Our Current Challenges
In addition to the challenges that are affecting the entire coal industry, issues specific to our company have also impacted Patriot’s ability to compete within the industry. These challenges stem from growing environmental liabilities and unsustainable, increasing labor-related costs. These issues have significantly impacted our operational and financial results.
- Growing Environmental Liabilities
- Increasing Labor-Related Costs and Employee-Related Legacy Liabilities
Growing Environmental Liabilities
Regulatory agencies and non-governmental organizations have been focused on the effects of surface coal mining on water quality, particularly as it relates to selenium, which has resulted in more rigorous permitting requirements and governmental and citizen lawsuit enforcement against Patriot. We estimate that we will spend hundreds of millions of dollars over the next several years to comply with selenium and other water treatment obligations at our facilities.
Increasing Labor-Related Costs and Employee-Related Legacy Liabilities
We are the second largest employer of UMWA miners in the United States. While less than 11.4% of miners currently employed in the U.S. coal industry are represented by the UMWA, approximately 40% of Patriot’s employees are represented by the UMWA.
Industry-wide, the significant decline in UMWA-represented employees has resulted in fewer active employees to fund the benefits of an increasing number of retirees and their dependents. Patriot currently provides healthcare and other benefits to active employees, retirees, non-active employees, and their dependents. Total covered lives are more than five times Patriot's number of active employees.
In 2012, we idled or closed a number of mines in response to the weakened coal markets. These were difficult decisions because they resulted in a reduction of our workforce of about 1,200 employee and contractor positions. We also lowered our cost of production by assuming full operation of several mines and facilities formerly operated by contractors.
1. Labor-Related Costs and Liabilities
We have substantial and unsustainable labor-related costs, primarily in the form of medical benefits and pension obligations.
Especially in an era of declining demand and price for coal, there is a mismatch between the cost of Patriot’s labor-related obligations and our ongoing ability to generate revenue. Our return to long-term viability depends on our ability to achieve savings with respect to these liabilities.
2. Multi-Employer Pension Plan Obligations Expected to Increase Substantially
Pursuant to UMWA collective bargaining agreements, some of our subsidiaries are required to make significant pension contributions to a multi-employer pension plan. The UMWA has notified these subsidiaries that it expects pension contributions to increase from $5.50 per hour worked in 2012 to a minimum of $12.50 per hour worked in 2017, and a maximum potential rate of $26.50 as early as 2022.