Oxford Resource Partners LP (NYSE: OXF) is “aggressively pursuing compensation for our damages through all appropriate legal measures” against Big Rivers Electric over termination of an 800,000 tons per year coal supply deal earlier this year, said Oxford in its Aug. 7 quarterly Form 10-Q filing.
Oxford didn’t actually refer to Big Rivers by name in the Form 10-Q, but did use the Big Rivers name in first revealing this contract termination in its March 14 annual Form 10-K report. “This contract requires us to supply the customer with 800,000 tons of coal per year, and absent any termination thereof the term of the contract runs until December 31, 2015,” said the Form 10-Q. “We believe that this customer’s action was taken in bad faith, motivated by the combination of the price increase that had recently gone into effect under the customer’s sales contract and the current coal market conditions. We are aggressively pursuing compensation for our damages through all appropriate legal measures.”
On March 2, Oxford received a notice of contract termination from Big Rivers Electric, said Oxford in the March Form 10-K filing. The notice said that Big Rivers was terminating an amended and restated coal supply agreement effective as of the close of business on March 2. Big Rivers said coal deliveries have not conformed to the quality specs in the agreement.
Oxford didn’t give any more details about the contract in either the Form 10-Q or Form 10-K. A Feb. 16 filing that Big Rivers made at the Kentucky Public Service Commission in a bi-annual fuel adjustment clause case said that it had one contract with Oxford during the May-October 2011 fuel review period. That contract was executed in October 2007 and called for coal out of Oxford’s Schoate prep plant in Muhlenberg County, Ky.
The Oxford contract, which had a base period that was due to expire at the end of 2015, called for 800,000 tons of B or C quality coal in 2012. B or C denotes certain differences in coal specs. In 2013, the contract only called for 200,000 tons of B or C quality coal. Then in each of 2014 and 2015, it calls for 800,000 tons per year and also 200,000 tons per year of B or C quality coal. Even though the official contract expiration is shown as the end of 2015, Big Rivers indicated possible shipment of 800,000 tons of B or C quality coal in 2016.
The actual deliveries in the May-October 2011 period under this contract were 366,146 tons of B quality coal, with no A or C quality coal shown as being delivered during that period. The contract price as of 2011 for the B quality coal was $32.44/ton, the Big Rivers fuel filing said.
Big Rivers in April went out for bids for coal and petroleum coke for its Wilson, Coleman, Green, Reid and Station Two (Henderson) power plants. The delivery period for this solid fuel would begin on or about May 1, and run through the end of this year. Big Rivers Electric also said it will consider term offers for years 2013 through 2017, or some portion thereof. Big Rivers was seeking about 250,000 to 500,000 tons of solid fuel for the remainder of 2012 for spot delivery, and up to 800,000 tons of coal per year for years 2013 through 2017.
Big Rivers loss adds to reasons to cut back Oxford’s western Kentucky production
To address this slump in coal demand out of its western Kentucky mines due to the Big Rivers loss, Oxford said in the Aug. 7 Form 10-Q that it began idling one mine, reduced mining operations at a second mine and terminated a significant number of employees. Prior to that, it had already idled another mine and a wash plant, closed its lab and terminated some employees in connection with a decision to substitute purchased coal for mined and washed coal under certain customer sales contracts.
Subsequent to the actions taken in the first quarter, Oxford updated its mine plans in western Kentucky to optimize the use of these mines, and is carrying out the updated mine plans through the following actions:
- it is adjusting the level of mining operations and varying the mines that are idled to best manage strip ratio impacts and other costs, and does not presently expect to permanently close any of the idled mines which leaves them available for resumption of mining operations as the market dictates;
- it is continuing to mine in western Kentucky with an expected reduction in production of 1.1 million tons for 2012 which enables it to meet contract commitments while reducing costs; and
- it has resumed operating on a limited basis the wash plant to wash some of the coal mined at the complex in connection with efforts to improve margins.
In addition, Oxford is continuing to redeploy or sell excess mining equipment from the western Kentucky operations which has been idled because of the reduced mine operations. Excess equipment redeployed its Ohio operations is expected to enhance productivity and reduce future capital expenditures. The proceeds from sales of excess equipment will be used to reinvest in the Ohio operations and/or to reduce borrowings outstanding.
Oxford reports trouble with contract to purchase coal
Oxford said it purchases coal from time to time from third parties in order to meet quality or delivery requirements under customer contracts. Additionally, it assumed one long-term purchase contract with a third-party supplier in connection with an acquisition. Under this contract the third-party supplier is obligated to deliver and Oxford is obligated to purchase 0.4 million tons of coal each year until the coal reserves covered by this contract are depleted. “We have experienced supplier performance issues under this contract which continued through 2011 and still persist in 2012,” Oxford reported. “The supplier has asserted that this contract is terminated by its terms, while we have taken a contrary position. We are actively pursuing resolution of this matter. We did not receive any tons from this supplier during either the second quarter or first half of 2012.”
On March 2, Oxford entered into another long-term coal purchase contract with a separate, unnamed supplier for the western Kentucky operations for delivery of 350,000 tons of coal in 2012 and 360,000 tons of coal in 2013. A majority of the tons purchased in the second quarter of 2012 were under this new contract as compared to purchases under the previously-referenced lower priced contract which were in the second quarter and first half of 2011. This arrangement has allowed Oxford to now operate under a greatly reduced production schedule for the wash plant in western Kentucky.
Oxford Resource Partners has three operating subsidiaries: Oxford Mining Co. LLC (which runs most of the Ohio mines); Oxford Mining Co.-Kentucky LLC (western Kentucky mines) and Harrison Resources (a joint venture with CONSOL Energy on certain properties in Harrison County, Ohio).
Oxford currently has 19 active surface mines, which it manages as eight mining complexes. Its operations also include two river terminals, strategically located in eastern Ohio and western Kentucky. During the three-month and six-month periods ended June 30, Oxford produced 1.7 and 3.6 million tons of coal, respectively, and sold 1.8 and 3.7 million tons of coal, respectively, including 0.1 and 0.2 million tons of purchased coal, respectively.
For 2012, 2013, 2014 and 2015, Oxford currently has long-term coal sales contracts for coal sales of 7.4 million tons, 6.6 million tons, 5.5 million tons and 4.1 million tons, respectively. These tonnages assume the successful renegotiation of some of the long-term coal sales contracts which contain price reopeners.
Oxford nails down one contract reopener, close on another
Two of its long-term coal sales contracts with the same customer provide for market-based adjustments to the initial contract price every three years. These two long-term contracts would terminate effective Dec. 31, 2012, if Oxford could not agree upon a market-based price with the customer by Sept. 30, 2012.
“We have reached an agreement in principle for such market-based pricing of one of those contracts and expect to conclude in the third quarter of 2012 the negotiations for and agreement regarding such market-based pricing, for the other contract, and therefore expect that both of these contracts will be extended for a further three years with such agreed pricing,” the Form 10-Q said. “In addition, we have one long-term coal sales contract with another customer that will terminate effective December 31, 2013 if we cannot agree upon a market-based price with the customer by June 30, 2013. The coal tonnage which is involved for these three contracts is 1.0 million tons for 2013, 1.4 million tons for 2014 and 0.9 million tons for 2015.”
Some long-term coal sales contracts contain options that give the customer the right to elect to purchase certain additional tons of coal during the contract term at the same price as the fixed tons provided for in the contract. Oxford has outstanding option tons of 0.4 million for each of 2012 through 2014 and 0.7 million for 2015. If there are customer elections to receive these option tons, Oxford believes it will have the operating flexibility to meet these requirements through increased production at its mining complexes. As of Aug. 1, no option tons have been elected and only 0.1 million option tons remain available for 2012 customer elections.