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Entrust Says ERCOT Material Breach Finding, POLR Drop Scuttled Sale Of Remaining Customer Book To Another Retail Provider (REP Named In Court Filing)

Price For Prior Book Sales To Rhythm, NRG Disclosed

March 30, 2021

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Copyright 2010-21
Reporting by Paul Ring •

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Entrust Energy (and affiliates, collectively known as the Debtors) has filed with a bankruptcy court a declaration in support of its bankruptcy which provides certain information regarding Entrust activities leading up to, and after, the ERCOT winter event

In the course of their business prior to the winter event, Debtors entered into a series of agreements with Shell Energy North America (US), L.P. and other Shell-related entities (collectively, 'Shell') for the purchase and sale of physical and financial electrical energy and related services, and to provide credit support arrangements for Debtor

Entrust detailed certain prior notices of default under the Shell agreement, including a default notice on March 16, 2020 declaring a default due to the Debtors' failure to meet the net worth calculation under the Global Agreement and Shell Loan.

Shortly thereafter, on July 1, 2020, the Debtors closed on a sale of 35,200 residential customer equivalents ('RCEs') to US Retailers LLC, which resulted in approximately $13.2 million in sale proceeds ('NRG Sale'). Entrust said that the NRG Sale dramatically improved the Debtors’ financial position and brought the Debtors back into compliance with all financial metrics under the Global Agreement and Shell Loan.

Entrust said, "Heading into February of 2021, the Debtors remained in compliance will all financial metrics under the Global Agreement and Shell Loan."

Entrust alleged that, "Only one day into the historic and extreme weather event, Shell attempted to have the Debtors agree to a mutual termination of their agreements. When the Debtors did not agree, Shell notified the Debtors that it was declaring a default under the Global Agreement and would no longer transact with the Debtors ('Termination Notice')."

Entrust alleged that the Termination Notice states:

As evidenced by the POTX forecast and hedge report provided today by Entrust to Shell, Entrust is in material default of the hedging requirements of Section 3.17 of the Global Agreement, thereby causing an Event of Default with respect to Entrust under the Global Agreement. Due to the current extreme weather event, Entrust’s failure to maintain hedges as required by the Global Agreement has resulted in, or will result in, expected losses to Entrust in excess of $40 million, making Entrust deeply insolvent and no longer financially viable, and Shell can no longer risk increasing its exposure to Entrust

"The combination of ERCOT’s failure to appropriately safeguard the grid from systematic failure during extreme winter weather and Shell’s unilateral termination of the Global Agreement based on its expectation that the Debtors hedges were inadequate eliminated the Debtors’ ability to continue as a going concern," Entrust said

Entrust alleged, "Immediately following the Termination Notice given to Entrust, Shell terminated hedges which Shell acknowledges were adequate to pay all amounts owed to Shell under the Global Agreement, Shell Loan, and other amounts owed to Shell under their related contracts."

Entrust alleged, "The Debtors have been actively communicating with Shell for weeks regarding an accounting of the funds collected and application of those funds. Preliminary reports from Shell indicate that Shell owes the Debtors well in excess of $8 million, but despite numerous efforts to seek more definitive documentation around mark-to-market valuations and evidence of each liquidating trading settlement activity, Shell has not yet provided complete backup documentation requested by the Debtors to verify the initial accounting reconciliation of the funds provided by Shell. The Debtors are still investigating Shell’s termination of the Global Agreement and related agreements as well as the amounts they are owed in connection with the early and unilateral termination of their hedges at the onset of the extreme weather event in Texas."

Entrust noted that, on March 10, 2021, the Debtors closed on a sale of approximately 91,000 commercial and residential RCEs and other assets, including certain systems and intellectual property to Rhythm Ops, LLC which resulted in $3.160 million of sale proceeds ('Rhythm Sale').

Following the Rhythm Sale, the Debtors still had approximately 13,000 customers (or approximately 90,000 RCEs) and continued efforts to find a purchaser for its remaining customer relationships

Entrust said, "On March 3, 2021, the Debtors received a letter of intent from JP Energy Resources, LLC to purchase a significant portion of the Debtors’ remaining customer relationships (the 'JP Resources LOI'). Within hours after receiving the JP Resources LOI, the Debtors notified ERCOT of its receipt of the JP Resources LOI and requested one week to close the sale. A client services representative from ERCOT indicated that a week may be too long, but that they would follow up with the appropriate decision maker. The next communication the Debtors received from ERCOT was later that same day informing the Debtors that they were in material breach the [sic] Standard Form Market Participation Agreement between ERCOT and the Debtors and that ERCOT planned to transition the Debtors’ existing Texas customers to the POLR program."

"Further requests by the Debtors for ERCOT to reconsider were dismissed, which effectively terminated the Debtors’ ability to consummate a sale under the JP Resources LOI," Entrust alleged

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