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September 13, 2022 – Following a September 13th hearing, the Court hearing the Brazos Electric Power Cooperative cases issued an order approving: (i) the Debtors' Disclosure Statement (conditionally), (ii) proposed Plan solicitation and voting procedures and (iii) a proposed timetable culminating in a November 14th Plan confirmation hearing [Docket No. 2271].
In anticipation of that hearing, the Debtors had filed a Revised Amended Plan of Reorganization and a related Disclosure Statement [Docket Nos. 2263 and 2262, respectively] with each attaching a blackline showing changes to the versions filed on September 12th [Docket Nos. 2257 and 2256, respectively] (with those September 12th iterations themselves including blacklines showing the considerably more significant changes from the versions filed on September 1st). Also now filed with the Disclosure Statement: (i) Financial Projections, (ii) a Valuation Analysis and (iii) the Liquidation Analysis (see latter below).
Also filed on September 13th was a letter in support of the Plan and Disclosure Statement (to be included wth solicitation materials) filed by the Debtors' Official Committee of Unsecured Creditors (the "Committee"), with the Committee noting as to their recently achieved settlement with the Debtors: "After extensive negotiations, the Committee reached a settlement with the Debtor on distributions to general unsecured creditors….The Plan provides for:
- full payment of all administrative expenses and claims other than ERCOT (which has its own settlement),
- payment of tort claims from insurance (with an option to elect into a convenience class with a cash-payout),
- payment of unsecured claims under $19,000 at 95 cents on the dollar, and
- payment of other general unsecured claims at not less than 89.5 cents on the dollar.
The Committee recommends that you vote to ACCEPT the Plan…"
On 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). At filing, the Debtor, the largest power generation and transmission cooperative in Texas (and sixth largest transmission provider overall), noted estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn ($2.4bn of funded debt).
The Chapter 11 case was designed to give the parent company its chance to pursue its force majeure arguments without immediate concerns for its inability to pay an enormous Electric Reliability Council of Texas (“ERCOT”) bill resulting from electric generation costs during Winter Storm Uri in February 2021.
On September 1, 2022, following a mediation-driven breakthrough and the resulting "ERCOT Settlement," the Debtor filed a Plan of Reorganization and a related Disclosure Statement [Docket Nos. 2220 and 2219, respectively].
Overview of Plan
The Disclosure Statement motion [Docket No. 2262, NB: Filed on September 1st, ie predates two turns of the documents, but is drafted after the Committee Settlement and ERCOT Settlement and is provided because the Disclosure Statement fails to include a top-level overview] notes,
“The Plan, among other things, incorporates the ERCOT Settlement, which is the culmination of an all-encompassing and lengthy multi-party, arm’s length mediation.
Under the ERCOT Settlement, the Debtor will make two Effective Date payments to ERCOT: first, a $599.7 million payment to replenish ERCOT’s CRR Reserve Account, and second, a $553.8 million payment to fund an initial distribution to Electing Market Participants. The Debtor will also make certain installment payments (of up to $13.8 million per year over 12 years) and contribute a portion of the generation sale proceeds (approx. $116.6 million) to fund payments — through ERCOT — to the applicable Eligible Market Participants. The ERCOT Settlement also includes certain release and injunction provisions, precluding ERCOT from collecting default uplifts for prepetition amounts owed by the Debtor.
Additionally, the Plan includes provisions regarding, among other things:
- the Participating Member Securitization, which allows Members to elect to participate in the Debtor-led securitization, or to arrange for alternative financing/securitization to satisfy their respective balances due to the Debtor in connection with Winter Storm Uri and the ERCOT Claim;
- the conversion of the DIP Facility into the Exit Facility;
- the post-Effective Date sale of the Reorganized Debtor’s Generation Assets and application of the Generation Sale Proceeds;
- the Reorganized Debtor’s entry into Amended Wholesale Transmission and Distribution Services Contracts with the Members, to become effective as of March 1, 2023, and the terms of the Consenting Member Settlement;
- the establishment and funding of the Ratepayer Hardship Fund to make Hardship Distributions to Qualified Hardship Recipients;
- the terms of the Brazos Sandy Creek Claims Settlement;
- the terms of the Sandy Creek Energy Associates, L.P. Claim Settlement; and
- the terms of the official committee of unsecured creditors Settlement….
In crafting the Plan, the Debtor sought and received the input of its advisors and key management personnel, its board of directors, the Members, the Committee, ERCOT, the PUCT, the Defendant Intervenors and other various Market Participants, the RUS Secured Parties and other major creditor constituents. Those discussions remain ongoing, and the Debtor and its various stakeholders are continuing to work through additional Plan comments provided by such parties; as such, further revisions to both the Plan and Disclosure Statement are anticipated in advance of the Disclosure Statement Hearing.
As described in more detail in the Disclosure Statement and the Plan, the Debtor’s Plan seeks to (a) right-size its balance sheet by, among other things, satisfying its debt, (b) settle and finally resolve the complex claims litigation with (i) ERCOT and the Defendant Intervenors. (ii) the Members and (iii) SCEA and BSCEC and (c) restructure the Debtor’s business in such a way that maximizes recovery to all creditors while ensuring that the Debtor remains a financially strong and competitive enterprise upon emergence.”
The following is an amended summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement; see also the Liquidation Analysis below):
- Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 3 (“RUS Secured Notes Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 4 (“ERCOT Claim”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1,886,595,737.08 and the estimated recovery is 76.1% – 100%FN. The Holder will (i) receive (a) on the Effective Date, the Initial ERCOT Cash Payment, and (b) the ERCOT Market Participant Consideration, which ERCOT will then allocate and distribute to Eligible Market Participants, in full and final satisfaction of the Eligible Market Participants’ respective shares of the Brazos Short Pay Claim, through the Market Participant Accelerated Cash Recovery, the Market Participant Convenience Cash Recovery or the Market Participant Deferred Cash Recovery as set forth in the ERCOT Recovery Appendix.
FN: The estimated recoveries described herein do not account for the value to ERCOT of the Debtor’s release of any potential avoidance actions in respect of certain prepetition collateral sweeps made by ERCOT, in the total amount of $350,255,036.39.
- Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $[•] and the estimated recovery is 89.5%. Each Holder will receive, up to the full amount of such Holder’s General Unsecured Claim, the GUC Cash Recovery, with the Initial GUC Cash Payment to be made on the Effective Date, the Additional GUC Cash Payment to be made on or before the Generation Sale Closing Date (or within ten Business Days thereafter, but, in any case, such payment must be paid on or before the Interim Distribution Deadline) and the Residual GUC Cash Payment, if any, to be made on the date when all General Unsecured Claims have either been Allowed or expunged; provided, that any such Holder of a General Unsecured Claim that votes to accept the Plan will have the option to irrevocably elect on its Ballot to reduce the Allowed amount of its Claim to the GUC Convenience Amount and receive the GUC Convenience Recovery; provided, further that any Holder that (i) votes to accept the Plan and (ii) affirmatively elects on its Ballot to receive treatment as a General Unsecured Convenience Claim will be deemed to be a Releasing Party hereunder in exchange for receiving the GUC Convenience Recovery.
- Class 6 (“General Unsecured Convenience Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1,218,000. Each Holder will receive the GUC Convenience Recovery on the later of (i) the Effective Date or (ii) the date that such Claim is Allowed. Class 6 will consist of all Claims that would otherwise be General Unsecured Claims and are Allowed in the GUC Convenience Amount or less. Any Holder of a Class 5 General Unsecured Claim that (i) votes to accept the Plan and (ii) affirmatively elects on its Class 5 Ballot to receive treatment as a General Unsecured Convenience Claim will be deemed to be a Releasing Party hereunder in exchange for receiving the GUC Convenience Recovery.
- Class 7 (“Tort Claims”) is impaired and entitled to vote on the Plan. The aggregate liquidated amountFN of claims is $1,683,855 and the estimated recovery is 100%. Each Holder will receive the Tort Claim Recovery; provided, that each such Holder that votes to accept the Plan will have the option to irrevocably elect on its Ballot to be treated as a Tort Convenience Claim and receive the Tort Convenience Recovery in full and final satisfaction of such Claim; provided, further that any Holder that (i) votes to accept the Plan and (ii) affirmatively elects on its Ballot to receive treatment as a Tort Convenience Claim will be deemed to be a Releasing Party hereunder and to have consented to and granted a full release and waiver of any claims and causes of action against the Members on account of such Holder’s Allowed Tort Claim in exchange for receiving the Tort Convenience Recovery.
FN: Of the 253 Tort Claims that were filed, 42 asserted liquidated amounts totaling $1,683,855. The remaining Tort Claims did not assert liquidated amounts.
- Class 8 (“Tort Convenience Claims”) is impaired and entitled to vote on the Plan. The estimated claim pool amount is $0. Each Holder will receive the Tort Convenience Recovery on the Effective Date. Any Holder of a Class 7 Tort Claim that (i) votes to accept the Plan and (ii) affirmatively elects on its Class 7 Ballot to receive treatment as a Tort Convenience Claim will be deemed to be a Releasing Party hereunder and to have consented to and granted a full release and waiver of any claims and causes of action against the Members on account of such Holder’s Claim in exchange for receiving the Tort Convenience Recovery.
- Class 9 (“Member Patronage Capital Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $779,118,5944 and the estimated recovery is N/A.
- Class 10 (“Member Other General Unsecured Claims”) is impaired and entitled to vote on the Plan. Each Holder will receive treatment pursuant to the Member Settlement as set forth in Article IV.F..
The Disclosure Statement [Docket No. 2263] attaches the following exhibits:
- Exhibit A: Plan of Reorganization [Docket No. 2220]
- Exhibit B: Financial Projections
- Exhibit C: Valuation Analysis
- Exhibit D: Liquidation Analysis
Updated Key Dates
- Solicitation Deadline: September 20, 2022
- Objection Deadline: October 28, 2022
- Voting Deadline: October 28, 2022
- Combined Hearing: November 14, 2022.
Petition Date Perspective
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.
Liquidation Analysis (see Disclosure Statement's Exhibit D for notes)
Corporate Structure Chart
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