Patriot deal an ‘Enron’ around Peabody pension obligations

Today the name Enron is synonymous with corporate fraud and financial ruin for tens of thousands of former employees, retirees and shareholders who lost billions of dollars and often their life savings in the energy giant’s collapse. Another victim was the American taxpayer who absorbed roughly $150 billion in costs.

It was a spectacular flameout for a corporation Forbes magazine had named America’s “Most Innovative Company” for six consecutive years prior to its collapse. Of course, the area in which Enron was the most innovative was its accounting department where the company’s financial wizards invented “Special Purpose Entities” – ostensibly independent companies upon which Enron unloaded hundreds of millions of dollars in liabilities, enabling it to falsely and fraudulently inflate its profitability and stock price.

Fast forward six years. In 2007, Peabody Coal Company, like Enron before it, was rolling. Profits were fabulous and, unlike Enron’s profits, they were legitimate. But, more is always better. So it occurred to Peabody executives that what Enron had done a decade ago with its Special Purpose Entities wasn’t a bad idea. It’s true that Enron broke the law, but what if the same thing could be done legally?

The liability that Peabody wanted to make disappear was more than a billion dollars in pensions owed to thousands of active and retired miners. Peabody had more than enough revenue to fulfill this obligation and still turn a profit, but the fact that the unwanted liability came in the form of a pension obligation was fortuitous. In 1984, the Supreme Court ruled in The National Labor Relations Board v. Bildisco and Bildisco that employers can unilaterally void labor agreements in bankruptcy.

Peabody wasn’t about to claim bankruptcy. But, Enron had shown Peabody how it could create another company upon which unwanted liabilities could be unloaded and, if a liability was a pension obligation, thanks to the Bildisco ruling, it could be discharged in bankruptcy court! Thus, Patriot Coal Corporation was born.

When Peabody spun off Patriot in 2007, it bequeathed its offspring 13 percent of its assets – primarily in the form of unionized coal mines in West Virginia and Kentucky. But, Patriot was also burdened with 40 percent of Peabody’s pension obligations. Suddenly 8,400 retired miners who had spent their entire working lives as Peabody employees discovered that Patriot, a company they had never worked for, was now paying their pensions. But, Patriot wouldn’t do so for long.

Fifty-seven months after coming into existence, a period during which it took on additional union mines and more pension obligations, Patriot declared bankruptcy with the intention of abandoning its contractual commitment to more than 10,000 retired miners, inevitably shifting a substantial portion of responsibility for their incomes and health care onto West Virginia taxpayers.

The scandal isn’t that Peabody secretly created illegal shell companies like Enron. It didn’t. Peabody’s special purpose entity was created in plain sight. Nor is it especially scandalous that Peabody and Patriot broke a contract. It happens all the time. The scandal is that Peabody was able to do both of these things legally – or at least that’s what the courts have said so far, most recently in a bankruptcy court in St. Louis where Patriot and Peabody are headquartered.

The Patriot Coal debacle isn’t the only case in which out-of-state companies are trying to dump their liabilities onto West Virginians. Two Ohio-based power-generating companies, American Electric Power and First Energy, are attempting to sell old, coal-fired power plants at inflated prices to subsidiaries, Monongahela Power and Potomac Edison, which provide power in West Virginia.

Why does selling power plants help the parent companies and hurt West Virginians? The parent companies receive cash – by credible estimates far more of it than the actual market price of the plants – while the resulting debt is shifted onto regulated electricity providers who can pass the cost onto West Virginia ratepayers. In short, the companies’ loss becomes our loss.

These transactions will, if permitted by West Virginia’s Public Service Commission, also allow the parent companies to diversify their energy portfolios into natural gas and renewable sources while making the West Virginia subsidiaries and the state’s ratepayers almost exclusively dependent on coal-generated power. In that way, the parent companies’ level of risk in volatile markets is reduced while that of West Virginia ratepayers increases.

In these cases as well as that of Patriot Coal, West Virginia’s elected leaders — legislators, the governor and the attorney general — can at least use their bully pulpits and influence to see that these corporate abusers are exposed, ridiculed and punished in whatever ways are possible. U.S. Sens. Joe Manchin and Jay Rockefeller have at least expressed outrage at the Patriot Coal situation. But, what of our governor and what of our attorney general, Patrick Morrisey, who files friend of the court briefs the way Fritos makes corn chips and who has previously shown little reticence to involve his office in issues in which its purview is less than clear?

Both have been studiously silent. Apparently they are more interested in attacking the Environmental Protection Agency on behalf of Peabody, Patriot, American Electric Power and First Energy than they are in defending the pocketbooks, livelihoods and health of West Virginians. Perhaps in recognition of its leaders’ disappearing act as corporations shift losses onto the shoulders of West Virginians, Forbes magazine will christen West Virginia “The Enron State.” Unlike Enron’s “Most Innovative Company” awards, this one will be deserved.

— Write to Sean O’Leary

at seanholeary@gmail.com

 

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