As has been reported widely, the February 2021 winter storm and related blackouts in Texas may have generated significant revenues for certain energy market participants and may leave other participants facing serious financial consequences. Given the degree of political and regulatory scrutiny that has accompanied this unprecedented event, considerable uncertainty continues to exist for certain market participants.
For example, on March 3, the Public Utility Commission of Texas (PUCT or Commission) ordered the Electric Reliability Council of Texas Inc. (ERCOT) to seek repayment of money that generators received for ancillary services they did not actually provide during the outages. While the Commission has not acted to date on a recommendation from an independent market monitor to reprice all day-ahead ancillary services clearing prices between February 15 and February 20 or the recommendation to reprice wholesale power during the last 32 hours of the emergency event, the planned forensic audit might ultimately change the Commission’s approach. On March 15, the Texas Senate passed a bill that would require the repricing of some wholesale electric charges and would direct ERCOT to seek repayment of such amounts. This bill appears to have stalled in the Texas House and may not ultimately pass. However, some market participants are now pursuing a repricing argument at the PUCT and in Texas courts.
Even if a particular transaction (such as the settlement of an energy hedge contract) is not one that is likely to be affected by regulatory or political changes, market participants should be mindful of applicable securities law principles and related finance agreement considerations as they seek to navigate this unprecedented landscape.
1. Securities Law Issues.
a. Disclosure. SEC-reporting companies with listed equity, voluntary filers and companies who have issued debt securities should consider whether their public disclosure regarding the winter storm and its aftermath adequately addresses all known risk contingencies (as well as possible upside or gains) arising from the storm. Alternatively, those companies with significant payment obligations should ensure that their public disclosures cover the negative effects of the storm, including the risk of not being able to make such payments or even potential bankruptcy, as relevant.
Companies that expect to receive or receive significant payments should also consider whether they have adequately disclosed the risk of nonpayment and the possibility and magnitude of a of a claw-back or reversal of a material payment. If there is a real risk of such payments being subject to regulatory claw-back or litigation, companies should consider how to appropriately tailor their disclosures to reflect this risk.
b. Trading and Securities Issuances. Company sponsors as well as issuers themselves should also be mindful of Regulation FD, which restricts the selective disclosure to security holders of material information that is not also made public. In particular, participants contemplating primary or secondary offerings of securities, or investments in securities of companies facing regulatory and disclosure uncertainty regarding their ability to collect and retain large payments should exercise caution. In general, the U.S. securities laws prohibit trading in securities while in possession of material non-public information.
The determination of what is material is fact-intensive but in situations of significant uncertainty, there is an enhanced risk of “second-guessing” in hindsight. As a result, companies considering offering or repurchasing their securities and other market participants exploring opportunistic investments in securities of companies with positive or negative exposure to material payments should also carefully evaluate with counsel the public disclosure record of the issuer.
2. Finance considerations
a. Disclosure Obligations. Companies with debt financing agreements should consider the scope of their affirmative obligations to disclose to their lenders material developments in their business. Many credit agreements and other debt financing arrangements include provisions requiring disclosure to the lenders of the occurrence of material litigation, events having a material adverse effect, and certain other material events, all of which could potentially be implicated in the current environment.
b. Covenant Compliance. Companies should also consider how a significant payment obligation could impact their ability to comply with any financial maintenance covenants contained in their debt financing agreements on a prospective basis, particularly covenants based on revenue or liquidity metrics.
c. Loan Purchases. Even though courts have generally held that loans are not securities, general fraud principles apply, meaning that absent an agreement between the parties to a trade disclaiming liability for disclosure issues (often referred to as a “big boy letter”), loans should not be purchased or reacquired by borrowers while in possession of material non-public information. In addition, where credit agreements permit borrowers to repurchase their loans from the lenders, such repurchases are often conditioned upon the borrower making a representation to the lenders as to the absence of undisclosed information.
The foregoing are general recommendations and considerations that may be relevant to specific circumstances and not others. As always, each situation will need to be evaluated on its own facts and circumstances. Please reach out to a member of the Baker Botts team with any questions.
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