Tue 09/13/2022 12:43 PM
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Relevant Documents:
Voluntary Petition
First Day Declaration
Cash Collateral Motion

















Summary
Basic Water Co. is a water delivery company
Filed after the elevation of Lake Mead fell below the point at which the debtors could continue to draw in sufficient water to satisfy water delivery obligations
Requests use of cash collateral with the consent of the indenture trustee for secured bonds, to “fund the orderly sale of its assets or other court approved reorganization transaction”

Basic Water Co., a Henderson, Nev.-based water delivery company, filed for chapter 11 protection on Saturday, Sept. 10, in the Bankruptcy Court for the District of Nevada, along with subsidiary Basic Water Co. SPE 1 LLC. The debtors are working toward a permanent solution with the city of Henderson and the Southern Nevada Water Authority, or SNWA, after the surface level of Lake Mead reached a “failure elevation” on July 1, saying that “a viable permanent solution has not been achieved.” The indenture trustee under secured bonds, the Bank of Nevada, has agreed to the company’s use of cash collateral to “fund the orderly sale of its assets or other court approved reorganization transaction.” The use of cash collateral is subject to various milestones including a sale closing by the end of February. As consideration for the use of cash collateral, on Friday, Sept. 9, the company effectuated a partial redemption of the bonds in the amount of $7.3 million.

The first day hearing has yet to be scheduled.

The company reports up to $10 million to $50 million in both assets and liabilities. The company’s prepetition capital structure includes:

  • Secured debt:

    • Basic Water Co. SPE 1 LLC, city of Henderson water delivery contract revenue bonds taxable Series 2017: $7.5 million in principal.



  • Equity: Basic Management Inc. owns 100% of Basic Water Co.’s equity, and holders of 10% or more of Basic Water Co. SPE’s equity are as follows:


 

In 2004, debtor Basic Water Co. formed debtor Basic Water Co. SPE 1 LLC as a special purpose entity to obtain financing and conveyed to it the company’s water facilities and a city water delivery contract. To fund the acquisition of Basic Water Co., SPE obtained a $17.6 million financing, which was refinanced through the issuance of the secured bonds, with Bank of Nevada as trustee. The bonds bear interest at 5.34% and mature in 2032. Western Alliance Business Trust, an affiliate of Bank of Nevada, is the registered owner of 100% of the outstanding bonds.

The debtors are represented by Schwartz Law in Las Vegas as counsel and Force 10 Partners as financial advisor. The case has been assigned to Judge Mike K. Nakagawa (case No. 22-13252).

Background and Events Leading to Bankruptcy Filing

The company’s history dates back to 1941 during World War II as a means to supply magnesium to build airplane bodies and other material “critical” to the Allied forces. The magnesium production facilities encompassed a complex, known as the Basic Complex, and the town of Henderson was created to house the complex’s workers.

By 1944, the need for magnesium fell and the Basic Complex was shut down, after which the government offered Henderson for sale as “war surplus property.” In order to “save the town,” the Colorado River Commission of Nevada purchased the Basic Complex for $24 million, with $1 as a down payment and the balance to be paid from leasing the facilities to private industries.

Through the years, the commission has sold portions of the complex to various manufacturers, referred to by the debtors as “the industries,” which together formed Basic Management Inc., or BMI. The residual assets remaining from the war effort were sold to BMI, including all of the water facilities and the rights to the water appropriation certificates to the extent of five million gallons daily.

BMI entered into agreements with the industries to deliver water to them through the water facilities and later entered into delivery agreements with the city of Henderson, Las Vegas Valley Water District and the National Park Services. For nearly a quarter of a century, BMI was the “sole provider” of water to Henderson and Las Vegas.

However, following a ruling by the U.S. Supreme Court, BMI’s water entitlements and priorities appeared to be “upended” after the court found that the relevant statute required that water from Lake Mead be released for consumptive use in the Lower Colorado Basin states of Arizona, California and Nevada “only” in accordance with the contracts between the U.S. and water users from the storage and delivery of that water.

Ultimately, all of BMI’s entitlements were assigned to the industries, the city of Henderson and the Southern Nevada Water Authority and subsequently assigned to other entities. As a result, co-equal fourth-priority entitlements are currently held by the industries, Henderson and the Southern Nevada Water Authority.

The debtors attribute the chapter 11 filing to the surface level of Lake Mead reaching a failure elevation on July 1, “below which the intake is unable to draw in sufficient water to satisfy the Debtors’ water delivery obligations.” The company has been exploring options to extend the intake structure to provide access to raw water in the event of lake levels continuing to decline, beginning when the “drought that began in 2000 continued to deepen.” The debtors received bids from various construction firms for the project to extend the intake into the lake, but the firms also suggested the debtors pursue other options after raising concerns about the 80-year-old structure being damaged by the proposed intake extension.

In light of the risk and cost, the debtors looked for alternative solutions and engaged with the city of Henderson about a possible sale of the water facilities. The debtors also explored a possible acquisition of the system by SNWA regarding a possible acquisition of the system, but concluded that the responses from both SNWA and the city were not viable.

In 2021, the debtors explored other options, but the projections concerning Lake Mead’s surface level began to “shift dramatically,” compressing the debtors’ time to complete the project. The timing problem was further exacerbated by an unusually bad snow year that produced less-than-expected snow runoff and accelerated the decline in Lake Mead’s surface level. Due to these setbacks, none of the designs would be able to be completed before the lake reached the failure elevation.

The industries negotiated an emergency interim solution for the continued delivery of water with the city whereby the city and SNWA agreed to supply Basic Water Co. with potable water to be redelivered to the industries on a temporary basis if the industries paid the fees and charges of SNWA and the city. To facilitate the agreement, the city and the Las Vegas Valley Water District entered into an agreement for the delivery of water from the city to Las Vegas through the debtors’ systems.

On July 1, the surface level of Lake Mead reached the failure elevation and the intake structure stopped pumping raw water, which led to the debtors beginning to deliver potable water from the city to the industries under the interim agreement. The debtors say, however, that interim agreement is not a long-term solution because the debtors can no longer receive water at the intake structure, pump and transport it to terminal points, or redeliver to the industries for beneficial consumptive use.

Additionally, the city has stopped taking water under the delivery contract and the debtors are not generating any revenue to pay their bonds. Rather, the debtors and industries are paying the city for potable water at a rate that is “four to five times higher” than the rate for raw water. The interim agreement required the parties to work in good faith toward finalizing a solution by today, Tuesday, Sept. 13.

The debtors’ largest unsecured creditors are as follows:







































10 Largest Unsecured Creditors
Creditor Location Claim Type Amount
EMD Acquisition LLC Henderson, Nev. $   0
Lhoist North America of Arizona Inc. Fort Worth, Texas 0
Pioneer Americas LLC Cleveland, Tenn. 0
Titanium Metals Corp. Cleveland 0

The case representatives are as follows:



































Representatives
Role Name Firm Location
Debtors' Counsel Samuel A. Schwartz Schwartz Law Las Vegas
Gabrielle A. Hamm
Debtors' Financial Advisor NA Force 10 Partners Las Vegas
U.S. Trustee Justin Charles Valencia Office of the
U.S. Trustee
Las Vegas

Cash Collateral Motion

The debtors request the use of cash collateral, with the consent of Bank of Nevada, a division of Western Alliance Bank. The company proposes the following adequate protection: replacement liens (including proceeds of avoidance actions), allowed superpriority administrative expense claims, payment of prepetition and postpetition interest at the nondefault rates, payment of fees and expenses including legal counsel, financial advisors and other consultants and financial reporting.

In support of the use of cash collateral, the debtors submitted the declaration of Stephanne Zimmerman, who states that the cash collateral would be used for debtor SPE to pay its share (70%) of operating costs so that Basic Water Co. can continue to maintain and operate the water facilities and “fund the orderly sale of its assets or other court approved reorganization transaction.”

In addition, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) (unless consented to by the Bank of Nevada and approved or unopposed by Western Alliance Business Trust) and the “equities of the case” exception under section 552(b).

The carve-out for professional fees is $150,000.

The proposed budget for the use of cash collateral is HERE.

The DIP financing is subject to the following milestones:

  • Oct. 21, 2022: File bid procedures motion;

  • Jan. 3, 2023: File sale motion;

  • Feb. 7: Sale hearing;

  • Feb. 28: Sale closing;

  • Sept. 15: Entry of plan confirmation order; and

  • Oct. 27: Plan effective date.


The lien challenge deadline is the earlier of 75 days after entry of “the [Interim] Order” and the effective date of a confirmed chapter 11 plan. The UCC lien investigation budget is $50,000.

First Day Motions

The debtors also filed various standard first day motions, including the following:
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