BRAZOS BANKRUPTCY: AGREEMENT ACHIEVED

Everyone seemed slightly amazed at the speed at which the two-year-old Brazos Electric Cooperative bankruptcy trial concluded.

Even U.S. Bankruptcy Judge David Jones remarked at the mere hour and a half that the trial needed for all debtors and creditors to agree upon the reorganization plan that would allow for Brazos to exit bankruptcy and reimburse suppliers of high-priced electricity during Winter Storm Uri in February 2021.

At the trial’s conclusion Nov. 14, participants had reached  agreement about the new cooperative that would emerge out of bankruptcy. Dubbed by the judge as  “Brazos 2.0,” the cooperative would become a transmission and distribution utility March 1, 2023. It would no longer generate electricity, nor would it procure wholesale power for its 16-member distribution cooperatives. It would sell its generation assets as part of the mediated settlement that reduces the bill  from $2.1 billion to  $1.89 billion.

Brazos was inordinately vulnerable to the February 2021 winter storm and ensuing unprecedented market costs of $9,000 per megawatt-hour that lasted days. The company’s gas supplies froze and their generators partially failed, forcing them to purchase power at the inflated ERCOT-mandated price.

Brazos became one of the first electric power providers forced into bankruptcy as a result.  Other ERCOT market participants failed, too, and will pay extraordinary costs incurred during that week for many years.

United’s cost to keep members’ power on during the ERCOT-mandated rotating outages during the four-day cold snap is expected to be about $440 million. This was reduced in the bankruptcy mediation from $560 million.

United and other Brazos member  co-ops would be allowed to securitize that debt  per Senate Bill 1580 passed by Texas legislators in 2021. The law provides the means for electric distribution cooperatives to satisfy those energy costs through securitized bonds.  The law requires those charges to be applied to all existing and future members’ bills until the securitization term ends (no longer than 28 years).

While many members of counsel praised Jones during the proceedings for his vision and moniker for Brazos 2.0, Jones refused to take credit and laid praise back on those who he said had worked so hard during the trial.

“It is so much better than what I had in mind,” Jones said addressing Brazos’ lead counsel. “I am in awe of the degree to which you were able to balance interests and recognize competing goals and find solutions to all of those. It is far better than what was floating around in my head. I’ll take ‘Brazos 2.0,’ but your Brazos 2.0 is much better, much more comprehensive. I compliment the Brazos 2.0 that you and your team, with the help of all of the constituents, put together.”

During the final proceedings, Josh Eppich, one of United’s attorneys, thanked the judge for the inclusion of a hardship fund, a special 10-year, $140 million assistance program championed by the co-op to help low-income families pay their portion of the final securitized amount United members owe.

“I just wanted to stand for a second and appreciate the efforts of the parties,” he said. “From the beginning of these cases, United was really focused on costs to the members who are the most harmed, and also continuing to provide competitive power and reliable power to our customers going forward. And we feel that this plan, though difficult to get to, the settlement accomplishes those goals, especially with the hardship fund, and the operational efficiencies that will be incurred at the Brazos level going forward. So we appreciate even up until last night, the debtors working with us to get through some of the funding issues that we’re facing as the plan goes effective. And obviously, we appreciate the courts and judges. Thank you.”

While the conclusion of the trial settles  all claims and disputes pertaining to the winter storm’s costs as it related to Brazos, its 16 distribution cooperative members and the hundreds of thousands of members served by those electric cooperatives, new challenges arise, said United CEO Cameron Smallwood.

Two major obstacles must still be cleared, Smallwood said. The first is making prompt payments in full through securitization.

“The plan doesn’t become truly effective until all the bills are paid by the different member co-ops,” he said. “And so, we and everybody else are in that process right now of working through that.”

Some Brazos member co-ops  have sought a classic long-term loan that works similarly to a home mortgage, he said. Others have banded together with other affected co-ops to seek a joint securitization.  

Smallwood said United decided to securitize alone, and that may have been a distinct advantage. The co-op’s bond offering received two separate AAA credit ratings from Moody’s and Fitch Group, which is the highest possible rating that may be assigned to an issuer’s bonds by any of the major credit rating agencies.

The AAA rating translates into low interest rates and lower costs for members, he said.

“The second thing that has to happen  is that Brazos’  generators have to sell,” he said. “That process has started, and we’ll see where it ends up. The plan calls for the generators to sell for about $650 million. Our bankruptcy professionals believe it will likely draw a higher price. If that happens, it might give further benefit to us in the distant future. If it sells for less than $650 million, we’re going to have to come up with more money. I don’t think that’s going to happen. But that’s really the two pieces left that have to happen to just put an ‘X’ through this and be done with it.”

As with all the loose ends left, timing is everything, Smallwood said. Some parts must be completed before others can conclude. Increasing interest rates can also mean major differences in the final amounts United will have to pay when all elements are achieved and officials actually sign contracts.

United must also finalize a contract with a new power supplier so that the new party can begin providing power to the cooperative—and ultimately the members—on March 1, 2023.

While many of the interactions United has with Brazos will not change (such as power transmission and Brazos’s upkeep on the substations serving United), United officials are currently in discussions about which market participant will become United’s new power supplier.

“One positive benefit to come from finding a new power supplier is United will be able to substantially mitigate the risk of major financial burdens that may come from another Winter Storm Uri-type event, something we didn’t have in our previous power supply arrangement,” Smallwood said.