Rayburn Storm Uri Costs Securitization Supports Feasibility of Similar Issuance by Brazos Electric

Brazos Electric Restructuring:

Relevant Documents:
Moody’s Rayburn Presale Credit Opinion
ERCOT Market Notice

One year after Winter Storm Uri, the Electric Reliability Council of Texas, or ERCOT, has collected unpaid invoices from Rayburn Country Electric Cooperative. As Reorg discussed in a November 2021 article on ERCOT claims reconciliation, Rayburn and fellow cooperative Brazos Electric Power Cooperative had the two largest remaining “short pay” amounts due to ERCOT.

Rayburn used proceeds from a securitization of its Storm Uri-related costs to pay the outstanding ERCOT invoices. Rayburn utilized a Texas state law passed in the wake of Storm Uri that was designed specifically for Rayburn and Brazos.

In light of recent comments by Judge David Jones in the Brazos bankruptcy - where Brazos and ERCOT recently agreed to mediate their dispute over the amount of ERCOT’s claims against Brazos - and Rayburn’s successful securitization, Reorg is returning to the subject of the feasibility of a securitization by Brazos of the amounts ERCOT claims Brazos owes. Based on the terms of the Rayburn securitization, it is reasonable to assume that Brazos could finance its Storm Uri costs with a similar monthly impact on customer bills as the Rayburn securitization. Reorg estimates the additional fee to customers could be approximately $18 per month.

Rayburn Securitization

Rayburn used the framework created by Texas state law Senate Bill 1580 for electric cooperatives to use securitization to recover extraordinary costs incurred from Winter Storm Uri and owed to ERCOT. A press release from Rayburn member co-op Fannin County Electric Cooperative noted that the boards of all four Rayburn member co-ops, as well as the Rayburn board, voted to approve the financing and issue an irrevocable financing order that grants the members the right to impose, bill and collect non-bypassable charges. A Moody’s presale credit opinion noted that the four Rayburn distribution member co-ops service approximately 229,000 meters.

According to a Feb. 18 market notice, ERCOT received a $637.3 million payment from Rayburn on Feb. 18 and subsequently dispersed the funds to market participants over a span of four days from Feb. 22 to Feb. 25.

Rayburn issued $908.2 million of “cost recovery bonds” in three tranches:

• Tranche A-1: $208.2 million principal amount, with a 2.307% interest rate and Dec. 1, 2030, maturity.


• Tranche A-2: $354 million principal amount, with a 3.025% interest rate and Dec. 1, 2041, maturity.


• Tranche A-3: $345.9 million principal amount, with a 3.354% interest rate and Dec. 1, 2049, maturity.

All three tranches were issued at par and rated Aaa by Moody’s.

The bonds are serviced by non-bypassable charges added to the bills of all retail electric customers in the co-op members’ service regions. The co-op members, which act as servicers, will impose and collect the charges on a per kilowatt-hour, or kWh, basis from all existing and future customers receiving distribution services.

Moody’s opinion states that the co-op members will levy such charges in “amounts sufficient to pay all interest on the bonds when due, retire the principal amount of the securitized bonds in accordance with the expected sinking fund schedule, pay all fees and expenses of the transaction’s service providers, and replenish any draws on the capital subaccount.”

The Moody’s opinion notes that 10 “excluded customers” representing approximately 5.65% of the Rayburn members’ sales “have already paid their allocation” and will not be subject to the non-bypassable charges.

Rayburn expected the securitization charge to customers to range initially from 8% to 11% (averaging 9.3%) of the total monthly electricity bill of an average 1,000-kWh residential customer across its member co-ops with the charge decreasing over time to below 8% by 2029 based on projected consumption growth, according to Moody’s opinion.

Moody’s notes that this charge “is slightly higher than the average initial charge of around 5%” for prior utility cost recovery charge transactions. As shown below, the Rayburn initial charge is higher than the average and top end of the range of other initial charges provided:

Brazos Application

Meanwhile, in the Brazos case, Judge Jones encouraged the debtor and ERCOT to mediate rather than continue to litigate the amount of ERCOT’s claim, expressing concern at a March 3 hearing about the unaffordability of a hypothetical “doubling” of electricity bills “for the person who lives in a trailer in central Texas.” The court’s concerns may be overdramatized based on an illustrative analysis of the potential size and costs of a Brazos securitization and a comparison of illustrative usage scenarios for a hypothetical customer in the Brazos service area.

Facility Size and Cost

In July 2021, after securitization was brought up as a possible solution, Reorg analyzed an illustrative securitization of Brazos’ Storm Uri costs. Our initial conclusion was that a $2.5 billion securitization financed over 30 years at an interest rate of 3% would cost $127.5 million per year in principal amortization and interest. The cost per customer would be $176/year, or $14.73/month, assuming approximately 720,000 meters served by Brazos. A replay of the webinar can be found HERE.

In January, Brazos financial advisor JPMorgan provided a brief overview during a case status conference of securitization possibilities, and presented the following illustrative example:

In light of this example from Brazos’ advisor and Rayburn’s recent bond sale, Reorg has updated its analysis with these reference points. On Rayburn’s securitization, the average weighted tenor of the three tranches of debt is 20.5 years and average weighted coupon rate is 3%.

The size of a potential Brazos securitization facility is still an open question, dependent on the ultimate allowed amount of the ERCOT claim and whether Brazos includes various additional Storm Uri-related costs. During the January case status conference, Mark Gilmore of JPMorgan said that facility sizing would be driven by three categories of components: (i) “final and non-appealable” allowed amounts on the ERCOT claim and Brazos’ member co-op claims, (ii) securitization facility issuance costs and (iii) “extraordinary costs associated with the bankruptcy filing.” On the third element, Gilmore elaborated that swap termination fees incurred by Brazos have been discussed as an example.

A summary of potential amounts that could be included in a future securitization facility is shown in the chart below:

The amount of the ERCOT claim is the single largest variable. ERCOT’s Nov. 4, 2021, amended proof of claim asserted $1.887 billion. Brazos has conceded that it owes ERCOT $762 million of the claimed amounts and argued that if the claim is not fully reduced to that amount, it should at minimum be reduced by $641 million.

A $641 million reduction represents purported overcharges during the 33 hours after load shed ceased that ERCOT continued to impose maximum prices and would leave ERCOT’s claim at $1.246 billion. Reorg’s mid scenario amount of $1.277 billion is based on Reorg’s November 2021 analysis that electricity sellers with outstanding claims against ERCOT would only need to look to Brazos for approximately $1.277 billion of additional recovery after partial paydowns from other sources.

Satisfying all remaining ERCOT accounts payable could eliminate the need for ERCOT to use its unpaid invoice recovery “default uplift” process (discussed by Reorg in the November 2021 analysis and during a March 3 hearing) to collect any difference between its proof of claim and a lesser allowed amount in the Brazos bankruptcy from all remaining ERCOT market participants. Avoiding the impact of default uplift on all market participants while reducing the claim close to the midpoint of Brazos’ two proposed reduction amounts could be seen as a win-win settlement outcome for Brazos and ERCOT.

Additional potential facility components include:

• Brazos’ member co-ops’ proofs of claim: Estimated at $0. The official committee of unsecured creditors in the Brazos case has objected to the proofs of claim filed by certain of the debtor’s member co-ops, charging that “[n]one of [the asserted] claims are valid as a matter of law or fact.” The UCC argues that the member co-ops are simply seeking to raise “ill-founded defense[s]” to their own obligations to pay for the power provided by Brazos via the parties’ long-term wholesale power contracts.
  
  Although not couched in these terms by the UCC, the proofs of claim could have been filed as an attempt to manufacture setoff rights against the storm period claims that Brazos has not yet, but ultimately will, pass through to its members.


• Gas provider claims: Although not explicitly referenced by Gilmore at the January status conference, Brazos filed an adversary proceeding to challenge the $180 million amount and asserted administrative priority of a set of claims asserted by gas suppliers during Storm Uri. These claims, given their amount and relation to Storm Uri, would be prime candidates for inclusion in a securitization facility.
  
  Brazos recently settled gas claim defendant Koch Energy Services’ $3.2 million of gas claims for $1.8 million, or 56% of the asserted amount. The low estimate in the chart above comes from applying this settlement percentage across the $180 million of gas claims at issue in the adversary.
  
  However, this reference point may be of limited utility because multiple gas claims were acquired by investment firms that may have based their investment decisions upon the principle that administrative claims must be paid in full in cash to exit bankruptcy; such firms may not be willing to settle in the same manner that prepetition trade counterparty Koch was.


• Swap termination fees: Explicitly referenced as a potential cost that would be included in a securitization by Gilmore from JPMorgan, Brazos has only generally stated that the amount of asserted claims arising from terminated swaps is “maybe a third higher” than the gas provider claims. The $240 million estimate is based on that lone general description, 33% greater than the $180 million of gas claims.


• DIP facility claims: Brazos’ latest monthly operating report notes that the debtor has drawn $22.7 million on its DIP facility as of Jan. 31, of which $20 million was drawn during January.


• Securitization costs: Issuance costs have not been estimated.

In one departure from the Rayburn analogy, two of Brazos’ member co-ops have vocally opposed securitization and said they would not consent to participating in a Brazos-led securitization facility. These two members constitute approximately half of Brazos’ load share; if they do not participate, Brazos may be able to securitize only approximately half of the ultimately allowed Storm Uri costs on a consensual basis.

However, despite its public statements against a Brazos systemwide securitization, one of the members has disclosed that it hired a financial advisor to analyze a stand-alone securitization. Further, Brazos has indicated that one possibility for reconciling the difference of opinion would be for a post-effective litigation trust to pursue members that do not consent to a group securitization for their proportionate share of the final allowed amount of the ERCOT claim.

Ratepayer Impact

Using a 20-year maturity and 3% interest rate, as implied by Rayburn’s securitization, at the high end of the estimated Brazos securitization facility size, the average monthly cost would be approximately $18 per meter, with room for this to actualize lower if the claim amount is reduced:

The cost per customer is also likely to be in a similar range as estimated by Rayburn as discussed above. Reorg has prepared illustrative impacts based on data provided by CoServ, Brazos’ largest member co-op. According to the co-op’s 2020 annual report, it served 263,950 meters and sold approximately 5.433 billion kWh of electricity in 2020, the most recent year data is available for. This implies an average usage of approximately 20,583 kWh per meter annually, or 1,700 kWh per meter per month.

Rayburn suggested its average customer used 1,000 kWh per month, Reorg has shown both usage levels using CoServ’s current standard residential rate for March 2022. While the percentage impact at the high end is above the range assuming 1,000 kWh per month, it is right in line using 1,700 kWh per month, which was the 2020 average for a CoServ customer.

As discussed above, Rayburn estimates that the 8% to 11% initial bill impact could decrease over time to below 8% by 2029 based on demand growth. During the now-paused trial in the Brazos bankruptcy on the amount of ERCOT’s claim, Brazos General Manager Clifton Karnei testified that historically, Brazos has seen demand increase in conjunction with population growth in the Dallas-Fort Worth areas served by certain of Brazos’ member coops. Karnei said that Brazos is additionally now seeing growth along “the I-35 corridor” and the outskirts of Houston.

Future continued demand growth as a result of population growth in Brazos’ member co-op service territories could serve to lower the percentage impact of the securitization over time in the same manner as projected by Rayburn.

Brazos included a map of its members’ service territories in its first day declaration in March 2021:

--Sean Daly, Hannah Deichman, Jeremy Sherby