Arch Coal says MidAmerican using court complaint for coal contract leverage

Arch Coal, which has just emerged from bankruptcy, on Oct. 7 told its bankruptcy court that it should be allowed to assume six coal supply contracts with MidAmerican Energy, despite MidAmerican’s Sept. 15 claim that the reorganized coal producer is still financially weak.

On Sept. 15, two days after a successful and virtually uncontested confirmation hearing, MidAmerican – a purchaser of coal under long-term coal-supply agreements – sought to commence a “meritless litigation that is a waste of judicial and party resources,” said Arch Coal. “In its Objection, MidAmerican falsely asserts – without any factual foundation – that the Debtors have breached the Coal-Supply Contracts and that there remains a risk that the Debtors will not be able to supply coal in the future. Nothing could be further from the truth.

“MidAmerican filed an Objection that contains false statements, omits central facts, and is otherwise wholly without merit. By way of example, MidAmerican misleads the Court in alleging that there was a prior breach of the Coal-Supply Contracts.” Arch said that:

  • MidAmerican fails to disclose that the Arch companies have supplied coal to MidAmerican – without interruption – for years, including throughout the duration of the bankruptcy case.
  • MidAmerican wrongly asserts that there must have been a violation of the confidentiality provision in the coal-supply contracts without providing any plausible factual basis for the accusation or citing the terms of the confidentiality provision.
  • MidAmerican fails to disclose the basis for its argument that there was a separate breach of the coal-supply contracts. Far short of providing specificity, MidAmerican merely makes the “gossamer promise” to both the debtors and the court that the purported breach will be discussed later in court. MidAmerican likewise misrepresents the facts when arguing that the debtors have failed to provide adequate assurance of future performance.
  • MidAmerican bases its argument on “rife speculation” concerning the financial viability of Arch Coal Sales, the signatory to the coal contracts.
  • MidAmerican fails to articulate any reason why the debtors, whose coal reserves and operational capacity have never been at issue in this bankruptcy, would be unable to continue to satisfy their supply obligations, especially in light of the improving market conditions and the debtors’ materially improved financial position.
  • Conspicuously absent from the objection is any recognition that the debtors’ plan of reorganization was confirmed at a hearing two days earlier, based on financial projections and written testimony from the debtors’ Chief Financial Officer and principal financial advisor, and that this court expressly found that the debtors’ plan was feasible and that the debtors had provided adequate assurance under the Bankruptcy Code.

Said Arch: “Contrary to the picture portrayed by MidAmerican, the facts squarely foreclose MidAmerican’s arguments under the Bankruptcy Code, under New York state law, and under the Coal-Supply Contracts. With the Debtors’ financial condition demonstrably improved, and their operational capacity and coal reserves as robust as ever, mid-September seemed a curious time to raise these concerns, particularly in light of the fact that never before had MidAmerican sought any assurance of continued coal supply. But the tactic becomes readily comprehensible if one views the Objection for what it truly is – pretext to strong-arm the Debtors to renegotiate the Coal-Supply Contracts….”

Parts of the Oct. 7 filing related to these contract talks is redacted from the public version of these arguments. The company added: “In short, MidAmerican is not seeking assurance of coal delivery from what is likely now the country’s strongest coal provider; it is looking for a way out.

“Further illuminating its aims, MidAmerican goes so far as to say that, under New York’s Uniform Commercial Code, failure to provide adequate assurance allows the party seeking such assurance to ‘repudiate’ the underlying contract within 30 days. New York law stands for no such proposition. Indeed, to the extent that MidAmerican is making a veiled threat that it intends to ‘repudiate’ the Coal-Supply Contracts in mid-October, clear damages will flow from that breach. Finally, in the hopes of consensually resolving this issue, and avoiding the time and expense of unnecessary litigation with a business partner, counsel for the Debtors contacted counsel for MidAmerican, explained the fundamental flaws in the arguments, identified the factual misstatements and key factual omissions in the Objection, and requested that MidAmerican withdraw the Objection on those grounds. MidAmerican declined to withdraw its Objection and asserted that it intends to pursue discovery. Under the circumstances, the Debtors reserve the right to seek sanctions under Bankruptcy Rule 9011, including for attorney’s fees incurred in litigating the Objection, and will move to quash any discovery demands issued by MidAmerican. This Objection is wholly without merit, it should be summarily rejected, and the assumption of the Coal-Supply Contracts should be approved.”

The coal-supply contracts are six related agreements, a “2006 Master Coal Purchase and Sale Agreement,” dated October 2008, and five “Confirmation” documents, which are dated between 2012 and 2015.

Arch Coal reported to the court that coal market indicators are continuing to recover. Prices for metallurgical coal have rebounded more than 120% since February and have strengthened significantly in recent weeks. The outlook for thermal coal has also improved in light of forecasted increases in natural gas prices, stabilization of coal consumption, and reduction of generator stockpiles. And on Oct. 5, the first day of post-emergence public trading in Arch Coal stock, share prices increased from less than $1 per share to $63 per share, giving the debtors a market capitalization of $1.575 billion. “In short, nearly every objective signal confirms that the Debtors are well-positioned to succeed following emergence, including in the operation of its core business – producing and supplying coal to customers,” said the company.

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.