6. Long-Term Debt

Long-term debt consisted of the following at September 30, 2017 and December 31, 2016:


(in thousands of dollars)	September 30, 2017		December 31, 2016
Revolver	$	151,000	$	178,000
2022 Notes		409,148		409,148
2023 Notes		150,000		150,000
Total principal amount		710,148		737,148
Less: unamortized discount		(5,481)		(6,240)
Less: debt issuance costs, net		(5,927)		(6,899)
Total carrying amount	$	698,740	$	724,009

Senior Unsecured Notes

On April 1, 2014, JEH and Jones Energy Finance Corp., JEH’s wholly owned subsidiary formed for the sole purpose of co-issuing certain of JEH’s debt (collectively, the “Issuers”), sold $500.0 million in aggregate principal amount of the Issuers’ 6.75% senior notes due 2022 (the “2022 Notes”). The Company used the net proceeds from the issuance of the 2022 Notes to repay certain indebtedness and for working capital and general corporate purposes. The 2022 Notes bear interest at a rate of 6.75% per year, payable semi-annually on April 1 and October 1 of each year beginning October 1, 2014. The 2022 Notes were registered in March 2015.

On February 23, 2015, the Issuers sold $250.0 million in aggregate principal amount of 9.25% senior notes due 2023 (the “2023 Notes”) in a private placement to affiliates of GSO Capital Partners LP and Magnetar Capital LLC. The 2023 Notes were issued at a discounted price equal to 94.59% of the principal amount. The Company used the $236.5 million net proceeds from the issuance of the 2023 Notes to repay outstanding borrowings under the Revolver (as defined below) and for working capital and general corporate purposes. The 2023 Notes bear interest at a rate of 9.25% per year, payable semi-annually on March 15 and September 15 of each year beginning September 15, 2015. The 2023 Notes were registered in February 2016.

During 2016, the Company purchased an aggregate principal amount of $190.9 million of its senior unsecured notes through several open-market and privately negotiated purchases. The Company purchased $90.9 million principal amount of its 2022 Notes for $38.1 million, and $100.0 million principal amount of its 2023 Notes for $46.5 million, in each case excluding accrued interest and including any associated fees. The Company used cash on hand and borrowings from its Revolver to fund the note purchases. In conjunction with the extinguishment of this debt, JEH recognized cancellation of debt income of $99.5 million for the twelve months ended December 31, 2016, on a pre-tax basis. This income is recorded in Gain on debt extinguishment on the Company’s Consolidated Statement of Operations. Of the Company’s total repurchases, $20.3 million principal amount of its 2022 Notes were not cancelled and are available for future reissuance, subject to applicable securities laws.

The 2022 Notes and 2023 Notes are guaranteed on a senior unsecured basis by the Company and by all of its significant subsidiaries. The 2022 Notes and 2023 Notes will be senior in right of payment to any future subordinated indebtedness of the Issuers.

The Company may redeem the 2022 Notes at any time on or after April 1, 2017 and the 2023 Notes at any time on or after March 15, 2018 at a declining redemption price set forth in the respective indentures, plus accrued and unpaid interest.

The indentures governing the 2022 Notes and 2023 Notes are substantially identical and contain covenants that, among other things, limit the ability of the Company to incur additional indebtedness or issue certain preferred stock, pay dividends on capital stock, transfer or sell assets, make investments, create certain liens, enter into agreements that restrict dividends or other payments from the Company’s restricted subsidiaries to the Company, consolidate, merge or transfer all of the Company’s assets, engage in transactions with affiliates or create unrestricted subsidiaries. If at any time when the 2022 Notes or 2023 Notes are rated investment grade and no default or event of default (as defined in the indenture) has occurred and is continuing, many of the foregoing covenants pertaining to the 2022 Notes or 2023 Notes, as applicable, will be suspended. If the ratings on the 2022 Notes or 2023 Notes, as applicable, were to decline subsequently to below investment grade, the suspended covenants would be reinstated.

As of September 30, 2017, the Company was in compliance with the indentures governing the 2022 Notes and 2023 Notes.

Other Long-Term Debt

The Company has a Senior Secured Revolving Credit Facility (the “Revolver”) with a syndicate of banks. On May 15, 2017 at its bi-annual redetermination, the borrowing base under the Revolver was reaffirmed at $425.0 million. Upon closing of the Arkoma Divestiture on August 1, 2017, the Company’s borrowing base was reduced to $375.0 million, where it remained as of September 30, 2017. The Company’s oil and gas properties are pledged as collateral to secure its obligations under the Revolver.

The terms of the Revolver require the Company to make periodic payments of interest on the loans outstanding thereunder, with all outstanding principal and interest under the Revolver due on the maturity date. The Revolver is subject to a borrowing base, which limits the amount of borrowings which may be drawn thereunder. The borrowing base will be re-determined by the lenders at least semi-annually on or about April 1 and October 1 of each year, with such re-determination based primarily on reserve reports using lender commodity price expectations at such time. Any reduction in the borrowing base will reduce our liquidity, and, if the reduction results in the outstanding amount under our Revolver exceeding the borrowing base, we will be required to repay the deficiency within a short period of time.

Interest on the Revolver is calculated, at the Company’s option, at either (a) the London Interbank Offered (“LIBO”) rate for the applicable interest period plus a margin of 1.50% to 2.50% based on the level of borrowing base utilization at such time or (b) the greatest of the federal funds rate plus 0.50%, the one month adjusted LIBO rate plus 1.00%, or the prime rate announced by Wells Fargo Bank, N.A. in effect on such day, in each case plus a margin of 0.50% to 1.50% based on the level of borrowing base utilization at such time. For the three and nine months ended September 30, 2017, the average interest rates under the Revolver were 3.12% and 2.84%, respectively, on average outstanding balances of $172.9 million and $187.5 million, respectively. For the three and nine months ended September 30, 2016, the average interest rates under the Revolver were 2.29% and 2.38%, respectively, on average outstanding balances of $184.5 million and $170.9 million, respectively.

Total interest and commitment fees under the Revolver were $1.6 million and $4.7 million for the three and nine months ended September 30, 2017, respectively, and $1.3 million and $4.0 million for the three and nine months ended September 30, 2016, respectively.

Jones Energy, Inc. and its consolidated subsidiaries are subject to certain covenants under the Revolver, including the requirement to maintain the following financial ratios:

a total leverage ratio, consisting of consolidated debt to EBITDAX, of not greater than 4.00 to 1.00 as of the last day of any fiscal quarter; and

a current ratio, consisting of consolidated current assets, including the unused amounts of the total commitments, to consolidated current liabilities, of not less than 1.00 to 1.00 as of the last day of any fiscal quarter.

As of September 30, 2017, our total leverage ratio was 3.90 to 1.00 and our current ratio was 2.49 to 1.00, as calculated based on the requirements in our covenants. We were in compliance with all terms of our Revolver at September 30, 2017.

If an event of default exists under the Revolver, the lenders would be able to accelerate the obligations outstanding under the Revolver and exercise other rights and remedies. Our Revolver contains customary events of default, including the occurrence of a change of control, as defined in the Revolver.

Going Concern Assessment and Management’s Plans

Pursuant to the FASB ASU 2014-15, the Company has assessed its ability to continue as a going concern for a period of one year from the date of the issuance of these financial statements. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year from the financial statement issuance date. As discussed above in “Other Long-Term Debt”, the Company has an obligation to maintain certain financial ratios in accordance with our covenants under the Revolver. Specifically, we are required to maintain a total leverage ratio of not greater than 4.00 to 1.00 and a current ratio of not less than 1.00 to 1.00, each as of the last day of any fiscal quarter. As of September 30, 2017, we were in compliance with all terms of our Revolver, with a total leverage ratio of 3.90 to 1.00 and a current ratio of 2.49 to 1.00. However, based on current projections, we expect to breach the total leverage ratio under our Revolver beginning with the next measurement date of December 31, 2017.

Management has initiated negotiations with our lenders under the Revolver to, among other things, modify or suspend the financial covenant requirements discussed above, thereby suspending our need to comply with the total leverage ratio for a specified period of time. We expect negotiations with our lenders will be finalized in advance of our next financial ratio measurement date of December 31, 2017. However, there can be no assurances that the requisite lenders under our Revolver approve any such amendment.

Any failure to comply with the conditions and covenants in our Revolver that is not waived by our lenders or otherwise cured could lead to a termination of our Revolver, acceleration of all amounts due under our Revolver, or trigger cross default provisions under other financing arrangements. These factors raise substantial doubt about the Company’s ability to continue as a going concern.