IP&L, in a late-November filing with the U.S. Bankruptcy Court for the Southern District of Indiana, said it wanted out of the contract because it no longer trusted Lily to supply the utility with thermal coal from the Landree underground mine in Greene County. Landree was idled on September 15, barely a week before Lily filed for Chapter 11 bankruptcy reorganization on September 23.

But IP&L, a subsidiary of AES Corp., a global power producer based in Arlington, Va., told the court its coal supply troubles with Lily/Landree started months before. Under a three-year deal executed on January 1, 2012, Lily had agreed to supply IP&L with 200,000 tons of coal in 2012 and 400,000 tons for each of 2013 and 2014.
\pThe actual tonnage delivered from Landree was far less than that, IP&L said, forcing the utility to purchase replacement coal to make up the difference.

According to court records, IP&L and Lily amended the original coal contract for the first time on November 15, 2012, when they agreed to reduce the guaranteed amount of coal supplied by Lily for 2012 to 60,000 tons, and granted IP&L the right to buy replacement coal from sources other than Lily if Lily was unable to meet its supply requirements.

On February 4, the contract was revised again, lowering the 2013 tonnage to 180,000 tons and for 2014 to 300,000 tons. The parties also acknowledged IP&L’s right to terminate the transaction “at any time,” court records show.

Again, on July 31, another contract amendment acknowledged Lily’s “material breach of the agreement” and IP&L’s right to terminate it at any time, reduced the guaranteed annual quantity of coal supply for 2013 to 70,000 tons and for 2014 to 240,000 tons, continued IP&L’s right to purchase replacement coal if Lily was unable to meet its supply requirements, permitted IP&L to further reduce Lily’s tonnage commitment, and set an August 1 deadline for Lily to meet its obligations under the agreement, according to court records.

Then came Lily’s Chapter 11 filing on September 23.

In mid-November, Quest confirmed it was interested in acquiring Lily out of bankruptcy, noting it had entered into a lease agreement with an unidentified landowner for a 1,200-acre contiguous reserve tract in Greene County containing an estimated 20.5 million tons of thermal-quality coal.

A Lily attorney said “other entities” had scouted Landree and might be willing to submit purchase offers as well. He declined to identify those would-be buyers.

IP&L’s application to end its coal contract with Lily, however, set the stage for the December court hearing that could go a long way in determining who, if anyone, winds up buying Lily/Landree.

The utility told the court it faces “substantial hardship” if it is not permitted to terminate the agreement. “IP&L is currently locked into the agreement for another year, with the knowledge that the debtor is unable to perform under the agreement,” it said. “IP&L will continue to be forced to purchase replacement coal in the face of market uncertainty.”

Exacerbating its predicament, IP&L said, is the dearth of coal suppliers in Indiana with the relatively low-sulfur coal produced at Landree. “Currently, there are only three other known sources of this quality-specified low-sulfur coal in Indiana and while, to date, IP&L has been able to purchase replacement coal at a price no less favorable than that contained in the [Lily] agreement, even a minor increase in demand for this coal could increase the market price causing further harm to IP&L.”

Even if Lily “immediately” resumed production at Landree, the utility added, “it would take months to mine enough coal to supply to IP&L and the tonnage may still not meet the current required minimum amounts under the agreement.”