Company Quick10K Filing
Quick10K
Vanguard Natural Resources
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-10-09 Officers
8-K 2019-09-23 Officers, Exhibits
8-K 2019-09-04 Regulation FD, Exhibits
8-K 2019-08-19 Earnings, Regulation FD, Exhibits
8-K 2019-08-01 Regulation FD, Exhibits
8-K 2019-07-16 Enter Agreement, Leave Agreement, Off-BS Arrangement, Sale of Shares, Shareholder Rights, Control, Amend Bylaw, Regulation FD, Exhibits
8-K 2019-07-16 Officers, Exhibits
8-K 2019-07-11 Regulation FD, Exhibits
8-K 2019-07-10 Bankruptcy, Exhibits
8-K 2019-07-09 Enter Agreement, Other Events, Exhibits
8-K 2019-07-03 Regulation FD, Exhibits
8-K 2019-06-05 Regulation FD, Exhibits
8-K 2019-05-13 Enter Agreement, Exhibits
8-K 2019-05-03 Enter Agreement, Exhibits
8-K 2019-04-11 Regulation FD, Exhibits
8-K 2019-04-05 Bankruptcy, Shareholder Rights, Exhibits
8-K 2019-04-04
8-K 2019-04-01 Enter Agreement, Bankruptcy, Off-BS Arrangement, Off-BS Arrangement, Regulation FD, Other Events, Exhibits
8-K 2019-02-19
8-K 2019-02-08 Officers, Shareholder Vote
8-K 2019-02-05
8-K 2019-02-01 Officers, Shareholder Vote
8-K 2019-01-28 Officers, Exhibits
8-K 2019-01-28 Officers, Exhibits
8-K 2019-01-10 Regulation FD, Exhibits
8-K 2018-12-31 Off-BS Arrangement
8-K 2018-12-21 Officers
8-K 2018-12-10 Enter Agreement, Exhibits
8-K 2018-11-13 Earnings, Regulation FD, Exhibits
8-K 2018-10-26 Other Events, Exhibits
8-K 2018-10-04 Regulation FD, Exhibits
8-K 2018-09-13 Other Events, Exhibits
8-K 2018-08-13 Regulation FD, Exhibits
8-K 2018-08-13 Earnings, Regulation FD, Exhibits
8-K 2018-08-09 Shareholder Vote
8-K 2018-08-02 Other Events, Exhibits
8-K 2018-07-27 Other Events, Exhibits
8-K 2018-07-17 Regulation FD, Exhibits
8-K 2018-07-09 Enter Agreement, Other Events, Exhibits
8-K 2018-07-05 Regulation FD, Exhibits
8-K 2018-05-03 Other Events, Exhibits
8-K 2018-04-13 Exhibits
8-K 2018-04-12 Regulation FD, Exhibits
8-K 2018-02-21 Officers, Shareholder Vote, Other Events, Exhibits
8-K 2018-02-13 Regulation FD, Exhibits
8-K 2018-01-15 Officers, Other Events, Exhibits
PPCB Propanc Biopharma 610
NTRB Nutriband 564
INVU Investview 54
MMND Mastermind 45
RMGN RMG Networks Holding 13
BLYQ Bally 12
NFE New Fortress Energy LLC 0
CIRT Cirtran 0
ADMEN ADM Endeavors 0
OPC Oglethorpe Power 0
VNR 2019-06-30
Part I - Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 vnr2019q210-qexhibit31x1.htm
EX-31.2 vnr2019q210-qexhibit31x2.htm
EX-32.1 vnr2019q210-qexhibit32x1.htm
EX-32.2 vnr2019q210-qexhibit32x2.htm

Vanguard Natural Resources Earnings 2019-06-30

VNR 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 vnr2019q210-q.htm 10-Q Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
 
 
 
 
 
(Mark One)
 
 
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2019
 
OR
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to
Commission File Number:  000-55826
Grizzly Energy, LLC
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
80-0411494
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)

5847 San Felipe, Suite 3000
Houston, Texas
 
77057
(Address of Principal Executive Offices)
 
(Zip Code)
 
(832) 327-2255
(Registrant’s Telephone Number, Including Area Code)

Vanguard Natural Resources, Inc.
(Former name, former address and former fiscal year, if changed since last report)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes      o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes     o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
o
Large accelerated filer
 
o
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
o
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. o





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes ☐ No

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Ticker symbol(s)
Name of each exchange on which registered

As of August 16, 2019, the registrant had 100,000 outstanding Series C common units, 45,738,661 outstanding Series A preferred units and 861,252 outstanding Series B preferred units.





GRIZZLY ENERGY, LLC AND SUBSIDIARIES
(formerly known as Vanguard Natural Resources, Inc. (Debtor-in-Possession))
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




GLOSSARY OF TERMS

Below is a list of terms that are common to our industry and used throughout this document:
 
/day
 = per day
 
Mcf
 = thousand cubic feet
 
 
 
 
 
Bbls
 = barrels
 
Mcfe
 = thousand cubic feet of natural gas equivalents
 
 
 
 
 
Bcf
 = billion cubic feet
 
MMBbls
 = million barrels
 
 
 
 
 
Bcfe
 = billion cubic feet equivalents
 
MMBOE
 = million barrels of oil equivalent
 
 
 
 
 
BOE
 = barrel of oil equivalent
 
MMBtu
 = million British thermal units
 
 
 
 
 
Btu
 = British thermal unit
 
MMcf
 = million cubic feet
 
 
 
 
 
MBbls
 = thousand barrels
 
MMcfe
 = million cubic feet of natural gas
    equivalents
 
 
 
 
 
MBOE
 = thousand barrels of oil equivalent
 
NGLs
 = natural gas liquids

When we refer to oil, natural gas and natural gas liquids (“NGLs”) in “equivalents,” we are doing so to compare quantities of natural gas with quantities of NGLs and oil or to express these different commodities in a common unit. In calculating equivalents, we use a generally recognized standard in which 42 gallons is equal to one Bbl of oil or one Bbl of NGLs and one Bbl of oil or one Bbl of NGLs is equal to six Mcf of natural gas. Also, when we refer to cubic feet measurements, all measurements are at a pressure of 14.73 pounds per square inch.

References in this report to “Grizzly” are to Grizzly Energy, LLC (formerly known as Vanguard Natural Resources, Inc.) and its subsidiaries, including Grizzly Natural Gas, LLC (formerly known as Vanguard Natural Gas, LLC) (“GNG”), Grizzly Energy Holdco, Inc., Grizzly Energy Holdings, LLC (formerly known as VNR Holdings, LLC) (“GEH”), Grizzly Operating, LLC (formerly known as Vanguard Operating, LLC) (“GO”), Escambia Operating Co. LLC (“EOC”), Escambia Asset Co. LLC (“EAC”), Grizzly Energy Acquisition Co., LLC (formerly known as Eagle Rock Energy Acquisition Co., Inc.) (“GAC”), Grizzly Upstream Development Co., LLC (formerly known as Eagle Rock Upstream Development Co., Inc.) (“GUD”), Grizzly Acquisition Partnership, LLC (formerly known as Eagle Rock Acquisition Partnership, L.P.) (“GAP”), Grizzly Energy Acquisition Co. II, LLC (formerly known as Eagle Rock Energy Acquisition Co. II, Inc.) (“GAC II”), Grizzly Upstream Development Co. II, LLC (formerly known as Eagle Rock Upstream Development Co. II, Inc.) (“GUD II”) and Grizzly Acquisition Partnership II, LLC (formerly known as Eagle Rock Acquisition Partnership II, L.P.) (“GAP II”).

References in this report to “us,” “we,” “our” or the “Company” or like terms refer to (i) Vanguard Natural Resources, Inc. for the period prior to emergence from the Chapter 11 bankruptcy cases on July 16, 2019 (the “Effective Date”) and (ii) Grizzly Energy, LLC for the period as of and following the Effective Date.



 





Forward-Looking Statements

Certain statements and information in this Quarterly Report on Form 10-Q (the “Quarterly Report”) may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Statements included in this Quarterly Report that are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto), including, without limitation, the information set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements.  These statements can be identified by the use of forward-looking terminology including “may,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “continue,” or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other “forward-looking” information. Forward-looking statements include, but are not limited to, statements we make concerning future actions, conditions or events, future operating results, income or cash flow.

These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things, those set forth in the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “2018 Annual Report”), our Quarterly Report on Form 10-Q for the three months ended March 31, 2019 and this Quarterly Report, and those set forth from time to time in our filings with the Securities and Exchange Commission (the “SEC”), which are available on our website at www.grizzlyenergyllc.com and through the SEC’s Electronic Data Gathering and Retrieval System at www.sec.gov. These factors and risks include, but are not limited to:

our ability to continue as a going concern;

our ability to achieve the anticipated benefits from the consummation of the Chapter 11 Cases (as defined herein);

our ability to execute our business strategies, including our business strategies following emergence from the Chapter 11 Cases;

our ability to meet our liquidity needs and service our indebtedness;

the potential adverse effects of the consummation of the Plan (as defined herein) on our liquidity and results of operations;

the impact of the Chapter 11 Cases on the liquidity and market price of our units and on our ability to access the public capital markets;

ability to maintain relationships with suppliers, customers, employees and other third parties as a result of our Bankruptcy Petitions (as defined herein) and following emergence from the Chapter 11 Cases;

the effects of the Bankruptcy Petitions on the Company and on the interests of various constituents, including holders of our Common and Preferred Units (as defined herein);

the outcome of all other pending litigation;

the potential adverse effects of the consummation of the Chapter 11 Cases on our liquidity and results of operations;

increased advisory costs and professional fees to implement the reorganization;

risks relating to any of our unforeseen liabilities;

declines in oil, NGLs or natural gas prices;

the level of success in exploration, development and production activities;





adverse weather conditions that may negatively impact development or production activities;

the timing of exploitation and development expenditures;

inaccuracies of reserve estimates or assumptions underlying them;

revisions to reserve estimates as a result of changes in oil, natural gas and NGLs prices;

impacts to financial statements as a result of impairment write-downs;

risks related to the level of indebtedness and periodic redeterminations of the borrowing base under our credit agreements;

ability to generate sufficient cash flows from operations to meet the internally funded portion of any capital expenditures budget;

ability to obtain external capital to finance exploration and development operations and acquisitions;

compliance with applicable laws, rules and regulations;

federal, state and local initiatives and efforts relating to the regulation of development drilling and hydraulic fracturing;

failure of properties to yield oil or natural gas in commercially viable quantities;

uninsured or underinsured losses resulting from oil and natural gas operations;

ability to access oil and natural gas markets due to market conditions or operational impediments;

the impact and costs of compliance with laws and regulations governing oil and natural gas operations;

ability to replace oil and natural gas reserves;

any loss of senior management or critical technical personnel;

competition in the oil and natural gas industry;

ability to execute our strategy including the divestment of assets;

the costs and effects of litigation; and

sabotage, terrorism or other malicious intentional acts (including cyber-attacks), war and other similar acts that disrupt operations or cause damage greater than covered by insurance.

All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this report.





PART I – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

GRIZZLY ENERGY, LLC AND SUBSIDIARIES
(formerly known as Vanguard Natural Resources, Inc. (Debtor-in-Possession))
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
  

Oil sales
$
37,150

 
$
46,503

 
$
69,897

 
$
92,614

Natural gas sales
29,132

 
42,623

 
91,446

 
97,890

NGLs sales
13,702

 
22,587

 
27,749

 
44,484

Oil, natural gas and NGLs sales
79,984

 
111,713

 
189,092

 
234,988

Net losses on commodity derivative contracts
(9,063
)
 
(45,332
)
 
(70,202
)
 
(63,917
)
Total revenues and losses on commodity derivative contracts
70,921

 
66,381

 
118,890

 
171,071

Costs and expenses:
 
 
 
 
 
 
 
Production:
 
 
 
 
 
 
 
Lease operating expenses
29,035

 
36,763

 
55,282

 
67,758

Transportation, gathering, processing and compression
8,484

 
9,768

 
18,006

 
21,270

Production and other taxes
7,833

 
7,971

 
17,656

 
17,752

Depreciation, depletion, amortization, and accretion
39,044

 
38,711

 
74,758

 
78,750

Impairment of oil and natural gas properties
323,188

 
7,552

 
323,626

 
22,153

Exploration expense
275

 
430

 
476

 
1,746

Selling, general and administrative expenses
9,238

 
11,108

 
21,795

 
23,844

Total costs and expenses
417,097

 
112,303

 
511,599

 
233,273

Loss from operations
(346,176
)
 
(45,922
)
 
(392,709
)
 
(62,202
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense (excludes contractual interest expense of
$15.7 million for each of the three and six months
ended June 30, 2019)
(1,680
)
 
(15,870
)
 
(18,655
)
 
(30,623
)
Net gain (loss) on divestitures of oil and natural gas properties

 
4,900

 
(458
)
 
4,900

Other
497

 
(175
)
 
586

 
(26
)
Total other expense, net
(1,183
)
 
(11,145
)
 
(18,527
)
 
(25,749
)
Loss before reorganization items
(347,359
)
 
(57,067
)
 
(411,236
)
 
(87,951
)
Reorganization items (Note 2)
(24,743
)
 
(610
)
 
(43,131
)
 
(2,317
)
Net loss
(372,102
)
 
(57,677
)
 
(454,367
)
 
(90,268
)
Less: Net income attributable to non-controlling interests

 
(96
)
 

 
(189
)
Net loss attributable to Common stockholders
$
(372,102
)
 
$
(57,773
)
 
$
(454,367
)
 
$
(90,457
)
Net loss per share – basic and diluted
$
(18.49
)
 
$
(2.87
)
 
$
(22.58
)
 
$
(4.50
)
Weighted average Common shares outstanding
 
 
 
 
 
 
 
Common shares – basic and diluted
20,124

 
20,100

 
20,124

 
20,100

See accompanying notes to condensed consolidated financial statements


3



GRIZZLY ENERGY, LLC AND SUBSIDIARIES
(formerly known as Vanguard Natural Resources, Inc. (Debtor-in-Possession))
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
 
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
44,782

 
$
33,538

Trade accounts receivable, net
 
42,892

 
62,073

Derivative assets
 

 
6,287

Restricted cash
 
4,449

 
4,450

Prepaid drilling costs
 
4,916

 
12,476

Other current assets
 
9,770

 
5,663

Total current assets
 
106,809

 
124,487

Oil and natural gas properties
 
 
 
 
Proved properties
 
1,574,565

 
1,567,903

Unproved properties
 
81,215

 
81,597

 
 
1,655,780

 
1,649,500

Accumulated depletion, amortization and impairment
 
(661,137
)
 
(269,972
)
Oil and natural gas properties, net – successful efforts
 
994,643

 
1,379,528

Other assets
 
 

 
 

Lease assets
 
13,661

 

Derivative assets
 

 
6,766

Other assets
 
16,422

 
9,321

Total assets
 
$
1,131,535

 
$
1,520,102

 
 
 
 
 
Liabilities and equity
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable: 
 
 

 
 

Trade
 
$
4,476

 
$
29,709

Accrued liabilities:
 
 

 
 

Lease operating
 
10,628

 
13,140

Developmental capital
 
3,298

 
6,937

Interest
 
330

 
4,999

Production and other taxes
 
23,358

 
23,658

Other
 
23,371

 
12,175

Derivative liabilities
 

 
6,483

Oil and natural gas revenue payable
 
19,969

 
35,802

Long-term debt classified as current
 

 
879,181

Short-term debt
 
20,000

 

Other current liabilities
 
11,122

 
9,091

Total current liabilities
 
116,552

 
1,021,175

Long-term debt, net of current portion (Note 5)
 

 
5,446

Asset retirement obligations
 
141,019

 
139,433

Other long-term liabilities
 
8,020

 
523

Total liabilities not subject to compromise
 
265,591

 
1,166,577

Liabilities subject to compromise (Note 2)
 
965,605

 

Total liabilities
 
1,231,196

 
1,166,577

Commitments and contingencies (Note 10)
 


 


Stockholders’ equity (deficit) (Note 11)
 
 

 
 

Common stock ($0.001 par value, 50,000,000 shares authorized;
20,124,081 and 20,124,080 shares issued and outstanding at June 30,
2019 and December 31, 2018, respectively)
 
20

 
20

Additional paid-in capital
 
510,067

 
508,886

Accumulated deficit
 
(609,748
)
 
(155,381
)
Total stockholders equity (deficit)
 
(99,661
)
 
353,525

Total liabilities and equity (deficit)
 
$
1,131,535

 
$
1,520,102

See accompanying notes to condensed consolidated financial statements

4



GRIZZLY ENERGY, LLC AND SUBSIDIARIES
(formerly known as Vanguard Natural Resources, Inc. (Debtor-in-Possession))
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
(Unaudited)

 
 
Three Months Ended June 30, 2019
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Deficit
 
 
Shares
 
Amount
 
 
 
Balance at March 31, 2019
 
20,124

 
$
20

 
$
509,477

 
$
(237,646
)
 
$
271,851

Net loss
 

 

 

 
(372,102
)
 
(372,102
)
Share-based compensation
 

 

 
590

 

 
590

Balance at June 30, 2019
 
20,124

 
$
20

 
$
510,067

 
$
(609,748
)
 
$
(99,661
)

 
 
Six Months Ended June 30, 2019
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Deficit
 
 
Shares
 
Amount
 
 
 
Balance at December 31, 2018
 
20,124

 
$
20

 
$
508,886

 
$
(155,381
)
 
$
353,525

Net loss
 

 

 

 
(454,367
)
 
(454,367
)
Share-based compensation
 

 

 
1,181

 

 
1,181

Balance at June 30, 2019
 
20,124

 
$
20

 
$
510,067

 
$
(609,748
)
 
$
(99,661
)

 
 
Three Months Ended June 30, 2018
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Non-controlling Interest
 
Total Stockholders’ Equity
 
 
Shares
 
Amount
 
 
 
 
Balance at March 31, 2018
 
20,100

 
$
20

 
$
507,136

 
$
(144,094
)
 
$
2,194

 
$
365,256

Net income (loss)
 

 

 

 
(57,773
)
 
96

 
(57,677
)
Share-based compensation
 

 

 
579

 

 

 
579

Potato Hills cash distribution to non-controlling interest
 

 

 

 

 
(250
)
 
(250
)
Balance at June 30, 2018
 
20,100

 
$
20

 
$
507,715

 
$
(201,867
)
 
$
2,040

 
$
307,908


 
 
Six Months Ended June 30, 2018
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Non-controlling Interest
 
Total Stockholders’ Equity
 
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017
 
20,100

 
$
20

 
$
506,640

 
$
(111,410
)
 
$
2,278

 
$
397,528

Net income (loss)
 

 

 

 
(90,457
)
 
189

 
(90,268
)
Share-based compensation
 

 

 
1,075

 

 

 
1,075

Potato Hills cash distribution to non-controlling interest
 

 

 

 

 
(427
)
 
(427
)
Balance at June 30, 2018
 
20,100

 
$
20

 
$
507,715

 
$
(201,867
)
 
$
2,040

 
$
307,908


See accompanying notes to condensed consolidated financial statements

5



GRIZZLY ENERGY, LLC AND SUBSIDIARIES
(formerly known as Vanguard Natural Resources, Inc. (Debtor-in-Possession))
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended
 
 
June 30,
(in thousands)
 
2019
 
2018
Operating activities
 
 
 
 
Net loss
 
$
(454,367
)
 
$
(90,268
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 

Depreciation, depletion, amortization, and accretion
 
74,758

 
78,750

Impairment of oil and natural gas properties
 
323,626

 
22,153

Amortization of deferred financing costs
 
841

 
1,361

Share-based compensation
 
1,181

 
1,075

Net losses on commodity derivative contracts
 
70,202

 
63,917

Cash settlements paid on matured commodity derivative contracts
 
(9,762
)
 
(27,139
)
Net (gain) loss on divestiture of oil and natural gas properties
 
458

 
(4,900
)
Non-cash reorganization items (Note 2)
 
20,365

 

Changes in operating assets and liabilities:
 
 
 


Trade accounts receivable
 
18,723

 
14,124

Other current assets
 
(4,158
)
 
(1,357
)
Accounts payable and oil and natural gas revenue payable
 
(24,051
)
 
(136
)
Accrued expenses and other current liabilities
 
(2,666
)
 
(6,598
)
Other assets
 
(7,291
)
 
126

Net cash provided by operating activities
 
7,859

 
51,108

Investing activities
 
 
 
 
Additions to property and equipment
 
(39
)
 
(94
)
Additions to oil and natural gas properties
 
(6,801
)
 
(42,637
)
Deposits and prepayments of oil and natural gas properties
 
(7,086
)
 
(49,256
)
Proceeds from the sale of oil and natural gas properties
 
4,461

 
59,876

Net cash used in investing activities
 
(9,465
)
 
(32,111
)
Financing activities
 
 
 
 
Proceeds from long-term debt
 

 
90,000

Repayment of long-term debt
 
(7,145
)
 
(104,702
)
Proceeds from debtor-in-possession financing
 
20,000

 

Potato Hills distribution to non-controlling interest
 

 
(427
)
Financing fees
 
(6
)
 
(172
)
Net cash provided by (used in) financing activities
 
12,849

 
(15,301
)
Net increase in cash, cash equivalents and restricted cash
 
11,243

 
3,696

Cash, cash equivalents and restricted cash, beginning of period
 
37,988

 
10,017

Cash, cash equivalents and restricted cash, end of period
 
$
49,231

 
$
13,713

Supplemental cash flow information:
 
 
 
 

Cash paid for interest
 
$
9,937

 
$
29,988

Non-cash financing and investing activities:
 
 
 
 
Lease assets obtained in exchange for lease liabilities
 
$
182

 
$

Asset retirement obligations, net
 
$
251

 
$
12,294

Reconciliation of Cash and Cash Equivalents and Restricted Cash
 
 
 
 
Cash and cash equivalents at beginning of period
 
$
33,538

 
$
2,762

Restricted cash at beginning of period
 
4,450

 
7,255

Cash and cash equivalents and restricted cash at beginning of period
 
$
37,988

 
$
10,017

 
 
 
 
 
Cash and cash equivalents at end of period
 
$
44,782

 
$
7,502

Restricted cash at end of period
 
4,449

 
6,211

Cash and cash equivalents and restricted cash at end of period
 
$
49,231

 
$
13,713

See accompanying notes to condensed consolidated financial statements

6



GRIZZLY ENERGY, LLC AND SUBSIDIARIES
(formerly known as Vanguard Natural Resources, Inc. (Debtor-in-Possession))
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)

General

References to the “Company,” refer to Grizzly Energy, LLC and its consolidated subsidiaries as a whole or an individual basis. References to “Vanguard” refer to the Company during the period prior to the Effective Date while references to “Grizzly” refer to the Company during the period following the Effective Date.

Description of the Business

We are an exploration and production company engaged in the production and development of oil and natural gas properties in the United States. We are currently focused on adding value by efficiently operating our producing assets and, in certain areas, applying modern drilling and completion technologies in order to fully assess and realize potential development upside. Our primary business objective is to maintain reserves, production and cash flow in a capital efficient manner while identifying opportunities to return cash to stakeholders. Through our operating subsidiaries, as of June 30, 2019, we own properties and oil and natural gas reserves primarily located in nine operating areas:

the Green River Basin in Wyoming;

the Piceance Basin in Colorado;

the Permian Basin in West Texas and New Mexico;

the Arkoma Basin in Oklahoma;

the Gulf Coast Basin in Texas, Louisiana and Alabama;

the Big Horn Basin in Wyoming and Montana;

the Anadarko Basin in Oklahoma and North Texas;

the Wind River Basin in Wyoming; and

the Powder River Basin in Wyoming.

On March 31, 2019 (the “Petition Date”), the Company and its 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 title 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 Chapter 11 Cases were jointly administered under the caption “In re Vanguard Natural Resources, Inc., et al.”

On July 9, 2019, the Bankruptcy Court entered an order confirming the Amended Joint Plan of Reorganization (as Modified) of Vanguard Natural Resources, Inc. and its Debtor Affiliates (the “Plan”) and on July 16, 2019, the Company consummated the Plan and emerged from the Chapter 11 Cases. As part of the transactions undertaken pursuant to the Plan, Vanguard was converted from a Delaware corporation to a Delaware limited liability company and renamed Grizzly Energy, LLC (“Grizzly”). See Note 2 for a discussion of the Chapter 11 proceedings.






7



1.  Summary of Significant Accounting Policies

The accompanying condensed consolidated financial statements are unaudited and were prepared from our records. We derived the condensed consolidated balance sheet as of December 31, 2018 from the audited financial statements contained in our 2018 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 along with our 2018 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 June 30, 2019, our significant accounting policies, except for those related to the effects of our Chapter 11 Cases discussed below, are consistent with those discussed in Note 1 of the Notes to the Consolidated Financial Statements contained in our 2018 Annual Report.

(a)
Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements as of June 30, 2019 and December 31, 2018, and for the three and six months ended June 30, 2019 and 2018, respectively, include our accounts and those of our subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.

Prior to August 2018, we consolidated the Potato Hills Gas Gathering System as we had 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 condensed consolidated financial statements. On August 1, 2018, we completed the sale of our 51% joint venture interest in Potato Hills Gas Gathering System, including the compression assets relating to the gathering system and our working interest in related oil and natural gas producing properties.

For periods subsequent to filing the Bankruptcy Petitions, we have prepared our consolidated financial statements in accordance with Accounting Standards Codification 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 are potentially 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.

(b)
Oil and Natural Gas Properties

The successful efforts method of accounting is used to account for oil and natural gas properties. Under the successful efforts method, we capitalize the costs of acquiring unproved and proved oil and natural gas leasehold acreage. When proved reserves are found on an unproved property, the associated leasehold cost is transferred to proved properties. Significant unproved leases are reviewed periodically, and a valuation allowance is provided for any estimated decline in value. In determining whether an unproved property is impaired, the Company considers numerous factors including, but not limited to, current exploration and development plans, favorable or unfavorable exploration activity on the property being evaluated and/or adjacent properties, and the remaining months in the lease term for the property. Development costs are capitalized, including the costs of unsuccessful and successful development wells and the costs to drill and equip exploratory wells that find proved reserves. Exploration costs, including unsuccessful exploratory wells and geological and geophysical costs, are expensed as incurred.

Depreciation, depletion and amortization

Depreciation, depletion and amortization (“DD&A”) of the leasehold and development costs that are capitalized into proved oil and natural gas properties are computed using the units-of-production method, at the district level, based on total proved reserves and proved developed reserves, respectively. Upon sale or retirement of oil and natural gas properties, the costs and related accumulated DD&A are eliminated from the accounts and the resulting gain or loss is recognized.


8



Impairment of Oil and Natural Gas Properties

Proved oil and natural gas properties are assessed for impairment in accordance with ASC Topic 360, Property, Plant and Equipment, when events and circumstances indicate a decline in the recoverability of the carrying values of such properties, such as a negative revision of reserves estimates or sustained decrease in commodity prices, but at least annually. We estimate future cash flows expected in connection with the properties and compare such future cash flows to the carrying amount of the properties to determine if the carrying amount is recoverable. If the sum of the undiscounted pretax cash flows is less than the carrying amount, then the carrying amount is written down to its estimated fair value.

Unproved properties are evaluated on a specific-asset basis or in groups of similar assets, as applicable. The Company performs periodic assessments of unproved oil and natural gas properties for impairment and recognizes a loss at the time of impairment. In determining whether an unproved property is impaired, the Company considers numerous factors including, but not limited to, current development and exploration drilling plans, favorable or unfavorable exploration activity on adjacent leaseholds, future reserve cash flows and the remaining lease term.

(c)
Income Taxes

Vanguard was a C corporation subject to federal and state income taxes. Grizzly has elected to be treated as a C corporation for federal and state income taxes. As a C corporation, we account for income taxes, as required, under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in net income or loss in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company incurred a net taxable loss in the current taxable period. Thus no current income taxes are anticipated to be paid and no net benefit will be recorded in the Company’s condensed consolidated financial statements due to the full valuation allowance on the tax assets.

Our policy is to record interest and penalties relating to uncertain tax positions in income tax expense. At June 30, 2019, we did not have any accrued liability for uncertain tax positions and do not anticipate recognition of any significant liabilities for uncertain tax positions during the next 12 months.

(d)
New Pronouncements Recently Adopted
    
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC Topic 842) (“ASU 2016-02”), which requires lessees to recognize at the commencement date for all leases, with the exception of short-term leases, (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) 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. ASU 2016-02 took effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The ASU requires adoption using a modified retrospective transition approach with either (a) periods prior to the adoption date being recast or (b) a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption date with prior periods not recast.

We adopted ASU No. 2016-02 as of January 1, 2019, using the targeted improvement transition option included in ASU No. 2018-11 - Leases (Topic 842). The targeted improvement approach allows us to apply the standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed us to carry forward the historical lease classification and not capitalize leases with terms of 12 months or less. In addition, it allowed us not to separate lease and non-lease components. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements.

The adoption of ASU 2016-02 resulted in the recording of additional net lease assets and lease liabilities of approximately $17.5 million and $18.0 million, respectively, as of January 1, 2019, with the difference largely due to prepaid and deferred rent that were reclassified to the right-of-use (“ROU”) asset value. The standard did not require any adjustment to the opening balance of retained earnings and had no impact on cash flows. Please see Note 9, “Leases,” for further details.

In June 2016, the FASB issued ASU 2016-13 - Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which provides financial statement users with more decision-useful information about

9



the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To comply with this, the amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. In May 2019, the FASB updated Topic 326 by issuing ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief, which provides entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments-Credit Losses - Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments-Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The amendments in these Updates will be applied using a modified-retrospective approach and, for public entities, are effective for fiscal years beginning after December 15, 2019 and interim periods within those annual periods. Management does not expect this update to have a material impact on the Company's financial statements.

(e)
Use of Estimates

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 future cash flows, the fair value of derivative contracts, asset retirement obligations, accrued oil, natural gas and NGLs revenues and expenses, as well as estimates of expenses related to DD&A and accretion expense, income taxes, and share-based compensation. Actual results could differ from those estimates.

2.     Chapter 11 Proceedings

Commencement of Bankruptcy Cases

On the Petition Date, the Debtors filed the Chapter 11 Cases under the Bankruptcy Code in the Bankruptcy Court. The Debtors were jointly administered under the caption “In re Vanguard Natural Resources, Inc., et al.”

The subsidiary Debtors in the Chapter 11 Cases were GNG, GEH, GO, EOC, EAC, GAC, GUD, GAP, GAC II, GUD II and GAP II.

Reorganization Process

Throughout the Chapter 11 Cases, we operated our business as a debtor-in-possession in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. We generally continued our operations without interruption during the pendency of the Chapter 11 Cases. To continue ordinary course operations, we secured orders from the Bankruptcy Court approving a variety of “first day” motions, including motions that authorized us to maintain our existing cash management system, to secure debtor-in-possession financing and other customary relief. These motions were designed primarily to minimize the effect of bankruptcy on the Company’s operations, customers and employees.

Subject to certain exceptions provided for in section 362 of the Bankruptcy Code, all judicial and administrative proceedings against us or our property were automatically enjoined, or stayed, as of the Petition Date. In addition, subject to certain exceptions, the filing of new judicial or administrative actions against us or our property for claims arising prior to the Petition Date were automatically enjoined. This prohibited, for example, our lenders, noteholders and other creditors from pursuing claims for defaults under our debt agreements and our contract counterparties from pursuing claims for defaults under our contracts. Accordingly, all of our prepetition liabilities and obligations were settled or compromised under the Bankruptcy Code through the Chapter 11 Cases.

Our operations and ability to execute our business remain subject to the risks and uncertainties arising as a result of our Chapter 11 Cases, and the number and nature of our outstanding common units and unitholders, assets, liabilities, officers and managers could change materially because of our Chapter 11 Cases. In addition, the descriptions of our prepetition operations, properties and capital plans may not accurately reflect our post-emergence operations, properties and capital plans.

Creditors’ Committees - Appointment & Formation
    

10



On April 11, 2019, the Office of the United States Trustee appointed the Official Committee of Unsecured Creditors (the “Unsecured Creditors Committee”) pursuant to section 1102 of the Bankruptcy Code. The Unsecured Creditors Committee consisted of the following three members: (i) Enterprise Jonah Gas Gathering LLC; (ii) Viva Energy Services LLC; and (iii) Trinity Environmental SWD I, LLC.

Schedules and Statements - Claims & Claims Resolution Process
    
On May 6, 2019 each of the Debtors filed a Schedule of Assets and Liabilities and Statement of Financial Affairs (collectively, the “Schedules and Statements”) with the Bankruptcy Court. These documents set forth, among other things, the assets and liabilities of each of the Debtors, including executory contracts to which each of the Debtors was a party, subject to the qualifications and assumptions included therein. The Schedules and Statements were subject to further amendment or modification after filing. Many of the claims identified in the Schedules and Statements were listed as disputed, contingent or unliquidated.

Pursuant to the Federal Rules of Bankruptcy Procedure, creditors who wished to assert prepetition claims against us and whose claim (i) were not listed in the Schedules and Statements or (ii) were listed in the Schedules and Statements as disputed, contingent, or unliquidated, were required to file a proof of claim with the Bankruptcy Court prior to the bar dates set by the court. The bar dates are June 14, 2019, for non-governmental creditors, and September 27, 2019, for governmental creditors.
        
As of August 14, 2019, approximately 1,405 claims totaling $7.7 billion were filed with the Bankruptcy Court against the Debtors by approximately 1,206 claimants. We expect additional claims to be filed prior to the last bar date. In addition, creditors who have already filed claims may amend or modify their claims in ways we cannot reasonably predict. The amounts of these additional claims and/or amendments or modifications to claims already filed may be material. We anticipate the claims filed against the Debtors in the Chapter 11 Cases will be numerous. We expect the process of resolving claims filed against the Debtors to be complex and lengthy. We plan to investigate and evaluate all filed claims in connection with the Plan. As part of the process, we will work to resolve differences in amounts scheduled by the Debtors and the amounts claimed by creditors, including through the filing of objections with the Bankruptcy Court where necessary. Accordingly, the ultimate number and amount of claims that will be allowed against the Debtors is not presently known, nor can the ultimate recovery with respect to allowed claims be reasonably estimated. As discussed above, the claims resolution process continues following our emergence from the Chapter 11 Cases.

Plan Support Agreement

On May 8, 2019, the Debtors entered into a Plan Support Agreement (the “Plan Support Agreement”) with (a) certain holders (the “RBL Lenders”) constituting over 66 2/3% in amount and over 50.1% in number of the revolving credit facility claims and over 66 2/3% in amount and over 50.1% in number of those certain secured swap claims, in each case under that certain Fourth Amendment and Restated Credit Agreement, dated as of August 1, 2017, by and among Vanguard Natural Gas, LLC (“VNG”), as borrower, the guarantors party thereto, Citibank N.A., as Administrative Agent, and the other lenders party thereto from time to time (as amended, the “VNG Credit Facility” and the claims thereunder, the “RBL Claims” and “Secured Swap Claims,” as applicable); and (b) certain holders (the “Term Loan Lenders” and, collectively with the RBL Lenders, the “Plan Support Parties”), constituting over 66 2/3% in amount and over 50.1% in number of the term loan claims under the VNG Credit Facility (the “Term Loan Claims”). On July 3, 2019, the Plan Support Agreement was amended to reflect the support of over 66 2/3% of Second Lien Notes. A summary of the restructuring transactions agreed to by the Plan Support Parties and effectuated through the Plan is included below.

Debtor-in-Possession Financing

In connection with the Chapter 11 Cases, on the Petition Date, the Debtors filed a motion (the “DIP Motion”) seeking, among other things, interim and final approval of the Debtors’ use of cash collateral and debtor-in-possession financing on terms and conditions set forth in a proposed Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”) among VNG, as borrower (the “DIP Borrower”), Citibank, N.A., as administrative agent and issuing bank (the “DIP Agent”), and the financial institutions or other entities from time to time parties thereto, as lenders, and the DIP Agent. The initial lender under the DIP Credit Agreement was Citibank N.A. The DIP Credit Agreement contained the following terms:

a super-priority senior secured revolving credit facility in the aggregate amount of up to $65.0 million (the “New Money Facility”), of which $20.0 million was drawn on April 4, 2019 and an additional $5.0 million was drawn in July 2019;


11



a “roll up” of $65.0 million of the outstanding principal amount of the revolving loans under the VNG Credit Facility (as defined in Note 5) (the “Roll-Up”, and, together with the New Money Facility, collectively, the “DIP Facility”);

proceeds of the New Money Facility were to be used by the DIP Borrower to (i) pay certain costs and expenses related to the Chapter 11 Cases, (ii) make payments provided for in the DIP Motion, including in respect of certain “adequate protection” obligations and (iii) fund working capital needs, capital improvements and other general corporate purposes of the DIP Borrower and its subsidiaries, in all cases subject to the terms of the DIP Credit Agreement and applicable orders of the Bankruptcy Court;

the DIP Credit Agreement was paid off prior to maturity on July 16, 2019 in connection with Grizzly’s emergence from the Chapter 11 Cases;

interest accrued at a rate per year equal to the LIBOR rate plus 5.50%, or the adjusted base rate plus 4.50% per annum; and

in addition to other fees paid to the DIP Agent, the DIP Borrower was required to pay to the DIP Agent for the account of the lenders under the DIP Credit Agreement, an unused commitment fee equal to 1.0% of the daily average of each lender’s unused commitment under the New Money Facility, which was payable in arrears on the last day of each calendar month and on the termination date for the facility for any period for which the unused commitment fee was not previously paid.

Plan of Reorganization

On July 9, 2019, the Bankruptcy Court entered an order confirming the Amended Joint Plan of Reorganization (as Modified) of Vanguard Natural Resources, Inc. and its Debtor Affiliates (the “Plan”) and on July 16, 2019, the Company consummated the Plan. The Plan provides for the reorganization of the Debtors as a going concern and will significantly reduce long-term debt and annual interest payments of the reorganized Debtors.

The following is a summary of the material terms of the Plan. This summary highlights only certain substantive provisions of the Plan and is not intended to be a complete description of the Plan. The Plan provided for:

holders of an allowed claim related to the DIP Credit Agreement to receive their pro rata share of participation in the Revolving Loans/Term Loan A (each as defined below);

holders of allowed RBL Claims and allowed Secured Swap Claims to receive their pro rata share of and interest in: (i) the Term Loan B (as defined below); (ii) the Series A Preferred Units (the “Series A Preferred Units”); and (iii) 75% of the Series C Common Units (the “Series C Common Units”);

holders of allowed claims under the senior secured term loan credit facility pursuant to the VNG Credit Facility to receive a pro rata share and interest in 10% of the Series C Common Units, as well as at the option of each holder of an Allowed Term Loan Claim, either: (i) such holder’s pro rata share of the Series A Preferred Units; or (ii) such holder’s pro rata share of the Series B Preferred Units (the “Series B Preferred Units” and together with the Series A Preferred Units, the “Preferred Units”);

holders of allowed claims related to the VNG Notes to receive a pro rata share and interest in: (i) 15% of the Series C Common Units, if the class of Allowed Senior Note Claims voted to accept the Plan; (ii) the Series A Preferred Units; and (iii) cash;

holders of certain other allowed general unsecured claim to receive 2% of the face amount of its unpaid claim as further described in the Plan; and

customary releases, exculpations, and injunctions.     


Pursuant to the Plan, the terms of the Vanguard’s board of directors expired as of the Effective Date. Our current board of managers (the “Board”) consists of five members who, except for one manager, are different from those who previously served on Vanguard’s board of directors.


12



Preferred and Common Units

The Preferred Units have no stated maturity and are not subject to mandatory redemption or any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by us, at our option, in accordance with the terms of the Company’s limited liability company agreement (the “LLC Agreement”). The Preferred Units had an initial liquidation preference of $10.00 per unit (the “Initial Liquidation Preference”).

From and after the date on which the Term Loan B is repaid, the Company may redeem, in whole or in part, the Series A Preferred Units, at such times as determined by the Board in its sole discretion at the price set forth in the LLC Agreement (the “Series A Redemption Price”). The Series A Redemption Price, at a given date of determination, is based upon an amount equal to the Initial Liquidation Preference increased each month by an annualized rate equal to the LIBO rate for such month, plus 9.5%, compounding monthly on the last day of each such month. Upon the redemption of any Series A Preferred Units and the payment in full to the holders thereof, such Series A Preferred Units will cease to be outstanding.

From and after the date on which all Series A Preferred Units are redeemed by Grizzly and are no longer outstanding (the “Series A Redemption Date”), the Company may redeem, in whole or in part, the Series B Preferred Units, at such times as determined by the Board in its sole discretion at the price set forth in the LLC Agreement (the “Series B Redemption Price”). The Series B Redemption Price, at a given date of determination, is based upon an amount equal to the Initial Liquidation Preference increased each month by an annualized rate equal to the LIBO rate for such month, plus 10.5%, compounding monthly on the last day of each such month. Upon the redemption of any Series B Preferred Units and the payment in full to the holders thereof, such Series B Preferred Units will cease to be outstanding.

The Common Units represent limited liability company interests. Record holders of Common and Preferred Units are entitled to vote at meetings of members and shall be entitled to one vote for each outstanding unit that is registered in the name of such member on the record date for such meeting.

Exit Facility

Grizzly has entered into that certain Fifth Amended and Restated Credit Agreement dated as of July 16, 2019 (the “RBL Credit Agreement”), among GNG, as borrower (the “RBL Borrower”), Grizzly, as parent, Citibank, N.A., as administrative agent, issuing bank and collateral agent, and the lenders party thereto from time to time. Pursuant to the RBL Credit Agreement, the lenders party thereto agreed to provide a new first-lien reserved-based credit facility with first-out revolving credit commitments in the aggregate amount of $65.0 million (the “Revolving Loans”) and a second-out term loan in the aggregate amount of $65.0 million (the “Term Loan A”). The initial borrowing base under the RBL Credit Agreement is $65.0 million. The borrowing base will be redetermined semi-annually on April 1st and October 1st of each year, commencing on April 1, 2020.

The maturity date of the RBL Credit Agreement, including the Term Loan A, is July 16, 2022. Until the maturity date, the Term Loan A shall bear interest at a rate per annum equal to 3.0% plus the adjusted LIBO rate for an alternate base rate loan, or 4.0% plus the adjusted LIBO rate for a Eurodollar loan, and the Revolving Loans shall bear interest based on borrowing base utilization percentage at a rate per annum equal to the alternate base rate plus a margin ranging from 2.0% to 3.0% for alternative base rate loans or the adjusted LIBO rate plus a margin ranging from 3.0% to 4.0% for Eurodollar loans. Unused commitments under the RBL Credit Agreement will accrue a commitment fee at a rate of 0.5%, payable quarterly in arrears.

The RBL Borrower will be required to repay the Term Loan A at the end of each quarter in equal quarterly installments at a rate of 1.0% per annum of the original principal amount of the Term Loan A.

Grizzly has also entered into that certain Term Loan Credit Agreement dated as of July 16, 2019 (the “Term Loan Credit Agreement”) among GNG, as borrower (the “Term Loan Borrower”), Grizzly, as parent, Citibank, N.A., as administrative agent and collateral agent, and the lenders party thereto from time to time. Pursuant to the Term Loan Credit Agreement, the lenders party thereto agreed to provide a first-lien, last-out term loan in the aggregate amount of $285.0 million (the “Term Loan B”). The Term Loan Credit Agreement and the RBL Credit Agreement together are referred to herein as the “Exit Facility”.

The maturity date of the Term Loan Credit Agreement is January 16, 2023. Until the maturity date, the Term Loan B shall bear interest at a rate per annum equal to (i) the alternate base rate plus an applicable margin of 6.5% for an alternate base rate loan or (ii) the adjusted LIBO rate plus an applicable margin of 7.5% for a Eurodollar loan.


13



The obligations under the Exit Facility are guaranteed by Grizzly and all of Grizzly’s subsidiaries (the “Guarantors”), subject to limited exceptions, and secured on a first-priority basis by substantially all of Grizzly’s and the Guarantors’ assets, including, without limitation, liens on at least 95% of the total value of Grizzly’s and the Guarantors’ oil and natural gas properties, and pledges of equity interests of all other direct and indirect subsidiaries of Grizzly, subject to certain limited exceptions.

The Exit Facility also contains certain financial covenants. The RBL Credit Agreement requires that as of the last day of any fiscal quarter commencing with the third full fiscal quarter ending after the effective date of the RBL Credit Agreement, that (i) the consolidated first-out leverage ratio not exceed 2.50 to 1.00 and (ii) current ratio not be less than 1.00 to 1.00. The Term Loan Credit Agreement requires that as of January 1 of each year and July 1 of each year, commencing with the first such date after the effective date of the Term Loan Credit Agreement, that the proved developed producing coverage ratio not be less than 1.00 to 1.00.

Amended and Restated Employment Agreements

Richard Scott Sloan Amended and Restated Employment Agreement

On July 16, 2019, Grizzly entered into an Amended and Restated Employment Agreement with its President and Chief Executive Officer, Richard Scott Sloan (the “Sloan Employment Agreement”). The initial term of the Sloan Employment Agreement will begin on July 16, 2019, and end on December 31, 2020, which term shall automatically renew for one-year periods unless Grizzly or Mr. Sloan gives notice that it or he, as applicable, does not wish to extend the agreement. The employment agreement provides that Mr. Sloan is entitled to receive an annual base salary of $720,000 and an annual target bonus equal to 100% of his base salary; provided that during the 2019 calendar year, Mr. Sloan will instead participate in a quarterly bonus arrangement that provides him the opportunity to earn a target quarterly bonus of $180,000 (the “Sloan STIP”). The Sloan STIP permits Mr. Sloan to earn a quarterly bonus if performance metrics are achieved during the applicable calendar quarter on either a stand-alone or “catch up” basis. Mr. Sloan can earn up to 150% of his quarterly target bonus if the applicable performance metrics are exceeded. The other terms of the Sloan Employment Agreement are generally consistent with the terms of Mr. Sloan’s prior agreement, except that: (i) the Effective Date of the Plan shall constitute a Change of Control (as defined therein), and (ii) Mr. Sloan’s voluntary resignation during the 30-day period following the three-month anniversary of the Effective Date of the Plan shall constitute Good Reason (as defined herein).

Ryan Midgett Amended and Restated Employment Agreement

On July 16, 2019, Grizzly entered into an Amended and Restated Employment Agreement with its Chief Financial Officer, Ryan Midgett (the “Midgett Employment Agreement”). The initial term of the Midgett Employment Agreement will begin on July 16, 2019, and end on December 31, 2020, which term shall automatically renew for one-year periods unless Grizzly or Mr. Midgett gives notice that it or he, as applicable, does not wish to extend the agreement. The Midgett Employment Agreement provides that Mr. Midgett is entitled to receive an annual base salary of $325,000 and an annual target bonus equal to 80% of his base salary; provided that during the 2019 calendar year, Mr. Midgett will instead participate in a quarterly bonus arrangement that provides him the opportunity to earn a target quarterly bonus of $65,000 (the “Midgett STIP”). The Midgett STIP permits Mr. Midgett to earn a quarterly bonus if performance metrics are achieved during the applicable calendar quarter on either a stand-alone or “catch up” basis. Mr. Midgett can earn up to 150% of his quarterly target bonus if the applicable performance metrics are exceeded. The other terms of the agreement are generally consistent with the terms of Mr. Midgett’s prior agreement, except that: (i) the Effective Date of the Plan shall constitute a Change of Control (as defined therein), and (ii) Mr. Midgett’s voluntary resignation during the 30-day period following the three-month anniversary of the Effective Date of the Plan shall constitute Good Reason (as defined herein).


14



Jonathan C. Curth Amended and Restated Employment Agreement

On July 16, 2019, Grizzly entered into an Amended and Restated Employment Agreement with its General Counsel, Corporate Secretary and Vice President of Land, Jonathan C. Curth (the “Curth Employment Agreement”). The initial term of the Curth Employment Agreement will begin on July 16, 2019, and end on December 31, 2020, which term shall automatically renew for one-year periods unless the Company or Mr. Curth gives notice that it or he, as applicable, does not wish to extend the agreement. The Curth Employment Agreement provides that Mr. Curth is entitled to receive an annual base salary of $380,000 and an annual target bonus equal to 80% of his base salary; provided that during the 2019 calendar year, Mr. Curth will instead participate in a quarterly bonus arrangement that provides him the opportunity to earn a target quarterly bonus of $76,000 (the “Curth STIP”). The Curth STIP permits Mr. Curth to earn a quarterly bonus if performance metrics are achieved during the applicable calendar quarter on either a stand-alone or “catch up” basis. Mr. Curth can earn up to 150% of his quarterly target bonus if the applicable performance metrics are exceeded. The other terms of the agreement are generally consistent with the terms of Mr. Curth’s prior agreement, except that: (i) the Effective Date of the Plan shall constitute a Change of Control (as defined therein), and (ii) Mr. Curth’s voluntary resignation during the 30-day period following the three-month anniversary of the Effective Date of the Plan shall constitute Good Reason (as defined herein).

Emergence from Chapter 11

On the Effective Date, the Debtors substantially consummated the Plan and emerged from the Chapter 11 Cases. As part of the transactions undertaken pursuant to the Plan, Vanguard was converted to a Delaware limited liability company and renamed Grizzly Energy, LLC.

Acceleration of Debt Obligations

As of December 31, 2018, the Company was not in compliance with certain covenants under the VNG Credit Facility (as defined in Note 5). Accordingly, all amounts due under the VNG Credit Facility and VNG Notes (as defined in Note 5) (collectively, the “Debt Instruments”) were classified as current in the accompanying consolidated balance sheets as of that date.

The commencement of the Chapter 11 Cases was an event of default that accelerated the Debtors’ obligations under the following Debt Instruments:

$677.7 million in unpaid principal with respect to the VNG Revolving Loan (defined in Note 5), $123.4 million in unpaid principal with respect to the Term Loan (defined in Note 5), and approximately $11.6 million of interest, fees, and other expenses arising under or in connection with the VNG Credit Facility; and

$80.7 million in unpaid principal, plus interest, fees, and other expenses, arising in connection with the VNG Notes issued pursuant to the Amended and Restated Indenture.

As of June 30, 2019, amounts outstanding under the Debt Instruments are included in liabilities subject to compromise in the condensed consolidated balance sheets. Further, in accordance with accounting guidance in ASC 852, we did not accrue interest on the Debt Instruments during the pendency of the 2019 Chapter 11 Cases.

Liabilities Subject to Compromise

Liabilities subject to compromise represent estimates of known or potential prepetition claims expected to be resolved in connection with the Chapter 11 Cases. Due to the uncertain nature of many of the potential claims, the magnitude of potential claims is not reasonably estimable at this time. Potential claims not currently included with liabilities subject to compromise in our Consolidated Balance Sheets may be material. In addition, differences between amounts we are reporting as liabilities subject to compromise and the amounts attributable to such matters claimed by our creditors or approved by the Bankruptcy Court may be material. We will continue to evaluate our liabilities throughout the Chapter 11 process, and we will make adjustments in future periods as necessary and appropriate. Such adjustments may be material.

Under the Bankruptcy Code, we had the right to assume, assign or reject certain executory contracts and unexpired leases, subject to the approval of the Bankruptcy Court and certain other conditions. Rejections of contracts or leases, generally (1) were treated as a prepetition breach of the contract or lease, (2) subject to certain exceptions, relieved the Debtors of performing their future obligations under such contract or lease and (3) entitled the counterparty thereto to a prepetition general unsecured claim for damages caused by such deemed breach. Assumption of executory contracts or unexpired leases, generally required the Company to cure any existing monetary defaults under such contract or lease and provide adequate assurance of

15



future performance to the counterparty. Accordingly, any description of an executory contract or unexpired lease, including any quantification of our obligations under any such contract or lease, is wholly qualified by the rejection rights we had under the Bankruptcy Code. Further, nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and we expressly preserve all of our rights with respect thereto.
 
The following table summarizes the components of liabilities subject to compromise included in our Consolidated Balance Sheets as of June 30, 2019:
 
June 30, 2019
 
(in thousands)
Accounts payable
$
3,233

Accrued liabilities
308

Undistributed oil and gas revenues
13,782

Derivative liabilities
53,870

Other liabilities
5

Debt and accrued interest
894,407

Liabilities subject to compromise
$
965,605


Interest Expense

We discontinued recording interest on debt classified as liabilities subject to compromise on the Petition Date. Contractual interest on liabilities subject to compromise not reflected in the consolidated statements of operations was approximately $15.7 million, representing contractual interest expense from the Petition Date through June 30, 2019.

Reorganization Items

We have incurred and will continue to incur significant costs associated with the reorganization. The amount of these costs, which are being expensed as incurred, are expected to significantly affect our results of operations. The following table summarizes the components included in reorganization items on our consolidated statements of operations for the three and six months ended June 30, 2019 and 2018:




 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Professional and legal fees (1)
$
24,743

 
$
610

 
$
36,820

 
$
2,317

Deferred financing costs and debt discount (2)

 

 
6,311

 

Total Reorganization items
$
24,743

 
$
610

 
$
43,131

 
$
2,317


(1)
Includes $14.1 million of accrued reorganization costs as of June 30, 2019 representing unpaid professional and legal fees directly related to the Chapter 11 Cases. Total payments made for professional and legal fees related to the Chapter 11 Cases amounted to $22.7 million for the six months ended June 30, 2019.
(2)
Includes a non-cash charge to write off of the unamortized debt issuance costs and debt discounts of $6.3 million related to the VNG Revolving Loan, Term Loan and VNG Notes as these debt instruments were expected to be impacted by the bankruptcy reorganization process.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. However, the Chapter 11 Cases raised substantial doubt about our ability to

16



continue as a going concern. The consolidated financial statements and related notes do not include any adjustments related to the recoverability and classification of recorded asset amounts or adjustments as a result of this substantial doubt.

3.  Revenues
    
Revenue from Contracts with Customers

Sales of oil, natural gas and NGLs are recognized at the point control of the product is transferred to the customer and collectability is reasonably assured. Virtually all of our contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of the oil or natural gas, and prevailing supply and demand conditions. As a result, the price of the oil, natural gas, and NGLs fluctuates to remain competitive with other available oil, natural gas, and NGLs supplies.

Natural gas and NGLs Sales

Under most of our natural gas processing contracts, we deliver natural gas to a midstream processing entity at the wellhead or the inlet of the midstream processing entity’s system. The midstream processing entity gathers and processes the natural gas and remits proceeds to us for the resulting sales of NGLs and residue gas. In these scenarios, the Company evaluates whether we are the principal or the agent in the transaction. For those contracts where we have concluded we are the principal and the ultimate third party is our customer, we recognize revenue on a gross basis, with transportation, gathering, processing and compression fees presented as an expense in our condensed consolidated statement of operations. Alternatively, for those contracts where we have concluded the Company is the agent and the midstream processing entity is our customer, we recognize natural gas and NGLs revenues based on the net amount of the proceeds received from the midstream processing.

In certain natural gas processing agreements, we may elect to take our residue gas and/or NGLs in-kind at the tailgate of the midstream entity’s processing plant and subsequently market the product. Through the marketing process, we deliver product to the ultimate third-party purchaser at a contractually agreed-upon delivery point and receive a specified index price from the purchaser. In this scenario, we recognize revenue when control transfers to the purchaser at the delivery point based on the index price received from the purchaser. The gathering, processing and compression fees attributable to the gas processing contract, as well as any transportation fees incurred to deliver the product to the purchaser, are presented as Transportation, gathering, processing and compression expense in our condensed consolidated statements of operations.

Oil sales

Our oil sales contracts are generally structured in one of the following ways:

We sell oil production at the wellhead and collect an agreed-upon index price, net of pricing differentials. In this scenario, we recognize revenue when control transfers to the purchaser at the wellhead at the net price received.

We deliver oil to the purchaser at a contractually agreed-upon delivery point at which the purchaser takes custody, title, and risk of loss of the product. Under this arrangement, we pay a third party to transport the product and receive a specified index price from the purchaser with no deduction. In this scenario, we recognize revenue when control transfers to the purchaser at the delivery point based on the price received from the purchaser. Oil revenues are recorded net of these third-party transportation fees in our condensed consolidated statements of operations.

Transaction price allocated to remaining performance obligations

A significant number of our product sales are short-term in nature with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

For our product sales that have a contract term greater than one year, we have utilized the practical expedient in ASC 606-10-50-14(a) which states the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.


17



Contract balances

Under our product sales contracts, we invoice customers once our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our product sales contracts do not give rise to contract assets or liabilities under ASC Topic 606.

Prior-period performance obligations

We record revenue in the month production is delivered to the purchaser. However, settlement statements for certain natural gas and NGL sales may not be received for 30 to 90 days after the date production is delivered, and as a result, we are required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. We record the differences between our estimates and the actual amounts received for product sales in the month that payment is received from the purchaser. For the six months ended June 30, 2019, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material.


4.  Divestitures

During March 2019, the Company completed the sale of certain oil and natural gas properties in the Jonah Field in the Green River Basin. Cash proceeds received from the sale were approximately $4.4 million, subject to customary post-closing adjustments, net of costs to sell of $0.2 million. The net cash proceeds from this divestment were used to pay down outstanding debt under the VNG Credit Facility (defined in Note 5, “Debt”).
    
5. Debt

Our financing arrangements consisted of the following as of the date indicated (in thousands): 
Description
 
Interest Rate
 
Maturity Date
 
June 30, 2019
 
December 31, 2018
VNG Revolving Loan
 
Variable (1)
 
February 1, 2021
 
$
677,718

 
$
682,145

Term Loan
 
Variable (2)
 
May 1, 2021
 
123,438

 
123,438

New Money Facility
 
Variable (3)
 
 
 
20,000

 

VNG Notes
 
9.0%
 
February 15, 2024
 
80,722

 
80,722

Lease Financing Obligations
 
4.16%
 
August 10, 2020 (4)
 

 
10,454

Unamortized deferred financing costs
 
 
 

 
(7,124
)
Total debt
 
 
 
 
 
$
901,878

 
$
889,635

Less:
 
 
 
 
 
 
 
 
Liabilities subject to compromise (Note 2)
 
(881,878
)
 

Short-term debt
 
 
 
(20,000
)
 

Long-term debt classified as current (5)

 
 
 

 
(879,181
)
Current portion of Lease Financing Obligation (4)
 

 
(5,008
)
Total long-term debt
 
 
 
 
 
$

 
$
5,446

 
(1)
Variable interest rate of 6.27% at December 31, 2018. In accordance with ASC 852, Reorganizations, we have accrued interest expense only up to the Petition Date.
(2)
Variable interest rate of 9.96% at December 31, 2018. In accordance with ASC 852, Reorganizations, we have accrued interest expense only up to the Petition Date.
(3)
Variable interest rate of 7.92% at June 30, 2019. Borrowings under the New Money Facility were paid off prior to maturity on July 16, 2019 in connection with Grizzly’s emergence from the Chapter 11 Cases.
(4)
Under ASU No. 2016-02, the lease financing obligations are classified and presented under the “Lease Liabilities” line item in the Balance Sheet. See Note 9, “Leases,” for a detailed discussion of our leases.
(5)
Under ASC Topic 470, “Debt,” as a result of our debt covenant violations, we classified our debt under our VNG Revolving Loan, Term Loan and VNG Notes as current at December 31, 2018.

Acceleration of Debt Obligations


18



As of December 31, 2018, the Company was not in compliance with certain covenants under the VNG Credit Facility (defined herein). Accordingly, all amounts due under the Debt Instruments are classified as current in the accompanying consolidated balance sheets as of that date. The commencement of the Chapter 11 Cases is an event of default that accelerated the Debtors’ obligations under these Debt Instruments. As of June 30, 2019, amounts outstanding under the Debt instruments are included in liabilities subject to compromise in the condensed consolidated balance sheets. Any efforts to enforce such obligations under the Debt Instruments are stayed automatically as a result of the filing of the Bankruptcy Petitions and the holders’ rights of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code.

We accelerated the amortization of the remaining debt issue costs of $6.3 million associated with the Debt Instruments, fully amortizing those amounts as of the Petition Date. Since the commencement of the Bankruptcy Petitions, no interest has been paid to the holders of the Debt Instruments. Also, in accordance with ASC 852, Reorganizations, we have accrued interest expense on the Debt Instruments only up to the Petition Date. The total amount accrued of $12.5 million is reflected as liabilities subject to compromise on the consolidated balance sheet as of June 30, 2019. In addition, contractual interest on liabilities subject to compromise not reflected in the consolidated statements of operations was approximately $15.7 million, representing interest expense from the Petition Date through June 30, 2019.
 
Additional information regarding the Chapter 11 cases is included in Note 2. Chapter 11 Cases.

VNG Credit Facility
 
Under the Company’s Fourth Amended and Restated Credit Agreement (the “VNG Credit Facility”), the lenders party thereto agreed to provide VNG with an $850.0 million senior secured reserve-based revolving credit facility (the “VNG Revolving Loan”). The VNG Credit Facility also included an additional $125.0 million senior secured term loan (the “Term Loan”). As of June 30, 2019, the VNG Credit Facility had a borrowing base of $677.9 million. Pursuant to the Plan, on the Effective Date, the Company’s obligations with respect to the VNG Credit Facility were canceled and discharged.

VNG Notes
 
On June 30, 2019, we had $80.7 million outstanding in aggregate principal amount of 9.0% Senior Secured Second Lien Notes due 2024 (the “VNG Notes”). Pursuant to the Plan, on the Effective Date, the Company’s obligations with respect to the VNG Notes were canceled and discharged.

Exit Facility

Grizzly has entered into the RBL Credit Agreement. Pursuant to the RBL Credit Agreement, the lenders party thereto agreed to provide the Revolving Loans and the Term Loan A. The initial borrowing base on the Revolving Loans is $65.0 million. The maturity date of the RBL Credit Agreement is July 16, 2022. The Company has also entered into that certain Term Loan Credit Agreement. Pursuant to the Term Loan Credit Agreement, the lenders party thereto agreed to provide a first-lien, last-out term loan in the aggregate amount of $285.0 million. The maturity date of the Term Loan Credit Agreement is January 16, 2023. See Note 2 for a detailed discussion of the Exit Facility.

6. Price Risk Management Activities

Historically, we entered into derivative contracts primarily with counterparties that were also lenders under our VNG Credit Facility to hedge price risk associated with a portion of our oil, natural gas and NGLs production. Our derivative contracts with these counterparties were governed by master agreements, which generally specify that a default under any of our debt agreements as well as any bankruptcy filing is an event of default which may result in early termination of such derivative contracts. As a result of our defaults under our debt agreements and our Bankruptcy Petitions, we were in default under our derivative contracts. In addition, our derivative contract counterparties were permitted to terminate any outstanding derivative transactions and to calculate the amounts due to or from the Debtors as a result of such terminations, in accordance with the terms of the agreements governing such derivative contracts. In April 2019, our derivative contract counterparties unilaterally terminated all derivative contracts to which we were a party and the net settlement owed to counterparties amounted to $53.9 million and was included in Liabilities Subject to Compromise on the Consolidated Balance Sheet as of June 30, 2019. The Company has not entered into any commodity derivative contracts subsequent to June 30, 2019.


19



Balance Sheet Presentation
 
Our commodity derivatives are presented on a net basis in “derivative assets” and “derivative liabilities” on the condensed consolidated balance sheets as governed by the International Swaps and Derivatives Association Master Agreement with each of the counterparties. The following table summarizes the gross fair values of our derivative instruments, presenting the impact of offsetting the derivative assets and liabilities on our condensed consolidated balance sheets for the period indicated (in thousands):

 
 
December 31, 2018
Offsetting Derivative Assets:
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts Presented in the Condensed Consolidated Balance Sheets
Commodity price derivative contracts  
 
$
22,361

 
$
(9,308
)
 
$
13,053

Total derivative instruments  
 
$
22,361

 
$
(9,308
)
 
$
13,053

 
 
 
 
 
 
 
Offsetting Derivative Liabilities:
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts Presented in the Condensed Consolidated Balance Sheets
Commodity price derivative contracts  
 
$
(15,791
)
 
$
9,308

 
$
(6,483
)
Total derivative instruments  
 
$
(15,791
)
 
$
9,308

 
$
(6,483
)

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. As previously discussed, all of our counterparties were participants in our VNG Credit Facility (see Note 5, “Debt” for further discussion), which is secured by our oil and natural gas properties; therefore, we were not required to post any collateral. As of June 30, 2019, 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 derivatives for the periods indicated are as follows (in thousands):
 
Six Months Ended June 30, 2019
 
Year Ended
December 31, 2018
Derivative asset (liability) at beginning of period, net
$
6,570

 
$
(64,437
)
Net losses on commodity derivative contracts
(70,202
)
 
(9,259
)
Cash settlements paid on matured commodity derivative contracts
9,762

 
80,266

Termination of commodity derivative contracts
53,870

 

Derivative asset at end of period, net
$

 
$
6,570


7.  Fair Value Measurements

Financial assets and financial liabilities measured at fair value on a recurring basis are summarized below (in thousands):

20



 
 
December 31, 2018
 
 
Fair Value Measurements
 
Assets/Liabilities
 
 
Using Level 2
 
at Fair Value
Assets:
 
 
 
 
Commodity price derivative contracts  
 
$
13,053

 
$
13,053

Total derivative instruments  
 
$
13,053

 
$
13,053

Liabilities:
 
 

 
 

Commodity price derivative contracts
 
$
(6,483
)
 
$
(6,483
)
Total derivative instruments  
 
$
(6,483
)
 
$
(6,483
)
  
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, some derivative instruments 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 condensed 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.

The Company periodically reviews oil and natural gas properties for impairment when facts and circumstances indicate that their carrying value may not be recoverable. During the six months ended June 30, 2019, we incurred impairment charges of $323.6 million as oil and natural gas properties with a net cost basis of $546.2 million were written down to their fair value of $222.6 million. The most significant factors causing us to record an impairment of oil and natural gas properties in 2019 was the reduction in our proved reserves and the reduction in the value of our unproved properties resulting from a decline in forward natural gas prices. During the six months ended June 30, 2018, we incurred impairment charges of $22.2 million as oil and natural gas properties with a net cost basis of $89.1 million were written down to their fair value of $66.9 million. The write downs in 2018 primarily relate to downward revisions of unproved property leasehold acreage and working interest in certain of our undeveloped leasehold as well as the reduction in the value of certain of our operating districts due to a decline in forward natural gas prices. In order to determine whether the carrying value of an asset is recoverable, the Company compares net capitalized costs of proved oil and natural gas properties to estimated undiscounted future net cash flows using management’s expectations of future oil and natural gas prices. These future price scenarios reflect the Company’s estimation of future price volatility. If the net capitalized cost exceeds the undiscounted future net cash flows, the Company writes the net cost basis down to the discounted future net cash flows, which is management’s estimate of fair value. Significant inputs used to determine the fair value include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate. The inputs used by management for the fair value measurements utilized in this review include significant unobservable inputs, and therefore, the fair value measurements employed are classified as Level 3 for these types of assets.

8.  Asset Retirement Obligations

The following provides a roll-forward of our asset retirement obligations (in thousands):

21



Asset retirement obligation at January 1, 2018
 
$
157,424

Liabilities added during the current period
 
610

Accretion expense
 
9,295

Liabilities related to assets divested
 
(16,687
)
Retirements
 
(2,499
)
Change in estimate
 
(4,935
)
Asset retirement obligation at December 31, 2018
 
143,208

Liabilities added during the current period
 
65

Accretion expense
 
4,377

Liabilities related to assets divested
 
(294
)
Retirements
 
(1,563
)
Change in estimate
 
(22
)
Asset retirement obligation at June 30, 2019
 
145,771

Less: current obligations
 
(4,752
)
Long-term asset retirement obligation at June 30, 2019
 
$
141,019


Inputs to the valuation of additions to the asset retirement obligation liability and certain changes in the estimated fair value of the liability include: (i) estimated plug and abandonment cost per well based on our experience; (ii) estimated remaining life per well based on average reserve life per field; (iii) our credit-adjusted risk-free interest rate and (iv) the average inflation factor. These inputs require significant judgments and estimates by the Company’s management at the time of the valuation and are sensitive and subject to change. During the year ended December 31, 2018, we used credit-adjusted risk-free interest rate ranging between 6.5% and 7.1%; and the average inflation factor of 1.7%. During the six months ended June 30, 2019, we used credit-adjusted risk-free interest rate ranging from 6.3% to 6.8% and the average inflation factor was 1.6%.

9. Leases

We determine if an arrangement is a lease at inception. Operating leases and finance leases are included in lease assets, other current liabilities and other long-term liabilities on our consolidated balance sheets. Operating leases with lease term of 12 months or less are not capitalized and excluded from operating lease ROU assets. The lease payments are expensed on a straight-line basis over the term of the lease. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. We do not have any variable lease payments.

We lease certain real estate, well equipment, vehicles, and information technology equipment. For certain well equipment, real-estate, and vehicle leases we account for the lease and non-lease components as a single lease component.

Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

The components of lease expense for the three and six months ended June 30, 2019 were as follows (in thousands):

22



 
 
 
 
Three Months Ended
 
Six Months Ended
Lease Expense
 
Classification
 
June 30, 2019
 
June 30, 2019
Assets
 
 
 
 
 
 
Short-term lease cost
 
Selling, general and administrative expenses
   or Lease operating expenses
 
$
371

 
$
666

Operating lease cost
 
Selling, general and administrative expenses
   or Lease operating expenses
 
670

 
1,521

 
 
 
 
 
 
 
Finance lease cost
 
 
 
 
 
 
Amortization of lease assets
 
Depreciation, depletion, amortization and
   accretion
 
1,341

 
2,674

Interest on lease liabilities
 
Interest expense
 
125

 
262

Net lease cost
 
 
 
$
2,507

 
$
5,123


Information regarding our lease terms and discount rates as of June 30, 2019 were as follows:
 
 
June 30, 2019
Weighted-average remaining lease term (years)
 
 
Operating leases
 
5.8

Finance leases
 
1.6

Weighted-average discount rate
 
 
Operating leases
 
18.5
%
Finance leases
 
5.7
%

Supplemental balance sheet information related to leases as of June 30, 2019 was as follows:
Leases
(in thousands)
 
Classification
 
June 30, 2019
Assets
 
 
 
 
Operating lease assets
 
Lease assets
 
$
5,699

 
 
 
 
 
Finance lease assets, at cost
 
Lease assets
 
10,636

Accumulated amortization
 
Lease assets
 
(2,674
)
Finance lease assets, net
 
Lease assets
 
7,962

 
 
 
 
 
Total lease assets
 
 
 
$
13,661

 
 
 
 
 
Liabilities
 
 
 
 
Current
 
 
 
 
Operating
 
Liabilities subject to compromise
 
$
1,116

Finance
 
Liabilities subject to compromise
 
5,183

Long-Term
 
 
 
 
Operating
 
Liabilities subject to compromise
 
5,051

Finance
 
Liabilities subject to compromise
 
2,969

Total lease liabilities
 
 
 
$
14,319


The maturity of our lease liabilities as of June 30, 2019 were as follows (in thousands):

23



 
 
Operating Leases
 
Finance Leases
 
Total
2019 (remaining of year)
 
$
1,221

 
$
2,755

 
$
3,976

2020
 
1,763

 
4,427

 
6,190

2021
 
1,557

 
1,347

 
2,904

2022
 
1,255

 
55

 
1,310

2023
 
1,247

 

 
1,247

Thereafter
 
3,150

 

 
3,150

Total undiscounted lease liability
 
10,193

 
8,584

 
18,777

Imputed interest
 
(4,026
)
 
(432
)
 
(4,458
)
Total discounted liability
 
$
6,167

 
$
8,152

 
$
14,319


Supplemental cash flow and other information related to leases for the six months ended June 30, 2019 was as follows (in thousands):
 
 
Six Months Ended
 
 
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
1,870

Operating cash flows from finance leases
 
$
262

Financing cash flows from finance leases
 
$
2,484


Rent expense for our office leases was $0.6 million and $1.1 million for the three and six months ended June 30, 2018, respectively. The rent expense was for the lease of our office space in Houston, Texas as well as office leases in our other operating areas. Prior to the adoption of ASU No. 2016-02, our policy was to amortize the total payments under the lease agreement on a straight-line basis over the term of the lease.

10. Commitments and Contingencies

Lease Commitments

As of December 31, 2018, the minimum contractual obligations under our lease commitments were approximately $9.2 million in the aggregate. Please see Note 9, “Leases,” for a detailed discussion of our current accounting for leases with the adoption of ASU 2016-02.
 
 
Lease Payments
 
 
(in thousands)
2019
 
$
1,211

2020
 
1,149

2021
 
1,169

2022
 
1,204

2023
 
1,241

Thereafter
 
3,262

Total
 
$
9,236


Transportation Demand Charges

As of June 30, 2019, we have a contract that provides firm transportation capacity on pipeline systems. The remaining term on this contract is approximately one year and requires 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 June 30, 2019. 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.

24



 
 
June 30, 2019
 
 
(in thousands)
July 1, 2019 - December 31, 2019
 
$
410

2020
 
410

Total
 
$
820


Development Commitments

We have commitments to third-party operators under joint operating agreements relating to the drilling and completion of oil and natural gas wells. As of June 30, 2019, total estimated costs to be spent in 2019 is approximately $9.6 million, of which $2.5 million relates to our drilling and completion commitments in the Pinedale field in the Green River Basin, and $6.1 million is for facility redevelopment costs for the Cotton Valley gas plant in Gulf Coast.

Legal Proceedings

We are defendants in certain legal proceedings arising in the normal course of our business. Management does not believe that it is probable that the outcome of these actions will have a material adverse effect on the Company’s condensed consolidated financial position, results of operations or cash flow, although the ultimate outcome and impact of such legal proceedings on the Company cannot be predicted with certainty. Furthermore, our insurance may not be adequate to cover all liabilities that may arise out of claims brought against us. If one or more negative outcomes were to occur relative to these matters, the aggregate impact to our financial position, results of operations or cash flow could be material.

In addition, we are not aware of any legal or governmental proceedings against us, or contemplated to be brought against us, under applicable environmental laws, that could reasonably be expected to have a material adverse effect on the Company’s condensed consolidated financial position, results of operations or cash flow. 

Pursuant to 11 U.S.C. § 362, with certain exceptions, our legal proceedings were automatically stayed as to the Debtors through the Effective Date. Please see Note 2, “Chapter 11 Proceedings,” for information regarding our Chapter 11 Cases.

11.  Stockholders’ Equity (Deficit)

Effect of Filing on Shareholders

Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, prepetition debt liabilities and post-petition liabilities must be satisfied in full before the holders of our common shares and warrants are entitled to receive any distribution or retain any property under a plan of reorganization.
 
Pursuant to the Plan the common shares and warrants of Vanguard were cancelled and Grizzly and its affiliates do not have any obligations thereunder.

Earnings Per Share

Basic earnings per share is computed by dividing net earnings attributable to stockholders by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed by adjusting the average number of shares outstanding for the dilutive effect, if any, of potential common shares. The Company uses the treasury stock method to determine the dilutive effect.

The diluted earnings per share calculation for the six months ended June 30, 2019 and 2018 excluded 301,065 restricted stock units (“RSUs”) and 143,181 RSUs, respectively, and approximately 1.3 million warrants for each of the period, that were antidilutive.

12. Share-Based Compensation

Effect of Emergence from Bankruptcy on Share-Based Compensation


25



Pursuant to the Plan, all unvested equity grants outstanding immediately before the Effective Date were canceled and of no further force or effect as of the Effective Date. In addition, on the Effective Date, the Company’s 2017 Management Incentive Plan (“MIP”) was canceled and extinguished, and participants in the 2017 MIP received no payment or other distribution on account of the 2017 MIP.

2017 MIP Restricted Stock Units

The following table summarizes our time-based RSUs as of June 30, 2019:
 
 
Time-Based Restricted Stock Units
 
Weighted Average
Grant Date Fair Value
Non-vested at December 31, 2018
 
244,496

 
$
16.62

Vested
 
(1,473
)
 
$
11.99

Non-vested at June 30, 2019
 
243,023

 
$
16.65


As of June 30, 2019, the total remaining unearned compensation related to non-vested time-based RSUs was $2.7 million with a weighted-average remaining service period of 1.5 years.

In addition, the total remaining unearned compensation related to TSR performance RSUs as of June 30, 2019 was $0.8 million, with a weighted-average remaining service period of 1.5 years.

Pursuant to the Plan, all RSUs issued by Vanguard were cancelled and Grizzly and its affiliates do not have any obligations related thereto.

Our condensed consolidated statements of operations reflect non-cash compensation related to our MIP of $0.6 million for each of the three months ended June 30, 2019 and 2018, and $1.2 million and $1.1 million for the six months ended June 30, 2019 and 2018, respectively.

13.  Income Taxes

For the six months ended June 30, 2019, we recorded no income tax expense or benefit. The difference between our effective tax rate and the federal statutory income tax rate of 21% is primarily due to the effect of changes in the Company’s valuation allowance. As described in Note 2, “Chapter 11 Proceedings,” in accordance with the Plan, our long-term debt was reorganized and significantly reduced. The Internal Revenue Code (“IRC”) of 1986, as amended, provides that a debtor in a Chapter 11 bankruptcy case may exclude cancellation of debt income (“CODI”) from taxable income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is determined based on the fair market value of the consideration received by the creditors in settlement of outstanding indebtedness. Upon emergence from Chapter 11 bankruptcy proceedings, the CODI may reduce some or all of the amount of prior U.S. tax attributes. The actual reduction in tax attributes will not occur until after the determination of tax for the 2019 taxable year. The utilization of certain remaining U.S. tax attributes are expected to be limited under IRC Section 382 due to the ownership change resulting from the Plan. Based on historical results and ownership change limitations, during the six months ended June 30, 2019, the Company recorded a full valuation allowance against its deferred tax position. A valuation allowance has been recorded as management does not believe that it is more-likely-than-not that its deferred tax assets will be realized.

Upon emergence, the Company has elected to be treated as a C corporation for federal and state income taxes.


26



14. Related Parties

One of the members of the Company’s Board, Kevin Asarnow, is also an Executive Director at RPA Advisors, LLC (“RPA”). RPA served as the financial advisor to the holders of allowed RBL Claims and allowed Secured Swap Claims during the Chapter 11 Cases. The Company incurred professional fees related to services provided by RPA of approximately $2.2 million for the six months ended June 30, 2019. We accrued professional services expense of $0.5 million for services rendered but not yet paid as of June 30, 2019.

Until August 2018, Dean E. Swick, also a member of the Company’s Board and Audit Committee Chairman, was a Managing Director at Alvarez & Marsal North America, LLC (“A&M”) where he served as the Co-Leader of Energy Restructuring. Another Alvarez & Marsal entity (the “A&M entity”) provided services to the Company related to the analysis of executive compensation. The Company incurred professional fees related to services provided by the A&M entity of approximately $0.2 million for the six months ended June 30, 2019. There were no outstanding amounts owed to the A&M entity as of June 30, 2019.


27



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion is intended to assist in understanding our results of operations for the three and six months ended June 30, 2019 and 2018, and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report and with our 2018 Annual Report.

Statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, including those discussed below, which could cause actual results to differ from those expressed. For more information, see “Forward-Looking Statements.”

Overview
 
We are an exploration and production company engaged in the production and development of oil and natural gas properties in the United States. We are currently focused on adding value by efficiently operating our producing assets and, in certain areas, applying modern drilling and completion technologies in order to fully assess and realize potential development upside. Our primary business objective is to maintain reserves, production and cash flow in a capital efficient manner while identifying opportunities to return cash to stakeholders. Through our operating subsidiaries, as of June 30, 2019, we own properties and oil and natural gas reserves primarily located in nine operating basins:

the Green River Basin in Wyoming;

the Piceance Basin in Colorado;

the Permian Basin in West Texas and New Mexico;

the Arkoma Basin in Oklahoma;

the Gulf Coast Basin in Texas, Louisiana and Alabama;

the Big Horn Basin in Wyoming and Montana;

the Anadarko Basin in Oklahoma and North Texas;

the Wind River Basin in Wyoming; and

the Powder River Basin in Wyoming.

As of June 30, 2019, based on internal reserve estimates, our total estimated proved reserves were 955.1 Bcfe, of which approximately 64% were natural gas reserves, 19% were oil reserves and 17% were NGLs reserves. All of our estimated reserves were classified as proved developed. As of December 31, 2018, the Company removed all proved undeveloped reserves from its total proved reserve estimate due to uncertainty regarding the availability of capital that would be required to develop the proved undeveloped reserves. Also, at June 30, 2019, we owned working interests in 10,424 gross (3,674 net) productive wells. Our operated wells accounted for approximately 59% of our total estimated proved reserves at June 30, 2019. Our average net daily production for the six months ended June 30, 2019 and the year ended December 31, 2018 was 296 MMcfe/day and 346 MMcfe/day, respectively.

We develop an annual capital expenditures budget which is reviewed and approved by our Board and revised throughout the year as circumstances warrant. We take into consideration our projected operating cash flow, commodity prices for oil and natural gas and externally available sources of financing, such as bank debt, asset divestitures, issuance of debt and equity securities, and strategic joint ventures, when establishing our capital expenditure budget.
Our revenues and operating cash flow depend on the successful development of our inventory of capital projects with available capital, the volume and timing of our production, as well as commodity prices for oil and natural gas. Such pricing factors are largely beyond our control; however, we have historically employed commodity hedging techniques in an attempt to minimize the volatility of short term commodity price fluctuations on our earnings and operating cash flow. As a result of our defaults under our debt agreements and our Bankruptcy Petitions (as defined below), we were in default under our derivative contracts. In addition, our derivative contract counterparties were permitted to terminate any outstanding derivative transactions and to calculate the amounts due to or from the Debtors (as defined below) as a result of such terminations, in accordance with the terms of the agreements governing such derivative contracts. In April 2019, our derivative contract counterparties

28



unilaterally terminated all derivative contracts to which we were a party. We currently have no commodity derivative contracts in place.

Bankruptcy Proceedings under Chapter 11
 
Commencement of Bankruptcy Cases
 
On March 31, 2019 (the “Petition Date”), the Company and its 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 title 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 were jointly administered under the caption “In re Vanguard Natural Resources, Inc., et al.”

Plan Support Agreement

On May 8, 2019, the Debtors entered into a Plan Support Agreement (the “Plan Support Agreement”) with (a) certain holders (the “RBL Lenders”) constituting over 66 2/3% in amount and over 50.1% in number of the revolving credit facility claims and over 66 2/3% in amount and over 50.1% in number of those certain secured swap claims, in each case under that certain Fourth Amendment and Restated Credit Agreement, dated as of August 1, 2017, by and among Vanguard Natural Gas, LLC, as borrower, the guarantors party thereto, Citibank N.A., as Administrative Agent, and the other lenders party thereto from time to time (as amended, the “VNG Credit Facility” and the claims thereunder, the “RBL Claims” and “Secured Swap Claims,” as applicable); and (b) certain holders (the “Term Loan Lenders” and, collectively with the RBL Lenders, the “Plan Support Parties”), constituting over 66 2/3% in amount and over 50.1% in number of the term loan claims under the VNG Credit Facility (the “Term Loan Claims”). On July 3, 2019, the Plan Support Agreement was amended to reflect the support of over 66 2/3% of Second Lien Notes. A summary of the restructuring transactions agreed to by the Plan Support Parties and effectuated through the Plan is included below. Capitalized terms used but not defined in this Quarterly Report are defined in the Plan Support Agreement and the Plan.

Debtor-in-Possession Financing

In connection with the Chapter 11 Cases, on the Petition Date, the Debtors filed a motion (the “DIP Motion”) seeking, among other things, interim and final approval of the Debtors’ use of cash collateral and debtor-in-possession financing on terms and conditions set forth in a proposed Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”) among GNG, as borrower (the “DIP Borrower”), Citibank, N.A., as administrative agent and issuing bank (the “DIP Agent”), and the financial institutions or other entities from time to time parties thereto, as lenders, and the DIP Agent. The initial lender under the DIP Credit Agreement was Citibank N.A. The DIP Credit Agreement contained the following terms:

a super-priority senior secured revolving credit facility in the aggregate amount of up to $65.0 million (the “New Money Facility”), of which $20.0 million was drawn on April 4, 2019 and an additional $5.0 million was drawn in July 2019;

a “roll up” of $65.0 million of the outstanding principal amount of the revolving loans under the VNG Credit Facility (as defined in Note 5 to the condensed consolidated financial statements) (the “Roll-Up”, and, together with the New Money Facility, collectively, the “DIP Facility”);

proceeds of the New Money Facility were to be used by the DIP Borrower to (i) pay certain costs and expenses related to the Chapter 11 Cases, (ii) make payments provided for in the DIP Motion, including in respect of certain “adequate protection” obligations and (iii) fund working capital needs, capital improvements and other general corporate purposes of the DIP Borrower and its subsidiaries, in all cases subject to the terms of the DIP Credit Agreement and applicable orders of the Bankruptcy Court;

the DIP Credit Agreement was paid off prior to maturity on July 16, 2019 in connection with Grizzly’s emergence from the Chapter 11 Cases;

interest accrued at a rate per year equal to the LIBOR rate plus 5.50%, or the adjusted base rate plus 4.50% per annum; and

in addition to other fees paid to the DIP Agent, the DIP Borrower was required to pay to the DIP Agent for the account of the lenders under the DIP Credit Agreement, an unused commitment fee equal to 1.00% of the daily average of each lender’s unused commitment under the New Money Facility, which was payable in arrears on the last day of each calendar

29



month and on the termination date for the facility for any period for which the unused commitment fee was not previously paid.

Plan of Reorganization

On July 9, 2019, the Bankruptcy Court entered an order confirming the Amended Joint Plan of Reorganization (as Modified) of Vanguard Natural Resources, Inc. and its Debtor Affiliates (the “Plan”) and on July 16, 2019, the Company consummated the Plan. The Plan provides for the reorganization of the Debtors as a going concern and will significantly reduce long-term debt and annual interest payments of the reorganized Debtors.

The following is a summary of the material terms of the Plan. This summary highlights only certain substantive provisions of the Plan and is not intended to be a complete description of the Plan. Capitalized terms used but not defined in this Quarterly Report are defined in the Plan. The Plan provided for:

holders of an allowed claim related to the DIP Credit Agreement to receive their pro rata share of participation in the Revolving Loans/Term Loan A (each as defined below);

holders of allowed RBL Claims and allowed Secured Swap Claims to receive their pro rata share of and interest in: (i) the Term Loan B (as defined below); (ii) the Series A Preferred Units; and (iii) 75% of the Series C Common Units;

holders of allowed claims under the senior secured term loan credit facility pursuant to the VNG Credit Facility to receive a pro rata share and interest in 10% of the Series C Preferred Units, as well as at the option of each holder of an Allowed Term Loan Claim, either: (i) such holder’s pro rata share of the Series A Preferred Units; or (ii) such holder’s pro rata share of the Series B Preferred Units;

holders of allowed claims related to the VNG Notes to receive a pro rata share and interest in: (i) 15% of the Series C Common Units, if the class of Allowed Senior Note Claims voted to accept the Plan; (ii) the Series A Preferred Units; and (iii) cash;

holders of certain other allowed general unsecured claim to receive 2% of the face amount of its unpaid claim as further described in the Plan; and

customary releases, exculpations, and injunctions.

Exit Facility

Grizzly has entered into that certain Fifth Amended and Restated Credit Agreement dated as of July 16, 2019 (the “RBL Credit Agreement”), among GNG, as borrower (the “RBL Borrower”), Grizzly, as parent, Citibank, N.A., as administrative agent, issuing bank and collateral agent, and the lenders party thereto from time to time. Pursuant to the RBL Credit Agreement, the lenders party thereto agreed to provide a new first-lien reserved-based credit facility with first-out revolving credit commitments in the aggregate amount of $65.0 million (the “Revolving Loans”) and a second-out term loan in the aggregate amount of $65.0 million (the “Term Loan A”). The initial borrowing base under the Revolving Loans is $65.0 million. The borrowing base will be redetermined semi-annually on April 1st and October 1st of each year, commencing on April 1, 2020.

The maturity date of the RBL Credit Agreement is July 16, 2022. Until the maturity date, the Term Loan A shall bear interest at a rate per annum equal to 3.0% for an alternate base rate loan or 4.0% for a Eurodollar loan, and the Revolving Loans shall bear interest based on borrowing base utilization percentage at a rate per annum equal to 2.0% to 3.0% for alternative base rate loans or 3.0% to 4.0% for Eurodollar loans. Unused commitments under the RBL Credit Agreement will accrue a commitment fee at a rate of 0.5%, payable quarterly in arrears.

The RBL Borrower will be required to repay the Term Loan A at the end of each quarter in equal quarterly installments at a rate of 1.0% per annum of the original principal amount of the Term Loan A.

Grizzly has also entered into that certain Term Loan Credit Agreement dated as of July 16, 2019 (the “Term Loan Credit Agreement”) among GNG, as borrower (the “Term Loan Borrower”), Grizzly, as parent, Citibank, N.A., as administrative agent and collateral agent, and the lenders party thereto from time to time. Pursuant to the Term Loan Credit Agreement, the lenders party thereto agreed to provide a first-lien, last-out term loan in the aggregate amount of $285.0 million

30



(the “Term Loan B”). The Term Loan Credit Agreement and the RBL Credit Agreement together are referred to herein as the “Exit Facility”.

The maturity date of the Term Loan Credit Agreement is January 16, 2023. Until the maturity date, the Term Loan B shall bear interest at a rate per annum equal to 6.50% for an alternate base rate loan or 7.5% for a Eurodollar loan.

The obligations under the Exit Facility are guaranteed by Grizzly and all of Grizzly’s subsidiaries (the “Guarantors”), subject to limited exceptions, and secured on a first-priority basis by substantially all of Grizzly’s and the Guarantors’ assets, including, without limitation, liens on at least 95% of the total value of Grizzly’s and the Guarantors’ oil and natural gas properties, and pledges of equity interests of all other direct and indirect subsidiaries of Grizzly, subject to certain limited exceptions.

The Exit Facility also contains certain financial covenants. The RBL Credit Agreement requires that as of the last day of any fiscal quarter commencing with the third full fiscal quarter ending after the effective date of the RBL Credit Agreement, that (i) the consolidated first-out leverage ratio not exceed 2.50 to 1.00 and (ii) current ratio not be less than 1.00 to 1.00. The Term Loan Credit Agreement requires that as of January 1 of each year and July 1 of each year, commencing with the first such date after the effective date of the Term Loan Credit Agreement, that the proved developed producing coverage ratio not be less than 1.00 to 1.00.

Amended and Restated Employment Agreements

Richard Scott Sloan Amended and Restated Employment Agreement

On July 16, 2019, Grizzly entered into an Amended and Restated Employment Agreement with its President and Chief Executive Officer, Richard Scott Sloan (the “Sloan Employment Agreement”). The initial term of the Sloan Employment Agreement will begin on July 16, 2019, and end on December 31, 2020, which term shall automatically renew for one-year periods unless Grizzly or Mr. Sloan gives notice that it or he, as applicable, does not wish to extend the agreement. The Sloan Employment Agreement provides that Mr. Sloan is entitled to receive an annual base salary of $720,000 and an annual target bonus equal to 100% of his base salary; provided that during the 2019 calendar year, Mr. Sloan will instead participate in a quarterly bonus arrangement that provides him the opportunity to earn a target quarterly bonus of $180,000 (the “Sloan STIP”). The Sloan STIP permits Mr. Sloan to earn a quarterly bonus if performance metrics are achieved during the applicable calendar quarter on either a stand-alone or “catch up” basis. Mr. Sloan can earn up to 150% of his quarterly target bonus if the applicable performance metrics are exceeded. The other terms of the Sloan Employment Agreement are generally consistent with the terms of Mr. Sloan’s prior agreement, except that: (i) the Effective Date of the Plan shall constitute a Change of Control (as defined therein), and (ii) Mr. Sloan’s voluntary resignation during the 30-day period following the three-month anniversary of the Effective Date of the Plan shall constitute Good Reason (as defined herein).

Ryan Midgett Amended and Restated Employment Agreement

On July 16, 2019, Grizzly entered into an Amended and Restated Employment Agreement with its Chief Financial Officer, Ryan Midgett (the “Midgett Employment Agreement”). The initial term of the Midgett Employment Agreement will begin on July 16, 2019, and end on December 31, 2020, which term shall automatically renew for one-year periods unless Grizzly or Mr. Midgett gives notice that it or he, as applicable, does not wish to extend the agreement. The Midgett Employment Agreement provides that Mr. Midgett is entitled to receive an annual base salary of $325,000 and an annual target bonus equal to 80% of his base salary; provided that during the 2019 calendar year, Mr. Midgett will instead participate in a quarterly bonus arrangement that provides him the opportunity to earn a target quarterly bonus of $65,000 (the “Midgett STIP”). The Midgett STIP permits Mr. Midgett to earn a quarterly bonus if performance metrics are achieved during the applicable calendar quarter on either a stand-alone or “catch up” basis. Mr. Midgett can earn up to 150% of his quarterly target bonus if the applicable performance metrics are exceeded. The other terms of the Midgett Employment Agreement are generally consistent with the terms of Mr. Midgett’s prior agreement, except that: (i) the Effective Date of the Plan shall constitute a Change of Control (as defined therein), and (ii) Mr. Midgett’s voluntary resignation during the 30-day period following the three-month anniversary of the Effective Date of the Plan shall constitute Good Reason (as defined herein).

Jonathan C. Curth Amended and Restated Employment Agreement

On July 16, 2019, Grizzly entered into an Amended and Restated Employment Agreement with its General Counsel, Corporate Secretary and Vice President of Land, Jonathan C. Curth (the “Curth Employment Agreement”). The initial term of the Curth Employment Agreement will begin on July 16, 2019, and end on December 31, 2020, which term shall automatically renew for one-year periods unless the Company or Mr. Curth gives notice that it or he, as applicable, does not wish to extend

31



the agreement. The Curth Employment Agreement provides that Mr. Curth is entitled to receive an annual base salary of $380,000 and an annual target bonus equal to 80% of his base salary; provided that during the 2019 calendar year, Mr. Curth will instead participate in a quarterly bonus arrangement that provides him the opportunity to earn a target quarterly bonus of $76,000 (the “Curth STIP”). The Curth STIP permits Mr. Curth to earn a quarterly bonus if performance metrics are achieved during the applicable calendar quarter on either a stand-alone or “catch up” basis. Mr. Curth can earn up to 150% of his quarterly target bonus if the applicable performance metrics are exceeded. The other terms of the Curth Employment Agreement are generally consistent with the terms of Mr. Curth’s prior agreement, except that: (i) the Effective Date of the Plan shall constitute a Change of Control (as defined therein), and (ii) Mr. Curth’s voluntary resignation during the 30-day period following the three-month anniversary of the Effective Date of the Plan shall constitute Good Reason (as defined herein).

Executory Contracts
 
Subject to certain exceptions, under the Bankruptcy Code, the Company and the Chapter 11 Subsidiaries had the right to assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Rejection of an executory contract or unexpired lease was generally treated as a prepetition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Company and the Chapter 11 Subsidiaries of performing their future obligations under such executory contract or unexpired lease but may have given rise to a prepetition general unsecured claim for damages caused by such deemed breach.
 
Chapter 11 Filing Impact on Creditors and Stockholders
 
Under the absolute priority scheme established by the Bankruptcy Code, unless our creditors agree otherwise, all of our prepetition debt liabilities and post-petition liabilities must be satisfied in full before the holders of our existing common stock can receive any distribution or retain any property under a plan of reorganization. The Plan, as continued, does not provide any economic recovery to holders of our existing common stock. Please read Note 2, “Chapter 11 Proceedings” of the Notes to the Condensed Consolidated Financial Statements for further discussion on plan provisions.
 
Reorganization Expenses
 
The Debtors have incurred and will continue to incur significant costs associated with the reorganization, principally professional fees. The amount of these costs, which are being expensed as incurred, are expected to significantly affect our results of operations.
 
Emergence from Chapter 11

On the Effective Date, the Debtors substantially consummated the Plan and emerged from the Chapter 11 Cases. As part of the transactions undertaken pursuant to the Plan, Vanguard was converted to a Delaware limited liability company and renamed Grizzly Energy, LLC.

Later this year, the Company intends to list on the OTC, our Series C Common Units, our Series A Preferred Units, and our Series B Preferred Units.

Capital Development

Total capital expenditures were approximately $21.5 million during the six months ended June 30, 2019. While we have sufficient access to capital, we are currently undertaking a review of our capital expenditures opportunities in conjunction with other opportunities to improve stakeholder value for the balance of 2019 and beyond. However, we anticipate that we are committed to spend approximately $5.0 million on operated capital projects and approximately $10.2 million on non-operated capital projects over the balance of 2019.

During the six months ended June 30, 2019, we participated in the drilling of 58 gross (10.6 net) non-operated wells and in the completion of 31 gross (4.3 net) non-operated wells.




32



Results of Operations

The following table sets forth selected financial and operating data for the periods indicated (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Oil sales
$
37,150

 
$
46,503

 
$
69,897

 
$
92,614

Natural gas sales
29,132

 
42,623

 
91,446

 
97,890

NGLs sales
13,702

 
22,587

 
27,749

 
44,484

Oil, natural gas and NGLs sales
79,984

 
111,713

 
189,092

 
234,988

Net losses on commodity derivative contracts
(9,063
)
 
(45,332
)
 
(70,202
)
 
(63,917
)
Total revenues and losses on commodity derivative contracts
$
70,921

 
$
66,381

 
$
118,890

 
$
171,071

Costs and expenses:
 
 
 
 
 
 
 
Production:
 
 
 
 
 
 
 
Lease operating expenses
29,035

 
36,763

 
55,282

 
67,758

Transportation, gathering, processing and compression
8,484

 
9,768

 
18,006

 
21,270

Production and other taxes
7,833

 
7,971

 
17,656

 
17,752

Depreciation, depletion, amortization, and accretion
39,044

 
38,711

 
74,758

 
78,750

Impairment of oil and natural gas properties
323,188

 
7,552

 
323,626

 
22,153

Exploration expense
275

 
430

 
476

 
1,746

Selling, general and administrative expenses
8,648

 
10,529

 
20,614

 
22,769

Share-based compensation
590

 
579

 
1,181

 
1,075

Total costs and expenses
$
417,097

 
$
112,303

 
$
511,599

 
$
233,273

Other income (expense):
 
 
 
 
 
 
 
Interest expense (excludes contractual interest expense of
$15.7 million for each of the three and six months
ended June 30, 2019)
$
(1,680
)
 
$
(15,870
)
 
$
(18,655
)
 
$
(30,623
)
Net gain (loss) on divestitures of oil and natural gas properties