Armstrong Coal says Peabody deal didn’t violate Francis settlement

In December 2011, Armstrong Coal formed a joint venture with Peabody Energy (NYSE: BTU) for coal reserves in western Kentucky, but that deal does not interfere with an agreement that Armstrong had with local coal investor Sam Francis, said Armstrong in a May 7 court filing.

Francis, locally-prominent for years in the western Kentucky coal business, in July 2011 sued Armstrong Coal at the U.S. District Court for the Western District of Kentucky. He said that under a deal he had with Armstrong Coal to make business contacts for it when Armstrong was getting going in the coal business last decade, the December 2011 property agreement with Peabody was not allowed. Francis said Armstrong Coal cut him out of potentially lucrative business with Peabody by making that deal.

In December 2011, Armstrong Coal formed a joint venture, Survant Mining Co. LLC with Peabody affiliates and/or subsidiaries, pursuant to which Peabody has agreed to lease to Survant certain clean recoverable #8 seam coal reserves in Muhlenberg County and to make a cash capital contribution to Survant. Armstrong Coal has agreed to contribute certain mining assets and cash as a capital contribution to Survant, provided that certain contingencies are satisfied.

In its May 7 motion for partial summary judgment on Count I of the Francis complaint, Armstrong said it is entitled to judgment as a matter of law as to plaintiff’s claim alleging that it has breached the non-interference provision of a 2008 settlement between Francis and Armstrong. Armstrong said the non-interference provision is not a non-competition provision and did not prohibit Armstrong and related parties from competing with Francis for acquiring the right to mine certain #8 seam coal in Muhlenberg County.

Under the non-competition agreement, Francis and related parties broadly agreed that they would not, for a period of five years from the date of the agreement, engage in any business in competition with the Armstrong parties or acquire any mineral interests in western Kentucky, except any existing business operations in which the Francis Parties were at that time engaged or committed to be engaged, or the purchase of any coal or other minerals located under certain property owned by Samuel Aaron Francis called the “Stone Property.” The plaintiff in this case, by the way, is Samuel S. Francis.

“The Armstrong Parties deny that they breached Section 13 of the 2008 Settlement Agreement by their successful effort to acquire the right to mine Peabody’s #8 seam coal,” said the filing. “Rather, the Armstrong Parties contend that the clear and unambiguous language of the parties’ agreements did not prohibit them from doing so.”

Armstrong Coal is readying for an IPO under newly-created parent Armstrong Energy. The company indicated in a May 4 Form S-1/A filing that there were a series of deals with Peabody late last year.

“In December 2011, we entered into a series of transactions with Cyprus Creek Land Resources, LLC and Cyprus Creek Land Company, LLC, each of which is an affiliate and/or subsidiary of Peabody Energy Corporation (together, ‘Peabody’), pursuant to which we acquired additional property near our existing and planned mines containing an estimated total of 7.7 million clean recoverable tons of coal and entered into leases for an estimated 14 million clean recoverable tons,” the filing said. “In addition we entered into a joint venture relating to coal reserves near our Parkway mine. In connection with the joint venture, Peabody has agreed to contribute an aggregate of approximately 25 million tons of clean recoverable coal reserves located in Muhlenberg County, Kentucky, and we have agreed to contribute mining assets to the joint venture. We and Peabody have also agreed to contribute 51% and 49%, respectively, of the cash sufficient to complete the development of the mine and sufficient for down payments on mining equipment. We will manage the joint venture’s day-to-day operations and the development of the mine in exchange for a $0.50 per ton sold management fee. Peabody will receive a $0.25 per ton commission on all coal sales by the joint venture.”

Also, Armstrong and Peabody entered into an Asset Purchase Agreement under which Armstrong acquired from Peabody its rights and interests in certain owned and leased coal reserves located in Muhlenberg County in exchange for: a cash payment by Armstrong of about $8.9m; a promissory note in the aggregate principal amount of around $4.4m: and an overriding royalty to Peabody to the extent Armstrong mines in excess of certain tonnages from the property as set forth in the Asset Purchase Agreement.

In December 2011, Armstrong and Midwest Coal Reserves LLC, an affiliate of Peabody, entered into a contract to sell and lease real estate under which Armstrong acquired from Midwest Coal its right, title and interest to #9 seam coal reserves in Union County, Ky. In addition, Midwest Coal agreed to lease to Armstrong about 2,000 acres of #9 seam of coal. In consideration, Armstrong agreed to deliver: about $6m in cash; a promissory note in the aggregate principal amount of about $3m; and an overriding royalty of 2% of the gross selling price on each ton of coal produced and sold from the coal reserves that were purchased (thus excluding the leased coal).

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.