Over the objection of a single power generator and distributor, U.S. Bankruptcy Chief Judge David Jones of Houston gave “conditional approval” of a multibillion-dollar preliminary settlement agreement — aka a “disclosure statement” — in the Brazos Electric Power Cooperative bankruptcy case.
At the end of a 74-minute hearing that included an intense exchange between the judge and a lawyer for South Texas Electric Coop, Judge Jones described Brazos’ Chapter 11 restructuring as “very complicated” but that the 172-page proposed agreement, which needs final approval of hundreds of affected parties, “strikes a very nice balance.”
“This is a very hard document to read, but this is a hard case to understand,” the judge said. “I’m very comfortable with where we are.”
Brazos filed for bankruptcy March 1, 2021, after the Electric Reliability Council of Texas hit the Waco-based utility with a $1.9 billion bill from power provided to Brazos customers during the brutal subzero temperatures and snow that hit Texas as part of Winter Storm Uri.
Under the agreement, ERCOT will be paid $1.4 billion, and other creditors will have a choice to be paid what they are owed faster but receive only 65 cents on the dollar or be paid fully but over three decades. Brazos also will sell its three power generation plants in early 2023 with the proceeds also going to creditors.
Finally, some senior officials at Brazos will be forced to resign, including the company’s general counsel, Philip Segrest.
Lou Strubeck, a partner at O’Melveny & Myers and co-lead counsel for Brazos, told Judge Jones that the company and all members of the creditors committee approved the disclosure statement and that they are putting final touches on the wording of the agreement, which would be sent to creditors for their vote of approval Sept. 20.
ERCOT will send out notices to its 750 market participants — including Shell Energy, Calpine Energy, Tenaska Power Services, EDF Trading and NRG — asking them which payment plan they chose to accept. Responses, according to lawyers for ERCOT, will be due in mid-to-late October.
Judge Jones set Nov. 14 as the court date for deciding final approval for Brazos’ exit plan.
The only intense moments during the hearing came when Haynes and Boone partner Patrick Hughes, who represents South Texas Electric Cooperative, took to the podium to voice his client’s objections.
Based in Nursery, Texas, and serving 290,000 customers in 47 Texas counties, South Texas Electric Coop is owed about $14 million by ERCOT for power supplied to Brazos customers. The twist is that Brazos owes South Texas Electric only $1,200.
Hughes said his client objects to the plan because of what he described as “the elephant in the room” — the lack of disclosure and transparency about how the compromise was reached between Brazos and ERCOT.
Approving the plan, Hughes said, requires “an expansion of the court’s jurisdiction” to prohibit “every market participant that traded with ERCOT and every counterparty” from “pursuing any claims against ERCOT and against the debtor.”
“ERCOT would dictate the messaging in which the market participants are treated,” he said.
“There is no discussion of the underlying terms,” Hughes said. “There’s no discussion for the rationale for the settlement. We tried to find out some of the rationale. Give us the details. We didn’t get it.”
Judge Jones said South Texas Electric seemed to be saying that ERCOT needs to disclose that “they’re breaking the law” in making the agreement.
An intense exchange then occurred.
Judge Jones: This is a litigation strategy. I know exactly what you are doing.
Hughes: We are going to object. We have to.
Judge Jones: The objection is the first step, but that’s not your endgame. That’s your beginning game.
Hughes: The disclosure is incomplete in how the settlement was reached.
Judge Jones: Disclosure and transparency, you know, are important to me. But I don’t like transparency and disclosure thrown back in my face as smokescreen for litigation strategy.
Hughes: That’s not my intention.
Judge Jones: Just your client’s [intention].
Hughes: That’s not my client’s intention.
Judge Jones: I know exactly what is going on. It has nothing to do with transparency or more disclosure. It has to do with a litigation strategy that you are trying to set up.
Hughes: I think I should cede the podium.
Judge Jones: It can only get worse.
In response, Munsch Hardt shareholder Kevin Lippman, who is co-lead counsel for ERCOT, said his client “disagrees with the statement that it is acting outside of the law.”
“ERCOT is acting within its authority,” Lippman said. “The market is not being left short under the settlement.”