Environment and Government and Manufacturing & Technology

Coal vendor not digging coke plant closure: Virginia firm sues Citizens Gas for breach of contract

May 28, 2007

Citizens Gas & Coke Utility faces the first big fallout from a vendor involving the planned closure of its coke manufacturing plant.

A breach-of-contract lawsuit by Bristol, Va.-based Central Coal Co. could make the plant even more of a money pit as Citizens seeks to cut its losses and escape the problems caused by falling coke demand and rising environmental compliance costs.

Central Coal says it's out almost $831,000 because Indianapolis Coke failed to buy all the coal required under its contract.

Central also seeks unspecified damages and interest for the coal mined in Winifrede, W.V., according to the suit filed April 27 in U.S. District Court for the Southern District of West Virginia.

The suit alleges Citizens extended the coal supply contract last December through December 2009. The extension came about two months after Citizens said it would explore selling the 98-year-old plant.

Central alleges Citizens' coal purchases came up short by 37,335 tons in the first four months of this year and by 73,739 tons since January 2006.

The coal company said Citizens was obligated to buy 130,000 tons of coal in 2006 and 2007 at $77 a ton. The price was lowered to $75.50 a ton when the contract was amended last December, according to the complaint.

"Citizens has anticipatorily breached and repudiated the agreement, as amended, and is liable for all damages caused Central Coal ... through the term of the agreement."

Citizens sent the company a letter, dated April 16, stating that, effective in 60 days, "Indianapolis Coke will no longer purchase or take deliveries of coal from your mines."

Central Coal's lawsuit was filed "prior to any opportunity to discuss the allegations," said Citizens' communications manager, Dan Considine.

"Therefore we have yet to fully evaluate the merits of the case. Also, we recently received an extension of time from Central Coal to discuss the matters raised in their court filing. It is our hope that any disputes with vendors or other parties can be resolved without legal action."

Indianapolis Coke buys coal from five suppliers in eastern Appalachia. Coal is by far the largest single purchase for the division.

Coal is baked at high temperatures to produce coke, a substance resembling volcanic rock that is used as a fuel in foundries and steel mills.

Citizens announced April 12 that it will close the plant this year due to increased competition from inexpensive foreign coke producers, declines in American heavy industry, and because it couldn't find a buyer for the plant.

About 300 workers are losing their jobs. Considine said it appears the plant might be closed toward the end of July, although the exact date will depend on when customers find alternative sources.

Demolition and cleanup could take five years and cost Citizens many millions of dollars.

By closing the plant, Citizens will avoid a minimum $2 million investment in environmental upgrades pledged under a 2006 settlement with the Indiana Department of Environmental Management for air pollution violations.

Many of those improvements were to reduce emissions of benzene-potentially more than 18,000 pounds of the substance each year. Benzene has been linked to cancer.

Some neighbors of the plant at Prospect Street and Keystone Avenue, southeast of downtown, have said pollution appears to have worsened in recent weeks. Preliminary data gathered at IDEM's air monitoring station near IPS School 21 show benzene emissions as low as 0.01 parts per billion--to a spike of 85 parts per billion recorded May 14.

But IDEM spokesman Rob Elstro said the agency is not aware of air pollution compliance problems at the plant. The agency plans to continue to monitor the site during dismantling and at least one year after it ceases operations.

Considine said emissions have been within allowable levels and noted an overall decline in air quality in the city with the hot, dry weather.

One byproduct of coke production is artificial gas. Until about 1950, when Citizens tapped into an interstate natural gas pipeline, the coke plant produced virtually all the gas the utility piped into homes and businesses. In the late-1990s, use of the plant's artificial gas was phased out entirely.

Even then, with all the headaches of this sooty throwback to early 20th-century industrial production, coke had its benefits because sales of the product often ran counter-cyclical to Citizens' other operations, helping mitigate income risk.

But in the late-1990s, the coke business soured because of foreign, government-subsidized suppliers who sold the fuel at below-market prices.

From 2000 to 2004, about a dozen of the coke plant's foundry customers filed for bankruptcy. During that time, Indianapolis Coke lost more than $87 million.

Four years ago, Congress enacted tariffs on imported coke but the plant continued to lose business. Citizens faced growing costs of repairs, as well, including the need to spend $4 million to repair equipment damaged in 2002.
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