Restructuring & Finance Litigation

The Herrick Restructuring Review provides insights and information related to restructuring and finance litigation. The Herrick team regularly represents official and ad hoc creditor committees, hedge funds, distressed debt investors, bondholders, and other parties in interest, and often serve as conflicts or special counsel for large-scale complex litigation matters.

---

Because of the unprecedented winter storm that clobbered Texas in February 2021, Brazos Electric Power Cooperative, Inc., was forced to file for chapter 11 in response to staggering increases in energy prices around the time of the storm. According to the first day declaration, Brazos was financially stable and bankruptcy “was unfathomable.” But in response to rotating outages across Texas, the Public Utility Commission of Texas instructed the Electric Reliability Council of Texas (“ERCOT”) to raise rates far beyond expectations for more than four straight days. ERCOT also imposed tremendous fees on energy use. After seven days of swelled energy prices, Brazos was presented with a bill for around $2.1 billion—due in mere days.

Brazos is a member-owned generation and transmission cooperative that generates and supplies electrical power to its 16 members and one municipal system, which in turn supply power to their own residential and business customers. Energy generation by Brazos is highly dependent on natural gas.

Beginning on February 13, 2021, an unprecedented winter storm crippled Brazos along with the rest of the state. Unfortunately, many Texas homes and businesses are not well insulated and they rely on electricity for heating. Further, Texas’s generating plants were not winterized, and could not manage in what would be normal winter temperatures in most other parts of the country. This tripart-calamity launched natural gas prices like rockets to 50x normal in the lead up to the storm. At the same time, Brazos experienced its highest ever demand for power. As the storm went on—when supply was at its lowest and demand was at its highest—ERCOT set prices more than 300x higher than they had been in the three months prior. Because of this energy catastrophe Brazos incurred around $2.1 billion in costs for seven days, almost three times Brazos’s total costs to its members in 2020.

Brazos challenged this $2.1 billion bill pursuant to a force majeure clause in its agreement with ERCOT and filed for chapter 11 relief. According to the first day petition, Brazos was caught in a liquidity trap and the mavericks were not willing to “foist this catastrophic ‘black swan’ financial event onto its members and their customers.” Instead, the company is seeking to discharge ERCOT’s $1.8 billion disputed claim.

The Texas deep freeze is a reminder of the utility of chapter 11 relief for profitable companies facing one-time debt disasters. Instead of destroying socially-useful enterprises, chapter 11 allows companies to discharge what can often seem like unfair debts from natural disasters and the price increases that accompany them.

---

For more information on this alert or other restructuring & finance litigation matters please contact:

Stephen B. Selbst at +1 212 592 1405 or [email protected]

© 2021 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.