West Virginia Company Finished Merger Days Before Spill

(Corrects conversion in fourth paragraph of story published Jan. 14.)

The closely held West Virginia company whose chemicals-storage plant polluted the Elk River, compromising water supplies for about 300,000 people and sending more than 100 to the hospital, had completed a four-way merger nine days before the leak was discovered.

Freedom Industries Inc., the owner of the plant in Charleston, the state capital, on Dec. 31 combined with two other West Virginia companies, Etowah River Terminal LLC and Poca Blending LLC, state records show. Freedom also merged with Delaware-based Crete Technologies LLC, the records show.

The deal consolidated the services that Freedom provides to the coal industry. West Virginia is the country’s second-largest producer of the commodity, even after increased competition from natural gas in recent years saw a reduction in capacity and a decline in output. The state had 264 coal mines in 2012, second only to Kentucky, according to the U.S. Department of Energy’s Energy Information Administration.

On Jan. 9, West Virginia officials discovered a leak from a 35,000-gallon (133,000-liter) tank of 4-methylcyclohexane methanol, a chemical used in coal processing. About 7,500 gallons escaped from a 1-inch (2.5 centimeter) hole. The spill led President Barack Obama to declare a state of emergency for the affected counties. It also prompted lawsuits from a local bar owner who is suing Freedom and West Virginia-American Water for negligence and causing a public nuisance.

Spill’s Cause

James Peterson, a lawyer for Scott Miller, the plaintiff, said in an e-mail yesterday that he hadn’t unearthed the spill’s cause and his “working hypothesis” currently is that Freedom didn’t adequately supervise and maintain its facilities.

“The impoundment earth barrier surrounding the tank was breached as well,” said Peterson, a lawyer at Hill, Peterson, Carper, Bee & Deitzler PLLC in Charleston. “It is obvious that neither had been attended to or repaired in quite some time.”

Miller said he suffered economic damage as the Kanawha County health department ordered closures of businesses in and around Charleston, including his Bar 101 and Ichiban Restaurant. West Virginia-American failed to deal promptly with the emergency and had no procedures in place to prevent chemicals from getting into the water system, according to a complaint filed Jan. 10 in Kanawha County Circuit Court in Charleston that was e-mailed to Bloomberg News.

No one at Freedom could be reached for comment on the merger or the cause of the leak or the lawsuit. Laura Jordan, a spokeswoman for West Virginia-American, didn’t immediately respond to e-mails seeking comment on the lawsuit. No one at the West Virginia Department of Environmental Protection was available for comment.

Coal Chemicals

Freedom President Gary Southern apologized for the spill at a Jan. 11 news conference. He told reporters that the company is working with state and federal officials.

Etowah River Terminal is a liquid bulk storage and transportation company serving coal companies, according to its website. Poca Blending produces chemicals used by coal miners to control dust, treat water and prepare their product for customers, its website shows.

Freedom, formed in 1986, also supplies specialty chemicals to the steel and cement industries, according to its website. Southern was a previously a manager at Univar Inc., a Redmond, Washington-based company that distributes chemicals globally. He left Univar “many” years ago, said Alison Jahn, a company spokeswoman.

Tax Evasion

Southern is also listed as a director of HVC Inc., a Cincinnati-based chemical distribution company that merged with Vopak USA Inc., according to West Virginia records.

Carl Lemley Kennedy II, a founder of Freedom, was sentenced to 40 months in prison in February 2006 after pleading guilty to two counts of tax evasion and failure to collect and pay taxes. At the time he was an accountant and officer at Freedom Industries and New River Chemical Co.,, according to the U.S. attorney’s charges filed in federal court in Charleston.

Kennedy, entrusted with collecting employees’ federal tax and insurance payments, failed to pay the U.S. more than $1 million of the money between 2001 and 2003, while evading about $510,000 of personal taxes over five years, according to the charges. He tried to cover his tracks by falsifying W-2 forms and company records, the U.S. said.

Kennedy’s guilty plea included an admission that he had used corporate funds for his personal benefit. His sentence was later reduced to 22 months.

Ban Lifted

The chemical that leaked into the Elk is used by some coal companies to extract coal dust from water used in processing the commodity. The dust can then be dried and sold. West Virginia produced 120.4 million tons of coal in 2012, according to EIA data. Alpha Natural Resources Inc. and Arch Coal Inc., the second- and fourth-largest U.S. coal producers by revenue, are among the companies that mine in the state.

West Virginia started to lift a ban on drinking water after tests showed falling levels of the leaked chemical, according to a statement yesterday from West Virginia-American.

To contact the reporter on this story: Sonja Elmquist in New York at selmquist1@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

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