Arizona Public Service (APS) and PacifiCorp on May 5 jointly asked the bankruptcy court for Peabody Energy to let them terminate a 2005 coal supply deal for the Cholla power plant, since the 2005 contract specifically says the deal can be terminated if any party files for bankruptcy.
Peabody, the nation’s largest coal producer, sought Chapter 11 bankruptcy protection on April 13.
The 2005 contract, as later amended in December 2013, is with Peabody COALSALES LLC (f/k/a COALSALES LLC).
Said the utilities: “On or around December 21, 2005, APS, PacifiCorp and the Debtor entered into the Agreement. Under the Agreement, APS and PacifiCorp agreed to acquire coal from CoalSales for delivery at the Cholla Generating Station in Northeastern Arizona each year over a term of nineteen years commencing January 1, 2006. For each calendar year, the Agreement specified, among other things, the quantity and price for coal to be provided, subject to various adjustments and conditions. Section 11.6 of the Agreement provides that the ‘Agreement shall automatically terminate’ if either party files a petition for bankruptcy relief.'”
A key to this situation is how this contract can be classified, since bankruptcy courts have differing power over differing types of contracts. APS and PacifiCorp said this is a “forward” contract and that coal is a “good” that qualifies for bankruptcy court jurisdiction. They said the elements of a “forward contract” can be summarized as a contract for the sale of a commodity, with a maturity date of greater than two days, that does not fall within the scope of a “commodity contract.” The Peabody agreement satisfies all three elements, they said.
The 995-MW Cholla plant is located in northeastern Arizona. APS operates the plant and owns Units 1, 2 and 3, which are capable of producing 615 MW. PacifiCorp owns the 380-MW Unit 4. Cholla is fueled by coal from Peabody’s Lee Ranch operations in New Mexico.
PacifiCorp has lately been pursuing permiting to convert Cholla Unit 4 to natural gas in 2025 to meet regional haze needs. APS parent Pinnacle West Capital said in its April 29 quarterly Form 10-Q report: “On September 11, 2014, APS announced that it would close Unit 2 of the Cholla Power Plant (‘Cholla’) and cease burning coal at the other APS-owned units (Units 1 and 3) at the plant by the mid-2020s, if the United States Environmental Protection Agency (‘EPA’) approves a compromise proposal offered by APS to meet required environmental and emissions standards and rules. On April 14, 2015, the [Arizona Corporation Commission] approved APS’s plan to retire Unit 2, without expressing any view on the future recoverability of APS’s remaining investment in the Unit. APS closed Unit 2 on October 1, 2015. Previously, APS estimated Cholla Unit 2’s end of life to be 2033.”