Peabody Energy Corporation (BTU)

[Crusen]

Bankruptcy as Bailout: Coal Company Insolvency and the Erosion of Federal Law

Almost half of all the coal produced in the United States is mined by companies that have recently gone bankrupt. As we explain in a recent article in the Stanford Law Review, those bankruptcy proceedings have undermined federal environmental and labor laws. In particular, coal companies have used the Bankruptcy Code to evade congressionally imposed liabilities requiring that they pay lifetime health benefits to coal miners and restore land degraded by surface mining. Using financial information reported in filings to the Securities and Exchange Commission and in the companies’ reorganization agreements, we show that between 2012 and 2017, four of the largest coal companies in the United States succeeded in shedding almost $5.2 billion of environmental and retiree liabilities. These regulatory debts constituted 22% of the total debt discharged.

Coal companies disposed of these regulatory obligations by placing them in underfunded subsidiaries that they later spun off. When the underfunded successor companies liquidated, the coal companies that originally incurred the obligations managed to get rid of their regulatory obligations without defaulting on the pecuniary debts they owed to their creditors. Peabody Energy pioneered this strategy in 2007, when it spun off a subsidiary called Patriot Coal. Patriot received 13% of Peabody’s coal reserves, 40% of its healthcare obligations, and $233 million in environmental clean-up costs. A year later, Arch Coal divested itself of 12% of its assets and 97% of its retiree and healthcare liabilities by giving those assets and liabilities to Patriot. At that point, Patriot held more than $2 billion in environmental and healthcare liabilities that had originally been incurred by Peabody and Arch. When Patriot filed for bankruptcy, first in 2012 and again in 2015, it wiped out legacy Arch and Peabody environmental and retiree obligations. Similarly, when Peabody itself filed for bankruptcy in 2016, it shifted hundreds of millions of dollars in environmental obligations onto a subsidiary called Gold Fields, which was spun off as a liquidating trust. Gold Fields had assets of roughly $6 million against claims of almost $13 billion, including at least $745 million in environmental claims.

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https://corpgov.law.harvard.edu/2019/05/22/bankruptcy-as-bailout-coal-company-insolvency-and-the-erosion-of-federal-law/