A March 21 hearing has been scheduled in federal bankruptcy court over a March 5 request by Dynegy Holdings LLC and related companies, including Dynegy Danskammer LLC, to reject two coal contracts with Patriot Coal Sales LLC, a unit of Patriot Coal (NYSE:PCX).
Any party objecting to the rejection request, like Patriot, has to file a formal objection with the court by March 14. Dynegy Holdings and affiliated companies sought Chapter 11 protection in November 2011 at the U.S. Bankruptcy Court for the Southern District of New York and currently have a second amended reorganization plan before the court. These are units of Dynegy Inc. (NYSE:DYN).
The March 5 rejection request said that Dynegy Danskammer is party to two separate coal supply contracts with Patriot Coal Sales that call for the delivery of unnamed amounts of crushed bituminous coal at unnamed prices. Due to the commercially sensitive nature of the pricing, copies of the contracts were not attached to the motion. They are probably not for that many tons, since one contract covers deliveries only in the first quarter of this year and the other covers coal delivered in the May-June period this year.
Since entering into the contracts in 2011, the price of coal has significantly decreased resulting in the Dynegy Danskammer being “out-of-the money” with respect to the contracts, the rejection motion said.
“For example, Dynegy Danskammer believes that if it were to purchase the same quality coal in the ‘spot’ market, it could do so at an approximate 20% savings to the pricing set forth in the executory contracts,” the filing said. “Moreover, due to the unseasonably mild winter, Dynegy Danskammer’s demand for coal has decreased and, as a result, Dynegy Danskammer no longer believes that it requires the full amount of the coal shipments contemplated under the executory contracts. In light of these factors, the debtors engaged in conversations with Patriot in an attempt to modify the executory contracts to bring the terms in line with the market and needs of the debtor’s estates. It is only after these discussions failed, that Dynegy Danskammer made the decision to seek rejection of the executory contracts, which it believes is a prudent exercise of its business judgment and in the best interest of their estate.”
Dynegy Danskammer owns units 1, 2, 5, and 6 at the Danskammer plant. Units 1 and 2 are “peakers” with a net capacity of 129.7 MW. They use natural gas and fuel oil as their primary fuels. Units 5 and 6 are emergency diesel generators with net capacities of 2.5 MW each and currently are not in operation and are not connected to the power grid. Dynegy Danskammer leases units 3 and 4, which are “baseload” facilities with a net capacity of 373.4 MW. They use coal and natural gas as their primary fuels.