FirstEnergy (NYSE: FE) said in its Feb. 16 annual Form 10-K report that is in legal disputes with various parties as it tries to assert force majeure to get out of rail contracts for coal moving to power plants it has had to shut due to the federal Mercury and Air Toxics Standards, which took initial effect in April of last year.
As a result of MATS, Eastlake Units 1-3, Ashtabula Unit 5 and Lake Shore Unit 18 in Ohio were deactivated in April 2015, which completes the deactivation of 5,429 MW of coal-fired plants since 2012 on the part of FirstEnergy.
In August 2015, FirstEnergy Generation submitted to an arbitration office in New York, N.Y., a demand for arbitration and statement of claim against the BNSF Railway and CSX Transportation railroads seeking a declaration that MATS constituted a force majeure that excuses FirstEnergy Generation’s performance under its coal transportation contract with these parties. Specifically, the dispute arises from a contract for the transportation by BNSF and CSX of a minimum of 3.5 million tons of coal annually through 2025 to certain coal-fired power plants owned by FirstEnergy Generation that are located in Ohio. As a result of MATS, those plants were deactivated by April 16, 2015.
In January 2012, FirstEnergy Generation notified BNSF and CSX that MATS constituted a force majeure event under the contract that excused its further performance. Separately, in August 2015, BNSF and CSX submitted to an arbitration office in Washington, D.C., a demand for arbitration and statement of claim against FirstEnergy Generation alleging that it breached the contract and that the declaration of a force majeure under the contract is not valid and seeking damages including, but not limited to, lost profits under the contract through 2025. As part of its statement of claim, a right to liquidated damages is alleged.
The arbitration panel has decided to consolidate the claims with a liability hearing expected to begin in November 2016, and, if necessary, a damages hearing to begin in May 2017. The decision on liability is expected to be issued within sixty days from the end of the liability hearings.
FirstEnergy Generation is also a party to another coal transportation contract covering the delivery of 2.5 million tons annually through 2025, a portion of which is to be delivered to another coal-fired plant that was deactivated as a result of MATS. FirstEnergy Generation has asserted a defense of force majeure in response to delivery shortfalls to this plant under this contract as well.
As to both coal transportation agreements referenced above, FirstEnergy paid in settlement approximately $70 million in liquidated damages for delivery shortfalls in 2014 related to its deactivated plants.
As for a specific coal supply agreement with an unnamed party related to MATS, FirstEnergy and its Allegheny Energy Supply have asserted termination rights effective in 2015. In response to notification of the termination, the coal supplier commenced litigation alleging FirstEnergy and AE Supply do not have sufficient justification to terminate the agreement. FirstEnergy and AE Supply have filed an answer denying any liability related to the termination. This matter is currently in the discovery phase of litigation and no trial date has been established. There are 6 million tons remaining under the contract for delivery.