On March 2, Oxford Resource Partners LP (NYSE:OXF) received a notice of contract termination from Big Rivers Electric Corp. related to a deal for coal out of Oxford’s western Kentucky strip mining operations, said Oxford in its March 14 annual Form 10-K filing.
The notice said that Big Rivers was terminating an amended and restated coal supply agreement effective as of the close of business on March 2. Big Rivers said coal deliveries have not conformed to the quality specifications in the agreement. The agreement covers 800,000 tons of coal per year and runs until the end of 2015.
“We have met with representatives of Big Rivers on two occasions following this action (on March 7 and March 12, 2012), but have been unable to achieve any satisfactory resolution of the issues during these meetings,” said the Oxford Form 10-K. “We are assessing the validity of the termination notice and any recourse that we may have under the Big Rivers Agreement or otherwise with respect to the actions by Big Rivers, including the termination. We are also assessing the financial and operational impact that such a termination would have on us and reviewing various alternatives, including without limitation mine closure(s) and related cost reduction measures, to compensate for and/or lessen any impact from such actions by Big Rivers and to bring our production and related cost structure in balance with our remaining contractual commitments.”
Oxford didn’t give any more details about the contract. A Feb. 16 filing that Big Rivers made at the Kentucky Public Service Commission in a bi-annual fuel adjustment clause case said that it had one contract with Oxford during the May-October 2011 fuel review period. That contract was executed in October 2007 and calls for coal out of Oxford’s Schoate prep plant in Muhlenberg County, Ky.
The Oxford contract, which has a base period that is due to expire at the end of 2015, calls for 800,000 tons of B or C quality coal in 2012. B or C denotes certain differences in coal specs, which can impact the contract price. In 2013, the contract only calls for 200,000 tons of B or C quality coal. Then in each of 2014 and 2015, it calls for 800,000 tons per year and also 200,000 tons per year of B or C quality coal. Even though the official contract expiration is shown as the end of 2015, Big Rivers indicated possible shipment of 800,000 tons of B or C quality coal in 2016.
The actual deliveries in the May-October 2011 period under this contract were 366,146 tons of B quality coal, with no A or C quality coal shown as being delivered during that period. The current contract price as of 2011 for the B quality coal was $32.44/ton, the Big Rivers filing said.
Oxford amends contract with AEP
Oxford reported that in October 2011 it concluded long-standing negotiations with American Electric Power Service, the coal procurement arm of American Electric Power (NYSE:AEP), to amend its long-term coal sales contract. The mutual goal of the parties was achieved to amend the contract to extend the term of the agreement, establish a future pricing methodology and adjust the amounts of fixed and optional coal tonnage covered by the contract.
In this amendment, the pricing is tied to and adjusted periodically based on indices reflecting current market pricing, and pricing adjusters were eliminated. Due to this amendment, the current term of the contract now runs through 2015, and it can be automatically extended for a further three-year term through 2018 if AEP gives Oxford 18 months of advance notice. Further, in more recent negotiations, Oxford said it reached an agreement in principle to reduce the 2012 contract tonnage in exchange for a compensating increase in pricing and that it is working to formalize that arrangement in a contract amendment.
Oxford derived 92.3% of its total revenues from coal sales to the 10 largest customers in 2011, with the top five customers accounting for 77.8% of total revenues. In 2011, it derived 34.9%, 14.5%, 11%, 10.9% and 6.5% of its revenues from AEP, FirstEnergy Corp. (NYSE:FE), Big Rivers Electric, East Kentucky Power Cooperative and Duke Energy (NYSE:DUK), respectively.
Oxford has coal mining operations in western Kentucky that produced 2.2 million tons in 2011, and a larger coal mining presence in southeastern Ohio, where production was 5.8 million tons in 2011.