GULF POWER COMPANY v. COALSALES II LLC

Filing 198

ORDER - the court finds that Gulf Power is entitled to a judgmentagainst Coalsales in the amount of $20,527,789, which represents the difference between the contract price of Gulf Power's 2007 cover purchases and the pric e Gulf Power would have paid for the same quantity of coal under the CSA. The clerk of court is directed to enter judgment in Gulf Powers favor in that amount and close the file. Gulf Power's damages thus exceed Coalsales' offer, and Coalsales' 176 Motion for Attorney Fees, therefore, is DENIED. Signed by CHIEF JUDGE M CASEY RODGERS on 9/30/2011. (sps)

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IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF FLORIDA
PENSACOLA DIVISION

GULF POWER COMPANY,
Plaintiff,
v.

Case No. 3:06cv270/MCR/MD

COALSALES II, L.L.C. f/k/a
PEABODY COALSALES COMPANY,
Defendant.
_______________________________/
ORDER
Gulf Power Company (“Gulf Power”) sued Coalsales II, LLC (“Coalsales”) for breach
of a multi-year coal supply agreement (“CSA”), seeking to recover $77,465,211 in damages
it allegedly incurred after it was forced to purchase substitute coal to make up for
deficiencies in the amount of coal Coalsales was obligated to supply under the CSA. On
September 30, 2009, the court granted Gulf Power’s motion for partial summary judgment
on liability (doc. 112). The issue of Gulf Power’s damages was tried to the court without
a jury from February 9, 2010, to February 17, 2010. Following trial, the court entered an
order setting forth its findings of fact and conclusions of law, ultimately ruling that Gulf
Power’s cover purchases were not reasonable and that Gulf Power, therefore, failed to
prove its damages claim (doc. 171). Gulf Power filed a Motion to Alter or Amend
Judgment, or, Alternatively, for Relief from Judgment (doc 177), arguing that the court’s
findings were based on mistakes of fact and law.1 Although Gulf Power did not concede
that any of its cover purchases were unreasonable, it urged the court to reconsider its

1
Specifically, Coalsales argued that the court m isconstrued the sulfur values set forth in two
docum ents and failed to appreciate the quantity of one of its 2007 cover purchases. Gulf Power also
challenged the court’s finding that it purchased lower sulfur coal when higher sulfur coal was available and
argued that the court erred in failing to properly apply § 672.712 because it did not address expenses saved
in connection with Gulf Power’s claim for cover dam ages.

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reasonableness finding with respect to its 2007 cover purchases and, at a minimum, award
it damages based on those purchases. After conducting another review of Gulf Power’s
2007 cover purchases, the court found that it committed a manifest error of fact in failing
to appreciate the quantity of one of the two cover coals Gulf Power purchased in 2007 and
that such error seriously impacted the court’s analysis with respect to the reasonableness
of Gulf Power’s 2007 cover purchases. The court thus granted Gulf Power’s motion and,
considering the correct quantity and quality of cover coal purchased by Gulf Power in 2007,
found that the cover purchases were reasonable and that Gulf Power should be afforded
an opportunity to prove its damages based on that cover. Accordingly, the court conducted
an evidentiary hearing on August 25, 2011, on the issue of Gulf Power’s 2007 cover
damages.
As set forth in the court’s findings of fact and conclusions of law, Coalsales was
obligated under the CSA to supply Gulf Power with 1.9 million tons of coal in 2007, to be
delivered F.O.B. Barge at a billing price of $34.11 per ton.2 The coal was to have a
minimum heat value of 12,000 Btus per lb. and a maximum sulfur dioxide (“SO2") content
of 1.7 lbs. per MMBtu.3 Coalsales designated the Galatia Mine, which was owned by The
American Coal Company (“AmCoal”), as the primary source from which the coal would be
provided and the McDuffie Terminal at the Alabama State Docks as the delivery point.4
Beginning in 2003, AmCoal encountered geologic conditions at the Millennium Portal of
the Galatia Mine that rendered mining there unreasonably dangerous. AmCoal thus was

2

That price was derived from a delivered price of 1.5197 lbs. per MMBtu, which the court previously
found applies to all coal delivered under the CSA.
3

“Btu” is an abbreviation for “British therm al unit,” which refers to the am ount of heat required to raise
the tem perature of one pound of water by one degree Fahrenheit, equivalent to approxim ately 1055 joules.
“Btu” is used in the power industry to describe the heat value of coal. MMBtu represents one thousand Btus.
The court also would note that the parties and the contracts at issue in this m atter refer to both the sulfur and
the SO 2 content of coal. For purposes of consistency, the court will refer to the SO2 content of coal
throughout the rem ainder of this order.
4
The m ajority of the coal shipped under the CSA cam e from the M illennium Portal of the Galatia
Mine. A coal m ine m ay have m ultiple portals which, in turn, m ay affect the characteristics of the coal
produced. The Galatia Mine contained at least three portals – the Millennium Portal, the North Portal, and
the Num ber 6 Portal.

Case No. 3:06cv270/MCR/MD

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unable to provide Coalsales with enough coal to permit Coalsales to fulfill its supply
obligation under the CSA. On January 23, 2006, Coalsales gave Gulf Power written notice
of a permanent force majeure and closure of the Millennium Portal.5 The parties attempted
to negotiate an alternative source of coal to be delivered under the CSA, but their
negotiations failed. Coalsales thereafter ceased performing under the CSA.6
Under Florida law, a buyer has two options when a seller repudiates a contract or
wrongfully fails to deliver goods – it may make in good faith and without unreasonable
delay a reasonable purchase of substitute goods, referred to as “cover,” or it may recover
damages for non-delivery. See Fla. Stat. §§ 672.711(1)(a), 672.712(1), and 672.713(1).
In this case, Gulf Power elected to procure substitute coal to make up for the coal
Coalsales failed to provide under the CSA. It did so under two purchase agreements – one
with AmCoal and the other with Interocean Coal Sales, LDC (“Interocean”). Pursuant to
its contract with Gulf Power, AmCoal was to supply Gulf Power with 1,200,000 tons of
North Portal coal in 2007 at a price of $47.81 per ton. The coal was to have a minimum
heat value of 12,000 Btus per lb. and a maximum SO2 content of 2.5 lbs. per MMBtu.
Unlike the CSA, Gulf Power’s contract with AmCoal included a provision requiring Gulf
Power to pay AmCoal a premium in the event AmCoal delivered coal under the contract
having an SO2 content less than the maximum specified in the contract. The AmCoal
contract also contained a dock charge. Although the CSA provided for delivery F.O.B.
barge at the McDuffie terminal, the AmCoal agreement provided for delivery F.O.B. the
dock, which meant that Gulf Power was responsible for the cost of having the coal loaded

5

The CSA contained a force majeure provision, excusing Coalsales from perform ance in the event
of certain circum stances beyond its control, including any event or condition having a m aterial adverse effect
on the m ining of the coal by the seller or its contractor. Coalsales declared force majeures under the CSA
in Septem ber, October, and Novem ber 2003; in June, August (twice), and Decem ber 2004; in January,
Septem ber (twice), October, Novem ber, and Decem ber 2005; and in January 2006. The parties did not
dispute that the geologic conditions at the Galatia Mine during the relevant tim e fram es constituted force
majeure events.
6

Coalsales took the position in this litigation that the CSA was a single source contract and that the
perm anent force majeure excused it from perform ance under the CSA. The court disagreed with Coalsales’
position in that regard and determ ined at the sum m ary judgm ent stage that Coalsales’ failure to ship coal from
other sources constituted a breach of the CSA (doc. 112).
Case No. 3:06cv270/MCR/MD

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from the dock onto its barge. As a result, Gulf Power entered into a contract with the
Alabama State Port Authority to perform those services for $1.96 per ton of coal.
In addition to the AmCoal contract, Gulf Power entered into a contract with
Interocean Coal Sales, LDC (“Interocean”) for the purchase of 1,125,000 tons of
Columbian coal to be delivered in 2007. The Interocean coal was to have a heat value of
11,500 Btus per lb. and a maximum SO2 content of 1.22 lbs. per MMBtu. It was to be
delivered F.O.B. barge at a price of $61.88 per ton.7 Gulf Power’s contract with Interocean
also contained a provision requiring Gulf Power to pay a premium in the event Interocean
delivered coal having an SO2 content less than that specified in the contract.
Although Coalsales declared a permanent force majeure under the CSA due to
conditions at the Galatia mine, AmCoal was able to provide Coalsales with additional coal
in 2007. Coalsales thus informed Gulf Power that the force majeure was not permanent
and delivered close to 800,000 tons of coal under the CSA that year. As a result, Gulf
Power procured only 1,123,889 tons of cover coal in 2007.8 As was the case with the CSA,
the cover coal was intended for two of Gulf Power’s plants – Plant Crist, located in
Escambia County, Florida, and Plant Smith, located in Bay County, Florida. According to
air permit requirements, Plant Crist could not burn coal with an SO2 content higher than
2.4 lbs. per MMbtu and Plant Smith could not burn coal with an SO2 content higher than
2.1 lbs. per MMbtu. Because the AmCoal agreement provided for coal having an SO2
content in excess of the plants’ limits, Gulf Power blended the AmCoal and Interocean
coals in equal quantities to achieve an SO2 content within the limitations of the air permit.
For purposes of establishing its damages at trial, Gulf Power relied on the average contract
price for the two cover coals, with adjustments made to account for the lower heat value

7

Because the Interocean coal had a heat value of 11,500 Btus per lb., as opposed to the 12,000 Btus
per lb. specified in the CSA, Coalsales did not dispute that, for purposes of determ ining Gulf Power’s
dam ages, the contract price for the Interocean coal should be adjusted to $64.57 per ton to account for the
difference in heat value.
8

Based on the evidence at trial, the court found that G ulf Power properly designated its cover
purchases. As a result, neither the am ount of those purchases nor their base contract price was in dispute
at the recent hearing.
Case No. 3:06cv270/MCR/MD

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of the Interocean coal and the dock charge Gulf Power was required to pay in connection
with the AmCoal contract.9 Based on that price, as well as the CSA price and quantity of
cover coal purchased, Gulf Power argued that it paid $20,527,789 more for the cover coal
than it would have paid for the same quantity of coal under the CSA.
Although, at the hearing, Coalsales did not dispute the amount or average base
contract price of Gulf Power’s 2007 cover purchases, it argued that Gulf Power is not
entitled to an adjustment to the base contract price to account for the dock charge because
Gulf Power did not offer evidence of the dock charge at trial.10 Coalsales is mistaken in
that regard. Indeed, Coalsales offered into evidence at trial a document prepared by
Russell Ball, Gulf Power’s fuel manager, setting forth Gulf Power’s damages calculation,
which included the adjusted average contract price of Gulf Power’s 2007 cover purchases.
Although that document did not reference the dock charge, according to Ball, the dock
charge was included as a component of the adjusted average contract price. Coalsales
thus was in possession of at least one document from which it could have deduced each
component of the adjusted average contract price, including the dock charge. The fact that
Coalsales did not do so does not preclude Gulf Power from recovering that expense.
Based on the evidence at the hearing, the court finds that Gulf Power is entitled to recover
the dock charge as part of its 2007 cover damages. See Fla. Stat. §§ 672.712, 672.715.
The court also finds from the evidence that Gulf Power paid $20,527,789 more for the
2007 cover coal than it would have paid for the same quantity of coal under the CSA and
that Gulf Power is entitled to a judgment in that amount.
Gulf Power also argued at the hearing that, in seeking only $20,527,789 for its 2007
cover purchases, it underestimated its damages at trial by $1,119,889.75. Seth Schwartz,
Gulf Power’s expert witness, testified during the damages hearing that, in order to

9

Gulf Power also relied on the average SO2 content of the cover coals. Coalsales never objected
to Gulf Power’s m ethodology in that regard.
10

According to Coalsales, it had no knowledge of the alleged dock charge until the afternoon before
the hearing.

Case No. 3:06cv270/MCR/MD

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accurately compute Gulf Power’s damages, the court should calculate the price Gulf Power
paid for the cover coal based on the specifications set forth in the CSA. In other words,
according to Schwartz, Gulf Power should be compensated for the fact that the average
SO2 content of the coal specified in Gulf Power’s cover contracts was .16 lbs. per MMBtu
higher than the SO2 content specified in the CSA. There are a number of problems with
Gulf Power’s position in that regard. First, as Coalsales pointed out, Gulf Power argued
at trial that the SO2 content of its 2007 cover coal was equivalent to that specified in the
CSA, and Gulf Power did not seek damages based on the SO2 differential.11 As a result,
Coalsales had no notice that Gulf Power would seek such damages at the damages
hearing and thus did not have a sufficient opportunity to defend against the claim. Second,
although Gulf Power adjusted its damages calculation to account for the higher average
SO2 content specified in its cover contracts, it did not make a corresponding adjustment
in the price set forth in those contracts despite undisputed evidence at trial regarding the
increased cost of lower SO2 coal.12 Finally, although the average guaranteed maximum
SO2 content specified in Gulf Power’s cover contracts was higher than the guaranteed
maximum SO2 content specified in the CSA, the coal delivered under the cover contracts
had an average SO2 content considerably less than the SO2 content specified in the CSA.
Indeed, according to Schwartz, the combined SO2 content of the cover coal was 1.38 lbs.
per MMBtu. As a result, Gulf Power would not have been required to surrender any
additional SO2 emissions allowances to burn the cover coal. The court thus finds that Gulf

11

Ball testified at the hearing that he did not focus at trial on the difference between the SO2 content
specified in Gulf Power’s cover contracts and the SO2 content specified in the CSA because the CSA did not
provide for a sulfur prem ium .
12

As explained in the court’s previous orders, when coal is burned, the sulfur com bines with oxygen,
producing SO2. State environm ental agencies issue perm its to utility com panies that lim it the am ount of SO2
they m ay em it at their generating plants. Utility com panies receive a certain num ber of SO2 em issions
allowances each year based on their allowed em issions and, at least during the tim e period at issue, were
required to surrender one em issions allowance for each ton of SO2 em itted. There is a m arket on which SO2
em issions allowances are traded at variable – and, at least at tim es, very significant – prices. If a utility
com pany em its m ore SO2 in a year than perm itted under its allowable em issions, it m ust surrender additional
allowances. Lower sulfur coal is desirable because it results in fewer SO2 em issions when burned. Sulfur
content is thus a huge factor in the purchase and pricing of coal in the United States.

Case No. 3:06cv270/MCR/MD

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Power is not entitled to recover damages based on the difference in the SO2 content
specified under the cover contracts and the CSA.
Having determined Gulf Power’s damages as a result of Coalsales’ breach, the
court must now consider whether Gulf Power saved any expenses as a result of its 2007
cover purchases.13 Although Gulf Power acknowledged that it received cover coal having
an SO2 content less than what was specified in the CSA, it insisted that it saved no
expenses as a result of the lower SO2 cover coal because it was required to pay AmCoal
a premium equal to the amount it saved in SO2 emissions allowances as a result of the
lower SO2 coal. Coalsales did not dispute that Gulf Power was required to pay a premium
for lower SO2 coal or that the premium would have offset any benefit Gulf Power received
from the lower SO2 content of the cover coal. Rather, Coalsales argued that Gulf Power
failed to prove that it actually paid an SO2 premium. As Coalsales points out, Gulf Power
did not produce a receipt or other document evidencing such a payment. Although
Coalsales is correct that Gulf Power did not present documentary evidence of its payment
of the SO2 premium, Ball testified that Gulf Power complied with all of its contractual
obligations to AmCoal and paid AmCoal a premium for the lower SO2 coal according to
the formula set forth in the parties’ agreement.14 According to Ball, as fuel manager for
Gulf Power, he would have known if Gulf Power had not paid AmCoal the SO2 premium
due under the contract, and no one ever indicated to him that it had not been paid.
Particularly considering the absence of any evidence to the contrary, the court credits the
testimony of Ball and Schwartz and finds that Gulf Power demonstrated by a
preponderance of the evidence that it paid a premium for the lower SO2 coal and that the

13

In its prior order, the court found that expenses saved is an elem ent of Gulf Power’s dam ages claim
on which Gulf Power bears the burden of proof and that Gulf Power is required to deduct from its dam ages
claim any expenses it saved as a result of its cover purchases.
14
Schwartz also testified that, assum ing Gulf Power com plied with its contractual obligations to
Am Coal, any savings it realized as a result of Am Coal’s delivery of coal having an SO2 content less than that
specified in the parties’ agreem ent “would have been exactly offset using the exact sam e calculation by the
additional paym ents Gulf Power would have m ade to the cover contract suppliers to buy that lower sulfur coal
that was actually delivered under the contract.”

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premium was approximately equal to the market value of the SO2 emissions allowances
Gulf Power was not required to surrender as a result of the low-SO2 coal, thereby
offsetting any benefit Gulf Power received. See Telecom Technical Services Inc. v. Rolm
Co., 388 F.3d 820, 830 (11th Cir. 2004) (noting that the best evidence rule applies only
“where the party presenting evidence seeks to prove the specific contents of a writing” and
that when a party is seeking to prove a fact other than the terms of a contract, testimony
will suffice). Gulf Power thus saved no expenses in connection with the lower SO2 content
of the cover coal.
In addition to the lower SO2 content, Coalsales argued that the cover coal had a
lower chlorine content than what was specified in the CSA, which reduced Gulf Power’s
operations and maintenance costs.15 In support of its position, Coalsales introduced
deposition testimony at the damages hearing of two of Gulf Power’s employees that highchlorine coal causes corrosion in Gulf Power’s boilers, resulting in increased operations
and maintenance costs. Although Coalsales offered evidence that high-chlorine coal
causes corrosion, Ball testified that Gulf Power’s plants were designed to burn coal with
a high chlorine content. Ball also testified that he consulted Gulf Power’s plant managers,
operations managers, and senior production manager about their experiences with highchlorine coal and that not one of them was aware of any impact on operations and
maintenance costs attributable to chlorine. Vick similarly testified that he was aware of no
economic costs associated with high-chlorine coal. Even assuming Gulf Power benefitted
from the lower chlorine content of the cover coal, there was no evidence that those benefits
can be quantified. Tris Swindle, one of Gulf Power’s coal buyers, testified in his deposition
that savings associated with low chlorine coal can be calculated; he also testified, however,
that he does not know how to perform that calculation. Ball likewise testified that he does
not know how to measure benefits associated with low-chlorine coal and that none of the
individuals with whom he spoke was aware of any method for doing so. And Coalsales

15

According to Jam es Vick, Gulf Power’s m anager of environm ental affairs, the chlorine content of
Galatian coal is ten tim es that of im port coal.

Case No. 3:06cv207/MCR/MD

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offered no evidence to the contrary. Because there is no evidence that Gulf Power
received any measurable benefit from the reduced chlorine content of the cover coal, the
court finds that Gulf Power saved no expenses as a result its cover purchases due to the
chlorine content.16 Accordingly, the court finds that Gulf Power is entitled to a judgment
against Coalsales in the amount of $20,527,789, which represents the difference between
the contract price of Gulf Power’s 2007 cover purchases and the price Gulf Power would
have paid for the same quantity of coal under the CSA. The clerk of court is directed to
enter judgment in Gulf Power’s favor in that amount and close the file.17
DONE and ORDERED this 30th day of September, 2011.

s/

M. Casey Rodgers

M. CASEY RODGERS
CHIEF UNITED STATES DISTRICT JUDGE

16

The court would also note that the m ajority of coal provided under the CSA was high-chlorine
Galatian coal.
17

After the court entered its findings of fact and conclusions of law, Coalsales filed a m otion for
attorney’s fees and expenses based on a $10,000,000 Proposal for Settlem ent it served on Gulf Power on
October 15, 2008 (doc. 176). Under Fla. Stat. § 768.79, if a defendant serves an offer of judgm ent that is not
accepted by the plaintiff within thirty days and the judgm ent is one of no liability or at least twenty-five percent
less than the offer, the defendant will be entitled to reasonable attorney’s fees and costs incurred from the
date the offer was served. Although Gulf Power did not accept Coalsales’ offer, the court has determ ined that
Gulf Power is entitled to recover $20,527,789 in dam ages from Coalsales. Gulf Power’s dam ages thus
exceed Coalsales’ offer, and Coalsales’ m otion for attorney’s fees and costs (doc. 176), therefore, is DENIED.

Case No. 3:06cv207/MCR/MD