Homer City, one of the largest power plants in Pennsylvania, is fighting against bankruptcy, low energy prices and, now, its largest coal supplier, Consol Energy Inc.
The Indiana County power plant, which employs about 270 people and has the capacity to power 2 million homes, is already on thin ice after its parent, GE Capital, said it wouldn’t pump any more money into the facility. In October, Homer City defaulted on its debt payment and has been keeping debtors at bay through a series of agreements giving it time to orchestrate a sale or otherwise reorganize.
Now the legal battle with Consol poses a new threat over piles of southwestern Pennsylvania coal that the plant doesn’t want but had a contract to buy.
At this point in the game, a legal battle could spell financial ruin for the power plant, Cecil-based Consol Energy said in its complaint filed in July in Allegheny County Common Pleas Court. And Homer City’s parent, GE Capital, knows it, the coal company charged.
With only $20 million in cash to its name as of Sept. 30, Homer City has already set aside $5.6 million in case it loses — a scenario it considers “probable” even as the power plant’s owners have vowed to mount a vigorous defense, according to the company’s latest earnings report.
Homer City’s spokesman, Tim Ragones, declined to comment for this story. Consol did not respond to the Post-Gazette.
In its complaint, Consol charged that GE Capital and its affiliated companies should be held responsible for breaching the coal supply contract.
“Homer City was a mere puppet of the GE entities,” the lawsuit states. It was GE officials who negotiated contract changes with Consol and they instructed Homer City’s staff to break that contract and buy cheaper coal from other producers, the complaint claims.
And because Homer City is a limited partnership, a corporate structure that insulates its owners, Consol said, the GE companies “will have succeeded in orchestrating Homer City’s breaches with no consequence due to (their) own undercapitalization and/or mismanagement of Homer City.”
GE Capital Corp. rescued Homer City from bankruptcy four years ago and invested $750 million into pollution controls at a plant. But earlier this year, GE wrote off the asset and put the power plant up for sale.
GE received several offers valued between $230 million and $535 million, but debt holders rejected all of them in September. Still, the company left the door open to discuss with potential buyers a more amenable arrangement.
Against this backdrop, Consol asked the court in July to halt a sale of the power station until the breach of contract case is resolved. If the sale goes through, Consol argued, it will have no recourse.
Defer and repeat
The conflict began last year when Homer City started deferring coal shipments it was obligated to buy from Consol under a January 2014 contract.
This was a common problem among coal producers that began to see inventories pile up during a warm winter in 2015. Many coal executives talked about their struggles, as clients asked to defer their obligations. Given that coal producers didn’t want to lose their share of an already shrinking market, many agreed to do so without penalties.
“It doesn’t behoove coal companies to push this coal on their customers, possibly pushing them into bankruptcy,” said Anthony Young, senior analyst at Macquarie Group who covers coal.
Many coal producers agreed to give their power plant clients a break when coal prices tumbled precipitously in 2015. Mr. Young likened it to the housing crisis in 2008 when a wave of short sales spread throughout the country.
“Sure, you had contracts in hand,” he said. But if a power plant said it might have to shut down or claim that market conditions have gotten so out of hand that it must break the contract, what good is it?
In its complaint, Consol claims it tried to play ball with Homer City. The coal company said it agreed to several contract changes. It instituted a monthly quota and allowed Homer City to defer up to 125,000 tons of coal each quarter.
But it didn’t work, Consol said, and by March, Homer City was already 900,000 tons behind on its obligations — a not insignificant amount, Mr. Young said. That’s more coal than Consol had delivered to the power plant during the first nine months of the year, according to data collected by the Energy Information Administration.
In June, Homer City told Consol it wouldn’t accept any more coal under the price in their agreement, the complaint states.
With so much unsold coal piling up and no immediate market for it, Consol begrudgingly agreed to sell at a “substantially reduced” price, if only to make a dent in Homer City’s shortfall.
Now, Consol says Homer City should be barred from buying coal from other producers, which is "compounding the injury to Consol by reducing its market share and advantage,” the coal miner said.
In the first nine months of this year, about 40 percent of Homer City’s coal came from Consol’s Bailey mine complex in southwestern Pennsylvania, according to government data. Another 35 percent came from Rosebud Mining Co., a Kittanning-based company, and the rest from other miners.
The puppetmaster
If Consol is victorious in court, Homer City won’t have enough money to pay damages, the coal company said in its lawsuit. It placed the responsibility for the conflict and for its potential award on the shoulders of GE Capital and its affiliated companies.
Consol’s lawsuit also lobbed broader accusations at the company, saying GE exercised “complete control over Homer City’s finances, including by providing,and then withdrawing, a $75 million working capital line of credit, the withdrawal of which crippled Homer City.”
Consol asked the court to breach the so-called corporate veil and hold GE responsible for Homer City’s actions.
So far, GE and Homer City haven’t responded to the charge that they violated a contract with Consol. But they did object to Consol’s legal arguments to breaching the veil, preventing a sale, and ordering Homer City to buy coal only from Consol.
The judge overruled those objections in October. The case will now proceed.
Anya Litvak: alitvak@post-gazette.com or 412-263-1455.
First Published: December 7, 2016, 5:00 a.m.
