Cloud Peak argues against court rejection of coal supply deal with Luminant

Energy Future Holdings and power production affiliate Luminant Energy Co. LLC told their bankruptcy court on April 9 that their March 24 motion to reject a coal contract, called a “Master Agreement,” with Cloud Peak Energy (NYSE: CLD) is proper, despite the objections of Cloud Peak.

“The Court should overrule the Objection,” said Energy Future. “The Motion seeks to reject obligations under the Master Agreement. The Master Agreement contemplates that the Debtors will periodically enter into transactions for the future purchase of coal and later evidence those transactions with confirmation letters. All of the transactions that the Motion seeks to reject were arranged before the Petition Date and have mutual obligations outstanding. Thus, they are subject to rejection under section 365 of the Bankruptcy Code.

“Cloud Peak nonetheless asserts that the Court’s first-day order concerning hedging and trading contracts, as well certain postpetition writings, turn these prepetition transactions into postpetition transactions that the Debtors cannot reject. First, the applicable Court order explicitly states the opposite. It does not authorize the assumption of any contract or otherwise obligate the Debtors to perform under any agreement. Second, the Master Agreement and the transactions under it are plainly executory. Cloud Peak’s assertion that certain postpetition writings prohibit rejection is contrary to applicable Third Circuit case law. The Debtors therefore respectfully submit that the Court should overrule the Objection and authorize the Debtors to reject the Master Agreement.”

Cloud Peak in part argues that the agreement that Luminant wants to reject is part of a relationship that has continued after the Energy Future companies petitioned for Chapter 11 protection in April 2014. “Luminant in fact entered into several postpetition agreements with Cloud Peak Energy for the purchase of coal, including the Postpetition Confirmation Agreement in July 2014 and the Letter Agreements on September 25, November 28, and December 23, 2014, under the authority of the Trade Agreement Orders,” said Cloud Peak. “In its May 12, 2014 email, Luminant specifically identified its relationship with Cloud Peak Energy as one covered by the Interim Trade Agreement Order and requested Cloud Peak Energy to execute a form of Trade Continuation Agreement. Ultimately, by signing the Postpetition Confirmation Agreement, Cloud Peak gave up its rights to terminate under bankruptcy default provisions in exchange for the payment of prepetition amounts owed and administrative expense status for amounts due under its pre and postpetition agreements.”

Cloud Peak later added: “Luminant should not be permitted to retain the benefit of locking a supplier into set prices with the enticement of a court-approved Trading Agreement Order and also retain the ability to reject an alleged prepetition contract. By now seeking to reject its Trading Arrangements with Cloud Peak Energy, Luminant puts Cloud Peak Energy in the position of trying to sell previously committed tons at a substantial loss in the current market. Cloud Peak Energy relied on the Court sanctioned and statutory authority of a debtor-in-possession to operate in the ordinary course in a Chapter 11 proceeding, and the Court should not permit Luminant to renege on its postpetition agreements and obligations. Put another way, if suppliers cannot rely on a debtor-in-possession to honor its postpetition contractual commitments, no supplier will do business with a Chapter 11 debtor.”

Cloud Peak also noted: “Postpetition, Cloud Peak Energy continued to honor its obligations to supply coal to Luminant pursuant to the Postpetition Confirmation Agreement and Letter Agreements. It made shipments to Luminant totaling nearly 1.5 million tons after the Petition Date.”

Cloud Peak is a major producer of Powder River Basin coal, both in Wyoming and Montana. Luminant’s coal-fired plants are in Texas and some of them use PRB coal to supplement locally-mined lignite. The Energy Future case is being handled at the U.S. Bankruptcy Court for the District of Delaware.

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.