Briefing is complete and oral argument is scheduled for May 16 in front of the Superior Court in Pennsylvania in a dispute where a unit of Arch Coal Inc. (NYSE: ACI) lost a lower court decision in a dispute with a unit of FirstEnergy (NYSE: FE) over interrupted coal supply for the coal-fired Harrison power plant in northern West Virginia.
The lower court entered a final judgment in favor of Allegheny Energy Supply on Aug. 25, 2011, in the amount of $104.1m, which included pre-judgment interest. The parties appealed the lower court’s decision to the Superior Court of Pennsylvania. Two units of Arch have filed an appeal bond in the amount of $124.9m, Arch said in its May 10 quarterly Form 10-Q filing at the SEC. The court website confirms that oral arguments are due in this case during a May 15-16 oral argument session in Pittsburgh.
Notable is that at the time this dispute began in 2006, Allegheny Energy Supply was part of Allegheny Energy, which FirstEnergy has since acquired, and that the involved Arch subsidiaries were at the time part of International Coal Group, which Arch acquired in June 2011.
Allegheny Energy Supply, the sole customer of coal produced at Arch subsidiary Wolf Run Mining Co.’s Sycamore No. 2 mine, filed a lawsuit against Wolf Run, Hunter Ridge Holdings Inc. and ICG in state court in Allegheny County, Pa., in December 2006, and amended its complaint in April 2007. Allegheny claimed that Wolf Run breached a coal supply contract when it declared force majeure after idling the Sycamore No. 2 mine in the third quarter of 2006, and that Wolf Run continued to breach the contract by failing to ship in volumes referenced in the contract. Sycamore No. 2 ran into adverse geologic conditions and abandoned gas wells that were previously unidentified. The mine was re-opened in 2007, but with notice to Allegheny that it would need to operate at reduced volumes in order to avoid the many gas wells within the reserve.
The amended complaint also alleged that the production stoppages constitute a breach of the guarantee agreement by Hunter Ridge and breach of certain representations made upon entering into the contract in early 2005. Allegheny later voluntarily dropped the breach of representation claims. Allegheny claimed that it would incur costs in excess of $100m to purchase replacement coal over the life of the contract.
In November 2008, ICG, Wolf Run and Hunter Ridge filed an amended answer and counterclaim against the plaintiffs seeking to void the coal supply agreement due to, among other things, fraudulent inducement and conspiracy. In September 2009, Allegheny filed a second amended complaint alleging several alternative theories of liability in its effort to extend contractual liability to ICG, which was not a party to the original contract and did not exist at the time Wolf Run and Allegheny entered into the contract, Arch noted.
ICG answered the second amended complaint in October 2009, denying all of the new claims ICG’s counterclaim was dismissed on motion for summary judgment entered in May 2010. Allegheny’s claims against ICG were also dismissed by summary judgment, but the claims against Wolf Run and Hunter Ridge were not.
The court conducted a non-jury trial of this matter in January and February 2011. At the trial, Allegheny claimed that it is entitled to past and future damages of between $228m and $377m. Wolf Run and Hunter Ridge presented their defense, including evidence with respect to the existence of force majeure conditions and excuse under the contract and applicable law. Wolf Run and Hunter Ridge presented evidence that claimed that Allegheny’s damages calculations were significantly inflated because it did not seek to determine damages as of the time of the breach and in some instances artificially assumed future non-delivery or did not take into account the apparent requirement to supply coal in the future.
On May 2, 2011, the trial court entered a memorandum and verdict determining that Wolf Run had breached the coal supply contract and that the performance shortfall was not excused by force majeure. ICG and Allegheny filed post-verdict motions in the trial court and on Aug. 23, 2011, the court denied the parties’ motions. The court entered the final judgment on Aug. 25, 2011, in the amount of $104.1m, which included pre-judgment interest.
As of March 31, 2012, and December 31, 2011, Arch said it had accrued $109.8m and $108.3m, respectively, for this lawsuit, including interest. “The ultimate resolution of this matter could result in an outcome which may be materially different than what the Company has accrued,” Arch added.
Said Arch’s Feb. 29 Form 10-K report about this operation: “The Sycamore No. 2 mining complex is an active underground mine operated by a contract miner located on approximately 8,900 acres in Harrison County, West Virginia. Mining operations extract coal from the Pittsburgh seam. The coal produced by this mining complex is sold on a raw basis and is transported to current customers by truck. As of December 31, 2011, the Sycamore No. 2 mining complex had approximately 9.3 million tons of proven and probable reserves. Without the addition of more coal reserves, the current reserves could sustain current production levels until 2028.”