FirstEnergy Solutions Corp. received bankruptcy court approval to reject a contract with coal producer Contura Energy Inc., a move the power generator says will likely save $20 million by the end of the 2020 contract expiration date.
FirstEnergy Solutions, or FES, says the coal deal is no longer economically viable as coal prices have decreased and the cost of operating coal plants has risen. The U.S. Bankruptcy Court for the Northern District of Ohio authorized rejection of several contracts in the June 12 order, including leases related to railcars and a coal supply contract and amendment entered into with a Contura affiliate.
Under a supply contract with Contura, FirstEnergy Generation, a subsidiary of FES, was required to purchase 1.5 million tons of coal annually through 2020, according to prior filings with the court. FES said it could save money by buying its coal closer to the market rate of $39.21 per ton rather than the $43.89 per ton pricing under the contract.
"Because there is ample supply of coal available in the market, [FirstEnergy Generation] believes that it will be able to purchase all of its coal requirements over the next twelve months from other vendors at the market rate to efficiently operate the coal-powered generation plants," a declaration from a FirstEnergy Generation executive stated. "Rejecting the coal supply contract will result in significant savings for the debtors' estates, and negotiations with the contract counterparty would be unlikely to be productive at this stage."
Contura had anticipated the outcome of the FES request before the court and said in a first-quarter earnings release issued May 24 that it had adjusted its committed and price tons from Northern Appalachia to reflect the change.
"Based on current markets and the company's previously announced committed and priced position for 2018 NAPP coal shipments, we do not expect the rejection of this singular contract in relation to FirstEnergy's bankruptcy process to have any material impact on Contura's full-year sales performance," Contura Energy said in a statement to S&P Global Market Intelligence on June 15.
Coal delivered under that contract was for the W.H. Sammis power plant in Ohio. S&P Global Market Intelligence data shows Contura's Cumberland mine in Pennsylvania was the primary source of coal burned at the plant in 2017.
Contura Coal Sales LLC was assigned the contract, originally entered into with an Alpha Natural Resources LLC subsidiary in July 2016. The two companies split during Alpha's bankruptcy, but recently announced they would be merging again.
A presentation about the merger shows the combined companies produced about 26.4 million tons of coal in 2017, though 12.6 million of those were metallurgical coal tons sold for steelmaking. The companies projected a combined range of 7.1 million to 7.7 million tons of coal shipments in 2018 from the Northern Appalachia coal segment where the Cumberland mine is located.
FES is the competitive subsidiary of FirstEnergy Corp.