Annual report pursuant to Section 13 and 15(d)

Bankruptcy Proceedings, Emergence and Fresh Start Accounting Bankruptcy Proceedings, Emergence and Fresh Start Accounting

v3.10.0.1
Bankruptcy Proceedings, Emergence and Fresh Start Accounting Bankruptcy Proceedings, Emergence and Fresh Start Accounting
12 Months Ended
Dec. 31, 2018
Reorganizations [Abstract]  
Bankruptcy Proceedings, Emergence and Fresh Start Accounting

4.
Bankruptcy Proceedings, Emergence and Fresh Start Accounting 
Bankruptcy Proceedings and Emergence
On May 12, 2016 (the “Petition Date”), we and eight of our subsidiaries (the “Chapter 11 Subsidiaries”) filed voluntary petitions (In re Penn Virginia Corporation, et al., Case No. 16-32395) seeking relief under Chapter 11 of Title 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Virginia (the “Bankruptcy Court”).
On August 11, 2016 (the “Confirmation Date”), the Bankruptcy Court confirmed our Second Amended Joint Chapter 11 Plan of Reorganization of Penn Virginia Corporation and its Debtor Affiliates (the “Plan”), and we subsequently emerged from bankruptcy on September 12, 2016 (the “Emergence Date”).
On November 20, 2018, the Bankruptcy Court issued a final decree to close the case.
Debtors-In-Possession. From the Petition Date through the Emergence Date, we and the Chapter 11 Subsidiaries operated our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court granted all “first day” motions filed by us and the Chapter 11 Subsidiaries, which were designed primarily to minimize the impact of the bankruptcy proceedings on our normal day-to-day operations, our customers, regulatory agencies, including taxing authorities, and employees. As a result, we were able to conduct normal business activities and pay all associated obligations for the post-petition period and we were also authorized to pay and have paid (subject to limitations applicable to payments of certain pre-petition obligations) pre-petition employee wages and benefits, pre-petition amounts owed to certain lienholders, amounts due to taxing authorities for production and other related taxes and funds belonging to third parties, including royalty and working interest holders.
Pre-Petition Agreements. Immediately prior to the Petition Date, the holders (the “Ad Hoc Committee”) of approximately 86 percent of the $1,075 million principal amount of our 7.25% Senior Notes due 2019 (the “2019 Senior Notes”) and 8.50% Senior Notes due 2020 (the “2020 Senior Notes” and, together with the 2019 Senior Notes, the “Senior Notes”) agreed to a restructuring support agreement (the “RSA”) that set forth the general framework of the Plan and the timeline for the bankruptcy proceedings. In addition, we entered into a backstop commitment agreement (the “Backstop Commitment Agreement”) with the parties thereto (collectively, the “Backstop Parties”), pursuant to which the Backstop Parties committed to provide a $50 million commitment to backstop a rights offering (the “Rights Offering”) that was conducted in connection with the Plan.
Plan of Reorganization. Pursuant to the terms of the Plan, which was supported by us, the holders (the “RBL Lenders”) of 100 percent of the claims attributable to our pre-petition credit agreement (as amended, the “RBL”), the Ad Hoc Committee and the Official Committee of Unsecured Claimholders (the “UCC”), the following transactions were completed subsequent to the Confirmation Date and prior to or at the Emergence Date:
the approximately $1,122 million of indebtedness, including accrued interest, attributable to our Senior Notes and certain other unsecured claims were exchanged for 6,069,074 shares representing 41 percent of the Successor’s common stock (“Successor Common Stock”);
a total of $50 million of proceeds were received on the Emergence Date from the Rights Offering resulting in the issuance of 7,633,588 shares representing 51 percent of Successor Common Stock to holders of claims arising under the Senior Notes, certain holders of general unsecured claims and to the Backstop Parties;
the Backstop Parties received a backstop fee comprised of 472,902 shares representing three percent of Successor Common Stock;
an additional 816,454 shares representing five percent of Successor Common Stock were authorized for disputed general unsecured claims and non-accredited investor holders of the Senior Notes and subsequently, 749,600 shares of Successor Common Stock were reserved for issuance under a new management incentive plan;
on the Emergence Date, we entered into a shareholders agreement and a registration rights agreement and amended our articles of incorporation and bylaws for the authorization of the Successor Common Stock and to provide customary registration rights thereunder, among other corporate governance actions;
holders of claims arising under the RBL were paid in full from cash on hand, $75.4 million from borrowings under a new credit agreement (the “Credit Facility”) (see Note 10 below) and proceeds from the Rights Offering;
the debtor-in-possession credit facility (the “DIP Facility”), under which there were no outstanding borrowings at any time from the Petition Date through the Emergence Date, was canceled and less than $0.1 million in fees were paid in full in cash;
certain other priority claims were paid in full in cash, reinstated or otherwise treated in a manner acceptable to the creditor claim-holders;
a cash reserve of $2.7 million was established for certain other secured, priority or convenience claims pending resolution as of the Emergence Date;
an escrow account for professional service fees attributable to our advisers and those of the UCC was funded by us with cash of $14.6 million, and we paid $7.2 million for professional fees and expenses on behalf of the RBL Lenders, the Ad Hoc Committee and the indenture trustee for the Senior Notes;
on the Emergence Date, our previous interim Chief Executive Officer, Edward B. Cloues, resigned and each member of our board of directors resigned and was replaced by new board members;
our Predecessor preferred stock and common stock was canceled, extinguished and discharged; and
all of our Predecessor share-based compensation plans and supplemental employee retirement plan (the “SERP”) entitlements were canceled.
Fresh Start Accounting
We adopted Fresh Start Accounting on the Emergence Date in connection with our emergence from bankruptcy. As referenced below, our reorganization value of $334.0 million, immediately prior to emergence was substantially less than our post-petition liabilities and allowed claims. Furthermore and in connection with our reorganization, we experienced a change in control as the outstanding common and preferred shares of the Predecessor were canceled and substantially all of the Successor Common Stock was issued to the Predecessor’s creditors, primarily former holders of our Senior Notes. Accordingly, the holders of the Predecessor’s common and preferred shares effectively received no shares of the Successor. The adoption of Fresh Start Accounting results in a new reporting entity, the Successor, for financial reporting purposes. The presentation is analogous to that of a new business entity such that the Successor is presented with no beginning retained earnings or deficit on the Emergence Date.
Reorganization Value
Reorganization value represents the fair value of the Successor’s total assets prior to the consideration of liabilities and is intended to approximate the amount a willing buyer would pay for the assets immediately after a restructuring. The reorganization value, which was derived from the Successor’s enterprise value, was allocated to our individual assets based on their estimated fair values.
Enterprise value represents the estimated fair value of an entity’s long term debt and shareholders’ equity. The Successor’s enterprise value, as approved by the Bankruptcy Court in support of the Plan, was estimated to be within a range of $218 million to $382 million with a mid-point value of $300 million. Based on the estimates and assumptions utilized in our Fresh Start Accounting process, we estimated the Successor’s enterprise value to be approximately $266.2 million after the consideration of cash and cash equivalents on hand at the Emergence Date.
The following table reconciles the enterprise value, net of cash and cash equivalents, to the estimated fair value of our Successor Common Stock as of the Emergence Date:
Enterprise value
 
$
234,831

Plus: Cash and cash equivalents
 
31,414

Less: Fair value of debt
 
(75,350
)
Fair value of Successor Common Stock
 
$
190,895

Shares outstanding as of September 12, 2016
 
14,992,018

Per share value
 
$
12.73


The following table reconciles the enterprise value to the reorganization value of our Successor assets as of the Emergence Date:
Enterprise value
 
$
234,831

Plus: Cash and cash equivalents
 
31,414

Plus: Current liabilities
 
54,171

Plus: Noncurrent liabilities excluding long-term debt
 
13,558

Reorganization value
 
$
333,974


Valuation Process
Our valuation analysis was prepared with the assistance of an independent third-party consultant utilizing reserve information prepared by our independent reserve engineers, internal development plans and schedules, other internal financial information and projections and the application of standard valuation techniques including risked net asset value analysis and comparable public company metrics. Because many of the inputs utilized in the valuation process are not observable, we have classified the Fresh Start fair value measurements as Level 3 inputs as that term is defined in GAAP.
Our principal assets include the Successor’s oil and gas properties. We determined the fair value of our oil and gas properties based on the discounted cash flows expected to be generated from these assets. Our analyses were based on market conditions and reserves in place as confirmed by our independent petroleum engineers. The proved reserves were segregated into various geographic regions, including sub-regions within the Eagle Ford where a substantial portion of our assets are located, for which separate risk factors were determined based on geological characteristics. Due to the limited drilling plans that we had in place, proved undeveloped locations were risked accordingly. Future cash flows were estimated by using New York Mercantile Exchange (“NYMEX”) forward prices for West Texas Intermediate (“WTI”) crude oil and Henry Hub natural gas with inflation adjustments applied to periods beyond a five-year horizon. These prices were adjusted for differentials realized by us for location and product quality. Gathering and transportation costs were estimated based on agreements that we had in place and development and operating costs were based on our most recent experience and adjusted for inflation in future years. The risk-adjusted after-tax cash flows were discounted at a rate of 13.5%. This rate was determined from a weighted-average cost of capital computation which utilized a blended expected cost of debt and expected returns on equity for similar industry participants. Plugging and abandonment costs were also identified and measured in this process in order to determine the fair value of the Successor’s AROs attributable to our proved developed reserves on the Emergence Date. Based on this valuation process, we determined fair values of $121.9 million for our proved reserves and $2.7 million for the related AROs.
With respect to the valuation of our undeveloped acreage, we segregated our current lease holdings in the Eagle Ford into prospect regions in which we had significant developed acreage and those in which we had not yet initiated any significant drilling activity. For those prospects within previously developed regions, we applied a multiple based on recent transactions involving acreage deemed comparable to our acreage for each targeted formation. Based on this valuation process, we determined a fair value of $92.5 million for our undeveloped acreage within previously developed regions of the Eagle Ford. For those lease holdings in other areas of the Eagle Ford, we disregarded those prospects for which lease expirations were to occur during 2016 as well as those for which future drilling was considered uneconomical at then current commodity prices. A reduced multiple was then applied to this adjusted undeveloped acreage consistent with recent transactions for acreage deemed comparable to our acreage resulting in a fair value of $8.3 million. We attributed no value to our limited undeveloped lease holdings in all areas other than the Eagle Ford.
Our remaining equipment and other fixed assets were valued at $26.7 million primarily using a cost approach that incorporated depreciation and obsolescence to the extent applicable on an asset-by-asset basis. The most significant of these assets is our water facility in South Texas which is integral to our regional operations. Accordingly, this asset, for which we determined a fair value of $23.4 million, is included in our full cost pool for purposes of determining our DD&A attributable to our oil and gas production. Certain assets, particularly personal property including office equipment and vehicles, among others, were valued based on market data for comparable assets to the extent such information was available.
The remaining reorganization value is attributable to certain natural gas imbalance receivables, cash and cash equivalents, working capital assets including accounts receivable, prepaid items, current derivative assets and debt issuance costs. Our natural gas imbalance receivables, which are fully attributable to our Mid-Continent operations in the Granite Wash, were valued using NYMEX spot prices for Henry Hub natural gas adjusted for basis differentials for transportation. Our accounts receivable, including amounts receivable from our joint venture partners, were subjected to analysis on an individual basis and reserved to the extent we believe was appropriate. Collectively, these remaining assets, including our current derivative assets which are marked-to-market on a monthly basis, were stated at their fair values on the Emergence Date. The reorganization value also included $3.0 million of issuance costs attributable to the Credit Facility under which we initially borrowed $75.4 million. This amount was capitalized in accordance with GAAP as it represents costs attributable to the access to credit over the term of the Credit Facility.
Our liabilities on the Emergence Date included the aforementioned borrowings under the Credit Facility, working capital liabilities including accounts payable and accrued liabilities, a reserve for certain litigation matters, pension and health care obligations attributable to certain retirees, AROs, and derivative liabilities. As the Credit Facility is current and is a variable-rate financial instrument, it was stated at its fair value. Our working capital liabilities and litigation reserve are ordinary course obligations and their carrying amounts approximated their fair values. We revalued our retiree obligations based on data from our independent actuaries and they have been stated at their fair values. The AROs were valued in connection with the valuation process attributable to our oil and gas reserves as discussed above. Finally, our derivative liabilities were also stated at their fair value as they are marked-to-market on a monthly basis.
Successor Balance Sheet
The following table reflects the reorganization and application of Fresh Start Accounting adjustments on our Consolidated Balance Sheet as of September 12, 2016:
 
 
 
 
 
Reorganization
 
Fresh Start
 
 
 
 
 
Predecessor
 
Adjustments
 
Adjustments
 
Successor
Assets
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
48,718

 
$
(17,304
)
(1
)
$

 
$
31,414

 
Accounts receivable, net of allowance for doubtful accounts
35,606

 
4,292

(2
)

 
39,898

 
Derivative assets
397

 

 

 
397

 
Other current assets
3,966

 
(832
)
(3
)

 
3,134

 
 
Total current assets
88,687

 
(13,844
)
 

 
74,843

Property and equipment, net
309,261

 

 
(55,751
)
(12
)
253,510

Other assets
6,902

 
(1,281
)
(4
)

 
5,621

 
 
Total assets
$
404,850

 
$
(15,125
)
 
$
(55,751
)
 
$
333,974

 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity (Deficit)
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
77,151

 
$
(21,166
)
(5
)
$
(3,455
)
(13
)
$
52,530

 
Derivative liabilities
1,641

 

 

 
1,641

 
Current maturities of long-term debt
113,653

 
(113,653
)
(6
)

 

 
 
Total current liabilities
192,445

 
(134,819
)
 
(3,455
)
 
54,171

 
 
 
 
 
 
 
 
 
 
Other liabilities
84,953

 
100

(5
)
(80,615
)
(14
)
4,438

Derivative liabilities
9,120

 

 

 
9,120

Long-term debt

 
75,350

(7
)

 
75,350

Liabilities subject to compromise
1,154,163

 
(1,154,163
)
(8
)

 

 
 
 
 
 
 
 
 
 
 
Shareholders’ equity (deficit)
 
 
 
 
 
 
 
 
Preferred stock (Predecessor)
1,880

 
(1,880
)
(9
)

 

 
Common stock (Predecessor)
697

 
(697
)
(9
)

 

 
Paid-in capital (Predecessor)
1,213,797

 
(1,213,797
)
(9
)

 

 
Deferred compensation obligation (Predecessor)
3,440

 
(3,440
)
(9
)

 

 
Accumulated other comprehensive income (Predecessor)
383

 
(383
)
(9
)

 

 
Treasury stock (Predecessor)
(3,574
)
 
3,574

(9
)

 

 
Common stock (Successor)

 
150

(10
)

 
150

 
Paid-in capital (Successor)

 
190,745

(10
)

 
190,745

 
Accumulated deficit
(2,252,454
)
 
2,224,135

(11
)
28,319

(15
)

 
 
Total shareholders’ equity (deficit)
(1,035,831
)
 
1,198,407

 
28,319

 
190,895

 
 
Total liabilities and shareholders’ equity (deficit)
$
404,850

 
$
(15,125
)
 
$
(55,751
)
 
$
333,974



Reorganization Adjustments
1.
Represents the net cash payments that occurred on the Emergence Date:
Sources:
 
 
 
Proceeds from the Credit Facility
$
75,350

 
 
Proceeds from the Rights Offering, net of issuance costs
49,943

 
 
Total sources
 
 
$
125,293

Uses:
 
 
 
Repayment of RBL
$
113,653

 
 
Accrued interest payable on RBL
1,374

 
 
DIP Facility fees
12

 
 
Debt issue costs of the Credit Facility
3,011

 
 
Funding of professional fee escrow account
14,575

 
 
RBL lender professional fees and expenses
455

 
 
Ad Hoc Committee and indenture trustee professional fees and expenses
6,782

 
 
Payment of certain allowed claims and settlements
2,735

 
 
Total uses
 
 
142,597

 
 
 
$
(17,304
)

2.
Represents the reclassification of SERP assets to a current receivable from other noncurrent assets upon the cancellation of the underlying plan and the reversion of the assets to the Successor.
3.
Represents the write-off of certain prepaid directors and officers tail insurance.
4.
Represents the capitalization of debt issuance costs attributable to the Credit Facility, net of the reclassification of SERP assets as discussed in item (2) above.
5.
Represents the payment of professional fees on behalf of the RBL Lenders, the Ad Hoc Committee and the UCC, indenture trustee fees and expenses, interest payable on the RBL as well as certain allowed claims and settlements net of the establishment of reserves and the reinstatement of certain other obligations.
6.
Represents the repayment of the RBL in cash in full.
7.
Represents the initial borrowings under the Credit Facility.
8.
Liabilities subject to compromise were settled as follows in accordance with the Plan:
Liabilities subject to compromise prior to the Emergence Date:
 
 
 
Senior Notes
$
1,075,000

 
 
Interest on Senior Notes
47,213

 
 
Firm transportation obligation
11,077

 
 
Compensation – related
9,733

 
 
Deferred compensation
4,676

 
 
Trade accounts payable
1,487

 
 
Litigation claims
1,092

 
 
Other accrued liabilities
3,885

 
 
 
 
 
$
1,154,163

Amounts settled in cash, reinstated or otherwise reserved at emergence
 
 
(3,915
)
Gain on settlement of liabilities subject to compromise
 
 
$
1,150,248


9.
Represents the cancellation of our Predecessor preferred and common stock and related components of our Predecessor shareholders’ deficit.
10.
Represents the issuance of 14,992,018 shares of Successor Common Stock with a fair value of $12.73 per share.


11.
Represents the cumulative impact of the reorganization adjustments described above:
Gain on settlement of liabilities subject to compromise
 
 
$
1,150,248

Fair value of equity allocated to:
 
 
 
Unsecured creditors on the Emergence Date
174,477

 
 
Unsecured creditors pending resolution on the Emergence Date
10,396

 
 
Backstop Parties in the form of a Commitment Premium
6,022

 
 
 
 
 
190,895

Cancellation of Predecessor shareholders’ deficit
 
 
882,992

Net impact to Predecessor accumulated deficit
 
 
$
2,224,135


Fresh Start Adjustments
12.
Represents the Fresh Start Accounting valuation adjustments applied to our oil and gas properties and other equipment.
13.
Represents the accelerated recognition of the current portion of previously deferred gains on sales of assets attributable to the accounting presentation required by GAAP under the Predecessor.
14.
Represents the recognition of Fresh Start Accounting adjustments to: (i) our AROs attributable to the revalued oil and gas properties and (ii) our retiree obligations based on actuarial measurements, as well as the accelerated recognition of the noncurrent portion of previously deferred gains on sales of assets attributable to the accounting presentation required by GAAP under the Predecessor.
15.
Represents the cumulative impact of the Fresh Start Accounting adjustments discussed above.
Reorganization Items. As described above in Note 2, our Consolidated Statements of Operations for the period ended September 12, 2016 include “Reorganization items, net,” which reflects gains recognized on the settlement of liabilities subject to compromise and costs and other expenses associated with the bankruptcy proceedings, principally professional fees, and the costs associated with the DIP Facility. These post-petition costs for professional fees, as well as administrative fees charged by the U.S. Trustee, have been reported in “Reorganization items, net” in our Consolidated Statement of Operations as described above. Similar costs that were incurred during the pre-petition periods have been reported in “General and administrative” expenses.
While we emerged from bankruptcy in September 2016, certain administrative and claims resolution activities continued until November 2018 when the Bankruptcy Court issued a final decree which effectively closed the case. Upon the closure, we reversed the $0.2 million remaining unused portion of an accrual that was established on the Emergence Date for legal and professional fees and administrative costs. In addition, we reversed the $2.7 million unallocated portion of a reserve that was established on the Emergence Date for the potential settlement of certain claims in cash. Finally, we also reversed $0.4 million of accounts payable that were held open since the Emergence Date as secured claims, but were ultimately expunged. As these items of income are directly attributable to the final administration of our bankruptcy case and not a part of our continuing operations, they are classified on our Consolidated Statement of Operations as components of “Reorganization items, net.”
The following table summarizes the components included in “Reorganization items, net” in our Consolidated Statements of Operations for the period presented:
 
Year Ended
 
January 1 Through
 
December 31,
 
September 12,
 
2018
 
2016
Gains on the settlement of liabilities subject to compromise
$

 
$
1,150,248

Fresh start accounting adjustments

 
28,319

Legal and professional fees and expenses
200

 
(29,976
)
Settlements attributable to contract amendments

 
(2,550
)
DIP Facility costs and commitment fees

 
(170
)
Write-off of prepaid directors and officers insurance

 
(832
)
Other reorganization items
3,122

 
(46
)
 
$
3,322

 
$
1,144,993