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March 1, 2021 – Brazos Electric Power Cooperative, Inc. (“Brazos” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, case number 21-30725 (Judge Jones). The Debtor, the largest power generation and transmission cooperative in Texas (and sixth largest transmission provider overall), is represented by Jason L. Boland of Norton Rose Fulbright US LLP. Further board-authorized engagements include (i) Berkeley Research Group, LLC as financial advisors and (ii) Stretto as claims agent.
At filing, the Debtor noted between 1,000 and 5,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn ($2.4bn of funded debt). Documents filed with the Court list the Debtor's three largest unsecured creditors as (i) Electric Reliability Council of Texas ("ERCOT") ($1.81bn disputed collateral claim), (ii) Bank of America, N.A ($480.0mn bank line of credit claim) and (iii) Tenaska Power Services Co. ($84.2mn trade claim). 14 unsecured creditors have claims in excess of $12.0mn with the Debtor's total trade debt standing at $340.0mn.
As the Debtor looks for the safety of Chapter 11 and its chance to pursue its force majeure arguments without immediate concerns for its inability to pay an enormous ERCOT bill; the question is who is next and how will the results of the unprecedented storm and its unprecedented impact on electricity costs (the wholesale ERCOT market incurring charges of $55.0bn over seven days, historically what is incurred over four years) be resolved holistically.
Goals of the Chapter 11 Filings
The Karnei Declaration (defined below) provides: "The circumstances described above [ie the winter storm and resulting electricity costs] left Brazos Electric with no choice but to file a petition under chapter 11 of the Bankruptcy Code to: (i) prevent immediate and irreparable harm to its business; (ii) preserve and protect its operations and assets; and (iii) provide necessary time to formulate and pursue an appropriate plan to satisfy the claims of its creditors."
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.”]
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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