By: Michael B. Lubic and Sumner C. Fontaine
On 1 March 2021, Brazos Electric Power Cooperative, Inc. (“Brazos”) commenced a chapter 11 bankruptcy case in the United States Bankruptcy Court for the Southern District of Texas. Brazos is a Texas-based non-profit electric cooperative corporation that provides wholesale electricity to its members, which, in turn, provide retail electricity to Texas consumers. Due to the freezing of essential electric generation and natural gas pipeline equipment during the historic winter storm that blanketed Texas in mid-February 2021 and the resulting spike in wholesale electricity prices, Brazos received approximately $2.1 billion in settlement charge invoices from the Electric Reliability Council of Texas (“ERCOT”). These invoices, promptly issued during and immediately following the storm, required payment within a matter of days. In a declaration accompanying the voluntary bankruptcy petition, Mr. Clifton Karnei, Brazos’ Executive Vice President and General Manager, described Brazos’ position following the sudden, dramatic spike in electricity costs as a “liquidity trap that [Brazos] cannot solve with its current balance sheet.”
Brazos’ first-day pleadings explain that its financial position and need for bankruptcy protection directly result from the effects of February’s winter storm on Texas’ electricity market, specifically on the relationship between Brazos and ERCOT. ERCOT serves a clearinghouse role in one of Texas’ three main energy grids, the Texas Interconnection, which covers 213 of the 254 counties in the state, and is responsible for procuring energy on behalf of its members while also administering the reliable operation of the wholesale electricity market. To buy and sell wholesale electricity, as Brazos does, ERCOT requires market participants to have sufficient available credit (calculated using a metric based on the participant’s credit limit plus a percentage of tangible net worth, among other factors) to support such participant’s total exposure. The effects of February’s winter storm on the Texas power grid caused prices to spike to $9,000 per megawatt-hour. The cut-off cap was set on 16 February by ERCOT as demand soared while the state’s electricity supply declined. For comparison, ERCOT’s monthly prices for wholesale electricity from November 2020 through January 2021 ranged between $21 to $29 per megawatt-hour. On 16 February, and each of the succeeding three days, ERCOT made collateral calls to Brazos for hundreds of millions of dollars each day, for a total of approximately $1.5 billion in collateral calls. Brazos filed a notice of force majeure on 25 February, informing ERCOT that it would not satisfy the invoices due to an event outside of Brazos’ reasonable control. Brazos filed for bankruptcy protection less than one week later.
As of the petition date, Brazos estimates the total principal amount of its funded debt obligations to be approximately $2.04 billion, with $1.81 billion of such debt being secured promissory notes financed through the Federal Financing Bank. Brazos has fully drawn its $500 million unsecured revolving facility with Bank of America, N.A. and other lenders. Mr. Karnei states that Brazos’ goals in commencing the chapter 11 case are to preserve its ongoing business operations and propose a reorganization plan to maximize creditors’ recovery. The first day hearing in front of Judge David Jones is scheduled for 3 March at 2:00 p.m. (EST).