⁽¹⁾ Continued low oil and natural gas prices during 2015 have had a significant adverse impact on our business, and, as a result of our financial condition, substantial doubt exists that we will be able to continue as a going concern. As a result, we have reclassified all of our total outstanding debt as short-term.

Ultra Resources, Inc. –

Bank indebtedness. The Company (through its subsidiary, Ultra Resources, Inc.) is a party to a senior revolving credit facility with a syndicate of banks led by JP Morgan Chase Bank, N.A. (the “Credit Agreement”). The Credit Agreement provides an initial loan commitment of $1.0 billion, which may be increased up to $1.25 billion at the request of the borrower and with the consent of lenders who are willing to increase their loan commitments, provides for the issuance of letters of credit of up to $250.0 million in aggregate, and matures in October 2016. With the majority (over 50%) lender consent, the term of the consenting lenders’ commitments may be extended for up to two successive one-year periods at the Borrower’s request. At December 31, 2015, the Company had $630.0 million in outstanding borrowings and $370.0 million of available borrowing capacity under the Credit Agreement.

Loans under the Credit Agreement are unsecured and bear interest, at the Borrower’s option, based on (A) a rate per annum equal to the prime rate or the weighted average fed funds rate on overnight transactions during the preceding business day plus a margin based on a grid of Ultra Resources, Inc.’s consolidated leverage ratio (150 basis points as of December 31, 2015) or (B) a base Eurodollar rate, substantially equal to the LIBOR rate, plus a margin based on a grid of the Borrower’s consolidated leverage ratio (250 basis points per annum as of December 31, 2015). The Company also pays commitment fees on the unused commitment under the facility based on a grid of its consolidated leverage ratio. For the year ended December 31, 2015, the Company incurred $1.7 million in commitment fees associated with its credit facility.

The Credit Agreement is guaranteed by Ultra Petroleum Corp. and UP Energy Corporation. Ultra Petroleum Corp. and UP Energy Corporation are holding companies that own no operating assets and have no significant operations independent of its subsidiary, Ultra Resources, Inc.

The Credit Agreement contains typical and customary representations, warranties, covenants and events of default. The Credit Agreement includes restrictive covenants requiring the Borrower to maintain a consolidated leverage ratio of no greater than three and one half times to one and, as long as Ultra Resources, Inc.’s debt rating is below investment grade, the maintenance of an annual ratio of the net present value of Ultra Resources, Inc.’s oil and gas properties to total funded debt of no less than one and one half times to one. At December 31, 2015, the Company was in compliance with all of its debt covenants under the Credit Agreement except as described below in Covenants and Events of Default.

Senior Notes. Ultra Resources also has outstanding $1.46 billion in principal amount of Senior Notes. Ultra Resources’ Senior Notes rank pari passu with the Company’s Credit Agreement. Payment of the Senior Notes is guaranteed by Ultra Petroleum Corp. and UP Energy Corporation. Ultra Petroleum Corp. and UP Energy Corporation are holding companies that own no operating assets and have no significant operations independent of its subsidiary, Ultra Resources, Inc.

The Senior Notes are pre-payable in whole or in part at any time following the payment of a make-whole premium and are subject to representations, warranties, covenants and events of default similar to those in the Credit Facility. At December 31, 2015, the Company was in compliance with all of its debt covenants under the Senior Notes.

Ultra Petroleum Corp. –

Senior Notes due 2024: On September 18, 2014, the Company issued $850.0 million of 6.125% Senior Notes due 2024 (“2024 Notes”). The 2024 Notes are general, unsecured senior obligations of the Company and mature on October 1, 2024. The 2024 Notes rank equally in right of payment to all existing and future senior indebtedness of the Company and effectively rank junior to all future secured indebtedness of the Company (to the extent of the value of the collateral securing such indebtedness). The 2024 Notes are not guaranteed by Ultra Resources, Inc. The 2024 Notes are not guaranteed by the Company’s subsidiaries and so are structurally subordinated to the indebtedness and other obligations of the Company’s subsidiaries. On and after October 1, 2019, the Company may redeem all or, from time to time, a part of the 2024 Notes at the following prices expressed as a percentage of principal amount of the 2024 Notes: (2019 – 103.063%; 2020 – 102.042%; 2021 – 101.021%; and 2022 and thereafter – 100.000%). The 2024 Notes are subject to covenants that restrict the Company’s ability to incur indebtedness, make distributions and other restricted payments, grant liens, use the proceeds of asset sales, make investments and engage in affiliate transactions. In addition, the 2024 Notes contain events of default customary for a senior note financing. At December 31, 2015, the Company was in compliance with all of its debt covenants under the 2024 Notes.

Senior Notes due 2018: On December 12, 2013, the Company issued $450.0 million of 5.75% Senior Notes due 2018 (“2018 Notes”). The 2018 Notes are general, unsecured senior obligations of the Company and mature on December 15, 2018. The 2018 Notes rank equally in right of payment to all existing and future senior indebtedness of the Company and effectively rank junior to all future secured indebtedness of the Company (to the extent of the value of the collateral securing such indebtedness). The 2018 Notes are not guaranteed by Ultra Resources, Inc. The 2018 Notes are not guaranteed by the Company’s subsidiaries and so are structurally subordinated to the indebtedness and other obligations of the Company’s subsidiaries. On and after December 15, 2015, the Company may redeem all or, from time to time, a part of the 2018 Notes at the following prices expressed as a percentage of principal amount of the 2018 Notes: (2015 – 102.875%; 2016 – 101.438%; and 2017 and thereafter – 100.000%). The 2018 Notes are subject to covenants that restrict the Company’s ability to incur indebtedness, make distributions and other restricted payments, grant liens, use the proceeds of asset sales, make investments and engage in affiliate transactions. In addition, the 2018 Notes contain events of default customary for a senior note financing. At December 31, 2015, the Company was in compliance with all of its debt covenants under the 2018 Notes.

Maturities

At December 31, 2015, we have the following obligations outstanding under the Credit Agreement, the 2018 Notes, the 2024 Notes, and the Senior Notes (maturity dates exclude the effect of the default provisions described in Note 1):

$630.0 million due October 2016 under the Credit Agreement;
$450.0 million due December 2018 with respect to the 2018 Notes;
$850.0 million due September 2024 with respect to the 2024 Notes; and
$1.46 billion due between March 2016 and October 2025 (see Note 8 for maturity details).

In addition, we anticipate the following significant near-term interest and maturity payments: (i) an approximately $40 million interest payment on March 1, 2016 under the Senior Notes; (ii) a $62 million maturity payment on March 1, 2016 under one series of the Senior Notes; and (iii) an approximately $26 million interest payment on April 1, 2016 under the 2024 Notes.

We are currently attempting to (i) amend, replace, refinance or restructure our Credit Agreement and Master Note Purchase Agreement and the indentures related to our 2018 Notes and our 2024 Notes; and/or (ii) secure additional capital through possible asset sales, public or private issuances of debt, equity or equity-linked securities, debt for equity swaps or any combination of these. We may also seek additional sources of liquidity in an effort to secure sufficient cash to meet our operating and financing needs. However, we cannot provide any assurances that we will be successful in accomplishing any of these plans.

Our ability to continue as a going concern is dependent on many factors, including, among other things, our ability to comply with the covenants in our existing debt agreements and amend or replace our debt agreements as they mature. We cannot provide any assurances that we will be able to comply with the covenants or to make satisfactory alternative arrangements in the event we cannot do so. Please refer to Note 1 for further discussion.

Covenants and Events of Default

Our Credit Agreement contains covenants, including: a consolidated leverage covenant pursuant to which Ultra Resources must maintain a maximum ratio of its total funded consolidated debt to its trailing four fiscal quarters’ EBITDAX of 3.5 to 1.0; a PV-9 covenant pursuant to which Ultra Resources is required to maintain a minimum ratio of the discounted net present value of its oil and gas properties to its total funded consolidated debt of 1.5 to 1.0; and a covenant requiring us to deliver annual, audited, consolidated financial statements of the Company without a “going concern” or like qualification or exception. The Master Note Purchase Agreement governing our Senior Notes contains a consolidated leverage ratio covenant similar to the consolidated leverage ratio covenant in the Credit Agreement. The indentures governing our 2018 Notes and our 2024 Notes contain an interest charge coverage ratio pursuant to which we are required to maintain a minimum ratio of our trailing four fiscal quarters’ consolidated EBITDA to total interest expense of no less than 2.25 to 1.00 as a precondition to our incurring additional indebtedness.

Based on our EBITDAX for the trailing four fiscal quarters ended December 31, 2015, we were in compliance with the consolidated leverage ratio covenant in the Credit Agreement and the Master Note Purchase Agreement at December 31, 2015. However, based on our estimates of forward commodity prices and our most recent production forecasts, we expect to breach the consolidated leverage covenant for the trailing four fiscal quarters ended March 31, 2016. A violation of this covenant can become an event of default under our debt agreements and result in the acceleration of all of our indebtedness.

Based on the net present value of Ultra Resources’ oil and gas properties and Ultra Resources’ total funded consolidated debt at December 31, 2015, we expect to breach the PV-9 ratio in the Credit Agreement when we report whether or not we are in compliance with the covenant on April 1, 2016. A violation of this covenant can become an event of default under our debt agreements and result in the acceleration of all of our indebtedness.

The audit report prepared by our auditors with respect to the financial statements in this Form 10-K includes an explanatory paragraph expressing uncertainty as to our ability to continue as a “going concern.” As a result, we expect to be in default under the Credit Agreement on March 15, 2016 when we deliver our financial statements to the Credit Agreement lenders. A violation of this covenant can become an event of default under our debt agreements and result in the acceleration of all of our indebtedness.

Based on our EBITDA for the trailing four fiscal quarters ended December 31, 2015, we were in compliance with the interest charge coverage ratio in the indentures governing our 2018 Notes and our 2024 Notes at December 31, 2015. However, if commodity prices stay at or decline from recent levels or if we fail to develop new properties and operate our existing properties profitably or if our interest expense increases due to changes in the agreements governing our indebtedness or due to breaches of the covenants in the agreements governing our indebtedness, we may not be able to continue to comply with this covenant during the next twelve months. If we breach this covenant, our ability to incur additional indebtedness will be limited, or we may not be able to incur additional indebtedness at all.

A failure by us to comply with our financial covenants or to comply with the other restrictions in our financing agreements may result in reduced borrowing capacity or an event of a default, causing our debt obligations under such financing agreements (and any other indebtedness or contractual obligations to the extent linked to it by reason of cross-default or cross-acceleration provisions) to potentially become immediately due and payable. If we are unable to cure any such default, or obtain a forbearance, a waiver or replacement financing, and those lenders, or other parties entitled to do so, accelerate the payment of such indebtedness or obligations, we may consider or pursue various forms of negotiated restructurings of our debt obligations and/or asset sales under court supervision pursuant to a voluntary bankruptcy filing under Chapter 11 of the U.S. Bankruptcy Code, which would have a material adverse effect on our business, financial condition, results of operations and cash flows. Under certain circumstances, it is also possible that our creditors may file an involuntary petition for bankruptcy against us.

Other long-term obligations: These costs primarily relate to the long-term portion of production taxes payable and our asset retirement obligations.