FirstEnergy Settles Coal Transport Dispute

FirstEnergy said its FirstEnergy Generation unit would pay CSX Corp's CSX Transportation and Berkshire Hathaway Inc's BNSF Railway in three annual installments beginning May 1, which would be guaranteed by FirstEnergy.

FirstEnergy warned if the CSX/BNSF agreement is not finalized or if another coal transport dispute with BNSF and Norfolk Southern Corp's Norfolk Southern Railway is not settled, the "amount of damages owed ... could be material and may cause FirstEnergy Solutions to seek protection under U.S. bankruptcy laws."

FirstEnergy Solutions is the company's competitive subsidiary. FirstEnergy Generation is a unit of FirstEnergy Solutions.

"The settlement does nothing to improve the long-term outlook for FirstEnergy's merchant generation business, in our view, with weak commodity forward prices for electricity and gas into 2018, and beyond," Paul Fremont, managing director Americas Research at Mizuho Securities USA, said in a statement Thursday.

Fremont also noted the settlement would add $109 million to FirstEnergy's exposure if FirstEnergy Solutions ends up declaring bankruptcy in the future.

FirstEnergy said in late 2016 it wants to exit the competitive generation business over the next 18 months to focus on its regulated businesses.

The competitive businesses have suffered over the past several years as declining natural gas prices depressed power prices to their lowest in more than 15 years.

At the same time, demand for electricity from the power grid has declined in several regions since many businesses closed during the Great Recession of the late 2000s, and with the proliferation of energy efficiency and distributed renewable generation programs that enable homeowners to produce more of their own electricity.

In the coal contract dispute with CSX and BNSF, FirstEnergy argued in a hearing concluded on Feb. 24 it should be allowed to exit the delivery contracts because it was forced to shut some of the plants that the fuel was to be delivered to due to new, unforeseen federal environmental regulations.

On April 12, an arbitration panel denied FirstEnergy's demand for declaratory judgment that force majeure excused its performance under the coal contracts, and ruled that FirstEnergy breached and repudiated the contract.

Separately, FirstEnergy said settlement discussions with BNSF and Norfolk Southern related to another long-term coal transportation contract were in early stages.