October 4, 2019 − Agera Energy LLC and five affiliated Debtors (“Agera Energy” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 19-23802. The Debtors, an electricity and natural gas reseller, are represented by Darren Azman of McDermott, Will & Emery LLP. Further board-authorized engagements include (i) Miller Buckfire & Co., LLC as investment banker, (ii) GlassRatner Advisory & Capital Group, LLC (“GlassRatner”) as financial advisor and (iii) Stretto as claims agent.
The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $100.0mn and $500.0mnmn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Massachusetts Department of Public Utilities ($43.9mn alternative compliance payment), (ii) Colorado Bankers Life Insurance Company ("CBLI," $35.7mn subordinated loan FN) and (iii) Connecticut Public Utilities Regulatory Authority ($8.2mn alternative compliance payment). There are five other "alternative compliance payments" (in respect of five further states) listed in the Debtors' list of top 30 unsecured claims.
FN: Durham, NC-based CBLI is owned by Greg E. Lindberg who is also the Debtors' major shareholder. Lindberg has been indicted for insurance fraud (ie for attempting to bribe NC state insurance commissioner Mike Causey) as is discussed further below in "Events Leading to the Chapter 11 Filing").
In a press release announcing the filing and a planned asset sale to Constellation, a subsidiary of Exelon Corporation (Nasdaq: EXC), the Debtors' CFO Mark Linzenbold advised: "Due to unforeseen circumstances impacting the viability of Agera Energy’s business and its objectives, the company’s management team has made the decision to facilitate a sale under chapter 11 to minimize disruptions to our customers. While we are deeply disappointed to be filing bankruptcy, we’re excited that a market-leading energy company will be able to continue serving our customers’ needs.”
Commenting on its planned acquisition, Jim McHugh Constellation's CEO added an important caveat: “This agreement would provide an opportunity to grow our retail business in strategic markets and strengthen our position as the nation’s largest competitive energy provider. Provided the court process unfolds favorably, we look forward to providing Agera Energy’s retail customers with the same quality products, services and clean energy solutions that Constellation customers currently enjoy.”
Proposed Sale to Exelon
On October 3, 2019, the Debtors and Exelon Generation Company, LLC (“Exelon”) executed an asset purchase agreement (the "Exelon APA"), pursuant to which Exelon will serve as the stalking horse bidder to acquire a significant portion of the Debtors’ customer contracts for $24.75mn. The execution of the Exelon APA followed an extensive marketing process that begun in May of 2019 which resulted in 20 interested parties advancing to the due diligence stage and "numerous" letters of intent. The asset purchase agreement contains a "guaranteed minimum amount" of $10.25mn although Exelon has numerous outs, notably in respect of claims filed by state regulators. Exelon is very clear that it is buying consumer energy contracts, to the extent that the Debtors cannot deliver those, it is not interested. Court documents state: "The bulk of the Purchased Assets proposed to be sold under the Stalking Horse APA are the Sellers’ customer contracts, which the Sellers will assume and assign to the Stalking Horse Bidder. The Stalking Horse Bidder is a qualified competitive energy supplier in each jurisdiction in which the Sellers operate…the size and value of the Sellers’ book of customer contracts decreases with the passage of time. Specifically, pending and future regulatory action against the Debtors may soon result in suspension or revocation of the Debtors’ licenses to sell energy in certain states. In turn, the Debtors would potentially lose all of their energy customers in such states. The Stalking Horse APA contains a purchase price adjustment mechanism that will adjust downward for every customer contract not successfully transferred to the Stalking Horse Bidder.”
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Sandford Declaration”), Todd Sandford, the Debtors' Chief Operating Officer, detailed the events leading to Agera Energy’s Chapter 11 filing. The Sandford Declaration starts off rather prosaicly, detailing a company squeezed by declining margins from its fixed price power contracts in "a very competitive, low margin business." Things, however, quickly get a bit more electric with new management uncovering the incompetence (or criminality) of the old management; funding necessary to survival disappearing as its source (Greg Lindberg) is indicted for insurance fraud; and the whole low-margin house of cards collapsing as a key electricity supplier and a pack of state regulators called in 8-figure debts.
The Sandford Declaration states: “The underlying retail energy business, by its nature, is a very competitive, low margin business. The Debtors’ senior management, who joined the Debtors approximately one year prior to the Petition Date, uncovered a number of structural challenges within the Debtors’ business.
The Debtors grew their power business significantly in the 18 month period from January 2017 through June 2018. Most of that growth resulted from selling and onboarding customers on fixed price (as opposed to variable price) power contracts. The size of the Debtors’ power business, as measured by annualized volumes on flow, more than doubled (120%+) during this time period. Fixed price contracts are inherently riskier than variable price contracts. The ability to accurately price customers and properly risk-manage the customer load is critical to the ongoing commercial sustainability of any retail supplier business.
Upon arrival, the new senior management team uncovered a number of challenges, including, but not limited to:
- Poor (and in some cases, no) visibility into forward margins and, consequently, poor overall financial planning and forecasting
- A significant number of customer contracts at very low and negative forward margins (uncovered only after developing visibility into forward margins and doing root cause analysis)
- A suboptimal control environment (financial, pricing, risk management, etc.)
- An overstated balance sheet
Upon discovering these issues, management developed, and presented in late September 2018, a number of strategic options for Eli Global to assess, ranging from a bankruptcy filing to a turnaround plan. Eli Global ultimately committed to a turnaround plan, with full recognition of the capital necessary to fund the plan."
Eli Global is 100% owned by Greg E. Lindberg (“Lindberg”) who also owns a 50% of the total economic interest and 89% of the total voting interest in the Debtors. In March 2019, Lindberg was indicted on charges that he conspired to bribe North Carolina’s insurance commissioner. The Sandford Declaration goes to pains to separate the Debtors from Lindberg (“To my knowledge, Lindberg has had no involvement with the Debtors’ day-to-day operations. I have never met nor communicated with Lindberg.”) but cannot separate the Debtors’ from Lindberg’s (ie Eli Global’s) money, that being critical to filling the many financial holes that the Debtors new management were in the process of discovering.
The Sandford Declaration continues: “In September 2018, the Debtors’ current management identified material balance sheet issues, which led to a restatement of the Debtors’ financials. Specifically, as of August 31, 2018, there was approximately $39 million of over stated receivables, of which $37 million related to unbilled receivables. As a result of the foregoing discovery, the Debtors suddenly found themselves in breach of the Senior Lien Supply Agreement’s $16 million Tangible Net Worth covenant."
Following the September 2018 discoveries, the Debtors were temporarily able to cut a deal with BP Energy Company (“BP”), the principal counterparty to the Senior Lien Supply Agreement. BP supplies electricity and natural gas to the Debtors and engages in hedging transactions with them. The BP forbearance agreement required the Debtors to make capital contributions of $51.0mn, capital that was to come from Eli Global…except Eli Capital did not fully honor that commitment.
Again, the Sandford Declaration. “On May 9, 2019, during a triparty meeting between the Debtors, Eli Global, and BP, it became clear that Eli Global was no longer in a position to inject the requisite capital needed to support the Debtors’ business.”
…and then things get worse….
The Sandford Declaration: “In certain states where the Debtors operate, the Debtors are required to satisfy renewable portfolio standards (‘RPS’) as a condition of their license or certification to supply energy to customers in such states. RPS laws require a certain portion of a state’s electricity consumption to be generated from renewable sources, such as wind, solar, biomass, geothermal, or hydroelectric. Energy suppliers that are required to comply with RPS obligations, such as the Debtors, must obtain a sufficient amount of renewable energy credits (often called renewable energy certificates or ‘RECs’) during regular reporting cycles (e.g., annually) with each state. RECs are created when renewable energy is generated and delivered to the grid. May and June of 2019 were very critical months because the Debtors were scheduled to pay for and take delivery of a significant number of RECs to satisfy RPS obligations for the 2018 compliance year. Without additional capital contributions from Eli Global, the Debtors were forced to default on a number of REC trades, and thus were unable to satisfy certain RPS obligations. The Debtors are currently in default of their 2018 RPS obligations in Massachusetts, New Hampshire, and Rhode Island as a result of the Debtors’ financial inability to acquire RECs or subsequently satisfy their ACP obligations. The Debtors will soon be in default of RPS obligations in other states."
Of these, the Massachusetts default is the largest and most pressing with an outstanding liability of $41.6mn.
About the Debtors
Headquartered in Briarcliff Manor, New York, Agera Energy provides retail electricity and natural gas to commercial, industrial, and residential customers. It enables customers to receive electricity and natural gas needs from a source other than the local utility and to tailor energy supply to their specific needs. Agera Energy provides services to customers in California, Connecticut, Delaware, District of Columbia, Illinois, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Texas and Virginia.
Across both electricity and natural gas supply, the Debtors service 87 distinct utility regions and provide service to approximately 35,000 customers, comprised of over 75,000 accounts in California, Connecticut, Delaware, District of Columbia, Illinois, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Texas and Virginia.
Constellation is a leading competitive retail supplier of power, natural gas and energy products and services for homes and businesses across the continental United States. Constellation's family of retail businesses serves approximately 2 million residential, public sector and business customers, including more than two-thirds of the Fortune 100. Baltimore-based Constellation is a subsidiary of Exelon Corporation (Nasdaq: EXC), the nation’s leading competitive energy provider, with 2018 revenues of approximately $36 billion, and more than 32,000 megawatts of owned capacity comprising one of the nation’s cleanest and lowest-cost power generation fleets. Learn more at www.constellation.com or on Twitter at @ConstellationEG.
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