Credit Facilities and Notes Payable

12 Months Ended

Dec. 31, 2019

Debt Disclosure [Abstract]

CREDIT FACILITIES AND NOTES PAYABLE

Note 7 - Credit Facilities and Notes Payable

The table below summarizes the outstanding credit facilities and notes payable:

(in thousands)	December 31, 2019			December 31, 2018
2018 Credit Facility – revolver	$	69,150		$	69,150
2018 Credit Facility – term note		5,833			15,000
Old Ironsides Notes		25,675			25,065
Other debt		45			57
Total debt		100,703			109,272
Less: unamortized debt discount		(45	)		(134	)
Total credit facilities and notes payable		100,658			109,138
Current portion of credit facilities and notes payable		(5,788	)		(11,910	)
Non-current debt, net of current portion and unamortized debt discount	$	94,870		$	97,228

Carbon Appalachia

2018 Credit Facility

In connection with and concurrently with the closing of the OIE Membership Acquisition, the Company and its subsidiaries amended and restated our prior credit facilities and entered into a $500.0 million senior secured asset-based revolving credit facility maturing December 31, 2022 and a $15.0 million term loan maturing in 2020 (the "2018 Credit Facility"). The 2018 Credit Facility includes a sublimit of $1.5 million for letters of credit. The borrowers under the 2018 Credit Facility are Carbon Appalachia Enterprises, LLC ("CAE") and various other subsidiaries of the Company (including Nytis USA, together with CAE, the "Borrowers"). Under the 2018 Credit Facility, Carbon Energy Corporation is neither a borrower nor a guarantor. The initial borrowing base under the 2018 Credit Facility was $75.0 million and remained so as of December 31, 2019.

The 2018 Credit Facility is guaranteed by each existing and future direct or indirect subsidiary of the Borrowers and certain other subsidiaries of the Company (subject to various exceptions) and the obligations under the 2018 Credit Facility are secured by essentially all tangible, intangible and real property (subject to certain exclusions).

Interest accrues on borrowings under the 2018 Credit Facility at a rate per annum equal to either (i) the base rate plus a margin equal to 0.25% - 0.75% depending on the utilization percentage or (ii) the Adjusted London Interbank Offered Rate ("LIBOR") plus a margin equal to 2.75% - 3.75% depending on the utilization percentage, at the Borrowers' option. The Borrowers are obligated to pay certain fees and expenses in connection with the 2018 Credit Facility, including a commitment fee for any unused amounts of 0.50% and an origination fee of 0.50%. Loans under the 2018 Credit Facility may be prepaid without premium or penalty.

The 2018 Credit Facility also provides for a $15.0 million term loan which bears interest at a rate of 6.25% and is payable in 18 equal monthly installments beginning February 1, 2019 with the last payment due on July 1, 2020.

The 2018 Credit Facility contains certain affirmative and negative covenants that, among other things, limit the Company's ability to (i) incur additional debt; (ii) incur additional liens; (iii) sell, transfer or dispose of assets; (iv) merge or consolidate, wind-up, dissolve or liquidate; (v) make dividends and distribution on, or repurchase of, equity; (vi) make certain investments; (vii) enter into certain transactions with their affiliates; (viii) enter in sale-leaseback transactions; (ix) make optional or voluntary payment of debt other than obligations under the 2018 Credit Facility; (x) change the nature of their business; (xi) change their fiscal year or make changes to the accounting treatment or reporting practices; (xii) amend their constituent documents; and (xiii) enter into certain hedging transactions.

The affirmative and negative covenants are subject to various exceptions, including certain basket amounts and acceptable transaction levels. In addition, the 2018 Credit Facility requires the Borrowers' compliance, on a consolidated basis, with a maximum Net Debt (all debt of the Borrowing Parties minus all unencumbered cash and cash equivalents of the Borrowers not to exceed $3.0 million) / EBITDAX (as defined) ratio of 3.50 to 1.00 and a current ratio, as defined, minimum of 1.00 to 1.00, tested quarterly, commencing with the quarter ending March 31, 2019.

In August 2019, we amended the 2018 Credit Facility, effective October 1, 2019, to restrict the aging of our accounts payable to 90 days or less, maintain minimum liquidity of $3.0 million and require the sale of certain non-core assets by December 31, 2019. 

In February 2020, we amended the 2018 Credit Facility to eliminate the minimum liquidity requirement and reduce the borrowing base to $73.0 million, with subsequent borrowing base reductions totaling $6.0 million scheduled through May 1, 2020. Also, in connection with this amendment, the lenders agreed to waive our noncompliance with the hedging requirement for the fiscal quarter ended September 30, 2019 and waive the asset sale covenant included in the amendment from August 2019.

As of December 31, 2019, there was approximately $69.2 million in outstanding borrowings and $5.0 million of additional borrowing capacity under the 2018 Credit Facility. After considering the waivers granted in the February 2020 amendment, we were in compliance with our December 31, 2019 financial covenants.

As a result of borrowing base reductions in 2020 discussed above and currently depressed oil and natural gas prices, certain of our covenants under the 2018 Credit Facility may be stressed and may require negotiations and adjustments with our lenders. While we have historically been successful in renegotiating covenant requirements with our lenders, there can be no assurance that we will be able to do so successfully in the future. The Company believes given these circumstances it is appropriate to keep the borrowings associated with the 2018 Credit Facility as non-current.

The terms of the 2018 Credit Facility require us to enter into derivative contracts at fixed pricing for a certain percentage of our production. We are party to International Swaps and Derivatives Association Master Agreements ("ISDA Master Agreements") that establish standard terms for the derivative contracts and inter-creditor agreements with the lenders whereby any credit exposure related to the derivative contracts entered into by us is secured by the collateral and backed by the guarantees supporting the 2018 Credit Facility.

Fees paid in connection with the 2018 Credit Facility totaled approximately $824,000, of which $134,000 was associated with the term loan. The current portion of unamortized fees associated with the credit facility is included in prepaid expenses, deposits and other current assets and the non-current portion is included in other non-current assets. The unamortized portion associated with the term loan was $45,000 as of December 31, 2019 and is directly offset against the loan in current liabilities. As of December 31, 2019, we had unamortized deferred issuance costs of approximately $519,000 associated with the 2018 Credit Facility. During the years ended December 31, 2019 and 2018, we amortized approximately $260,000 and $786,000, respectively, as interest expense associated with the 2018 Credit Facility.

Old Ironsides Notes

On December 31, 2018, as part of the OIE Membership Acquisition, we delivered unsecured, promissory notes in the aggregate original principal amount of approximately $25.2 million to Old Ironsides (the "Old Ironsides Notes"). The Old Ironsides Notes bear interest at 10.0% per annum and have a term of five years, the first three of which require interest-only payments at the end of each calendar quarter beginning with the quarter ending March 31, 2019. At the end of the three-year interest-only period, the then current outstanding principal balance and interest is to be paid in 24 equal monthly payments. The Old Ironsides Notes also require mandatory prepayments upon the occurrence of certain subsequent liquidity events. A mandatory, one-time principal reduction payment in the aggregate amount of $2.0 million was made to Old Ironsides on February 1, 2019. Subsequent to the closing of the OIE Membership Acquisition, Old Ironsides ceased to be a related party.

The interest payable under the Old Ironsides Notes can be paid-in-kind at the election of the Company. This provision allows the Company to increase the principal balance associated with the Old Ironsides Notes. This election creates a second tranche of principal, which bears interest at 12.0% per annum. For the year ended December 31, 2019, the Company elected payment-in-kind interest of approximately $2.5 million.

Carbon California

The table below summarizes the outstanding notes payable – related party:

(in thousands)	December 31, 2019			December 31, 2018
Senior Revolving Notes, related party, due February 15, 2022	$	33,000		$	38,500
Subordinated Notes, related party, due February 15, 2024		13,000			13,000
Total principal		46,000			51,500
Less: Deferred notes costs		(175	)		(235	)
Less: unamortized debt discount		(1,084	)		(1,346	)
Total notes payable – related party	$	44,741		$	49,919

Senior Revolving Notes, Related Party

On February 15, 2017, Carbon California entered into a Note Purchase Agreement (the "Note Purchase Agreement") for the issuance and sale of Senior Secured Revolving Notes to Prudential with an initial revolving borrowing capacity of $25.0 million which mature on February 15, 2022 (the "Senior Revolving Notes"). Carbon Energy Corporation is not a guarantor of the Senior Revolving Notes. The closing of the Note Purchase Agreement on February 15, 2017 resulted in the sale and issuance by Carbon California of Senior Revolving Notes in the principal amount of $10.0 million. The maximum principal amount available under the Senior Revolving Notes is based upon the borrowing base attributable to Carbon California's proved oil and gas reserves which is to be determined at least semi-annually. As of December 31, 2019, the borrowing base was $45.0 million, of which $33.0 million was outstanding.  

Carbon California may elect to incur interest at either (i) 5.50% plus LIBOR or (ii) 4.50% plus the Prime Rate (which is defined as the interest rate published daily by JPMorgan Chase Bank, N.A.). As of December 31, 2019, the effective borrowing rate for the Senior Revolving Notes was 7.10%. In addition, the Senior Revolving Notes include a commitment fee for any unused amounts at 0.50% as well as an annual administrative fee of $75,000, payable on February 15 each year.

The Senior Revolving Notes are secured by all the assets of Carbon California. The Senior Revolving Notes require Carbon California, as of January 1 and July 1 of each year, to hedge its anticipated proved developed production for year one, two and three at a rate of 75%, 65% and 50%, respectively. Carbon California may make principal payments in minimum installments of $500,000. Distributions to equity members are generally restricted.

Carbon California incurred fees directly associated with the issuance of the Senior Revolving Notes and amortizes these fees over the life of the Senior Revolving Notes. The current portion of these fees are included in prepaid expenses, deposits and other current assets and the non-current portion is included in other non-current assets for a combined value of approximately $599,000 as of December 31, 2019. For the years ended December 31, 2019 and 2018, Carbon California amortized fees of $273,000 and $217,000, respectively.

Subordinated Notes, Related Party

On February 15, 2017, Carbon California entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with Prudential Capital Energy Partners, L.P. for the issuance and sale of Subordinated Notes due February 15, 2024, bearing interest of 12.0% per annum (the "Subordinated Notes"). Carbon Energy Corporation is not a guarantor of the Subordinated Notes. The closing of the Securities Purchase Agreement on February 15, 2017 resulted in the sale and issuance by Carbon California of Subordinated Notes in the original principal amount of $10.0 million, all of which remains outstanding as of December 31, 2019.

Prudential received an additional 1,425 Class A Units, representing 5.0% of the total sharing percentage, for the issuance of the Subordinated Notes. Carbon California valued this unit issuance based on the relative fair value by valuing the units at $1,000 per unit and aggregating the amount with the outstanding Subordinated Notes of $10.0 million. The Company then allocated the non-cash value of the units of approximately $1.3 million, which was recorded as a discount to the Subordinated Notes. As of December 31, 2019, Carbon California has an outstanding discount of $735,000, which is presented net of the Subordinated Notes within Notes payable-related party on the consolidated balance sheets. During the years ended December 31, 2019 and 2018, Carbon California amortized fees of $178,000 and $58,000, respectively, associated with the Subordinated Notes.

The Subordinated Notes require Carbon California, as of January 1 and July 1 of each year, to hedge its anticipated production for year one, two and three at a rate of 67.5%, 58.5% and 45%, respectively.

Prepayment of the Subordinated Notes is allowed at 100%, subject to a 3.0% fee of outstanding principal. Prepayment is not subject to a prepayment fee after February 17, 2020. Distributions to equity members are generally restricted. 

2018 Subordinated Notes, Related Party

On May 1, 2018, Carbon California entered into an agreement with Prudential for the issuance and sale of $3.0 million in subordinated notes due February 15, 2024, bearing interest of 12.0% per annum (the "2018 Subordinated Notes"), of which $3.0 million remains outstanding as of December 31, 2019.

Prudential received 585 Class A Units, representing an approximate 2.0% additional sharing percentage, for the issuance of the 2018 Subordinated Notes. Carbon California valued this unit issuance based on the relative fair value by valuing the units at $1,000 per unit and aggregating the amount with the outstanding 2018 Subordinated Notes of $3.0 million. The Company then allocated the non-cash value of the units of approximately $490,000, which was recorded as a discount to the 2018 Subordinated Notes. As of December 31, 2019, Carbon California had an outstanding discount of $349,000 associated with these notes, which is presented net of the 2018 Subordinated Notes within Notes payable - related party on the consolidated balance sheet. During the year ended December 31, 2019 and 2018, Carbon California amortized fees of $84,000 and $57,000, respectively, associated with the 2018 Subordinated Notes.

The 2018 Subordinated Notes require Carbon California, as of January 1 and July 1 of each year, to hedge its anticipated production for year one, two and three at a rate of 67.5%, 58.5% and 45%, respectively.

Prepayment of the 2018 Subordinated Notes is allowed at 100%, subject to a 3.0% fee of outstanding principal. Prepayment is not subject to a prepayment fee after February 17, 2020. Distributions to equity members are generally restricted.

Restrictions and Covenants

The Senior Revolving Notes, Subordinated Notes and 2018 Subordinated Notes contain affirmative and negative covenants that, among other things, limit Carbon California's ability to (i) incur additional debt; (ii) incur additional liens; (iii) sell, transfer or dispose of assets; (iv) merge or consolidate, wind-up, dissolve or liquidate; (v) make dividends and distributions on, or repurchases of, equity; (vi) make certain investments; (vii) enter into certain transactions with our affiliates; (viii) enter into sales-leaseback transactions; (ix) make optional or voluntary payments of debt; (x) change the nature of our business; (xi) change our fiscal year to make changes to the accounting treatment or reporting practices; (xii) amend constituent documents; and (xiii) enter into certain hedging transactions.

In December 2019, Carbon California amended the Senior Revolving Notes, the Subordinated Notes and the 2018 Subordinated Notes to amend the total leverage ratio and senior leverage ratio, effective September 30, 2019. The Senior Revolving Notes were also amended to provide a mechanism to determine a successor reference rate to LIBOR.

The affirmative and negative covenants are subject to various exceptions, including basket amounts and acceptable transaction levels. In addition, (i) the Senior Revolving Notes require at December 31, 2019 Carbon California's compliance with (A) a maximum Debt/EBITDA ratio of 4.5 to 1.0 (B) a maximum Senior Revolving Notes/EBITDA ratio of 3.5 to 1.0 and (C) a minimum interest coverage ratio of 2.0 to 1 and (ii) the Subordinated Notes require at December 31, 2019 Carbon California's compliance with (A) a maximum Debt/EBITDA ratio of 5.18 to 1.0, (B) a maximum Senior Revolving Notes/EBITDA ratio of 4.03 to 1.0, (C) a minimum interest coverage ratio of 1.6 to 1.0, (D) an asset coverage test whereby indebtedness may not exceed the product of 0.65 times Adjusted PV-10 of proved developed reserves set forth in the most recent reserve report, (E) maintenance of a minimum borrowing base of $30.0 million under the Senior Revolving Notes and (F) a minimum current ratio of 0.85 to 1.00.

As of December 31, 2019, Carbon California was in compliance with its financial covenants.