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Appalachia Natural Gas Surplus Cited in FirstEnergy Bankruptcy Filing

Citing prolific natural gas supplies from the Appalachian Basin that have eroded profits from power sales, FirstEnergy Corp. (FE) subsidiaries FirstEnergy Solutions Corp. and affiliates, along with FirstEnergy Nuclear Operating Co. (FENOC), have filed for Chapter 11 bankruptcy protection.

The filing, made over the weekend in the U.S. Bankruptcy Court for the Northern District of Ohio, comes more than a year after FE said it would exit the competitive power generation business and transition to a fully-regulated company. FE said in 2016 bankruptcy was an option for its deregulated power businesses, noting at the time that weak prices, insufficient results from capacity auctions and anemic electricity demand forecasts were dragging the rest of its operations down. 

FirstEnergy Solutions and FENOC own and operate two coal-fired power plants, one dual-fuel facility fired with gas and oil, a petroleum coke plant and three nuclear power plants in Ohio and Pennsylvania. Along with FirstEnergy Solutions’ subsidiaries, which are also listed on the bankruptcy petitions, the companies employ more than 3,000 people.

Significant debt obligations, increased operational costs tied to tighter environmental regulations, reduced revenues and obligations under long-term power purchase agreements prompted the bankruptcy filing, FirstEnergy Solutions President Donald Schneider said in a declaration supporting the petitions.

“There has been a well documented and rapid expansion in natural gas supplies, which has caused electricity prices to plummet, and has consequently reduced the debtors’ profits from power sales,” he said, adding that the “significant increase in the availability of cheap natural gas due to fracking has given gas-fired generation an advantage.”

FE and its distribution, transmission, regulated generation and Allegheny Energy (AE) Supply subsidiaries are not involved in the bankruptcy filing. AE Supply owns competitive coal-fired and  hydro generation assets that are scheduled to be sold or deactivated. FE has four regulated electric generation plants and 10 regulated utility companies that serve six million customers in Ohio, Pennsylvania, New Jersey, West Virginia and Maryland.

Over the last year, the competitive subsidiaries have sold plants, including more than 800 MW of gas-fired assets, announced plans to deactivate generating units and worked for federal and state support of coal-fired and nuclear facilities.

According to FirstEnergy Solutions, the voluntary Chapter 11 would allow the companies to restructure and “improve the viability of their operations.” It also said it would continue seeking legislative and regulatory relief at the state and federal level.

Last week, in a move that was chastised by environmental and industry groups, including the Sierra Club and the Natural Gas Supply Association (NGSA), FirstEnergy Solutions filed an application with U.S. Dept. of Energy (DOE) Secretary Rick Perry seeking an emergency order directing the PJM Interconnection to secure long-term capacity for nuclear and coal-fired plants that would compensate owners for the baseload power they provide.

The relief was sought under Section 202(c) of the Federal Power Act, which gives the DOE secretary the ability to address power emergencies. The Sierra Club said the kind of order FirstEnergy Solutions was seeking is intended to be used during war time or a severe grid impairment.

For the natural gas industry, the move was nothing new, as it’s fought against legislative efforts by FE and others in the PJM market to provide subsidies to nuclear facilities. NGSA CEO Dena Wiggins pointed to PJM comments submitted during the DOE’s unsuccessful notice of proposed rulemaking last year to compensate coal and nuclear generators, saying the grid operator noted that its system is “unquestionably” reliable.

“Competitive markets have a long track record of delivering affordable power to customers,” Wiggins said in response to the emergency application. “It would be counterproductive and send the wrong signal to the market for DOE to grant this request.”

PJM stated over the weekend that it fundamentally disagreed with the FirstEnergy Solutions application for relief. The grid operator also said in a reliability analysis last year that it’s not becoming too reliant on gas and renewable resources as more baseload coal-fired facilities continue to retire. 

Dozens of gas-fired power plants have been proposed or are under construction in the Appalachian Basin. Increasing renewables in the PJM market have also provided stiff competition for baseload power sources like coal and nuclear. FE said FirstEnergy Solutions, its subsidiaries and FENOC have been deconsolidated from its financial reporting.

The debtors have $550 million in cash on hand, which they said would be enough to operate normally during the course of the bankruptcy proceedings.

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