Patriot Coal settles claims with Peabody, eyes Chapter 11 exit


(Corrects first bullet and 5th paragraph to reflect thatPeabody's contribution will fund healthcare only, not healthcareand pensions)

* Peabody to provide $310 mln to fund health benefits

* Peabody to provide $140 mln in liquidity funding toPatriot

* Knighthead Capital to infuse $250 mln of new capital inPatriot

* Patriot also reaches settlement with Arch Coal

* Patriot expects to emerge out of bankruptcy by year end

Oct 10 (Reuters) - Patriot Coal Corp said it hasresolved certain legal claims against Peabody Energy Corp in exchange for key funding, which would help thecompany emerge out of chapter 11 bankruptcy by the end of theyear.

The two companies have been fighting over funding of healthbenefits for about 3,100 retirees that Peabody agreed tocontinue covering after it spun off the now-bankrupt PatriotCoal in October 2007.

Peabody had said it had no obligation to fund health andpension benefits for Patriot retirees affected by the company'sinsolvency, arguing that new labor deals between Patriot and theUnited Mine Workers of America (UMWA) effectively relievedPeabody of any funding obligations.

However, Peabody continued to fund healthcare benefits forretirees during Patriot's bankruptcy proceedings, said Peabody'sChief Legal Officer Alexander Schoch.

In an amended reorganization plan filed with a bankruptcycourt on Wednesday, Patriot said Peabody has agreed to provide$310 million, payable over four years through 2017, to fundhealth benefits and settle all Patriot and UMWA claims.

Peabody will also provide about $140 million to Patriot inthe form of letters of credit.

As per the settlement, Peabody's existing contractualcommitment to fund healthcare benefits for a certain group ofPatriot retirees would terminate on Dec. 31.

After this date, all healthcare benefits would be funded bythe newly established Voluntary Employee Beneficiary Association(VEBA).

In a settlement with Arch Coal Inc, Patriot willreceive $5 million in cash and a release of a $16 million letterof credit posted in Arch's name. Arch Coal had spun off a unitthat was later acquired by Patriot.

UMWA had claimed that Peabody and Arch deliberately shuntedtheir obligations onto Patriot in an effort to avoid having topay the full amount.

The settlements with Peabody and Arch Coal will be presentedto the bankruptcy court for approval at the Nov. 6 hearing.

Patriot Coal also said it will receive $250 million in newcapital through a rights offering backstopped by KnightheadCapital Management.

"As a result of the transaction with Knighthead and thecompany's settlement with Peabody, the VEBA is expected toreceive more than $400 million in cash over the next four years.These agreements resolve all matters with the UMWA," PatriotCoal said in a statement.

The case is in re Patriot Coal Corp et al, U.S. BankruptcyCourt, Eastern District of Missouri, No. 12-51502. (Reporting by Sakthi Prasad in Bangalore; Editing by SupriyaKurane)

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