Coal Tattoo

How much will selenium clean up cost Patriot Coal?

HUNTINGTON, W.Va. — I spent yesterday afternoon in federal court again, listening to testimony in the big selenium showdown in front of U.S. District Judge Robert C. Chambers.

You can catch up on the case with my preview blog post and with a Gazette story that details Monday’s part of the trial. Recall that environmental group lawyers Joe Lovett, Derek Teaney and Jim Hecker are trying to convince Judge Chambers to finally crack down on Patriot Coal and require action to stop selenium violations that a top expert says have pushed at least one West Virginia watershed “to the brink of a major toxic event.”

Monday’s testimony and opening arguments touched on the question of how much a selenium cleanup at all of its West Virginia operations would cost St. Louis-based Patriot Coal.

For example, Lovett told Judge Chambers in his opening that Patriot “has yet to come clean” to its shareholders and the public about these costs and that the company is “underestimating cost by at least one order of magnitude.”

It’s important to note that, in one fairly recent filing with the U.S. Securities and Exchange Commission, Patriot Coal explained its potential selenium liabilities this way:

In connection with the Magnum acquisition, we assumed liabilities related to water treatment. At the acquisition date, Magnum was in the process of testing various water treatment alternatives related to selenium effluent limits in order to comply with certain mining permits. Subsequent to the acquisition of Magnum, we have implemented selenium control plans to adjust our mining processes in a manner intended to prevent future violations of the applicable water quality standard for selenium. Uncertainty existed at the time of the acquisition related to the exact amount of our assumed liability due to the fact there is no proven technology to remediate our existing selenium discharge exceedances to meet current permit standards. The cost to treat the selenium exceedances was estimated at a net present value of $85.2 million at the acquisition date. This liability reflects the estimated costs of the treatment systems to be installed and maintained with the goal of meeting the requirements of current court orders, consent decrees and mining permits. This estimate was prepared considering the dynamics of current legislation, capabilities of currently available technology and our planned remediation strategy.

The company also said:

We used a 13% discount rate in determining the net present value of the selenium liability. The estimated aggregate undiscounted liability was $390.7 million at acquisition date. Our estimated future payments for selenium remediation average $12 million each year over the next five years, with the remainder to be paid in the 25 years thereafter.

During testimony on Tuesday afternoon, Lovett questioned Patriot Chief Financial Officer, Mark Schroeder, repeatedly about these figures and how Patriot calculated them.

If I followed this testimony and the documents discussed correctly, Patriot started with a January 2009 report that was prepared for it by consultants at Potesta & Associates. That report assumed that Patriot was going to have to treat about 14,040 gallons per minute of selenium-laden water at 72 different water pollution outlets at its various operations.

Later, in June 2009, Patriot vice president and controller Christopher Knibb provided Schroeder with an email describing the status of efforts to estimate the selenium treatment costs:

We have a rough cut of a new number that’s about half of the old one. We have not sold [Ernst and Young, Patriot’s auditors] on it yet. Still working on the ‘story’.

Then, in July 2009, Potesta provided a final report. This time, the consultants included a different figure for how much water Patriot would have to treat — 24 gallons per minute at each of the 72 outlets, or 1,728 gallons per minute total. That’s where Lovett got his comment that the company was low-balling the costs by an order of magnitude.

It’s not clear where this case is heading. Judge Chambers has had some harsh words before for Patriot, but has never really come down hard to require enough treatment to comply with West Virginia’s selenium water quality standards.

Testimony was to continue today and the judge set aside Thursday and Friday for the case as well.

We don’t know where this business about what the company did and did not report as its selenium liability is heading, but it was clear that Patriot lawyer Blair Gardner thought the judge was letting questioning about it go on too long:

This is not a securities case. I fail to understand, given the purpose of this hearing, what the relevance of this line of questioning is.