Peabody battles with Arizona Public, PacifiCorp over Cholla coal contract

Peabody COALSALES LLC, which like parent Peabody Energy is in bankruptcy protection, on May 31 asked its bankruptcy court to combine two disputes over coal supply to the Cholla power plant into one proceeding.

Peabody, the nation’s largest coal producer, and various subsidiaries filed on April 13 for Chapter 11 protection at the U.S. Bankruptcy Court for the Eastern District of Missouri. The May 31 motion to consolidate is due for a June 15 hearing.

Since then, Arizona Public Service and PacifiCorp, which co-own the Cholla plant, have asked the court to enforce termination provisions in their Coal Supply Agreement with Peabody. Also, Peabody COALSALES has filed an adversary proceeding, which is handled something like a lawsuit, at the bankruptcy court against Arizona Public Service.

Arizona Public Service operates the Cholla Generating Station, a coal fueled power plant consisting of four generating units, three of which are currently operating. APS owns three of these units, and PacifiCorp owns the other. Cholla is located in northeast Arizona near the New Mexico border.

APS, PacifiCorp and Peabody are parties to a Coal Supply Agreement, dated December 21, 2005, as amended. Under the agreement, Peabody supplies the coal APS and PacifiCorp use to fuel Cholla from two nearby mines in New Mexico, primarily the El Segundo surface mine and, to a lesser extent, the nearby Lee Ranch surface mine.

Said Peabody’s May 31 motion: “Although APS and PacifiCorp sent trains to the Debtors’ mines and accepted four deliveries of coal under the Coal Supply Agreement after Peabody’s bankruptcy filing, APS sent a letter to Peabody on April 20, 2016, stating that APS and PacifiCorp would not purchase any coal in May 2016 citing Peabody’s bankruptcy. On May 20, 2016, APS sent Peabody another letter stating that APS and PacifiCorp would not purchase any coal in June 2016 again citing Peabody’s bankruptcy.

“On May 5, 2016, APS and PacifiCorp filed the Contested Motion, purporting to seek permission to repudiate the Coal Supply Agreement, although in fact they already had done so. On May 13, 2016, Peabody filed the adversary proceeding asserting, among other things, that APS and PacifiCorp’s refusal to take delivery of coal under the Coal Supply Agreement post-petition was a violation of the automatic stay and a material breach of the Coal Supply Agreement. Peabody will file an objection to the Contested Motion on or before any deadline for Peabody to do so.”

The automatic stay is a routine step that bankruptcy courts issue right after a company seeks Chapter 11 and prevents the pursuit of legal actions against the bankrupt company outside of the bankruptcy court.

Said Peabody: “The Court should exercise its discretion to consolidate the Contested Motion and the Adversary Proceeding. They involve the same parties—Peabody, APS and PacifiCorp—and common issues of law and fact. Indeed, the two proceedings, one commenced by Peabody, one by APS and PacifiCorp, differ only in that they ask the Court to reach opposite legal conclusions about the same set of facts. On the one hand, APS and PacifiCorp contend that their refusal to take coal post-petition was not a violation of the automatic stay and not a breach of contract because Bankruptcy Code safe harbor provisions exempt them from the automatic stay and allow them to terminate the Coal Supply Agreement pursuant to its ipso facto clause. On the other hand, Peabody contends that the Bankruptcy Code’s narrow safe harbor provisions do not apply to the Coal Supply Agreement and, APS and PacifiCorp’s refusal to take coal post-petition was a violation of the automatic stay and a material breach of the Coal Supply Agreement.”

James C. Wilde, the Director of Resource Planning for Arizona Public Service, in June 1 rate case testimony filed at the Arizona Corporation Commission mentioned this legal matter in a footnote. He wrote: “Peabody Coalsales LLC (a Peabody Energy Corp. subsidiary), is the sole provider of coal to the Cholla Power Plant. While the Peabody bankruptcy has not yet affected delivery, on May 4, 2016, APS filed a motion with the U.S. Bankruptcy Court for the Eastern District of Missouri to seek a determination that APS has the right to terminate its coal supply agreement for the Cholla Power Plant. The motion has not yet been ruled on. Should the agreement be terminated, APS will evaluate its options to purchase coal from available resources.”

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.