Trinity Coal sues Santee Cooper over termination of big contract

Trinity Coal Corp. and its Trinity Coal Marketing LLC affiliate filed suit March 19 against the South Carolina Public Service Authority d/b/a Santee Cooper, accusing the state-controlled utility of reneging on a coal supply contract and causing the shutdown of a Trinity mining operation in Perry County, Ky.

The lawsuit was filed in the U.S. District Court for the Eastern District of Kentucky. Santee Cooper had not replied to the suit in court as of March 22. Utility spokesperson Mollie Gore on March 22 generally confirmed what was in a March 6 contract termination letter to Trinity Coal, saying that is Santee Cooper’s position in this case.

Trinity Coal, one of the largest coal producers in Central Appalachia, was bought in 2010 from an investment firm by India’s Essar Group.

One of Trinity Coal’s mines is located in Perry County. Until Santee Cooper’s breach of its contract with Trinity Coal Marketing in early March, the mine, which opened in April 2005, employed more than 300 individuals, the lawsuit said. In or about early October 2007, Trinity Coal Marketing entered into a coal supply agreement (CSA) with the defendant, under which Trinity Coal Marketing agreed to sell at least 14 million tons of coal in the 2008-2013 period. The parties subsequently amended the CSA on or about Jan. 1, 2010. A copy of the CSA was attached to the lawsuit.

Beginning in late 2010, Santee Cooper failed to take delivery of significant tonnage obligations under the CSA, ultimately refusing to accept delivery of, and pay for, hundreds of thousands of tons of coal, said the lawsuit. Furthermore, despite Trinity’s proper notice to defendant in January 2011 of governmental impositions affecting Trinity’s production costs – which impositions entitled Trinity to a price adjustment under the CSA – defendant failed to work out contract changes.

Despite Santee Cooper’s “unjustified recalcitrance” in negotiating a price adjustment to which Trinity was entitled under the CSA, Trinity continued to supply coal to the utility, at substantial additional costs to Trinity. “At no point did Trinity utilize defendant’s repeated failures to perform its obligations under the CSA as a trigger to terminate the CSA, although the CSA permitted Trinity to take such action,” said the lawsuit.

On or about March 6, Trinity received from defendant a letter purporting to terminate the CSA. In its March 6 letter, Santee Cooper alleged that its termination was due to Trinity’s alleged failure to meet certain quality specifications under the CSA. This purported termination of the CSA was both substantively unjustified and procedurally deficient, the lawsuit said.

Trinity has been forced to idle its mining operations and lay off about 260 skilled personnel at the Perry County mine, with additional layoffs likely to follow. The mine produces about 170,000 tons of coal for sale each month, with 150,000 tons of that allocated to Santee Cooper under the CSA. Also, coal produced at Trinity’s facilities in Breathitt, Knott, Magoffin, Floyd, and Pike counties, Ky., have been, and are, used to fulfill Trinity’s responsibilities under the CSA, and all will be seriously and negatively affected by Santee Cooper’s actions, the lawsuit added.

“Should defendant’s wrongful conduct continue, Trinity may be forced into bankruptcy and may be destroyed as a viable entity,” the lawsuit said. “The irreparable harm suffered by Trinity cannot be compensated through an award of money damages alone. As a result of the immediate and irreparable harm being suffered by Trinity as a result of defendant’s ongoing breach of the CSA, Trinity seeks a preliminary injunction from this court requiring defendant to specifically perform its obligations under the CSA in their entirety pending the conclusion of this matter.”

Over the course of the CSA, Trinity has supplied Santee Cooper about 603 unit trains carrying more than 7 million tons of coal without a single suspension, rejection, or formal complaint from the defendant, said the lawsuit. Santee Cooper failed to accept delivery of the tonnage it was required to accept under the CSA for the 2010 calendar year, failing by the end of that year to accept delivery of about 136,267 tons of coal it was contractually obligated to take, Trinity claimed.

Parties worked out 2011 deal on 2010 contract issues

In early January 2011, Trinity and Santee Cooper negotiated a resolution to the utility’s failure to accept delivery of the required 2010 tonnage. Shortly thereafter, Trinity provided notice to defendant of its claim for a price adjustment for coal to be delivered on or after Jan. 1, 2011. In that notice, Trinity also advised the utility that it has reason to provide notice of force majeure. Trinity, however, advised defendant that it prefers to work with Santee Cooper toward a fair and reasonable price adjustment.

Trinity followed up on that notice with a February 2011 letter advising the utility that its costs per ton of coal produced increased by $7.60 as a result of the actions of the U.S. Environmental Protection Agency. In that letter, Trinity reiterated its interest in working with defendant toward a fair price adjustment as a result of the government imposition claim.

In the weeks and months following the February 2011 letter, Trinity said it attempted to engage Santee Cooper in negotiations for a fair price adjustment to resolve the governmental imposition (GI) claim. But the utility failed to respond in the first half of 2011. “At the same time defendant was largely ignoring the GI claim, it was likewise failing to take delivery of substantial volumes of coal that it was obligated to take under the CSA; indeed, by September 2011, defendant was more than 400,000 tons behind on its tonnage obligations for the 2011 calendar year,” said the lawsuit.

Trinity says parties had a January verbal deal

At no point in time during months of recent discussions did Santee Cooper advise Trinity, either verbally or in writing, that defendant had concerns with Trinity’s ability to supply coal that met the quality specs in the CSA, said the lawsuit. In early January, representatives of Trinity and defendant reached a verbal agreement to resolve the GI claim and all outstanding issues. This agreement included relaxing quality specs for Btu and ash. The negotiated resolution also involved a deletion of certain volumes from the CSA, adjustments to CSA volumes and pricing for the calendar years 2012 and 2013, and the addition of the calendar year 2014 as an additional contract year under the CSA, the lawsuit said.

Mike Wilder, Director of Sales for Trinity, confirmed this verbal agreement in a Jan. 16 email to Jeff Armfield, Santee Cooper’s Vice President of Fuels Strategy & Supply, the lawsuit said. In the following days and weeks, Armfield “backtracked” on the verbal agreement confirmed in Wilder’s Jan. 16 email. “Defendant’s unwillingness to abide by the parties’ agreed-to resolution coincided with a precipitous drop in demand for and the market price of coal in early 2012,” the lawsuit explained.

On or about Feb. 9, representatives of both Trinity and defendant met to further discuss a resolution of these issues. Following the meeting, Santee Cooper CFO and Executive Vice President Elaine Peterson emailed Trinity’s representatives and indicated that she found the meeting “enlightening,” and that the utility was “discussing some options to offer” that would resolve the outstanding issues, said the lawsuit. Then came Santee Cooper’s March 6 termination letter.

Trinity wants the court to enter an order granting Trinity’s motion for injunctive relief, and requiring defendant to specifically perform its obligations under the CSA in their entirety pending the conclusion of this matter by accepting delivery of paying for all coal tonnages, including the full amount of the GI claim, for which it failed to accept delivery under the CSA.

Coal is for four Santee Cooper power plants

The attached contract shows various terms of this deal. This is coal for the Winyah, Cross, Jefferies and Grainger power plants. Mentioned coal sources are Little Elk Mining Co. LLC, Levisa Fork Resources LLC and Prater Branch Resources LLC. The base tonnage was 2 million tons per year in 2008 and 2009, then 2.5 million tons per year in 2010 through 2013. Coal specs included a minimum of 12,000 Btu/lb, with maximums of 12% ash and 1.3% sulfur. The fixed contract price, FOB railcar at the CSX-served Sigmon loadout, was $41/ton in 2008, then $42.50 in 2009, $44.50 in 2010, $46.50 in 2011, $48.50 in 2012 and $50.50 in 2013.

A later revision of the contract changed the base tonnage for the 2010-2013 period to 3 million tons per year, and also adjusted the pricing mechanism.

The Jan. 16 email from Trinity to Santee Cooper said the newly-agreed contract terms included: 1.91 million tons of shipments in 2012 at a new contract price of $59.80/ton; 2 million tons in 2013 at a new price of $64.58; and 1 million tons in 2014, the newly-added contract year, also at $64.58/ton. The companies also agreed to cut the Btu spec from a minimum of 12,000 down to 11,750, and to an increase in the maximum ash spec from 12% up to 14%.

While Santee Cooper hasn’t answered the lawsuit in court, some of its position is in the March 6 contract termination letter to Trinity. The letter said that Trinity hadn’t been meeting the contract’s ash and Btu specs through much of 2011.

“This trend of non-compliance with the coal quality specifications has continued into 2012,” the letter added. “An independent lab analysis has not been performed on the final two trains of coal shipped by Trinity in February; however, the analysis completed by Santee Cooper’s lab shows that the coal does not meet the Btu guarantees. But assuming solely for the purposes of this letter that both of these loads are determined to meet both the ash and BTU quality specifications, in the sixty days of 2012 spanning from January 1 to March 1 only 31% of the coal shipped by Trinity will have met the ash quality specifications, and only 13% of the coal shipped by Trinity will have met the BTU quality specifications guaranteed under the agreement.”

As for the Trinity force majeure claim, Santee Cooper said that it is based on profitability concerns on the part of Trinity, which is not an allowed basis for a force majeure claim under the contract.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.