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October 27, 2021 – The Debtor filed a motion to extend (for a second time) the periods during which they have an exclusive right to file a Plan and solicit acceptances thereof, through and including March 28, 2022 and May 25, 2022, respectively [Docket No. 1258]. Absent the requested relief, the Plan filing and solicitation periods are scheduled to expire on October 27, 2021 and December 28, 2021, respectively.
The Debtor notes that "the threshold item that must be addressed now under any likely reorganization scenario is the ERCOT Claim Objection," a $1.9bn dispute which the Debtor is hopeful can "be resolved as soon as February 2022" (the adversary proceeding trial begins on February 22nd). Electric Reliability Council of Texas, Inc. ("ERCOT") argues that it has a $1.9bn claim against the Debtor related to unpaid wholesale energy costs incurred during winter storm Uri…" the vast majority [of which] is entitled to administrative expense priority" in bankruptcy. The Debtor argues that the figure must be recalculated to exclude ERCOT's $9,000/MWh winter storm Uri charges (which are in violation of contractual provisions) and that, regardless, the claim must be shoved down the pecking order to a general unsecured class.
The Debtor has had several early wins in its battle with ERCOT (this motion does a nice job of summarizing where the adversary proceeding stands, see detail below), with Judge Jones rejecting ERCOT's dismissal and abstention motion and allowing the Debtor to replead the one count where dismissal had been granted (which the Debtor has now done).
The Debtor's requesting motion reads: “….this case is one of the more complex Chapter 11 cases in recent history. The unprecedented consequences of Winter Storm Uri, including the pricing of power by ERCOT, were devastating to the Debtor, its Members, and their customers. Despite the Debtor’s 'free fall' into Chapter 11, and the many unique challenges it is currently working to address, the Debtor has managed to make substantial progress toward a successful reorganization in the short time that it has been in bankruptcy. The Debtor operates in an extraordinarily complicated industry across a number of different business lines and market functions, all of which are subject to and governed by the Debtor’s contracts with ERCOT—in particular, the Debtor’s Standard Form Market Participant Agreement (the “SFA”) with ERCOT.
Resolving the Debtor’s disputes with ERCOT in connection with the ERCOT Claim Objection will play a significant role in determining the ultimate treatment of the SFA in this Chapter 11 Case and provide clarity around the Debtor’s go-forward business plan. The ERCOT Claim Objection is on track to be resolved on an expedited basis in early 2022 and, as that litigation continues, any developments will provide the Debtor and its stakeholders with important guidance on key legal and business issues.
As the Debtor and its professionals repeatedly have explained, there are a number of important issues that will be addressed during the Chapter 11 Case that necessarily will influence the Debtor’s strategic options and, ultimately, its Chapter 11 plan. As discussed below, the threshold item that must be addressed now under any likely reorganization scenario is the ERCOT Claim Objection (as defined below) and the treatment of the Debtor’s SFA with Electric Reliability Council of Texas, Inc. ('ERCOT'). The ERCOT Claim Objection remains the Debtor’s priority and is currently on track to be resolved as soon as February 2022. Resolution of the ERCOT Claim Objection will provide much-needed clarity for all stakeholders. In addition, the Debtor is actively working to address a range of other issues that it believes will help to maximize value for stakeholders and reduce the number of issues that the Debtor and others may need to address in connection with any plan process, including, without limitation, addressing the amount and classification of various other asserted administrative claims under Bankruptcy Code section 503(b)(9) and evaluating potential financing transactions to fund its plan.
On June 14…ERCOT filed a proof of claim (the 'ERCOT Claim') asserting that the Debtor is in default under the SFA for its alleged failure to pay certain invoices
for power and ancillary services in a net amount of approximately $1.9 billion. ERCOT further asserts that the vast majority of the ERCOT Claim is entitled to administrative expense priority under Bankruptcy Code section 503(b)(9). The ERCOT Claim is the largest claim asserted in this Chapter 11 Case by an order of magnitude.
On August 18, 2021, the Debtor filed an objection to the ERCOT Claim under Bankruptcy Code sections 502, 503, 544, and 548 (the ‘ERCOT Claim Objection’) by filing an adversary complaint, arguing, among other things, that the ERCOT Claim must be (a) reduced to the extent that it was calculated using a rate that ERCOT fixed at $9,000/MWh in violation of the SFA and the protocols and (b) reclassified, in its entirety, as a general unsecured, non-priority claim. On August 30, 2021, the Court entered a scheduling order [Adv. Dkt. No. 13] (the ‘Scheduling Order’) that sets forth an expedited timeline for the disposition of the ERCOT Claim
Objection, with trial to begin no later than February 21, 2022.
On September 14, 2021, ERCOT filed its motion for dismissal and abstention [Adv. Dkt. No. 23] (the ‘Dismissal and Abstention Motion’) requesting that the Court dismiss various counts asserted in the Debtor’s adversary complaint and abstain from hearing the ERCOT Claim Objection at all. The Debtor and the Committee opposed the Dismissal and Abstention Motion.
On October 18, 2021, the Court granted in part and denied in part the Dismissal and Abstention Motion; specifically, the Court declined to abstain from presiding over the ERCOT Claim Objection and denied dismissal on all counts other than Count 1, which the Court permitted theDebtor to re-plead.
On October 25, 2021, the Debtor filed its First Amended Complaint [Adv. Dkt. No. 173], re-pleading Count 1 to include additional factual allegations and details in connection with the Debtor’s objections and defenses to the ERCOT Claim under Bankruptcy Code section 502.
More specifically, Count 1 explains that ERCOT, among other things, “boost[ed] and [held] prices at $9,000/MWh during Winter Storm Uri,” and “manipulated [pricing] algorithms” in violation of the applicable protocols.
As set forth in the Debtor’s various filings, this Court’s determination of the correct amount and classification of the ERCOT Claim is paramount to the Debtor’s ongoing efforts to confirm a plan and exit from Chapter 11. The disposition of the ERCOT Claim Objection, one way or the other, will undoubtedly affect the Debtor’s reorganization options (including whether it will be able to continue to perform the above market-participant functions for the benefit of its Members) and provide clarity needed to fully negotiate and confirm a Chapter 11 plan."
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.”]
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.
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