| Chapter 11 Proceedings | Chapter 11 Proceedings Commencement of Bankruptcy Cases On the Petition Date, the Debtors filed the Chapter 11 Cases under the Bankruptcy Code in the Bankruptcy Court. The Debtors were jointly administered under the caption “In re Vanguard Natural Resources, Inc., et al.” The subsidiary Debtors in the Chapter 11 Cases were GNG, GEH, GO, EOC, EAC, GAC, GUD, GAP, GAC II, GUD II and GAP II. Reorganization Process Throughout the Chapter 11 Cases, we operated our business as a debtor-in-possession in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. We generally continued our operations without interruption during the pendency of the 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 authorized us to maintain our existing cash management system, to secure debtor-in-possession financing and other customary relief. These motions were 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, subject to certain exceptions, 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 prohibited, for example, our lenders, noteholders and other creditors from pursuing claims for defaults under our debt agreements and our contract counterparties from pursuing claims for defaults under our contracts. Accordingly, all of our prepetition liabilities and obligations were settled or compromised under the Bankruptcy Code through the Chapter 11 Cases. Our operations and ability to execute our business remain subject to the risks and uncertainties arising as a result of our Chapter 11 Cases, and the number and nature of our outstanding common units and unitholders, assets, liabilities, officers and managers could change materially because of our Chapter 11 Cases. In addition, the descriptions of our prepetition operations, properties and capital plans may not accurately reflect our post-emergence operations, properties and capital plans. Creditors’ Committees - Appointment & Formation 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 consisted of the following three members: (i) Enterprise Jonah Gas Gathering LLC; (ii) Viva Energy Services LLC; and (iii) Trinity Environmental SWD I, LLC. Schedules and Statements - Claims & Claims Resolution Process On May 6, 2019 each of the 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 Debtors, including executory contracts to which each of the Debtors was a party, subject to the qualifications and assumptions included therein. The Schedules and Statements were subject to further amendment or modification after filing. Many of the claims identified in the Schedules and Statements were listed as disputed, contingent or unliquidated. Pursuant to the Federal Rules of Bankruptcy Procedure, creditors who wished to assert prepetition claims against us and whose claim (i) were not listed in the Schedules and Statements or (ii) were listed in the Schedules and Statements as disputed, contingent, or unliquidated, were required to file a proof of claim with the Bankruptcy Court prior to the bar dates set by the court. The bar dates are June 14, 2019, for non-governmental creditors, and September 27, 2019, for governmental creditors. As of August 14, 2019, approximately 1,405 claims totaling $7.7 billion were filed with the Bankruptcy Court against the Debtors by approximately 1,206 claimants. We expect additional claims to be filed prior to the last bar date. 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 Debtors in the Chapter 11 Cases will be numerous. We expect the process of resolving claims filed against the Debtors to be complex and lengthy. We plan to investigate and evaluate all filed claims in connection with the Plan. As part of the process, we will work to resolve differences in amounts scheduled by the 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 Debtors is not presently known, nor can the ultimate recovery with respect to allowed claims be reasonably estimated. As discussed above, the claims resolution process continues following our emergence from the Chapter 11 Cases. Plan Support Agreement On May 8, 2019, the 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 (“VNG”), 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 “VNG 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 VNG Credit Facility (the “Term Loan Claims”). On July 3, 2019, the Plan Support Agreement was amended to reflect the support of over 66 2/3% of Second Lien Notes. A summary of the restructuring transactions agreed to by the Plan Support Parties and effectuated through the Plan is included below. Debtor-in-Possession Financing In connection with the Chapter 11 Cases, on the Petition Date, the Debtors filed a motion (the “DIP Motion”) seeking, among other things, interim and final approval of the 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, as borrower (the “DIP Borrower”), Citibank, N.A., as administrative agent and issuing bank (the “DIP Agent”), and 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 was Citibank N.A. The DIP Credit Agreement contained 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 and an additional $5.0 million was drawn in July 2019; • a “roll up” of $65.0 million of the outstanding principal amount of the revolving loans under the VNG Credit Facility (as defined in Note 5) (the “Roll-Up”, and, together with the New Money Facility, collectively, the “DIP Facility”); • proceeds of the New Money Facility were to be used by the DIP Borrower to (i) pay certain costs and expenses related to the 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 DIP Credit Agreement was paid off prior to maturity on July 16, 2019 in connection with Grizzly’s emergence from the Chapter 11 Cases; • interest accrued at a rate per year equal to the LIBOR rate plus 5.50% , or the adjusted base rate plus 4.50% per annum; and • in addition to other fees paid to the DIP Agent, the DIP Borrower was 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 was 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 was not previously paid. Plan of Reorganization On July 9, 2019, the Bankruptcy Court entered an order confirming the Amended Joint Plan of Reorganization (as Modified) of Vanguard Natural Resources, Inc. and its Debtor Affiliates (the “Plan”) and on July 16, 2019, the Company consummated the Plan. The Plan provides for the reorganization of the Debtors as a going concern and will significantly reduce long-term debt and annual interest payments of the reorganized Debtors. The following is a summary of the material terms of the Plan. This summary highlights only certain substantive provisions of the Plan and is not intended to be a complete description of the Plan. The Plan provided for: • holders of an allowed claim related to the DIP Credit Agreement to receive their pro rata share of participation in the Revolving Loans/Term Loan A (each as defined below); • holders of allowed RBL Claims and allowed Secured Swap Claims to receive their pro rata share of and interest in: (i) the Term Loan B (as defined below); (ii) the Series A Preferred Units (the “Series A Preferred Units”); and (iii) 75% of the Series C Common Units (the “Series C Common Units”); • holders of allowed claims under the senior secured term loan credit facility pursuant to the VNG Credit Facility to receive a pro rata share and interest in 10% of the Series C Common Units, 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 Series A Preferred Units; or (ii) such holder’s pro rata share of the Series B Preferred Units (the “Series B Preferred Units” and together with the Series A Preferred Units, the “Preferred Units”); • holders of allowed claims related to the VNG Notes to receive a pro rata share and interest in: (i) 15% of the Series C Common Units, if the class of Allowed Senior Note Claims voted to accept the Plan; (ii) the Series A Preferred Units; and (iii) cash; • holders of certain other allowed general unsecured claim to receive 2% of the face amount of its unpaid claim as further described in the Plan; and • customary releases, exculpations, and injunctions. Pursuant to the Plan, the terms of the Vanguard’s board of directors expired as of the Effective Date. Our current board of managers (the “Board”) consists of five members who, except for one manager, are different from those who previously served on Vanguard’s board of directors. Preferred and Common Units The Preferred Units have no stated maturity and are not subject to mandatory redemption or any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by us, at our option, in accordance with the terms of the Company’s limited liability company agreement (the “LLC Agreement”). The Preferred Units had an initial liquidation preference of $10.00 per unit (the “Initial Liquidation Preference”). From and after the date on which the Term Loan B is repaid, the Company may redeem, in whole or in part, the Series A Preferred Units, at such times as determined by the Board in its sole discretion at the price set forth in the LLC Agreement (the “Series A Redemption Price”). The Series A Redemption Price, at a given date of determination, is based upon an amount equal to the Initial Liquidation Preference increased each month by an annualized rate equal to the LIBO rate for such month, plus 9.5% , compounding monthly on the last day of each such month. Upon the redemption of any Series A Preferred Units and the payment in full to the holders thereof, such Series A Preferred Units will cease to be outstanding. From and after the date on which all Series A Preferred Units are redeemed by Grizzly and are no longer outstanding (the “Series A Redemption Date”), the Company may redeem, in whole or in part, the Series B Preferred Units, at such times as determined by the Board in its sole discretion at the price set forth in the LLC Agreement (the “Series B Redemption Price”). The Series B Redemption Price, at a given date of determination, is based upon an amount equal to the Initial Liquidation Preference increased each month by an annualized rate equal to the LIBO rate for such month, plus 10.5% , compounding monthly on the last day of each such month. Upon the redemption of any Series B Preferred Units and the payment in full to the holders thereof, such Series B Preferred Units will cease to be outstanding. The Common Units represent limited liability company interests. Record holders of Common and Preferred Units are entitled to vote at meetings of members and shall be entitled to one vote for each outstanding unit that is registered in the name of such member on the record date for such meeting. Exit Facility Grizzly has entered into that certain Fifth Amended and Restated Credit Agreement dated as of July 16, 2019 (the “RBL Credit Agreement”), among GNG, as borrower (the “RBL Borrower”), Grizzly, as parent, Citibank, N.A., as administrative agent, issuing bank and collateral agent, and the lenders party thereto from time to time. Pursuant to the RBL Credit Agreement, the lenders party thereto agreed to provide a new first-lien reserved-based credit facility with first-out revolving credit commitments in the aggregate amount of $65.0 million (the “Revolving Loans”) and a second-out term loan in the aggregate amount of $65.0 million (the “Term Loan A”). The initial borrowing base under the RBL Credit Agreement is $65.0 million . The borrowing base will be redetermined semi-annually on April 1st and October 1st of each year, commencing on April 1, 2020. The maturity date of the RBL Credit Agreement, including the Term Loan A, is July 16, 2022. Until the maturity date, the Term Loan A shall bear interest at a rate per annum equal to 3.0% plus the adjusted LIBO rate for an alternate base rate loan, or 4.0% plus the adjusted LIBO rate for a Eurodollar loan, and the Revolving Loans shall bear interest based on borrowing base utilization percentage at a rate per annum equal to the alternate base rate plus a margin ranging from 2.0% to 3.0% for alternative base rate loans or the adjusted LIBO rate plus a margin ranging from 3.0% to 4.0% for Eurodollar loans. Unused commitments under the RBL Credit Agreement will accrue a commitment fee at a rate of 0.5% , payable quarterly in arrears. The RBL Borrower will be required to repay the Term Loan A at the end of each quarter in equal quarterly installments at a rate of 1.0% per annum of the original principal amount of the Term Loan A. Grizzly has also entered into that certain Term Loan Credit Agreement dated as of July 16, 2019 (the “Term Loan Credit Agreement”) among GNG, as borrower (the “Term Loan Borrower”), Grizzly, as parent, Citibank, N.A., as administrative agent and collateral agent, and the lenders party thereto from time to time. Pursuant to the Term Loan Credit Agreement, the lenders party thereto agreed to provide a first-lien, last-out term loan in the aggregate amount of $285.0 million (the “Term Loan B”). The Term Loan Credit Agreement and the RBL Credit Agreement together are referred to herein as the “Exit Facility”. The maturity date of the Term Loan Credit Agreement is January 16, 2023. Until the maturity date, the Term Loan B shall bear interest at a rate per annum equal to (i) the alternate base rate plus an applicable margin of 6.5% for an alternate base rate loan or (ii) the adjusted LIBO rate plus an applicable margin of 7.5% for a Eurodollar loan. The obligations under the Exit Facility are guaranteed by Grizzly and all of Grizzly’s subsidiaries (the “Guarantors”), subject to limited exceptions, and secured on a first-priority basis by substantially all of Grizzly’s and the Guarantors’ assets, including, without limitation, liens on at least 95% of the total value of Grizzly’s and the Guarantors’ oil and natural gas properties, and pledges of equity interests of all other direct and indirect subsidiaries of Grizzly, subject to certain limited exceptions. The Exit Facility also contains certain financial covenants. The RBL Credit Agreement requires that as of the last day of any fiscal quarter commencing with the third full fiscal quarter ending after the effective date of the RBL Credit Agreement, that (i) the consolidated first-out leverage ratio not exceed 2.50 to 1.00 and (ii) current ratio not be less than 1.00 to 1.00. The Term Loan Credit Agreement requires that as of January 1 of each year and July 1 of each year, commencing with the first such date after the effective date of the Term Loan Credit Agreement, that the proved developed producing coverage ratio not be less than 1.00 to 1.00. Amended and Restated Employment Agreements Richard Scott Sloan Amended and Restated Employment Agreement On July 16, 2019, Grizzly entered into an Amended and Restated Employment Agreement with its President and Chief Executive Officer, Richard Scott Sloan (the “Sloan Employment Agreement”). The initial term of the Sloan Employment Agreement will begin on July 16, 2019, and end on December 31, 2020, which term shall automatically renew for one -year periods unless Grizzly or Mr. Sloan gives notice that it or he, as applicable, does not wish to extend the agreement. The employment agreement provides that Mr. Sloan is entitled to receive an annual base salary of $720,000 and an annual target bonus equal to 100% of his base salary; provided that during the 2019 calendar year, Mr. Sloan will instead participate in a quarterly bonus arrangement that provides him the opportunity to earn a target quarterly bonus of $180,000 (the “Sloan STIP”). The Sloan STIP permits Mr. Sloan to earn a quarterly bonus if performance metrics are achieved during the applicable calendar quarter on either a stand-alone or “catch up” basis. Mr. Sloan can earn up to 150% of his quarterly target bonus if the applicable performance metrics are exceeded. The other terms of the Sloan Employment Agreement are generally consistent with the terms of Mr. Sloan’s prior agreement, except that: (i) the Effective Date of the Plan shall constitute a Change of Control (as defined therein), and (ii) Mr. Sloan’s voluntary resignation during the 30 -day period following the three -month anniversary of the Effective Date of the Plan shall constitute Good Reason (as defined herein). Ryan Midgett Amended and Restated Employment Agreement On July 16, 2019, Grizzly entered into an Amended and Restated Employment Agreement with its Chief Financial Officer, Ryan Midgett (the “Midgett Employment Agreement”). The initial term of the Midgett Employment Agreement will begin on July 16, 2019, and end on December 31, 2020, which term shall automatically renew for one -year periods unless Grizzly or Mr. Midgett gives notice that it or he, as applicable, does not wish to extend the agreement. The Midgett Employment Agreement provides that Mr. Midgett is entitled to receive an annual base salary of $325,000 and an annual target bonus equal to 80% of his base salary; provided that during the 2019 calendar year, Mr. Midgett will instead participate in a quarterly bonus arrangement that provides him the opportunity to earn a target quarterly bonus of $65,000 (the “Midgett STIP”). The Midgett STIP permits Mr. Midgett to earn a quarterly bonus if performance metrics are achieved during the applicable calendar quarter on either a stand-alone or “catch up” basis. Mr. Midgett can earn up to 150% of his quarterly target bonus if the applicable performance metrics are exceeded. The other terms of the agreement are generally consistent with the terms of Mr. Midgett’s prior agreement, except that: (i) the Effective Date of the Plan shall constitute a Change of Control (as defined therein), and (ii) Mr. Midgett’s voluntary resignation during the 30 -day period following the three -month anniversary of the Effective Date of the Plan shall constitute Good Reason (as defined herein). Jonathan C. Curth Amended and Restated Employment Agreement On July 16, 2019, Grizzly entered into an Amended and Restated Employment Agreement with its General Counsel, Corporate Secretary and Vice President of Land, Jonathan C. Curth (the “Curth Employment Agreement”). The initial term of the Curth Employment Agreement will begin on July 16, 2019, and end on December 31, 2020, which term shall automatically renew for one -year periods unless the Company or Mr. Curth gives notice that it or he, as applicable, does not wish to extend the agreement. The Curth Employment Agreement provides that Mr. Curth is entitled to receive an annual base salary of $380,000 and an annual target bonus equal to 80% of his base salary; provided that during the 2019 calendar year, Mr. Curth will instead participate in a quarterly bonus arrangement that provides him the opportunity to earn a target quarterly bonus of $76,000 (the “Curth STIP”). The Curth STIP permits Mr. Curth to earn a quarterly bonus if performance metrics are achieved during the applicable calendar quarter on either a stand-alone or “catch up” basis. Mr. Curth can earn up to 150% of his quarterly target bonus if the applicable performance metrics are exceeded. The other terms of the agreement are generally consistent with the terms of Mr. Curth’s prior agreement, except that: (i) the Effective Date of the Plan shall constitute a Change of Control (as defined therein), and (ii) Mr. Curth’s voluntary resignation during the 30 -day period following the three -month anniversary of the Effective Date of the Plan shall constitute Good Reason (as defined herein). Emergence from Chapter 11 On the Effective Date, the Debtors substantially consummated the Plan and emerged from the Chapter 11 Cases. As part of the transactions undertaken pursuant to the Plan, Vanguard was converted to a Delaware limited liability company and renamed Grizzly Energy, LLC. Acceleration of Debt Obligations As of December 31, 2018, the Company was not in compliance with certain covenants under the VNG Credit Facility (as defined in Note 5). Accordingly, all amounts due under the VNG Credit Facility and VNG Notes (as defined in Note 5) (collectively, the “Debt Instruments”) were classified as current in the accompanying consolidated balance sheets as of that date. The commencement of the Chapter 11 Cases was an event of default that accelerated the Debtors’ obligations under the following Debt Instruments: • $677.7 million in unpaid principal with respect to the VNG Revolving Loan (defined in Note 5), $123.4 million in unpaid principal with respect to the Term Loan (defined in Note 5), and approximately $11.6 million of interest, fees, and other expenses arising under or in connection with the VNG Credit Facility; and • $80.7 million in unpaid principal, plus interest, fees, and other expenses, arising in connection with the VNG Notes issued pursuant to the Amended and Restated Indenture. As of June 30, 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 did not accrue interest on the Debt Instruments during the pendency of the 2019 Chapter 11 Cases. Liabilities Subject to Compromise Liabilities subject to compromise represent estimates of known or potential prepetition claims expected to be resolved in connection with the 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 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 had the right to assume, assign or reject certain executory contracts and unexpired leases, subject to the approval of the Bankruptcy Court and certain other conditions. Rejections of contracts or leases, generally (1) were treated as a prepetition breach of the contract or lease, (2) subject to certain exceptions, relieved the Debtors of performing their future obligations under such contract or lease and (3) entitled the counterparty thereto to a prepetition general unsecured claim for damages caused by such deemed breach. Assumption of executory contracts or unexpired leases, generally required the Company to cure any existing monetary defaults under such contract or lease and provide adequate assurance of future performance to the counterparty. Accordingly, any description of an executory contract or unexpired lease, including any quantification of our obligations under any such contract or lease, is wholly qualified by the rejection rights we had under the Bankruptcy Code. Further, nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and we expressly preserve all of our rights with respect thereto. The following table summarizes the components of liabilities subject to compromise included in our Consolidated Balance Sheets as of June 30, 2019 : June 30, 2019 (in thousands) Accounts payable $ 3,233 Accrued liabilities 308 Undistributed oil and gas revenues 13,782 Derivative liabilities 53,870 Other liabilities 5 Debt and accrued interest 894,407 Liabilities subject to compromise $ 965,605 Interest Expense We discontinued recording interest on debt classified as liabilities subject to compromise on the Petition Date. Contractual interest on liabilities subject to compromise not reflected in the consolidated statements of operations was approximately $15.7 million , representing contractual interest expense from the Petition Date through June 30, 2019. Reorganization Items 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 the three and six months ended June 30, 2019 and 2018: Three Months Ended Six Months Ended June 30, June 30, 2019 2018 2019 2018 Professional and legal fees (1) $ 24,743 $ 610 $ 36,820 $ 2,317 Deferred financing costs and debt discount (2) — — 6,311 — Total Reorganization items $ 24,743 $ 610 $ 43,131 $ 2,317 (1) Includes $14.1 million of accrued reorganization costs as of June 30, 2019 representing unpaid professional and legal fees directly related to the Chapter 11 Cases. Total payments made for professional and legal fees related to the Chapter 11 Cases amounted to $22.7 million for the six months ended June 30, 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 VNG Revolving Loan, Term Loan and VNG Notes as these debt instruments were expected to be impacted by the bankruptcy reorganization process. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. However, the Chapter 11 Cases raised substantial doubt about our ability to continue as a going concern. The consolidated financial statements and related notes do not include any adjustments related to the recoverability and classification of recorded asset amounts or adjustments as a result of this substantial doubt. |
