in its filing, stated it believes it has utilized reliable information, supplied information to the UMWA and bargained in good faith, the three criteria required for a bankruptcy court to approved rejection of a collective bargaining agreement.
Sights on Peabody
The UMWA has been in negotiations with Patriot since it has begun the Chapter 11 bankruptcy process. Patriot, in a filing in bankruptcy court, says it has provided four proposals the union has rejected.
According to Patriot's filing, the union has set its sights on Peabody and Arch Coal. Patriot has not denied there may be justification for blame of the company, but says it must first focus on restructuring Patriot Coal.
"A large percentage of the operations that Patriot inherited had unionized employees," Patriot wrote. "As a result, Patriot acquired many of its current subsidiaries – and many of its retiree obligations – through these two transactions. … Patriot and Creditor's Committee are investigating whether these transactions give rise to fraudulent transfer or other claims."
Peabody has strongly denied the notion that Patriot Coal was created as anything but a viable company.
"A series of other unforeseen events affecting all coal producers followed − all on Patriot's watch. These included an unprecedented global financial crisis; development of low-cost shale gas that reduced coal use; burdensome regulation by the U.S. EPA that dramatically increased Patriot's environmental compliance costs; an increase in safety regulations that, in turn, increased operating costs; and a significant reduction in the price of Patriot's major product: metallurgical coal," Peabody wrote in response to the Patriot bankruptcy.
Peabody even suggests Patriot could have strengthened its position in mid-2008 but instead bought former Arch Coal operation Magnum Coal.
"Patriot was highly successful following its launch more than five years ago with significant assets, low debt levels and a market value that more than quadrupled in less than a year," Peabody stated.
Patriot says whether or not there is an issue, a more immediate task at hand is to find a way to bring the company out of bankruptcy.
"An examination of Peabody's actions and Arch's actions is necessary and appropriate, and the Creditor's Committee is undertaking such and investigation," Patriot wrote. "However the UMWA's focus on these issues appeared to distract it from the critical task at hand – namely negotiations over the merits of the proposal."
In writing about the investigation of Peabody and Arch, Patriot wrote the investigation "may give rise to causes of action in the future." In the meantime, the company says such future potential legal victories can not be considered in the short-term survival of the company. Patriot said it has already agreed to the UMWA's suggestion on how to share any potential recoveries of action against Arch and Peabody.
"Patriot's need for relief is urgent and immediate, and most assuredly cannot await the uncertain outcome of a multi-year litigation against third parties who will vigorously contest any claims," the filing states. Adding later that it would reckless to gamble "its very survival by betting" on a speculative legal recovery from Peabody or Arch.