| Emergence from Voluntary Reorganization under Chapter 11 of the Bankruptcy Code | 2019 Chapter 11 Proceedings Commencement of Bankruptcy Cases During the year ended December 31, 2018, the Company had liquidity issues, and it was not in compliance with certain of its debt covenants as of December 31, 2018. On March 31, 2019, the 2019 Debtors filed the 2019 Bankruptcy Petitions under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The 2019 Debtors have filed a motion with the Bankruptcy Court seeking to jointly administer the 2019 Chapter 11 Cases under the caption “In re Vanguard Natural Resources, Inc., et al.” The subsidiary 2019 Debtors in the 2019 Chapter 11 Cases are VNG, VNRH, VO, EOC, EAC, ERAC, ERUD, ERAP, ERAC II, ERUD II and ERAP II. No trustee has been appointed and the Company will continue to manage itself and its affiliates and operate their businesses as “debtors-in-possession” subject to the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The Company expects to continue its operations without interruption during the pendency of the 2019 Chapter 11 Cases. To assure ordinary course operations, the 2019 Debtors secured orders from the Bankruptcy Court approving a variety of “first day” motions, including motions that authorize the 2019 Debtors to maintain their existing cash management system, to secure debtor-in-possession financing and other customary relief. These motions are designed primarily to minimize the effect of bankruptcy on the Company’s operations, customers and employees. Debtor-in-Possession Financing In connection with the 2019 Chapter 11 Cases, on the 2019 Petition Date, the 2019 Debtors filed the DIP Motion seeking, among other things, interim and final approval of the 2019 Debtors’ use of cash collateral and debtor-in-possession financing on terms and conditions set forth in the DIP Credit Agreement among the DIP Borrower, the financial institutions or other entities from time to time parties thereto, as lenders, and the DIP Agent. The initial lender under the DIP Credit Agreement is Citibank N.A. The DIP Credit Agreement contains the following terms: • a super-priority senior secured revolving credit facility in the aggregate amount of up to $65.0 million (the “New Money Facility”), of which $20.0 million was drawn on April 4, 2019; • a “roll up” of $65.0 million of the outstanding principal amount of the revolving loans under Vanguard Natural Resources, Inc.’s (the “Company”) Credit Agreement (the “Roll-Up”, and, together with the New Money Facility, collectively, the “DIP Facility”); • proceeds of the New Money Facility may be used by the DIP Borrower to (i) pay certain costs and expenses related to the 2019 Chapter 11 Cases, (ii) make payments provided for in the DIP Motion, including in respect of certain “adequate protection” obligations and (iii) fund working capital needs, capital improvements and other general corporate purposes of the DIP Borrower and its subsidiaries, in all cases subject to the terms of the DIP Credit Agreement and applicable orders of the Bankruptcy Court; • the maturity date of the DIP Credit Agreement is expected to be the earliest to occur of (a) nine months after the 2019 Petition Date, (b) 35 days after the entry of the interim DIP order, if the Bankruptcy Court has not entered the final DIP order on or prior to such date, (c) the consummation of a sale of all or substantially all of the equity and/or assets of the DIP Borrower and its subsidiaries, (d) the occurrence of an Event of Default (subject to any cure periods), and (e) the effective date of a plan of reorganization in the 2019 Chapter 11 Cases. • interest will accrue at a rate per year equal to the LIBOR rate plus 5.50% , or the adjusted base rate plus 4.50% per annum; • in addition to fees to be paid to the DIP Agent, the DIP Borrower is required to pay to the DIP Agent for the account of the lenders under the DIP Credit Agreement, an unused commitment fee equal to 1.0% of the daily average of each lender’s unused commitment under the New Money Facility, which is payable in arrears on the last day of each calendar month and on the termination date for the facility for any period for which the unused commitment fee has not previously been paid; • the obligations and liabilities of the DIP Borrower and its subsidiaries owed to the DIP Agent and lenders under the DIP Credit Agreement and related loan documents will be entitled to joint and several super-priority administrative expense claims against each of the DIP Borrower and its subsidiaries in their respective 2019 Chapter 11 Cases subject to limited exceptions provided for in the DIP Motion, and will be secured by (i) a first priority, priming security interest and lien on all encumbered property of the DIP Borrower and its subsidiaries, subject to limited exceptions provided for in the DIP Motion, (ii) a first priority security interest and lien on all unencumbered property of the DIP Borrower and its subsidiaries, subject to limited exceptions provided for in the DIP Motion and (iii) a junior security interest and lien on all property of the DIP Borrower and its subsidiaries that is subject to (a) a valid, perfected and non-avoidable lien as of the petition date (other than the first priority and second priority prepetition liens) or (b) a valid and non-avoidable lien that is perfected subsequent to the petition date, in each case subject to limited exceptions provided for in the DIP Motion; • the DIP Credit Agreement is subject to customary covenants, including a requirement that the Company maintain a minimum liquidity (as defined in the DIP Credit Agreement) of $10.0 million , prepayment events, events of default and other provisions; and • generally, any undrawn commitments on the New Money Facility as of the effective date of a plan of reorganization are contemplated to be converted into an exit RBL facility and the Roll-Up is contemplated to be converted into an exit term loan as of such date. The DIP Credit Agreement is subject to final approval by the Bankruptcy Court, which has not been obtained at this time, and the Roll-Up is subject to the entry of the Final Dip Order by the Bankruptcy Court. We can provide no assurances that the DIP Motion will be granted. Acceleration of Debt Obligations As of December 31, 2018 and March 31, 2019, VNG was not in compliance with certain covenants under the Successor Credit Facility. Accordingly, all amounts due under the Successor Credit Facility and New Notes are classified as current in the accompanying consolidated balance sheet as of December 31, 2018. The commencement of the 2019 Chapter 11 Cases described above is an event of default that accelerated the 2019 Debtors’ obligations under the following debt instruments (the “Debt Instruments”). Any efforts to enforce such obligations under the Debt Instruments are stayed automatically as a result of the filing of the 2019 Bankruptcy Petitions and the holders’ rights of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code. • $677.7 million in unpaid principal with respect to the Revolving Loan, $123.4 million in unpaid principal with respect to the Term Loan, and approximately $11.6 million of interest, fees, and other expenses arising under or in connection with the Successor Credit Facility. • $80.7 million in unpaid principal, plus interest, fees, and other expenses, arising in connection with the New Notes issued pursuant to the Amended and Restated Indenture. Emergence from Voluntary Reorganization under Chapter 11 of the Bankruptcy Code On February 1, 2017, the 2017 Debtors filed the 2017 Chapter 11 Cases under Chapter 11 of the Bankruptcy Code in the 2017 Bankruptcy Court. The 2017 Chapter 11 Cases were administered under the caption “In re Vanguard Natural Resources, LLC, et al.” On July 18, 2017, the 2017 Bankruptcy Court entered the Confirmation Order, which approved and confirmed the Final Plan. The Final Plan provided for the reorganization of the 2017 Debtors as a going concern and significantly reduced the long-term debt and annual interest payments of the Successor. During the pendency of the 2017 Chapter 11 Cases, we operated our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code and orders of the 2017 Bankruptcy Court. The 2017 Debtors satisfied all conditions precedent under the Final Plan and emerged from bankruptcy on August 1, 2017. The Successor reorganized as a Delaware corporation named Vanguard Natural Resources, Inc. on the Effective Date. Pursuant to the Final Plan, each of the Predecessor’s equity securities outstanding immediately before the Effective Date (including any unvested restricted units held by employees or officers of the Debtor, or options and warrants to purchase such securities) have been cancelled and are of no further force or effect as of the Effective Date. Under the Final Plan, the 2017 Debtors’ new organizational documents became effective on the Effective Date. The Successor’s new organizational documents authorize the Successor to issue new equity, certain of which was issued to holders of allowed claims pursuant to the Final Plan on the Effective Date. In addition, on the Effective Date, the Successor entered into a registration rights agreement with certain equity holders. As of August 1, 2017, the Successor issued 20.1 million outstanding shares of common stock, $0.001 par value. (“Common Stock”). Fresh-Start Accounting Upon the Company’s emergence from the 2017 Chapter 11 Cases, the Company qualified for and applied fresh-start accounting in accordance with the provisions set forth in ASC 852 as (i) the Reorganization Value (as defined below) of the Company’s assets immediately prior to the date of confirmation was less than the post-petition liabilities and allowed claims, and (ii) the holders of the existing voting shares of the Predecessor entity received less than 50% of the voting shares of the emerging entity. Refer to Note 14 , “Emergence from Voluntary Reorganization under Chapter 11 of the Bankruptcy Code” for the terms of the Final Plan. Fresh-start accounting requires the Company to present its assets, liabilities, and equity as if it were a new entity upon emergence from bankruptcy. The new entity is referred to as “Successor” or “Successor Company.” However, the Company will continue to present financial information for any periods before application of fresh-start accounting for the Predecessor Company. The Predecessor and Successor companies lack comparability, as required in ASC Topic 205, Presentation of Financial Statements (ASC 205). Therefore, “black-line” financial statements are presented to distinguish between the Predecessor and Successor companies. Adopting fresh-start accounting results in a new financial reporting entity with no beginning retained earnings or deficit as of the fresh-start reporting date. Upon the application of fresh-start accounting, the Company allocated the fair value of the Successor Company’s total assets (the “Reorganization Value”) to its individual assets based on their estimated fair values. The Reorganization Value is intended to represent the approximate amount a willing buyer would value the Company's assets immediately after the reorganization. Reorganization Value is derived from an estimate of Enterprise Value, or the fair value of the Company’s long-term debt and stockholders’ equity. The estimated Enterprise Value at the Effective Date was $1.425 billion as established in the Final Plan and approved by the 2017 Bankruptcy Court. The Enterprise Value was derived from an independent valuation using an asset based methodology of proved reserves, undeveloped acreage, and other financial information, considerations and projections, applying a combination of the income, cost and market approaches as of the Convenience Date. The Company’s principal assets are its oil and natural gas properties. Significant inputs used to determine the fair values of properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future oil, natural gas and NGLs prices; and (iv) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the Company’s management at the time of the valuation and are the most sensitive and subject to change. For purposes of estimating the fair value of the Company’s proved, probable and possible reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Company’s reserves, risked by reserve category and discounted using a weighted average cost of capital rate of 10.0% . The proved reserve locations were limited to wells expected to be drilled in the Company’s five -year development plan. Weighted average oil, natural gas and NGLs prices utilized in the determination of the fair value of oil and natural gas properties were $67.20 per barrel of oil, $3.69 per million British thermal units (MMBtu) of natural gas and $24.59 per barrel of oil equivalent of natural gas liquids, after adjustment for transportation fees, quality differentials and regional price differentials. Base pricing was derived from an average of forward strip prices and analysts’ estimated prices. In estimating the fair value of the Company's unproved acreage that was not included in the valuation of probable and possible reserves, a market approach was used in which a review of recent transactions involving properties in the same geographical location indicated the fair value of the Company's unproved acreage from a market participant perspective. See further discussion below under “Fresh-Start Adjustments” for the specific assumptions used in the valuation of the Company's various other assets. Although the Company believes the assumptions and estimates used to develop Enterprise Value and Reorganization Value are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions. The assumptions used in estimating these values are inherently uncertain and require judgment. The following table reconciles the Company’s Enterprise Value to the estimated fair value of the Successor’s common stock as of July 31, 2017 (in thousands): July 31, 2017 Enterprise Value $ 1,425,000 Plus: Cash and cash equivalents 27,610 Less: Debt (943,393 ) Total stockholders' equity 509,217 Less: Fair value of warrants (11,734 ) Less: Fair value of non-controlling interest (2,274 ) Fair Value of Successor common stock $ 495,209 The following table reconciles the Company’s Debt as of July 31, 2017 (in thousands): July 31, 2017 Revolving Loan $ 730,000 Term Loan 125,000 New Notes 80,722 Lease Financing Obligation, net of current portion 12,464 Current portion of Lease Financing Obligation 4,647 Total Fair value of debt 952,833 Revolving Loan fees and debt issuance costs (9,440 ) Total Debt $ 943,393 The following table reconciles the Company’s Enterprise Value to its Reorganization Value as of July 31, 2017 (in thousands): July 31, 2017 Enterprise Value $ 1,425,000 Plus: Cash and cash equivalents 27,610 Plus: Current liabilities, excluding current portion of Lease Financing Obligation 147,552 Plus: Other noncurrent liabilities 15,589 Plus: Long-term asset retirement obligation 136,769 Reorganization Value of Successor assets $ 1,752,520 Condensed Consolidated Balance Sheet The following illustrates the effects on the Company’s consolidated balance sheet due to the reorganization and fresh-start accounting adjustments. The explanatory notes following the table below provide further details on the adjustments, including the Company’s assumptions and methods used to determine fair value for its assets and liabilities. As of July 31, 2017 (in thousands) Predecessor Reorganization Adjustments (1) Fresh-Start Adjustments Successor Assets Current assets Cash and cash equivalents $ 68,933 $ (41,323 ) (2) $ — $ 27,610 Trade accounts receivable, net 64,253 (155 ) (3) (8,231 ) (15) 55,867 Derivative assets 3,236 — — 3,236 Restricted cash 102,556 (74,101 ) (4) — 28,455 Other current assets 4,430 (394 ) (5) 416 (16) 4,452 Total current assets 243,408 (115,973 ) (7,815 ) 119,620 Oil and natural gas properties, at cost 4,635,867 — (3,029,173 ) (17) 1,606,694 Accumulated depletion (3,916,889 ) — 3,916,889 (17) — Oil and natural gas properties 718,978 — 887,716 1,606,694 Other assets Goodwill 253,370 — (253,370 ) (18) — Other assets 44,315 — (18,109 ) (19)(20) 26,206 Total assets $ 1,260,071 $ (115,973 ) $ 608,422 $ 1,752,520 Liabilities and equity (deficit) Current liabilities Accounts payable: Trade $ 8,444 $ 9,978 (6) $ — $ 18,422 Accrued liabilities: Lease operating 13,199 — — 13,199 Development capital 8,928 — — 8,928 Interest 8,478 (8,478 ) (7) — — Production and other taxes 23,494 — — 23,494 Other 20,933 12,297 (8) — 33,230 Derivative liabilities 12,987 — — 12,987 Oil and natural gas revenue payable 36,087 — (7,808 ) (15) 28,279 Long-term debt classified as current 1,300,971 (1,300,971 ) (9) — — Other 14,246 (382 ) (10) (203 ) (21) 13,661 Total current liabilities 1,447,767 (1,287,556 ) (8,011 ) 152,200 Long-term debt, net of current portion 12,647 926,281 (11) (183 ) (22) 938,745 Derivative liabilities 15,143 — — 15,143 Asset retirement obligations, net of current portion 260,089 — (123,320 ) (23) 136,769 Other long-term liabilities 37,683 — (37,237 ) (24) 446 Total liabilities not subject to compromise 1,773,329 (361,275 ) (168,751 ) 1,243,303 Liabilities subject to compromise 479,911 (479,911 ) (12) — — Total liabilities 2,253,240 (841,186 ) (168,751 ) 1,243,303 As of July 31, 2017 Predecessor Reorganization Adjustments (1) Fresh-Start Adjustments Successor Stockholders’ equity/Members’ (deficit) Preferred units (Predecessor) 335,444 (335,444 ) (13) — — Common units (Predecessor) (1,342,849 ) 763,217 (13) 579,632 (25) — Class B units (Predecessor) 7,615 (7,615 ) (13) — — Common stock (Successor) — 20 (14) — 20 Additional paid-in capital (Successor) — 305,035 (14) 201,888 (25) 506,923 Total VNR stockholders' equity/ members’ (deficit) (999,790 ) 725,213 781,520 506,943 Non-controlling interest in subsidiary 6,621 — (4,347 ) (26) 2,274 Total stockholders' equity/members’ (deficit) (993,169 ) 725,213 777,173 509,217 Total liabilities and equity (deficit) $ 1,260,071 $ (115,973 ) $ 608,422 $ 1,752,520 Reorganization Adjustments: 1) Represent amounts recorded as of the Convenience Date for the implementation of the Final Plan, including, among other items, settlement of the Predecessor’s liabilities subject to compromise, repayment of certain of the Predecessor’s debt, cancellation of the Predecessor’s equity, issuances of the Successor’s common stock and equity warrants, proceeds received from the Successor’s rights offering and issuance of the Successor’s debt. 2) Changes in cash and cash equivalents included the following (in thousands): Proceeds from equity investment from holders of Old Second Lien Notes $ 19,250 Proceeds from rights offering 255,750 Borrowings under the Successor's Term Loan 125,000 Removal of restriction on cash balance 102,556 Payment of holders of claims under the Predecessor Credit Facility (500,266 ) Payment of interest and fees under the Predecessor Credit Facility (3,390 ) Payment of Revolving Loan fees (9,300 ) Payment of professional fees (2,468 ) Funding of the general unsecured claims cash distribution pools (6,750 ) Funding of the professional fees escrow account (21,705 ) Changes in cash and cash equivalents $ (41,323 ) 3) Reflects the write-off of lease incentive costs due to the rejection of the related lease contract. 4) Net change to restricted cash includes the following: Removal of restriction on cash balance $ (102,556 ) Funding of the general unsecured claims cash distribution pools 6,750 Funding of the professional fees escrow account 21,705 $ (74,101 ) 5) Primarily reflects the write-off of the Predecessor’s equity offering costs. 6) Reflects reinstatement of payables for the general unsecured claims and trade claims cash distribution pool. 7) Reflects payment of accrued interest related to Predecessor Credit Facility and Predecessor debtor-in-possession credit facility of $3.4 million and the capitalization of approximately $5.1 million accrued interest on the Old Second Lien Notes into the principal amount of the New Notes. 8) Net increase in other accrued expenses reflect (in thousands): Recognition of payables for the professional fees escrow account $ 12,627 Write-off of accrued non-cash compensation related to Phantom Units granted (330 ) Net increase in accounts payable and accrued expenses $ 12,297 9) Reflects the repayment of outstanding borrowings under the Predecessor Credit Facility of approximately $500.3 million and the conversion of the remaining outstanding debt to Revolving Loan and the New Notes to Long-Term Debt, net of the write-off of deferred financing fees. 10) Reflects the write-off of deferred rent due to the rejection of the related lease contract. 11) Reflects $855.0 million of outstanding borrowings under the Successor Credit Facility, which includes a $730.0 million Revolving Loan and a $125.0 million Term Loan. The adjustment also reflects the issuance of New Notes of $80.7 million . The amounts are presented net of capitalized deferred financing fees related to each debt. 12) Settlement of Liabilities subject to compromise and the resulting net gain were determined as follows (in thousands): Accounts payable and accrued expenses $ 36,224 Accrued interest payable 10,737 Debt 432,950 Total liabilities subject to compromise 479,911 Reinstatement of liability for the general unsecured claims (4,978 ) Reinstatement of liability for settlement of an unsecured claim (5,000 ) Issuance of common shares to holders of general unsecured claims (1,089 ) Issuance of common shares to holders of Senior Notes claims (16,715 ) Gain on settlement of liabilities subject to compromise $ 452,129 13) Net change in Predecessor common units reflects (in thousands): Recognition of gain on settlement of liabilities subject to compromise $ 452,129 Cancellation of Predecessor Preferred units 335,444 Cancellation of Predecessor Class B units 7,615 Write-off of deferred financing costs and debt discounts (4,917 ) Recognition of professional and success fees (14,968 ) Fair value of warrants issued to Predecessor unitholders (11,734 ) Fair value of shares issued to Predecessor unitholders (517 ) Terminated contracts 165 Net change in Predecessor Common units $ 763,217 14) Net change in Successor equity reflects net increase in capital accounts as follows (in thousands): Issuance of common stock to general unsecured creditors $ 1,089 Issuance of common stock to holders of Senior Notes claims 16,715 Issuance of common stock to Predecessor preferred unitholders 517 Issuance of common stock for the second lien equity investment 19,250 Issuance of common stock pursuant to the rights offering 255,750 Issuance of warrants 11,734 Net increase in capital accounts 305,055 Par value of common stock (20 ) Change in additional paid-in capital $ 305,035 See Note 11 , “Stockholders’ Equity (Members’ Deficit)” for additional information on the issuances of the Successor’s equity. Fresh-Start Adjustments: 15) Reflects a change in accounting policy from the entitlements method for natural gas production imbalances in accordance with the adoption of ASC 606. 16) Reflects fair value adjustment for oil inventory. 17) Reflects the adjustments to oil and natural gas properties, based on the methodology discussed above, and the elimination of accumulated depletion. The following table summarizes the components of oil and natural gas properties as of the Convenience Date (in thousands): Successor Predecessor Fair Value Historical Book Value Proved properties $ 1,511,083 $ 4,635,867 Unproved properties 95,611 — 1,606,694 4,635,867 Less: accumulated depletion and amortization — (3,916,889 ) $ 1,606,694 $ 718,978 18) Reflects the write-off of Predecessor goodwill. 19) Reflects a decrease of other property and equipment and the elimination of accumulated depreciation. The following table summarizes the components of other property and equipment as of the Convenience Date (in thousands): Successor Predecessor Fair Value Historical Book Value Gas gathering assets $ 4,196 $ 19,942 Office equipment and furniture 574 5,847 Buildings and leasehold improvements 57 836 Vehicles 1,311 1,549 6,138 28,174 Less: accumulated depreciation — (13,657 ) $ 6,138 $ 14,517 In estimating the fair value of other property and equipment, the Company used a combination of cost and market approaches. A cost approach was used to value the Company’s other operating assets, based on current replacement costs of the assets less depreciation based on the estimated economic useful lives of the assets and age of the assets. A market approach was used to value the Company’s vehicles, using recent transactions of similar assets to determine the fair value from a market participant perspective. 20) Reflects an adjustment for the intangible asset related to the Company’s nickel gas contract of $5.6 million and the write-off of deferred tax asset of $4.1 million . 21) Reflects the adjustment of current portion of financing obligation to fair value and write-off of deferred rent. 22) Reflects the adjustment of long-term portion of financing obligation to fair value. 23) Primarily reflects the fair value adjustment of asset retirement obligations (“ARO”) to fair value of approximately $145.2 million , of which $136.8 million is reflected as long-term ARO and $8.4 million of current ARO shown in other current liabilities. The fair value of asset retirement obligations was estimated using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of: (i) plug and abandon costs per well based on existing regulatory requirements; (ii) remaining life per well; (iii) future inflation factors; and (iv) a credit-adjusted risk-free interest rate. Refer to Note 9, “Asset Retirement Obligations” for further details of the Company's asset retirement obligations. 24) Reflects the write-off of deferred tax liabilities. 25) Reflects the cumulative impact of the fresh-start accounting adjustments discussed above and the elimination of Common units (Predecessor). 26) Reflects the fair value adjustment to the Potato Hills gas gathering assets on the non-controlling interest. Reorganization Items Reorganization items represent (i) expenses or income incurred subsequent to the 2017 Petition Date as a direct result of the Final Plan, (ii) gains or losses from liabilities settled, and (iii) fresh-start accounting adjustments and are recorded in “Reorganization items” in the Company’s unaudited consolidated statements of operations. The following table summarizes the net reorganization items (in thousands): Predecessor Seven Months Ended July 31, 2017 Gain on settlement of Liabilities subject to compromise $ 452,129 Fresh-start accounting adjustments 781,520 Issuance of common shares and warrants (214,140 ) Legal and other professional fees (58,482 ) Recognition of additional unsecured claims (31,346 ) Write-off of deferred financing costs and debt discounts (21,361 ) Terminated contracts 165 Reorganization items $ 908,485 Subsequent to the Emergence Date, we recorded reorganization costs of $3.7 million and $6.5 million during the year ended December 31, 2018 and the five months ended December 31, 2017, respectively, primarily for legal and professional fees attributable to post restructuring activities. |
