Pittsburgh Post-Gazette

FirstEnerg­y awaits decision that could hasten its bankruptcy

- By Anya Litvak

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.

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