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Retail Supplier Files For Bankruptcy, Customers To Be Returned To Default Service

Supplier Serves Over 100 Muni Aggregations

March 28, 2022

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Copyright 2010-21
Reporting by Paul Ring •

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Volunteer Energy Services, Inc. (Debtor or VESI) has filed a Chapter 11 voluntary bankruptcy petition with a federal court

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.

Of the 212,000 accounts, eighty-one percent of those accounts are held under the Debtor’s 139 municipal aggregation contracts, with the remaining 19% of accounts being general business and residential.

A declaration filed with the court by a representative of the Debtor states, "In late 2014, VESI entered into a $150 million syndicated credit facility (the 'Syndicated Facility') led by PNC Bank and five additional lenders (collectively, the 'Syndicated Lenders'). Less than one year into the Syndicated Facility, the Syndicated Lenders expressed concerns about VESI’s financial performance and the Syndicated Facility. To address these concerns, in July 2015, VESI retained me [the declarant] as a consultant."

"Upon my review of VESI’s audited financials from 2010-2014 and year to date unaudited 2015 financials, it quickly became clear 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," the declaration states

The declaration states that efforts to correct such accounting resulted in restated audited financials for the period ending December 31, 2015, which included the elimination of approximately $40 million of previously reported pre-tax net income and retained earnings.

The declaration states that, shortly thereafter, the Syndicated Facility was terminated and VESI entered into the Credit Agreement with PNC Bank, N.A. In connection with the Credit Agreement, VESI created new borrowing base certificate reporting mechanisms, which were consistent with the revised gas accounting processes that supported VESI’s monthly balance sheets

In a 2016 agreement, PNC agreed to make available to VESI a revolving credit line in the maximum principal amount of $42 million. 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 million is outstanding under the Credit Agreement

The declaration cited the following as events leading to the Chapter 11 petition:

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," the declaration states

"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," the declaration states

The declaration reports that, in mid-May 2021, VESI launched a process to sell the company’s assets (or as a going concern). This sale process was conducted in parallel with the ongoing refinance efforts.

As a result, 13 parties executed confidentiality agreements ('NDA') with VESI to gain access to VESI’s virtual dataroom to conduct preliminary due diligence

"As a result of these efforts, in fall 2021, VESI entered into extensive negotiations with a prospective purchaser interested in acquiring VESI’s ownership interests with a target outside closing date of January 31, 2022. To close the sale, the prospective purchaser requested that PNC provide post-closing working capital financing for a transition period of 12-18 months. After extensive discussions, however, the parties (PNC and the prospective purchaser) were unable to agree to post-closing working capital financing terms, which prevented the sale from going forward," the declaration states

Volunteer then conducted a second marketing effort for an asset sale, but the declaration notes that completing such process on an accelerated schedule was challenging.

"First, any prospective purchaser must be a qualified competitive energy supplier in each jurisdiction in which VESI operates in order to continue servicing VESI’s customer contracts upon the closing of any sale. Second, unlike many retail energy providers, VESI’s prepetition lender does not also serve as VESI’s energy supplier. Accordingly, VESI was forced to conduct strategic marketing efforts without alarming its Wholesale Energy Suppliers, which may have resulted in suppliers refusing to provide energy necessary to continue VESI’s business given that they are not contractually obligated to do so," the declaration states

In response to the second marketing effort, VESI received two indicative, non-binding offers for the purchase of certain customer contracts. However, PNC was unwilling to fund an orderly winddown and transition of customers to a purchaser or the default utility providers, the declaration states

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.

Volunteer said this will trigger the transitioning of the Debtor’s customers to default service

"[U]ntil 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," the declaration states

"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," the declaration states

"The Debtor commenced this Chapter 11 Case with minimal liquidity and an upside-down balance sheet. Given the reality of the Debtor’s financial situation, it is doubtful whether the Debtor’s obligations to its senior secured lender will be fully repaid, leaving little to no value for residual claimants. Consequently, it is imperative that the Debtor make every effort to minimize the administrative expenses incurred in this case," Volunteer said

As a result, Debtor will be seeking authority to reject all of the contracts under which the Debtor supplies natural gas and/or electricity to its Customers, and, as noted above, it is anticipated each Customer’s gas or electric service will be transitioned to the default service provider.

Debtor noted that some customers are due refunds under their contracts which it is seeking to reject

Liabilities for the Debtor were listed as between $50-100 million

Case 2:22-bk-50804

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