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Bankruptcy judge grants Patriot Coal's motion to reject its collective bargaining agreement

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UPDATED WITH UMWA, PATRIOT COAL COMMENTS

U.S. Bankruptcy Judge Kathy A Surratt-States has ruled that Patriot Coal has authority to reject its collective bargaining agreement and modify its agreements regarding retiree benefits.

The order allows Patriot Coal to terminate employee retiree benefits for certain retirees pursuant to bankruptcy code.

"Was debtor Patriot Coal Corporation created to fail? Maybe not," Surrate-States wrote in the ruling. "Maybe. Maybe the executive team involved at debtor Patriot Coal Corporation's inception thought the liabilities were manageable and thus the reality of debtors' bankruptcy was more attributed to unwarranted optimism about future prospects.

"Unions generally try to bargain for the best deal for their members, however, there is likely some responsibility to be absorbed for demanding benefits that the employer cannot realistically fund in perpetuity, particularly given the availability of sophisticated actuarial analysts and cost trend experts."

The judge wrote that "the legacy of unfunded retiree medical benefits was itself the result of Congressional inaction, a changing manufacturing landscape, and the benign neglect and false hopes of companies and unions alike."

The United Mine Workers of America has fought the company on plans to reduce union contract benefits since the company filed for bankruptcy last July. The trial has taken place in St. Louis after a major push to move it away from where the case was filed in New York.

United Mine Workers of America (UMWA) International President Cecil E. Roberts said the decision was "wrong, unfair and fails to fully recognize the coming wave of human suffering that will be experienced by thousands of people throughout the coalfields."

"Patriot is using a temporary liquidity problem to achieve permanent changes that will significantly reduce the living standards of thousands of active and retired miners and their families. 

"We are disappointed that the Bankruptcy Court failed to see that, and we intend to appeal the ruling to the Federal District Court," Roberts said.

The decision allows the company to now proceed with the bankruptcy reorganization process. While the decision might dictate the immediate results of the bankruptcy, the story of Patriot's bankruptcy and its effects on workers is hardly over.

"This ruling represents a major step forward for Patriot, allowing our company to achieve savings that are critical to our reorganization and the preservation of more than 4,000 jobs," stated Patriot President and Chief Executive Officer Bennett K. Hat field..  "The savings contemplated by this ruling, together with other cost reductions implemented across our company, will put Patriot on course to becoming a viable business."

"For the coming days, we plan to continue operating in the normal course under our current UMWA contracts.  Patriot management will continue diligent negotiations with the UMWA leadership to address their concerns about our court-approved proposals," continued Hatfield.  "While the Court has given Patriot the authority to impose these critical changes to the collective bargaining agreements, and our financial needs mandate implementation by July 1, we continue to believe that a consensual resolution is the best possible outcome for all parties."

Joining the UMWA in its protests has been a number of large organizations including religious and labor groups. According to the UMWA, about 90 percent of retirees receiving benefits from Patriot never worked at a Patriot mine when it was under Patriot ownership; the union says they are former employees of subsidiaries at Peabody and Arch. The union estimates approximately 22,000 retirees, their dependents and surviving spouses receive health care benefits from Patriot will be affected.

Patriot was spun off from Peabody Energy Corp. in 2007. Former Arch Coal properties that had been spun into a company called Magnum Coal were later added to Patriot.

The next step for the United Mine Workers, and perhaps Patriot Coal itself, could be to go after Peabody Energy, and to some extent Arch Coal. The UMWA has accused Peabody of intentionally pairing steep liabilities with assets of comparatively lower value.

 "But I want to make it emphatically clear that despite this ruling, the UMWA's effort to win fairness for these active and retired workers is by no means over," Roberts said. "Indeed, this ruling makes it more important than ever for the architects of this travesty, Peabody Energy and Arch Coal, to take responsibility for the obligations they made to thousands of retirees who are now at imminent risk."

Peabody has insisted that the downfall of Patriot was a combination of market conditions and Patriot's own management decisions.

In the spin-off, Peabody escaped legacy liabilities including retiree health care and related experiences by "roughly $1 billion" while reducing expense and cash spending "in the neighborhood of $100 million," CEO Gregory Boyce said at the time of the spin-off.

Patriot's stock was offered at $15 in its initial public offering. The company's stock skyrocketed to more than $88 per share at its peak, bolstering Peabody's claims that Patriot Coal had potential.

However, declining demand for coal and other factors brought troubling times for the industry, particularly in the Central Appalachian region where Patriot operations are located. Whether or not these market were foreseeable has been debated by numerous analysts.

"Our company has certain core strengths that make it an excellent vehicle for long-term value creation — strengths that made Patriot Coal an excellent candidate for a spin-off and that attracted me and the other members of our management team to this opportunity," wrote Patriot's then-president and CEO Richard Whiting in a 2007 SEC filing.

Patriot's current CEO, Ben Hatfield, was brought on just last year months before the bankruptcy. In an interview with The State Journal, Hatfield said when he saw the deal from the outside, he was "suspicious" of Patriot's potential as a stand-alone company.

"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 told The State Journal in April. "Now, they were some good assets. These are coal mines that have a lot of potential and good people and good management, but an inordinate amount of legacy liabilities disproportionate to the assets.

"As a competitor we were very suspect from the day the spin was announced as to whether this venture could survive."

Patriot has even suggested that it is investigating potential recovery of damages from Peabody in other court filings. Patriot, in its filings, have made it clear that now it must focus on getting out of bankruptcy due to the length of time it could take to see any sort of court decision if it did pursue Peabody or Arch.

The UMWA has protested Patriot's offered bankruptcy settlement – which includes a 35 percent equity stake in the company and terms that bring union workers pensions and health benefits in line with non-union miners. While Patriot's plan does reduce benefits and wages to union members, it leaves many in the union with better wages and benefits than Patriot's non-union employees.

Patriot has even offered a share in whatever might be collected from future legal actions taken against Peabody or Arch. Peabody, in recent statements, have continued to deny the UMWA claims and says it has no responsibility in Patriot's bankruptcy.

"Patriot was highly successful following its launch more than five years ago with significant assets, low debt and a market value that more than quadrupled in less than a year," Peabody wrote in a recent statement. "Peabody has lived up to its obligations and continues to do so.  This is a matter between the union and Patriot Coal, and will be decided in the bankruptcy court."

Patriot's retiree health care liabilities total about $1.6 billion, providing employment for 1,650 union employees, while 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 statute.

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 company said in documents seeking a modification to its agreement with the UMWA. 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 one filing Patriot said union obligations 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 also 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."

Roberts rejected that notion.

'"Patriot says that for it to survive, the union-represented workforce needs to be on the same scale as its non-union workers," Roberts said. "No, it does not need that and it never did.

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