Oxford said Big Rivers’ February decision, which the Henderson, Ky., generation and transmission co-op blamed on Oxford’s alleged failure to meet coal specifications contained in their contract, could result in as much as $20 million in damages. It already has caused Oxford to idle the Briar Hill surface mine and reduce operations at the Rose France surface mine, both in western Kentucky’s Muhlenberg County.
Oxford went public in the U.S. in 2010 and acquired several existing mines and high-sulfur coal reserves in the region from Phoenix Coal Co. They included both Briar Hill and Rose France. Earlier this year, Oxford applied for a Section 404 Clean Water Act permit from the U.S. Army Corps of Engineers for an expansion at Rose France.
In its breach of contract complaint filed in Ohio County Circuit Court in Hartford, Ky., Oxford said that in 2010 it sought to ensure through 2015 “a secured long-term market for a significant portion of its coal production at pricing it could count on, thereby producing a stream of revenue it could rely on to fund its continued operations and meet its other working capital needs.”
Following an extended bidding and negotiation process, Big Rivers on July 1, 2010, entered into an amended CSA with Oxford, which revised and restated an existing coal supply deal between the two parties, Oxford said. Among other provisions, the amended CSA provided Oxford “with a guaranteed supply arrangement with fixed and known pricing through 2015.” The accord called for Oxford to supply “various tonnages of coal in 2010 and 2011, and a minimum of 800,000 tons of coal in 2012 and each calendar year through and including 2015.”
Throughout 2010 and 2011, Big Rivers benefited from the low prices, relative to market, provided by the amended CSA, Oxford said. However, the market price of coal has fallen since late 2011 while the agreed-upon pricing under the amended CSA “substantially increased at the outset of 2013, with the result that the 2012 pricing was above the market price of coal.”
Also starting in 2012, Big Rivers was required under provisions of the amended CSA to begin reimbursing Oxford mining operations cost increases for diesel fuel, equipment and explosives.
This is when Big Rivers started to complain about Oxford delivering coal that typically fell short of both average minimum quality specs and the rejection limits set out in the amended CSA and its predecessor coal supply contract, Oxford said.
As a result, Big Rivers “determined to source its coal supply needs covered by the amended CSA either on a reduced pricing basis extracted from Oxford or elsewhere for less money, despite its contractual obligations to Oxford,” according to the suit. “At that time, Big Rivers began to make complaints about coal quality, and for the first time threatened to reject Oxford’s coal, as a pretext to extract from Oxford a reduction in the pricing under the amended CSA or to set up Oxford for a termination enabling Big Rivers to seek coal elsewhere at lower pricing.”
This alleged strategy by Big Rivers, Oxford said, “was made clear when a Big Rivers representative told an Oxford representative in a meeting in late February 2012 that, if Oxford would reduce the price charged under the amended CSA to the currently prevailing market price, ‘everything would be okay’ despite its new quality complaints, and all of those complaints about quality would go away.”
Oxford said Big Rivers wanted the price rolled back from 2.0402/mmBtu to $1.8946/mmBtu, a reduction it claimed would have slashed prices under the amended CSA by more than $2 million annually.
Oxford said it rejected the proposal, Big Rivers canceled the contract and Oxford responded by filing the lawsuit.
A Big Rivers official said the contract was shelved because of Oxford’s “repeated failure to meet contract coal specifications.” As of late April, Big Rivers had not yet replaced the Oxford contract, the official added.
