FirstEnergy (NYSE: FE) reported in its Nov. 4 Form 10-Q financial statement that it is fighting to get rid of legal obligations related to coal it can no longer take for power plants it shut in 2015 due to the federal Mercury and Air Toxics Standards (MATS).
In August 2015, FirstEnergy Generation LLC (FG), a subsidiary of FirstEnergy Solutions Corp. (FES), submitted to the AAA office in New York, N.Y., a demand for arbitration and statement of claim against the BNSF Railway and CSX Transportation seeking a declaration that MATS constituted a force majeure event that excuses FG’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 FG that are located in Ohio. As a result of and in compliance with MATS, all plants covered by this contract were deactivated by April 16, 2015.
In January 2012, FG notified BNSF and CSX that MATS constituted a force majeure event under the contract that excused FG’s further performance. Separately, in August 2015, BNSF and CSX submitted to the AAA office in Washington, D.C., a demand for arbitration and statement of claim against FG alleging that FG breached the contract and that FG’s declaration of a force majeure under the contract is not valid and seeking damages under the contract through 2025.
On May 31, 2016, the parties agreed to a stipulation that if FG’s force majeure defense is determined to be wholly or partially invalid, liquidated damages are the sole remedy available to BNSF and CSX. The arbitration panel has determined to consolidate the claims with a liability hearing scheduled to begin on Nov. 28, 2016, and, if necessary, a damages hearing scheduled to begin on May 8, 2017. The decision on liability is expected to be issued within sixty days from the end of the liability hearing proceedings, which are scheduled to conclude Feb. 24, 2017.
Said the Form 10-Q: “FirstEnergy and FES continue to believe that MATS constitutes a force majeure event under the contract as it relates to the deactivated plants and that FG’s performance under the contract is therefore excused. FG intends to vigorously assert its position in the arbitration proceedings. If, however, the arbitration panel rules in favor of BNSF and CSX, the results of operations and financial condition of both FirstEnergy and FES could be materially adversely impacted. Refer to the Strategic Review of Competitive Operations section of Note 1, Organization and Basis of Presentation, for possible actions that may be taken by FES in the event of an adverse outcome, including, without limitation, seeking protection under the bankruptcy laws. FirstEnergy and FES are unable to estimate the loss or range of loss.”
FG is 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 owned by FG that was deactivated as a result of MATS. FG has asserted force majeure in response to delivery shortfalls to such plant under this contract as well. If FG fails to reach a resolution with the applicable counterparties to the contract, and if it were ultimately determined that, contrary to FirstEnergy’s and FES’ belief, the force majeure provisions of that contract do not excuse the delivery shortfalls to the deactivated plant, the results of operations and financial condition of both FirstEnergy and FES could be materially adversely impacted. FirstEnergy and FES are unable to estimate the loss or range of loss.
As to both coal transportation agreements referenced above, FG paid approximately $70 million in the aggregate in liquidated damages to settle delivery shortfalls in 2014 related to its deactivated plants, which approximated full liquidated damages under the agreements for such year related to the plant deactivations. Liquidated damages for the period 2015-2025 remain in dispute.
As to a specific coal supply agreement, Allegheny Energy Supply Co. LLC (AE Supply) has asserted termination rights effective in 2015. In response to notification of the termination, the unnamed coal supplier commenced litigation alleging AE Supply does not have sufficient justification to terminate the agreement. AE Supply has 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 approximately 5.5 million tons remaining under the contract for delivery. At this time, AE Supply cannot estimate the loss or range of loss regarding the on-going litigation with respect to this agreement, FirstEnergy noted.