Energy Harbor has agreed to pay Ohio Valley Electric Corp. (OVEC) $32.5 million and drop its attempt to abrogate a 30-year power purchase agreement signed by its predecessor, bankrupt FirstEnergy Solutions (FES).

In a settlement lodged with FERC on May 19, the companies said Energy Harbor will assume FES’ obligations under the multiparty intercompany power agreement (ICPA) as of June 1 and pay OVEC $32.5 million “for any cure costs associated with such assumption.”

OVEC agreed to waive all claims against FES and Energy Harbor arising prior to June 1 and withdraw a complaint it filed with FERC before FES’ bankruptcy and its appeal of the bankruptcy court order confirming FES’ reorganization.

Under the ICPA, which runs through June 30, 2040, OVEC provides power from its two coal-fired generating plants — the 1.1-GW Kyger Creek in Cheshire, Ohio, and 1.3-GW Clifty Creek in Madison, Ind. — to Energy Harbor and seven other corporate “sponsors.” FES signed the ICPA in 2010, taking a 4.85% “power participation ratio,” which required it to pay about $30 million annually to cover OVEC’s losses.

Bankruptcy Filing

OVEC filed a complaint on March 26, 2018, asking FERC to rule that allowing FES to reject the ICPA under the Bankruptcy Code without first obtaining commission approval violated the Federal Power Act. FES filed its Chapter 11 bankruptcy petition five days later.

In October 2018, OVEC filed a proof of claim seeking $531 million for damages from FES’ rejection of the contract. OVEC also sought $29.3 million for power it provided to FES while the company was in bankruptcy.

FES changed its name to Energy Harbor upon emerging from bankruptcy in February, with former bondholders owning 50% of the equity. In March, FERC ordered a paper hearing to consider FES’ attempt to void the OVEC contract and PPAs with renewable generators as part of its bankruptcy proceeding (EL20-35). (See FERC Sets Hearing on FirstEnergy PPAs.)

The commission acted after the 6th U.S. Circuit Court of Appeals issued a mandate overruling a U.S. bankruptcy court’s May 2018 injunction preventing FERC from issuing any order requiring FES to continue complying with the contracts. The appellate court also reversed the bankruptcy court’s ruling allowing FES to reject the contracts.

On May 19, the commission granted OVEC and Energy Harbor’s request to extend the briefing schedule in the case for 30 days to “allow OVEC to avoid incurring the time and expense of preparing a reply brief that they state is likely to be unnecessary due to” the settlement.

Litigation Costs, Time

OVEC and Energy Harbor said they called a truce to end litigation that could have continued for years and cost millions.

“The parties’ disputes have involved complicated legal and factual issues, with appeals now having made their way to the United States Court of Appeals for the Sixth Circuit multiple times,” they said. “There is no doubt that the litigation between FES and OVEC has been hard-fought, complex, time-consuming and costly.”

The companies also said the settlement will ensure bigger recoveries for FES’ creditors. “Creditors of FES will no longer be diluted by OVEC’s asserted claim, which, assuming the estimated recoveries in the disclosure statement, would have been entitled to receive cash distributions of over $160 million if allowed in full.”

The Bankruptcy Court for the Northern District of Ohio will hold a hearing June 16 to consider the settlement.

Looking Forward

The deal also will allow Energy Harbor’s management “to focus on the growth and success of the reorganized business,” the companies said. OVEC will waive its claims against FES, including its rejection damages claim of $531 million.

Energy Harbor and OVEC pledged to work together “to reallocate to EH the right to offer its ‘power participation ratio’ share of OVEC’s ‘available energy’ … through the offering of energy and capacity” in PJM.

Energy Harbor said that while it continues “to believe that the costs associated with the ICPA are burdensome to their retail business, [Energy Harbor] understand[s] that OVEC is focused on improving its operational cost structure and that recent Ohio state legislation will assist OVEC in maintaining financial stability while doing so.”

Ohio House Bill 6 authorized a surcharge on electricity customers to subsidize OVEC’s coal plants in Ohio and Indiana and FES’ — now Energy Harbor’s — Davis-Besse and Perry nuclear plants.

“The reorganized debtors believe that operational improvements and cost savings can be achieved through their ongoing participation in OVEC pursuant to the ICPA, and they are ready, willing and able to assist in those efforts.”

Pitch to Investors: Nuclear Power and Retail

Energy Harbor emerged from bankruptcy with low debt and largely subsidized generation, winning it investment-grade ratings from Moody’s Analytics and Standard and Poor’s.

In March, the first month after emerging from bankruptcy, the company reported $142 million in revenue and a $124 million net loss, driven largely by $153 million in losses on nuclear decommissioning trust investments. It also repurchased $113 million in company stock, part of a plan to purchase up to $800 million in shares over nine months. Its adjusted cash flow for the month, including its nuclear fuel amortization expense, was $23 million.

An investor slide deck posted May 10 touts the company’s carbon-free nuclear generation and its retail sales operation, which it says will generate $200 million in annual cash flow by 2022, when it says more than 95% of its free cash flow will come from carbon-free sources.

Energy Harbor owns about 7,200 MW of capacity, including three nuclear plants: Beaver Valley Power Station in Shippingport, Pa. (1,872 MW); Davis-Besse Nuclear Power Station in Oak Harbor, Ohio (908 MW); and Perry Nuclear Power Plant in Perry, Ohio (1,268 MW). The company rescinded plans to retire Beaver Valley in March, citing Pennsylvania’s efforts to join the Regional Greenhouse Gas Initiative. (See Beaver Valley Nuclear Plant to Stay Open.)

The company is retiring the coal-fired Units 1-4 of its W.H. Sammis Plant (669 MW) in Stratton, Ohio, at the end of this month, with a 13-MW diesel unit set to shut down next year. It had also planned to shutter Sammis’ coal-fired Units 5-7 (1,491 MW) in 2022, but FES rescinded the notice last year in response to Ohio House Bill 6. Its coal-fired Pleasants Power Station (1,278 MW) in Willow Island, W.Va., is set to retire in June 2022.

Three-quarters of its cash flow comes from nuclear zero-emission credits, plus capacity payments and retail sales, leaving only 25% “commodity exposed,” it says.

It notes its gross debt-to-cash-flow ratio is only 0.8, less than a third of the “peer average” of 2.9.

Another selling point: The “company [is] not expected to be a material federal cash taxpayer for [the] foreseeable future.”