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March 25, 2022 – Privately held* Volunteer Energy Services Inc. (“VESI” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Ohio, lead case number 22-50804 (Judge Preston). The Debtor, "a leading Midwestern natural gas and electricity supplier", is represented by David M. Whittaker of Isaac Wiles & Burkholder LLC. Further board-authorized engagements include: (i) McDermott Will & Emery LLP as general bankruptcy counsel, (ii) B. Riley Financial, Inc. as financial advisors and (iii) Epiq Corporate Restructuring, LLC as claims agent.
* Richard A. Curnutte Sr. of Pickerington, OH holds 100% of the Debtor's equity [Docket No. 3].
The Debtors’ lead petition notes between more than 100,000 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $50.0mn and $100.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Sequent Energy Management (gas supplier with $6.9mn trade claim), (ii) Eco-Energy (gas supplier with $4.2mn trade claim) and (iii) Shell Energy North America (gas supplier with $2.5mn trade claim).
In a declaration in support of first day filings (the “Whittaker Declaration, " see further below), CFO David Whittaker, notes that the Debtor's issues go back a long way; with his own hiring in 2015 coming after then senior lenders expressed concern about "VESI’s financial performance and the [potential resulting exposure under their] Syndicated Facility."
Whittaker's subsequent review as to the period 2010-2015 revealed that "VESI’s gross profit accounting (i.e., gas accounting) was incorrect, which caused inaccuracies in VESI’s profit and loss and balance sheet reporting" with ramifications of that review including "the elimination of approximately $40 million of previously reported pre-tax net income and retained earnings" in respect of 2015.
Further to that review, the then lenders terminated their facility; with the Debtor finding new secured financing from PNC Bank, N.A., albeit with the new sclaed-down financing reflecting the Debtor's more modest operating results and a reduced borrowing base. From there, the Debtor's appear to have more or less limped along; with the Debtor and PNC reaching agreement to remedy covenant-related defaults in July 2017, August 2018, July 2019, May 2020, and June 2020.
Things really took a turn for the worse for the Debtors, however, from the end of 2020 with extreme weather (first too hot and then too cold) and the pandemic leaving the relatively fixed-cost Debtor with revenue shorfalls.
First in the winter of 2020-2021, unusually warm weather meant lower than normal energy consumption; with lower revenues lining up uncomfortably against fixed pipeline capacity costs on the income statement. Then the pandemic shut-down many of the Debtor's retail customers, again lowering revenue against fixed pipeline costs. Finally, Texas' winter storm Uri had knock-on effects even for this Midwestern supplier as it was forced to access the exponentially (and then some) more expensive natural gas spot market after several of its wholesale suppliers declared force majeur events.
From there, the Debtor failed twice to close a going concern sale; eventually looking to sell off customer contracts on a piecemeal basis before defaults (declared by PNC and wholesale suppliers) accelerated the Debtor's decline and led to an "irreversible domino effect resulting in the need for chapter 11 relief."
Goals of the Chapter 11 Filings
The Whittaker Declaration (defined below) provides: "The goal of this Chapter 11 Case is to expedite the process of transitioning the Debtor’s customers to default service to stop the unnecessary imposition of significant penalties against the Company, which will allow the Company to conduct an orderly winddown for the benefit of all stakeholders."
Events Leading to the Chapter 11 Filing
In a declaration in support of first day filings (the “Whittaker Declaration), David Whittaker, the Debtor’s CFO provides: “… the Debtor enters into contractual arrangements with Wholesale Energy Suppliers [ie, (i) gas marketing companies, (ii) utilities, (iii) ISOs, and (iv) local producers] to meet its retail customers’ varying consumption requirements, or ‘load.’ The overall load that the Debtor is obligated to supply fluctuates frequently depending on customer usage, which constantly changes based on a number of factors, including weather and other factors affecting customers’ businesses.
… Due to the nature of VESI’s business, certain factors (e.g., winter weather issues, price volatility, industry margin trends, and sales trends) can greatly impact gross profit. Specifically, VESI’s operating expenses remain relatively fixed each year regardless of weather outcomes or performance. Thus, if gross profits underperform relative to these fixed operating expenditures, then VESI’s financial position necessarily weakens. Over the last few years, certain key events have taken their toll on VESI’s financial position culminating in the need for this Chapter 11 Case.
- Winter 2019-2020. One of VESI’s fixed operating expenses is its pipeline capacity costs (i.e., the volume of firm transportation and storage capacity assigned to VESI pursuant to various Choice programs). If for any reason VESI’s winter throughput volumes are significantly decreased due to warm weather, then the per unit cost of fixed capacity costs increases, resulting in margin reduction. In the winter months of 2019 into 2020, the states in which VESI operates had an extremely warm winter, which, in turn, reduced the demand for natural gas and negatively impacted VESI’s gross profit performance.
- COVID-19 Pandemic. Shortly after the winter of 2019-2020, VESI’s financial performance continued to be negatively impacted because of the COVID-19 pandemic. Many of VESI’s customers are small businesses, restaurants, and food chains, which were ordered to be closed in the second quarter of 2021. Such closures further reduced actual sales versus expected sales, while VESI remained liable for its fixed pipeline capacity and other operating costs.
- Winter Storm Uri. It appeared that in fiscal year 2021, VESI would be able to turn a corner, and the Company projected a strong and profitable year. In mid-February 2021, however, a historic blast of arctic weather ('Winter Storm Uri') engulfed much of the United States. Winter Storm Uri caused a number of short-term supply disruptions to the U.S. natural gas industry, including, without limitation, natural gas well head freeze offs, pipeline operational constraints, and redirection of existing gas to alternate markets. As a result, the available gas supply within the market dramatically decreased at a time when there was a significant short term increase in consumer demand for gas in Texas and the entire mid-west. Additionally, as a result of the storm, four of VESI’s wholesale gas suppliers were unable to supply gas citing force majeure events. Due to increased demand and other factors, VESI was then forced to purchase incremental gas on the secondary market/cash market or risk non-compliance with utility instructions for energy delivery. Because of the extreme industry wide demand for natural gas at the time, the cost to purchase gas during the storm period in the cash market increased from approximately $3.00/MCF to $300/MCF, $600/MCF, and as high as $1200/MCF. VESI procured and delivered the utility required incremental gas as instructed and fully paid all wholesale suppliers. In so doing, in only a ten-day span, VESI’s gross profit for the year was negatively impacted by $7.6 million.
From 2016 to 2021, although VESI’s gross profit remained positive, VESI’s net income financial performance was inconsistent due to, among other things, warm winters, COVID, and Winter Storm Uri. As a result, VESI triggered various events of default under the Credit Agreement for, among other things, failing to maintain (i) minimum undrawn availability and (ii) average balance of revolving advances, which prompted amendments to the Credit Agreement to remedy such defaults on July 21, 2017, August 2, 2018, July 25, 2019, May 13, 2020, and June 26, 2020.
On June 26, 2020, VESI and PNC entered into a seventh amendment to the Credit Agreement and, at the request of PNC, VESI began efforts to refinance in order to close out PNC’s position. In January 2021, however, PNC reconsidered its desire to exit its position and began to work with VESI to procure a subordinated debt facility. Such efforts were ultimately not fruitful, and by May 2021 VESI was forced to pursue parallel paths of refinancing and efforts to sell its book of customers. Since the June 26, 2020 amendment to the Credit Agreement, PNC has been lending to VESI pursuant to a series of weekly or monthly extensions and forbearance agreements.
….On March 25, 2022, the Debtor defaulted on approximately $12.6 million in payments due to its Wholesale Energy Suppliers. These defaults create an irreversible domino effect resulting in the need for chapter 11 relief.
- First, Wholesale Energy Suppliers will refuse to enter into new short- term commitments to continue to provide energy to the Debtor;
- Second, the Debtor will have no means to procure sufficient energy to service its customers;
- Third, the process will begin for transitioning the Debtor’s customers to default service (however defined under applicable state law or by the applicable electric utility or natural gas local distribution company) at the applicable electric utility, natural gas local distribution company, or, to the extent required by state law, such other electric or gas company providing such service; and
- Fourth, until the Debtor’s customers are successfully transitioned, the Debtor will incur severe daily penalties for the energy that local distribution companies will provide to customers on the Debtor’s behalf given that the Debtor is no longer able to do so.
As of the Petition Date, the Debtor is in most instances between the second and third steps and in some instances already facing the penalties in the fourth step."
- Amended and Restated Revolving Credit and Security Agreement. The Debtor is party to a June 2016 credit agreement with PNC Bank, N.A. (the “Credit Agreement” and “PNC Bank,” respectively), pursuant to which PNC agreed to make available to VESI a revolving credit line in the maximum principal amount of $42.0mn. VESI pledged substantially all of its assets to PNC as collateral security for VESI’s obligations to PNC under the Credit Agreement. As of the Petition date, approximately $30.0mn is outstanding under the Credit Agreement.
- POR Agreements. The Debtor is party to various POR agreements with local gas distribution companies (“LDCs”). Pursuant to the Credit Agreement, VESI is permitted to sell receivables to applicable LDCs that participate in the delivery of gas that gives rise to the receivable. VESI is further permitted to grant security interests to the LDC to the extent necessary to effect the transfer of any receivable to the LDC, provided that such security interest relates solely to sales of such receivable and does not secure any other obligation owing to the LDC. Under the POR agreements, VESI has agreed to sell some or all of its receivables arising out of the supply of gas to customers within the LDC’s territory to the applicable LDC. The transactions effectuated under the POR agreements are intended to be true sales. However, certain LDCs—Columbia Gas of Ohio, Inc.; Columbia Gas of Kentucky, Inc.; East Ohio Gas Company d/b/a Dominion East Ohio; and Vectren Energy Delivery of Ohio, Inc.—have filed protective UCC-1 financing statements evidencing a security interest in the applicable subject receivables to the extent that any true sale is recharacterized as a secured financing. In such case, VESI will be deemed to have granted the affected LDC a security interest in the relevant receivables.
- Unsecured Debt. The Debtor estimates that, as of the Petition date, approximately $40.0mn of general unsecured debt is outstanding, which is comprised primarily of Wholesale Energy Suppliers and transportation debt.
About the Debtors
According to the Debtors: “Volunteer Energy is a leading Midwestern natural gas and electricity supplier. Our mission is to help our customers control energy costs with value based products. For 20 years, family-owned Volunteer Energy has been a trusted partner to both residential energy and business energy customers across Ohio, Michigan, Pennsylvania and Kentucky. We’ve always focused on creating long term customer relationships by listening to what customers want and responding with products that meet those needs."
The Whittaker Declaration adds: "The Debtor is a family-owned retail energy provider headquartered in Pickerington, Ohio. Since 2001, the Debtor has supplied retail electricity and natural gas to its various commercial, industrial, and residential customers across Ohio, Michigan, Pennsylvania, and Kentucky. The Debtor also manages interstate transportation contracts, gas storage, and gas supplies via interstate and intrastate pipelines, and administers energy purchases, monitors energy deliveries, and reconciles all deliveries and imbalances with local distribution companies.
The Debtor serves gas customers in eleven utility regions throughout Ohio, Michigan, Kentucky, and Pennsylvania, and power customers in three utility regions throughout Ohio. The Debtor currently has approximately 212,000 customers that consume approximately 25 billion cubic feet of annualized gas and approximately 500,000 megawatt hours of annualized power. Eighty- one percent of those [212k] accounts are held under the Debtor’s 139 municipal aggregation contracts, with the remaining 19% of accounts being general business and residential."
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