FirstEnergy, MEPCO brace for possible legal tussle over coal contract

The Allegheny Energy Supply Co. LLC subsidiary of FirstEnergy (NYSE: FE) told the bankruptcy court for Longview Power and associated coal producer MEPCO LLC that it wants to reserve a later right to argue over a contract under which MEPCO has been supplying coal to Allegheny.

Allegheny filed the Jan. 6 objection at the U.S. Bankruptcy Court for the District of Delaware, where Longview and MEPCO jointly sought Chapter 11 protection in August 2013. Longview is trying to refinance and fix mechanical problems at its 700-MW coal plant in northern West Virginia. MEPCO produces coal for that plant and also for outside customers, including the Hatfields Ferry coal plant in Pennsylvania that FirstEnergy deactivated in the fall of 2013.

MEPCO has threatened to sue FirstEnergy over the halt of coal deliveries under a contract to supply coal to Hatfields Ferry. Another related company in bankruptcy, Coresco LLC, on Dec. 23, 2013, asked the bankruptcy court to let it terminate a related 2009 contract for it to dispose of coal ash from the same power plant.

Allegheny, in its Jan. 6 response to the motion to reject the ash contract, told the court that the 2009 coal supply contract is “inextricably linked” with the ash contract. “The two agreements were executed simultaneously and as part of the same bargain, i.e., for both the purchase of usable coal and the disposal of spent coal, they each contain a cross-default provision referencing the other, and Debtor MEPCO, LLC is also the guarantor of the obligations of Debtor Coresco under the Ash Disposal Contract. The Debtors’ silence on the Coal Supply Contract in the Motion, combined with the fact that the Debtors’ proposed plan of reorganization (the ‘Plan,’ Doc. 671) will by default assume all contracts not rejected (See Plan section V.A), suggests that the Debtors may intend to attempt to assume the Coal Supply Contract after rejecting the Ash Disposal Contract, effectively jettisoning half of the bargain between the Debtors and Allegheny and retaining the other. Allegheny therefore files this response to reserve its rights to argue at a later time, if necessary, that the cross-default clauses between the Ash Disposal Contract and the Coal Supply Contract make the latter either incapable of assumption, or place it immediately in default upon such assumption.”

What Allegheny is saying is that if Coresco wants to reject the ash deal, then the coal contract will automatically have to get rejected with it. Considering the shutdown of Hatfields Ferry, possibly forever, that legal argument, if successful in court, would relieve Allegheny of a major liability related to the coal contract.

Given the current state of the bankruptcy docket, this issue is probably unripe for a final judicial determination, as the Longview debtors have not yet made clear on the record whether they do in fact intend to assume the coal supply contract, said Allegheny. “Therefore, Allegheny seeks only to avoid waiving or being estopped from asserting this argument, and therefore asks that this Court’s order granting the instant Motion reflect Allegheny’s reservation of rights.”

Coresco has been handling coal combustion byproducts for FirstEnergy’s 1,710-MW Hatfields Ferry plant. On Dec. 13, 2013, Longview got a letter from FirstEnergy that said that operations had been suspended at the Hatfields Ferry (also known simply as Hatfield) plant and that coal would no longer be taken from Longview’s MEPCO coal producing affiliate.

“Debtors have determined that the Ash Disposal Contract is no longer beneficial to the Debtors since there will be no coal combustion byproducts generated at Hatfield Station for the Debtors to load, transport or place in light of FirstEnergy’s and Allegheny’s determination to shut down operations at Hatfield Station,” said the Dec. 23 petition. “Accordingly, the Debtors have elected to reject the Ash Disposal Contract.”

In a Dec. 23 letter sent to FirstEnergy by Longview’s legal counsel in response to the Dec. 13 letter, Longview indicated it may not go down without a fight on FirstEnergy breaking the coal supply deal. A heavily-redacted version of the Dec. 23 letter is attached to the court filing.

“Moreover, given your acknowledgment that Hatfield Station is not operational, and the fact that we are not aware of any plan to return the plant to commercial operation in the near term, it unfortunately is clear that you do not intend to comply with your obligations under the Agreement,” said the letter to FirstEnergy about the coal contract. “Given all facts and circumstances, Mepco has no choice but to consider your letter and actions at a minimum an anticipatory breach of the Agreement, and by your refusal to take deliveries as of January 1, 2014, you are in breach of the Agreement.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.