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TheStreet Open House

Vanguard Natural Resources Reports Third Quarter 2012 Results

Stocks in this article: VNR

Distributable Cash Flow

We present Distributable Cash Flow in addition to our reported net income (loss) attributable to Vanguard unitholders in accordance with GAAP. Distributable Cash Flow is a non-GAAP financial measure that is defined as net income (loss) attributable to Vanguard unitholders plus:

  • For 2011, net income attributable to the non-controlling interest.

The result is net income which includes the non-controlling interest for 2011. From this we add or subtract the following:

  • Depreciation, depletion, amortization and accretion;
  • Impairment of oil and natural gas properties;
  • Amortization of premiums paid on derivative contracts;
  • Amortization of value on derivative contracts acquired;
  • Unrealized gains and losses on commodity and interest rate derivative contracts;
  • Net gains and losses on acquisition of oil and natural gas properties;
  • Deferred taxes;
  • Unit-based compensation expense;
  • Unrealized fair value of phantom units granted to officers;
  • Material transaction costs incurred on acquisitions and mergers;
  • For 2011, non-controlling interest amount attributable to each of the items above from the beginning of year through the completion of the Encore Merger on December 1, 2011, which revert the calculation back to an amount attributable to the Vanguard unitholders; and
  • For 2011, administrative services fees charged to Encore, excluding the non-controlling interest, which are eliminated in consolidation.

Less:

  • Drilling, capital workover and recompletion expenditures.

Plus:

  • Proceeds from the sale of leasehold interests.

Distributable Cash Flow is used by management as a tool to measure (prior to the establishment of any cash reserves by our board of directors) the cash distributions we could pay our unitholders. Specifically, this financial measure indicates to investors whether or not we are generating cash flow at a level that can sustain or support an increase in our monthly distribution rates. While Distributable Cash Flow is measured on a quarterly basis for reporting purposes, management must consider the timing and size of its planned capital expenditures in determining the sustainability of its monthly distribution. Capital expenditures are typically not spent evenly throughout the year due to a variety of factors including weather, rig availability, and the commodity price environment. As a result, there will be some volatility in Distributable Cash Flow measured on a quarterly basis. Distributable Cash Flow is not intended to be a substitute for net income, operating income, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP.

 
VANGUARD NATURAL RESOURCES, LLC
Reconciliation of Net Income to Adjusted EBITDA (a) and Distributable Cash Flow
(Unaudited)
(in thousands)
 
      Three Months Ended       Nine Months Ended
September 30, September 30,
2012      

2011(b)

 

2012      

2011(b)

 

Net income (loss) attributable to Vanguard unitholders $ (68,727 ) $ 75,884 $ 32,696 $ 77,271
Net income attributable to non-controlling interest     50,061   50,593  
Net income (loss) (68,727 ) 125,945 32,696 127,864
Plus:
Interest expense, including realized losses on interest rate derivative contracts 12,857 8,173 29,158 23,306
Depreciation, depletion, amortization and accretion 31,245 21,419 73,897 62,797
Impairment of oil and natural gas properties 18,029 18,029
Amortization of premiums paid on derivative contracts 3,441 4,663 10,516 9,501
Amortization of value on derivative contracts acquired 14,213 36 14,096 154
Unrealized (gains) losses on commodity and interest rate derivative contracts 53,795 (107,700 ) (3,736 ) (66,984 )
Net (gain) loss on acquisition of oil and natural gas properties (487 ) (13,796 ) 383
Deferred taxes (16 ) 220 (153 ) 415
Unit-based compensation expense 818 675 2,394 1,821
Fair value of phantom units granted to officers 622 77 864 310
Material transaction costs incurred on acquisitions and mergers     1,182   1,745  
Adjusted EBITDA before non-controlling interest 66,277 54,203 163,965 161,312
Non-controlling interest attributable to adjustments above (17,957 ) (52,457 )
Administrative services fees eliminated in consolidation     782   2,250  
Adjusted EBITDA attributable to Vanguard unitholders   66,277   37,028     163,965   111,105  
Plus:
Interest expense, net (12,857 ) (8,173 ) (29,158 ) (23,306 )
Drilling, capital workover and recompletion expenditures (16,925 ) (15,000 ) (40,285 ) (23,729 )
Proceeds from the sale of leasehold interests 145 5,522
Non-controlling interest     5,174       8,929  
Distributable Cash Flow $ 36,640 $ 19,029   $ 100,044 $ 72,999  
$ 0.67

$

0.63 $ 1.89 $ 2.42
Distributable Cash Flow per unit
(a)       Our Adjusted EBITDA should not be considered as an alternative to net income, operating income, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Our Adjusted EBITDA excludes some, but not all, items that affect net income and operating income and these measures may vary among other companies. Therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
 
(b) Results of operations from oil and gas properties acquired in the ENP Purchase during 2011 through the date of the completion of the ENP Merger on December 1, 2011 were subject to a 53.4% non-controlling interest.

Adjusted Net Income

We present Adjusted Net Income in addition to our reported net income (loss) attributable to Vanguard unitholders in accordance with GAAP. Adjusted Net Income is a non-GAAP financial measure that is defined as net income (loss) attributable to Vanguard unitholders plus:

  • For 2011, net income attributable to the non-controlling interest.

The result is net income which includes the non-controlling interest for 2011. From this we add or subtract the following:

  • Unrealized gains and losses on commodity derivative contracts;
  • Unrealized gains and losses on interest rate derivative contracts;
  • Amortization of value on derivative contracts acquired;
  • Unrealized fair value of phantom units granted to officers;
  • Impairment of oil and natural gas properties;
  • Net gains and losses on acquisition of oil and natural gas properties;
  • Material transaction costs incurred on acquisitions and mergers;
  • For 2011, non-controlling interest amount attributable to each of the items above from the beginning of year through the completion of the Encore Merger on December 1, 2011 which revert the calculation back to an amount attributable to the Vanguard unitholders; and
  • For 2011, administrative services fees charged to Encore, excluding the non-controlling interest, which are eliminated in consolidation.

This information is provided because management believes exclusion of the impact of our unrealized derivatives not accounted for as cash flow hedges and non-cash oil and natural gas property impairment charge will help investors compare results between periods and identify operating trends that could otherwise be masked by these items and to highlight the impact that commodity price volatility has on our results. Adjusted Net Income is not intended to represent cash flows for the period, nor is it presented as a substitute for net income, operating income, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP.

 
VANGUARD NATURAL RESOURCES, LLC
Reconciliation of Net Income to Adjusted Net Income
(in thousands, except per unit data)
(Unaudited)
 
      Three Months Ended       Nine Months Ended
September 30, September 30,
2012       2011 2012       2011
 
Net income (loss) attributable to Vanguard unitholders $ (68,727 ) $ 75,884 $ 32,696 $ 77,271
Net income attributable to non-controlling interest     50,061     50,593  
Net income (loss) (68,727 ) 125,945 32,696 127,864
Plus (Less):
Unrealized (gain) loss on commodity derivative contracts 51,332 (109,639 ) (9,243 ) (68,625 )
Unrealized loss on interest rate derivative contracts 2,463 1,939 5,507 1,641
Amortization of value on derivative contracts acquired 14,213 36 14,096 154
Unrealized fair value of phantom units granted to officers 622 77 864 310
Impairment of oil and natural gas properties 18,029 18,029
Net (gain) loss on acquisition of oil and natural gas properties (487 ) (13,796 ) 383
Material transaction costs incurred on acquisitions and mergers     1,182     1,745  
Total adjustments   86,659   (106,892 )   15,457   (64,392 )
Adjusted net income before non-controlling interest   17,932   19,053   48,153   63,472  
Non-controlling interest attributable to items above (5,698 ) (19,250 )
Administrative services fees eliminated in consolidation     782     2,250  
Adjusted Net Income attributable to Vanguard unitholders $ 17,932 $ 14,137 $ 48,153 $ 46,472  
 
 
Net income (loss) per unit attributable to Vanguard unitholders $ (1.29 ) $ 2.51 $ 0.62 $ 2.56
Net income attributable to non-controlling interest     1.66     1.68  
Net income (loss) per unit: (1.29 ) 4.17 0.62 4.24
Plus (Less):
Unrealized (gain) loss on commodity derivative contracts 0.96 (3.62 ) (0.17 ) (2.27 )
Unrealized (gain) loss on interest rate derivative contracts 0.05 0.06 0.10 0.05
Amortization of value on derivative contracts acquired 0.27 0.27 0.01
Unrealized fair value of phantom units granted to officers 0.01 0.02 0.01
Impairment of oil and natural gas properties 0.34 0.34
Net (gain) loss on acquisition of oil and natural gas properties (0.02 ) (0.26 ) 0.01
Material transaction costs incurred on acquisitions and mergers 0.04 0.06
Non-controlling interest attributable to items above (0.19 ) (0.64 )
Administrative services fees eliminated in consolidation     0.03     0.07  
Adjusted Net Income per unit attributable to Vanguard unitholders $ 0.34 $ 0.47 $ 0.92 $ 1.54  




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