| 2019 Chapter 11 Proceedings | 2019 Chapter 11 Proceedings Commencement of Bankruptcy Cases On March 31, 2019, the 2019 Debtors filed the 2019 Chapter 11 Cases under the Bankruptcy Code in the Bankruptcy Court. The 2019 Debtors are being jointly administered 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. Reorganization Process We are currently operating our business as a debtor-in-possession in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. We expect to generally continue our operations without interruption during the pendency of the 2019 Chapter 11 Cases. To continue ordinary course operations, we secured orders from the Bankruptcy Court approving a variety of “first day” motions, including motions that authorize us to maintain our 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. Subject to certain exceptions provided for in section 362 of the Bankruptcy Code, all judicial and administrative proceedings against us or our property were automatically enjoined, or stayed, as of the Petition Date. In addition, the filing of new judicial or administrative actions against us or our property for claims arising prior to the Petition Date were automatically enjoined. This prohibits, for example, our lenders or noteholders from pursuing claims for defaults under our debt agreements and our contract counterparties from pursuing claims for defaults under our contracts. Accordingly, unless the Bankruptcy Court agrees to lift the automatic stay, all of our prepetition liabilities and obligations should (subject to certain exceptions) be settled or compromised under the Bankruptcy Code through the 2019 Chapter 11 Cases. Our operations and ability to execute our business remain subject to the risks and uncertainties described in Item 1A, “Risk Factors” in our 2018 Annual Report on Form 10-K and Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. These include risks and uncertainties arising as a result of the 2019 Chapter 11 Cases, and the number and nature of our outstanding shares and shareholders, assets, liabilities, officers and directors could change materially because of the 2019 Chapter 11 Cases. Creditors’ Committees - Appointment & Formation Official Unsecured Creditors Committee On April 11, 2019, the Office of the United States Trustee appointed the Official Committee of Unsecured Creditors (the “Unsecured Creditors Committee”) pursuant to section 1102 of the Bankruptcy Code. The Unsecured Creditors Committee consists of the following three members: (i) Enterprise Jonah Gas Gathering LLC; (ii) Viva Energy Services LLC; and (iii) Trinity Environmental SWD I, LLC. Exclusivity; Plan of Reorganization Under the Bankruptcy Code, we have the exclusive right to file a plan of reorganization under Chapter 11 through and including July 29, 2019, and to solicit acceptances of such plan through September 27, 2019. We filed a Chapter 11 plan of reorganization, together with an accompanying disclosure statement on April 30, 2019 (as may be amended, modified, or supplemented from time to time, the “2019 Plan”). We plan to emerge from our Chapter 11 cases after we obtain approval from the Bankruptcy Court confirming the 2019 Plan. Among other things, the Plan determines the rights and satisfy the claims of our creditors and security holders. The 2019 Plan is subject to further negotiations with stakeholders and, possibly, decisions by the Bankruptcy Court. Under the absolute priority scheme established by the Bankruptcy Code, unless our creditors agree otherwise, all of our prepetition liabilities and post-petition liabilities must be satisfied in full before the holders of our existing common stock can receive any distribution or retain any property under a plan of reorganization. The 2019 Plan currently does not contemplate providing any economic recovery to holders of our existing common stock. The ultimate recovery to creditors, if any, will not be determined until confirmation and implementation of the 2019 Plan. We can give no assurance that any recovery or distribution of any amount will be made to any of our creditors. Our Plan could result in any of the holders of our liabilities receiving no distribution on account of their interests and cancellation of their holdings. Moreover, the 2019 Plan can be confirmed, under the Bankruptcy Code even though the 2019 Plan provides that the holders of our common stock receive no distribution on account of their equity interests. Schedules and Statements - Claims & Claims Resolution Process To the best of our knowledge, after making reasonable efforts, we have notified all of our known current or potential creditors that the 2019 Debtors have filed Chapter 11 cases. On May 6, 2019 each of the 2019 Debtors filed a Schedule of Assets and Liabilities and Statement of Financial Affairs (collectively, the “Schedules and Statements”) with the Bankruptcy Court. These documents set forth, among other things, the assets and liabilities of each of the 2019 Debtors, including executory contracts to which each of the 2019 Debtors is a party, are subject to the qualifications and assumptions included therein, and are subject to amendment or modification as our Chapter 11 cases proceed. The Schedules and Statements may be subject to further amendment or modification after filing. Many of the claims identified in the Schedules and Statements are listed as disputed, contingent or unliquidated. Pursuant to the Federal Rules of Bankruptcy Procedure, creditors who wish to assert prepetition claims against us and whose claim (i) is not listed in the Schedules and Statements or (ii) is listed in the Schedules and Statements as disputed, contingent, or unliquidated, must file a proof of claim with the Bankruptcy Court prior to the bar date set by the court. The bar dates are June 14, 2019, for non-governmental creditors, and September 27, 2019, for governmental creditors. As of May 10, 2019, approximately 83 claims totaling $2.3 million have been filed with the Bankruptcy Court against the 2019 Debtors by approximately 73 claimants. We expect additional claims to be filed prior to the bar dates. In addition, creditors who have already filed claims may amend or modify their claims in ways we cannot reasonably predict. The amounts of these additional claims and/or amendments or modifications to claims already filed may be material. We anticipate the claims filed against the 2019 Debtors in the 2019 Chapter 11 Cases will be numerous. We expect the process of resolving claims filed against the 2019 Debtors to be complex and lengthy. We plan to investigate and evaluate all filed claims in connection with the 2019 Plan. As part of the process, we will work to resolve differences in amounts scheduled by the 2019 Debtors and the amounts claimed by creditors, including through the filing of objections with the Bankruptcy Court where necessary. Accordingly, the ultimate number and amount of claims that will be allowed against the 2019 Debtors is not presently known, nor can the ultimate recovery with respect to allowed claims be reasonably estimated. Plan Support Agreement On May 8, 2019, the 2019 Debtors entered into a Plan Support Agreement (the “Plan Support Agreement”) with (a) certain holders (the “RBL Lenders”) constituting over 66 2/3% in amount and over 50.1% in number of the revolving credit facility claims and over 66 2/3% in amount and over 50.1% in number of those certain secured swap claims, in each case under that certain Fourth Amendment and Restated Credit Agreement, dated as of August 1, 2017, by and among Vanguard Natural Gas, LLC, as borrower, the guarantors party thereto, Citibank N.A., as Administrative Agent, and the other lenders party thereto from time to time (as amended, the “Successor Credit Facility” and the claims thereunder, the “RBL Claims” and “Secured Swap Claims,” as applicable); and (b) certain holders (the “Term Loan Lenders” and, collectively with the RBL Lenders, the “Plan Support Parties”), constituting over 66 2/3% in amount and over 50.1% in number of the term loan claims under the Successor Credit Facility (the “Term Loan Claims”). The Plan Support Agreement sets forth, subject to certain conditions, the commitment of the 2019 Debtors and the Plan Support Parties to support a comprehensive restructuring of the 2019 Debtors’ long-term debt (the “Restructuring Transactions”). The Restructuring Transactions will be effectuated through the 2019 Plan. The Restructuring Transactions will be financed by (i) the issuance of new common stock in the reorganized Company (the “New Common Stock”); (ii) the issuance of a new series of class A preferred stock in the reorganized Company (the “New Preferred Equity Class A Stock”); (iii) potentially the issuance of a new series of class B preferred stock in the reorganized Company (the “New Preferred Equity Class B Stock”); (iv) a new first lien reserve-based revolving credit facility with an initial borrowing base of $65.0 million and a term loan lending facility in the aggregate amount of $65.0 million (the “Exit RBL/Term Loan A Facility”); and (v) a new term loan lending facility in the aggregate amount of $285.0 million (the “Exit Term Loan B Facility,” and together with the Exit RBL/Term Loan A Facility, the “Exit Facilities”). The material terms of the Exit Facilities will be filed in advance of the hearing to consider confirmation of the 2019 Plan. Pursuant to the Plan Support Agreement, the Company intends to commence the solicitation of votes on the 2019 Plan on May 28, 2019, by causing the 2019 Plan and related disclosure statement to be distributed consistent with section 1126(b) of the Bankruptcy Code. Certain principal terms of the 2019 Plan are outlined below: • holders of Allowed DIP Facility Claims (as defined in the 2019 Plan) will receive their pro rata share of participation in the Exit RBL/Term Loan A Facility; • holders of Allowed Revolving Credit Facility Claims and Allowed Secured Swap Claims (each as defined in the 2019 Plan) will receive their pro rata share of and interest in: (i) the Exit Term Loan B Facility; (ii) at least 86.1% of the New Preferred Equity Class A Stock; and (iii) 75% or 89% of the New Common Stock, depending on whether the class of holders of Allowed Senior Note Claims (as defined in the 2019 Plan) votes to accept or reject the 2019 Plan, and subject to dilution on account of the Management Incentive Plan (as defined below) (if any); • holders of Allowed Term Loan Claims will receive a pro rata share and interest in 10% of the New Common Stock, subject to dilution on account of the Management Incentive Plan (if any), as well as at the option of each holder of an Allowed Term Loan Claim, either: (i) such holder’s pro rata share of the New Preferred Equity Class A Stock available to such holders in accordance with the Preferred Equity Documents (as defined in the Plan Support Agreement) (albeit the maximum amount of New Preferred Equity Class A Stock available to all holders of Allowed Term Loan Claims who elect such option shall not exceed 13.9% percent of the New Preferred Equity Class A Stock to be distributed in the aggregate); or (ii) such holder’s pro rata share of the New Preferred Equity Class B Stock; • holders of Allowed Senior Note Claims will receive a pro rata share and interest in: (i) 15% of the New Common Stock, if the class of Allowed Senior Note Claims votes to accept the 2019 Plan, subject to dilution on account of the Management Incentive Plan (if any); or (ii) 1% of the New Common Stock, if the class of Allowed Senior Note Claims votes to reject the 2019 Plan, subject to dilution on account of the Management Incentive Plan (if any); • holders of Allowed General Unsecured Claims (as defined in the Plan Support Agreement) shall receive (to the extent such General Unsecured Claims have not already been paid in full during the 2019 Chapter 11 Cases), in full and final satisfaction, settlement, release, and discharge of, and in exchange for each Allowed General Unsecured Claim, on the Effective Date such treatment as is acceptable to the 2019 Debtors, the Required Consenting Revolver Lenders (as defined in the 2019 Plan), and the DIP Agent (as defined in the 2019 Plan) and in accordance with the Bankruptcy Code, to be determined prior to the hearing to consider approval of the Disclosure Statement; and • the 2019 Plan may provide for the establishment of a customary management incentive plan at the Company to the officers and other key employees of the respective reorganized entities (the “Management Incentive Plan”). The 2019 Plan will provide for releases of specified claims held by the 2019 Debtors, the Plan Support Parties, and certain other specified parties against one another and for customary exculpations and injunctions. The Plan Support Agreement obligates the 2019 Debtors and the Plan Support Parties to, among other things, support and not interfere with consummation of the Restructuring Transactions and, as to the Plan Support Parties, vote their claims in favor of the 2019 Plan. We believe the Plan Support Agreement will contribute to reducing the duration of the 2019 Chapter 11 Cases. The Plan Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet specified milestones relating to the filing, confirmation and consummation of the 2019 Plan, among other requirements, and in the event of certain breaches by the parties under the Plan Support Agreement. Except as otherwise agreed by the 2019 Debtors and the Plan Support Parties, the Plan Support Agreement contemplates the effective date of the Plan will be no later than 120 days after the filing of the 2019 Bankruptcy Petitions, and the Plan Support Agreement will be subject to termination if the effective date of the 2019 Plan has not occurred within that time. There can be no assurances that the Restructuring Transactions will be consummated. See Part II, Item 1A, “Risk Factors” “If the Plan Support Agreement is terminated, our ability to confirm and consummate a Chapter 11 plan of reorganization could be materially and adversely affected.” Debtor-in-Possession Financing In connection with the 2019 Chapter 11 Cases, on the 2019 Petition Date, the 2019 Debtors filed a motion (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 a proposed Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”) among VNG (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 the Successor Credit Facility (as defined in Note 6) (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) the consummation of a sale of all or substantially all of the equity and/or assets of the DIP Borrower and its subsidiaries, (c) the occurrence of an event of default (subject to any cure periods), and (d) 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 relief requested in the DIP Motion was approved by the Bankruptcy Court on April 30, 2019. Acceleration of Debt Obligations As of December 31, 2018, the Company was not in compliance with certain covenants under the Successor Credit Facility (as defined in Note 6). Accordingly, all amounts due under the Successor Credit Facility and New Notes (as defined in Note 6) (collectively, the “Debt Instruments”) are classified as current in the accompanying consolidated balance sheets as of that date. The commencement of the 2019 Chapter 11 Cases is an event of default that accelerated the 2019 Debtors’ obligations under these Debt Instruments as described in further detail below. In addition, as of March 31, 2019, amounts outstanding under the Debt Instruments are included in liabilities subject to compromise in the condensed consolidated balance sheets. Further, in accordance with accounting guidance in ASC 852, we will not accrue interest on the Debt Instruments during the pendency of the 2019 Chapter 11 Cases. • $677.7 million in unpaid principal with respect to the Revolving Loan (defined in Note 6), $123.4 million in unpaid principal with respect to the Term Loan (defined in Note 6), 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. 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. Liabilities Subject to Compromise Liabilities subject to compromise represent estimates of known or potential prepetition claims expected to be resolved in connection with the 2019 Chapter 11 Cases. Additional amounts may be included in liabilities subject to compromise in future periods if we elect to reject executory contracts and unexpired leases as part of our 2019 Chapter 11 Cases. Due to the uncertain nature of many of the potential claims, the magnitude of potential claims is not reasonably estimable at this time. Potential claims not currently included with liabilities subject to compromise in our Consolidated Balance Sheets may be material. In addition, differences between amounts we are reporting as liabilities subject to compromise in this Quarterly Report on Form 10-Q and the amounts attributable to such matters claimed by our creditors or approved by the Bankruptcy Court may be material. We will continue to evaluate our liabilities throughout the Chapter 11 process, and we will make adjustments in future periods as necessary and appropriate. Such adjustments may be material. Under the Bankruptcy Code, we may assume, assign or reject certain executory contracts and unexpired leases, subject to the approval of the Bankruptcy Court and certain other conditions. If we reject a contract or lease, such rejection generally (1) is treated as a prepetition breach of the contract or lease, (2) subject to certain exceptions, relieves the 2019 Debtors of performing their future obligations under such contract or lease and (3) entitles the counterparty thereto to a prepetition general unsecured claim for damages caused by such deemed breach. If we assume an executory contract or unexpired lease, we are generally required to cure any existing monetary defaults under such contract or lease and provide adequate assurance of future performance to the counterparty. The following table summarizes the components of liabilities subject to compromise included in our Consolidated Balance Sheets as of March 31, 2019 : March 31, 2019 (in thousands) Accounts payable $ 17,000 Accrued liabilities 42,507 Undistributed oil and gas revenues 33,453 Derivative liabilities 40,428 Other liabilities 5,425 Debt and accrued interest 894,407 Lease liabilities 16,054 Liabilities subject to compromise $ 1,049,274 Reorganization Items We use this category to reflect, where applicable, expenses, gains and losses that are direct and incremental as a result of the reorganization of the business. We have incurred and will continue to incur significant costs associated with the reorganization. The amount of these costs, which are being expensed as incurred, are expected to significantly affect our results of operations. The following table summarizes the components included in reorganization items on our consolidated statements of operations for three months ended March 31, 2019 : Three Months Ended March 31, 2019 (in thousands) Professional and legal fees (1) $ 12,077 Deferred financing costs and debt discount (2) 6,311 Total Reorganization items $ 18,388 (1) All professional and legal fees were incurred and paid as of March 31, 2019 . (2) Includes a non-cash charge to write off of the unamortized debt issuance costs and debt discounts of $6.3 million related to the Revolving Loan, Term Loan and New Notes as these debt instruments are expected to be impacted by the bankruptcy reorganization process. |
