Alliance sues FirstEnergy in Pennsylvania court over terminated coal contract

The Tunnel Ridge LLC unit of coal producer Alliance Resource Partners LP (NASDAQ: ARLP) on Jan. 15 filed suit against a unit of FirstEnergy (NYSE: FE) over the termination of a contract for Tunnel Ridge and its Pittsburgh-seam longwall mine in northern West Virginia to supply coal.

Said Alliance in its Feb. 27 annual Form 10-K report: “We initiated litigation on January 15, 2015 alleging that a customer anticipatorily breached a coal supply contract when it notified us that it would not accept coal shipments under the contract after April 15, 2015. (Tunnel Ridge, LLC v. Allegheny Energy Supply Company, LLC, Court of Common Pleas, Allegheny County, Pennsylvania.) The contract obligates the customer to purchase more than 5.0 million tons during the period between April 16, 2015 and the end of the contract term on December 31, 2021. We are seeking to recover damages resulting from the customer’s alleged breach of contract.”

The Form 10-K doesn’t say which power plant or plants that this contract involves. Notable is that April 15 is the day before the federal Mercury and Air Toxics Standards (MATS) take effect.

FirstEnergy apparently hinted at this dispute in its Feb. 17 Form 10-K, saying about endangered coal-fired capacity: “As of September 1, 2012, Albright, Armstrong, Bay Shore Units 2-4, Eastlake Units 4-5, R. Paul Smith, Rivesville and Willow Island were deactivated. [FirstEnergy Generation] entered into [reliability must-run] arrangements with PJM for Eastlake Units 1-3, Ashtabula Unit 5 and Lake Shore Unit 18 through the spring of 2015, when they are scheduled to be deactivated. In February 2014, PJM notified FG that Eastlake Units 1-3 and Lake Shore Unit 18 will be released from RMR status as of September 15, 2014. FG intends to operate the plants through April 2015, subject to market conditions. As of October 9, 2013, the Hatfield’s Ferry and Mitchell stations were also deactivated.

“FirstEnergy and [FirstEnergy Solutions] have various long-term coal supply and transportation agreements, some of which run through 2025 and certain of which are related to the plants described above. FE and FES have asserted force majeure defenses for delivery shortfalls under certain agreements, and are in discussion with the applicable counterparties. As to coal transportation agreements, FE and FES have agreed to pay liquidated damages for delivery shortfalls for 2014 in the estimated amount of $70 million. If FE and FES fail to reach a resolution with the applicable counterparties for the agreements associated with the deactivated plants or unresolved aspects of the agreements and it were ultimately determined that, contrary to their belief, the force majeure provisions or other defenses, do not excuse or otherwise mitigate the delivery shortfalls, the results of operations and financial condition of both FirstEnergy and FES could be materially adversely impacted. If that were to occur, FE and FES are unable to estimate the loss or range of loss.

“Additionally, on July 1, 2014, FES terminated a long-term fuel supply agreement. In connection with this termination, FES recognized a pre-tax charge of $67 million in the second quarter of 2014. In one coal supply agreement, AE Supply has asserted termination rights effective in 2015. In response to the notification of the termination, the coal supplier has commenced litigation alleging AE Supply does not have sufficient justification to terminate the agreement. There are 6 million tons remaining under the contract for delivery. At this time, FirstEnergy cannot estimate the loss or range of loss regarding the on-going litigation with respect to this agreement.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.