FirstEnergy currently has long-term coal contracts with various terms to acquire about 34.5 million tons of coal in 2012, which is about 90% of its 2012 coal requirements of 38.5 million tons, the utility holding company said in its Feb. 28 annual Form 10-K report.
This coal requirement excludes the impact of the recently-announced decisions to close nine older coal-fired plants by Sept. 1, subject to review for reliability impacts by PJM. This contract coal is produced primarily from mines located in Ohio, Pennsylvania, West Virginia, Montana and Wyoming. The contracts expire at various times through Dec. 31, 2030.
The coal plants and units targeted for retirement by Sept. 1 are: Eastlake Units 1-5, 1,233 MW; Bay Shore Units 2-4, 495 MW; Armstrong Units 1-2, 356 MW; Albright Units 1-3, 292 MW; Lakeshore Unit 18, 245 MW; Ashtabula Unit 5, 244 MW; Willow Island Units 1-2, 242 MW; Rivesville Units 5-6, 126 MW; and R. Paul Smith Units 3-4, 116 MW.
On Jan. 26, FirstEnergy announced that its unregulated generation subsidiaries will retire six older coal-fired plants located in Ohio, Pennsylvania and Maryland. On Feb. 8, FirstEnergy announced that Monongahela Power will retire three older coal-fired plants located in West Virginia. All of these generating plants will be closed by Sept. 1.
The decisions to close the plants is the result of a comprehensive review of FirstEnergy’s coal-fired facilities in light of the U.S. Environmental Protection Agency’s Mercury and Air Toxics Standards (MATS) rules that were recently finalized and other environmental regulations. In addition, Monongahela Power will make a filing with the West Virginia Public Service Commission to provide it with information regarding the retirement of its plants.
As a result of the closure decisions, impairment charges associated with these assets were recognized by FirstEnergy, aggregating about $334m ($207m after-tax) in the fourth quarter of 2011, including about $243m ($152m after-tax) which is applicable to FirstEnergy Solutions.
When the retired coal plants are removed from the FirstEnergy fleet, nearly 100% of its generation output will be from either low- or non-emitting facilities, including nuclear, hydro, natural gas and scrubbed coal units. Recent investments of $3bn at the coal-fired Hatfield, Fort Martin and Sammis plants reduced emissions of SO2 by over 95%, and NOx by at least 64%, at these facilities. Since 1990, FirstEnergy said it has reduced emissions of NOx by more than 76%, SO2 by more than 86%, and mercury by about 56%.
FirstEnergy sells stake in coal mine, awaits coal dispute ruling
In October 2011, FirstEnergy announced that Gunvor Group Ltd. purchased a one-third interest in Global Holding, a joint venture that owns the Signal Peak longwall coal mine in Montana, and in the related Global Rail coal transportation operations. Following the sale, FirstEnergy, through its wholly owned subsidiary, FirstEnergy Ventures, has a one-third interest in Global Holding.
FirstEnergy Generation has a long-term coal supply agreement with Signal Peak for up to 10 million tons per year. FirstEnergy Generation has re-evaluated its coal usage under that agreement and has determined to resell its coal purchased from Signal Peak to an affiliate of Global Holding; provided, however, that such affiliate may require FirstEnergy Generation to repurchase up to 2 million tons annually from the existing underground mine, and, if Signal Peak develops surface mines, it could require FirstEnergy Generation to purchase an additional 2 million tons per year. FirstEnergy remains a 100% guarantor on Signal Peak’s and Global Rail’s $350m senior secured credit facility.
FirstEnergy also reported in the Form 10-K that it is still waiting out a court appeal in a coal contract dispute with International Coal Group that it won at a lower court level. ICG, by the way, was acquired in June 2011 by Arch Coal (NYSE:ACI), so this case is now being handled by Arch on that side of the dispute.
In December 2006, Allegheny Energy Supply and Monongahela Power filed a complaint in the Court of Common Pleas of Allegheny County, Pa. against ICG and affiliates over a contract to supply coal to the Harrison power plant in northern West Virginia. Prior to the time of trial, ICG was dismissed as a defendant by the court, which issue can be the subject of a future appeal. ICG cited geology problems at a mine near the Harrison plant for its inability to supply contracted coal quantities.
A non-jury trial was held from January-February 2011. At trial, Allegheny Energy Supply and Monongahela Power presented evidence that they have incurred in excess of $80m in damages for replacement coal purchased through the end of 2010 and will incur additional damages in excess of $150m for future shortfalls. Defendants primarily claim that their performance is excused under a force majeure clause in the coal contract and presented evidence at trial that they will continue to not provide the contracted yearly tonnage amounts.
In May 2011, the court entered a verdict in favor of Allegheny Energy Supply and Monongahela Power for $104m ($90m in future damages and $14m for replacement coal/interest). In August 2011, the court denied all motions for post-trial relief and the May 2011 verdict became final. In August 2011, ICG posted bond and filed a notice of appeal. Briefing on the appeal has concluded and oral argument is expected in May or June, the Form 10-K noted.