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Patriot Coal’s 2nd bankruptcy is sign of even worse times for mining industry

Entered into the October 2012 official record of Patriot Coal Corp.’s bankruptcy case in Missouri is a short, handwritten note punctuated by a list of eight medications prescribed for heart conditions and high blood pressure.

“1. Digoxin, 2. Simvastatin, 3. Inderal, 4. Lisinopril,” and so on.

Addressed to the judge overseeing the case, and signed by Jessie Smith who said he was a retired coal miner represented by the United Mine Workers of America, it read: “The expense of the medications listed below would be very, very expensive for us without our insurance. Please consider what is at stake for so many people.”

Weighing what it would take for one of the top five coal producers in the Appalachian basin to emerge from Chapter 11 bankruptcy as a viable company took 18 months. In the end creditors and union workers took at hit but Scott Depot, W.Va.-based Patriot Coal emerged as a thinner, restructured business confident in its future.

But last month, Patriot Coal collapsed again.

Patriot Coal’s second time in bankruptcy is perhaps the clearest signal yet that more stringent federal environmental regulations, coupled with weakened demand for coal as low-priced natural gas has stolen market share, are palpable enough to bring down even the most carefully structured Appalachian producers.

Patriot’s restructuring “was predicated on assumptions about coal prices that ultimately did not materialize,” said Ray Dombrowski, an attorney representing Patriot, in the May 12 bankruptcy filing.

The company’s plan going forward remains unclear. A Patriot spokesman declined to comment for this article. But news of the bankruptcy sounded an alarm through a region that the UMWA estimates has lost a staggering 18,000 mining jobs since 2012.

“In the course of any Chapter 11 bankruptcy process, workers come last,” said UMWA spokesman Phil Smith. Those who are owed money from the company line up to get paid, he said, and “workers come at the end of that line.”

Coal demand weakens

Patriot was born in 2007 when St. Louis-based Peabody Energy, the world’s largest coal company, spun off its coal operations in West Virginia and Illinois into an independent, publicly traded company.

Patriot employed about 4,000 workers who dug more than 31 million tons of coal in 2011. About three-quarters of that coal was sold to power plants; the rest went to steel mills and independent coke producers that use coal in steelmaking. It attracted more than 80 customers across 15 states and 13 countries.

But the good times were soon to come to an end.

The booming economic growth that coal had largely fueled in developing countries such as China, India and Brazil leveled off. Domestically, power producers began to switch to natural gas as drilling technology unlocked natural gas reserves in the Marcellus and other shale formations.

Coal’s share of total U.S. electricity generation has been shaved from 50 percent in 2005 to 39 percent in 2014. At the same time, natural gas’ share of generation grew from 19 percent to 27 percent, according to government data. In March, coal power hit a nearly three-year low at 33.5 percent of electricity generation.

When Patriot first filed for bankruptcy in 2012, Mark Schroeder, then chief financial officer, wrote in court documents that some customers had canceled or delayed shipments of coal contracted for delivery, affecting “hundreds of thousands of tons of coal from Patriot at prices favorable to Patriot.”

“The coal industry as a whole has been forced to reduce production, idle mines and lay off workers,” Mr. Schroeder wrote, noting that Patriot’s cutbacks had slashed 1,000 positions.

Mr. Schroeder identified Patriot’s costs of providing retirement benefits — exceeding $100 million in 2012 — as “unsustainable.” Because Patriot had inherited a large pool of workers who had retired from Peabody and Arch Coal, which Patriot had acquired in 2008, retirees outnumbered active employees three-to-one.

Patriot won authorization to use sections of the U.S. bankruptcy code that allow a company to nullify collective bargaining agreements.

After a UMWA appeal in federal district court, however, the company agreed to keep its retirement benefits largely intact and signed new five-year labor agreements. Peabody and Arch also agreed to pay Patriot $310 million and $5 million, respectively, to cover some benefit costs of its former employees.

In December 2013, Patriot announced its emergence from bankruptcy as a leaner, privately held company set up to save $200 million annually.

No power plant, no business

In 2013, Patriot sold 21.5 million tons of coal — roughly twothirds of what it sold prior to bankruptcy. It also shifted focus overseas, with exports growing from 29 percent in 2011 to 48 percent in 2013.

But the same factors blamed in Patriot’s first bankruptcy were starting to unravel the company again.

In 2013, average sales price of coal fell 7 percent from 2012, according to the U.S. Energy Information Administration, and annual U.S. coal production dipped below 1 billion short tons for the first time in two decades.

U.S. power plants struggled to meet new standards on mercury emissions and other pollutants. At least 12,000 megawatts of coalfired electricity is expected to be removed from service this year, representing 4 percent of U.S. coal plants, according to an SNL Energy analysis.

The effect on coal producers is devastating, said Luke Popovich, vice president of external communications at the National Mining Association.

“If you don’t have a power plant burning your coal, you don’t have a customer,” Mr. Popovich said. “If you don’t have a customer, you don’t have a business.”

Patriot’s coal shipments to domestic power plants continued to stagnate, an analysis of government data shows. Shipments from its most productive mine, Federal Mine No. 2, near the border of Pennsylvania in Monongalia County, W.Va., have declined every year since 2010.

Over the past months, Patriot struggled to sell off some of its mines and reserves, according to bankruptcy documents.

Mr. Dombrowski described extensive negotiations with buyers interested in Federal, but Patriot postponed a potential transaction to see if it could get a better deal under bankruptcy proceedings. Meanwhile, a sale of some mine reserves in Huff Creek in southern West Virginia derailed at the last minute in April.

Since the bankruptcy, talks with a potential buyer to purchase nearly all Patriot’s assets has reached a “highly advanced stage,” Mr. Dombrowski wrote. Though he did not name the buyer, news reports have suggested Blackhawk Mining, a Lexington based coal producer that has gobbled up mines in Central Appalachia, could be the buyer.

One thorn likely to complicate that sale, he warns, is that the buyer has “thus far expressed an unwillingness to enter into a transaction” that would assume liabilities part of the union’s collective bargaining agreements.

This is troublesome for union workers, Mr. Smith said. While the company, in its 2012 restructuring, expressed an interest in striking a deal with the UMWA, it seems to be resigned to selling off assets this time around, he said.

“This is a different kind of bankruptcy,” Mr. Smith said.

Kent Carper, a county commissioner in Kanawaha County, W.Va., where some of Patriot’s mining operations are located, expressed frustration at Patriot’s management, saying Peabody “created a company designed to fail.” He dismissed much of the criticism lofted at the Obama administration as a political show.

“Politicians had a great time blaming everything on the EPA and Obama — and they should get their fair share — but it’s much bigger than that,” Mr. Carper said. “Coal is not dead. It’s going to be part of the energy production of this country for a number of decades to come. Sooner or later, somebody’s gonna show up here and dig it out.”

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