Mon 03/01/2021 14:20 PM
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Relevant Documents:
Voluntary Petition
First Day Declaration

Brazos Electric Power Cooperative Inc., a Waco, Texas-based 3,994 megawatt generation and transmission cooperative whose members' service territory extends across 68 counties from the Texas Panhandle to Houston, filed for chapter 11 protection today in the Bankruptcy Court for the Southern District of Texas. The bankruptcy filing by the nonprofit cooperative - “a model of financial stability for 80 years” - follows fallout from the recent winter storms in Texas, which resulted in maxed out prices and ancillary fees imposed by the Electric Reliability Council of Texas, leading to more than $2.1 billion of invoices for which payment was required “within days.” For access to the relevant documents above as well as our First Day by Reorg team's coverage of all U.S. chapter 11 cases filed since 2012 with over $10 million in liabilities including the Brazos Electric bankruptcy filing Request a Trial here.

“Simply put,” Brazos Executive Vice President Clifton Karnei says in the first day declaration, Brazos Electric “suddenly finds itself caught in a liquidity trap that it cannot solve with its current balance sheet.” The debtor asserts that Brazos “will not foist this catastrophic ‘black swan’ financial event onto its members and their consumers.” To that end, the debtor says it commenced the chapter 11 case “to maintain the stability and integrity of its entire electric cooperative system.”

The first day hearing has been scheduled for Wednesday, March 3, at 2 p.m. ET. The case has been assigned to Judge David Jones.

The company reports $1 billion to $10 billion in both assets and liabilities.

According to Karnei, the cooperative undertook extensive efforts prepetition to reach out to its employees, its cooperative member-owners, and other parties-in-interest to minimize the disruption of its operations and cash flow. Brazos Electric is also in talks with its lenders regarding financing options and an efficient chapter 11 process. The cooperative’s immediate objectives include minimizing any losses in the value of its assets, preserving ongoing business operations, and to propose a plan of reorganization, according to the declaration.

The case docket is available on Reorg HERE.

Brazos Electric’s capital structure is below:
Brazos electric capital structure

Brazos Electric has $1.81 billion of secured indebtedness financed through the Federal Financing Bank, or FFB, “a government corporation that provides financings at favorable, below-market rates, which indebtedness is guaranteed by the Rural Utilities Service (‘RUS’), a Rural Development agency of the United States Department of Agriculture (‘USDA’).” The FFB secured notes are secured under a trust indenture by liens on substantially all of Brazos Electric’s assets, “including the All Requirements Contracts.”

Brazos Electric’s unsecured line of credit is due September 2023. Bank of America is the administrative agent, swing line lender and LC issuer. The debtor states that the other the lenders under the unsecured revolving facility include CoBank; ACB; National Rural Utilities Cooperative Finance Corp.; Wells Fargo Bank, National Association; Comerica Bank; MUFG Bank Ltd.; Regions Bank; and Truist Bank, fka Branch Banking and Trust Co. The debtor says that as a result of the “Black Swan Winter Event,” it has fully drawn down the revolving facility.

The cooperative also has an unsecured LC facility with MUFG Bank, and as of the petition date, there were $99.2 million in letters of credit issued under the MUFG LC agreement.

Additionally, Brazos Electric estimates that it has about $340 million in outstanding trade debt and $345.9 million of cash collateral provided to various counterparties as margin collateral.

Brazos Electric participates in a “Cushion for Credit” program through which an account administered by the Rural Utilities Service, or RUS, is funded on a voluntary basis by Brazos with amounts that exceed the required payments under the applicable financing documents. The account, once funded, “is fully restricted for application to debt service for the FFB Secured Notes.” As of the petition date, Brazos Electric’s “Cushion for Credit” account contains $245 million, which the company says is sufficient to pay Brazos Electric’s debt service on its current FFB/RUS secured debt for the next 18 months.

The cooperative filed chapter 11 as a result of events during the week of Feb. 13 which, according to the declaration, “[e]xperts have opined that Texas was 4 minutes and 37 seconds away from a blackout that could have lasted for months.” In total, the wholesale market of the Electric Reliability Council of Texas, or ERCOT, incurred charges of $55 billion over the seven-day period and Brazos estimates its share of those charges at $2.1 billion, more than the amount of Brazos Electric’s total outstanding secured debt.

Brazos describes its obligations to ERCOT’s day-ahead market as being required to have sufficient available credit, equalling the sum of an unsecured credit limit based on a percentage of tangible net worth, plus any additional posted collateral in the form of cash or letters of credit, to support a calculated total potential exposure. Prices reached $9,000 per MWh over a four-day period during the storm, which resulted in collateral calls for Brazos Electric of up to $1.6 billion. The first day declaration points out by way of comparison, ERCOT’s monthly round-the-clock prices for wholesale electricity during the three months of November and December 2020, and January 2021 were in the range of $21 to $29 per MWh.

The first day declaration says that on Feb. 15, ERCOT ordered electricity providers to shed as much as 20 gigawatts of retail load - enough to serve about 4 million households - and reports that about 46 GW of natural gas, coal and wind generation was not available.

On Feb. 16, 17 and 18, ERCOT requested additional collateral from Brazos Electric of more than $174.5 million, $351.5 million and $432.2 million, respectively. On Feb. 19, ERCOT made another collateral call to Brazos Electric seeking more than $638.2 million in financial assurance. During the week of Feb. 22, $2.1 billion in ERCOT settlement-charge invoices came due.

On Feb. 25, Brazos Electric filed a “notice of force majeure” with ERCOT and informed it that Brazos Electric would not satisfy ERCOT’s pending requests for financial assurance and payment of invoices. According to the notice, under ERCOT protocols a market participant may declare a force majeure event when such event is “outside of the reasonable control of Brazos” to avoid a default. Karnei also resigned from ERCOT’s board of directors, and the cooperative determined that the commencement of chapter 11 proceedings was inevitable.

The debtor is represented by Norton Rose Fulbright in Houston as counsel and Berkeley Research Group as financial advisor. Stretto is the debtor’s noticing and claims agent.

Background

According to the declaration, Brazos Electric is Texas’s largest and oldest nonprofit generation and transmission electric cooperative, or G&T Co-Op. The company is a 4,000-MW G&T Co-Op and has more than 370 employees at Brazos Electric’s power plants and at transmission field offices. The debtor sources electricity through a combination of purchased power, owned generation and forward-energy purchases from a number of different counterparties. Brazos Electric’s energy mix in recent years has predominantly been purchased power, followed by Brazos Electric’s owned natural-gas-fired generation, coal-fired generation, dual fuel and renewables. Currently, Brazos Electric’s three gas-fired plants provide about 2,075 MW of power.

Brazos Electric’s generation and transmission revenue was $1.038 billion and $1.041 billion in 2019 and 2020, respectively. The company’s three largest Co-Op members are CoServ Electric, Tri-County and UCS, who accounted for 36%, 18% and 14%, respectively, of Brazos Electric’s 2019 revenue.

While all of Brazos Electric’s generation facilities are natural gas-fired, the cooperative has long-term power purchase agreements for coal-fired generation from subsidiary Sandy Creek Generating Station and renewable energy from a solar-generation facility, and has a short-term power purchase agreements for renewable energy from a hydroelectric facility, as well as other bilateral purchases of various terms from other wholesale market energy suppliers.

Brazos Electric has more than 2,682 miles of transmission line and 385 substations/delivery points and is Texas’s sixth-largest transmission provider. The co-op builds, owns and operates many of the transmission lines that move electric power to its members’ distribution systems.

The debtor’s Jack County Plant is a 1,210-MW natural gas-fired, combined-cycle power plant near Jacksboro, Texas. The plant consists of four natural gas-fired turbine generators, four heat recovery steam generators, two steam turbine generators, and other assorted equipment. The Jack County plant is Brazos Electric’s newest gas plant.

The debtor’s Randle W. Miller County Plant is a 596-MW gas-fired facility consisting of three steam generators and two gas turbines, in Palo Pinto County. Four of the units at this plant have backup oil supply that can fuel generation.

The debtor’s Johnson County plant is a 269-MW gas-fired combined cycle plant in Cleburne, Texas. This plant has a backup oil supply that can fuel generation. The plant entered commercial operation in 1997 and Brazos purchased the power through a long-term power purchase agreement. Brazos acquired the plant after it was severely damaged in 2005. In 2006, the plant was repaired and restarted.
Brazos electric member territory

Brazos Electric generates and procures through short-term and long-term power purchase agreements, or PPAs, power and energy to sell at wholesale to its 16 member-owner distribution cooperatives. Because Brazos Electric’s business is a nonprofit, the first day declaration says, it does not earn profits, but rather, any revenue received over and above its operating expenses is called margin, a portion of which is allocated to the members as “patronage capital,” based upon individual power purchases during that year. Although each co-op member has a patronage capital account that is retired over time and benefits from a liquidation preference, the debtor says that the majority of Brazos Electric patronage is re-invested in the company to maintain financial stability and fund capital projects.

Although the size of the co-op members’ respective ownership interests varies, each member has the same voting power.

Brazos Electric services its co-op members through substantially identical and interdependent “all-requirements” wholesale power contracts, under which the debtor is obligated to supply each of its members with 100% of their requirements for electricity, transmission, substation and ancillary services needed for the co-op members to supply their respective member retail consumers, the first day declaration says. The all-requirements contracts expire in December 2045. Brazos Electric’s revenue is derived primarily from the sale of electric energy through the all-requirements contracts, and the end users of power provided by the debtor through its co-op members are predominantly residential (accounting for about 58% of all revenue).

Brazos Electric’s board of directors establishes the rates charged for power and distribution services provided to its co-op members, and the transmission rates charged by Brazos Electric are regulated by the PUCT.

The first day declaration explains that parties, like the debtor, that wish to participate in ERCOT’s “Day-Ahead Market” are required to have sufficient available credit (established by ERCOT as the sum of an unsecured credit limit based on a percentage of tangible net worth, plus any additional posted collateral in the form of cash or letters of credit) to support a calculated total potential exposure, or TPEA, metric. Since 2018, ERCOT determines market participants’ collateral requirements on the basis of forward prices calculated by using the previous 14 days’ prices to forecast such forward process. Prior to the winter storm, Brazos Electric’s typical ERCOT credit requirement for participating in the Real-Time or Day-Ahead Market ranged from $40 million to $83 million, depending on Brazos Electric’s load and recent generation output and ERCOT’s assessment of market-price volatility.

The debtor says that in response to co-op members’ “desire for competitive rates,” Brazos Electric has sought to take advantage of low energy prices in the ERCOT wholesale market to serve a portion of its load. Brazos Electric has a “fuel mix that is natural-gas dependent, which - until very recently - has consistently provided a favorable price environment, due to low gas prices (averaging $1.77 per MMBtu in 2020).” In addition, Brazos Electric has been implementing a $610 million capital plan through 2025 (primarily funded through RUS-backed debt under the trust indenture) to bolster its transmission business and fund critical co-op member-line substation needs, the first day declaration says. Moreover, at the start of February, the debtor says it was “very much ‘on plan’ and ideally positioned to emerge from the pandemic largely unscathed and primed for continued growth.”

A simplified organizational structure is shown below:
Brazos electric organizational structure

The debtor’s largest unsecured creditors are listed below:











































































10 Largest Unsecured Creditors
Creditor Location Claim Type Amount
Electric Reliability
Council of Texas
Austin, Texas ERCOT Collateral $   1,809,469,233
Bank of America NA Richardson, Texas Bank Line
of Credit
479,975,000
Tenaska Power
Services Co.
Omaha, Neb. Power Supplier 84,249,504
J. Aron & Co. New York Interest Rate
Swap and
Power Derivatives
76,234,169
Morgan Stanley
Capital Group Inc.
New York Interest Rate
Swap and
Power Supplier
69,026,959
Bank of Tokyo Jersey City, N.J. Interest Rate Swap 67,420,781
Mercuria Energy
America Inc.
Houston, Texas Natural Gas Supplier 61,146,360
Shell Energy
North America
(US) LP
Spokane, Wash. Power Supplier and
Power Derivatives
39,497,900
Concord Energy LLC Denver, Colo. Natural Gas Supplier 37,382,500
Tenaska Marketing
Ventures
Omaha, Neb. Natural Gas Supplier 30,081,550


The case representatives are as follows:














































































Case Representatives
Role Name Firm Location
Debtor's Counsel Louis R. Strubeck Jr. Norton Rose
Fulbright
Houston
Jason L. Boland
Julie G. Harrison
Maria Mokrzycka
Michael M. Parker San Antonio
Steve A. Peirce
Debtor's Financial
Advisor
N/A Berkeley
Research Group
N/A
Counsel to ERCOT Kevin M. Lippman Munsch Hardt
Kopf & Harr
Dallas
Deborah M. Perry
Counsel to CoServ Charles R. Gibbs McDermott
Will & Emery
Dallas
Eric Seitz
Jane A. Gerber
United
States Trustee
Hector Duran Jr. Office of the U.S.Trustee Houston
Stephen Douglas Statham
Debtor's Claims
Agent
N/A Stretto N/A

 


Other Motions

The debtor also filed various standard first day motions, including the following:


 

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