Severstal answers Massey/Alpha lawsuit over Follansbee coal deal

A long-running court battle between Massey Energy, taken over in June 2011 by Alpha Natural Resources (NYSE: ANR), and OAO Severstal over coal supply to a coke plant at Follansbee, W.Va., is continuing, with Severstal recently answering a third amended version of the complaint.

That third amended complaint was filed all the way back in August 2011 at the U.S. District Court for the Southern District of West Virginia by Central West Virginia Energy (CWVEC) and Appalachia Holding (as successor in interest to A.T. Massey Coal). The lawsuit, initially filed in April 2009, is against Mountain State Carbon LLC, RG Steel Wheeling LLC (as successor in interest to Severstal Wheeling); Severstal North America Inc. (now known as Severstal Dearborn) and parent OAO Severstal.

Central West Virginia Energy and Appalachia Holding seek damages from Mountain State based upon its breach of the implied duty of good faith and fair dealing; promissory estoppel; breach of contract for failure to take its nominated annual requirements; and breach of contract for failure for take its quarterly nominated quantities, under a coal supply agreement dated Nov. 15, 1993.

Mountain State Carbon is in the business of manufacturing coke at its plant in Follansbee. That coke is supplied to its parent, Severstal Wheeling, and to affiliated entities owned and controlled by Severstal U.S., for use in their steelmaking activities.

In November 1993, Wheeling Pittsburgh Steel (a predecessor to Severstal) and Central West Virginia entered into a 10-year coal supply agreement under which Central West Virginia agreed to supply, and Wheeling Pitt agreed to purchase, 100% of the high-vol metallurgical coal required at Follansbee. Because of the specific blend of coal required by the plant, the coal delivered under the terms of the coal supply agreement was to be sourced from specific mines operated by subsidiaries of Appalachia Holding (then known as Massey Energy) in Raleigh and Boone counties, W.Va. In 2002, the terms of the coal supply agreement were formally amended to, among other things, extend its term by a period of seven years, each new year to begin Nov. 1 and to end Oct. 31 of the next year.

Mountain State’s requirements are predicated upon its standard practice of blending high-vol and low-vol coking coal, subject to the condition that its high-vol coking coal comprise not less than 70% of all the coking coal acquired by Mountain State from all sources during any contract year, the third amended complaint noted. Central West Virginia is required to deliver, and Mountain State is required to accept, not less than 95% and not more than 105% of the annual requirements for each contract year, deliverable during that contract year, the amended complaint said.

Massey/Alpha says coal take was cut at bad time for steel industry

In or about June 2008, Mountain State was notified by its parent and affiliate companies that orders for steel products appeared to be declining or were about to decline precipitously, the third amended complaint said. Mountain State, as well as its parent and affiliate companies, were also aware that orders for steel fell dramatically in August 2008, prompting widespread concern and fear within the “Severstal empire” over a collapse of the industry, the amended lawsuit said.

Under the terms of the coal supply agreement, Mountain State’s nominated quantity for the first contract quarter-year of contract year 2009 was due at 90 days prior to Nov. 1, 2008 – or by about Aug. 3, 2008. Neither Mountain State nor the remaining defendants provided Central West Virginia with timely notice of Mountain State’s first contract quarter nominated quantity for contract year 2009, the amended lawsuit said. Severstal Russia, Severstal U.S., and Severstal Wheeling directed Mountain State to notify Central West Virginia that it was unilaterally reducing the amount of coal that it would accept for delivery during the first quarter of the 2009 contract year, despite the fact that under the terms of the coal supply agreement the amount to be delivered and accepted during that quarter had been set on or about Aug. 3, 2008.

By letter dated Oct. 31, 2008 – one day before the beginning of the contract year and the first contract quarter-year – Mountain State, under the instructions of Severstal Russia and Severstal U.S., provided Central West Virginia with “notice of its Nominated Quantity for the upcoming Contract-Year,” stating that it “requires 1,128,000 tons for the Contract-Year,” said the amended lawsuit. As a consequence of this “nomination,” Central West Virginia became obligated to deliver, and Mountain State became obligated to accept, not less than 1,071,600 tons and not more than 1,184,400 tons of coal during contract year 2009, the amended lawsuit said.

Mountain State failed to accept delivery of at least 90% of the nominated coal it was required to take in each of the four contract quarter-years of contract year 2009, said the amended lawsuit. “The failure or refusal of Mountain State to accept delivery of the tonnages set forth above was the direct consequence of the fact that, as a result of the downturn in steel prices, Severstal Russia’s $2.5 billion acquisition of United States’ assets was dragging down its profits and diluting its cheap Russian production costs ($290/ton as compared to $600/ton in the United States),” said the amended lawsuit. “In order to minimize this, Defendants sought to shift this economic burden away from themselves and onto Central West Virginia, Appalachia Holding, their miners, pensioners, and bondholders – many of whom are situated in Raleigh County and throughout southern West Virginia – to the greatest extent possible, notwithstanding the fact that they had no legal or contractual basis for doing so.”

Severstal Dearborn says suit should be dismissed

On April 13, Severstal North America, now known as Severstal Dearborn, answered the third amended complaint. In that answer, it admitted that Mountain State did not provide 90 days advance written notice of an intent to reduce the amount of coal to be delivered in the first quarter of the 2009 contract year, but said it is believed that plaintiffs were aware of statements made by Wilbur Winland prior to Oct. 31, 2008, indicating that future operating plans were in the process of being reviewed and that future coal needs could be lower than the then-current levels.

Severstal Dearborn asked the court to dismiss the third amended complaint, based on the contention that it fails to state a claim upon which relief can be granted. “Under the Coal Supply Agreement, Mountain State had the right to elect to take such quantity of coal which, in its opinion, would satisfy the requirements of the Follansbee Plant,” the steelmaker said. “Nothing in the Coal Supply Agreement required Mountain State to take (and pay for) more coal than was needed to satisfy the requirements of the Follansbee Plant. At all relevant times, Mountain State accepted the quantity of high volatile metallurgical coal made available by CWVEC which satisfied in whole or in part the requirements of the Follansbee Plant.”

Under the coal supply agreement, at least 20 days prior to the beginning of a calendar month, CWVEC was required to advise Mountain State of the number of tons to be shipped at each loading point at which barge deliveries were to be made during that month so that Mountain State could make arrangements to provide sufficient empty barges at those locations. “CWVEC failed to provide this information to Mountain State during the 2009 Contract Year,” Severstal said.

“Plaintiffs’ contention that the Coal Supply Agreement required CWVEC to obtain the coal to be delivered to Mountain State from mines owned and/or operated by A.T. Massey and/or its related entities was a material and disputed issue in prior litigation between the parties, which was resolved in favor of Mountain State,” Severstal also argued. “That contention is barred by the doctrines of res judicata and/or collateral estoppel.”

Plaintiffs’ tortious interference claims are barred because the conduct of Severstal Dearborn was privileged or justified, the steelmaker added. Another contention is that plaintiffs’ tortious interference claims are barred because plaintiffs have not identified any wrongful conduct committed by Severstal Dearborn.

The latest filing in the case came on April 23, saying that Central West Virginia Energy and Appalachia Holding will take the deposition of Charles Gress, in his capacity as a designated corporate representative of Mountain State Carbon and Severstal Wheeling, on May 4.

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.