Norfolk Southern might owe millions for alleged contract breach
Norfolk Southern Corporation (NYSE: NSC) could be forced to pay millions of dollars for breaching a contract to ship coal to coal-fired power plants, a jury determined last week.
A jury found on Sept. 17 that NSC didn't deliver coal supplied by Alabama-based Drummond Coal from the Shipyard Terminal in Charleston, South Carolina, to 23 destinations in the eastern U.S. The case was heard in the U.S. District Court in Roanoke, Virginia.
NSC declined to comment on the proceeding since it's part of ongoing litigation.
An initial contract, entered in January 2006, called for NSC to deliver coal that Drummond imported from Colombia to power plants in the southeastern U.S., according to a court filing that Drummond submitted. Drummond and NSC amended that contract in January 2010, and the contract was to last through December 31, 2019.
But during that timeframe, coal consumption among U.S. power plants declined. Regulations from the U.S. Environmental Protection Agency called for utilities to adopt emissions controls that discouraged utilities from consuming coal.
Low natural gas prices in this same time period also encouraged utilities to switch to using more natural gas instead of coal to generate electricity.
As a result of these factors, utilities shut down their coal-fired units. Drummond said in court filings that more than half of the 23 destinations that were to receive Drummond's coal had closed or no longer burned coal.
Drummond stipulates that the contract requires NSC to work with Drummond to ship a guaranteed volume for each year of the contract. But Drummond said NSC didn't provide any alternatives, and instead sent shortfall invoices for not meeting guaranteed volumes for each year from 2011 to 2015. Drummond paid about $35 million in shortfall fees.
But NSC argued that Drummond elected not to ship any coal from the Shipyard River Terminal in 2011 and in subsequent years. NSC said the guaranteed volume was 1.29 million short tons annually.
Drummond also said that NSC has contracts with utilities to ship minimal amounts of coal, and instead of shipping Drummond's coal, NSC shipped coal that came from Drummond's competitors, which enabled NSC to receive a "double benefit" because it was collecting fees from Drummond.
NSC said it "merely transports the coal tendered to it for shipment," and Drummond didn't tender any coal for shipment between 2011 and 2015.
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