IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
In re: § Chapter 11
§ BRAZOS ELECTRIC POWER COOPERATIVE, INC.
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Case No. 21-30725 (DRJ)
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Debtor. §
LIMITED RESPONSE BY TRI-COUNTY ELECTRIC COOPERATIVE, INC. TO DEBTOR’S EMERGENCY MOTION FOR ENTRY OF INTERIM AND FINAL ORDERS (A) AUTHORIZING
THE DEBTOR TO OBTAIN POSTPETITION FINANCING, (B) AUTHORIZING THE DEBTOR TO USE CASH COLLATERAL, (C) GRANTING LIENS AND PROVIDING CLAIMS WITH
SUPERPRIORITY ADMINISTRATIVE EXPENSE STATUS, (D) GRANTING ADEQUATE PROTECTION TO THE PREPETITION REVOLVING LENDERS, AND RUS PARTIES, (E)
MODIFYING THE AUTOMATIC STAY, (F) SCHEDULING A FINAL HEARING, AND (G) GRANTING RELATED RELIEF
TO THE HONORABLE DAVID JONES, UNITED STATES BANKRUPTCY JUDGE:
COMES NOW Tri-County Electric Cooperative Inc.(“Tri-County”) and files this Limited Response to Debtor’s Emergency Motion For Entry Of Interim And Final Orders (A) Authorizing The Debtor To Obtain Postpetition Financing, (B) Authorizing The Debtor To Use Cash
Collateral, (C) Granting Liens And Providing Claims With Superpriority Administrative Expense Status, (D) Granting Adequate Protection To The Prepetition Revolving Lenders, And Rus Parties, (E) Modifying The Automatic Stay, (F) Scheduling A Final Hearing, And (G) Granting Related Relief (“DIP Motion”) filed by the Debtor, Brazos Electric Power Cooperative, Inc.
I. Executive Summary
1. The February winter storm wreaked havoc on many people and businesses.
This included energy providers throughout Texas. One of the hardest hit providers was the Debtor racking up over $2.0 billion in alleged costs to ERCOT and other suppliers of electricity and natural gas as a result of the storm. Tri-County and its members were innocent spectators to this financial carnage, but spectators whose interests were nonetheless severely affected.
Tri-County understands that the Debtor needs the liquidity furnished by the DIP facility and does
not object to the relief sought. The purpose of this Limited Response is to point out to the parties in interest what Court has already recognized: as the Debtor takes on another significant layer of debt, the Debtor has a limited ability to pass this growing pile of debt through to Tri- County and its members. At some point, such a pass-through of debt will render Tri-County and the other member co-ops uncompetitive in the Texas energy market and, consequently, unable to properly serve their members. No interest is served if the Debtor is reorganized at the cost of destroying the competitive viability of the member co-ops and their ability to serve their members by providing reasonably priced power. This is explained in greater detail below.
II. Tri-County’s Mission
2. The Debtor is composed of 16 members, each of which is an electric distribution cooperative. The Debtor’s customer base is comprised of its 16 member co-ops. The Debtor sells electricity to the member co-ops who distribute this electricity to the households and businesses who are the ultimate retail consumers of this power.
3. Tri-County serves 16 counties1 generally to the west and north of Fort Worth.
Tri-County’s mission is to provide reliable, affordable, and safe electric service to its members as the ultimate consumers of the power provided by the Debtor. Tri-County has been an integral part of the communities it serves for 70 plus years.
4. Tri-County is one of the three (3) largest member co-ops which collectively hold 63% of the estimated capital patronage allocations for the Debtor. Tri-County is the second largest member co-op holding 17.6% of the patronage capital. Denton County Electric
Cooperative, Inc., d/b/a/ CoServ Electric (“CoServ”) is the largest member co-op holding 30.8%, and United Cooperative Services (“United”) is the third largest member co-op holding 14.6%.
CoServe, Tri-County and United respectively accounted for 37%, 19%, and 14% of the Debtor’s
1 This includes Wilbarger, Foard, King, Knox, Baylor, Archer, Stonewall, Haskell, Throckmorton, Jack, Wise, Denton, Palo Pinto, Parker, Tarrant and Hood Counties, Texas.
electric sales in 2018. The three (3) largest member co-ops collectively purchase approximately 70% of the electricity sold by the Debtor.
5. The Debtor’s credit and financial strength is largely dependent on the financial viability of the member co-ops. Indeed, at the first day hearings on March 3, 2021, Debtor’s counsel alluded to the importance to the Debtor of the three (3) largest member co-ops, Tri- County, CoServ and United, noting that the strong and growing customer bases of the three (3) largest co-ops were substantial sources of financial strength for the Debtor. To a large extent, CoServ, Tri-County, United and their retail customer bases are the Debtor’s financial backbone.
6. Under the co-op structure, there are no equity owners to invest or contribute capital in the hope of earning an investment profit. As a result, co-ops tend to be highly leveraged entities relying heavily on debt to fund their capital needs. The Debtor can only generate the funds it needs to retire its debts through charges passed on to the 16 member co- ops. However, Tri-County can only pass through to its members charges that are reasonable and affordable and which will allow Tri-County to remain competitive in the Texas market.
7. If the rates Tri-County charges to its members are higher than the energy market in which it competes, which includes both neighboring utilities and utilities which have the ability to compete directly in Tri-County’s service area, it will eventually lose its competitive viability.
The growth of the membership base will slow or cease, and the membership base may even shrink as existing members migrate to other utilities. The higher electricity costs may force Tri- County, in order protect the members from high electric bills, to opt into retail competition, a step which would allow the members to choose to acquire power from any available source in the market. In that event, Tri-County’s membership base will likely decrease, as will the amount of the electricity it would purchase from the Debtor. The result would be a huge and likely
irreplaceable loss of financial support for the Debtor.
8. The Debtor exists to serve its 16 member co-ops; similarly, each of the 16 member co-ops exists to serve their retail members who are the homeowners and businesses
that actually consume the electricity. Indeed, the entire structure exists for the ultimate purpose of serving the retail consumers who are the members of the 16-member co-ops. Tri-County is concerned that the current path of the Debtor’s bankruptcy case may turn this fundamental dynamic on its head by burdening Tri-County’s members indefinitely with artificially high electric bills to fund the Debtor’s reorganization. Indeed, such a course may lead to a death spiral destroying both the Debtor and the member co-ops.
III. The Debtor’s Income Generation
9. The Debtor has contracted to provide all power requirements of the 16-member co-ops, each of which has agreed in return to buy all of their power from the Debtor. The
Debtor can obtain power to sell to the member co-ops through the generating facilities owned by the Debtor or by acquiring power from third-parties.
10. A key reason to belong to a co-op with power-generating capacity is to protect the members from the volatility caused by price fluctuations in the power market. In Texas, this normally occurs during the summer months but, as the winter storm demonstrated, this can also occur in the winter as well. The power produced by the Debtor is sold to ERCOT and into the grid to meet the needs of the Texas power market. The Debtor’s goal has been to generate and sell into the market power equal to approximately 50% of the member co-ops’ peak load
requirements. If power prices in the open market reach high levels, the power generated by the Debtor, and which is sold to ERCOT, will be sold into the market at the same high market prices. This should offset the high cost paid by the Debtor in the open market for the remainder of the member co-ops’ power requirements.
11. In theory, this arrangement should have avoided the devastating effects of the February winter storm. Unfortunately, during the winter storm, the Debtor’s generation facilities were unable to produce power at anything near full capacity limiting the amount of power which the Debtor could sell to ERCOT. This limited the income generated to offset the high cost of the
power purchased by the Debtor on the open market from ERCOT. This largely resulted in the huge claim for power furnished by ERCOT to the Debtor during the winter storm.
12. Pursuant to section 3 of the Debtor’s bylaws, the 16 member co-ops are not liable for the Debtor’s debts. They are members of the Debtor co-op and, in this capacity, have no liability for any of the Debtor’s debts. The member co-ops are only obligated to pay the Debtor for the power supplied by the Debtor to each member under their wholesale power contracts. The mechanism through which the Debtor passes costs through to the member co- ops is through higher power charges under these wholesale power contracts. In effect, the Debtor may be required to add a surcharge to its power charges to its members, over and above operating costs and ordinary debt service, to provide the cash to fund the reorganization.
At some point, if this requires the member co-ops to charge substantially more for power sold to their customers, the competitive viability of the member co-ops will be placed in jeopardy.
13. However, the Debtor’s ability to push these charges through onto the member co-ops under the wholesale power contracts is not unlimited. Pursuant to Tri-County’s
wholesale power contracts, it is required to pay the Debtor for power based on the rates set by tariffs approved and adopted by Debtor’s Board of Directors and approved by the appropriate governmental authorities. Tri-County would contest the legality of any charges for power which were not incorporated in a tariff approved by the Debtor’s Board of Directors, or which were not approved by the requisite governmental authorities (like the Rural Utilities Services (“RUS”), or which imposed such draconian charges on the member co-ops as to render them non-
competitive in the marketplace and thus unable to properly serve their members.
IV. The Debtor’s Debt Structure
14. The Debtor’s filings with the Court reflect debt of $1.810 billion to the RUS. This debt is secured by substantially all of the Debtor’s assets. This debt is also secured by a cash deposit made by the Debtor under a RUS cushion of credit program which, on the petition date, was $245 million. The Debtor has been using this money to pay interest and amortization on
this secured debt. Debt service on this obligation is currently approximately $125 million per year. Based on this level of payments, the reserve cash deposit will be exhausted no later than early 2023. Thereafter, this debt service must be paid out of Debtor’s operating cash flow.
15. The Debtor is indebted to Bank of America (“B of A”) for approximately $500 million based on a revolving credit facility. In addition, the Debtor’s schedule of the 30 largest creditors [Docket No. 1, pg. 14-17] includes substantial creditors, excluding ERCOT’s $1.809 billion claim for charges incurred during the winter storm and the $500 million owed to B of A, reflects a balance owed to the remaining 28 creditors of $575 million. Of this amount, at least
$271 million appears to be attributable to third-party suppliers of power or natural gas. These creditors may assert administrative priority pursuant to section 503(b)(9) on all or a substantial portion of their claims. ERCOT may also assert priority treatment for its $1.8 billion claim on the basis of section 503(b)(9). Tri-County fears that the potential for hundreds of millions of dollars (and perhaps billions) in section 503(b)(9) administrative claims will greatly increase the
pressure on the Debtor to push these potential administrative costs through to the member co- ops.
16. Because of the potential for section 503(b)(9) claims and with the bar date still pending, the total amount of the claims by general unsecured creditors is unclear. Excluding potential tort claimants, ERCOT and the creditors holding section 503(b)(9) claims, the amount of the unsecured claims appears well in excess of $700 million.
17. A huge drain on the Debtor’s cash and capital is the requirement to post
performance obligation collateral with various counterparties, including ERCOT and suppliers of natural gas. The proposed order granting the DIP Motion [Docket No. 553-3, pages 279 and 280] reflects $146 million in performance obligation collateral. The Declaration of Christopher J.
Kearns supporting the DIP Motion [Docket No. 553-1] refers at page 7 to $171 million in hedging-and-trading-party collateral. These collateral requirements represent a substantial burden on the Debtor’s capital structure.
18. A wholly owned, non-debtor subsidiary of the Debtor owns an undivided, 25%
tenant in common interest in the Sandy Creek Energy Station (“Sandy Creek”), which is a coal- fired generation plant located in Reisel, Texas. Sandy Creek came on line during 2013 and is one of the last coal plants constructed in the United States. Tri-County is advised that the debt secured by the Sandy Creek facility is in default and is currently subject to a waiver with the lenders which extends through September 2021. This facility often cannot be operated because of its cost to generate power is in excess of the then current ERCOT market prices. The Debtor is also a party to a long-term power purchase agreement for power produced by the same Sandy Creek facility. If rejected, this long-term power contract may give rise to a substantial rejection claim. In any event, the value of the Debtor’s investment in the Sandy Creek facility is questionable.
19. In the DIP Motion, the Debtor now seeks to layer over this debt with a DIP facility of $350 million. Tri-County is very concerned about this level of debt and how the Debtor proposes to handle this debt without crippling the member co-ops.
V. The DIP Motion
20. Tri-County appreciates the Debtor’s need for the post-petition infusion of cash which is the subject of the DIP Motion. On the petition date, the Debtor had $241.1 million in cash. Of this sum, approximately $221 million represents the proceeds of a draw against a
$500 million line of credit with B of A shortly before the petition date. This raises the troubling prospect that, before the draw on the line of credit, the Debtor had only $20 million in available cash before borrowing.
21. A review of the DIP Motion confirms that the Debtor will remain relatively cash poor. The DIP budget reflects that the Debtor’s available cash drops down to $29.3 million for the week of June 4, 2021. Thereafter, the Debtor projects draws against the DIP to sustain its operations. By July 30, 2021, the Debtor’s available cash is $20 million with $81.0 million drawn on the $150 million line of credit, leaving $79 million in remaining availability. This leaves the
Debtor with only $100 million in potential cash availability. The Debtor has not yet disclosed how it intends to raise the necessary cash to emerge from bankruptcy.
VI. The Current Path of the Case
22. Tri-County is concerned about the current path of the Debtor’s bankruptcy case.
Specifically, Tri-County is deeply troubled by the apparent perception that the Debtor can simply pass through, on an unlimited basis, its cash needs onto the member co-ops in order to
reorganize. An example of this dangerous perception was asserted in a recent court hearing and appears in a recent letter to the Debtor from counsel for the Official Unsecured Creditors Committee (“Committee”). This correspondence states that ERCOT made a sweep of $346 million of the Debtor’s collateral. The Committee then demands that the Debtor immediately invoice and collect from the member co-ops the $346 million paid by the Debtor to ERCOT.
While the Debtor has no unilateral power to simply invoice the member co-ops for this sum, Tri- County’s share of this sum would be approximately $72 million. This amount would equal, in a single payment, approximately 40% of Tri-County’s total power costs for the entire fiscal year of 2020. The Committee, unfortunately, offers no guidance as to how Tri-County could pay this huge sum to the Debtor without compromising its own finances. Indeed, payment of this amount by Tri-County would require it to exhaust all of its cash position and to borrow both the balance of the $72 million and cash to fund its ongoing operations.
23. Perhaps lost in the flow of events on everyone but this Court is the fact that Tri- County’s paramount duty is to protect its members by providing them with safe, reliable, and affordable power. The ceiling on how much can be charged by the Debtor to the member co- ops is another way of expressing the concept that the member co-ops must protect their
members from excessive, above market electric bills. If the member co-ops can only buy power from the Debtor at inflated prices substantially above the market, this will eventually destroy their competitive position in the market and their ability to serve their members.
VII. The Debtor’s Exit Strategy
24. Although it is relatively early in the case, the Debtor has articulated no clear strategy to exit from bankruptcy. The Debtor’s preferred exit plan is a political solution through a bailout by the Legislature. So far, no bailout has materialized.
25. A second exit strategy may be based upon legislative action to allow the Debtor and other co-ops to engage in securitization arrangements. It appears that the Legislature will not allow the Debtor to uplift its debts onto ERCOT through fees charged by it to all purchasers of electricity through the ERCOT grid. This would in effect spread the cost over all power consumers throughout the state. There is also the prospect that the Legislature will allow co- ops to engage in off-balance sheet securitization arrangements. However, securitization is just a form of long-term secured debt, at a much higher than market interest rates, which must be paid back over time. In the end, if the Debtor seeks to reorganize through securitized
borrowings, the members of each co-op may be subject to a triple whammy. First, the uplifting of costs to ERCOT, and the resulting fees, will be passed through to all consumers throughout the state, including the co-op members, as it increases the price of ERCOT’s power sold to the Debtor. While that fee will not impact the member co-ops’ competitive position, it will increase the cost of power supplied by the Debtor. Second, the costs of the Debtor’s securitization arrangement will be passed through to the member co-ops in the form of higher power charges by the Debtor. Third, the members of each co-op will bear the costs to service their own co-op’s securitized debt. Such an exit strategy offers little if any appeal to either the member co-ops or their members as it would likely commit the member co-ops to pass through these costs to their members indefinitely in the form of higher electric bills.
26. If the Debtor elects to move forward with a plan to emerge from bankruptcy by passing its obligations through to the member co-ops, the member co-ops will be faced with difficult decisions. Indeed, such an exit strategy for the Debtor may place the member co-ops in a position where they will no longer be competitive in their markets and no longer able to
properly serve their members. Tri-County is very concerned that, as the Debtor piles on more debt, this case may begin to move down a path to a death spiral which will destroy the Debtor and place the survival of the member co-ops in peril.
27. G&T (generation and transmission) co-ops like the Debtor come in many flavors.
G&Ts were formed by groups of distribution co-ops to efficiently aggregate their needs for reliable and affordable electrical power and to pool their financial resources to fund the capital- intensive construction of generating and transmission facilities. Some G&Ts, like the Debtor, own both generating and transmission facilities. Other G&Ts do not own generating assets but act as aggregators to purchase their members’ power requirements from third-party suppliers.
Some of the aggregators own their transmission facilities and provide transmission services to their members. Other G&Ts serve purely as aggregators and own no transmission facilities and provide no transmission services to their members.
28. The upshot of this is that the Debtor does not have to emerge from bankruptcy in its current form. There are other functional structures that will allow both the Debtor and the member co-ops to survive and allow the members to continue to provide their retail customers with power at affordable prices. However, standing pat and passing the increased costs through to the member co-ops is a strategy that does not serve the interests of the customers who are the ultimate beneficiaries of this co-op structure.
Prayer for Relief
ACCORDINGLY, Tri-County respectfully asks the Court to grant to Tri-County all relief to which it is entitled.
DATED: May 17, 2021 Respectfully Submitted,
/s/ J. Robert Forshey J. Robert Forshey State Bar No. 07264200 Jeff Prostok
State Bar No. 16352500 FORSHEY & PROSTOK LLP 777 Main St., Suite 1550
Fort Worth, Texas 76102 Telephone: (817) 877-8855 Facsimile: (817) 877-4151 [email protected] [email protected]
ATTORNEYS FOR TRI-COUNTY ELECTRIC
COOPERATIVE,INC.
CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the foregoing document has been served upon all parties receiving electronic notice via the Court's CM/ECF system on May 17, 2021.
/s/ J. Robert Forshey J. Robert Forshey
L:\BFORSHEY\Tri-County Electric Co-Op (C11) #6206\Pleadings 21-30725 txsb (Brazos Electric)\Ltd Response to Debtors DIP Mt (8v) 5.17.21.docx