May 4, 2022 – The Court hearing the Brazos Electric Power Cooperative case has extended the periods during which the Debtor has an exclusive right to file a Plan and solicit acceptances thereof, through and including July 26, 2022 and September 22, 2022, respectively [Docket No. 1757]. Absent the relief, the Plan filing and solicitation periods were scheduled to expire on March 28, 2022 and May 25, 2022, respectively.
Also extended is ongoing mediation between the Debtor and ERCOT which has resulted in the suspension of a trial relating to ERCOT's $1.9bn claim.
At a May 4th hearing during which Judge David R. Jones commented before granting the extension: "I Want this to get done right propbably more so than anything ever presented to me because of the 1,000s of 'meters' (ie people) involved," Debtor's counsel had a chance to update the Court on a process that they hope will result in a Plan filing by the end of June.
Replying to Judge Jones' question as to whether mediator Judge Marvin Isgur has peppered him with late night calls, Debtors' counsel responded in the affirmative before noting that the @100 hours that Judge Isgur had spent modelling potential paths forward had resulted in a securitization based "concept" which appears to have some traction and which has resulted in the forming of a Securitization Committee. Debtors' counsel continued, "we think we have a concept, but devil is in details and there are a lot of details…no one has given up…if we get lucky on mediation we could pivot quickly." Also noted as to time-consuming workstreams was the reconciliation of claims (for voting purposes), notably gas claims and swap claims.
At several points during the hearing, the rising interest rate environment was raised and its possible bearing on a securitization transaction (in respect of which JP Morgan has been engaged), with the Debtors' counsel acknowledging that "interest rates are moving against us."
Background
As previously reported, the Electric Reliability Council of Texas ("ERCOT") and the Debtor agreed to participate in mediation in an attempt to resolve ERCOT's $1.9bn claim tied to Winter Storm Uri. The extension motion explains that those negotiations and exit strategy discussions will go a long way toward negotiation of a consensual Plan, but, those matters won't be resolved until later in the spring. In the meantime, the Debtor says it "has maintained a strong liquidity position," and it expects to shortly seek a six-month extension of its debtor-in-possession financing.
The extension motion [Docket No. 1645] states, “Under the circumstances, at this juncture the Debtor is exactly where it should be in the plan formulation process. This is, and will continue to be, an extremely complex and uniquely challenging case. Just over one year ago, the Debtor was forced into bankruptcy, with precious little time to prepare. Since then, the Debtor and its professionals have endeavored to address considerations related to the paramount issue in this case: the timely resolution of more than $2 billion in asserted priority claims — including ERCOT’s $1.9 billion claim (the ‘ERCOT Claim’) — arising out of Winter Storm Uri, the unprecedented storm that devastated Texas residents last winter. Resolution of that gating issue is critical to the Debtor’s plan negotiations with key stakeholders, including the Members, the RUS, and the Creditors’ Committee, and finalizing its exit plan. Consensus-building is never easy, and it is especially challenging here as the major stakeholder groups in this case have their own strategic, economic — and even political — interests and incentives to which the Debtor’s chapter 11 plan must strive to address.
Nevertheless, the Debtor has made substantial progress toward a successful reorganization during its second exclusivity extension. As explained in prior filings, the Debtor’s top priorities in this Chapter 11 Case are three-fold: (i) the prompt resolution of certain Winter Storm Uri-related claims against the estate, (ii) the negotiation and finalizing of a confirmable plan of reorganization that has support from a broad range of constituents and (iii) the creation of additional efficiencies across the Debtor’s operations to ensure the continued delivery of reliable and affordable power to the Members and Texas ratepayers.
First, the Debtor’s Chapter 11 Case was filed after it incurred more than $2.2 billion in liabilities during Winter Storm Uri. Everyone agrees that addressing ERCOT’s asserted $1.9 billion priority claim is a — if not the — threshold issue in this case. Resolution of the ERCOT Claim is a critical component to the Debtor’s go-forward business plan and its potential restructuring alternatives. Further, resolution of the ERCOT Claim will narrow the scope of the Debtor’s negotiations with the Members and others concerning the terms of a plan of reorganization, which the Debtor hopes will be consensual.
By all accounts, the Debtor has promptly and zealously litigated issues in the ERCOT Claim Objection in recent months and, on February 22, 2021, the trial officially commenced. On March 3, 2021, after eight days of argument and testimony, the parties agreed to suspend the trial in order to explore a potential consensual resolution of the litigation through mediation with the Honorable Marvin Isgur, United States Bankruptcy Judge. The Debtor is hopeful that the mediation will result in a consensual resolution of the ERCOT Claim — and potentially, other issues relating to the ERCOT Claim.
However, given the complexity of the issues and the potential for additional parties to participate in the mediation, the ERCOT Claim Objection is not likely to be resolved (either through mediation or continued litigation) before late April 2022. While the Debtor has done, and will continue to do all it can to expedite the ERCOT Claim Objection, the litigation ‘pause’ and mediation before Judge Isgur provides the parties with what is likely the best, and realistically may be the only, opportunity to consensually resolve the ERCOT Claim Objection. The Debtor looks forward to participating in the mediation which it hopes will culminate in a consensual resolution of the ERCOT Claim, but under any scenario, more time is now needed for the Debtor to explore potential exit solutions and finalize a plan that has the support of its Members and creditors.
In addition to the ERCOT Claim Objection, the Debtor has challenged storm-related claims filed by various natural gas providers (the ‘Gas Providers’). The Gas Providers have asserted more than $150 million in priority claims against the Debtor. On November 22, 2021, the Debtor initiated an adversary proceeding against the Gas Providers (the ‘Gas Provider Adversary Proceeding’). Although that litigation is ongoing, on March 10, 2022, the Court approved a settlement between the Debtor and one of those Gas Providers, Koch Energy Services, LLC. The Debtor is confident that it either can resolve consensually other claims in the Gas Provider Adversary Proceeding or that it will otherwise succeed in litigation.
The results in the ERCOT Claim Objection and the Gas Provider Adversary Proceeding will have concrete, substantial economic consequences. The Debtor and its stakeholders must better understand and address those consequences to narrow the focus on plan negotiations and finalize its exit plan.
Second, the Debtor continues to work on a ‘dual track,’ simultaneously prosecuting, now mediating, the ERCOT Claim Objection while at the same time negotiating the terms of a potentially consensual plan with the Members and other stakeholders. This approach has yielded real progress toward the Debtor’s formulation of a potential consensual plan with its Members. After the Court granted the Second Exclusivity Motion, the Debtor, its management team, and its professionals promptly focused its continuing dialogue with the Members and others (e.g., the RUS and its professionals and the Creditors’ Committee and its professionals) on a potential restructuring and other viable plan alternatives.
Over the past three months there have been repeated and extensive discussions (at both in-person and remote meetings) with representatives from the Creditors’ Committee, the RUS, JPMorgan (including in its capacity as DIP Lender) and each of the Members. For example, the Debtor’s Structuring Advisor, JPMS, has held in-person meetings with representatives of each Member that has indicated a willingness to explore the securitization of Winter Storm Uri costs. Those meetings have helped the Debtor and the Members better understand and assess the pros and cons of securitization and various other exit-financing options and components, as well as the potential impact on their respective ratepayers. Additionally, in order to expedite the Debtor’s review and analysis of plan alternatives, beginning in March 2022, the Board began meeting twice every month, devoting most, if not all, of the additional time to discussing business-plan options, vetting restructuring alternatives and addressing other chapter 11 matters.
To this point, on March 11, 2022, and following up on the Court’s comments from the prior exclusivity hearing, the Debtor presented the Board with an exit plan summary. The Debtor believes that this plan construct generally is viewed favorably by the overwhelming majority of its Members, and the Debtor and its advisors will continue to engage with its Members and other major stakeholders (including the RUS, Committee and JP Morgan and others) to continue to build consensus around a plan. Although the Debtor is confident that it is well on its way to achieving consensus, more time is needed to address the myriad of political and economic concerns unique to electric cooperatives generally (e.g., member governance and go-forward business plan) and the Debtor’s case in particular (e.g., continued market-participant status and post-bankruptcy capital structure)….
Third, the Debtor continues to review strategic options in respect of its power supply contracts, take steps to reduce costs and maintain stable operations. Utilizing the tools afforded by the Bankruptcy Code to reject or renegotiate burdensome contracts is an important step toward emerging from bankruptcy with a stronger enterprise and lower power-supply costs. The Debtor is reviewing its various power purchase agreements (or PPAs) and other contracts as part of its overall restructuring to identify potential cost savings to its Members. The goal remains to keep long-term costs low without jeopardizing the Debtor’s ability to continue to reliably deliver affordable power to the Members and the 1.5 million Texans they serve without interruption.
To this point, on March 17, 2022, the Debtor filed a Motion for an Order (I) Authorizing the Debtor to Reject Certain Power Purchase Agreements and (II) Granting Related Relief (the ‘Sandy Creek Motion’) [Dkt. No. 1622]. The rejection of the Sandy Creek PPAs alone will save the Debtor around $65 million per year and a total of almost $1.6 billion over the remaining term. The Debtor is currently paying approximately 50% more than the market value of capacity and power under those agreements, and would be expected to do so for the remaining lives of these executory contracts. The Debtor’s efforts to review power-supply options, create efficiencies and lower costs for the Members is ongoing, but is expected to conclude in the coming months. Moreover, during this case, and particularly in the past few months, the Debtor and its management team have worked to bolster counterparty confidence and ensure stable postpetition operations. To that end, the Debtor has maintained a strong liquidity position and has been able to enter into certain power transactions with new counterparties on favorable terms. The Debtor anticipates extending the maturity date under its DIP financing for an additional six months shortly."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Karnei Declaration”), Clifton Karnei, the Debtors’ Executive Vice President and General Manager, detailed the events leading to Brazos's Chapter 11 filing. The Karnei Declaration details the impact of an "unfathomable," "catastrophic" Black Swan winter storm that left the entire Texas grid within 4 minutes and 37 seconds of total failure (and a months' long blackout) and the Debtor with an unpayable $2.1bn electric bill from ERCOT (an organization from which Karmei resigned on February 25th after handing ERCOT a notice of force majeure). Karnei notes that the Debtor is "unwilling" to foist $9k per megawatt hour (plus $25k per MWh "ancillary fees") charges on its members and their consumers, but the reality is that whatever its "will," there was no "way" the Debtor was going to be able to collect from its members (and its members from their consumers)…in time to meet ERCOT's demands…if at all.
The Debtor notes that its exposure, as a power generator largely reliant on natural gas, made its exposure to the winter elements particularly acute; with gas pipelines and wellheads freezing during the storm.
To give some idea as to the extreme nature of power demands/costs during the storm, the Debtor adds: "The Black Swan Winter Event Caused the ERCOT Wholesale Market to Incur Charges for Wholesale Power of $55 Billion Over a Seven-Day Period, an Amount Equal to What it Ordinary Incurs over Four Years…"
The Karnei Declaration provides: “As the month of February 2021 began, the notion that a financially stable cooperative such as Brazos Electric would end the month preparing for bankruptcy was unfathomable. Yet that changed as a direct result of the catastrophic failures that accompanied the winter storm that blanketed the state of Texas on or about February 13, 2021 and maintained its grip of historically sub-freezing temperatures for days. Electric generation equipment and natural gas pipeline equipment have been reported to have frozen, causing the available generation within ERCOT to dramatically decline.
'If we hadn’t taken action, it was seconds and minutes (away from a total system failure)' said ERCOT’s CEO Bill Magness after almost losing power across the entire ERCOT grid early the morning of February 15, 2021 and forced rotating outages across Texas. In the wake of the crisis, the Public Utility Commission of Texas (“PUCT”) instructed ERCOT to set record-high prices for electricity, as described by the Wall Street Journal article “Amid Black outs, Texas Scrapped Its Power Market and Raised Prices. It Didn’t Work.” The price for wholesale electricity was set at the maximum price of $9,000 per megawatt hour (or MWh) for more than four straight days. In addition, ERCOT also imposed other ancillary fees totaling more than $25,000 per MWh. The consequences of these prices were devastating.
As will be described in more detail below, Brazos Electric was presented with invoices for the seven-day Black Swan Winter Event…by ERCOT, which, when combined, amounted to over $2.1 billion, payment of which was required within days. Brazos Electric responded to this demand for payment with a Force Majeure Event letter, a copy of which is attached hereto as Exhibit B, and informed ERCOT that it was abating payment pending resolution of the Force Majeure Event. Notably, while issuing invoices, ERCOT and PUCT members were called to testify before the Texas legislature as to the catastrophic events of the prior week.
As will be discussed further below, Brazos Electric is the wholesale provider for its member cooperatives. Brazos Electric recovers its costs from its members, which, ultimately, areorne by the Texas retail consumers that the members serve. Simply put, Brazos Electric suddenly finds itself caught in a liquidity trap that it cannot solve with its current balance sheet. Brazos Electric will not foist this catastrophic “black swan” financial event onto its members and their consumers, and commenced this bankruptcy to maintain the stability and integrity of its entire electric cooperative system."
On its heightened exposure as an owner/operator of gas fired generation facilities, the Karnei Declaration continues: "All of Brazos Electric’s owned generation facilities are natural gas-fired and it has long-term power purchase agreements (‘PPAs’) for coal-fired generation from Sandy Creek Generating Station (defined herein), renewable energy from a solar-generation facility, and has a short-term PPA for renewable energy from a hydroelectric facility, as well as other bilateral purchases of various terms from other wholesale market energy suppliers….
Brazos Electric’s generation facilities, and other generation facilities in ERCOT, are heavily dependent upon natural gas for generating power, and, as a result, power prices in ERCOT are highly dependent upon the price and availability of natural gas (only approximately 41% of Brazos Electric’s natural gas-fired plants have the ability to burn oil as a backup fuel source)…."
[NB: Of ERCOT’s total installed capacity, approximately 51% is natural gas-fueled generation, 24.8% is fueled by wind and other renewable resources, and 24.2% is lignite/coal and nuclear-fueled generation.”]
Prepetition Indebtedness
As of the Petition date, the principal amount of Brazos Electric’s funded debt obligations total approximately $2.04bn (excluding interest, obligations under various hedging arrangements, letters of credit, and other charges), as summarized on a consolidated basis below:
About the Debtor
According to the Debtor: “Brazos Electric is a 3,994 megawatt generation and transmission cooperative whose members' service territory extends across 68 counties from the Texas Panhandle to Houston. Organized in 1941, Brazos Electric was the first cooperative formed in the Lone Star state for the purpose of generating and supplying electrical power. Today, it is the largest generation and transmission cooperative in Texas. Brazos Electric is the wholesale power supplier for its 16 member-owner distribution cooperatives and one municipal system.
Owned by its member cooperatives, the Brazos Electric board of directors is comprised of one representative from each of these 16 members.
Corporate Structure Chart
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The post Brazos Electric Power Cooperative, Inc. – Court Allows Third Extension of Exclusivity Periods; ERCOT Mediation Extended for 30 Days as Debtor Hopeful Securitization-Based Plan Can Be Filed By End of June appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.