In re Firstenergy Solutions Corp.

591 B.R. 688

IN RE FIRSTENERGY SOLUTIONS CORP., et al., Debtors.

Case No. 18-50757 (Jointly Administered)

United States Bankruptcy Court, N.D. Ohio, Eastern Division.

Signed September 18, 2018

Julie Anderson Bickis, Orville L. Reed, Stark & Knoll Co. LPA, Kate M. Bradley, John Cleaveland Fairweather, Bridget Aileen Franklin, Marc Merklin, Brouse & McDowell, LPA, Akron, OH, Kate Doorley, Akin Gump Strauss Hauer & Feld LLP, Michael Flynn McBride, Van Ness Feldman, LLP, Washington, DC, Matthew A. Feldman, Richard W. Mancino, Willkie Farr & Gallagher LLP, New York, NY, Kathy Jo Kolich, Kolich & Associates, LLC, Uniontown, OH, David Lynn Yaussy, Spilman Thomas & Battle PLLC, Charleston, WV, for Debtors.

Kim Martin Lewis, Dinsmore & Shohl LLP, Cincinnati, OH, Robert C. Folland, Barnes & Thornburg LLP, Columbus, OH, Richard M. Bain, David M. Neumann, Meyers, Roman, Friedberg & Lewis, Rocco I. Debitetto, Christopher B. Wick, Hahn Loeser + Parks LLP, Lawrence E. Oscar, Daniel A. DeMarco, Cleveland, OH, for Creditor Committee.

MEMORANDUM DECISION DENYING DEBTORS' MOTION FOR AUTHORITY TO CONTINUE AND MAKE PAYMENTS DUE AND OWING UNDER THE 2018 FENOC KEY EMPLOYEE RETENTION PLAN, WITH LEAVE TO AMEND

ALAN M. KOSCHIK, U.S. Bankruptcy Judge

On April 23, 2018, the debtors in these jointly administered chapter 11 cases (the "Debtors") filed a motion (Docket No. 400) (the "Motion") for authority to continue and make payments due and owing under several of the Debtors' employee retention plans. The Motion identified and requested authority to continue making payments under six separate plans. Only the largest and most-recently adopted retention plan, Debtor FirstEnergy Nuclear Operating Company's ("FENOC") 2018 Key Employee Retention Plan ("KERP") (the "2018 FENOC KERP"), drew opposition. On May 14, 2018, the Court granted the Motion, in part, authorizing the Debtors to continue making payments due to qualifying employees under the other five employee retention plans identified in the Motion.¹ (Docket No. 542.) Consideration of the 2018 FENOC KERP was adjourned for further hearings after an opportunity for further investigation by the Debtors' creditors and other parties-in-interest.

The Court ultimately held an evidentiary hearing on the Motion with respect to the 2018 FENOC KERP and certain objections to that plan on August 10, 13, 14, 17, and 27, 2018. For the reasons set forth in this Memorandum Decision, the Court denies, with leave to amend, the remaining part of the Motion as it relates to the 2018 FENOC KERP. After weighing the evidence and considering the applicable legal standards under 11 U.S.C. §§ 363(b)(1), 503(c)(3), and applicable caselaw interpreting those provisions of the Bankruptcy Code, the Court concludes that the proposed bonus payments under the 2018 FENOC KERP in its present form are not justified by the facts and circumstances of these cases.

This Memorandum Decision constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a)(1), made applicable to this contested matter via Federal Rules of Bankruptcy Procedure 7052 and 9014.

JURISDICTION AND VENUE

This Court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334 and General Order No. 2012-7 entered by the United States District Court for the Northern District of Ohio on April 4, 2012. Venue is proper pursuant to 28 U.S.C. § 1409(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (M), and (O).

FACTUAL AND PROCEDURAL HISTORY

On March 31, 2018, each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code with the Court. The Debtors' cases have been consolidated for procedural purposes only and are being jointly administered. The Debtors are operating their businesses and managing their property as debtors-in-possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code. On April 11, 2018, the United States Trustee for the Northern District of Ohio appointed the Official Committee of Unsecured Creditors (the "Committee") to represent the interests of unsecured creditors in these cases, pursuant to Section 1102 of the Bankruptcy Code.

Non-debtor FirstEnergy Corp. ("FE Corp"), an Ohio corporation, is the ultimate parent company for each of the Debtors, as well as certain of FE Corp's non-debtor affiliates. Debtor FirstEnergy Solutions Corp. ("FES"), an Ohio corporation, is the parent company for multiple other Debtors. These include FirstEnergy Generation, LLC ("FG"), an Ohio limited liability company that owns most or all of the Debtors' fossil-fuel powered electricity generation fleet, and FirstEnergy Nuclear Generation, LLC ("NG"), which owns the Debtors' nuclear powered electricity generation fleet, consisting of four nuclear reactors in three power stations. NG owns (i) the Beaver Valley Power Station ("Beaver Valley") in Shippingport, Pennsylvania, which encompasses two reactors ("Beaver Valley 1" and "Beaver Valley 2"); (ii) the Davis-Besse Nuclear Power Station ("Davis-Besse") in Oak Harbor, Ohio; and (iii) the Perry Nuclear Power Plant ("Perry") in Perry, Ohio.

Debtor FirstEnergy Nuclear Operating Company ("FENOC"), an Ohio corporation, is an affiliate of FES and a direct subsidiary of FE Corp. NG has no employees. The nuclear power plants owned by NG are operated by FENOC, whose employees compose more than two-thirds of the Debtors' combined workforce. As of March 15, 2018, the Debtors had 3,076 employees: 57 employed by FES, 686 employed by FG, and 2,333 employed by FENOC.

The Debtors have only seven employees who they concede meet the statutory definition of "insiders" under 11 U.S.C. § 101(31). None of those insiders participate in any of the Motion's retention plans, including the 2018 FENOC KERP. No party has challenged the Debtors' position that the seven insiders are not participants in any of their retention plans covered by the Motion, including the 2018 FENOC KERP. In addition, all parties appear to be in agreement that no participant in the 2018 FENOC KERP is an insider.

On March 28, 2018, three days prior to the petition date, the board of directors of FENOC and the managing members of NG made the decision to file with the Nuclear Regulatory Commission notice of their intent to deactivate of all of the Debtors' nuclear power plants. The proposed shutdown dates of the various plants are June 1, 2020, for Davis-Besse; June 1, 2021, for Perry and Beaver Valley 1; and October 31, 2021, for Beaver Valley 2. The FENOC board of directors approved the 2018 FENOC KERP contemporaneously with that decision.

The 2018 FENOC KERP was developed over the course of several months prior to the FENOC board's approval. At the time the Debtors began to plan for the potential deactivation of their nuclear plants, they began to consider how to alter or replace the 2016 FENOC KERP because the Debtors had determined that the existing retention plan would be inadequate to ensure the retention of critical employees through the nuclear plants' anticipated shutdown dates. The 2016 FENOC KERP's retention period ends in November 2018, is limited in scope, and, in the Debtors' view, does not cover critical employees who would now be likely to constitute "flight risks" because they are seeking or are likely to seek job security elsewhere in light of the deactivation announcement.

In January 2018, senior management of FENOC formed a working group of experts (the "Working Group") to explore the potential of a new retention plan for FENOC employees. The Working Group consisted of members of FENOC's senior management, certain law firms, a restructuring advisory firm, and human resources management shared with FE Corp via a wholly-owned FE Corp. subsidiary providing shared services, FirstEnergy Service Company ("FESC").

While the Debtors' other, smaller, and already partially-performed retention plans were approved by the Court in May 2018, the 2018 FENOC KERP drew opposition from both the Committee and a group of FENOC's collective bargaining units, the Utility Workers Union of America, Locals 270, 351, and 457, AFL-CIO, and the International Brotherhood of Electrical Workers Locals 29, 245, 272, and 1413, AFL-CIO (collectively, the "Unions"). On May 9, 2018, the Committee filed its reservation of rights with respect to the 2018 FENOC KERP at Docket No. 511. The Committee supported the Debtors' other retention plans, but "with respect to the 2018 FENOC KERP ... the Committee is not currently satisfied that [the] relief requested comports with the Bankruptcy Code." The Committee stated its intent to negotiate with the Debtors, obtain additional information, and reserved its right to interpose further objections.

The previous day, on May 8, 2018, the Unions filed their first response to the Motion. (Docket No. 481.) The Unions also asserted no objection to the other retention plans, but reserved their rights with respect to the 2018 FENOC KERP on the grounds that the Unions were still investigating the details of that retention plan.

On June 8, 2018, at Docket No. 707, the Unions filed their substantive objection (the "Unions' Response") to the Debtors' Motion seeking approval of the 2018 FENOC KERP. The Union objected to what it characterized as the unreasonable relationship between the proposed plan and the results that the Debtors sought to achieve with the 2018 FENOC KERP. The Unions objected, in particular, to the proposal to provide substantial retention bonuses to management level employees and other non-union employees only, without providing retention bonuses to any union employees, including a variety of skilled employees they alleged were necessary to operate and maintain the nuclear plants. The Unions cited examples of other utility companies and electricity producers undergoing the shutdown and deactivation of nuclear plants that had maintained their workforce by implementing retention programs applicable to wider cross-sections of their...