Both Arch and FirstEnergy win a little, lose a little in court decision

There was no clear win for Arch Coal (NYSE: ACI) or FirstEnergy (NYSE: FE) in an Aug. 13 decision by the Pennsylvania Superior Court on appeals by both sides of a lower court decision that granted FirstEnergy damages in a dispute over a coal supply contract.

This dispute dates back to before Arch Coal acquired International Coal Group and FirstEnergy bought Allegheny Energy. The consolidated appeal and cross appeal stemmed from a judgment entered in favor of Allegheny Energy Supply Co. LLC and Monongahela Power against former units of ICG, including Wolf Run Mining, which are now controlled by Arch. The Superior Court on Aug. 13 affirmed in part, vacated in part, and remanded for further proceedings the lower court decision, which was out of the Court of Common Pleas of Allegheny County, Pa.

The dispute is over a 2005 contract where Allegheny agreed to buy coal from the Sycamore No. 2  deep mine of ICG, which is located in Harrison County, W.Va., very near the customer Harrison power plant. At the time, the existing reserve of the Sycamore No. 2 mine was estimated to contain not less than 20 million tons of coal. The agreement provided that throughout 2005 until September 2006, ICG would deliver to Allegheny Energy the actual production of the Sycamore No. 2 mine, which was estimated at 500,000 tons. Beginning in October 2006, ICG would deliver 150,000 tons per month. Beginning in January 2007 through the expiration of the agreement, ICG would deliver 1.8 million tons of coal per year until the reserve was exhausted. The agreement also contained a force majeure clause which excused non-delivery when certain events occurred.

During the summer of 2006, operations at Sycamore No. 2 were temporarily idled. ICG attributed the closing to the accidental breach of an abandoned gas well, changes in the enforcement of regulations for mining within the vicinity of gas wells, and a collapsing mine roof. So, in August 2006, ICG issued a formal force majeure notice that said the conditions leading to the idling of Sycamore No. 2 were beyond its control and not the result of its fault or negligence. To cover the delivery shortfalls Allegheny Energy purchased more expensive coal from third-party suppliers.

In December 2006, Allegheny Energy instituted a breach of contract action against the involved ICG companies based on a failure to perform under the agreement. ICG filed a counterclaim.

In May 2010, a Pennsylvania judge granted summary judgment in favor of ICG with respect to all claims asserted against it.  The judge also granted summary judgment in favor of Allegheny Energy with respect to ICG’s counterclaim.

There was then a January-February 2011 trial. In May 2011, the trial court found that ICG had breached the agreement, that the force majeure clause contained in the agreement did not excuse this breach, that the defense of commercial impracticability under Section 2-615 of the Uniform Commercial Code was unavailable to ICG and that Allegheny Energy was entitled to damages.

The trial court awarded damages to Allegheny Energy of $104.1m. This award included $11.3m in past damages and prejudgment interest for breaches related to the Sycamore No. 2 mine, $2.5m in past damages and prejudgment interest for breaches related to the Sycamore No. 1 mine, and $90.3m in future damages.

Prior to the execution of the 2005 agreement, Allegheny Energy entered into a separate contract with Wolf Run for delivery of coal from the Sycamore No. 1 mine. Wolf Run closed Sycamore No. 1 before the required tonnage was delivered. The 2005 agreement specified that the delivery shortfalls from Sycamore No. 1 would be covered by coal from the Sycamore No. 2 mine at the prices that had been previously established for Sycamore No. 1 coal.

Both sides filed timely motions for post-trial relief, which were denied in their entirety in August 2011. On that same date, judgment was entered against ICG and in favor of Allegheny Energy in the amount of $106.1m, which included the amount of the verdict plus interest accrued since the May 2011 verdict. Both parties then appealed to the Superior Court.

Allegheny said its past damages were actually $84.2m

Allegheny Energy said on appeal that it spent $84.2m to purchase cover coal because of ICG’s failure to deliver the quantities of coal required, so it contended the trial court erred by limiting the damages awarded to Allegheny Energy for cover coal to $11.3m. Allegheny also raised issues about the corporate relationships of the involved ICG companies and whether ICG itself should not have been dismissed from the case by the lower court.

Among the Arch Coal/ICG issues was whether the trial court erred in its legal application of the contractual force majeure standard by focusing on the foreseeability of conditions despite the parties’ agreement that force majeure may apply to “existing” or “foreseen” conditions, and by determining negligence based on a standard of “aggressiveness” instead of “reasonableness.”

Arch also wanted to know whether the trial court erred in its calculation of future damages by measuring damages as of the time of trial instead of the time Allegheny Energy learned of the breach years before trial, by making a finding regarding the amount of coal remaining in the reserve that is not supported by competent evidence and by failing to reduce future damages to present value.

Arch in addition wanted to know if the trial court erred by awarding prejudgment interest on the damages arising out of Section 1.3 of the Coal Sales Agreement, where the Section 1.3 pricing had not become due by agreement of the parties.

In ruling on this case, the Superior Court said in part that Allegheny Energy has failed to meet its threshold burden under the summary judgment rule to present a genuine issue of material fact regarding the relationship between Wolf Run and ICG which would permit ICG to be held liable for Wolf Run’s non-performance, so it affirmed the lower court’s grant of summary judgment as to all claims against ICG.

The Superior Court also affirmed the judgment entered after trial insofar as it recognized that the force majeure clause did not provide a defense to Wolf Run.

“Despite Wolf Run’s argument to the contrary, the trial court rejected the force majeure defense not on the basis of foreseeability, but because it found that the conditions leading to the breach of the Agreement were not beyond the reasonable control of Wolf Run and occurred due to Wolf Run’s fault or negligence concerning the maintenance and operation of the Sycamore No. 2 Mine,” the ruling said. “Thus, we conclude that the trial court did not err in determining that Wolf Run’s underperformance was not excused by the terms of the force majeure clause.”

With respect to the various questions concerning damages, the Superior Court affirmed the trial court’s award of $11.3m in past damages for Wolf Run’s breach of the agreement related to the Sycamore No. 2 mine and the trial court’s award of prejudgment interest with regard to Wolf Run’s breach of the agreement related to the Sycamore No. 1 mine. The Superior Court, though, vacated the award of future damages and remanded this matter to the trial court with instructions to recalculate using the market price of coal when Allegheny Energy learned of Wolf Run’s repudiation in August 2006.

The trial court rejected Allegheny Energy’s calculations and ordered past damages and prejudgment interest in the amount of $11.3m, a calculation presented to the court by an ICG witness, consultant Kevin Cardwell, which inflated actual market prices 2.5% each year through 2010, the court noted. “Because the trial court’s determination was based on competent evidence presented at trial, and because the trial court, as fact finder, was free to believe all, part of or none of the evidence presented, we see no reason to disturb the trial court’s award of past damages,” the Aug. 13 ruling said.

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.