FirstEnergy awaits decision that could hasten its bankruptcy

As FirstEnergy Corp., one of the largest electric utility companies in the U.S., barrels toward a verdict on what to do about its money-losing power plant subsidiaries, a dispute with a couple of railroads may force the company’s hand.

A decision in one of several contract dispute cases nagging at the Ohio-based energy company is expected by Tuesday. It involves FirstEnergy’s claim that environmental regulations forced the company to close several coal-fired power plants in Ohio that were due to receive coal on CSX and BNSF railroads. Those regulations, the company said, constituted an event so unforeseen and out of its control that the company should be excused from its obligations under the rail contracts.

That will be up to an arbitrator to decide.

If the decision doesn’t go FirstEnergy’s way, a hearing will be held on just how much the company owes the railroads for breaking contracts that were supposed to last through 2025. The amount of damages — to be determined by sometime in July — could be the deciding factor in FirstEnergy’s bankruptcy calculus. As company leaders have said, FirstEnergy is on a fast track to get out of its competitive generation business, which operates power plants including Bruce Mansfield and Beaver Valley in Beaver County.

The environmental rules in question set the nation’s first limits on mercury, lead and other toxics that power plants could release into the air.

Instead of spending hundreds of millions of dollars to outfit some of its coal-fired power

stations with pollution controls to comply with rules by 2015, FirstEnergy closed several of them and claimed the enactment of the mercury and air toxics standards rules constituted a condition beyond the company’s control — one that allows FirstEnergy to break the contract. The railroads disagree. FirstEnergy has a similar conflict with BNSF and Norfolk Southern, which had a contract to deliver 2.5 million tons of coal each year to several now-shuttered Ohio coal plants. Here, too, FirstEnergy told the railroads that the federal rules amount to an insurmountable roadblock to its ability to run the plants and that excuses the company’s performance under its coal transportation contracts.

Again, the railroads aren’t buying it. They’re seeking damages, “including lost profits through 2025,” and asking for a declaratory judgment that the energy company’s claim doesn’t release it from its obligations, FirstEnergy said in its annual report.

Already, the energy company said it has paid $70 million in liquidated damages in 2014 to compensate for coal delivery shortfalls.

All this comes during a bizarre time in the history of the federal agency that crafted the mercury and air toxic rules.

The standards are an outgrowth of the Clean Air Act, which was passed in the 1970s and amended in the 1990s, giving the U.S. Environmental Protection Agency the power to regulate mercury and other toxic emissions. Because of legal wrangling — including lawsuits from utilities and unsympathetic state attorneys general, such as Oklahoma’s Scott Pruitt — the rules didn’t go into effect until 2012 and compliance wasn’t mandated for another three years, with the availability of an extra year to boot.

Now, Mr. Pruitt is in charge of the EPA and has indicated that the agency will be reviewing the mercury rule as part of a string of nods to the coal industry.

Still on the EPA’s website, however, is a statement that broadly argues against FirstEnergy’s claims that the mercury standards caused it to close its plants.

“In the EPA’s 40-year history, the Clean Air Act has not impacted power companies’ability to keep the lights on in communities across the United States,” it says.

Stephanie Walton, a First Energy spokesperson, said the federal government’s recent move to reconsider the mercury rules has no bearing on the plants the company has already closed.

Nor does it change FirstEnergy’s stated goal of getting rid of its competitive generation assets — power plants that aren’t owned by a utility and don’t have a guaranteed rate of return. Those plants have fared poorly recently as power demand hasn’t grown and cheap natural gas overtook coal as the preferred fuel for electricity generation.

Those factors aren’t lost on Tunnel Ridge LLC, a coal mining company in Triadelphia, W.Va., that is involved in a similar legal dispute with FirstEnergy.

Tunnel Ridge said it spent millions of dollars building out a mine that was supposed to supply more than 5 million tons of coal to FirstEnergy’s Hatfield’s Ferry and Mitchell power plants in southwestern Pennsylvania. Both of the plants closed in 2013, and FirstEnergy blamed the mercury standards for breaking its contract with the coal supplier.

Unlike the railroad cases that are in arbitration and therefore don’t have a publicly available paper trail of the arguments from both sides, the Tunnel Ridge litigation is rich with accusations. The case is in the discovery phase. Tunnel Ridge, seeing an opportunity to piggyback off FirstEnergy’s similar feuds, was granted the right to subpoena FirstEnergy’s documents related to the railroad cases.

Tunnel Ridge wanted the documents to build support for its theory that FirstEnergy used environmental rules as a “pretext” for closing certain plants and breaking certain contracts.

It’s unclear how much FirstEnergy could stand to lose if arbitrators decide that shutting the plants because of environmental regulations isn’t a good enough excuse to get out of rail transportation contracts.

In a note downgrading FirstEnergy in November, Moody’s Investor Service said the maximum liability could be as high as $770 million. Though that figure is unlikely, “There is a reasonable possibility of a partial award for the rail companies,” Moody’s wrote, cautioning that “a significant penalty” might usher in a bankruptcy or restructuring effort. This, Moody’s said, is “something explicitly acknowledged by the management.”

The interconnectedness of FirstEnergy’s subsidiaries and their reliance on the parent company for certain financial support and guarantees make any unfavorable event in one a potential catalyst for the fall of others.

For example, if FirstEnergy Solutions, which operates many of the coal-fired power plants still in the company’s portfolio, files for bankruptcy, it’s likely to drag FirstEnergy Nuclear Operating Co., which runs the Beaver Valley nuclear power station, along with it.