NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Description of the Business
We are a publicly traded limited liability company focused on the acquisition and development of mature, long-lived oil and natural gas properties in the United States. Our primary business objective is to generate stable cash flows allowing us to resume making monthly cash distributions to our unitholders and, over time, increase our monthly cash distributions through the acquisition of additional mature, long-lived oil and natural gas properties. Through our operating subsidiaries, as of
March 31, 2017
, we own properties and oil and natural gas reserves primarily located in
ten
operating areas:
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the Green River Basin in Wyoming;
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the Permian Basin in West Texas and New Mexico;
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the Piceance Basin in Colorado;
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the Gulf Coast Basin in Texas, Louisiana, Mississippi and Alabama;
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the Arkoma Basin in Arkansas and Oklahoma;
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the Big Horn Basin in Wyoming and Montana;
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the Williston Basin in North Dakota and Montana;
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the Anadarko Basin in Oklahoma and North Texas;
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the Wind River Basin in Wyoming; and
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the Powder River Basin in Wyoming.
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We were formed in October 2006 and completed our initial public offering in October 2007. Our common units are listed on OTC Pink under the symbol “VNRSQ.” Our
7.875%
Series A Cumulative Redeemable Preferred Units (“Series A Preferred Units”),
7.625%
Series B Cumulative Redeemable Preferred Units (“Series B Preferred Units”) and
7.75%
Series C Cumulative Redeemable Preferred Units (“Series C Preferred Units,” and, collectively with the Series A Units and Series B Units, the “Preferred Units”) are also listed on OTC Pink under the symbols “VNRAQ,” “VNRBQ” and “VNRCQ,” respectively.
1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements are unaudited and were prepared from our records. We derived the Consolidated Balance Sheet as of
December 31, 2016
, from the audited financial statements contained in our
2016
Annual Report. Because this is an interim period filing presented using a condensed format, it does not include all of the disclosures required by generally accepted accounting principles in the United States (“GAAP”). You should read this Quarterly Report on Form 10-Q along with our
2016
Annual Report, which contains a summary of our significant accounting policies and other disclosures. In our opinion, we have made all adjustments which are of a normal, recurring nature to fairly present our interim period results. Information for interim periods may not be indicative of our operating results for the entire year.
As of
March 31, 2017
, our significant accounting policies, except for those related to the effects of our Chapter 11 Proceedings discussed below, are consistent with those discussed in Note 1 of our consolidated financial statements contained in our
2016
Annual Report.
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(a)
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Basis of Presentation and Principles of Consolidation
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The consolidated financial statements as of
March 31, 2017
and
December 31, 2016
and for the
three
months ended
March 31, 2017
and
2016
include our accounts and those of our subsidiaries. We present our financial statements in accordance with GAAP. All intercompany transactions and balances have been eliminated upon consolidation.
We consolidated Potato Hills Gas Gathering System as of the close date of the acquisition in January 2016 as we have the ability to control the operating and financial decisions and policies of the entity through our
51%
ownership and reflected the non-controlling interest as a separate element in our consolidated financial statements.
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(b)
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Chapter 11 Proceedings
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On February 1, 2017 (the “Petition Date”), Vanguard filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. Please read Note 2. Chapter 11 Proceedings for a discussion of the Chapter 11 Cases (as defined in Note 2).
For periods subsequent to filing the Bankruptcy Petitions (as defined in Note 2), we have prepared our consolidated financial statements in accordance with Accounting Standards Codification (“ASC”) 852,
Reorganizations
(“ASC 852”). ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, professional fees incurred in the Chapter 11 Cases have been recorded in a reorganization line item on the consolidated statements of operations. In addition, ASC 852 provides for changes in the accounting and presentation of significant items on the consolidated balance sheets, particularly liabilities. Prepetition obligations that may be impacted by the Chapter 11 reorganization process have been classified on the consolidated balance sheets in liabilities subject to compromise. These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.
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(c)
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Oil and Natural Gas Properties
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The full cost method of accounting is used to account for oil and natural gas properties. Under the full cost method, substantially all costs incurred in connection with the acquisition, development and exploration of oil, natural gas and NGLs reserves are capitalized. These capitalized amounts include the costs of unproved properties, internal costs directly related to acquisitions, development and exploration activities, asset retirement costs and capitalized interest. Under the full cost method, both dry hole costs and geological and geophysical costs are capitalized into the full cost pool, which is subject to amortization and ceiling test limitations as discussed below.
Capitalized costs associated with proved reserves are amortized over the life of the reserves using the unit of production method. Conversely, capitalized costs associated with unproved properties are excluded from the amortizable base until these properties are evaluated, which occurs on a quarterly basis. Specifically, costs are transferred to the amortizable base when properties are determined to have proved reserves. In addition, we transfer unproved property costs to the amortizable base when unproved properties are evaluated as being impaired and as exploratory wells are determined to be unsuccessful. Additionally, the amortizable base includes estimated future development costs, dismantlement, restoration and abandonment costs net of estimated salvage values.
Capitalized costs are limited to a ceiling based on the present value of future net revenues, computed using the 12-month unweighted average of first-day-of-the-month historical price, the “12-month average price” discounted at
10%
, plus the lower of cost or fair market value of unproved properties. If the ceiling is less than the total capitalized costs, we are required to write-down capitalized costs to the ceiling. We perform this ceiling test calculation each quarter. Any required write-downs are included in the Consolidated Statements of Operations as an impairment charge.
We recorded a non-cash ceiling test impairment of oil and natural gas properties for the
three months ended March 31, 2016
of
$207.8 million
as a result of a decline in oil and natural gas prices at the measurement date, March 31, 2016. The first
quarter 2016 impairment was calculated based on the 12-month average price of
$2.41
per MMBtu for natural gas and
$46.16
per barrel of crude oil. No ceiling test impairment was required during the
three months ended March 31, 2017
.
When we sell or convey interests in oil and natural gas properties, we reduce oil and natural gas reserves for the amount attributable to the sold or conveyed interest. We do not recognize a gain or loss on sales of oil and natural gas properties unless those sales would significantly alter the relationship between capitalized costs and proved reserves. Sales proceeds on insignificant sales are treated as an adjustment to the cost of the properties.
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(d)
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Goodwill and Other Intangible Assets
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We account for goodwill under the provisions of the Accounting Standards Codification (ASC) Topic 350,
“Intangibles-Goodwill and Other.”
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in business combinations. Goodwill is not amortized, but is tested for impairment annually on October 1 or whenever indicators of impairment exist.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350) (ASU 2017-04) to simplify the accounting for goodwill impairment. The guidance eliminated the need for Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The new standard also eliminated the need for a company to perform goodwill impairment test for a reporting unit with a zero or negative carrying amount. We elected to early adopt ASU 2017-04 for the quarter ended
March 31, 2017
. We did not record any goodwill impairment during the
three months ended March 31, 2017
since the carrying value of our reporting unit was negative at
March 31, 2017
.
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(e)
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New Pronouncements Issued But Not Yet Adopted
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In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers ("ASU 2015-14"), which approved a one-year delay of the standard's effective date. In accordance with ASU 2015-14, the standard is now effective for annual periods beginning after December 15, 2017, and interim periods therein.
We are currently evaluating the provisions of ASU 2014-09 and assessing the impact, if any, other than additional disclosures, it may have on our financial position and results of operations. As part of our assessment work to date, we have dedicated resources to the implementation and begun contract review and documentation.
The Company is required to adopt the new standards in the first quarter of 2018 using one of two application methods: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company is currently evaluating the available adoption methods.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)", which requires lessees to recognize at the commencement date for all leases, with the exception of short-term leases, (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The ASU on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We do not expect the adoption of ASU No. 2016-02 will have a material impact on our consolidated financial statements.
In May 2016, the FASB issued ASU No. 2016-11, Revenue Recognition (Topic 605) and Derivatives Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16, pursuant to Staff Announcements at the March 3, 2016, EITF Meeting. Under this ASU, the SEC Staff is rescinding certain SEC Staff Observer comments that are codified in Topic 605, Revenue Recognition, and Topic 932, Extractive Activities - Oil and Gas, effective upon adoption of Topic 606. As discussed above, Revenue from Contracts with Customers (Topic 606) is effective for public entities for fiscal years, and interim periods within the fiscal years, beginning after December 15, 2017.
In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (ASU No. 2016-12). The amendments under this ASU provide clarifying guidance in certain narrow areas and add some practical expedients. These amendments are also effective at the same date that Topic 606 is effective.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU No. 2017-01). The amendments under this ASU provide guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (disposals) or business combinations by providing a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value
of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business, therefore reducing the number of transactions that need to be further evaluated for treatment as a business combination. This ASU will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and should be applied prospectively. The Company is currently evaluating the provisions of ASU 2017-01 and assessing the impact adoption may have on our consolidated financial statements. Currently, we do not expect the adoption of ASU 2017-01 to have a material impact on our consolidated financial statements, however these amendments could result in the recording of fewer business combinations in future periods.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates pertain to proved oil, natural gas and NGLs reserves and related cash flow estimates used in impairment tests of oil and natural gas properties and goodwill, the acquisition of oil and natural gas properties, the fair value of derivative contracts and asset retirement obligations, accrued oil, natural gas and NGLs revenues and expenses, as well as estimates of expenses related to depreciation, depletion, amortization and accretion. Actual results could differ from those estimates.
2. Chapter 11 Proceedings
Commencement of Bankruptcy Cases
On
February 1, 2017
, the Company and certain subsidiaries (such subsidiaries, together with the Company, the “Debtors”) filed voluntary petitions for relief (collectively, the “Bankruptcy Petitions” and, the cases commenced thereby, the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Debtors have filed a motion with the Bankruptcy Court seeking to jointly administer the Chapter 11 Cases under the caption “In re Vanguard Natural Resources, LLC, et al.”
The subsidiary Debtors in the Chapter 11 Cases are VNRF; VNG; VO; VNRH; ECFP; ERAC; ERAC II; ERUD; ERUD II; ERAP; ERAP II; EAC; and EOC.
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. To assure ordinary course operations during the pendency of the Chapter 11 Cases, the Bankruptcy Court granted certain relief requested by the Debtors, including, among other things and subject to the terms and conditions of such orders, authorizing us to maintain our existing cash management system, to secure debtor-in-possession financing, to remit funds we hold from time to time for the benefit of third parties (such as royalty owners), and to pay the prepetition claims of certain of our vendors that hold liens under applicable non-bankruptcy law. This relief is designed primarily to minimize the effect of bankruptcy on the Company’s operations, customers and employees. For goods and services provided following the Petition Date, we intend to pay vendors in full under normal terms.
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 be settled or compromised under the Bankruptcy Code through our Chapter 11 proceedings.
Our operations and ability to execute our business remain subject to the risks and uncertainties described in Item 1A, “Risk Factors” in our 2016 Annual Report. These include risks and uncertainties arising as a result of our Chapter 11 proceedings, and the number and nature of our outstanding shares and shareholders, assets, liabilities, officers and directors could change materially because of our Chapter 11 cases. In addition, the description of our operations, properties and capital plans included in this Quarterly Report on Form 10-Q may not accurately reflect our operations, properties and capital plans after we emerge from Chapter 11.
Creditors’ Committees — Appointment & Formation
(a)
Restructuring Support Parties
Prior to the filing of the Bankruptcy Petitions, on
February 1, 2017
, the Debtors entered into a restructuring support agreement (the “Restructuring Support Agreement”) with (i) certain holders (the “Consenting 2020 Noteholders”) constituting at the time of signing approximately
52%
of the
7.875%
Senior Notes due 2020 (the “Senior Notes due 2020”); (ii) certain holders (the “Consenting 2019 Noteholders and, together with the Consenting 2020 Noteholders, the “Consenting Senior Noteholders”) constituting at the time of signing approximately
10%
of the
8.375%
Senior Notes due 2019 (the “Senior Notes due 2019,” and all claims arising under or in connection with the Senior Notes due 2020 and Senior Notes due 2019, the “Senior Note Claims”); and (iii) certain holders (the “Consenting Second Lien Noteholders” and, together with the Consenting Senior Noteholders, the “Restructuring Support Parties”) constituting at the time of signing approximately
92%
of the
7.0%
Senior Secured Second Lien Notes due 2023 (the “Second Lien Notes,” and all claims and obligations arising under or in connection with the Second Lien Notes, the “Second Lien Note Claims”).
(b) Official Unsecured Creditors Committee
On February 14, 2017, 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) UMB Bank, National Association, as Indenture Trustee; (ii) Wilmington Trust, National Association, as Indenture Trustee; and (iii) Encana Oil & Gas (USA), Inc.
(c) Ad Hoc Equity Committee
On March 16, 2017, we filed a motion with the Bankruptcy Court disclosing a Stipulation and Agreed Order entered into on March 15, 2017, by and between the Debtors and certain unaffiliated holders of our Preferred Units and common units(the “Ad Hoc Equity Committee”) pursuant to which the Debtors and the Ad Hoc Equity Committee agreed, among other things, that professionals for the Ad Hoc Equity Committee would be funded by the Debtors’ estates for services performed within a defined scope and subject to agreed caps on fees and expenses as described in the Stipulation and Agreed Order.
Magnitude of Potential Claims
On March 16, 2017, the Debtors filed with the Bankruptcy Court Schedules and Statements, as defined below, setting forth, among other things, the assets and liabilities of the Debtors, subject to the assumptions filed in connection therewith. The Schedules and Statements may be subject to further amendment or modification after filing. Certain holders of prepetition claims are required to file proofs of claim by the specified deadline for filing certain proofs of claims in the Debtors’ Chapter 11 cases, which deadline is April 30, 2017 for prepetition general unsecured claims and July 31, 2017, for governmental claims. Differences between amounts scheduled by the Debtors and claims by creditors will be investigated and resolved through the claims resolution process. In light of the expected number of creditors, the claims resolution process may take a significant amount of time to complete and we expect the process will continue after our emergence from bankruptcy. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be reasonably estimated.
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 June 1, 2017, and to solicit acceptances of such plan through July 31, 2017. We plan to emerge from our Chapter 11 cases after we obtain approval from the Bankruptcy Court for a Chapter 11 plan of reorganization. Among other things, a Chapter 11 plan of reorganization will determine the rights and satisfy the claims of our creditors and security holders. The terms and conditions of any approved Chapter 11 plan of reorganization will be determined through negotiations with our 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 units can receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or unitholders, if any, will not be determined until confirmation and implementation of a plan of reorganization. We can give no assurance that any recovery or distribution of any amount will be made to any of our creditors or unitholders. Our plan of reorganization could result in any of the holders of our liabilities and/or securities, including our common units, receiving no distribution on account of their interests and cancellation of their holdings. Moreover, a plan of reorganization can be
confirmed, under the Bankruptcy Code, even if the holders of our common units vote against the plan and even if the plan provides that the holders of our common units receive no distribution on account of their equity interests.
Schedules and Statements — Claims & Claims Resolution Process
To the best of our knowledge, we have notified all of our known current or potential creditors that the Debtors have filed Chapter 11 cases. On March 16, 2017 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 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.
Many of the claims identified in the Schedules and Statements are listed as disputed, contingent or unliquidated. In addition, there may be variances between the amounts for certain claims listed in the Schedules and Statements and the amounts claimed by our creditors. We anticipate that such variances, as well as other disputes and contingencies will be investigated and resolved through the claims resolution process in our Chapter 11 cases.
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 April 30, 2017, for non-governmental creditors, and July 31, 2017, for governmental creditors.
As of April 30, 2017, approximately
940
claims totaling
$19.5 billion
have been filed with the Bankruptcy Court against the Debtors by approximately
750
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 Debtors in the Chapter 11 proceedings 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 our plan of reorganization. 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.
As discussed above, we expect the claims resolution process will take substantial time to complete, and it may continue after our emergence from bankruptcy. 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.
Restructuring Support Agreement
The Restructuring Support Agreement sets forth, subject to certain conditions, the commitment of the Debtors and the Restructuring Support Parties to support a comprehensive restructuring of the Debtors’ long-term debt (the “Restructuring Transactions”). The Restructuring Transactions will be effectuated through one or more plans of reorganization (the “Plan”) to be filed in the Chapter 11 Cases.
The Restructuring Transactions will be financed by (i) use of cash collateral, (ii) the proposed DIP Credit Agreement (as described below), (iii) a fully committed
$19.25 million
equity investment (the “Second Lien Investment”) by the Consenting Second Lien Noteholders and (iv) a
$255.75 million
rights offering (the “Senior Note Rights Offering”) that is fully backstopped by the Consenting Senior Noteholders.
Certain principal terms of the Plan are outlined below:
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Allowed claims (“First Lien Claims”) under the Third Amended and Restated Credit Agreement, dated as of September 30, 2011 (as amended from time to time, the “Reserve-Based Credit Facility”) will be paid down with
$275.0 million
in cash from the proceeds of the Senior Note Rights Offering and Second Lien Investment and may be paid down further with proceeds from non-core asset sales or other available cash. The remaining First Lien Claims will participate in a new Company
$1.1 billion
reserve-based lending facility (the “New Facility) on terms substantially the same as the Reserve-Based Credit Facility and provided by some of all of the lenders under the Reserve-Based Credit Facility.
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Allowed Second Lien Claims will receive new notes in the current principal amount of approximately
$75.6 million
, which shall be substantially similar to the current Second Lien Notes but providing a
12
-month later maturity and a
200
basis point increase to the interest rate.
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Each holder of an allowed Senior Note Claim shall receive (a) its pro rata share of
97%
of the ownership interests in the reorganized Company (the “New Equity Interests”) and (b) the opportunity to participate in the Senior Note Rights Offering.
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If the Plan is accepted by the classes of the general unsecured claims and holders of the Preferred Units, the holders of the Preferred Units will receive their pro rata share of (a)
3%
of the New Equity Interests and (b)
three
-year warrants for
3%
of the New Equity Interests.
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The Plan will provide for the
$255.75 million
Senior Note Rights Offering to holders of Senior Note Claims to purchase New Equity Interests at an agreed discount. Certain holders of the Senior Note Claims will execute a backstop commitment agreement whereby they will agree to fully backstop the Senior Note Rights Offering.
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The Plan will provide for the Second Lien Investors to purchase
$19.25 million
in New Equity Interests at a
25%
discount to the Company’s total enterprise value.
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The Plan will provide for the establishment of a management incentive plan at the Company under which
10%
of the New Equity Interests will be reserved for grants made from time to time to the officers and other key employees of the respective reorganized entities. The Plan will provide for releases of specified claims held by the Debtors, the Restructuring Support Parties, and certain other specified parties against one another and for customary exculpations and injunctions.
The Restructuring Support Agreement obligates the Debtors and the Restructuring Support Parties to, among other things, support and not interfere with consummation of the Restructuring Transactions and, as to the Restructuring Support Parties, vote their claims in favor of the Plan. The Restructuring 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 Plan, among other requirements, and in the event of certain breaches by the parties under the Restructuring Support Agreement. The Restructuring Support Agreement is subject to termination if the effective date of the Plan has not occurred within
150
days of the filing of the Bankruptcy Petitions. There can be no assurances that the Restructuring Transactions will be consummated.
The Administrative Agent (as defined in the Restructuring Agreement) under the Reserve-Based Credit Facility and the financial institutions party thereto (the “First Lien Lenders”) have not executed the Restructuring Support Agreement, and the New Facility will be subject to the approval of the Administrative Agent and First Lien Lenders in all respects. The Company and the Restructuring Support Parties expect to engage with the First Lien Lenders in an effort to agree upon mutually acceptable terms of the New Facility.
Debtor-in-Possession Financing
In connection with the Chapter 11 Cases, on February 1, 2017, 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 (the “DIP Borrower”), the financial institutions or other entities from time to time parties thereto, as lenders, Citibank N.A., as administrative agent (the “DIP Agent”) and as issuing bank. The initial lenders under the DIP Credit Agreement include lenders under the Company’s existing first-lien credit agreement or the affiliates of such lenders. The proposed DIP Credit Agreement, if approved by the Bankruptcy Court, contains the following terms:
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a revolving credit facility in the aggregate amount of up to
$50.0 million
, and
$15.0 million
available on an interim basis;
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proceeds of the DIP Credit Agreement may 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;
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the maturity date of the DIP Credit Agreement is expected to be the earliest to occur of November 1, 2017,
forty-five
days following the date of the interim order of the Bankruptcy Court approving the DIP Facility on an interim basis, if the Bankruptcy Court has not entered the final order on or prior to such date, or the effective date of a plan of reorganization in the Chapter 11 Cases. In addition, the maturity date may be accelerated upon the occurrence of certain events set forth in the DIP Credit Agreement;
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interest will accrue at a rate per year equal to the LIBOR rate plus
5.50%
;
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in addition to fees to be paid to the DIP Agent, the DIP Borrower is required to pay 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 DIP Credit Agreement, 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;
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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 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;
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the sum of unrestricted cash and cash equivalents of the loan parties and undrawn funds under the DIP Credit Agreement shall not be less than
$25.0 million
at any time; and
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the DIP Credit Agreement is subject to customary covenants, prepayment events, events of default and other provisions.
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The DIP Credit Agreement is subject to final approval by the Bankruptcy Court, which has not been obtained at this time. The Debtors anticipate closing the DIP Credit Agreement promptly following final approval by the Bankruptcy Court of the DIP Motion.
Acceleration of Debt Obligations
The commencement of the Chapter 11 Cases described above constitutes an event of default that accelerated the Debtors’ obligations under the following debt instruments (the Debt Instruments). Any efforts to enforce such obligations under the Debt Documents are stayed automatically as a result of the filing of the Bankruptcy Petitions and the holders’ rights of enforcement in respect of the Debt Documents are subject to the applicable provisions of the Bankruptcy Code.
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$1.25 billion
in unpaid principal and approximately
$0.2 million
of undrawn letters of credit, plus interest, fees, and other expenses arising under or in connection with the Reserve-Based Credit Facility.
|
|
|
•
|
$51.12 million
in unpaid principal, plus interest, fees, and other expenses arising under or in connection with the Senior Notes due 2019 issued pursuant to that certain Indenture, dated as of May 27, 2011, as amended, by and among the Eagle Rock Energy Partners, L.P.; Eagle Rock Energy Finance Corp., the guarantors named therein, and U.S. Bank, National Association, as indenture trustee. VO became the issuer of the Senior Notes due 2019 pursuant to the Fourth Supplemental Indenture effective as of October 8, 2015, among VO, the Subsidiary Guarantors named therein, as guarantors and U.S. Bank, National Association. Wilmington Trust, National Association, is the successor indenture trustee to the Senior Notes due 2019.
|
|
|
•
|
$381.83 million
in unpaid principal, plus interest, fees, and other expenses arising in connection with the Senior Notes due 2020 issued pursuant to that certain Indenture, dated as of April 4, 2012, among the Company and VNRF, as issuers, the Subsidiary Guarantors named therein, as guarantors, and U.S. Bank, National Association, as trustee. UMB Bank, N.A., is the successor indenture trustee to the Senior Notes due 2020.
|
|
|
•
|
$75.63 million
in unpaid principal, plus interest, fees, and other expenses arising in connection with the Second Lien Notes issued pursuant to that certain Indenture, dated as of February 10, 2016, among the Company and VNRF, as issuers, the Subsidiary Guarantors named therein, as guarantors, and U.S. Bank, National Association, as trustee. The Delaware Trust Company is the successor indenture trustee to the Second Lien Notes.
|
Amounts outstanding under our prepetition Reserve-Based Credit Facility and Second Lien Secured Notes were reclassified as current liabilities in the consolidated balance sheet as of
March 31, 2017
due to cross-default provisions as a result of the Bankruptcy Petitions. In addition, as discussed below, the unsecured obligations under our Senior Notes due 2020 and Senior Notes 2019 are included in liabilities subject to compromise in the consolidated balance sheet as of
March 31, 2017
. Any efforts to enforce such obligations under the related Credit Agreement and Indentures are stayed automatically as a result of the filing of the Petitions and the holders’ rights of enforcement in respect of the Credit Agreement and Indentures 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 our Chapter 11 proceedings. 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 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 plan to 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 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. Accordingly, any description of an executory contract or unexpired lease in this Quarterly Report on Form 10-Q, including any quantification of our obligations under any such contract or lease, is wholly qualified by the rejection rights we have 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
March 31, 2017
:
|
|
|
|
|
|
March 31, 2017
|
|
(in thousands)
|
Accounts payable
|
$
|
2,467
|
|
Accrued liabilities
|
1,468
|
|
Undistributed oil and gas revenues
|
758
|
|
Other liabilities
|
383
|
|
Senior notes and accrued interest
|
443,687
|
|
Other long-term liabilities
|
610
|
|
Liabilities subject to compromise
|
$
|
449,373
|
|
Interest Expense
We have 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
$5.7 million
, representing interest expense from the Petition Date through
March 31, 2017
.
Reorganization Items
We use this category to reflect, where applicable, post-petition revenues, 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, 2017
:
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
(in thousands)
|
Professional and legal fees
(1)
|
$
|
10,302
|
|
Deferred financing costs and debt discount
(2)
|
16,444
|
|
Total Reorganization items
|
$
|
26,746
|
|
|
|
(1)
|
Includes
$3.0 million
of accrued reorganization costs as of
March 31, 2017
representing unpaid professional and legal fees directly related to the Chapter 11 Cases.
|
|
|
(2)
|
Includes a non-cash charge to write off of the unamortized debt issuance costs and debt discounts of
$16.4 million
related to the Senior Notes due 2019 and Senior Notes due 2020 as these debt instruments are 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 raise 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 to the amounts and classification of liabilities or any other adjustments that would be required should we be unable to continue as a going concern.
3. Acquisitions and Divestitures
Our acquisitions are accounted for under the acquisition method of accounting in accordance with ASC Topic 805,
“Business Combinations”
(“ASC Topic 805”). An acquisition may result in the recognition of a gain or goodwill based on the measurement of the fair value of the assets acquired at the acquisition date as compared to the fair value of consideration transferred, adjusted for purchase price adjustments. Any such gain or any loss resulting from the impairment of goodwill is recognized in current period earnings and classified in other income and expense in the accompanying Consolidated Statements of Operations. The initial accounting for acquisitions may not be complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that existed as of the acquisition dates. The results of operations of the properties acquired in our acquisitions have been included in the consolidated financial statements since the closing dates of the acquisitions. All our acquisitions were funded with borrowings under our Reserve-Based Credit Facility (defined in Note 4), except for certain acquisitions, in which the Company issued shares or exchanged assets as described below.
2017 Divestitures
During the three months ended
March 31, 2017
, we completed sales of certain of our other properties in several different counties within our operating areas for an aggregate consideration of approximately
$1.0 million
. All cash proceeds received from the sales of these properties were used to reduce borrowings under our Reserve-Based Credit Facility.
2016 Acquisitions and Divestitures
In January 2016, we completed the acquisition of a
51%
joint venture interest in Potato Hills Gas Gathering System, a gathering system located in Latimer County, Oklahoma, including the acquisition of the compression assets relating to the gathering system, for a total consideration of
$7.9 million
. As part of the acquisition, Vanguard also acquired the seller’s rights
as manager under the related joint venture agreement. The acquisition was funded with borrowings under our existing Reserve-Based Credit Facility.
In May 2016, we completed the sale of our natural gas, oil and natural gas liquids properties in the SCOOP/STACK area in Oklahoma to entities managed by Titanium Exploration Partners, LLC for
$270.5 million
, subject to final post-closing adjustments (the “SCOOP/STACK Divestiture”). The Company used
$268.4 million
of the cash received to reduce borrowings under our Reserve-Based Credit Facility and
$2.1 million
to pay for some of the transaction fees related to the sale.
During the year ended December 31, 2016, we completed sales of certain of our other properties in several different counties within our operating areas for an aggregate consideration of approximately
$28.2 million
. All cash proceeds received from the sales of these properties were used to reduce borrowings under our Reserve-Based Credit Facility.
The SCOOP/STACK Divestiture and the sale of other oil and natural gas properties did not significantly alter the relationship between capitalized costs and proved reserves. As such, no gain or loss on sales of oil and natural gas properties were recognized and the sales proceeds were treated as an adjustment to the cost of the properties.
Pro Forma Operating Results
In accordance with ASC Topic 805, presented below are unaudited pro forma results for the
three months ended March 31, 2016
to show the effect on our consolidated results of operations as if the SCOOP/STACK Divestiture completed in
2016
had occurred on January 1,
2015
.
The pro forma results reflect the elimination of the results of operations from the oil and natural gas properties divested in the SCOOP/STACK Divestiture.
The pro forma information is based upon these assumptions and is not necessarily indicative of future results of operations:
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Three Months Ended March 31, 2016
|
|
|
(in thousands, except per unit data)
|
Total revenues
|
|
$
|
103,043
|
|
Net loss
|
|
$
|
(148,704
|
)
|
Net loss per unit
|
|
|
Common and Class B units - basic and diluted
|
|
$
|
(1.19
|
)
|
The amount of revenues and excess of revenues over direct operating expenses that were eliminated to reflect the impact of the SCOOP/STACK Divestiture in the pro forma results presented above are as follows:
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
(in thousands)
|
Revenues
|
|
$
|
10,156
|
|
Excess of revenues over direct operating expenses
|
|
$
|
9,056
|
|
4. Debt
Our financing arrangements consisted of the following as of the date indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Outstanding
|
Description
|
|
Interest Rate
|
|
Maturity Date
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
|
|
|
|
(in thousands)
|
Senior Secured Reserve-Based
Credit Facility
|
|
Variable
(1)
|
|
April 16, 2018
|
|
$
|
1,248,795
|
|
|
$
|
1,269,000
|
|
Senior Notes due 2019
|
|
8.375% (2)
|
|
June 1, 2019
|
|
51,120
|
|
|
51,120
|
|
Senior Notes due 2020
|
|
7.875% (3)
|
|
April 1, 2020
|
|
381,830
|
|
|
381,830
|
|
Senior Notes due 2023
|
|
7.00%
|
|
February 15, 2023
|
|
75,634
|
|
|
75,634
|
|
Lease Financing Obligation
|
|
4.16%
|
|
August 10, 2020 (4)
|
|
19,012
|
|
|
20,167
|
|
Unamortized discount on Senior Notes
|
|
|
|
—
|
|
|
(13,167
|
)
|
Unamortized deferred financing costs
|
|
|
|
(6,338
|
)
|
|
(11,072
|
)
|
Total debt
|
|
|
|
|
|
$
|
1,770,053
|
|
|
$
|
1,773,512
|
|
Less:
|
|
|
|
|
|
|
|
|
Long-term debt classified as current
|
|
(1,318,091
|
)
|
|
(1,753,345
|
)
|
Liabilities subject to compromise (Note 2)
|
|
(432,950
|
)
|
|
—
|
|
Current portion of Lease Financing Obligation
|
|
(4,741
|
)
|
|
(4,692
|
)
|
Total long-term debt
|
|
|
|
|
|
$
|
14,271
|
|
|
$
|
15,475
|
|
|
|
(1)
|
Variable interest rate was
3.33%
and
3.11%
at
March 31, 2017
and
December 31, 2016
, respectively.
|
|
|
(2)
|
Effective interest rate was
21.45%
at
March 31, 2017
and
December 31, 2016
.
|
|
|
(3)
|
Effective interest rate was
8.00%
at
March 31, 2017
and
December 31, 2016
.
|
|
|
(4)
|
The Lease Financing Obligations expire on August 10, 2020, except for certain obligations which expire on July 10, 2021.
|
Acceleration of Debt Obligations
The Debtors filing of the Bankruptcy Petitions on the Petition Date constituted an event of default that accelerated our indebtedness under our Reserve-Based Credit Facility, our Senior Notes due 2019, Senior Notes due 2020 and our Senior Secured Second Lien Notes, all of which we describe in further detail below. Any efforts to enforce such obligations under the respective Credit Agreement and Indentures are stayed automatically as a result of the filing of the Bankruptcy Petitions and the holders’ rights of enforcement in respect of the Credit Agreement and Indentures are subject to the applicable provisions of the Bankruptcy Code. Amounts outstanding under our prepetition Reserve-Based Credit Facility and Senior Secured Second Lien Notes were reclassified as current liabilities in the consolidated balance sheet as of March 31, 2017 due to cross-default provisions as a result of the Bankruptcy Petitions. These amount have not been classified as liabilities subject to compromise as we believe the values of the underlying assets provide sufficient collateral to satisfy such obligations. In addition, the unsecured obligations under our Senior Notes due in 2019 and Senior Notes due 2020 are included in liabilities subject to compromise in the consolidated balance sheet as of March 31, 2017.
We accelerated the amortization of the remaining debt issue discount of
$12.8 million
and debt issue costs of
$3.6 million
associated with the Senior Notes due 2019 and Senior Notes due 2020, fully amortizing those amounts as of the Petition Date. We currently believe that it is probable that we will enter into a potential restructuring agreement with the Lenders under our Reserve-Based Credit Facility, along with the Restructuring Support Agreement with certain holders of the Senior Secured Second Lien Notes, that be approved by the Bankruptcy Court. Accordingly, we have not accelerated the amortization of the remaining debt issue costs related to the Reserve-Based Credit Facility and Senior Secured Second Lien Notes.
Since the commencement of the Bankruptcy Petitions, no interest has been paid to the holders of the Senior Notes due 2019 and Senior Notes due 2020. Also, in accordance with ASC 852,
Reorganizations
, we have accrued interest expense on the Senior Notes due 2019 and Senior Notes due 2020 only up to the Petition Date. The total amount accrued of
$10.7 million
is reflected as liabilities subject to compromise on the consolidated balance sheet as of
March 31, 2017
. In addition, contractual interest on liabilities subject to compromise not reflected in the consolidated statements of operations was approximately
$5.7 million
, representing interest expense from the Petition Date through
March 31, 2017
. We continue to accrue interest on the Reserve-Based Credit Facility and Senior Secured Second Lien Notes subsequent to the Petition Date since we anticipate such interest will be allowed by the Bankruptcy Court to be paid to the Lenders. During the Chapter 11 Cases, we expect to remain current on our interest payments under the Reserve-Based Credit Facility to the extent required by order of the Bankruptcy Court. Also, no interest has been paid to the holders of the Senior Secured Second Lien Notes subsequent to the Petition Date.
Additional information regarding the Chapter 11 cases is included in Note 2.
Chapter 11 Proceedings.
Senior Secured Reserve-Based Credit Facility
The Company’s Third Amended and Restated Credit Agreement (the “Credit Agreement”) provides a maximum credit facility of
$3.5 billion
and a borrowing base of
$1.1 billion
(the “Reserve-Based Credit Facility”). As of
March 31, 2017
there were approximately
$1.2 billion
of outstanding borrowings and approximately
$0.2 million
in outstanding letters of credit resulting in a borrowing deficiency of
$148.9 million
under the Reserve-Based Credit Facility.
The Reserve-Based Credit Facility is secured by a first priority security interest in and lien on substantially all of the Debtors’ assets, including the proceeds thereof and after-acquired property. Therefore, upon the acceleration as a consequence of the commencement of the Chapter 11 Cases, we reclassified the amount outstanding under our Reserve-Based Credit Facility to current portion of long-term debt, as the principal became immediately due and payable. However, any efforts to enforce such payment obligations are automatically stayed as a result of the filing of the Bankruptcy Petitions. There can be no assurances that the agent and lenders will consensually agree to a restructuring of the Reserve-Based Credit Facility. Any proposed non-consensual restructuring of the Reserve-Based Credit Facility could result in substantial delay in emergence from
bankruptcy and there can be no assurances that the Bankruptcy Court would approve such proposed non-consensual restructuring.
Letters of Credit
At
March 31, 2017
, we have unused irrevocable standby letters of credit of approximately
$0.2 million
. The letters are being maintained as security related to the issuance of oil and natural gas well permits to recover potential costs of repairs, modification, or construction to remedy damages to properties caused by the operator. Borrowing availability for the letters of credit is provided under our Reserve-Based Credit Facility. The fair value of these letters of credit approximates contract values based on the nature of the fee arrangements with marketing counterparties.
8.375% Senior Notes Due 2019
At
March 31, 2017
, we had
$51.1 million
outstanding in aggregate principal amount of
8.375%
senior notes due in 2019 (the “Senior Notes due 2019”). The Senior Notes due 2019 were assumed by VO in connection with the Eagle Rock Merger.
7.875% Senior Notes Due 2020
At
March 31, 2017
, we had
$381.8 million
outstanding in aggregate principal amount of
7.875%
senior notes due in 2020 (the “Senior Notes due 2020”). The issuers of the Senior Notes due 2020 are VNR and our
100%
owned finance subsidiary, VNRF. VNR has no independent assets or operations.
7.0% Senior Secured Second Lien Notes Due 2023
On February 10, 2016, we issued approximately
$75.6 million
aggregate principal amount of new
7.0%
Senior Secured Second Lien Notes due 2023 (the “Senior Secured Second Lien Notes”) to certain eligible holders of our outstanding
7.875%
Senior Notes due 2020 in exchange for approximately
$168.2 million
aggregate principal amount of the Senior Notes due 2020 held by such holders.
The exchanges were accounted for as an extinguishment of debt. As a result, we recorded a gain on extinguishment of debt of
$89.7 million
for the
three months ended March 31, 2016
, which is the difference between the aggregate fair market value of the Senior Secured Second Lien Notes issued and the carrying amount of Senior Notes due 2020 extinguished in the exchange, net of unamortized bond discount and deferred financing costs, of
$165.3 million
.
Lease Financing Obligations
On October 24, 2014, as part of our acquisition of certain natural gas, oil and NGLs assets in the Piceance Basin, we entered into an assignment and assumption agreement with Banc of America Leasing & Capital, LLC as the lead bank, whereby we acquired compressors and related facilities and assumed the related financing obligations (the “Lease Financing Obligations”). Certain rights, title, interest and obligations under the Lease Financing Obligations have been assigned to several lenders and are covered by separate assignment agreements, which expire on August 10, 2020 and July 10, 2021. We have the
option to purchase the equipment at the end of the lease term for the current fair market value. The Lease Financing Obligations also contain an early buyout option whereby the Company may purchase the equipment for
$16.0 million
on February 10, 2019. The lease payments related to the equipment are recognized as principal and interest expense based on a weighted average implicit interest rate of
4.16%
.
5. Price and Interest Rate Risk Management Activities
Historically, we have entered into derivative contracts primarily with counterparties that are also lenders under our Reserve-Based Credit Facility to hedge price risk associated with a portion of our oil, natural gas and NGLs production. While it is never management’s intention to hold or issue derivative instruments for speculative trading purposes, conditions sometimes arise where actual production is less than estimated which has, and could, result in over hedged volumes. Pricing for these derivative contracts is based on certain market indexes and prices at our primary sales points.
We also enter into fixed LIBOR interest rate swap agreements with certain counterparties that are lenders under our Reserve-Based Credit Facility, which require exchanges of cash flows that serve to synthetically convert a portion of our variable interest rate obligations to fixed interest rates.
In October and December 2016, we monetized substantially all of our commodity and interest rate hedge agreements for total proceeds of approximately
$54.0 million
. We used the net proceeds from the hedge settlements to make the deficiency payments under our Reserve-Based Credit Facility.
Balance Sheet Presentation
Our commodity derivatives and interest rate swap derivatives are presented on a net basis in “derivative assets” and “derivative liabilities” on the Consolidated Balance Sheets. The following table summarizes the gross fair values of our derivative instruments, presenting the impact of offsetting the derivative assets and liabilities on our Consolidated Balance Sheets for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
December 31, 2016
|
Derivative Liabilities:
|
|
Amount Presented in the Consolidated Balance Sheets
|
Interest rate derivative contracts
|
|
$
|
(125
|
)
|
Total derivative instruments
|
|
$
|
(125
|
)
|
By using derivative instruments to economically hedge exposures to changes in commodity prices and interest rates, we expose ourselves to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk. The majority of our counterparties were participants in our Reserve-Based Credit Facility (see Note 4. for further discussion), which is secured by our oil and natural gas properties; therefore, we were not required to post any collateral. As of
March 31, 2017
, we had no outstanding commodity price or interest rate derivative contracts, and therefore no credit risk related to derivative instruments.
Changes in fair value of our commodity and interest rate derivatives for the
three months ended March 31, 2017
and the year ended
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Year Ended December 31, 2016
|
|
(in thousands)
|
Derivative asset at beginning of period, net
|
$
|
(125
|
)
|
|
$
|
316,691
|
|
Purchases
|
|
|
|
Net premiums and fees received or deferred for derivative contracts
|
—
|
|
|
(2,444
|
)
|
Net gains (losses) on commodity and interest rate derivative contracts
|
37
|
|
|
(46,939
|
)
|
Settlements
|
|
|
|
Cash settlements received on matured commodity derivative contracts
|
(7
|
)
|
|
(226,876
|
)
|
Cash settlements paid on matured interest rate derivative contracts
|
95
|
|
|
13,398
|
|
Termination of derivative contracts
|
—
|
|
|
(53,955
|
)
|
Derivative asset at end of period, net
|
$
|
—
|
|
|
$
|
(125
|
)
|
6. Fair Value Measurements
We estimate the fair values of financial and non-financial assets and liabilities under ASC Topic 820
“Fair Value Measurements and Disclosures”
(“ASC Topic 820”). ASC Topic 820 provides a framework for consistent measurement of fair value for those assets and liabilities already measured at fair value under other accounting pronouncements. Certain specific fair value measurements, such as those related to share-based compensation, are not included in the scope of ASC Topic 820. Primarily, ASC Topic 820 is applicable to assets and liabilities related to financial instruments, to some long-term investments and liabilities, to initial valuations of assets and liabilities acquired in a business combination, recognition of asset retirement obligations and to long-lived assets written down to fair value when they are impaired. It does not apply to oil and natural gas properties accounted for under the full cost method, which are subject to impairment based on SEC rules. ASC Topic 820 applies to assets and liabilities carried at fair value on the Consolidated Balance Sheets, as well as to supplemental information about the fair values of financial instruments not carried at fair value.
We have applied the provisions of ASC Topic 820 to assets and liabilities measured at fair value on a recurring basis, which includes our commodity and interest rate derivatives contracts, and on a nonrecurring basis, which includes goodwill, acquisitions of oil and natural gas properties and other intangible assets. ASC Topic 820 provides a definition of fair value and a framework for measuring fair value, as well as expanding disclosures regarding fair value measurements. The framework requires fair value measurement techniques to include all significant assumptions that would be made by willing participants in a market transaction.
ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 provides a hierarchy of fair value measurements, based on the inputs to the fair value estimation process. It requires disclosure of fair values classified according to the “levels” described below. The hierarchy is based on the reliability of the inputs used in estimating fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The framework for fair value measurement assumes that transparent “observable” (Level 1) inputs generally provide the most reliable evidence of fair value and should be used to measure fair value whenever available. The classification of a fair value measurement is determined based on the lowest level (with Level 3 as the lowest) of significant input to the fair value estimation process.
The standard describes three levels of inputs that may be used to measure fair value:
|
|
|
Level 1
|
Quoted prices for identical instruments in active markets.
|
|
|
|
Level 2
|
Quoted market prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
|
|
|
|
Level 3
|
Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Level 3 assets and liabilities generally include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation or for which there is a lack of transparency as to the inputs used.
|
As required by ASC Topic 820, financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Financing arrangements.
The carrying amounts of our bank borrowings outstanding represent their approximate fair value because our current borrowing rates do not materially differ from market rates for similar bank borrowings. We consider this fair value estimate as a Level 2 input. As of
March 31, 2017
, the fair value of our Senior Notes due 2020 was estimated to be
$210.0 million
, our Senior Notes due 2019 was estimated to be
$30.4 million
and our Senior Secured Second Lien Notes was estimated to be
$73.7 million
. We consider the inputs to the valuation of our Senior Notes and our Senior Secured Second Lien Notes to be Level 1, as fair value was estimated based on prices quoted from a third-party financial institution.
Derivative instruments.
As previously discussed, we monetized all of our commodity hedges and substantially all of our interest rate hedges during 2016. As of
March 31, 2017
, all of the Company's hedging agreements had settled.
As of December 31, 2016, we had
one
remaining interest rate swap derivative contract, which expired in February 2017. In order to estimate the fair value of our interest rate swaps, we use a yield curve based on money market rates and interest rate swaps, extrapolate a forecast of future interest rates, estimate each future cash flow, derive discount factors to value the fixed and floating rate cash flows of each swap, and then discount to present value all known (fixed) and forecasted (floating) swap cash flows. We consider the fair value estimate for these derivative instruments as a Level 2 input.
Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties. Management validates the data provided by third parties by understanding the pricing models used, analyzing pricing data in certain situations and confirming that those securities trade in active markets. Assumed credit risk adjustments, based on published credit ratings, public bond yield spreads and credit default swap spreads, are applied to our commodity derivatives and interest rate derivatives.
Financial assets and financial liabilities measured at fair value on a recurring basis are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Fair Value Measurements
|
|
|
Assets/Liabilities
|
|
|
Using Level 2
|
|
at Fair Value
|
Liabilities:
|
|
|
|
|
|
|
Interest rate derivative contracts
|
|
$
|
(125
|
)
|
|
$
|
(125
|
)
|
Total derivative instruments
|
|
$
|
(125
|
)
|
|
$
|
(125
|
)
|
The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 (unobservable inputs) in the fair value hierarchy:
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
(in thousands)
|
Unobservable inputs, beginning of period
|
|
$
|
(5,933
|
)
|
Total gains
|
|
3,412
|
|
Settlements
|
|
(1,888
|
)
|
Unobservable inputs, end of period
|
|
$
|
(4,409
|
)
|
|
|
|
Change in fair value included in earnings related to derivatives
still held as of March 31,
|
|
$
|
(84
|
)
|
During periods of market disruption, including periods of volatile oil and natural gas prices, there may be certain asset classes that were in active markets with observable data that become illiquid due to changes in the financial environment. In such cases, more derivative instruments, other than the range bonus accumulators, may fall to Level 3 and thus require more subjectivity and management judgment. Further, rapidly changing commodity and unprecedented credit and equity market conditions could materially impact the valuation of derivative instruments as reported within our consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results of operations or financial condition.
We apply the provisions of ASC Topic 350 “
Intangibles-Goodwill and Other
.” Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in business combinations. Goodwill is assessed for impairment annually on October 1 or whenever indicators of impairment exist. The goodwill test is performed at the reporting unit level, which represents our oil and natural gas operations in the United States. If indicators of impairment are determined to exist, an impairment charge is recognized if the carrying value of goodwill exceeds its implied fair value. We utilize a market approach to determine the fair value of our reporting unit. Any sharp prolonged decreases in the prices of oil and natural gas as well as any continued declines in the quoted market price of the Company’s units could change our estimates of the fair value of our reporting unit and could result in an impairment charge.
Our nonfinancial assets and liabilities that are initially measured at fair value are comprised primarily of assets acquired in business combinations and asset retirement costs and obligations. These assets and liabilities are recorded at fair value when acquired/incurred but not re-measured at fair value in subsequent periods. We classify such initial measurements as Level 3 since certain significant unobservable inputs are utilized in their determination. A reconciliation of the beginning and ending balance of our asset retirement obligations is presented in Note 7, in accordance with ASC Topic 410-20 “
Asset Retirement Obligations.
” During the
three months ended March 31, 2017
, in connection with new wells drilled, we incurred and recorded asset retirement obligations totaling
$0.2 million
, at fair value and also recorded a
$0.03 million
reduction due to a change in estimate as a result of revisions to the timing or the amount of our original undiscounted estimated asset retirement costs during the
three months ended March 31, 2017
. During the year ended
December 31, 2016
, in connection with the new wells drilled, we incurred and recorded asset retirement obligations totaling
$0.7 million
, at fair value. In addition, we recorded a
$1.3 million
change in estimate as a result of revisions to the timing or the amount of our original undiscounted estimated asset retirement costs during the year ended
December 31, 2016
. The fair value of additions to the asset retirement obligation liability is measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Inputs to the valuation include: (1) estimated plug and abandonment cost per well based on our experience; (2) estimated remaining life per well based on average reserve life per field; (3) our credit-adjusted risk-free interest rate ranging between
4.7%
and
5.5%
; and (4) the average inflation factor ranging between
1.8%
and
2.0%
. 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.
7. Asset Retirement Obligations
The asset retirement obligations as of
March 31, 2017
and
December 31, 2016
reported on our Consolidated Balance Sheets and the changes in the asset retirement obligations for the
three months ended
March 31, 2017
and the year ended
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
(in thousands)
|
Asset retirement obligations, beginning of period
|
|
$
|
272,436
|
|
|
$
|
271,456
|
|
Liabilities added during the current period
|
|
242
|
|
|
713
|
|
Accretion expense
|
|
2,887
|
|
|
12,145
|
|
Retirements
|
|
—
|
|
|
(2,230
|
)
|
Liabilities related to assets divested
|
|
(5,525
|
)
|
|
(10,915
|
)
|
Change in estimate
|
|
(29
|
)
|
|
1,267
|
|
Asset retirement obligation, end of period
|
|
270,011
|
|
|
272,436
|
|
Less: current obligations
|
|
(8,318
|
)
|
|
(7,884
|
)
|
Long-term asset retirement obligation, end of period
|
|
$
|
261,693
|
|
|
$
|
264,552
|
|
Each year the Company reviews and, to the extent necessary, revises its asset retirement obligation estimates. During the
three months ended
March 31, 2017
and year ended
December 31, 2016
, the Company reviewed actual abandonment costs with previous estimates and as a result, decreased its estimates of future asset retirement obligations by
$0.03 million
and increased its estimates of future asset retirement obligations by
$1.3 million
, respectively, to reflect revised estimates to be incurred for plugging and abandonment costs.
8. Commitments and Contingencies
Transportation Demand Charges
As of
March 31, 2017
, we have contracts that provide firm transportation capacity on pipeline systems. The remaining terms on these contracts range from
one month
to
three years
and require us to pay transportation demand charges regardless of the amount of pipeline capacity we utilize.
The values in the table below represent gross future minimum transportation demand charges we are obligated to pay as of
March 31, 2017
. However, our financial statements will reflect our proportionate share of the charges based on our working interest and net revenue interest, which will vary from property to property.
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
(in thousands)
|
April 1, 2017 - December 31, 2017
|
|
$
|
1,220
|
|
2018
|
|
1,009
|
|
2019
|
|
820
|
|
2020
|
|
410
|
|
Total
|
|
$
|
3,459
|
|
As part of our Chapter 11 Cases, we rejected significant contracts for transportation via the Rockies Express Pipeline and the East Tennessee Natural Gas Pipeline. These rejected contracts total
$27.6 million
in gross future minimum transportation demand charges. The prepetition amounts due to these parties, of
$0.8 million
, are reflected as liabilities subject to compromise on the consolidated balance sheet as of
March 31, 2017
Legal Proceedings
We are defendants in certain legal proceedings arising in the normal course of our business. We are also a party to separate legal proceedings relating to (i) the LRE Merger, (ii) the Eagle Rock Merger and (iii) our exchange (the Debt Exchange) of the Senior Notes due 2020 for the Senior Secured Second Lien Notes (please read Note 4.
Debt
of the Notes to the Consolidated Financial Statements for further discussion).
While the outcome and impact of such legal proceedings on the Company cannot be predicted with certainty, management does not believe that it is probable that the outcome of these actions will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flow. In addition, we are not aware of any legal or governmental proceedings against us, or contemplated to be brought against us, under the various environmental protection statutes to which we are subject.
9. Members’ Deficit and Net Loss per Common and Class B Unit
Effect of Filing on Unitholders
Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, prepetition liabilities and post-petition liabilities must be satisfied in full before the holders of our Series A Preferred Units, Series B Preferred Units, Series C Preferred Units and Common and Class B Units are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or unitholders, if any, will not be determined until confirmation and implementation of a plan or plans of reorganization. No assurance can be given as to what distributions, if any, will be made to each of these constituencies or the nature thereof. If certain requirements of the Bankruptcy Code are met, a plan of reorganization can be confirmed notwithstanding its rejection or deemed rejection by the holders of our Series A Preferred Units, Series B Preferred Units and Common Units and notwithstanding the fact that such holders do not receive or retain any property on account of their equity interests under the plan. Because of such possibilities, the value of our securities, including our Series A Preferred Units, Series B Preferred Units and Common Units, is highly speculative. Accordingly, there can be no assurance that the holders of our Series A Preferred Units, Series B Preferred Units and Common Units will retain any value under a plan of reorganization.
We will continue to account for our Common Units, Class B Units and Preferred Units at their carrying value until a plan of reorganization is confirmed by the Bankruptcy Court and becomes effective.
Cumulative Preferred Units
The following table summarizes the Company’s Cumulative Preferred Units outstanding at
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
Earliest
Redemption Date
|
|
Liquidation Preference
Per Unit
|
|
Distribution Rate
|
|
Units Outstanding
|
|
Carrying Value
(in thousands)
|
|
Units Outstanding
|
|
Carrying Value
(in thousands)
|
Series A
|
|
June 15, 2023
|
|
$25.00
|
|
7.875%
|
|
2,581,873
|
|
|
$
|
62,200
|
|
|
2,581,873
|
|
|
$
|
62,200
|
|
Series B
|
|
April 15, 2024
|
|
$25.00
|
|
7.625%
|
|
7,000,000
|
|
|
$
|
169,265
|
|
|
7,000,000
|
|
|
$
|
169,265
|
|
Series C
|
|
October 15, 2024
|
|
$25.00
|
|
7.75%
|
|
4,300,000
|
|
|
$
|
103,979
|
|
|
4,300,000
|
|
|
$
|
103,979
|
|
Total Cumulative Preferred Units
|
|
13,881,873
|
|
|
$
|
335,444
|
|
|
13,881,873
|
|
|
$
|
335,444
|
|
The Cumulative 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 or converted into our common units, at our option, in connection with a change of control. The Cumulative Preferred Units can be redeemed, in whole or in part, out of amounts legally available therefore, at a redemption price of
$25.00
per unit plus an amount equal to all accumulated and unpaid distributions thereon to the date of redemption, whether or not declared. We may also redeem the Cumulative Preferred Units in the event of a change of control. Holders of the Cumulative Preferred Units will have
no
voting rights except for limited voting rights if we fail to pay dividends for
eighteen
or more monthly periods (whether or not consecutive) and in certain other limited circumstances or as required by law. The Cumulative Preferred Units have a liquidation preference which is equal to the redemption price described above.
On February 25, 2016, our board of directors elected to suspend cash distributions to the holders of our common and Class B units and Cumulative Preferred Units effective with the February 2016 distribution. All preferred distributions will continue to accumulate and must be paid in full before distributions to common and Class B unitholders can resume. Also, as result of the Bankruptcy Petitions, we are no longer accruing dividends on Cumulative Preferred Units as of the Petition date. As of
March 31, 2017
, dividends in arrears related to our Cumulative Preferred Units through the Petition Date were
$5.1 million
,
$13.3 million
and
$8.3 million
, respectively.
Common and Class B Units
The common units represent limited liability company interests. Holders of Class B units have substantially the same rights and obligations as the holders of common units.
The following is a summary of the changes in our common units issued during the
three months ended March 31, 2017
and the year ended
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Beginning of period
|
|
131,009
|
|
|
130,477
|
|
Unit-based compensation
|
|
(62
|
)
|
|
532
|
|
End of period
|
|
130,947
|
|
|
131,009
|
|
There was no change in issued and outstanding Class B units during the
three months ended March 31, 2017
or the year ended
December 31, 2016
.
Net Loss per Common and Class B Unit
Basic net income per common and Class B unit is computed in accordance with ASC Topic 260 “
Earnings Per Share
” (“ASC Topic 260”) by dividing net income attributable to common and Class B unitholders, which reflects all accumulated distributions on Cumulative Preferred Units, including distributions in arrears, by the weighted average number of units outstanding during the period. Diluted net income (loss) per common and Class B unit is computed by adjusting the average number of units outstanding for the dilutive effect, if any, of unit equivalents. We use the treasury stock method to determine the dilutive effect. Class B units participate in distributions; therefore, all Class B units were considered in the computation of basic net income (loss) per unit. The Cumulative Preferred Units have no participation rights and accordingly are excluded from the computation of basic net income (loss) per unit.
For the
three months ended March 31, 2017
and
2016
,
13,482,997
and
2,711,333
phantom units were excluded from the calculation of diluted earnings per unit, respectively, due to their antidilutive effect as we were in a loss position.
Distributions Declared
The Cumulative Preferred Units rank senior to our common units with respect to the payment of distributions and distribution of assets upon liquidation, dissolution and winding up. Distributions on the Cumulative Preferred Units are cumulative from the date of original issue and will be payable monthly in arrears on the 15th day of each month of each year, when, as and if declared by our board of directors. Distributions on our Cumulative Preferred Units accumulate at a monthly rate of
7.875%
per annum of the liquidation preference of
$25.00
per Series A Preferred Unit, a monthly rate of
7.625%
per annum of the liquidation preference of
$25.00
per Series B Preferred Unit and a monthly rate of
7.75%
per annum of the liquidation preference of
$25.00
per Series C Preferred Unit.
The following table shows the distribution amount per unit, declared date, record date and payment date of the cash distributions we paid on each of our common and Class B units attributable to each period presented. Future distributions are at the discretion of our board of directors and will depend on business conditions, earnings, our cash requirements and other relevant factors.
Our board of directors elected to suspend cash distributions to the holders of our common and Class B units and Cumulative Preferred Units effective with the February 2016 distribution.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Distributions
|
Distribution
|
|
Per Unit
|
|
Declared Date
|
|
Record Date
|
|
Payment Date
|
2016
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
|
|
|
|
|
January
|
|
$
|
0.0300
|
|
|
February 18, 2016
|
|
March 1, 2016
|
|
March 15, 2016
|
2015
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
|
|
|
|
|
|
December
|
|
$
|
0.0300
|
|
|
January 20, 2016
|
|
February 1, 2016
|
|
February 12, 2016
|
10. Unit-Based Compensation
Long-Term Incentive Plan
The Vanguard Natural Resources, LLC Long-Term Incentive Plan (the “VNR LTIP”) was adopted by the Board of Directors of the Company to compensate employees and nonemployee directors of the Company and its affiliates who perform services for the Company under the terms of the plan. The VNR LTIP is administered by the compensation committee of the board of directors (the “Compensation Committee”) and permits the grant of unrestricted units, restricted units, phantom units, unit options and unit appreciation rights.
Restricted and Phantom Units
A restricted unit is a unit grant that vests over a period of time and that during such time is subject to forfeiture. A phantom unit grant represents the equivalent of
one
common unit of the Company. The phantom units, once vested, are settled through the delivery of a number of common units equal to the number of such vested units, or an amount of cash equal to the fair market value of such common units on the vesting date to be paid in a single lump sum payment, as determined by the compensation committee in its discretion. The Compensation Committee may grant tandem distribution equivalent rights (“DERs”) with respect to the phantom units that entitle the holder to receive the value of any distributions made by us on our units while the phantom units are outstanding.
The fair value of restricted unit and phantom unit awards is measured based on the fair market value of the Company units on the date of grant. The values of restricted unit grants and phantom unit grants that are required to be settled in units are recognized as expense over the vesting period of the grants with a corresponding charge to members’ equity. When the Company has the option to settle the phantom unit grants by issuing Company units or through cash settlement, the Company recognizes the value of those grants utilizing the liability method as defined under ASC Topic 718 based on the Company’s historical practice of settling phantom units predominantly in cash. The fair value of liability awards is remeasured at each reporting date through the settlement date with the change in fair value recognized as compensation expense over that period.
Executive Employment Agreements
On March 18, 2016, we and VNRH entered into new amended and restated executive employment agreements (the “Amended Agreements”) with each of our
three
executive officers, Messrs. Smith, Robert and Pence in order to set forth in writing the revised terms of each executive’s employment relationship with VNRH. The Amended Agreements were effective January 1, 2016 and the initial term of the Amended Agreements ends on January 1, 2019, with a subsequent
twelve
-month term extension automatically commencing on January 1, 2019 and each successive January 1 thereafter, provided that neither VNRH nor the executives deliver a timely non-renewal notice prior to a term expiration date.
The Amended Agreements provide for the executive officers an annual base salary and eligibility to receive an annual performance-based cash bonus award. The annual bonus will be calculated based upon
four
Company performance components: adjusted EBITDA results, production results, lease operating expenses, and cash general and administrative expenses, as well as a fifth component determined solely in the discretion of our board of directors. As a result of the Bankruptcy Petitions, the executive officers did not receive any compensation related to the performance-based cash bonus award for the
three months ended March 31, 2017
and as such no compensation expense were recognized related to these arrangements during the same period. As of
March 31, 2017
, we recognized an accrued liability of
$0.4 million
for the unpaid portion of the executive officers’ 2016 performance-based cash bonus award which is included in liabilities subject to compromise on the Consolidated Balance Sheets. As of March 31, 2016, an accrued liability was recognized and compensation expense of
$0.5 million
was recorded for the
three months ended March 31, 2016
related to these arrangements, which was classified in the selling, general and administrative expenses line item in the Consolidated Statement of Operations.
Under the Amended Agreements, the executives are also eligible to receive annual equity-based compensation awards, consisting of restricted units and/or phantom units granted under the VNR LTIP. Any restricted units and phantom units granted to executives under the Amended Agreements are subject to a
three
-year vesting period. One-third of the aggregate number of the units vest on each one-year anniversary of the date of grant so long as the executive remains continuously employed with the Company. Both the restricted and phantom units include a tandem grant of DERs.
Unit Grants
In January 2017, the executives were granted a total of
10,611,940
phantom units in accordance with the Amended Agreements. Also, during the
three months ended March 31, 2017
, our three independent board members were granted a total of
480,768
phantom units which will vest
one
year from the date of grant.
Restricted Units
A summary of the status of the non-vested restricted units as of
March 31, 2017
is presented below:
|
|
|
|
|
|
|
|
|
|
|
Number of
Non-vested Restricted Units
|
|
Weighted Average
Grant Date Fair Value
|
Non-vested restricted units at December 31, 2016
|
|
647,784
|
|
|
$
|
19.14
|
|
Forfeited
|
|
(11,051
|
)
|
|
$
|
17.85
|
|
Vested
|
|
(183,548
|
)
|
|
$
|
19.69
|
|
Non-vested restricted units at March 31, 2017
|
|
453,185
|
|
|
$
|
18.96
|
|
At
March 31, 2017
, there was approximately
$3.3 million
of unrecognized compensation cost related to non-vested restricted units. The cost is expected to be recognized over an average period of approximately
1.0
year. Our Consolidated Statements of Operations reflect non-cash compensation related to restricted unit grants of
$0.8 million
and
$1.3 million
in the selling, general and administrative expenses line item for the
three months ended March 31, 2017
and
2016
, respectively.
Phantom Units
A summary of the status of the non-vested phantom units under the VNR LTIP as of
March 31, 2017
is presented below:
|
|
|
|
|
|
|
|
|
|
|
Number of
Non-vested
Phantom Units
|
|
Weighted Average
Grant Date Fair Value
|
Non-vested phantom units at December 31, 2016
|
|
3,628,529
|
|
|
$
|
2.96
|
|
Granted
|
|
11,092,708
|
|
|
$
|
0.67
|
|
Forfeited
|
|
(43,298
|
)
|
|
$
|
1.82
|
|
Vested
|
|
(877,517
|
)
|
|
$
|
2.98
|
|
Non-vested phantom units at March 31, 2017
|
|
13,800,422
|
|
|
$
|
1.13
|
|
At
March 31, 2017
, there was approximately
$12.3 million
of unrecognized compensation cost related to non-vested phantom units. The cost is expected to be recognized over an average period of approximately
1.3 years
. Our Consolidated Statements of Operations reflect non-cash compensation related to phantom unit grants of
$1.8 million
and
$1.1 million
in the selling, general and administrative expense line item for the
three months ended March 31, 2017
and
2016
, respectively.
11. Shelf Registration Statement
Prior to the entry into the Chapter 11 Cases, the Company had an effective universal shelf registration statement on Form S-3, as amended (File No. 333-210329), filed with the SEC, under which the Company registered an indeterminate amount of common units, Preferred Units, debt securities and guarantees of debt securities. The Company also had on file with the SEC a post-effective shelf registration statement on Form S-3, as amended (File No. 333-207357), under which the Company registered up to
14,593,606
common units. The Company is no longer eligible to offer or sell any of its securities pursuant to the shelf registration statements on Form S-3.