UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
[X]     Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2013
[  ]    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File No. 1-13726
Chesapeake Energy Corporation
(Exact name of registrant as specified in its charter)
Oklahoma

73-1395733
(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)
6100 North Western Avenue

 
Oklahoma City, Oklahoma

73118
(Address of principal executive offices)

(Zip Code)
(405) 848-8000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X]     NO [ ] 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X]     NO [ ] 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [X] Accelerated Filer [ ] Non-accelerated Filer [ ] Smaller Reporting Company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ]      NO [X]
As of August 1, 2013 , there were 665,524,165 shares of our $0.01 par value common stock outstanding.



 


CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2013


 
PART I.
 
 
Financial Information
 
 
 
 
 
Page
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
 
 
Condensed Consolidated Balance Sheets as of June 30, 2013
and December 31, 2012
 
 
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2013 and 2012
 
 
Condensed Consolidated Statements of Comprehensive Income for the
Three and Six Months Ended June 30, 2013 and 2012
 
 
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2013 and 2012
 
 
Condensed Consolidated Statements of Stockholders’ Equity for the
Six Months Ended June 30, 2013 and 2012
 
 
Notes to Condensed Consolidated Financial Statements
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
Controls and Procedures
 
 
 
 
 
 
PART II.
 
 
Other Information
 
 
 
 
 
 
Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults Upon Senior Securities
 
Item 4.
Mine Safety Disclosures
 
Item 5.
Other Information
 
Item 6.
Exhibits
 





CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
 
June 30, 2013
 
December 31, 2012
 
 
($ in millions)
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents ($1 and $1 attributable to our VIEs)
 
$
677

 
$
287

Restricted cash
 
81

 
111

Accounts receivable
 
2,417

 
2,245

Short-term derivative assets
 
50

 
58

Deferred income tax asset
 
71

 
90

Other current assets
 
294

 
153

Current assets held for sale
 
2

 
4

Total Current Assets
 
3,592

 
2,948

PROPERTY AND EQUIPMENT:
 
 
 
 
Natural gas and oil properties, at cost based on full cost accounting:
 
 
 
 
Evaluated natural gas and oil properties ($488 and $488 attributable
to our VIEs)
 
53,609

 
50,172

Unevaluated properties
 
13,166

 
14,755

Oilfield services equipment
 
2,243

 
2,130

Other property and equipment
 
3,589

 
3,778

Total Property and Equipment, at Cost
 
72,607

 
70,835

Less: accumulated depreciation, depletion and amortization (($136) and
($58) attributable to our VIEs)
 
(35,769
)
 
(34,302
)
Property and equipment held for sale, net
 
511

 
634

Total Property and Equipment, Net
 
37,349

 
37,167

LONG-TERM ASSETS:
 
 
 
 
Investments
 
636

 
728

Long-term derivative assets ($1 and $0 attributable to our VIEs)
 
7

 
2

Other long-term assets
 
561

 
766

TOTAL ASSETS
 
$
42,145

 
$
41,611

 
 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
1

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS – (Continued)
(Unaudited)

 
 
June 30, 2013
 
December 31, 2012
 
 
($ in millions)
CURRENT LIABILITIES:
 
 
 
 
Accounts payable
 
$
1,787

 
$
1,710

Short-term derivative liabilities ($4 and $4 attributable to our VIEs)
 
54

 
105

Accrued interest
 
212

 
226

Current maturities of long-term debt, net
 
—

 
463

Other current liabilities ($21 and $21 attributable to our VIEs)
 
3,549

 
3,741

Current liabilities held for sale
 
18

 
21

Total Current Liabilities
 
5,620

 
6,266

LONG-TERM LIABILITIES:
 
 
 
 
Long-term debt, net
 
13,057

 
12,157

Deferred income tax liabilities
 
3,260

 
2,807

Long-term derivative liabilities ($0 and $3 attributable to our VIEs)
 
546

 
934

Asset retirement obligations
 
389

 
375

Other long-term liabilities
 
1,069

 
1,176

Total Long-Term Liabilities
 
18,321

 
17,449

CONTINGENCIES AND COMMITMENTS (Note 4)
 

 

EQUITY:
 
 
 
 
Chesapeake Stockholders’ Equity:
 
 
 
 
Preferred stock, $0.01 par value, 20,000,000 shares authorized:
 
 
 
 
7,251,515 shares outstanding
 
3,062

 
3,062

Common stock, $0.01 par value, 1,000,000,000 shares authorized:
 
 
 
 
668,918,705 and 666,467,664 shares issued
 
7

 
7

Paid-in capital
 
12,383

 
12,293

Retained earnings
 
805

 
437

Accumulated other comprehensive income (loss)
 
(170
)
 
(182
)
Less: treasury stock, at cost; 2,288,449 and 2,147,724 common shares
 
(52
)
 
(48
)
Total Chesapeake Stockholders’ Equity
 
16,035

 
15,569

Noncontrolling interests
 
2,169

 
2,327

Total Equity
 
18,204

 
17,896

TOTAL LIABILITIES AND EQUITY
 
$
42,145

 
$
41,611


The accompanying notes are an integral part of these condensed consolidated financial statements.
2

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
($ in millions except per share data)
REVENUES:
 
 
 
 
 
 
 
 
Natural gas, oil and NGL
 
$
2,406

 
$
2,117

 
$
3,858

 
$
3,185

Marketing, gathering and compression
 
2,057

 
1,113

 
3,838

 
2,328

Oilfield services
 
212

 
159

 
402

 
294

Total Revenues
 
4,675

 
3,389

 
8,098

 
5,807

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
Natural gas, oil and NGL production
 
288

 
335

 
595

 
685

Production taxes
 
59

 
41

 
112

 
89

Marketing, gathering and compression
 
2,028

 
1,096

 
3,772

 
2,292

Oilfield services
 
177

 
109

 
332

 
205

General and administrative
 
106

 
155

 
216

 
291

Employee retirement and other termination benefits
 
7

 
1

 
140

 
1

Natural gas, oil and NGL depreciation, depletion and amortization
 
645

 
588

 
1,293

 
1,094

Depreciation and amortization of other assets
 
76

 
83

 
154

 
166

Impairments of fixed assets and other
 
231

 
243

 
258

 
243

Net gains on sales of fixed assets
 
(109
)
 
—

 
(158
)
 
(2
)
Total Operating Expenses
 
3,508

 
2,651

 
6,714

 
5,064

INCOME FROM OPERATIONS
 
1,167

 
738

 
1,384

 
743

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
Interest expense
 
(104
)
 
(14
)
 
(124
)
 
(26
)
Earnings (losses) on investments
 
23

 
(59
)
 
(4
)
 
(64
)
Impairment of investment
 
—

 
—

 
(10
)
 
—

Gains (losses) on sales of investments
 
(10
)
 
1,030

 
(10
)
 
1,030

Losses on purchases of debt
 
(70
)
 
—

 
(70
)
 
—

Other income
 
3

 
5

 
8

 
11

Total Other Income (Expense)
 
(158
)
 
962

 
(210
)
 
951

INCOME BEFORE INCOME TAXES
 
1,009

 
1,700

 
1,174

 
1,694

INCOME TAX EXPENSE:
 
 
 
 
 
 
 
 
Current income taxes
 
2

 
2

 
3

 
2

Deferred income taxes
 
382

 
661

 
443

 
659

Total Income Tax Expense
 
384

 
663

 
446

 
661

NET INCOME
 
625

 
1,037

 
728

 
1,033

Net income attributable to noncontrolling interests
 
(45
)
 
(65
)
 
(89
)
 
(89
)
NET INCOME ATTRIBUTABLE TO CHESAPEAKE
 
580

 
972

 
639

 
944

Preferred stock dividends
 
(43
)
 
(43
)
 
(86
)
 
(86
)
Premium on purchase of preferred shares of a subsidiary
 
(69
)
 
—

 
(69
)
 
—

Earnings allocated to participating securities
 
(11
)
 
—

 
(11
)
 
—

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
 
$
457

 
$
929

 
$
473

 
$
858

EARNINGS PER COMMON SHARE:
 
 
 
 
 
 
 
 
Basic
 
$
0.70

 
$
1.45

 
$
0.72

 
$
1.34

Diluted
 
$
0.66

 
$
1.29

 
$
0.72

 
$
1.25

CASH DIVIDEND DECLARED PER COMMON SHARE
 
$
0.0875

 
$
0.0875

 
$
0.175

 
$
0.175

WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in millions):
 
 
 
 
 
 
 
 
Basic
 
653

 
642

 
653

 
642

Diluted
 
760

 
751

 
653

 
752


The accompanying notes are an integral part of these condensed consolidated financial statements.
3

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
($ in millions)
NET INCOME
 
$
625

 
$
1,037

 
$
728

 
$
1,033

Other comprehensive income (loss), net of income tax:
 
 
 
 
 
 
 
 
Unrealized gain (loss) on derivative instruments, net of income tax expense (benefit) of $1 million, ($2) million, $0 and $0
 
1

 
(3
)
 
—

 
—

Reclassification of (gain) loss on settled derivative instruments, net of income tax expense (benefit) of $0, ($6) million, $7 million and ($7) million
 
(1
)
 
(11
)
 
11

 
(12
)
Unrealized gain (loss) on investments, net of income tax expense (benefit) of $0, ($6) million, ($3) million and ($2) million
 
—

 
(9
)
 
(5
)
 
(3
)
Reclassification of impairment of investment, net of
income tax expense (benefit) of $0, $0, $4 million
and $0
 
—

 
—

 
6

 
—

Other comprehensive income (loss)
 
—

 
(23
)
 
12

 
(15
)
COMPREHENSIVE INCOME
 
625

 
1,014

 
740

 
1,018

COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
 
(45
)
 
(65
)
 
(89
)
 
(89
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CHESAPEAKE
 
$
580

 
$
949

 
$
651

 
$
929




The accompanying notes are an integral part of these condensed consolidated financial statements.
4

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
 
($ in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
NET INCOME
 
$
728

 
$
1,033

ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY
OPERATING ACTIVITIES:
 
 
 
 
Depreciation, depletion and amortization
 
1,447

 
1,260

Deferred income tax expense
 
443

 
659

Unrealized gains on derivatives
 
(372
)
 
(542
)
Stock-based compensation
 
56

 
63

Net gains on sales of fixed assets
 
(158
)
 
(2
)
Impairments of fixed assets and other
 
258

 
243

Losses on investments
 
7

 
120

(Gains) losses on sales of investments
 
10

 
(1,030
)
Losses on purchases of debt
 
17

 
—

Impairment of investment
 
10

 
—

Employee retirement and other termination benefits
 
104

 
—

Other
 
(4
)
 
1

Changes in assets and liabilities
 
(341
)
 
(776
)
Cash provided by operating activities
 
2,205

 
1,029

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Drilling and completion costs
 
(3,159
)
 
(5,120
)
Acquisitions of proved and unproved properties
 
(536
)
 
(1,795
)
Proceeds from divestitures of proved and unproved properties
 
1,895

 
1,555

Additions to other property and equipment
 
(506
)
 
(1,311
)
Proceeds from sales of other assets
 
459

 
79

Additions to investments
 
(4
)
 
(128
)
Proceeds from sales of investments
 
102

 
2,000

(Increase) decrease in restricted cash
 
170

 
(180
)
Other
 
4

 
(21
)
Cash used in investing activities
 
(1,575
)
 
(4,921
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from credit facilities borrowings
 
6,559

 
10,104

Payments on credit facilities borrowings
 
(6,578
)
 
(11,592
)
Proceeds from issuance of senior notes, net of discount and offering costs
 
2,274

 
1,263

Proceeds from issuance of term loans, net of discount and offering costs
 
—

 
3,789

Cash paid to purchase debt
 
(1,874
)
 
—

Cash paid for common stock dividends
 
(116
)
 
(112
)
Cash paid for preferred stock dividends
 
(86
)
 
(86
)
Cash paid on financing derivatives
 
(25
)
 
(36
)
Cash paid for prepayment of mortgage
 
(55
)
 
—

Proceeds from sales of noncontrolling interests
 
5

 
1,039

Proceeds from other financings
 
22

 
225

Cash paid to purchase preferred shares of a subsidiary
 
(212
)
 
—

Distributions to noncontrolling interest owners
 
(111
)
 
(104
)
Other
 
(43
)
 
82

Cash provided by (used in) financing activities
 
(240
)
 
4,572

Change in cash and cash equivalents classified as current assets held for sale
 
—

 
(7
)
Net increase in cash and cash equivalents
 
390

 
673

Cash and cash equivalents, beginning of period
 
287

 
351

Cash and cash equivalents, end of period
 
$
677

 
$
1,024


The accompanying notes are an integral part of these condensed consolidated financial statements.
5

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Unaudited)

Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:
 
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
 
($ in millions)
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Interest, net of capitalized interest
 
$
—

 
$
—

Income taxes, net of refunds received
 
$
13

 
$
6

 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Change in accrued drilling and completion costs
 
$
(60
)
 
$
(55
)
Change in accrued acquisition of proved and unproved property costs
 
$
54

 
$
62

Change in accrued costs for other property and equipment
 
$
(58
)
 
$
49




The accompanying notes are an integral part of these condensed consolidated financial statements.
6

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

 
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
 
($ in millions)
PREFERRED STOCK:
 
 
 
 
Balance, beginning and end of period
 
$
3,062

 
$
3,062

COMMON STOCK:
 
 
 
 
Balance, beginning and end of period
 
7

 
7

PAID-IN CAPITAL:
 
 
 
 
Balance, beginning of period
 
12,293

 
12,146

Stock-based compensation
 
99

 
84

Reduction in tax benefit from stock-based compensation
 
(12
)
 
(4
)
Exercise of stock options
 
3

 
—

Balance, end of period
 
12,383

 
12,226

RETAINED EARNINGS:
 
 
 
 
Balance, beginning of period
 
437

 
1,608

Net income attributable to Chesapeake
 
639

 
944

Dividends on common stock
 
(116
)
 
(114
)
Dividends on preferred stock
 
(86
)
 
(86
)
Premium on purchase of preferred shares of a subsidiary
 
(69
)
 
—

Balance, end of period
 
805

 
2,352

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
Balance, beginning of period
 
(182
)
 
(166
)
Hedging activity
 
11

 
(12
)
Investment activity
 
1

 
(3
)
Balance, end of period
 
(170
)
 
(181
)
TREASURY STOCK – COMMON:
 
 
 
 
Balance, beginning of period
 
(48
)
 
(33
)
Purchase of 247,183 and 272,640 shares for company benefit plans
 
(5
)
 
(6
)
Release of 106,458 and 13,254 shares from company benefit plans
 
1

 
—

Balance, end of period
 
(52
)
 
(39
)
TOTAL CHESAPEAKE STOCKHOLDERS’ EQUITY
 
16,035

 
17,427

NONCONTROLLING INTERESTS:
 
 
 
 
Balance, beginning of period
 
2,327

 
1,337

Sales of noncontrolling interests
 
5

 
1,039

Net income attributable to noncontrolling interests
 
89

 
89

Distributions to noncontrolling interest owners
 
(109
)
 
(104
)
Purchase of preferred shares of a subsidiary
 
(143
)
 
—

Balance, end of period
 
2,169

 
2,361

TOTAL EQUITY
 
$
18,204

 
$
19,788


The accompanying notes are an integral part of these condensed consolidated financial statements.
7

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1.
Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements of Chesapeake Energy Corporation (“Chesapeake” or the “Company”) and its subsidiaries have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission (SEC). This Form 10-Q relates to the three and six months ended June 30, 2013 (the “Current Quarter” and the “Current Period”, respectively) and the three and six months ended June 30, 2012 (the “Prior Quarter” and the “Prior Period”, respectively). Chesapeake’s annual report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”) includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods have been reflected. The accompanying condensed consolidated financial statements of Chesapeake include the accounts of our direct and indirect wholly owned subsidiaries and entities in which Chesapeake holds a controlling interest. All significant intercompany accounts and transactions have been eliminated. The results for the Current Quarter and Current Period are not necessarily indicative of the results to be expected for the full year.
Critical Accounting Policies
We consider accounting policies related to variable interest entities, natural gas and oil properties, derivatives and income taxes to be critical policies. These policies are summarized in Note 1 to our consolidated financial statements included in Item 8 of our 2012 Form 10-K.
Risks and Uncertainties
Our business strategy is to continue growing our reserves and production while transitioning from an asset base primarily focused on natural gas to an asset base more balanced between natural gas and liquids production. This is a capital-intensive strategy, and we made capital expenditures historically and in the Current Period that exceeded our cash flow from operations, supplementing such cash flows with borrowings and proceeds from a strategic joint venture and asset sales that we determined were noncore or did not fit our long-term plans . We project that our capital expenditures will continue to exceed our operating cash flow in the 2013 second half, although the gap in 2013 is expected to be significantly smaller than in 2012. Our 2013 capital expenditure budget is approximately 45% less than our 2012 capital expenditures, and proceeds from asset sales completed in 2013 through August 1 are sufficient to make up the difference between our budgeted capital expenditures and operating cash flow in 2013. Additional asset sales contemplated for the 2013 second half may reduce our long-term debt and further enhance our financial liquidity.
We continue to have significant exposure to natural gas prices. Approximately 70% of our estimated proved reserve volumes as of December   31, 2012 were natural gas, and natural gas represented approximately 75% and 80% of our natural gas, oil and NGL sales volumes for the Current Quarter and the year ended December 31, 2012 , respectively. To add certainty to future estimated cash flows, we currently have downside price protection, in the form of over-the-counter derivative contracts, on approximately 79% of our remaining 2013 estimated natural gas production at an average price of $3.70 per mcf and 94% of our remaining 2013 estimated oil production at an average price of $95.64 per bbl. Our use of derivative contracts allows us to reduce our exposure to price volatility on our cash flows and EBITDA (defined as earnings before interest, taxes, depreciation, depletion and amortization), but the amount of production subject to derivative contracts for any period depends on our outlook about future prices and risk assessment. Low natural gas prices can reduce our estimate of proved reserves, potentially resulting in a future write-down of the carrying value of our natural gas and oil properties. In 2012, when natural gas prices reached 10-year lows, we reduced our estimate of proved reserves by 3.1 tcfe , or 17% , primarily due to the impact of downward natural gas price revisions, and incurred a write-down of the carrying value of our natural gas and oil properties.

8

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

As part of our asset sales planning and capital expenditure budgeting process, we closely monitor the resulting effects on the amounts and timing of our sources and uses of funds, particularly as they affect our ability to maintain compliance with the financial covenants of our corporate revolving bank credit facility. While asset sales enhance our ability to reduce debt, sales of producing natural gas and oil properties may adversely affect the amount of cash flow and EBITDA we generate and reduce the amount and value of collateral available to secure our obligations, both of which can be exacerbated by low prices received for our production. See Note 3 for discussion of our debt instruments, including the terms of an amendment to our corporate revolving bank credit facility that increased the required indebtedness to EBITDA ratio as of September 30, 2012 and for the two subsequent quarters.
We believe we have taken appropriate measures to mitigate the risks and uncertainties facing us in 2013. Nevertheless, our ability to generate operating cash flow and complete asset sales is subject to all the risks and uncertainties that exist in our industry, some of which we may not be able to anticipate at this time. We do not have binding agreements for all of our planned asset sales, and our ability to consummate each of these transactions is subject to changes in market conditions and other factors beyond our control. If one or more of the transactions are not completed in the anticipated time frame, or at all, or for less proceeds than anticipated, our ability to reduce our indebtedness could be adversely affected. Finally, future impairments of the carrying value of our natural gas and oil properties, if any, will be dependent on many factors, including natural gas, oil and NGL prices, production rates, levels of reserves, the evaluation of costs excluded from amortization, the timing and impact of asset sales, future development costs and service costs.
Assets and Liabilities Held for Sale
As of June 30, 2013, we had entered into contracts to sell the majority of our remaining natural gas gathering business which we anticipate completing in the 2013 third quarter. The natural gas gathering business qualified as held for sale as of June 30, 2013 and December 31, 2012 and is reported under our marketing, gathering and compression operating segment. In addition, in the Current Quarter we determined we would sell certain of our buildings and land (other than our core campus) in the Oklahoma City area. These assets are being actively marketed, and we believe it is probable they will be sold over the next 12 months. As a result, these assets qualified as held for sale as of June 30, 2013. In addition, as of June 30, 2013, we were continuing to pursue the sale, within the next 12 months, of various land and buildings located in the Fort Worth, Texas area. The land and buildings in both the Oklahoma City and Fort Worth areas are reported under our other operations segment. Natural gas and oil properties that we intend to sell are not presented as held for sale pursuant to the rules governing full cost accounting for oil and gas properties. A summary of the assets and liabilities held for sale on our condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012 is detailed below.
 
 
June 30,
2013
 
December 31,
2012
 
 
($ in millions)
Accounts receivable
 
$
2

 
$
4

Current assets held for sale
 
$
2

 
$
4

 
 
 
 
 
Natural gas gathering systems and treating plants, net of accumulated depreciation (a)
 
$
205

 
$
352

Oilfield services equipment, net of accumulated depreciation (b)
 
1

 
27

Other property and equipment, net of accumulated depreciation
 
305

 
255

Property and equipment held for sale, net
 
$
511

 
$
634

 
 
 
 
 
Accounts payable
 
$
1

 
$
4

Accrued liabilities
 
17

 
17

Current liabilities held for sale
 
$
18

 
$
21

___________________________________________
(a)
In the Current Quarter, we sold gas gathering systems classified as held for sale as of December 31, 2012 for proceeds of approximately $245 million and recorded a $106 million gain. See Note 11 for further discussion of this transaction.
(b)
In the Current Period, we sold eight rigs classified as assets held for sale as of December 31, 2012 for proceeds of approximately $27 million .

9

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Accumulated Other Comprehensive Income (Loss)
For the Current Period, changes in accumulated other comprehensive income (loss) by component, net of tax, are detailed below.
 
 
Net Gains
(Losses) on
Cash Flow
Hedges
 
Net Gains
(Losses)
on
Investments
 
Total
 
 
($ in millions)
Balance, December 31, 2012
 
$
(189
)
 
$
7

 
$
(182
)
Other comprehensive income before reclassifications
 
—

 
(5
)
 
(5
)
Amounts reclassified from accumulated other comprehensive income
 
11

 
6

 
17

Net current period other comprehensive income
 
11

 
1

 
12

Balance, June 30, 2013
 
$
(178
)
 
$
8

 
$
(170
)
For the Current Quarter and the Current Period, amounts reclassified from accumulated other comprehensive income (loss), net of tax, into the condensed consolidated statement of operations are detailed below.
Details About Accumulated
Other Comprehensive
Income Components
 
Affected Line Item
in the Statement
Where Net Income is Presented
 
Three Months Ended
June 30, 2013
 
Six Months Ended
June 30, 2013
 
 
 
 
($ in millions)
Net losses on cash flow hedges:
 
 
 
 
 
 
Commodity contracts
 
Natural gas, oil and NGL revenues
 
$
(1
)
 
$
11

Investments:
 
 
 
 
 
 
Impairment of investment
 
Impairment of investment
 
—

 
6

Total reclassifications
for the period, net of tax
 
$
(1
)
 
$
17



10

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

2.
Earnings Per Share
For the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, the contingent convertible senior notes did not have a dilutive effect and therefore were not included in the calculation of diluted earnings per share (EPS). See Note 3 for discussion of the contingent convertible senior notes. Participating securities, for purposes of our EPS computations, consist of unvested restricted stock issued to our employees and non-employee directors that provide dividend rights.
For the Current Period, the following shares of unvested restricted stock awards and cumulative convertible preferred stock and associated adjustments to net income, consisting of dividends on such shares, were not included in the calculation of diluted EPS, as the effect was antidilutive:
 
 
Net Income
Adjustments
 
Shares
 
 
($ in millions)
 
(in millions)
Six Months Ended June 30, 2013:
 
 
 
 
Common stock equivalent of our preferred stock outstanding:
 
 
 
 
5.75% cumulative convertible preferred stock
 
$
43

 
56

5.75% cumulative convertible preferred stock (series A)
 
$
32

 
39

5.00% cumulative convertible preferred stock (series 2005B)
 
$
5

 
5

4.50% cumulative convertible preferred stock
 
$
6

 
6

Unvested restricted stock
 
$
11

 
5

Basic weighted average shares outstanding, which is used in computing basic EPS, and diluted weighted average shares outstanding, which is used in computing diluted EPS, were 653 million shares in the Current Period. The basic and diluted earnings per common share were $0.72 in the Current Period.
For the Current Quarter, Prior Quarter and Prior Period, all outstanding equity securities that were convertible into common stock were included in the calculation of diluted EPS. A reconciliation of basic EPS and diluted EPS for the Current Quarter, Prior Quarter and the Prior Period is as follows:
 
 
Net Income
Available to
Common
Stockholders
(Numerator)
 
Weighted
Average
Shares
(Denominator)
 
Per
Share
Amount  
 
 
(in millions, except per share data)
Three Months Ended June 30, 2013:
 
 
 
 
 
 
Basic EPS
 
$
457

 
653

 
$
0.70

Effect of Dilutive Securities:
 
 
 
 
 
 
Assumed conversion as of the beginning of the period
    of preferred shares outstanding during the period:
 
 
 
 
 
 
Common shares assumed issued for 5.75%
cumulative convertible preferred stock
 
21

 
56

 
 
Common shares assumed issued for 5.75%
cumulative convertible preferred stock (series A)
 
16

 
40

 
 
Common shares assumed issued for 5.00%
cumulative convertible preferred stock (series 2005B)
 
3

 
5

 
 
Common shares assumed issued for 4.50%
cumulative convertible preferred stock
 
3

 
6

 
 
Diluted EPS
 
$
500

 
760

 
$
0.66

 
 
 
 
 
 
 

11

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

 
 
Net Income
Available to
Common
Stockholders
(Numerator)
 
Weighted
Average
Shares
(Denominator)
 
Per
Share
Amount  
 
 
(in millions, except per share data)
Three Months Ended June 30, 2012:
 
 
 
 
 
 
Basic EPS
 
$
929

 
642

 
$
1.45

Effect of Dilutive Securities:
 
 
 
 
 
 
Assumed conversion as of the beginning of the period
    of preferred shares outstanding during the period:
 
 
 
 
 
 
Common shares assumed issued for 5.75%
cumulative convertible preferred stock
 
21

 
56

 
 
Common shares assumed issued for 5.75%
cumulative convertible preferred stock (series A)
 
16

 
39

 
 
Common shares assumed issued for 5.00%
cumulative convertible preferred stock (series 2005B)
 
3

 
5

 
 
Common shares assumed issued for 4.50%
cumulative convertible preferred stock
 
3

 
6

 
 
Unvested restricted stock
 
—

 
3

 
 
Diluted EPS
 
$
972

 
751

 
$
1.29

 
 
 
 
 
 
 
Six Months Ended June 30, 2012:
 
 
 
 
 
 
Basic EPS
 
$
858

 
642

 
$
1.34

Effect of Dilutive Securities:
 
 
 
 
 
 
Assumed conversion as of the beginning of the period
    of preferred shares outstanding during the period:
 
 
 
 
 
 
Common shares assumed issued for 5.75%
cumulative convertible preferred stock
 
43

 
56

 
 
Common shares assumed issued for 5.75%
cumulative convertible preferred stock (series A)
 
32

 
39

 
 
Common shares assumed issued for 5.00%
cumulative convertible preferred stock (series 2005B)
 
5

 
5

 
 
Common shares assumed issued for 4.50%
cumulative convertible preferred stock
 
6

 
6

 
 
Unvested restricted stock
 
—

 
4

 
 
Diluted EPS
 
$
944

 
752

 
$
1.25


12

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

3.
Debt
Our long-term debt consisted of the following as of June 30, 2013 and December 31, 2012 :
 
 
June 30, 2013
 
December 31, 2012
 
 
($ in millions)
Term loan due 2017
 
$
2,000

 
$
2,000

7.625% senior notes due 2013 (a)
 
247

 
464

9.5% senior notes due 2015
 
1,265

 
1,265

3.25% senior notes due 2016
 
500

 
—

6.25% euro-denominated senior notes due 2017 (b)
 
447

 
454

6.5% senior notes due 2017
 
660

 
660

6.875% senior notes due 2018
 
97

 
474

7.25% senior notes due 2018
 
669

 
669

6.625% senior notes due 2019 (c)
 
650

 
650

6.775% senior notes due 2019 (d)
 
—

 
1,300

6.625% senior notes due 2020
 
1,300

 
1,300

6.875% senior notes due 2020
 
500

 
500

6.125% senior notes due 2021
 
1,000

 
1,000

5.375% senior notes due 2021
 
700

 
—

5.75% senior notes due 2023
 
1,100

 
—

2.75% contingent convertible senior notes due 2035 (e)
 
396

 
396

2.5% contingent convertible senior notes due 2037 (e)
 
1,168

 
1,168

2.25% contingent convertible senior notes due 2038 (e)
 
347

 
347

Corporate revolving bank credit facility
 
—

 
—

Oilfield services revolving bank credit facility
 
399

 
418

Discount on senior notes and term loan (f)
 
(404
)
 
(465
)
Interest rate derivatives (g)
 
16

 
20

Total debt, net
 
13,057

 
12,620

Less current maturities of long-term debt, net (a)
 
—

 
(463
)
Total long-term debt, net
 
$
13,057

 
$
12,157

___________________________________________
(a)
See Note 18 for further discussion of the repayment of these notes subsequent to June 30, 2013. We reclassified our 7.625% Senior Notes due 2013 from current liabilities to long-term debt as of June 30, 2013 as we refinanced these notes on a long-term basis in the Current Quarter. As of December 31, 2012, there was $1 million of discount associated with the 7.625% Senior Notes due 2013.
(b)
The principal amount shown is based on the exchange rate of $1.3010 to €1.00 and $1.3193 to €1.00 as of June 30, 2013 and December 31, 2012 , respectively. See Note 7 for information on our related foreign currency derivatives.
(c)
Issuers are Chesapeake Oilfield Operating, L.L.C. (COO), an indirect wholly owned subsidiary of the Company, and Chesapeake Oilfield Finance, Inc. (COF), a wholly owned subsidiary of COO formed solely to facilitate the offering of the 6.625% Senior Notes due 2019. COF is nominally capitalized and has no operations or revenues. Chesapeake Energy Corporation is the issuer of all other senior notes and the contingent convertible senior notes.
(d)
In the Current Quarter, we redeemed our 6.775% Senior Notes due 2019 at par pursuant to the special early redemption provision of the indenture.

13

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

(e)
The holders of our contingent convertible senior notes may require us to repurchase, in cash, all or a portion of their notes at 100% of the principal amount of the notes on any of four dates that are five, ten, fifteen and twenty years before the maturity date. The notes are convertible, at the holder’s option, prior to maturity under certain circumstances into cash and, if applicable, shares of our common stock using a net share settlement process. One such triggering circumstance is when the price of our common stock exceeds a threshold amount during a specified period in a fiscal quarter. Convertibility based on common stock price is measured quarterly. In the Current Quarter, the price of our common stock was below the threshold level for each series of the contingent convertible senior notes during the specified period and, as a result, the holders do not have the option to convert their notes into cash and common stock in the third quarter of 2013 under this provision. The notes are also convertible, at the holder’s option, during specified five -day periods if the trading price of the notes is below certain levels determined by reference to the trading price of our common stock. During the Current Quarter, the notes were not convertible under this provision. In general, upon conversion of a contingent convertible senior note, the holder will receive cash equal to the principal amount of the note and common stock for the note’s conversion value in excess of such principal amount. We will pay contingent interest on the convertible senior notes after they have been outstanding at least ten years, under certain conditions. We may redeem the convertible senior notes once they have been outstanding for ten years at a redemption price of 100% of the principal amount of the notes, payable in cash. The optional repurchase dates, the common stock price conversion threshold amounts and the ending date of the first six-month period in which contingent interest may be payable for the contingent convertible senior notes are as follows:
    Contingent  
    Convertible  
    Senior  Notes    
 
Repurchase Dates
 
Common Stock
 Price Conversion 
Thresholds
 
 Contingent Interest
First Payable
(if applicable)
2.75% due 2035
 
November 15, 2015, 2020, 2025, 2030
 
$
48.31

 
May 14, 2016
2.5% due 2037
 
May 15, 2017, 2022, 2027, 2032
 
$
63.62

 
November 14, 2017
2.25% due 2038
 
December 15, 2018, 2023, 2028, 2033
 
$
107.01

 
June 14, 2019

(f)
Discount as of June 30, 2013 and December 31, 2012 included $340 million and $376 million , respectively, associated with the equity component of our contingent convertible senior notes. This discount is amortized based on an effective yield method. The discount also included $36 million and $40 million as of June 30, 2013 and December 31, 2012 , respectively, associated with our term loan discussed further below.
(g)
See Note 7 for further discussion related to these instruments.
Term Loan
In November 2012, we established an unsecured five-year term loan credit facility in an aggregate principal amount of $2.0 billion for net proceeds of $1.935 billion (November 2012 term loan). Our obligations under the facility rank equally with our outstanding senior notes and contingent convertible senior notes and are unconditionally guaranteed on a joint and several basis by our direct and indirect wholly owned subsidiaries that are subsidiary guarantors under the indentures for such notes. Amounts borrowed under the facility bear interest at our option, at either (i) the Eurodollar rate, which is based on the London Interbank Offered Rate (LIBOR), plus a margin of 4.50% or (ii) a base rate equal to the greater of (a) the Bank of America, N.A. prime rate, (b) the federal funds effective rate plus 0.50% per annum and (c) the Eurodollar rate that would be applicable to a Eurodollar loan with an interest period of one month plus 1% per annum, in each case, plus a margin of 3.50% . The Eurodollar rate is subject to a floor of 1.25% per annum, and the base rate is subject to a floor of 2.25% per annum. Interest is payable quarterly or, if the Eurodollar rate applies, it may be payable at more frequent intervals.

The term loan matures on December 2, 2017 and may be voluntarily repaid at a make-whole price in the first year, at par plus a specified premium in the second and third years and at any time thereafter at par. The term loan may also be refinanced or amended to extend the maturity date at our option, subject to lender approval.

The term loan credit agreement contains negative covenants substantially similar to those contained in the Company’s corporate revolving bank credit facility, including covenants that limit our ability to incur indebtedness, grant liens, make investments, loans and restricted payments and enter into certain business combination transactions. Other covenants include additional restrictions regarding the incurrence of certain unsecured indebtedness, the

14

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

incurrence of secured indebtedness, the disposition of assets and the prepayment of certain indebtedness. The term loan credit agreement does not contain financial maintenance covenants.

We were in compliance with all covenants under the term loan credit agreement as of June 30, 2013 . If we should fail to perform our obligations under the agreement, the term loan could be terminated and any outstanding borrowings under the term loan credit agreement could be declared immediately due and payable. The term loan credit agreement also has cross default provisions that apply to other indebtedness of Chesapeake and its restricted subsidiaries with an outstanding principal amount in excess of $125 million .
Chesapeake Senior Notes and Contingent Convertible Senior Notes
The Chesapeake senior notes and the contingent convertible senior notes are unsecured senior obligations of Chesapeake and rank equally in right of payment with all of our other existing and future senior unsecured indebtedness and rank senior in right of payment to all of our future subordinated indebtedness. Chesapeake is a holding company and owns no operating assets and has no significant operations independent of its subsidiaries. Chesapeake’s obligations under the senior notes and the contingent convertible senior notes are jointly and severally, fully and unconditionally guaranteed by certain of our direct and indirect wholly owned subsidiaries. Certain of our oilfield services subsidiaries, midstream subsidiaries and subsidiaries formed to invest in natural gas demand initiatives, subsidiaries with noncontrolling interests, subsidiaries qualified as variable interest entities, and certain de minimis subsidiaries are not guarantors. See Note 16 for condensed consolidating financial information regarding our guarantor and non-guarantor subsidiaries.
We may redeem the senior notes, other than the contingent convertible senior notes, at any time at specified make-whole or redemption prices. Our senior notes are governed by indentures containing covenants that may limit our ability and our subsidiaries’ ability to incur certain secured indebtedness, enter into sale/leaseback transactions, and consolidate, merge or transfer assets. The indentures governing the contingent convertible senior notes do not have any financial or restricted payment covenants. The senior notes and contingent convertible senior notes indentures have cross default provisions that apply to other indebtedness the Company or any guarantor subsidiary may have from time to time with an outstanding principal amount of at least $50 million , depending on the indenture.
We are required to account for the liability and equity components of our convertible debt instruments separately and to reflect interest expense at the interest rate of similar nonconvertible debt at the time of issuance. The applicable rates for our 2.75% Contingent Convertible Senior Notes due 2035, our 2.5% Contingent Convertible Senior Notes due 2037 and our 2.25% Contingent Convertible Senior Notes due 2038 are 6.86% , 8.0% and 8.0% , respectively.
During the Current Quarter, we issued $2.3 billion in aggregate principal amount of senior notes at par. The offering included three series of notes: $500 million in aggregate principal amount of 3.25% Senior Notes due 2016; $700 million in aggregate principal amount of 5.375% Senior Notes due 2021; and $1.1 billion in aggregate principal amount of 5.75% Senior Notes due 2023. We used a portion of the net proceeds of $2.274 billion to repay outstanding indebtedness under our corporate revolving bank credit facility and purchase certain senior notes. We purchased $217 million in aggregate principal amount of our 7.625% Senior Notes due 2013 for $221 million and $377 million in aggregate principal amount of our 6.875% Senior Notes due 2018 for $405 million pursuant to tender offers which expired on April 12, 2013. We recorded a loss of approximately $37 million associated with the tender offers, including $32 million in premiums and $5 million of unamortized deferred charges. In addition, on May 13, 2013, we redeemed $1.3 billion in aggregate principal amount of our 6.775% Senior Notes due 2019 (the “2019 Notes”) at par pursuant to notice of special early redemption. We recorded a loss of approximately $33 million associated with the redemption, including $19 million of unamortized deferred charges and $14 million of discount. As described in the following paragraph, the notice has been the subject of recent litigation. On July 15, 2013, we retired at maturity the remaining $247 million aggregate principal amount outstanding of our 7.625% Senior Notes due 2013.
In March 2013, the Company brought suit in the U.S. District Court for the Southern District of New York (the “Court”) against The Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”), the indenture trustee for the 2019 Notes. The Company sought a declaration that the notice it issued on March 15, 2013 to redeem all of the 2019 Notes at par (plus accrued interest through the redemption date) was timely and effective pursuant to the special early redemption provision of the supplemental indenture governing the 2019 Notes. BNY Mellon asserted that the March 15, 2013 notice was not effective to redeem the 2019 Notes at par because it was not timely for that purpose and because of the specific phrasing in the notice that provided that it would not be effective unless the Court concluded it was timely. The Court conducted a trial on the matter in late April and on May 8, 2013, ruled in the Company’s favor.

15

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

On May 14, 2013, BNY Mellon filed an appeal of the decision with the United States Court of Appeals for the Second Circuit and the appeal is currently pending.
No other scheduled principal payments are required on our senior notes until 2015.
During the Prior Period, we issued $1.3 billion in aggregate principal amount of the 2019 Notes in a registered public offering. We used the net proceeds of $1.263 billion from the offering to repay outstanding indebtedness under our corporate revolving bank credit facility. During the Current Quarter, as discussed above, we redeemed the notes at par pursuant to the special early redemption provision of the indenture.
COO Senior Notes
The COO senior notes are the unsecured senior obligations of COO and rank equally in right of payment with all of COO’s other existing and future senior unsecured indebtedness and rank senior in right of payment to all of its future subordinated indebtedness. The COO senior notes are jointly and severally, fully and unconditionally guaranteed by all of COO’s wholly owned subsidiaries, other than de minimis subsidiaries. The notes may be redeemed at any time at specified make-whole or redemption prices and, prior to November 15, 2014, up to 35% of the aggregate principal amount may be redeemed in connection with certain equity offerings. Holders of the COO notes have the right to require COO to repurchase their notes upon a change of control on the terms set forth in the indenture, and COO must offer to repurchase the notes upon certain asset sales. The COO senior notes are subject to covenants that may, among other things, limit the ability of COO and its subsidiaries to make restricted payments, incur indebtedness, issue preferred stock, create liens, and consolidate, merge or transfer assets. The COO senior notes have cross default provisions that apply to other indebtedness COO or any of its guarantor subsidiaries may have from time to time with an outstanding principal amount of $50 million or more.
Under a registration rights agreement, we agreed to file a registration statement enabling holders of the COO senior notes to exchange the privately placed COO senior notes for publicly registered notes with substantially the same terms. We filed the registration statement on April 5, 2013, it became effective on June 13, 2013, and the exchange offer was completed on July 19, 2013.
Bank Credit Facilities
During the Current Period, we used two revolving bank credit facilities as sources of liquidity. In addition, in the Prior Period, we utilized a midstream credit facility. In June 2012, we paid off and terminated our midstream credit facility. Our remaining revolving bank credit facilities are described below.
 
 
Corporate
Credit Facility (a)
 
Oilfield Services
Credit Facility (b)
 
 
($ in millions)
Facility structure
 
Senior secured
revolving
 
Senior secured
revolving
Maturity date
 
December 2015
 
November 2016
Borrowing capacity
 
$
4,000

 
$
500

Amount outstanding as of June 30, 2013
 
$
—

 
$
399

Letters of credit outstanding as of June 30, 2013
 
$
31

 
$
—

 ___________________________________________
(a)
Co-borrowers are Chesapeake Exploration, L.L.C., Chesapeake Appalachia, L.L.C. and Chesapeake Louisiana, L.P.
(b)
Borrower is COO.

16

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Our credit facilities do not contain material adverse change or adequate assurance covenants. Although the applicable interest rates under our corporate credit facility fluctuate slightly based on our long-term senior unsecured credit ratings, our credit facilities do not contain provisions which would trigger an acceleration of amounts due under the respective facilities or a requirement to post additional collateral in the event of a downgrade of our credit ratings.
Corporate Credit Facility. Our $4.0 billion syndicated revolving bank credit facility is used for general corporate purposes. Borrowings under the facility are secured by proved reserves and bear interest at our option at either (i) the greater of the reference rate of Union Bank, N.A. or the federal funds effective rate plus 0.50% , both of which are subject to a margin that varies from 0.50% to 1.25%  per annum according to our senior unsecured long-term debt ratings, or (ii) the Eurodollar rate, which is based on LIBOR, plus a margin that varies from 1.50% to 2.25%  per annum according to our senior unsecured long-term debt ratings. The collateral value and borrowing base are determined periodically. The unused portion of the facility is subject to a commitment fee of 0.50%  per annum. Interest is payable quarterly or, if LIBOR applies, it may be payable at more frequent intervals.
The credit facility agreement contains various covenants and restrictive provisions which limit our ability to incur additional indebtedness, make investments or loans and create liens and require us to maintain an indebtedness to total capitalization ratio and an indebtedness to EBITDA ratio, in each case as defined in the agreement. In September 2012, we entered into an amendment to the credit facility agreement, effective September 30, 2012. The amendment, among other things, adjusted our required indebtedness to EBITDA ratio through the earlier of (i) December 31, 2013 and (ii) the date on which we elected to reinstate the indebtedness to EBITDA ratio in effect prior to the amendment (in either case, the “Amendment Effective Period”). On June 28, 2013, we elected to reinstate the indebtedness to EBITDA ratio to 4.00 to 1.00 , which was the ratio in effect prior to the amendment. Prior to the end of the Amendment Effective Period, the amendment increased the maximum indebtedness to EBITDA ratio to 6.00 to 1.00 as of September 30, 2012, 5.00 to 1.00 as of December 31, 2012 and 4.75 to 1.00 as of March 31, 2013.
The credit facility amendment also increased the applicable margin by 0.25% for borrowings under the corporate credit facility on each day during the Amendment Effective Period when credit extensions exceeded 50% of the borrowing capacity and would have required us to pay a fee to each lender in an amount equal to 0.05% of its revolving commitment if the Amendment Effective Period had been in effect on June 30, 2013. The amendment did not allow our collateral value securing the borrowings to be more than $75 million below the collateral value that was in effect as of September 30, 2012 during the Amendment Effective Period. We were in compliance with all covenants under the credit facility agreement as of June 30, 2013 .
The facility is fully and unconditionally guaranteed, on a joint and several basis, by Chesapeake and certain of our wholly owned subsidiaries. If we should fail to perform our obligations under the credit facility agreement, the revolving credit commitment could be terminated and any outstanding borrowings under the facility could be declared immediately due and payable. Such acceleration, if involving a principal amount of $50 million or more, would constitute an event of default under our senior note and contingent convertible senior note indentures, which could in turn result in the acceleration of a significant portion of such indebtedness. The credit facility agreement also has cross default provisions that apply to our secured hedging facility, equipment master lease agreements, term loan and other indebtedness of Chesapeake and its restricted subsidiaries with an outstanding principal amount in excess of $125 million . In addition, the facility contains a restriction on our ability to declare and pay cash dividends on our common or preferred stock if an event of default has occurred.

17

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Oilfield Services Credit Facility. Our $500 million syndicated oilfield services revolving bank credit facility is used to fund capital expenditures and for general corporate purposes associated with our oilfield services operations. Borrowings under the oilfield services credit facility are secured by all of the assets of the wholly owned subsidiaries of COO, itself an indirect wholly owned subsidiary of Chesapeake. The facility has initial commitments of $500 million and may be expanded to $900 million at COO’s option, subject to additional bank participation. Borrowings under the credit facility are secured by all of the equity interests and assets of COO and its wholly owned subsidiaries (the restricted subsidiaries for this facility, which are unrestricted subsidiaries under Chesapeake’s senior notes, contingent convertible senior notes, term loan and corporate revolving bank credit facility), and bear interest at our option at either (i) the greater of the reference rate of Bank of America, N.A., the federal funds effective rate plus 0.50% , or one-month LIBOR plus 1.00% , all of which are subject to a margin that varies from 1.00% to 1.75%  per annum, or (ii) the Eurodollar rate, which is based on LIBOR plus a margin that varies from 2.00% to 2.75%  per annum. The unused portion of the credit facility is subject to a commitment fee that varies from 0.375% to 0.50%  per annum. Both margins and commitment fees are determined according to the most recent leverage ratio described below. Interest is payable quarterly or, if LIBOR applies, it may be payable at more frequent intervals.
The oilfield services credit facility agreement contains various covenants and restrictive provisions which limit the ability of COO and its restricted subsidiaries to enter into asset sales, incur additional indebtedness, make investments or loans and create liens. The agreement requires maintenance of a leverage ratio based on the ratio of lease-adjusted indebtedness to earnings before interest, taxes, depreciation, amortization and rent (EBITDAR), a senior secured leverage ratio based on the ratio of secured indebtedness to EBITDA and a fixed charge coverage ratio based on the ratio of EBITDAR to lease adjusted interest expense, in each case as defined in the agreement. COO was in compliance with all covenants under the agreement as of June 30, 2013 . If COO or its restricted subsidiaries should fail to perform their obligations under the agreement, the revolving credit commitment could be terminated and any outstanding borrowings under the facility could be declared immediately due and payable. Such acceleration, if involving a principal amount of $50 million or more, would constitute an event of default under our COO senior note indenture, which could in turn result in the acceleration of the COO senior note indebtedness. The oilfield services credit facility agreement also has cross default provisions that apply to other indebtedness COO and its restricted subsidiaries may have from time to time with an outstanding principal amount in excess of $15 million .
4.
Contingencies and Commitments
Contingencies
Litigation and Regulatory Proceedings
The Company is involved in a number of litigation and regulatory proceedings (including those described below). Many of these proceedings are in early stages, and many of them seek an indeterminate amount of damages. We estimate and provide for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and can be reasonably estimated. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our total estimated liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. We account for legal defense costs in the period the costs are incurred.
July 2008 Common Stock Offering. On February 25, 2009, a putative class action was filed in the U.S. District Court for the Southern District of New York against the Company and certain of its officers and directors along with certain underwriters of the Company’s July 2008 common stock offering. The plaintiff filed an amended complaint on September 11, 2009 alleging that the registration statement for the offering contained material misstatements and omissions and seeking damages under Sections 11, 12 and 15 of the Securities Act of 1933 of an unspecified amount and rescission. The action was transferred to the U.S. District Court for the Western District of Oklahoma on October 13, 2009. Chesapeake and the officer and director defendants moved for summary judgment on grounds of loss causation and materiality on December 16, 2011, and the motion was granted as to all claims as a matter of law on March 29, 2013. Final judgment in favor of Chesapeake and the officer and director defendants was entered on June 21, 2013, and the plaintiff filed a notice of appeal on July 19, 2013 in the U.S. Court of Appeals for the Tenth Circuit. We are currently unable to assess the probability of loss or estimate a range of potential loss associated with this matter.

18

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

A related derivative action filed in the District Court of Oklahoma County, Oklahoma on March 10, 2009 against certain current and former directors and officers of the Company was dismissed on May 3, 2013 pursuant to the parties’ joint stipulation of dismissal without prejudice. A second derivative action relating to the July 2008 offering filed in the U.S. District Court for the Western District of Oklahoma on September 6, 2011 is pending. Following the denial on September 28, 2012 of its motion to dismiss and pursuant to court order, nominal defendant Chesapeake filed an answer in the case on October 12, 2012. By stipulation between the parties, the individual defendants are not required to answer the complaint unless and until the plaintiff establishes standing to pursue claims derivatively.
2012 Securities and Shareholder Litigation. A putative class action was filed in the U.S. District Court for the Western District of Oklahoma on April 26, 2012 against the Company and its former CEO, Aubrey K. McClendon. On July 20, 2012, the court appointed a lead plaintiff, which filed an amended complaint on October 19, 2012 against the Company, Mr. McClendon and certain other officers. The amended complaint asserted claims under Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934 based on alleged misrepresentations regarding the Company’s asset monetization strategy, including liabilities associated with its volumetric production payment (VPP) transactions, as well as Mr. McClendon’s personal loans and the Company’s internal controls. On December 6, 2012, the Company and other defendants filed a motion to dismiss the action. On April 10, 2013, the Court granted the motion, and on April 16, 2013 entered judgment against the plaintiff and dismissed the complaint with prejudice. The plaintiff filed a notice of appeal on June 14, 2013 in the U.S. Court of Appeals for the Tenth Circuit. We are currently unable to assess the probability of loss or estimate a range of potential loss associated with this matter .
A related federal consolidated derivative action and an Oklahoma state court derivative action are stayed pursuant to the parties ' stipulation pending resolution of the appeal in the federal securities class action. Two additional related state court derivative actions were appealed to the Oklahoma Supreme Court, one on May 31, 2013 and the other on June 20, 2013. In both cases, the District Court of Oklahoma County, Oklahoma had granted Chesapeake ' s motion to dismiss for lack of derivative standing .
In June and July 2012, three putative class actions were filed in the U.S. District Court for the Western District of Oklahoma against the Company, Chesapeake Energy Savings and Incentive Stock Bonus Plan (the Plan), and certain of the Company’s officers and directors alleging breaches of fiduciary duties under the Employee Retirement Income Security Act (ERISA). The three cases have been consolidated, and the Plan is not named in the consolidated amended complaint which was filed on February 21, 2013. The action is brought on behalf of participants and beneficiaries of the Plan, and alleges that as fiduciaries of the Plan, defendants owed fiduciary duties, which they purportedly breached by, among other things, failing to manage and administer the Plan’s assets with appropriate skill and care, and engaging in activities that were in conflict with the best interest of the Plan. The plaintiffs seek class certification, damages of an unspecified amount, equitable relief, and attorneys’ fees and other costs. The defendants filed a motion to dismiss on April 22, 2013, and the plaintiffs opposed on June 18, 2013. We are currently unable to assess the probability of loss or estimate a range of potential loss associated with this matter.
On May   8, 2012, a derivative action was filed in the District Court of Oklahoma County, Oklahoma against the Company ' s directors alleging, among other things, breaches of fiduciary duties and corporate waste related to the Company ' s officers and directors ' use of the Company ' s fractionally owned corporate jets. On August 21, 2012, the District Court granted the Company ' s motion to dismiss for lack of derivative standing, and the plaintiff appealed the ruling on December 6, 2012.
  Regulatory Proceedings. On May 2, 2012, Chesapeake and Mr. McClendon received notice from the U.S. Securities and Exchange Commission that its Fort Worth Regional Office had commenced an informal inquiry into, among other things, certain of the matters alleged in the foregoing lawsuits. On December 21, 2012, the SEC’s Fort Worth Regional Office advised Chesapeake that its inquiry is continuing as an investigation. The Company is providing information and testimony to the SEC pursuant to subpoenas and otherwise in connection with this matter and is also responding to related inquiries from other governmental and regulatory agencies and self-regulatory organizations.
On June 29, 2012, Chesapeake received a subpoena from the Antitrust Division, Midwest Field Office of the U.S. Department of Justice. The subpoena requires the Company to produce certain documents before a grand jury in the Western District of Michigan, which is conducting an investigation into possible violations of antitrust laws in connection with the purchase and lease of oil and gas rights. The Company has also received demands for documents and information from certain state governmental agencies in connection with other investigations relating to the Company’s purchase and lease of oil and gas rights. Chesapeake’s Board of Directors commenced its own investigation of certain

19

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

conduct covered by the Department of Justice subpoena in June 2012 and in February 2013 announced its conclusion that the Company did not violate antitrust laws in connection with the acquisition of Michigan oil and gas rights in 2010. Chesapeake continues to provide information in response to these investigations.
Business Operations. Chesapeake is involved in various other lawsuits and disputes incidental to its business operations, including commercial disputes, personal injury claims, claims for underpayment of royalties, property damage claims and contract actions. With regard to contract actions, various mineral or leasehold owners have filed lawsuits against us seeking specific performance to require us to acquire their natural gas and oil interests and pay acreage bonus payments, damages based on breach of contract and/or, in certain cases, punitive damages based on alleged fraud. The Company has successfully defended a number of these cases in various courts, has settled others and believes that it has substantial defenses to the claims made in those pending at the trial court and on appeal. Based on management’s current assessment, we are of the opinion that no pending or threatened lawsuit or dispute relating to the Company’s business operations is likely to have a material adverse effect on its consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates.
Environmental Risk
The nature of the natural gas and oil business carries with it certain environmental risks for Chesapeake and its subsidiaries. Chesapeake has implemented various policies, procedures, training and auditing to reduce and mitigate such environmental risks. Chesapeake conducts periodic reviews, on a company-wide basis, to assess changes in our environmental risk profile. Environmental reserves are set for environmental liabilities for which economic losses are probable and reasonably estimable. We manage our exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and addressing the potential liability. Depending on the extent of an identified environmental concern, Chesapeake may, among other things, exclude a property from the transaction, require the seller to remediate the property to our satisfaction in an acquisition or agree to assume liability for the remediation of the property.
There are presently pending against our subsidiary, Chesapeake Appalachia, L.L.C. (CALLC), orders for compliance first initiated in the 2010 fourth quarter by the U.S. Environmental Protection Agency (EPA) related to our compliance with Clean Water Act (CWA) permitting requirements in West Virginia. We have responded to all pending orders and are actively working with the EPA to resolve these and similar matters. For one site subject to an EPA order for compliance, CALLC pled guilty in 2012 to three misdemeanor counts of unauthorized discharge of dredged or fill materials into a water of the U.S. We have paid the applicable fine in full, our restoration of the site has been completed and approved by the government, and we believe that we are in compliance with the terms of probation.
The CWA provides authority for significant civil penalties for the placement of fill in a jurisdictional stream or wetland without a permit from the Army Corps of Engineers. CWA civil penalties can be as high as $37,500 per day, per violation. The CWA sets forth subjective criteria, including degree of fault and history of prior violations, that influence CWA penalty assessments, and the EPA may also seek to recover the economic benefit derived from non-compliance. While we expect that resolution of the EPA’s orders for compliance will include monetary sanctions exceeding $100,000 , we believe the liability with respect to these matters will not have a material effect on the consolidated financial position, results of operations or cash flow of the Company.
Commitments
Rig Leases
In a series of transactions beginning in 2006, our drilling subsidiary sold 94 drilling rigs (of which 28 rigs have been repurchased) and related equipment and entered into master lease agreements under which we agreed to lease the rigs from the buyer for initial terms of five to ten years. The lease commitments are guaranteed by Chesapeake and certain of its subsidiaries. These transactions were recorded as sales and operating leasebacks and any related net gains are amortized to oilfield services expenses over the lease term. Under the leases, we can exercise an early purchase option or we can purchase the rigs at the expiration of the lease for the fair market value at the time. In addition, in most cases we have the option to renew a lease for negotiated new terms at the expiration of the lease. Commitments related to rig lease payments are not recorded in the accompanying condensed consolidated balance sheets. As of June 30, 2013 , the minimum aggregate undiscounted future rig lease payments were approximately $260 million .

20

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Chesapeake has contracts with various drilling contractors to utilize approximately 15 rigs with terms ranging from one year to three years . These commitments are not recorded in the accompanying condensed consolidated balance sheets. As of June 30, 2013 , the aggregate undiscounted minimum future payments under these drilling rig commitments were approximately $116 million .
Compressor Leases
Through various transactions beginning in 2007, our compression subsidiary sold 2,558 compressors (of which 246 units have been repurchased), a significant portion of its compressor fleet, and entered into a master lease agreement under which we agreed to lease the compressors from the buyer for initial terms of four to ten years. The lease commitments are guaranteed by Chesapeake and certain of its subsidiaries. These transactions were recorded as sales and operating leasebacks, and any related net gains are amortized to marketing, gathering and compression expenses over the lease term. Under the leases, we can exercise an early purchase option or we can purchase the compressors at the expiration of the lease for the fair market value at the time. In addition, in most cases we have the option to renew a lease for negotiated new terms at the expiration of the lease. Commitments related to compressor lease payments are not recorded in the accompanying condensed consolidated balance sheets. As of June 30, 2013 , the minimum aggregate undiscounted future compressor lease payments were approximately $363 million .
Gathering, Processing and Transportation Agreements
We have contractual commitments with midstream service companies and pipeline carriers for future gathering, processing and transportation of natural gas and liquids to move certain of our production to market. Working interest owners and royalty interest owners, where appropriate, will be responsible for their proportionate share of these costs. Commitments related to gathering, processing and transportation agreements are not recorded in the accompanying condensed consolidated balance sheets; however, they are reflected as adjustments to future natural gas, oil and NGL sales prices used in our proved reserves estimates.
The aggregate undiscounted commitments under our gathering, processing and transportation agreements, excluding any reimbursement from working interest and royalty interest owners, are presented below.
 
 
June 30, 2013
 
 
($ in millions)
2013
 
$
902

2014
 
2,001

2015
 
1,820

2016
 
1,914

2017
 
1,947

2018 - 2099
 
9,477

Total
 
$
18,061

Drilling Commitments
In December 2011, as part of our Utica joint venture development agreement with Total S.A. (Total) (see Note 8), we committed to spud no less than 90 cumulative Utica wells by December 31, 2012, 270 cumulative wells by December 31, 2013 and 540 cumulative wells by December 31, 2014. Through June 30, 2013 , we had spud 290 cumulative Utica wells and had met our 2012 and 2013 commitment. If we fail to meet the drilling commitment at December 31, 2014 for any reason other than a force majeure event, the drilling carry percentage used to determine our promoted well reimbursement will be reduced from 60% to 45% for a number of wells drilled in 2015 equal to the number of wells we were short the drilling commitment. As such, any reduction would only affect the timing of the receipt of the drilling carry but not the total drilling carry to be received.
We have also committed to drill wells in conjunction with our CHK Utica and CHK C-T financial transactions and in conjunction with the formation of the Chesapeake Granite Wash Trust. See Note 6 for discussion of these transactions and commitments.

21

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Property and Equipment Purchase Commitments
Much of the oilfield services and other equipment we purchase requires long production lead times. As a result, we have outstanding orders and commitments for such equipment. As of June 30, 2013 , we had $59 million of purchase commitments related to future capital expenditures for oilfield services and other equipment.
Natural Gas and Liquids Purchase Commitments
We regularly commit to purchase natural gas and liquids from other owners in the properties we operate, including owners associated with our VPP transactions. Production purchased under these arrangements is based on market prices at the time of production, and the purchased natural gas and liquids are resold at market prices. See Note 8 for further discussion of our VPP transactions.
Net Acreage Maintenance Commitments
Under the terms of our joint venture agreements with Statoil, Total and Sinopec (see Note 8), we are required to extend, renew or replace certain expiring joint leasehold, at our cost, to ensure that the net acreage is maintained in certain designated areas. To date, we have satisfied our replacement commitments under the Statoil and Sinopec agreements. We did not fully meet the initial net acreage maintenance commitment with Total under the terms of our Barnett Shale joint venture agreement as of the December 31, 2012 measurement date. As of June 30, 2013 , we estimated a net acreage shortfall of approximately 13,500 net acres and anticipate making a cash payment of approximately $27 million to Total in the 2013 second half. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ from management’s estimates.
Affiliate Commitments
Under the terms of our corporate revolving bank credit facility, certain of our subsidiaries, including our oilfield services companies, are not guarantors of the credit facility debt. Transactions under certain agreements between us and our non-guarantor subsidiaries could affect our EBITDA or indebtedness for purposes of our credit facility covenant calculations, but they would have no effect on the condensed consolidated financial statements because the transactions would be eliminated through consolidation. See Note 3 for discussion of our covenant calculations.
In October 2011, we entered into a services agreement with our wholly owned subsidiary, COO, under which we guarantee the utilization of a portion of COO’s drilling rig and hydraulic fracturing fleets during the term of the agreement. Through October 2016, we are subject to monetary penalties if we do not operate a specific number of COO’s drilling rigs or utilize a specific number of its hydraulic fracturing fleets. No monetary penalties have been incurred pursuant to the services agreement. Any monetary penalties incurred in future periods would be eliminated in consolidation.

22

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Other Commitments
In April 2011, we entered into a master frac service agreement with our equity affiliate, FTS International, Inc. (FTS), which expires on December 31, 2014. Pursuant to this agreement, we are committed to enter into a predetermined number of backstop contracts, providing at least a 10% gross margin to FTS, if utilization of FTS fleets falls below a certain level. To date, we have not entered into any backstop contracts and, since we use hydraulic fracturing services continuously, we do not anticipate any material payments under this commitment.
In July 2011, we agreed to invest $155 million in preferred equity securities of Sundrop Fuels, Inc., a privately held cellulosic biofuels company based in Longmont, Colorado. As of June 30, 2013 , we had funded $115 million of our commitment. The remaining tranches of preferred equity investment will be scheduled around certain funding and operational milestones that are expected to be reached in the 2013 second half. See Note 9 for further discussion of this investment.
In December 2011, we sold Appalachia Midstream Services, L.L.C., a wholly owned subsidiary of our wholly owned subsidiary, Chesapeake Midstream Development, L.L.C. (CMD), to Access Midstream Partners, L.P. (NYSE:ACMP) for total consideration of $884 million . In addition, CMD committed to pay ACMP for any quarterly shortfall between the actual adjusted EBITDA from the assets sold and specified quarterly targets, which total $100 million in 2012 and $150 million in 2013. We recorded this guarantee at an estimated fair value of $27 million at the time of the sale. No payment was required for the Current Period or for 2012, and we recognized $5 million of gain in the Current Period associated with the release of the liability related to the quarterly target achieved. The remaining $14 million fair value is included in other current liabilities on our condensed consolidated balance sheet as of June 30, 2013 . We will release this liability over the remainder of 2013. To the extent CMD is required to make payments under the guarantee, we will record the differences between the liability and the associated payments in earnings.
As part of our normal course of business, we enter into various agreements providing, or otherwise arranging, financial or performance assurances to third parties on behalf of our wholly owned guarantor subsidiaries. These agreements may include future payment obligations or commitments regarding operational performance that effectively guarantee our subsidiaries’ future performance.
In connection with divestitures, our purchase and sale agreements generally provide indemnification to the counterparty for liabilities incurred as a result of a breach of a representation or warranty by the indemnifying party or in regards to perfecting title to property. These indemnifications generally have a discrete term and are intended to protect the parties against risks that are difficult to predict or cannot be quantified at the time of the consummation of a particular transaction.
Certain of our natural gas and oil properties are burdened by non-operating interests such as royalty and overriding royalty interests, including overriding royalty interests sold through our VPP transactions. As the holder of the working interest from which such interests have been created, we have the responsibility to bear the cost of developing and producing the reserves attributable to such interests. See Note 8 for further discussion of our VPP transactions. 

23

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

5.
Other Liabilities
Other current liabilities as of June 30, 2013 and December 31, 2012 are detailed below. 
 
 
June 30, 2013
 
December 31, 2012
 
 
($ in millions)
Revenues and royalties due others
 
$
1,408

 
$
1,337

Accrued natural gas, oil and NGL drilling and production costs
 
459

 
525

Joint interest prepayments received
 
564

 
749

Accrued payroll and benefits
 
187

 
224

Accrued dividends
 
101

 
101

Other
 
830

 
805

Total other current liabilities
 
$
3,549

 
$
3,741

Other long-term liabilities as of June 30, 2013 and December 31, 2012 are detailed below. 
 
 
June 30, 2013
 
December 31, 2012
 
 
($ in millions)
CHK Utica ORRI conveyance obligation (a)
 
$
266

 
$
275

CHK C-T ORRI conveyance obligation (b)
 
157

 
164

Financing lease obligations (c)
 
141

 
143

Mortgages payable (d)
 
—

 
56

Other
 
505

 
538

Total other long-term liabilities
 
$
1,069

 
$
1,176

____________________________________________
(a)
$21 million and $18 million of the total $287 million and $293 million obligations are recorded in other current liabilities as of June 30, 2013 and December 31, 2012 , respectively. See Note 6 for further discussion of the transaction.
(b)
$11 million and $14 million of the total $168 million and $178 million obligation is recorded in other current liabilities as of June 30, 2013 and December 31, 2012 , respectively. See Note 6 for further discussion of the transaction.
(c)
In 2009, we financed 111 real estate surface properties in the Barnett Shale area for approximately $145 million and entered into a 40 -year master lease agreement under which we agreed to lease the sites for approximately $15 million to $27 million annually. This lease transaction was recorded as a financing lease and the cash received was recorded with an offsetting long-term liability on the condensed consolidated balance sheet. Chesapeake exercised its option to repurchase one of the properties in 2011 and two of the properties in the Current Quarter.
(d)
In 2009, we financed our regional Barnett Shale headquarters building in Fort Worth, Texas for net proceeds of approximately $54 million with a five -year term loan which had a floating interest rate of prime plus 275 basis points. In the Current Period, we prepaid the term loan in full without penalty. As of June 30, 2013 , the building was classified as property and equipment held for sale on our condensed consolidated balance sheet.

24

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

6.
Stockholders’ Equity, Stock-Based Compensation, Performance Share Units and Noncontrolling Interests
Common Stock
The following is a summary of the changes in our common shares issued for the six months ended June 30, 2013 and 2012 :
 
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
 
(in thousands)
Shares issued as of January 1
 
666,468

 
660,888

Restricted stock issuances (net of forfeitures) (a)
 
2,138

 
3,063

Stock option exercises
 
313

 
244

Shares issued as of June 30
 
668,919

 
664,195

___________________________________________
(a)
Beginning in June 2013, we began granting restricted stock units (RSUs) in lieu of restricted stock awards (RSAs) to non-employee directors and subsequent to June 30, 2013, we began granting RSUs to employees in lieu of RSAs. Shares of common stock underlying RSUs are issued when the units vest, whereas restricted shares of common stock are issued on the grant date of RSAs. We refer to RSAs and RSUs collectively as restricted stock.
Preferred Stock
The following reflects the shares outstanding and liquidation preference of our preferred shares for the six months ended June 30, 2013 and 2012 : 
 
 
5.75%
 
5.75% (A)
 
4.50%
 
5.00%
(2005B)  
 
Total
Shares outstanding as of January 1, 2013
and 2012 and June 30, 2013 and 2012
(in thousands)
 
1,497

 
1,100

 
2,559

 
2,096

 
7,252

 
 
 
 
 
 
 
 
 
 
 
Liquidation preference per share
 
$
1,000

 
$
1,000

 
$
100

 
$
100

 
 
Dividends
Dividends declared on our common stock and preferred stock are reflected as adjustments to retained earnings to the extent a surplus of retained earnings will exist after giving effect to the dividends. To the extent retained earnings are insufficient to fund the distributions, such payments constitute a return of contributed capital rather than earnings and are accounted for as a reduction to paid-in capital.
Dividends on our outstanding preferred stock are payable quarterly. We may pay dividends on our 5.00% Cumulative Convertible Preferred Stock (Series 2005B) and our 4.50% Cumulative Convertible Preferred Stock in cash, common stock or a combination thereof, at our option. Dividends on both series of our 5.75% Cumulative Convertible Non-Voting Preferred Stock are payable only in cash.

25

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Stock-Based Compensation
Chesapeake’s stock-based compensation program consists of restricted stock and stock options granted to employees and restricted stock issued to non-employee directors. We recognize in our financial statements the cost of employee services received in exchange for awards of equity instruments, including restricted stock and stock options, based on the fair value of the equity instruments at the date of the grant. For employees, this value is amortized over the vesting period, which is generally three or four years from the date of grant. For directors, although restricted stock grants vest over three years , this value is expensed immediately as there is a non-substantive service condition for vesting. To the extent compensation cost relates to employees directly involved in the acquisition of natural gas and oil leasehold and exploration and development activities, such amounts are capitalized to natural gas and oil properties. Amounts not capitalized to natural gas and oil properties are recognized as general and administrative expenses, natural gas, oil and NGL production expenses, marketing, gathering and compression expenses or oilfield services expenses. We recorded the following stock-based compensation during the Current Quarter, the Prior Quarter, the Current Period and the Prior Period:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
($ in millions)
Natural gas and oil properties
 
$
12

 
$
18

 
$
32

 
$
38

General and administrative expenses
 
15

 
20

 
35

 
38

Natural gas, oil and NGL production expenses
 
6

 
5

 
12

 
12

Marketing, gathering and compression expenses
 
1

 
4

 
4

 
8

Oilfield services expenses
 
2

 
2

 
5

 
5

Total
 
$
36

 
$
49

 
$
88

 
$
101

Restricted Stock
In the Current Period, we granted restricted stock to employees and non-employee directors. Restricted stock vests over a minimum of three years and the holder will receive dividends or dividend equivalents on unvested shares. A summary of the changes in unvested shares during the six months ended June 30, 2013 is presented below.
 
 
Number of
Unvested
Restricted Shares
 
Weighted Average
Grant-Date
Fair Value
 
 
(in thousands)
 
 
Unvested shares as of January 1, 2013
 
18,899

 
$
23.72

Granted
 
5,390

 
$
18.12

Vested
 
(6,223
)
 
$
23.82

Forfeited
 
(889
)
 
$
21.76

Unvested shares as of June 30, 2013
 
17,177

 
$
22.04

The aggregate intrinsic value of restricted stock that vested during the Current Period was approximately $115 million based on the stock price at the time of vesting.
As of June 30, 2013 , there was $239 million of total unrecognized compensation cost related to unvested restricted stock. The cost is expected to be recognized over a weighted average period of approximately 2.5 years .
The vesting of certain restricted stock grants could result in state and federal income tax benefits related to the difference between the market price of the common stock at the date of vesting and the date of grant. During the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, we recognized reductions in tax benefits related to restricted stock of $2 million , $1 million , $12 million and $5 million , respectively, which were recorded as adjustments to additional paid-in capital and deferred income taxes.

26

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Stock Options
In the Current Period, as part of our long-term compensation, we granted members of our senior management team stock options that will vest ratably over a three -year period. We also granted retention awards to certain officers of stock options that will vest one-third on each of the third , fourth and fifth anniversaries of the grant date. The stock option awards have an exercise price equal to the closing price of the Company’s common stock on the grant date. Prior to 2006, we had granted stock options under several stock compensation plans which vested over a four -year period. Outstanding options expire ten years from the date of grant.
The following table provides information related to stock option activity for the six months ended June 30, 2013 : 
 
 
Number of
Shares
Underlying  
Options
 
Weighted
Average
Exercise
Price
Per Share
 
Weighted  
Average
Contract
Life in
Years
 
Aggregate  
Intrinsic
Value (a)
 
 
(in thousands)
 
 
 
 
 
($ in millions)
Outstanding at January 1, 2013
 
481

 
$
12.69

 
0.96
 
$
2

Granted
 
5,187

 
$
19.22

 
 
 
 
Exercised
 
(336
)
 
$
10.81

 
 
 


Expired
 
(12
)
 
$
22.49

 
 
 
 
Outstanding at June 30, 2013
 
5,320

 
$
19.15

 
9.42
 
$
7

 
 
 
 
 
 
 
 
 
Exercisable at June 30, 2013
 
357

 
$
18.08

 
6.47
 
$
1

___________________________________________
(a)
The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.
As of June 30, 2013 , there was $27 million of total unrecognized compensation cost related to stock options. The cost is expected to be recognized over a weighted average period of approximately 3.1 years .
During the Current Quarter, the Prior Quarter, the Current Period and the Prior Period we recognized excess tax benefits related to stock options of $0 , $1 million , $0 and $1 million , respectively. All amounts were recorded as adjustments to additional paid-in capital and deferred income taxes.
Performance Share Units
In January 2012 and 2013, we granted performance share units (PSUs) to senior management under our Long Term Incentive Plan that vest ratably over a three-year period. The 2012 awards are settled in cash on the first, second and third anniversary dates of the awards, and the 2013 awards are settled in cash on the third anniversary of the awards. The PSU awards include both an internal operational performance condition and an external market condition. The operational performance condition is a function of internal proved reserves growth and production growth. The market condition is a function of total shareholder return (TSR), and generally requires a Monte Carlo simulation to determine the fair value.
For PSUs granted in 2012, each of the TSR and operational payout components can range from 0% to 125% resulting in a maximum total payout of 250% . For PSUs granted in 2013, the TSR component can range from 0% to 125% and each of the two operational components can range from 0% to 62.5% ; however, the maximum total payout is capped at 200% in all cases and at 100% in situations where the Company’s absolute TSR is less than zero. The PSUs can only be settled in cash, so they are classified as a liability in our condensed consolidated financial statements and are measured at fair value as of the grant date, and re-measured at fair value at the end of each reporting period. Compensation expense is recognized over the vesting period with a corresponding adjustment to the liability.

27

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

The following table presents a summary of our PSU awards as of June 30, 2013 :
 
 
Units
 
Fair Value
as of
Grant-Date
 
Fair Value
 
Liability for
Vested
Amount
 
 
 
 
($ in millions)
2012 Awards
 
 
 
 
 
 
 
 
Payable 2014
 
278,084

 
$
8

 
$
5

 
$
5

Payable 2015
 
834,246

 
23

 
17

 
15

Total 2012 Awards
 
1,112,330

 
$
31

 
$
22

 
$
20

 
 
 
 
 
 
 
 
 
2013 Awards
 
 
 
 
 
 
 
 
Payable 2016
 
1,636,572

 
$
35

 
$
39

 
$
26

Noncontrolling Interests
Cleveland Tonkawa Financial Transaction. We formed CHK Cleveland Tonkawa, L.L.C. (CHK C-T) in March 2012 to continue development of a portion of our natural gas and oil assets in our Cleveland and Tonkawa plays. CHK C-T is an unrestricted subsidiary under our corporate credit facility agreement and is not a guarantor of, or otherwise liable for, any of our indebtedness or other liabilities, including indebtedness under our indentures. In exchange for all of the common shares of CHK C-T, we contributed to CHK C-T approximately 245,000 net acres of leasehold and the existing wells within an area of mutual interest in the plays between the top of the Tonkawa and the top of the Big Lime formations covering Ellis and Roger Mills counties in western Oklahoma. In March 2012, in a private placement, third-party investors contributed $1.25 billion in cash to CHK C-T in exchange for (i)  1.25 million preferred shares, and (ii) our obligation to deliver a 3.75% overriding royalty interest (ORRI) in the existing wells and up to 1,000 future net wells to be drilled on the contributed play leasehold. Subject to customary minority interest protections afforded the investors by the terms of the CHK C-T limited liability company agreement (the CHK C-T LLC Agreement), as the holder of all the common shares and the sole managing member of CHK C-T, we maintain voting and managerial control of CHK C-T and therefore include it in our condensed consolidated financial statements. Of the $1.25 billion of investment proceeds, we allocated $225 million to the ORRI obligation and $1.025 billion to the preferred shares based on estimates of fair values. The remaining ORRI obligation is included in other current and long-term liabilities and the preferred shares are included in noncontrolling interests on our condensed consolidated balance sheets. Pursuant to the CHK C-T LLC Agreement, CHK C-T is currently required to retain an amount of cash (measured quarterly) equal to (i) the next two quarters of preferred dividend payments plus (ii) its projected operating funding shortfall for the next six months (projected operating funding shortfall requirement ends on December 31, 2013). The amount so retained, approximately $37 million as of June 30, 2013 , is reflected as restricted cash on our condensed consolidated balance sheet.
Dividends on the preferred shares are payable on a quarterly basis at a rate of 6%  per annum based on $1,000 per share. This dividend rate is subject to increase in limited circumstances in the event that, and only for so long as, any dividend amount is not paid in full for any quarter. As the managing member of CHK C-T, we may, at our sole discretion and election at any time after March 31, 2014, distribute certain excess cash of CHK C-T, as determined in accordance with the CHK C-T LLC Agreement. Any such optional distribution of excess cash is allocated 75% to the preferred shares (which is applied toward redemption of the preferred shares) and 25% to the common shares unless we have not met our drilling commitment at such time, in which case an optional distribution would be allocated 100% to the preferred shares (and applied toward redemption thereof). We may also, at our sole discretion and election, in accordance with the CHK C-T LLC Agreement, cause CHK C-T to redeem all or a portion of the CHK C-T preferred shares for cash. The preferred shares may be redeemed at a valuation equal to the greater of a 9% internal rate of return or a return on investment of 1.35 x, in each case inclusive of dividends paid through redemption at the rate of 6%  per annum and optional distributions made through the applicable redemption date. In the event that redemption does not occur on or prior to March 31, 2019, the optional redemption valuation will increase to provide a 15% internal rate of return to the investors. The preferred shares can be redeemed on a pro-rata basis in accordance with the then-applicable redemption valuation formula. As of June 30, 2013 , the redemption price and the liquidation preference were each $1,275 per preferred share.
We have committed to drill and complete, for the benefit of CHK C-T in the area of mutual interest, a minimum of 37.5 net wells per six-month period through 2013, inclusive of wells drilled in 2012, and 25 net wells per six-month

28

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

period in 2014 through 2016, up to a minimum cumulative total of 300 net wells. If we fail to meet the then-current cumulative drilling commitment in any six-month period, any optional cash distributions would be distributed 100% to the investors. If we fail to meet the then-current cumulative drilling commitment in two consecutive six-month periods, the then-applicable internal rate of return to investors at redemption would increase by 3%  per annum. In addition, if we fail to meet the then-current cumulative drilling commitment in four consecutive six-month periods, the then-applicable internal rate of return to investors at redemption would be increased by an additional 3%  per annum. Any such increase in the internal rate of return would be effective only until the end of the first succeeding six-month period in which we have met our then-current cumulative drilling commitment. CHK C-T is responsible for all capital and operating costs of the wells drilled for the benefit of the entity. Under the development agreement, approximately 51 and 41 qualified net wells were added in the Current Period and the Prior Period, respectively. As of June 30, 2013 , we were on target to meet our 2013 drilling commitment associated with the CHK C-T transaction.
The CHK C-T investors’ right to receive, proportionately, a 3.75% ORRI in the contributed wells and up to 1,000 future net wells on our contributed leasehold is subject to an increase to 5% on net wells earned in any year following a year in which we do not meet our net well commitment under the ORRI obligation, which runs from 2012 through the first quarter of 2025. However, in no event would we deliver to investors more than a total ORRI of 3.75% in existing wells and 1,000 future net wells. If at any time CHK C-T holds fewer net acres than would enable us to drill all then-remaining net wells on 160 -acre spacing, the investors have the right to require us to repurchase their right to receive ORRIs in the remaining net wells at the then-current fair market value of such remaining ORRIs. We retain the right to repurchase the investors’ right to receive ORRIs in the remaining net wells at the then-current fair market value of such remaining ORRIs once we have drilled a minimum of 867 net wells. The obligation to deliver future ORRIs has been recorded as a liability which will be settled through the conveyance of the underlying ORRIs to the investors on a net-well basis, at which time the associated liability will be reversed and the sale of the ORRIs reflected as an adjustment to the capitalized cost of our natural gas and oil properties. Under the ORRI obligation, we delivered an ORRI in approximately 54 net wells in the Current Period and 32 net wells in the Prior Period. While operations began on April 1, 2012, all wells completed since January 1, 2012 are credited to the ORRI obligation of 1,000 future net wells. Through June 30, 2013 , we were on target to meet the ORRI conveyance commitment associated with the CHK C-T transaction.
As of June 30, 2013 and December 31, 2012 , $1.015 billion of noncontrolling interests on our condensed consolidated balance sheets was attributable to CHK C-T. In the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, income of $19 million , $19 million , $38 million and $19 million , respectively, was attributable to the noncontrolling interests of CHK C-T.
Utica Financial Transaction. We formed CHK Utica, L.L.C. (CHK Utica) in October 2011 to develop a portion of our Utica Shale natural gas and oil assets. CHK Utica is an unrestricted subsidiary under our corporate credit facility agreement and is not a guarantor of, or otherwise liable for, any of our indebtedness or other liabilities, including indebtedness under our indentures. In exchange for all of the common shares of CHK Utica, we contributed to CHK Utica approximately 700,000 net acres of leasehold and the existing wells within an area of mutual interest in the Utica Shale play covering 13 counties located primarily in eastern Ohio. During November and December 2011, in private placements, third-party investors contributed $1.25 billion in cash to CHK Utica in exchange for (i)  1.25 million preferred shares, and (ii) our obligation to deliver a 3% ORRI in 1,500 net wells to be drilled on certain of our Utica Shale leasehold. Subject to customary minority interest protections afforded the investors by the terms of the CHK Utica limited liability company agreement (the CHK Utica LLC Agreement), as the holder of all the common shares and the sole managing member of CHK Utica, we maintain voting and managerial control of CHK Utica and therefore include it in our condensed consolidated financial statements. Of the $1.25 billion of investment proceeds, we allocated $300 million to the ORRI obligation and $950 million to the preferred shares based on estimates of fair values. The remaining ORRI obligation is included in other current and long-term liabilities and the preferred shares are included in noncontrolling interests on our condensed consolidated balance sheets. Pursuant to the CHK Utica LLC Agreement, CHK Utica is required to retain a cash balance equal to the next two quarters of preferred dividend payments. The amount reserved for paying such dividends, approximately $44 million , was reflected as restricted cash on our condensed consolidated balance sheet as of June 30, 2013 . In addition, pursuant to the CHK Utica LLC Agreement, with respect to any divestiture proceeds as defined by the agreement, CHK Utica is required to separately account for, and dedicate all of such divestiture proceeds to either (i) capital expenditures made by CHK Utica in connection with its assets or (ii) the redemption of CHK Utica preferred shares. As of December 31, 2012, we held $155 million received from divestitures defined by the agreement as restricted cash in other long-term assets on our condensed consolidated balance sheet. In the Current Period, we used all of the $155 million for CHK Utica capital expenditures.

29

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Dividends on the preferred shares are payable on a quarterly basis at a rate of 7%  per annum based on $1,000 per share. This dividend rate is subject to increase in limited circumstances in the event that, and only for so long as, any dividend amount is not paid in full for any quarter. As the managing member of CHK Utica, we may, at our sole discretion and election at any time after December 31, 2013, distribute certain excess cash of CHK Utica, as determined in accordance with the CHK Utica LLC Agreement. Any such optional distribution of excess cash is allocated 70% to the preferred shares (which is applied toward redemption of the preferred shares) and 30% to the common shares unless we have not met our drilling commitment and are in a liquidated damages period, in which case an optional distribution would be allocated 100% to the preferred shares (and applied toward redemption thereof). We may also, at our sole discretion and election, in accordance with the CHK Utica LLC Agreement, cause CHK Utica to redeem the CHK Utica preferred shares for cash, in whole or in part. The preferred shares may be redeemed at a valuation equal to the greater of a 10% internal rate of return or a return on investment of 1.4 x, in each case inclusive of dividends paid at the rate of 7%  per annum and optional distributions made through the applicable redemption date. In the event that redemption does not occur on or prior to October 31, 2018, the optional redemption valuation will increase to provide the investors the greater of a 17.5% internal rate of return or a return on investment of 2.0 x. The preferred shares can be redeemed on a pro-rata basis in accordance with the then-applicable redemption valuation formula. As of June 30, 2013 , the redemption price and the liquidation preference were each approximately $1,287 per preferred share.
We have committed to drill and complete, for the benefit of CHK Utica in the area of mutual interest, a minimum of 50 net wells per year from 2012 through 2016, up to a minimum cumulative total of 250 net wells. CHK Utica is responsible for all capital and operating costs of the wells drilled for the benefit of the entity. If we fail to meet the then-current drilling commitment in any year, we must pay CHK Utica $5 million for each well we are short of such drilling commitment. CHK Utica also receives its proportionate share of the benefit of the drilling carry associated with our joint venture with Total in the Utica Shale. See Note 8 for further discussion of the joint venture. Under the development agreement, approximately 60 and 30 qualified net wells were added in the Current Period and Prior Period, respectively. As of June 30, 2013 , we had met our 2013 drilling commitment associated with the CHK Utica transaction.
The CHK Utica investors’ right to receive, proportionately, a 3% ORRI in the first 1,500 net wells drilled on our Utica Shale leasehold is subject to an increase to 4% on net wells earned in any year following a year in which we do not meet our net well commitment under the ORRI obligation, which runs from 2012 through 2023. However, in no event would we deliver to investors more than a total ORRI of 3% in 1,500 net wells. If at any time we hold fewer net acres than would enable us to drill all then-remaining net wells on 150 -acre spacing, the investors have the right to require us to repurchase their right to receive ORRIs in the remaining net wells at the then-current fair market value of such remaining ORRIs. We retain the right to repurchase the investors’ right to receive ORRIs in the remaining net wells at the then-current fair market value of such remaining ORRIs once we have drilled a minimum of 1,300 net wells. The obligation to deliver future ORRIs has been recorded as a liability which will be settled through the future conveyance of the underlying ORRIs to the investors on a net-well basis, at which time the associated liability will be reversed and the sale of the ORRIs reflected as an adjustment to the capitalized cost of our natural gas and oil properties. Under the ORRI obligation, we delivered an ORRI in approximately 51 new net wells in the Current Period and 8 net wells in the Prior Period. We did not meet our ORRI commitment in 2012. The ORRI increased to 4% for wells earned in 2013, and the ultimate number of wells in which we must assign an interest will be reduced accordingly.
As of June 30, 2013 and December 31, 2012 , $807 million and $950 million of noncontrolling interests on our condensed consolidated balance sheets, respectively, were attributable to CHK Utica. For the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, income of approximately $20 million , $22 million , $42 million and $44 million , respectively, was attributable to the noncontrolling interests of CHK Utica. In the Current Quarter, we purchased approximately 190,000 preferred shares of CHK Utica from existing investors for approximately $212 million , or approximately $1,115 per share plus accrued dividends, reducing the amount of outstanding preferred shares held by third-party investors by approximately 15% . The difference between the cash paid for the preferred shares and the carrying value of the noncontrolling interest acquired of $69 million is reflected in retained earnings and as a reduction to net income available to common stockholders for purposes of our EPS computations.

30

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Chesapeake Granite Wash Trust. In November 2011, Chesapeake Granite Wash Trust (the “Trust”) sold 23,000,000 common units representing beneficial interests in the Trust at a price of $19.00 per common unit in its initial public offering. The common units are listed on the New York Stock Exchange and trade under the symbol “CHKR”. We own 12,062,500 common units and 11,687,500 subordinated units, which in the aggregate represent an approximate 51% beneficial interest in the Trust. The Trust has a total of 46,750,000 units outstanding.
In connection with the initial public offering of the Trust, we conveyed royalty interests to the Trust that entitle the Trust to receive (i)  90% of the proceeds (after deducting certain post-production expenses and any applicable taxes) that we receive from the production of hydrocarbons from 69 producing wells, and (ii)  50% of the proceeds (after deducting certain post-production expenses and any applicable taxes) in 118 development wells that have been or will be drilled on approximately 45,400 gross acres ( 29,000 net acres) in the Colony Granite Wash play in Washita County in the Anadarko Basin of western Oklahoma. Pursuant to the terms of a development agreement with the Trust, we are obligated to drill, or cause to be drilled, the development wells at our own expense prior to June 30, 2016, and the Trust will not be responsible for any costs related to the drilling of the development wells or any other operating or capital costs of the Trust properties. In addition, we granted to the Trust a lien on our remaining interests in the undeveloped properties that are subject to the development agreement in order to secure our drilling obligation to the Trust, although the maximum amount that may be recovered by the Trust under such lien could not exceed $263 million initially and is proportionately reduced as we fulfill our drilling obligation over time. As of June 30, 2013 , we had drilled or caused to be drilled approximately 73 development wells, as calculated under the development agreement, and the maximum amount recoverable under the drilling support lien was approximately $102 million .
The subordinated units we hold in the Trust are entitled to receive pro rata distributions from the Trust each quarter if and to the extent there is sufficient cash to provide a cash distribution on the common units that is not less than the applicable subordination threshold for such quarter. If there is not sufficient cash to fund such a distribution on all of the Trust units, the distribution to be made with respect to the subordinated units will be reduced or eliminated for such quarter in order to make a distribution, to the extent possible, of up to the subordination threshold amount on the common units. In exchange for agreeing to subordinate a portion of our Trust units, and in order to provide additional financial incentive to us to satisfy our drilling obligation and perform operations on the underlying properties in an efficient and cost-effective manner, Chesapeake is entitled to receive incentive distributions equal to 50% of the amount by which the cash available for distribution on the Trust units in any quarter exceeds the applicable incentive threshold for such quarter. The remaining 50% of cash available for distribution in excess of the applicable incentive threshold will be paid to Trust unitholders, including Chesapeake, on a pro rata basis. At the end of the fourth full calendar quarter following our satisfaction of our drilling obligation with respect to the development wells, the subordinated units will automatically convert into common units on a one-for-one basis and our right to receive incentive distributions will terminate. After such time, the common units will no longer have the protection of the subordination threshold, and all Trust unitholders will share in the Trust’s distributions on a pro rata basis.
For the Current Period and Prior Period, the Trust declared and paid the following distributions.
Production Period
 
Distribution Date
 
Cash Distribution
per
Common Unit
 
Cash Distribution
per
Subordinated Unit
December 2012 - February 2013
 
May 31, 2013
 
$
0.6900

 
$
0.3010

September 2012 - November 2012
 
March 1, 2013
 
$
0.6700

 
$
0.3772

December 2011 - February 2012
 
May 31, 2012
 
$
0.6588

 
$
0.6588

September 2011 - November 2011
 
March 1, 2012
 
$
0.7277

 
$
0.7277

We have determined that the Trust constitutes a VIE and that Chesapeake is the primary beneficiary. As a result, the Trust is included in our condensed consolidated financial statements. As of June 30, 2013 and December 31, 2012 , $338 million and $356 million of noncontrolling interests on our condensed consolidated balance sheets, respectively, were attributable to the Trust. For the Current Quarter, Prior Quarter, Current Period and Prior Period, approximately $7 million , $24 million , $12 million and $27 million , respectively, of income was attributable to the Trust’s noncontrolling interests in our condensed consolidated statements of operations. See Note 10 for further discussion of VIEs.

31

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Wireless Seismic, Inc. We have a controlling 51% equity interest in Wireless Seismic, Inc. (Wireless), a privately owned company engaged in research, development and eventual production of wireless seismic systems and any related technology that deliver seismic information obtained from standard geophones in real time to laptop and desktop computers. As of June 30, 2013 and December 31, 2012, $9 million and $5 million of noncontrolling interests on our condensed consolidated balance sheets, respectively, were attributable to Wireless. In the Current Quarter and Current Period, $1 million and $2 million , respectively, of Wireless’ losses were attributable to noncontrolling interests of Wireless in our condensed consolidated statement of operations.
Big Star Crude Co., LLC. Oilfield Trucking Solutions, LLC, a wholly owned subsidiary of Chesapeake, entered into a joint venture to form Big Star Crude Co., LLC, (“Big Star”), which engages in commercial trucking. We determined that Big Star was a VIE because our voting rights were disproportionate to our economic interests and the activities of the entity involve us and were conducted on our behalf. We also determined that Chesapeake was the primary beneficiary since it had the power to direct the activities of the VIE, had the obligation to absorb losses and had the right to receive benefits from the VIE. As a result, Big Star was included in our condensed consolidated financial statements. As of June 30, 2013 and December 31, 2012, $1 million of noncontrolling interests on our condensed consolidated balance sheets was attributable to Big Star. In the Current Quarter and Current Period, nominal amounts of losses were attributable to noncontrolling interests of Big Star in our condensed consolidated statement of operations. On July 30, 2013, we sold our membership interest in Big Star for approximately $3 million in cash and working capital, in addition to various equipment.
7.
Derivative and Hedging Activities
Natural Gas, Oil and NGL Derivatives
Our results of operations and cash flows are impacted by changes in market prices for natural gas, oil and NGL. To mitigate a portion of our exposure to adverse price changes, we have entered into various derivative instruments. These instruments allow us to predict with greater certainty the effective prices to be received for our production. We believe our derivative instruments continue to be highly effective in achieving our risk management objectives. As of June 30, 2013 and December 31, 2012 , our natural gas and oil derivative instruments consisted of the following types of instruments:
•
Swaps : Chesapeake receives a fixed price and pays a floating market price to the counterparty for the hedged commodity.
•
Options : Chesapeake sells, and occasionally buys, call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, Chesapeake pays the counterparty such excess on sold call options, and Chesapeake receives such excess on bought call options. If the market price settles below the fixed price of the call option, no payment is due from either party.
•
Swaptions:  Chesapeake sells call swaptions in exchange for a premium that allows a counterparty, on a specific date, to enter into a fixed-price swap for a certain period of time.
•
Basis Protection Swaps : These instruments are arrangements that guarantee a price differential to NYMEX from a specified delivery point. Our natural gas basis protection swaps typically have negative differentials to NYMEX. Chesapeake receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract. Our oil basis protection swaps typically have positive differentials to NYMEX. Chesapeake receives a payment from the counterparty if the price differential is less than the stated terms of the contract and pays the counterparty if the price differential is greater than the stated terms of the contract.
•
Collars: These instruments contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, Chesapeake receives the fixed price and pays the market price. If the market price is between the put and the call strike price, no payments are due from either party. Three-way collars include an additional put option in exchange for a more favorable strike price on the collar. This eliminates the counterparty’s downside exposure below the second put option.
All of our derivative instruments are net settled based on the difference between the fixed-price payment and the floating-price payment, resulting in a net amount due to or from the counterparty.

32

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

The estimated fair values of our natural gas and oil derivative instrument assets (liabilities) as of June 30, 2013 and December 31, 2012 are provided below. 
 
 
June 30, 2013
 
December 31, 2012
 
 
Volume    
 
Fair Value  
 
Volume    
 
Fair Value  
 
 
 
 
($ in millions)  
 
 
 
($ in millions)  
Natural gas (tbtu):
 
 
 
 
 
 
 
 
Fixed-price swaps
 
519

 
$
94

 
49

 
$
24

Call options
 
193

 
(227
)
 
193

 
(240
)
Call swaptions
 
12

 
(1
)
 
—

 
—

Basis protection swaps
 
90

 
(7
)
 
111

 
(15
)
Three-way collars
 
55

 
3

 
—

 
—

Total natural gas
 
869

 
(138
)
 
353

 
(231
)
Oil (mmbbl):
 
 
 
 
 
 
 
 
Fixed-price swaps
 
36.8

 
75

 
28.1

 
68

Call options
 
67.6

 
(363
)
 
73.8

 
(748
)
Call swaptions
 
5.3

 
(2
)
 
5.3

 
(13
)
Basis protection swaps
 
0.7

 
3

 
5.5

 
—

Total oil
 
110.4

 
(287
)
 
112.7

 
(693
)
Total estimated fair value
 
 
 
$
(425
)
 
 
 
$
(924
)
 
Pursuant to accounting guidance, certain derivatives qualify for designation as cash flow hedges. Following this guidance, changes in the fair value of derivative instruments designated as cash flow hedges, to the extent they are effective in offsetting cash flows attributable to the hedged risk and locked-in gains and losses of settled designated derivative contracts, are recorded in accumulated other comprehensive income until the hedged item is recognized in earnings. Any change in fair value resulting from ineffectiveness is recognized in natural gas, oil and NGL sales. Changes in the fair value of derivatives not designated as cash flow hedges that occur prior to their maturity (i.e., temporary fluctuations in value) are reported in the condensed consolidated statements of operations within natural gas, oil and NGL sales. As of June 30, 2013 , we did not have any natural gas or oil derivatives that were designated as cash flow hedges. Therefore, changes in the fair value of these derivatives are reported in the condensed consolidated statement of operations. See further discussion below under Cash Flow Hedges .
The components of natural gas, oil and NGL sales for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period are presented below. 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
($ in millions)
Natural gas, oil and NGL sales
 
$
1,869

 
$
1,112

 
$
3,464

 
$
2,334

Gains (losses) on natural gas, oil and NGL derivatives
 
537

 
1,005

 
394

 
851

Total natural gas, oil and NGL sales
 
$
2,406

 
$
2,117

 
$
3,858

 
$
3,185


33

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Hedging Facility
We have a multi-counterparty secured hedging facility with 16 counterparties that have committed to provide approximately 6.2 tcfe of hedging capacity for natural gas, oil and NGL price derivatives and 6.2 tcfe for basis derivatives with an aggregate mark-to-market capacity of $16.5 billion under the terms of the facility. As of June 30, 2013 , we had hedged under the facility 1.4 tcfe of our future production with price derivatives and 0.1 tcfe with basis derivatives. The multi-counterparty facility allows us to enter into cash-settled natural gas, oil and NGL price and basis derivatives with the counterparties. Our obligations under the multi-counterparty facility are secured by proved reserves, the value of which must cover the fair value of the transactions outstanding under the facility by at least 1.65 times at semi-annual collateral dates and 1.30 times in between those dates, and guarantees by certain subsidiaries that also guarantee our corporate revolving bank credit facility, indentures, term loan and equipment master lease agreements. The counterparties’ obligations under the facility must be secured by cash or short-term U.S. Treasury instruments to the extent that any mark-to-market amounts they owe to Chesapeake exceed defined thresholds. The maximum volume-based trading capacity under the facility is governed by the expected production of the pledged reserve collateral, and volume-based trading limits are applied separately to price and basis derivatives. In addition, there are volume-based sub-limits for natural gas, oil and NGL derivative instruments. Chesapeake has significant flexibility with regard to releases and/or substitutions of pledged reserves, provided that certain requirements are met including maintaining specified collateral coverage ratios as well as maintaining credit ratings with either of the designated rating agencies at or above current levels. The facility does not have a maturity date. Counterparties to the agreement have the right to cease entering into derivative instruments with the Company on a prospective basis as long as obligations associated with any existing transactions in the facility continue to be satisfied in accordance with the terms of the agreement.
Interest Rate Derivatives
To mitigate a portion of our exposure to volatility in interest rates related to our senior notes and bank credit facilities, we enter into interest rate derivatives. As of June 30, 2013 and December 31, 2012 , our interest rate derivative instruments consisted of swaps. Chesapeake enters into fixed-to-floating interest rate swaps (we receive a fixed interest rate and pay a floating market rate) to mitigate our exposure to changes in the fair value of our senior notes. We enter into floating-to-fixed interest rate swaps (we receive a floating market rate and pay a fixed interest rate) to manage our interest rate exposure related to our bank credit facilities borrowings.
The notional amount and the estimated fair value of our interest rate derivative liabilities as of June 30, 2013 and December 31, 2012 are provided below. 
 
 
June 30, 2013
 
December 31, 2012
 
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
 
 
 
 
($ in millions)
 
 
Interest rate swaps
 
$
2,100

 
$
(91
)
 
$
1,050

 
$
(35
)

34

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Realized and unrealized gains or losses from interest rate derivative transactions are reflected as adjustments to interest expense in the condensed consolidated statements of operations. The components of interest expense for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period are presented below. 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
($ in millions)
Interest expense on senior notes
 
$
194

 
$
185

 
$
380

 
$
359

Interest expense on credit facilities
 
11

 
16

 
22

 
37

Interest expense on term loans
 
29

 
62

 
58

 
62

(Gains) losses on interest rate derivatives
 
50

 
(7
)
 
54

 
(2
)
Amortization of loan discount, issuance costs and other
 
30

 
42

 
48

 
42

Capitalized interest
 
(210
)
 
(284
)
 
(438
)
 
(472
)
Total interest expense
 
$
104

 
$
14

 
$
124

 
$
26

We have terminated certain fair value hedges related to senior notes. Gains and losses related to these terminated hedges will be amortized as an adjustment to interest expense over the remaining term of the related senior notes. Over the next eight years, we will recognize $16 million in net gains related to such transactions.
Foreign Currency Derivatives
In December 2006, we issued €600 million of 6.25% Euro-denominated Senior Notes due 2017. Concurrent with the issuance of the euro-denominated senior notes, we entered into cross currency swaps to mitigate our exposure to fluctuations in the euro relative to the dollar over the term of the notes. In May 2011, we purchased and subsequently retired €256 million in aggregate principal amount of these senior notes following a tender offer, and we simultaneously unwound the cross currency swaps for the same principal amount. Under the terms of the remaining cross currency swaps, on each semi-annual interest payment date, the counterparties pay us €11 million and we pay the counterparties $17 million , which yields an annual dollar-equivalent interest rate of 7.491% . Upon maturity of the notes, the counterparties will pay us €344 million and we will pay the counterparties $459 million . The terms of the cross currency swaps were based on the dollar/euro exchange rate on the issuance date of 1.3325 to €1.00. Through the cross currency swaps, we have eliminated any potential variability in our expected cash flows related to changes in foreign exchange rates and therefore the swaps are designated as cash flow hedges. The fair values of the cross currency swaps are recorded on the condensed consolidated balance sheet as a liability of $27 million as of June 30, 2013 . The euro-denominated debt in long-term debt has been adjusted to $447 million as of June 30, 2013 using an exchange rate of $1.3010 to €1.00.

35

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Additional Disclosures Regarding Derivative Instruments and Hedging Activities
In accordance with accounting guidance for derivatives and hedging, to the extent that a legal right of set-off exists, we net the value of our derivative arrangements with the same counterparty in the accompanying condensed consolidated balance sheets. Derivative instruments reflected as current in the condensed consolidated balance sheets represent the estimated fair value of derivatives scheduled to settle over the next twelve months based on market prices/rates as of the respective balance sheet dates. The derivative settlement amounts are not due until the month in which the related hedged transaction occurs. Cash settlements of our derivative instruments are generally classified as operating cash flows unless the derivative is deemed to contain, for accounting purposes, a significant financing element at contract inception, in which case these cash settlements are classified as financing cash flows in the accompanying condensed consolidated statements of cash flows.
The following table presents the fair value and location of each classification of derivative instrument disclosed in the condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012 on a gross basis without regard to same-counterparty netting: 
 
 
 
 
Fair Value
 
 
Balance Sheet Location
 
June 30,
2013
 
December 31,
2012
 
 
 
 
($ in millions)
Asset Derivatives:
 
 
 
 
 
 
Not designated as hedging instruments:
 
 
 
 
 
 
Commodity contracts
 
Short-term derivative instruments
 
$
159

 
$
110

Commodity contracts
 
Long-term derivative instruments
 
61

 
5

Total
 
220

 
115

 
 
 
 
 
 
 
Liability Derivatives:
 
 
 
 
 
 
Designated as hedging instruments:
 
 
 
 
 
 
Foreign currency contracts
 
Long-term derivative instruments
 
(27
)
 
(20
)
Total
 
(27
)
 
(20
)
 
 
 
 
 
 
 
Not designated as hedging instruments:
 
 
 
 
 
 
Commodity contracts
 
Short-term derivative instruments
 
(163
)
 
(157
)
Commodity contracts
 
Long-term derivative instruments
 
(482
)
 
(882
)
Interest rate contracts
 
Long-term derivative instruments
 
(91
)
 
(35
)
Total
 
(736
)
 
(1,074
)
Total derivative instruments
 
$
(543
)
 
$
(979
)

36

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

All of the Company’s derivative positions are subject to netting arrangements which provide for offsetting of asset and liability positions, as well as related cash collateral if applicable. Such netting arrangements generally do not have restrictions. Under such netting arrangements, the Company offsets the fair value of derivative instruments with cash collateral received or paid for those contracts executed with the same counterparty, which reduces the Company’s total assets and liabilities. As of June 30, 2013 and December 31, 2012 , we did not have any cash collateral balances for these derivatives.
The following tables present the netting offsets of derivative assets and liabilities as of June 30, 2013 and December 31, 2012 :
 
 
June 30, 2013
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Short-
Term
 
Long-
Term
 
Short-
Term
 
Long-
Term
 
 
($ in millions)
Commodity Contracts:
 
 
 
 
 
 
 
 
Gross amounts of recognized assets (liabilities)
 
$
159

 
$
61

 
$
(163
)
 
$
(482
)
Gross amounts offset in the condensed consolidated
statements of financial position
 
(109
)
 
(54
)
 
109

 
54

Net amounts of assets (liabilities) presented in the
statements of financial position
 
50

 
7

 
(54
)
 
(428
)
Interest Rate Contracts:
 
 
 
 
 
 
 
 
Gross amounts of recognized assets (liabilities)
 
—

 
—

 
—

 
(91
)
Gross amounts offset in the condensed consolidated
statements of financial position
 
—

 
—

 
—

 
—

Net amounts of assets (liabilities) presented in the
statements of financial position
 
—

 
—

 
—

 
(91
)
Foreign Currency Contracts:
 
 
 
 
 
 
 
 
Gross amounts of recognized assets (liabilities)
 
—

 
—

 
—

 
(27
)
Gross amounts offset in the condensed consolidated
statements of financial position
 
—

 
—

 
—

 
—

Net amounts of assets (liabilities) presented in the
statements of financial position
 
—

 
—

 
—

 
(27
)
 
 
 
 
 
 
 
 
 
Total derivatives as reported
 
$
50

 
$
7

 
$
(54
)
 
$
(546
)
 
 
 
 
 
 
 
 
 

37

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

 
 
December 31, 2012
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Short-
Term
 
Long-
Term
 
Short-
Term
 
Long-
Term
 
 
($ in millions)
Commodity Contracts:
 
 
 
 
 
 
 
 
Gross amounts of recognized assets (liabilities)
 
$
110

 
$
5

 
$
(157
)
 
$
(882
)
Gross amounts offset in the consolidated statements of
financial position
 
(52
)
 
(3
)
 
52

 
3

Net amounts of assets (liabilities) presented in the
statements of financial position
 
58

 
2

 
(105
)
 
(879
)
Interest Rate Contracts:
 
 
 
 
 
 
 
 
Gross amounts of recognized assets (liabilities)
 
—

 
—

 
—

 
(35
)
Gross amounts offset in the consolidated statements of
financial position
 
—

 
—

 
—

 
—

Net amounts of assets (liabilities) presented in the
statements of financial position
 
—

 
—

 
—

 
(35
)
Foreign Currency Contracts:
 
 
 
 
 
 
 
 
Gross amounts of recognized assets (liabilities)
 
—

 
—

 
—

 
(20
)
Gross amounts offset in the consolidated statements of
financial position
 
—

 
—

 
—

 
—

Net amounts of assets (liabilities) presented in the
statements of financial position
 
—

 
—

 
—

 
(20
)
 
 
 
 
 
 
 
 
 
Total derivatives as reported
 
$
58

 
$
2

 
$
(105
)
 
$
(934
)
A consolidated summary of the effect of derivative instruments on the condensed consolidated statements of operations for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period is provided below, separating fair value, cash flow and undesignated derivatives.
Fair Value Hedges
For interest rate derivative instruments designated as fair value hedges, the fair values of the hedges are recorded on the condensed consolidated balance sheets as assets or liabilities, with corresponding offsetting adjustments to the debt’s carrying value. We have elected not to designate any of our qualifying interest rate derivatives as fair value hedges. Therefore, changes in the fair value of all of our interest rate derivatives that occur prior to their maturity (i.e., temporary fluctuations in value) are reported in the condensed consolidated statements of operations within interest expense.
The following table presents the gain (loss) recognized in the condensed consolidated statements of operations for terminated instruments that were designated as fair value derivatives:  
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Fair Value Derivatives 
 
Location of Gain (Loss)
 
2013
 
2012
 
2013
 
2012
 
 
 
 
($ in millions)
Interest rate contracts
 
Interest expense
 
$
1

 
$
2

 
$
3

 
$
4



38

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Cash Flow Hedges
A reconciliation of the changes of accumulated other comprehensive income (loss) in the condensed consolidated statements of stockholders’ equity related to our cash flow hedges is presented below.  
 
 
Three Months Ended
June 30,
 
 
2013
 
2012
 
 
Before 
Tax  
 
After 
Tax  
 
Before 
Tax  
 
After 
Tax  
 
 
($ in millions)
Balance, beginning of period
 
$
(287
)
 
$
(178
)
 
$
(284
)
 
$
(176
)
Net change in fair value
 
2

 
1

 
(5
)
 
(3
)
(Gains) losses reclassified to income
 
(1
)
 
(1
)
 
(17
)
 
(11
)
Balance, end of period
 
$
(286
)
 
$
(178
)
 
$
(306
)
 
$
(190
)
 
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
 
Before 
Tax  
 
After 
Tax  
 
Before 
Tax  
 
After 
Tax  
 
 
($ in millions)
Balance, beginning of period
 
$
(304
)
 
$
(189
)
 
$
(287
)
 
$
(178
)
Net change in fair value
 
—

 
—

 
—

 
—

(Gains) losses reclassified to income
 
18

 
11

 
(19
)
 
(12
)
Balance, end of period
 
$
(286
)
 
$
(178
)
 
$
(306
)
 
$
(190
)
Approximately $168 million of the $178 million of accumulated other comprehensive loss as of June 30, 2013 represents the net deferred loss associated with commodity derivative contracts that were previously designated as cash flow hedges for which the hedged items are still expected to occur. These amounts will be recognized in earnings in the month in which the originally forecasted hedged items occur. As of June 30, 2013 , we expect to transfer approximately $21 million of net loss included in accumulated other comprehensive income to net income (loss) during the next 12 months. The remaining amount will be transferred by December 31, 2022. As of June 30, 2013 , none of our open commodity derivative instruments were designated as a cash flow hedge.
The following table presents the pre-tax gain (loss) recognized in, and reclassified from, accumulated other comprehensive income (AOCI) related to instruments designated as cash flow derivatives:  
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Cash Flow Derivatives
 
Location of Gain (Loss)
 
2013
 
2012
 
2013
 
2012
 
 
 
 
($ in millions)
Gain (Loss) Recognized in
AOCI (Effective Portion):
 
 
 
 
 
 
 
 
 
 
Foreign currency
contracts
 
AOCI
 
$
2

 
$
(5
)
 
$
—

 
$
—

 
 
 
 
$
2

 
$
(5
)
 
$
—

 
$
—

Gain (Loss) Reclassified from
AOCI Effective Portion):
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Natural gas, oil and
NGL sales
 
$
1

 
$
17

 
$
(18
)
 
$
19

 
 
 
 
$
1

 
$
17

 
$
(18
)
 
$
19


39

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Undesignated Derivatives
The following table presents the gain (loss) recognized in the condensed consolidated statements of operations for instruments not designated as either cash flow or fair value hedges:  
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Derivative Contracts
 
Location of Gain (Loss)
 
2013
 
2012
 
2013
 
2012
 
 
 
 
($ in millions)
Commodity contracts
 
Natural gas, oil and
NGL sales
 
$
536

 
$
988

 
$
412

 
$
832

Interest rate contracts
 
Interest expense
 
(51
)
 
5

 
(57
)
 
(2
)
Equity contracts
 
Other income
 
—

 
1

 
—

 
—

Total
 
$
485

 
$
994

 
$
355

 
$
830


Credit Risk
Derivative instruments that enable us to manage our exposure to natural gas, oil and NGL prices and interest rate volatility expose us to credit risk from our counterparties. To mitigate this risk, we enter into derivative contracts only with counterparties that are rated investment-grade and deemed by management to be competent and competitive market makers, and we attempt to limit our exposure to non-performance by any single counterparty. As of June 30, 2013 , our natural gas, oil and interest rate derivative instruments were spread among 15 counterparties. Additionally, counterparties to our multi-counterparty secured hedging facility described previously are required to secure their obligations in excess of defined thresholds. We use this facility for substantially all of our natural gas, oil and NGL derivatives.  
8.
Acquisitions and Divestitures of Natural Gas and Oil Properties
Divestitures of Natural Gas and Oil Properties
Under full cost accounting rules, we account for the sale of natural gas and oil properties as an adjustment to capitalized costs, with no recognition of gain or loss as the sales typically do not involve a significant change in proved reserves or significantly alter the relationship between costs and proved reserves. In conjunction with certain sales , affiliates of our former Chief Executive Officer, Aubrey K.   McClendon, have sold interests in the same properties and on the same terms as those that applied to the interests sold by the Company, and the net proceeds were paid to the sellers based on their respective ownership. These interests were acquired through the Founder Well Participation Program, which provides Mr. McClendon a contractual right to participate and invest as a working interest owner (with up to a 2.5% working interest) in new wells drilled on the Company’s leasehold through June 2014.
In April 2012, we sold approximately 60,000 net acres of leasehold in the Texoma Woodford play in Bryan, Carter, Johnston and Marshall counties, Oklahoma to XTO Energy Inc., a subsidiary of Exxon Mobil Corporation (NYSE:XOM), for net proceeds of approximately $572 million . The properties generated approximately 25 mmcfe per day of net production at the time of sale.
During the Current Period and the Prior Period, we received proceeds of approximately $815 million and $100 million , respectively, from various other divestitures of natural gas and oil properties.
Joint Ventures
On June 28, 2013, we completed a strategic joint venture with Sinopec International Petroleum Exploration and Production Corporation (Sinopec) in which Sinopec purchased a 50% undivided interest in approximately 850,000 acres in the Mississippi Lime play in northern Oklahoma ( 425,000 acres net to Sinopec). The total consideration for the transaction was approximately $1.110 billion in cash, of which approximately $1.040 billion of net proceeds, or 94% , was received upon closing. Receipt of up to an additional $70 million of net proceeds is subject to customary post-closing contingencies. The assets conveyed to Sinopec produced approximately 9,600 barrels of liquids and 54 mmcf of natural gas per day during the 2013 first quarter. All future exploration and development costs in the joint venture will be shared proportionately between the parties with no drilling carries involved.

40

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

As of June 30, 2013 , we had entered into eight significant joint ventures with other leading energy companies pursuant to which we sold a portion of our leasehold, producing properties and other assets located in eight different resource plays and received cash of $8.1 billion and commitments by our counterparties to pay our share of future drilling and completion costs of $9.0 billion . In each of these joint ventures, Chesapeake serves as the operator and conducts all drilling, completion and operations, the majority of leasing and, in certain transactions, marketing activities for the project. The carries paid by a joint venture partner are for a specified percentage of our drilling and completion costs. In addition, a joint venture partner is responsible for its proportionate share of drilling and completion costs as a working interest owner. We bill our joint venture partners for their drilling carries at the same time we bill them and other joint working interest owners for their share of drilling costs as they are incurred. For accounting purposes, initial cash proceeds from these joint venture transactions were reflected as a reduction of natural gas and oil properties with no gain or loss recognized. The transactions are detailed below.  
Primary
Play
 
Joint
Venture
Partner (a)
 
Joint
Venture
Date
 
Interest
Sold
 
Initial Proceeds (b)
 
Total
Drilling
Carries
 
Total Initial
and Drilling
Carry
Proceeds
 
Drilling
Carries
Remaining (c)
 
 
 
 
 
 
 
 
($ in millions)
Mississippi
Lime
 
Sinopec
 
June 2013
 
50.0%
 
$
1,040

(d)  
$
—

 
$
1,040

 
$
—

Utica
 
TOT
 
December 2011
 
25.0%
 
610

 
1,422

(e)  
2,032

 
836

Niobrara
 
CNOOC
 
February 2011
 
33.3%
 
570

 
697

(f)  
1,267

 
343

Eagle Ford
 
CNOOC
 
November 2010
 
33.3%
 
1,120

 
1,080

  
2,200

 
—

Barnett
 
TOT
 
January 2010
 
25.0%
 
800

 
1,403


2,203

 
—

Marcellus
 
STO
 
November 2008
 
32.5%
 
1,250

 
2,125

  
3,375

 
—

Fayetteville
 
BP
 
September 2008
 
25.0%
 
1,100

 
800

  
1,900

 
—

Haynesville & Bossier
 
PXP
 
July 2008
 
20.0%
 
1,650

 
1,508

 
3,158

 
—

 
 
 
 
 
 
 
 
$
8,140

 
$
9,035

  
$
17,175

 
$
1,179

____________________________________________
(a)
Joint venture partners include Sinopec International Petroleum Exploration and Production (Sinopec), Total S.A. (TOT), CNOOC Limited (CNOOC), Statoil (STO), BP America (BP) and Plains Exploration & Production Company (PXP).
(b)
Excludes closing and post-closing adjustments.
(c)
As of June 30, 2013 .
(d)
Excludes approximately $70 million of net proceeds (or 6% of the total transaction) to be received subject to certain customary post-closing contingencies and the accrual of $17 million of transaction costs paid subsequent to June 30, 2013.
(e)
The Utica drilling carries cover 60% of our drilling and completion costs for Utica wells drilled and must be used by December 2018. We expect to fully utilize these drilling carry commitments prior to expiration. See Note 4 for further discussion of the Utica drilling carries.
(f)
The Niobrara drilling carries cover 67% of our drilling and completion costs for Niobrara wells drilled and must be used by December 2014. We expect to fully utilize these drilling carry commitments prior to expiration.
During the Current Period and the Prior Period, our drilling and completion costs included the benefit of approximately $436 million and $518 million , respectively, in drilling and completion carries paid by our joint venture partners.
During the Current Period and the Prior Period, we sold interests in additional leasehold we acquired in the Marcellus, Barnett and Utica shale plays to our joint venture partners TOT and STO for approximately $39 million and $137 million , respectively.

41

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Volumetric Production Payments
From time to time, we have sold certain of our producing assets which are located in more mature producing regions through the sale of VPPs. A VPP is a limited-term overriding royalty interest in natural gas and oil reserves that (i) entitles the purchaser to receive scheduled production volumes over a period of time from specific lease interests; (ii) is free and clear of all associated future production costs and capital expenditures; (iii) is nonrecourse to the seller (i.e., the purchaser’s only recourse is to the reserves acquired); (iv) transfers title of the reserves to the purchaser; and (v) allows the seller to retain all production beyond the specified volumes, if any, after the scheduled production volumes have been delivered. For all of our VPP transactions, we have novated hedges to each of the respective VPP buyers and such hedges covered all VPP volumes sold. If contractually scheduled volumes exceed the actual volumes produced from the VPP wellbores that are attributable to the ORRI conveyed, either the shortfall will be made up from future production from these wellbores (or, at our option, from our retained interest in the wellbores) through an adjustment mechanism or the initial term of the VPP will be extended until all scheduled volumes, to the extent produced, are delivered from the VPP wellbores to the VPP buyer. We retain drilling rights on the properties below currently producing intervals and outside of producing wellbores.
As the operator of the properties from which the VPP volumes have been sold, we have the responsibility to bear the cost of producing the reserves attributable to such interests, which we include as a component of production expenses and production taxes in our condensed consolidated statements of operations in the periods such costs are incurred. As with all non-expense-bearing royalty interests, volumes conveyed in a VPP transaction are excluded from our estimated proved reserves; however, the estimated production expenses and taxes associated with VPP volumes expected to be delivered in future periods are included as a reduction of the future net cash flows attributable to our proved reserves for purposes of determining the cost center ceiling for impairment purposes and in determining our standardized measure. Pursuant to SEC guidelines, the estimates used for purposes of determining the cost center ceiling and the standardized measure are based on current costs. Our commitment to bear the costs on any future production of VPP volumes is not reflected as a liability on our balance sheet. The costs that will apply in the future will depend on the actual production volumes as well as the production costs and taxes in effect during the periods in which such production actually occurs, which could differ materially from our current and historical costs, and production may not occur at the times or in the quantities projected, or at all.
We have committed to purchase natural gas and liquids associated with our VPP transactions. Production purchased under these arrangements is based on market prices at the time of production, and the purchased natural gas and liquids are resold at market prices.
Our outstanding VPPs consist of the following:  
 
 
 
 
 
 
 
 
Volume Sold
VPP #
 
Date of VPP        
 
Division
 
Proceeds
 
Natural Gas
 
Oil
 
NGL
 
Total
 
 
 
 
 
 
($ in millions)
 
 (bcf)
 
(mmbbl)
 
(mmbbl)
 
(bcfe)
10
 
March 2012
 
Anadarko Basin Granite
Wash
 
$
744

 
87

 
3.0

 
9.2

 
160

9
 
May 2011
 
Mid-Continent
 
853

 
138

 
1.7

 
4.8

 
177

8
 
September 2010
 
Barnett Shale
 
1,150

 
390

 
—

 
—

 
390

6
 
February 2010
 
East Texas and Texas
Gulf Coast
 
180

 
44

 
0.3

 
—

 
46

5
 
August 2009
 
South Texas
 
370

 
67

 
0.2

 
—

 
68

4
 
December 2008
 
Anadarko and Arkoma
Basins
 
412

 
95

 
0.5

 
—

 
98

3
 
August 2008
 
Anadarko Basin
 
600

 
93

 
—

 
—

 
93

2
 
May 2008
 
Texas, Oklahoma and
Kansas
 
622

 
94

 
—

 
—

 
94

1
 
December 2007
 
Kentucky and West
Virginia
 
1,100

 
208

 
—

 
—

 
208

 
 
 
 
 
 
$
6,031

 
1,216

 
5.7

 
14.0

 
1,334


42

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

The volumes produced on behalf of our VPP buyers for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period were as follows:
 
 
Three Months Ended June 30, 2013
VPP #
 
Natural Gas
 
Oil
 
NGL
 
Total
 
 
 (bcf)
 
(mbbl)
 
 (mbbl)
 
 (bcfe)
10
 
4

 
141.0

 
379.0

 
6.8

9
 
4

 
54.2

 
144.2

 
5.3

8
 
17

 
—

 
—

 
17.2

6
 
1

 
6.0

 
—

 
1.2

5
 
2

 
6.2

 
—

 
1.9

4
 
3

 
14.2

 
—

 
2.7

3
 
2

 
—

 
—

 
2.1

2
 
3

 
—

 
—

 
2.6

1
 
3

 
—

 
—

 
3.6

 
 
39

 
221.6

 
523.2

 
43.4

 
 
Three Months Ended June 30, 2012
VPP #
 
Natural Gas
 
Oil
 
NGL
 
Total
 
 
 (bcf)
 
(mbbl)
 
 (mbbl)
 
 (bcfe)
10
 
6

 
244.0

 
565.0

 
10.8

9
 
5

 
63.6

 
163.3

 
6.0

8
 
20

 
—

 
—

 
20.3

7
 
—

 
168.0

 
—

 
1.2

6
 
2

 
6.0

 
—

 
1.4

5
 
2

 
7.1

 
—

 
2.3

4
 
3

 
16.2

 
—

 
3.1

3
 
2

 
—

 
—

 
2.3

2
 
3

 
—

 
—

 
2.9

1
 
4

 
—

 
—

 
3.7

 
 
47

 
504.9

 
728.3

 
54.0

 
 
Six Months Ended June 30, 2013
VPP #
 
Natural Gas
 
Oil
 
NGL
 
Total
 
 
 (bcf)
 
(mbbl)
 
 (mbbl)
 
 (bcfe)
10
 
8

 
295.0

 
786.7

 
14.2

9
 
9

 
110.4

 
292.7

 
10.8

8
 
35

 
—

 
—

 
35.0

7
 
—

 
—

 
—

 
—

6
 
3

 
12.0

 
—

 
2.5

5
 
4

 
12.2

 
—

 
4.0

4
 
5

 
28.8

 
—

 
5.5

3
 
4

 
—

 
—

 
4.1

2
 
5

 
—

 
—

 
5.3

1
 
7

 
—

 
—

 
7.4

 
 
80

 
458.4

 
1,079.4

 
88.8


43

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

 
 
Six Months Ended June 30, 2012
VPP #
 
Natural Gas
 
Oil
 
NGL
 
Total
 
 
 (bcf)
 
(mbbl)
 
 (mbbl)
 
 (bcfe)
10
 
8

 
341.0

 
782.9

 
14.9

9
 
9

 
130.1

 
332.7

 
12.3

8
 
42

 
—

 
—

 
41.7

7
 
—

 
343.0

 
—

 
2.0

6
 
3

 
12.0

 
—

 
2.8

5
 
5

 
14.7

 
—

 
4.8

4
 
6

 
32.9

 
—

 
6.3

3
 
5

 
—

 
—

 
4.8

2
 
6

 
—

 
—

 
5.8

1
 
8

 
—

 
—

 
7.8

 
 
92

 
873.7

 
1,115.6

 
103.2

The volumes remaining to be delivered on behalf of our VPP buyers as of June 30, 2013 were as follows:
 
 
 
 
Volume Remaining as of June 30, 2013
VPP #
 
Term Remaining
 
Natural Gas
 
Oil
 
NGL
 
Total
 
 
(in months)
 
 (bcf)
 
(mmbbl)
 
 (mmbbl)
 
 (bcfe)
10
 
104
 
61

 
1.9

 
6.7

 
112.8

9
 
92
 
94

 
1.1

 
3.2

 
119.7

8
 
26
 
129

 
—

 
—

 
128.6

6
 
79
 
24

 
0.2

 
—

 
24.7

5
 
43
 
20

 
0.1

 
—

 
20.9

4
 
42
 
30

 
0.2

 
—

 
30.7

3
 
73
 
35

 
—

 
—

 
35.0

2
 
70
 
25

 
—

 
—

 
25.6

1
 
114
 
112

 
—

 
—

 
112.5

 
 
 
 
530

 
3.5

 
9.9

 
610.5

For accounting purposes, cash proceeds from the sale of VPPs were reflected as a reduction of natural gas and oil properties with no gain or loss recognized, and our proved reserves were reduced accordingly.
In September 2012, to facilitate the sales process associated with our Permian Basin divestiture packages, we purchased the remaining reserves from our Permian Basin VPP (VPP #7), originally sold in June 2010, for $313 million . The reserves purchased totaled 28 bcfe and were subsequently sold to the buyers of our Permian Basin assets.

44

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

9.
Investments
A summary of our investments is presented below, including our approximate ownership percentage as of June 30, 2013 .
 
 
 
 
 
 
Carrying Value
 
 
Approximate
Ownership %
 
Accounting
Method
 
June 30,
2013
 
December 31,
2012
 
 
 
 
 
 
($ in millions)
FTS International, Inc.
 
30%
 
Equity
 
$
329

 
$
298

Chaparral Energy, Inc.
 
20%
 
Equity
 
139

 
141

Sundrop Fuels, Inc.
 
50%
 
Equity
 
101

 
111

Twin Eagle Resource Management, LLC
 
30%
 
Equity
 
30

 
34

Maalt Specialized Bulk, LLC
 
49%
 
Equity
 
13

 
13

Clean Energy Fuels Corp.
(common stock)
 
1%
 
Fair Value
 
13

 
12

Clean Energy Fuels Corp.
(convertible notes)
 
—
 
Cost
 
—

 
100

Gastar Exploration Ltd.
 
—
 
Fair Value
 
—

 
8

Other
 
—
 
—
 
11

 
11

Total investments
 
$
636

 
$
728

FTS International, Inc. FTS International, Inc. (FTS), based in Fort Worth, Texas, is a privately held company which, through its subsidiaries, provides hydraulic fracturing and other services to oil and gas companies.
During the Current Period, we recorded positive equity method adjustments, prior to intercompany profit eliminations, of $5 million for our share of FTS’s net income and recorded accretion adjustments of $23 million related to the excess of our underlying equity in net assets of FTS over our carrying value. The carrying value of our investment in FTS was less than our underlying equity in net assets by approximately $344 million as of June 30, 2013 , of which $31 million was attributed to goodwill. During the Current Period, the value attributed to goodwill decreased by $265 million , which represents our proportionate share, net of tax, of an impairment recorded by FTS related to its goodwill. The value not attributed to goodwill is being accreted over the nine -year estimated useful lives of the underlying assets. Additionally, in the Current Period, we purchased FTS common stock offered to existing stockholders for $3 million .
Chaparral Energy, Inc. Chaparral Energy, Inc., based in Oklahoma City, Oklahoma, is a private independent oil and natural gas company engaged in the production, acquisition and exploitation of oil and natural gas properties.
In the Current Period, we recorded a positive equity method adjustment of $3 million related to our share of Chaparral’s net income, a $3 million charge related to our share of its other comprehensive income, and an amortization adjustment of $2 million related to our carrying value in excess of our underlying equity in net assets. The carrying value of our investment in Chaparral was in excess of our underlying equity in net assets by approximately $50 million as of June 30, 2013 . This excess is attributed to the natural gas and oil reserves held by Chaparral and is being amortized over the estimated life of these reserves based on a unit of production rate.
Sundrop Fuels, Inc. Sundrop Fuels, Inc., is a privately held cellulosic biofuels company based in Longmont, Colorado, that is constructing a nonfood biomass-based “green gasoline” plant.
In the Current Period, we recorded a $10 million charge related to our share of Sundrop’s net loss. The carrying value of our investment in Sundrop was in excess of our underlying equity in net assets by approximately $53 million as of June 30, 2013 . This excess will be amortized over the life of the plant, once it is placed into service.
Twin Eagle Resource Management LLC. Twin Eagle Resource Management LLC is a natural gas trading and management firm. During the Current Period, we recorded a $4 million charge related to our share of Twin Eagle’s net loss.

45

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Maalt Specialized Bulk, LLC. Maalt Specialized Bulk, LLC (Maalt), is engaged in bulk transportation services of sand. During the Current Period, we recorded a nominal positive equity method adjustment related to our share of Maalt's net income.
Clean Energy Fuels Corp . Clean Energy Fuels Corp. (Nasdaq:CLNE) (Clean Energy), based in Seal Beach, California, builds and operates compressed natural gas (CNG) and liquefied natural gas (LNG) fueling stations; manufactures CNG and LNG equipment and technologies; converts vehicles to natural gas; and develops renewable natural gas production facilities.
As of June 30, 2013 , we had an investment in Clean Energy common stock of $10 million which was classified as available-for-sale and reported at fair value. In the Current Period, the carrying value of our investment increased by $1 million as the common stock price of Clean Energy increased from $12.45 per share as of December 31, 2012 to $13.20 per share as of June 30, 2013 . Through June 30, 2013 , we had recorded a mark-to-market pre-tax gain of $3 million in accumulated other comprehensive income for this investment. Subsequent to June 30, 2013, we sold all of our shares of Clean Energy common stock for approximately $13 million .
In June 2013, we sold our $100 million investment in Clean Energy convertible notes for cash proceeds of $85 million . The buyer also assumed our commitment to purchase the third and final $50 million tranche of Clean Energy convertible notes. We recorded a $15 million loss related to this sale.
Gastar Exploration Ltd . Gastar Exploration Ltd. (NYSE MKT:GST) (Gastar), based in Houston, Texas, is an independent energy company engaged in the exploration, development and production of natural gas and oil in the U.S. In the Current Quarter, we sold our investment in Gastar for cash proceeds of $10 million .
Other. In June 2013, we sold an equity investment for cash proceeds of $6 million and recorded a $5 million gain associated with the transaction.
10.
Variable Interest Entities
We consolidate the activities of VIEs of which we are the primary beneficiary. The primary beneficiary of a VIE is that variable interest holder possessing a controlling financial interest through (i) its power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) its obligation to absorb losses or its right to receive benefits from the VIE that could potentially be significant to the VIE. In order to determine whether we own a variable interest in a VIE, we perform qualitative analysis of the entity’s design, organizational structure, primary decision makers and relevant agreements.
Consolidated VIE
Chesapeake Granite Wash Trust . For a discussion of the formation, operations and presentation of the Trust, please see Noncontrolling Interests in Note 6. The Trust is considered a VIE due to the lack of voting or similar decision-making rights by its equity holders regarding activities that have a significant effect on the economic success of the Trust. Our ownership in the Trust and our obligations under the development agreement and related drilling support lien constitute variable interests. We have determined that we are the primary beneficiary of the Trust because (i) we have the power to direct the activities that most significantly impact the economic performance of the Trust via our obligations to perform under the development agreement, and (ii) as a result of the subordination and incentive thresholds applicable to the subordinated units we hold in the Trust, we have the obligation to absorb losses and the right to receive residual returns that could potentially be significant to the Trust. As a result, we consolidate the Trust in our financial statements, and the common units of the Trust owned by third parties are reflected as a noncontrolling interest.
The Trust is a consolidated entity whose legal existence is separate from Chesapeake and our other consolidated subsidiaries, and the Trust is not a guarantor of any of Chesapeake’s debt. The creditors or beneficial holders of the Trust have no recourse to the general credit of Chesapeake; however, we have certain obligations to the Trust through the development agreement that are secured by a drilling support lien on our retained interest in the development wells up to a specified maximum amount recoverable by the Trust, which could result in the Trust acquiring all or a portion of our retained interest in the undeveloped portion of an area of mutual interest, if we do not meet our drilling commitment. In consolidation, as of June 30, 2013 , approximately $352 million of net natural gas and oil properties, $21 million of current liabilities, $1 million of cash and cash equivalents, $4 million of short-term derivative liabilities and $1 million of long-term derivative assets were attributable to the Trust. We have presented parenthetically on the

46

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

face of the condensed consolidated balance sheets the assets of the Trust that can be used only to settle obligations of the Trust and the liabilities of the Trust for which creditors do not have recourse to the general credit of Chesapeake.
Unconsolidated VIE
Mineral Acquisition Company I, L.P. In 2012, MAC-LP, L.L.C., a wholly owned non-guarantor unrestricted subsidiary of Chesapeake, entered into a partnership agreement with KKR Royalty Aggregator LLC (KKR) to form Mineral Acquisition Company I, L.P. The purpose of the partnership is to acquire mineral interests, or royalty interests carved out of mineral interests, in oil and natural gas basins in the continental United States. We are committed to acquire for our own account (outside the partnership) 10% of any acquisition agreed upon by the partnership up to a maximum of $25 million , and the partnership will acquire the remaining 90% up to a maximum of $225 million , funded entirely by KKR, making KKR the sole equity investor. We have significant influence over the decisions made by the partnership, as we hold two of five seats on the board of directors. We will receive proportionate distributions from the partnership of any cash received from royalties in excess of expenses paid, ranging from 7% to 22.5% . The partnership is considered a VIE because KKR’s control over the partnership is disproportionate to its economic interest. This VIE remains unconsolidated as the power to direct the activities of the partnership is shared between the Company and KKR. We are using the equity method to account for this investment.
11.
Net Gains on Sales of Fixed Assets
For assets outside of our full cost pool, the cost of assets retired or otherwise disposed of and the applicable accumulated depreciation are removed from accounts, and the resulting gain or loss is reflected as a component of operating expenses. A summary of our gains or losses by asset class for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period is as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
($ in millions)
Gathering systems and treating plants
 
$
109

 
$
—

 
$
179

 
$
1

Drilling rigs and equipment
 
—

 
(1
)
 
(1
)
 
(2
)
Buildings and land
 
(1
)
 
—

 
(23
)
 
—

Other
 
1

 
1

 
3

 
3

Total net gains on sales of fixed assets
 
$
109

 
$
—

 
$
158

 
$
2

Gathering Systems and Treating Plants
In the Current Quarter, our wholly owned midstream subsidiary, CMD, sold its wholly owned subsidiary, Granite Wash Midstream Gas Services, L.L.C. (GWMGS), to MarkWest Oklahoma Gas Company, L.L.C., a wholly owned subsidiary of MarkWest Energy Partners, L.P. (NYSE:MWE), for net proceeds of approximately $245 million , subject to post-closing adjustments. We recorded a $106 million pre-tax gain associated with this transaction. GWMGS owns certain midstream assets in the Anadarko Basin that service the Granite Wash and Hogshooter formations. The transaction with MWE included long-term fixed-fee agreements for gas gathering, compression, treating and processing services.
In the Current Period, we sold our interest in certain gathering system assets in Pennsylvania to Western Gas Partners, LP (NYSE:WES) for proceeds of approximately $134 million . We recorded a $56 million pre-tax gain associated with this transaction.
Buildings and Land
In the Current Period, the net losses on sales of buildings and land were primarily from the sale of certain of our buildings and land in our Barnett Shale operating area.

47

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

12.
Impairments of Fixed Assets and Other
We test our long-lived assets, other than natural gas and oil properties, for recoverability whenever events or changes in circumstances indicate that carrying amounts may not be recoverable and recognize an impairment loss if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. A summary of our impairments of fixed assets and other by asset class for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period is as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
($ in millions)
Buildings and land
 
$
213

 
$
219

 
$
239

 
$
219

Drilling rigs and equipment
 
4

 
24

 
4

 
24

Other
 
14

 
—

 
15

 
—

Total impairments
 
$
231

 
$
243

 
$
258

 
$
243

Buildings and Land
In the Current Quarter, we determined we would sell certain of our buildings and land (other than our core campus) in the Oklahoma City area. These assets are being actively marketed and we believe it is probable that these assets will be sold over the next 12 months. As a result, these assets qualified as held for sale as of June 30, 2013. We recognized an impairment loss of $134 million during the Current Quarter on these assets for the difference between the carrying amount and fair value of the assets, less the anticipated costs to sell.
Given the impairment losses associated with these assets, we tested other non-core buildings and land that we own in the Oklahoma City area for recoverability in the Current Quarter. Our estimate of the future undiscounted cash flows for these assets was less than their carrying amounts, and we recognized an additional impairment loss of $44 million on these assets for the difference between the carrying amount and fair value of the assets. We measured the fair value of these assets based on prices from orderly sales transactions for comparable properties between market participants and, in certain cases, discounted cash flows. The buildings and land are included in our other operations segment.
Due to a decrease in the estimated market prices of certain surface land classified as held for sale in the Fort Worth area, in the Current Quarter we recognized an additional impairment loss of $29 million . See below for discussion of the impairment of Barnett surface land in the Prior Period. We measured the fair value of these assets based on recent prices from orderly sales transactions for comparable properties between market participants. The surface land is included in our other operations segment.
In the Current Period, we recognized an impairment loss of $26 million related to three office buildings in the Oklahoma City area. We received a purchase offer from a third party that we used to determine the fair value of the office buildings. As of June 30, 2013, the office buildings were classified as held for sale and included in our other operations segment. We anticipate selling the buildings in the 2013 second half.
In the Prior Period, we recognized $219 million of impairment losses associated with an office building and surface land located in our Barnett Shale operating area. Due to depressed natural gas prices, we initiated a significant reduction in our Barnett Shale operations. The change in business climate in the Barnett Shale required us to test these long-lived assets for recoverability in the Prior Period. We received a purchase offer from a third party that we used to determine the fair value of the office building and measured the fair value of the surface land using prices from orderly sales transactions for comparable properties between market participants. The office building and surface land are included in our other operations segment.
Drilling Rigs and Equipment
In the Prior Period, we recognized $15 million of impairment losses on five owned drilling rigs. A current expectation that the drilling rigs would have insufficient cash flow to recover carrying values and a change in the business climate

48

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

due to depressed natural gas prices led to the testing of the carrying value recoverability. We estimated the fair value of the drilling rigs using prices that would be received to sell each rig in an orderly transaction between market participants. Also, in the Prior Period, we recognized $9 million of impairment losses primarily related to drill pipe. The drilling rigs and equipment are included in our oilfield services operating segment.  
13.
Employee Retirement and Other Termination Benefits
On April 1, 2013, Aubrey K. McClendon, the co-founder of the Company, ceased serving as President and Chief Executive Officer (CEO) and as a director of the Company pursuant to his agreement with the Board of Directors announced on January 29, 2013. Mr. McClendon’s departure from the Company was treated as a termination without cause under his employment agreement. On April 18, 2013, the Company and Mr. McClendon entered into a Founder Separation and Services Agreement, effective January 29, 2013, regarding his separation from employment and to facilitate the relationship between the Company and Mr. McClendon as joint working interest owners of oil and gas wells, leases and acreage. In the Current Period, we accrued for the termination benefits that will be afforded Mr. McClendon under the terms of his separation and services agreement.
In December 2012, Chesapeake announced that it had offered a voluntary separation program (VSP) to certain employees as part of the Company's ongoing efforts to improve efficiencies and reduce costs. The VSP was offered to approximately 275 employees who met criteria based upon a combination of age and years of Chesapeake service. Employees had until February 7, 2013 to respond, and 211 employees accepted the offer. Certain employees have a separation date in the 2013 second half. We are recognizing the expense related to their termination benefits over their remaining service period, including $6 million recognized in the Current Quarter.
In addition, we provide benefits under certain circumstances to other employees that retire from or are terminated by Chesapeake. We recorded the following expenses related to the termination benefits provided to Mr. McClendon, the VSP participants and others. A summary of our employee retirement and other termination benefits for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period is as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
($ in millions)
Termination benefits provided to Mr. McClendon:
 
 
 
 
 
 
 
 
Salary and bonus expense
 
$
—

 
$
—

 
$
11

 
$
—

Acceleration of 2008 performance bonus
“claw-back” feature
 
—

 
—

 
11

 
—

Acceleration of stock-based compensation awards
 
—

 
—

 
22

 
—

Acceleration of performance share unit awards
 
—

 
—

 
13

 
—

Estimated aircraft usage benefits
 
—

 
—

 
7

 
—

Total termination benefits provided to
Mr. McClendon
 
—

 
—

 
64

 
—

 
 
 
 
 
 
 
 
 
Termination benefits provided to VSP participants:
 
 
 
 
 
 
 
 
Salary and bonus expense
 
3

 
—

 
32

 
—

Acceleration of restricted stock awards
 
3

 
—

 
27

 
—

Other associated costs
 
—

 
—

 
3

 
—

Total termination benefits provided to
VSP participants
 
6

 
—

 
62

 
—

 
 
 
 
 
 
 
 
 
Other termination benefits
 
1

 
1

 
14

 
1

 
 
 
 
 
 
 
 
 
Total employee retirement and other
termination benefits
 
$
7

 
$
1

 
$
140

 
$
1


49

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

14.
Fair Value Measurements
Certain financial instruments are reported at fair value on the condensed consolidated balance sheets. Under fair value measurement accounting guidance, fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants, i.e., an exit price. To estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into three levels. Level 1 inputs are unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the financial asset or liability and have the lowest priority. Chesapeake uses a market valuation approach based on available inputs and the following methods and assumptions to measure the fair values of its assets and liabilities, which may or may not be observable in the market.
Recurring Fair Value Measurement
Other Assets. Assets related to forfeited Company matches of employee contributions to Chesapeake’s 401(k) plan and deferred compensation plan are included in other current assets. The fair value of these assets is determined using quoted market prices as they consist of exchange traded securities.
Investments . The fair value of Chesapeake’s investment in Clean Energy Fuels Corp. (NASDAQ:CLNE) common stock is based on a quoted market price.
Other Liabilities . Liabilities related to Chesapeake’s deferred compensation plan are included in other current liabilities. The fair values of these liabilities are determined using quoted market prices, as the plan consists of exchange-traded mutual funds.
Derivatives . The fair value of most of our derivatives is based on third-party pricing models which utilize inputs that are either readily available in the public market, such as natural gas and oil forward curves and discount rates, or can be corroborated from active markets or broker quotes. These values are then compared to the values given by our counterparties for reasonableness. Since natural gas, oil, NGL, interest rate and cross currency swaps do not include optionality and therefore generally have no unobservable inputs, they are classified as Level 2. All other derivatives have some level of unobservable input, such as volatility curves, and are therefore classified as Level 3. For interest rate swaptions, we use the fair value estimates provided by our respective counterparties. These values are reviewed internally for reasonableness using future interest rate curves and time to maturity. Derivatives are also subject to the risk that either party to a contract will be unable to meet its obligations. We factor non-performance risk into the valuation of our derivatives using current published credit default swap rates. To date, this has not had a material impact on the values of our derivatives.

50

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

The following table provides fair value measurement information for financial assets (liabilities) measured at fair value on a recurring basis as of June 30, 2013 :  
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
 
 
 
 
($ in millions)
 
 
Financial Assets (Liabilities):
 
 
 
 
 
 
 
 
Other current assets
 
$
84

 
$
—

 
$
—

 
$
84

Investments
 
13

 
—

 
—

 
13

Other current liabilities
 
(78
)
 
—

 
—

 
(78
)
Derivatives:
 
 
 
 
 
 
 
 
Commodity assets
 
—

 
209

 
11

 
220

Commodity liabilities
 
—

 
(40
)
 
(605
)
 
(645
)
Interest rate liabilities
 
—

 
(91
)
 
—

 
(91
)
Foreign currency liabilities
 
—

 
(27
)
 
—

 
(27
)
Total derivatives
 
—

 
51

 
(594
)
 
(543
)
Total
 
$
19

 
$
51

 
$
(594
)
 
$
(524
)
The following table provides fair value measurement information for financial assets (liabilities) measured at fair value on a recurring basis as of December 31, 2012 :  
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
 
 
 
 
($ in millions)
 
 
Financial Assets (Liabilities):
 
 
 
 
 
 
 
 
Other current assets
 
$
4

 
$
—

 
$
—

 
$
4

Investments
 
20

 
—

 
—

 
20

Other long-term assets
 
88

 
—

 
—

 
88

Other long-term liabilities
 
(87
)
 
—

 
—

 
(87
)
Derivatives:
 
 
 
 
 
 
 
 
Commodity assets
 
—

 
105

 
10

 
115

Commodity liabilities
 
—

 
(13
)
 
(1,026
)
 
(1,039
)
Interest rate liabilities
 
—

 
(35
)
 
—

 
(35
)
Foreign currency liabilities
 
—

 
(20
)
 
—

 
(20
)
Total derivatives
 
—

 
37

 
(1,016
)
 
(979
)
Total
 
$
25

 
$
37

 
$
(1,016
)
 
$
(954
)

51

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

A summary of the changes in Chesapeake’s financial assets (liabilities) classified as Level 3 measurements during the Current Period and the Prior Period is presented below.  
 
 
Derivatives
 
 
Commodity
 
Interest Rate
 
 
($ in millions)
Beginning Balance as of January 1, 2013
 
$
(1,016
)
 
$
—

Total gains (losses) (realized/unrealized):
 
 
 
 
Included in earnings (a)
 
362

 
(1
)
Total purchases, issuances, sales and settlements:
 
 
 
 
Sales
 
—

 
1

Settlements
 
60

 
—

Ending Balance as of June 30, 2013
 
$
(594
)
 
$
—

 
 
 
 
 
Beginning Balance as of January 1, 2012
 
$
(1,654
)
 
$
—

Total gains (losses) (realized/unrealized):
 
 
 
 
Included in earnings (a)
 
548

 
2

Total purchases, issuances, sales and settlements:
 
 
 
 
Sales
 
—

 
(2
)
Settlements
 
42

 
—

Ending Balance as of June 30, 2012
 
$
(1,064
)
 
$
—

___________________________________________
(a)
 
Natural Gas, Oil and
NGL Sales
 
Interest Expense
 
 
 
2013
 
2012
 
2013
 
2012
 
 
($ in millions)
Total gains (losses) included in earnings for the
period
 
$
362

 
$
548

 
$
(1
)
 
$
2

Change in unrealized gains (losses) relating
to assets still held at reporting date
 
$
353

 
$
430

 
$
—

 
$
—



52

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

Qualitative Disclosures about Unobservable Inputs for Level 3 Fair Value Measurements
The significant unobservable inputs for Level 3 derivative contracts include unpublished forward prices of natural gas and oil, market volatility and credit risk of counterparties. Changes in these inputs will impact the fair value measurement of our derivative contracts. For example, an increase (decrease) in the forward prices and volatility of natural gas and oil prices will decrease (increase) the fair value of natural gas and oil derivatives and adverse changes to our counterparties’ creditworthiness will decrease the fair value of our derivatives.
Quantitative Disclosures about Unobservable Inputs for Level 3 Fair Value Measurements
Instrument
Type
 
Unobservable
Input
 
Range
 
Weighted
Average
 
Fair Value
June 30, 2013
 
 
 
 
 
 
 
 
($ in millions)
Oil Trades (a)
 
Oil price volatility curves
 
10.94% - 24.33%
 
17.22
%
 
$
(365
)
Oil Basis Swaps (b)
 
Physical pricing point forward
curves
 
$6.03 - $7.07
 
$
6.55

 
$
3

Natural Gas Trades (a)
 
Natural gas price volatility
curves
 
20.25% - 37.87%
 
22.94
%
 
$
(225
)
Natural Gas Basis Swaps (b)
 
Physical pricing point forward
curves
 
($1.68) - ($0.04)
 
$
(0.28
)
 
$
(7
)
____________________________________________
(a)
Fair value is based on an estimate derived from option models.
(b)
Fair value is based on an estimate of discounted cash flows.
Nonrecurring Fair Value Measurements
In the Current Quarter, we determined we would sell certain of our buildings and land (other than our core campus) in the Oklahoma City area. Fair value measurements were applied with respect to these non-financial assets, measured on a nonrecurring basis, to determine impairments. We used the income approach, specifically discounted cash flows, for income-producing assets and the market approach for the remaining assets. As the fair values estimated using the market approach were based on recent prices from orderly sales transactions for comparable properties between market participants, the values of these properties are classified as Level 2. The discounted cash flow method includes the development of both current operating metrics as well as assumptions pertaining to the subsequent change of such metrics, including rent growth, operating expense growth and absorption. These assumptions are applied to a specified period to develop future cash flow projections that are then discounted to estimate fair value. Due to these assumptions, the values of these properties are classified as Level 3. See Note 12 for further discussion of the impairments recorded.
Fair Value of Other Financial Instruments
The following disclosure of the estimated fair value of financial instruments is made in accordance with accounting guidance for financial instruments. The carrying values of financial instruments comprising cash and cash equivalents, restricted cash, accounts payable and accounts receivable approximate fair values due to the short-term maturities of these instruments. We estimate the fair value of our exchange-traded debt using quoted market prices (Level 1). The fair value of all other debt, which consists of our credit facilities and our term loans, is estimated using our credit default swap rate (Level 2). Fair value is compared to the carrying value, excluding the impact of interest rate derivatives, in the table below.  
 
 
June 30, 2013
 
December 31, 2012
 
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
 
 
 
($ in millions)
 
 
Current maturities of long-term debt (Level 1)
 
$
—

 
$
—

 
$
463

 
$
480

Long-term debt (Level 1)
 
$
10,678

 
$
11,479

 
$
9,759

 
$
10,457

Long-term debt (Level 2)
 
$
2,363

 
$
2,337

 
$
2,378

 
$
2,284

 

53

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

15.
Segment Information
In accordance with accounting guidance for disclosures about segments of an enterprise and related information, we have three reportable operating segments. Our exploration and production operating segment, natural gas, oil and NGL marketing, gathering and compression operating segment and oilfield services operating segment are managed separately because of the nature of their products and services. The exploration and production operating segment is responsible for finding and producing natural gas, oil and NGL. The marketing, gathering and compression operating segment is responsible for marketing, gathering and compression of natural gas, oil and NGL primarily from Chesapeake-operated wells. The oilfield services operating segment is responsible for contract drilling, oilfield trucking, oilfield rentals, hydraulic fracturing and other oilfield services operations for both Chesapeake-operated wells and wells operated by third parties.
Management evaluates the performance of our segments based upon income (loss) before income taxes. Revenues from the sale of natural gas, oil and NGL related to Chesapeake’s ownership interests by the marketing, gathering and compression operating segment are reflected as exploration and production revenues. Such amounts totaled $1.933 billion , $1.161 billion , $3.678 billion and $2.336 billion for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, respectively. The following table presents selected financial information for Chesapeake’s operating segments.

54

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

 
 
Exploration
and
Production
 
Marketing,
Gathering
and
Compression 
 
Oilfield
Services  
 
Other
Operations  
 
Intercompany
Eliminations
 
Consolidated 
Total
 
 
($ in millions)
Three Months Ended
June 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
2,406

 
$
3,990

 
$
582

 
$
14

 
$
(2,317
)
 
$
4,675

Intersegment revenues
 
—

 
(1,933
)
 
(377
)
 
(7
)
 
2,317

 
—

Total revenues
 
$
2,406

 
$
2,057

 
$
205

 
$
7

 
$
—

 
$
4,675

 
 
 
 
 
 
 
 
 
 
 
 
 
Income (Loss) Before
Income Taxes
 
$
1,162

 
$
158

 
$
4

 
$
(213
)
 
$
(102
)
 
$
1,009

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
June 30, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
2,117

 
$
2,274

 
$
506

 
$
—

 
$
(1,508
)
 
$
3,389

Intersegment revenues
 
—

 
(1,161
)
 
(347
)
 
—

 
1,508

 
—

Total revenues
 
$
2,117

 
$
1,113

 
$
159

 
$
—

 
$
—

 
$
3,389

 
 
 
 
 
 
 
 
 
 
 
 
 
Income (Loss) Before
Income Taxes
 
$
1,090

 
$
1,089

 
$
57

 
$
(401
)
 
$
(135
)
 
$
1,700

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
June 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
3,858

 
$
7,516

 
$
1,127

 
$
23

 
$
(4,426
)
 
$
8,098

Intersegment revenues
 
—

 
(3,678
)
 
(735
)
 
(13
)
 
4,426

 
—

Total revenues
 
$
3,858

 
$
3,838

 
$
392

 
$
10

 
$
—

 
$
8,098

 
 
 
 
 
 
 
 
 
 
 
 
 
Income (Loss) Before
Income Taxes
 
$
625

 
$
272

 
$
26

 
$
451

 
$
(200
)
 
$
1,174

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
June 30, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
3,185

 
$
4,664

 
$
953

 
$
—

 
$
(2,995
)
 
$
5,807

Intersegment revenues
 
—

 
(2,336
)
 
(659
)
 
—

 
2,995

 
—

Total revenues
 
$
3,185

 
$
2,328

 
$
294

 
$
—

 
$
—

 
$
5,807

 
 


 


 


 


 


 


Income (Loss) Before
Income Taxes
 
$
1,178

 
$
1,156

 
$
96

 
$
(502
)
 
$
(234
)
 
$
1,694

 
 
 
 
 
 
 
 
 
 
 
 
 
As of
June 30, 2013:
 


 


 


 


 


 


Total Assets
 
$
37,983

 
$
2,423

 
$
1,780

 
$
2,313

 
$
(2,354
)
 
$
42,145

 
 
 
 
 
 
 
 
 
 
 
 
 
As of
December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
37,004

 
$
2,291

 
$
2,115

 
$
2,529

 
$
(2,328
)
 
$
41,611

 

55

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

16.
Condensed Consolidating Financial Information
Chesapeake Energy Corporation is a holding company, owns no operating assets, and has no significant operations independent of its subsidiaries. Our obligations under our outstanding senior notes and contingent convertible senior notes listed in Note 3 are fully and unconditionally guaranteed, jointly and severally, by certain of our wholly owned subsidiaries on a senior unsecured basis. Our oilfield services subsidiary, COS, and its subsidiaries are separately capitalized and are not guarantors of our senior notes or our other debt obligations, but are subject to the covenants and guarantees in the oilfield services revolving bank credit facility agreement referred to in Note 3 that limit their ability to pay dividends or distributions or make loans to Chesapeake. Our midstream subsidiary, CMD, and certain of its subsidiaries, including Chesapeake Midstream Operating, L.L.C. (CMO), were added as guarantors of our senior notes and certain other obligations in June 2012 upon the termination of the midstream credit facility. In December 2012 upon the sale of CMO to ACMP, CMO and its subsidiaries were then released as guarantors of our senior notes and of our other debt obligations and all prior year information was restated at that time to reflect CMO and its subsidiaries as non-guarantor subsidiaries and CMD and certain of its remaining subsidiaries as guarantor subsidiaries. Certain of our oilfield services subsidiaries and subsidiaries formed to invest in natural gas demand initiatives, subsidiaries with noncontrolling interests, consolidated variable interest entities, and certain de minimis subsidiaries are also non-guarantors.
Set forth below are condensed consolidating financial statements for Chesapeake Energy Corporation (parent) on a stand-alone, unconsolidated basis, and its combined guarantor and combined non-guarantor subsidiaries as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012 . The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the subsidiaries operated as independent entities.

56

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2013
($ in millions)  
 
 
Parent  
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
—

 
$
655

 
$
22

 
$
—

 
$
677

Restricted cash
 
—

 
—

 
81

 
—

 
81

Other
 
95

 
2,550

 
686

 
(499
)
 
2,832

Current assets held for sale
 
—

 
2

 
—

 
—

 
2

Intercompany receivable, net
 
25,923

 
—

 
—

 
(25,923
)
 
—

Total Current Assets
 
26,018

 
3,207

 
789

 
(26,422
)
 
3,592

PROPERTY AND EQUIPMENT:
 
 
 
 
 
 
 
 
 
 
Natural gas and oil properties, at cost based on full cost accounting, net
 
—

 
29,270

 
3,144

 
70

 
32,484

Other property and equipment, net
 
—

 
2,595

 
1,759

 
—

 
4,354

Property and equipment held for sale, net
 
—

 
510

 
1

 
—

 
511

Total Property and Equipment,
Net
 
—

 
32,375

 
4,904

 
70

 
37,349

LONG-TERM ASSETS:
 
 
 
 
 
 
 
 
 
 
Other assets
 
121

 
1,331

 
124

 
(372
)
 
1,204

Investments in subsidiaries and
intercompany advances
 
3,117

 
(143
)
 
—

 
(2,974
)
 
—

TOTAL ASSETS
 
$
29,256

 
$
36,770


$
5,817


$
(29,698
)
 
$
42,145

CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
$
311

 
$
5,316

 
$
474

 
$
(499
)
 
$
5,602

Current liabilities held for sale
 
—

 
18

 
—

 
—

 
18

Intercompany payable, net
 
—

 
24,242

 
1,386

 
(25,628
)
 
—

Total Current Liabilities
 
311

 
29,576

 
1,860

 
(26,127
)
 
5,620

LONG-TERM LIABILITIES:
 
 
 
 
 
 
 
 
 
 
Long-term debt, net
 
12,008

 
—

 
1,049

 
—

 
13,057

Deferred income tax liabilities
 
595

 
2,829

 
130

 
(294
)
 
3,260

Other long-term liabilities
 
307

 
1,248

 
821

 
(372
)
 
2,004

Total Long-Term Liabilities
 
12,910

 
4,077

 
2,000

 
(666
)
 
18,321

EQUITY:
 
 
 
 
 
 
 
 
 
 
Chesapeake stockholders’ equity
 
16,035

 
3,117

 
1,957

 
(5,074
)
 
16,035

Noncontrolling interests
 
—

 
—

 
—

 
2,169

 
2,169

Total Equity
 
16,035

 
3,117

 
1,957

 
(2,905
)
 
18,204

TOTAL LIABILITIES AND EQUITY
 
$
29,256

 
$
36,770

 
$
5,817

 
$
(29,698
)
 
$
42,145

 

57

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2012
($ in millions)  
 
 
  Parent
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
—

 
$
228

 
$
59

 
$
—

 
$
287

Restricted cash
 
—

 
—

 
111

 
—

 
111

Other
 
1

 
2,369

 
513

 
(337
)
 
2,546

Current assets held for sale
 
—

 
—

 
4

 
—

 
4

Intercompany receivable, net
 
25,584

 
—

 
—

 
(25,584
)
 
—

Total Current Assets
 
25,585

 
2,597

 
687

 
(25,921
)
 
2,948

PROPERTY AND EQUIPMENT:
 
 
 
 
 
 
 
 
 
 
Natural gas and oil properties, at
cost, based on full cost
accounting, net
 
—

 
29,083

 
3,057

 
(222
)
 
31,918

Other property and equipment, net
 
—

 
3,066

 
1,549

 
—

 
4,615

Property and equipment held for
sale, net
 
—

 
255

 
379

 
—

 
634

Total Property and Equipment,
Net
 
—

 
32,404

 
4,985

 
(222
)
 
37,167

LONG-TERM ASSETS:
 
 
 
 
 
 
 
 
 
 
Other assets
 
217

 
1,396

 
261

 
(378
)
 
1,496

Investments in subsidiaries and
intercompany advances
 
2,241

 
(186
)
 
—

 
(2,055
)
 
—

TOTAL ASSETS
 
$
28,043

 
$
36,211

 
$
5,933

 
$
(28,576
)
 
$
41,611

CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
$
789

 
$
5,368

 
$
426

 
$
(338
)
 
$
6,245

Current liabilities held for sale
 
—

 
—

 
21

 
—

 
21

Intercompany payable, net
 
—

 
24,394

 
1,311

 
(25,705
)
 
—

Total Current Liabilities
 
789

 
29,762

 
1,758

 
(26,043
)
 
6,266

LONG-TERM LIABILITIES:
 
 
 
 
 
 
 
 
 
 
Long-term debt, net
 
11,089

 
—

 
1,068

 
—

 
12,157

Deferred income tax liabilities
 
361

 
2,425

 
127

 
(106
)
 
2,807

Other liabilities
 
235

 
1,783

 
839

 
(372
)
 
2,485

Total Long-Term Liabilities
 
11,685

 
4,208

 
2,034

 
(478
)
 
17,449

EQUITY:
 
 
 
 
 
 
 
 
 
 
Chesapeake stockholders’ equity
 
15,569

 
2,241

 
2,141

 
(4,382
)
 
15,569

Noncontrolling interests
 
—

 
—

 
—

 
2,327

 
2,327

Total Equity
 
15,569

 
2,241

 
2,141

 
(2,055
)
 
17,896

TOTAL LIABILITIES AND EQUITY
 
$
28,043

 
$
36,211

 
$
5,933

 
$
(28,576
)
 
$
41,611


58

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2013
($ in millions)
 
 
Parent  
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
 
 
 
Natural gas, oil and NGL
 
$
—

 
$
2,241

 
$
160

 
$
5

 
$
2,406

Marketing, gathering and compression
 
—

 
2,051

 
6

 
—

 
2,057

Oilfield services
 
—

 
—

 
598

 
(386
)
 
212

Total Revenues
 
—

 
4,292

 
764

 
(381
)
 
4,675

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
Natural gas, oil and NGL production
 
—

 
274

 
14

 
—

 
288

Production taxes
 
—

 
57

 
2

 
—

 
59

Marketing, gathering and compression
 
—

 
2,026

 
2

 
—

 
2,028

Oilfield services
 
—

 
—

 
476

 
(299
)
 
177

General and administrative
 
—

 
80

 
26

 
—

 
106

Employee retirement and other
termination benefits
 
—

 
6

 
1

 
—

 
7

Natural gas, oil and NGL depreciation,
depletion and amortization
 
—

 
589

 
56

 
—

 
645

Depreciation and amortization of other
assets
 
—

 
45

 
73

 
(42
)
 
76

Impairment of natural gas and oil
properties
 
—

 
—

 
70

 
(70
)
 
—

Impairments of fixed assets and other
 
—

 
224

 
7

 
—

 
231

Net gains on sales of fixed assets
 
—

 
(109
)
 
—

 
—

 
(109
)
Total Operating Expenses
 
—

 
3,192

 
727

 
(411
)
 
3,508

INCOME FROM OPERATIONS
 
—

 
1,100

 
37

 
30

 
1,167

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(278
)
 
(48
)
 
(21
)
 
243

 
(104
)
Earnings (losses) on investments
 
—

 
23

 
—

 
—

 
23

Loss on sale of investment
 
—

 
(10
)
 
—

 
—

 
(10
)
Losses on purchases of debt
 
(70
)
 
—

 
—

 
—

 
(70
)
Other income
 
228

 
21

 
4

 
(250
)
 
3

Equity in net earnings of subsidiary
 
655

 
(57
)
 
—

 
(598
)
 
—

Total Other Income (Expense)
 
535

 
(71
)
 
(17
)
 
(605
)
 
(158
)
INCOME BEFORE INCOME TAXES
 
535

 
1,029


20


(575
)
 
1,009

INCOME TAX EXPENSE (BENEFIT)
 
(45
)
 
412

 
8

 
9

 
384

NET INCOME
 
580

 
617

 
12

 
(584
)
 
625

Net income attributable to
noncontrolling interests
 
—

 
—

 
—

 
(45
)
 
(45
)
NET INCOME ATTRIBUTABLE
TO CHESAPEAKE
 
580

 
617

 
12

 
(629
)
 
580

Other comprehensive income (loss)
 
2

 
(2
)
 
—

 
—

 
—

COMPREHENSIVE INCOME
ATTRIBUTABLE TO CHESAPEAKE
 
$
582

 
$
615

 
$
12

 
$
(629
)
 
$
580


59

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2012
($ in millions)
 
 
Parent 
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
 
 
 
Natural gas, oil and NGL
 
$
—

 
$
2,009

 
$
106

 
$
2

 
$
2,117

Marketing, gathering and compression
 
—

 
1,063

 
50

 
—

 
1,113

Oilfield services
 
—

 
—

 
506

 
(347
)
 
159

Total Revenues
 
—

 
3,072

 
662

 
(345
)
 
3,389

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
Natural gas, oil and NGL production
 
—

 
329

 
6

 
—

 
335

Production taxes
 
—

 
40

 
1

 
—

 
41

Marketing, gathering and compression
 
—

 
1,070

 
26

 
—

 
1,096

Oilfield services
 
—

 
1

 
373

 
(265
)
 
109

General and administrative
 
—

 
126

 
30

 
(1
)
 
155

Employee retirement and other
termination benefits
 
—

 
1

 
—

 
—

 
1

Natural gas, oil and NGL depreciation,
depletion and amortization
 
—

 
553

 
35

 
—

 
588

Depreciation and amortization of other
assets
 
—

 
43

 
75

 
(35
)
 
83

Impairments of fixed assets and other
 
—

 
219

 
24

 
—

 
243

Net gains on sales of fixed assets
 
—

 
(1
)
 
1

 
—

 
—

Total Operating Expenses
 
—

 
2,381

 
571

 
(301
)
 
2,651

INCOME FROM OPERATIONS
 
—

 
691

 
91

 
(44
)
 
738

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(231
)
 
17

 
(25
)
 
225

 
(14
)
Earnings (losses) on investments
 
—

 
(88
)
 
29

 
—

 
(59
)
Gains on sale of investments
 
—

 
1,030

 
—

 
—

 
1,030

Other income
 
218

 
18

 
33

 
(264
)
 
5

Equity in net earnings of subsidiary
 
980

 
(34
)
 
—

 
(946
)
 
—

Total Other Income (Expense)
 
967

 
943

 
37

 
(985
)
 
962

INCOME BEFORE INCOME TAXES
 
967

 
1,634

 
128

 
(1,029
)
 
1,700

INCOME TAX EXPENSE (BENEFIT)
 
(5
)
 
651

 
49

 
(32
)
 
663

NET INCOME
 
972

 
983

 
79

 
(997
)
 
1,037

Net income attributable to
noncontrolling interests
 
—

 
—

 
—

 
(65
)
 
(65
)
NET INCOME ATTRIBUTABLE
TO CHESAPEAKE
 
972

 
983

 
79

 
(1,062
)
 
972

Other comprehensive income (loss)
 
(3
)
 
(20
)
 
—

 
—

 
(23
)
COMPREHENSIVE INCOME
ATTRIBUTABLE TO CHESAPEAKE
 
$
969

 
$
963

 
$
79

 
$
(1,062
)
 
$
949



60

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2013
($ in millions)
 
 
Parent  
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
 
 
 
Natural gas, oil and NGL
 
$
—

 
$
3,562

 
$
288

 
$
8

 
$
3,858

Marketing, gathering and compression
 
—

 
3,829

 
9

 
—

 
3,838

Oilfield services
 
—

 
—

 
1,152

 
(750
)
 
402

Total Revenues
 
—

 
7,391

 
1,449

 
(742
)
 
8,098

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
Natural gas, oil and NGL production
 
—

 
570

 
25

 
—

 
595

Production taxes
 
—

 
108

 
4

 
—

 
112

Marketing, gathering and compression
 
—

 
3,767

 
5

 
—

 
3,772

Oilfield services
 
—

 
—

 
902

 
(570
)
 
332

General and administrative
 
—

 
167

 
49

 
—

 
216

Employee retirement and other
termination benefits
 
—

 
137

 
3

 
—

 
140

Natural gas, oil and NGL depreciation,
depletion and amortization
 
—

 
1,180

 
113

 
—

 
1,293

Depreciation and amortization of other
assets
 
—

 
93

 
144

 
(83
)
 
154

Impairment of natural gas and oil
properties
 
—

 
—

 
161

 
(161
)
 
—

Impairments of fixed assets and other
 
—

 
251

 
7

 
—

 
258

Net gains on sales of fixed assets
 
—

 
(158
)
 
—

 
—

 
(158
)
Total Operating Expenses
 
—

 
6,115

 
1,413

 
(814
)
 
6,714

INCOME (LOSS) FROM OPERATIONS
 
—

 
1,276

 
36

 
72

 
1,384

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(496
)
 
(51
)
 
(42
)
 
465

 
(124
)
Earnings (losses) on investments
 
—

 
(4
)
 
—

 
—

 
(4
)
Impairment of investment
 
—

 
(10
)
 
—

 
—

 
(10
)
Losses on sales of investments
 
—

 
(10
)
 
—

 
—

 
(10
)
Losses on purchases of debt
 
(70
)
 
—

 
—

 
—

 
(70
)
Other income
 
443

 
35

 
7

 
(477
)
 
8

Equity in net earnings of subsidiary
 
715

 
(144
)
 
—

 
(571
)
 
—

Total Other Income (Expense)
 
592

 
(184
)
 
(35
)
 
(583
)
 
(210
)
INCOME BEFORE INCOME TAXES
 
592

 
1,092

 
1

 
(511
)
 
1,174

INCOME TAX EXPENSE (BENEFIT)
 
(47
)
 
470

 
—

 
23

 
446

NET INCOME
 
639

 
622

 
1

 
(534
)
 
728

Net income attributable to
noncontrolling interests
 
—

 
—

 
—

 
(89
)
 
(89
)
NET INCOME ATTRIBUTABLE
TO CHESAPEAKE
 
639

 
622

 
1

 
(623
)
 
639

Other comprehensive income
 
—

 
12

 
—

 
—

 
12

COMPREHENSIVE INCOME (LOSS)
ATTRIBUTABLE TO CHESAPEAKE
 
$
639

 
$
634

 
$
1

 
$
(623
)
 
$
651


61

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2012
($ in millions)
 
 
Parent  
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
 
 
 
Natural gas, oil and NGL
 
$
—

 
$
3,053

 
$
130

 
$
2

 
$
3,185

Marketing, gathering and compression
 
—

 
2,235

 
93

 
—

 
2,328

Oilfield services
 
—

 
—

 
955

 
(661
)
 
294

Total Revenues
 
—

 
5,288

 
1,178

 
(659
)
 
5,807

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
Natural gas, oil and NGL production
 
—

 
678

 
7

 
—

 
685

Production taxes
 
—

 
87

 
2

 
—

 
89

Marketing, gathering and compression
 
—

 
2,239

 
53

 
—

 
2,292

Oilfield services
 
—

 
1

 
728

 
(524
)
 
205

General and administrative
 
—

 
235

 
56

 
—

 
291

Employee retirement and other
termination benefits
 
—

 
1

 
—

 
—

 
1

Natural gas, oil and NGL depreciation,
depletion and amortization
 
—

 
1,045

 
49

 
—

 
1,094

Depreciation and amortization of other
assets
 
—

 
88

 
147

 
(69
)
 
166

Impairments of fixed assets and other
 
—

 
219

 
24

 
—

 
243

Net gains on sales of fixed assets
 
—

 
(2
)
 
—

 
—

 
(2
)
Total Operating Expenses
 
—

 
4,591

 
1,066

 
(593
)
 
5,064

INCOME FROM OPERATIONS
 
—

 
697

 
112

 
(66
)
 
743

OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(392
)
 
15

 
(43
)
 
394

 
(26
)
Earnings (losses) on investments
 
—

 
(119
)
 
55

 
—

 
(64
)
Gain on sale of investment
 
—

 
1,030

 
—

 
—

 
1,030

Other income
 
381

 
27

 
67

 
(464
)
 
11

Equity in net earnings of subsidiary
 
951

 
(52
)
 
—

 
(899
)
 
—

Total Other Income (Expense)
 
940

 
901

 
79

 
(969
)
 
951

INCOME BEFORE INCOME TAXES
 
940

 
1,598

 
191

 
(1,035
)
 
1,694

INCOME TAX EXPENSE (BENEFIT)
 
(4
)
 
644

 
74

 
(53
)
 
661

NET INCOME
 
944

 
954

 
117

 
(982
)
 
1,033

Net income attributable to
noncontrolling interests
 
—

 
—

 
—

 
(89
)
 
(89
)
NET INCOME ATTRIBUTABLE
TO CHESAPEAKE
 
944

 
954

 
117

 
(1,071
)
 
944

Other comprehensive income (loss)
 
—

 
(15
)
 
—

 
—

 
(15
)
COMPREHENSIVE INCOME (LOSS)
ATTRIBUTABLE TO CHESAPEAKE
 
$
944

 
$
939

 
$
117

 
$
(1,071
)
 
$
929



62

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2013
($ in millions)  
 
 
Parent  
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
CASH FLOWS FROM OPERATING
ACTIVITIES
 
$
—

 
$
1,933

 
$
297

 
$
(25
)
 
$
2,205

CASH FLOWS FROM INVESTING
ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
Additions to proved and unproved
properties
 
—

 
(3,238
)
 
(457
)
 
—

 
(3,695
)
Proceeds from divestitures of proved
and unproved properties
 
—

 
1,834

 
61

 
—

 
1,895

Additions to other property and
equipment
 
—

 
(316
)
 
(190
)
 
—

 
(506
)
Other investing activities
 
—

 
161

 
440

 
130

 
731

Cash used in investing activities
 
—

 
(1,559
)
 
(146
)
 
130

 
(1,575
)
CASH FLOWS FROM FINANCING
ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
Proceeds from credit facilities
borrowings
 
—

 
6,013

 
546

 
—

 
6,559

Payments on credit facilities borrowings
 
—

 
(6,013
)
 
(565
)
 
—

 
(6,578
)
Proceeds from issuance of senior notes,
net of discount and offering costs
 
2,274

 
—

 
—

 
—

 
2,274

Cash paid to purchase debt
 
(1,874
)
 
—

 
—

 
—

 
(1,874
)
Proceeds from sales of noncontrolling
interests
 
—

 
5

 
—

 
—

 
5

Other financing activities
 
(245
)
 
(292
)
 
16

 
(105
)
 
(626
)
Intercompany advances, net
 
(155
)
 
340

 
(185
)
 
—

 
—

Cash provided by financing
activities
 
—

 
53

 
(188
)
 
(105
)
 
(240
)
Net increase (decrease) in cash and cash
equivalents
 
—

 
427


(37
)

—

 
390

Cash and cash equivalents, beginning of
period
 
—

 
228

 
59

 
—

 
287

Cash and cash equivalents, end of period
 
$
—

 
$
655

 
$
22

 
$
—

 
$
677

 

63

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2012
($ in millions)  
 
 
Parent  
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
CASH FLOWS FROM OPERATING
ACTIVITIES
 
$
—

 
$
1,846

 
$
128

 
$
(945
)
 
$
1,029

CASH FLOWS FROM INVESTING
ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
Additions to proved and unproved
properties
 
—

 
(6,693
)
 
(222
)
 
—

 
(6,915
)
Proceeds from divestitures of proved
and unproved properties
 
—

 
1,555

 
—

 
—

 
1,555

Additions to other property and
equipment
 
—

 
(429
)
 
(882
)
 
—

 
(1,311
)
Other investing activities
 
—

 
3,426

 
(171
)
 
(1,505
)
 
1,750

Cash used in investing activities
 
—

 
(2,141
)
 
(1,275
)
 
(1,505
)
 
(4,921
)
CASH FLOWS FROM FINANCING
ACTIVITIES:
 
 
 
 
 
 
 
 
 
 
Proceeds from credit facilities borrowings
 
—

 
7,990

 
2,114

 
—

 
10,104

Payments on credit facilities borrowings
 
—

 
(9,709
)
 
(1,883
)
 
—

 
(11,592
)
Proceeds from issuance of senior notes,
net of discount and offering costs
 
1,263

 
—

 
—

 
—

 
1,263

Proceeds from issuance of term loans,
net of discount and offering costs
 
3,789

 
—

 
—

 
—

 
3,789

Proceeds from sales of noncontrolling
interests
 
—

 
—

 
1,039

 
—

 
1,039

Other financing activities
 
(235
)
 
117

 
(2,363
)
 
2,450

 
(31
)
Intercompany advances, net
 
(4,817
)
 
2,807

 
2,010

 
—

 
—

Cash provided by financing
activities
 
—

 
1,205

 
917

 
2,450

 
4,572

Change in cash and cash equivalents
classified in current assets held for sale
 
—

 
—

 
(7
)
 
—

 
(7
)
Net increase in cash and cash equivalents
 
—

 
910

 
(237
)
 
—

 
673

Cash and cash equivalents, beginning of
period
 
—

 
1

 
350

 
—

 
351

Cash and cash equivalents, end of period
 
$
—

 
$
911

 
$
113

 
$
—

 
$
1,024

    


64

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

17.
Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) recently issued the following standards:
Recently Adopted Accounting Standards
In February 2012, the FASB issued guidance changing the presentation requirements of significant reclassifications out of accumulated other comprehensive income in their entirety and their corresponding effect on net income. We adopted this standard in the first quarter of 2013 and it did not have a material impact on our financial statements.
In December 2011 and January 2013, the FASB issued guidance amending and expanding disclosure requirements about offsetting and related arrangements associated with derivatives. We adopted this standard in the first quarter of 2013 and it did not have a material impact on our financial statements.
Recently Issued Accounting Standards
In February 2013, the FASB issued guidance on the recognition, measurement and disclosure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. We will adopt this standard effective January 1, 2014. We do not expect the adoption to have a material impact on our financial statements.
18.
Subsequent Events
On July 12, 2013, we sold assets in the Haynesville Shale to EXCO Operating Company, LP (EXCO) for net proceeds of approximately $257 million . Receipt of up to an additional $32 million of net proceeds is subject to customary post-closing contingencies. The assets sold included our operated and non-operated interests in approximately 9,600 net acres in DeSoto and Caddo parishes, Louisiana. Average net daily production from the Haynesville properties was approximately 90 mmcfe during June 2013.
On July 15, 2013, we retired at maturity the remaining $247 million aggregate principal amount outstanding of our 7.625% Senior Notes due 2013.
On July 31, 2013, we sold assets in the northern Eagle Ford Shale to EXCO for net proceeds of approximately $617 million . Receipt of up to an additional $70 million of net proceeds is subject to customary post-closing contingencies. The assets sold included approximately 55,000 net acres in Zavala, Dimmit, La Salle and Frio counties, Texas, including approximately 120 producing wells with average net daily production of approximately 6,150 barrels of oil equivalent during June 2013.
On August 1, 2013, CMD sold its wholly owned midstream subsidiary, Mid-America Midstream Gas Services, L.L.C. (MAMGS), to SemGas, L.P. (SemGas), a wholly owned subsidiary of SemGroup Corporation, for net proceeds of approximately $306 million , subject to post-closing adjustments. MAMGS owns certain gathering and processing assets located in the Mississippi Lime play, and the transaction with SemGas included a new long-term fixed-fee gathering and processing agreement covering acreage dedication areas in the Mississippi Lime play.







65


ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Data
The following table sets forth certain information regarding our production volumes, natural gas, oil and natural gas liquids (NGL) sales, average sales prices received, other operating income and expenses for the periods indicated:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
Net Production:
 
 
 
 
 
 
 
 
Natural gas (bcf)
 
277.6

 
275.4

 
550.8

 
546.3

Oil (mmbbl)
 
10.5

 
7.3

 
19.8

 
13.3

NGL (mmbbl)
 
4.8

 
4.5

 
9.6

 
8.9

Natural gas equivalent (bcfe) (a)
 
369.4

 
346.5

 
727.5

 
679.4

Natural Gas, Oil and NGL Sales ($ in millions):
 
 
 
 
 
 
 
 
Natural gas sales
 
$
779

 
$
336

 
$
1,352

 
$
815

Natural gas derivatives – realized gains (losses) (b)
 
(53
)
 
182

 
(45
)
 
339

Natural gas derivatives – unrealized gains (losses)
 
347

 
(164
)
 
68

 
(311
)
Total natural gas sales
 
1,073

 
354

 
1,375

 
843

Oil sales
 
975

 
656

 
1,859

 
1,247

Oil derivatives – realized gains (losses) (b)
 
14

 
15

 
10

 
(19
)
Oil derivatives – unrealized gains (losses)
 
229

 
955

 
361

 
817

Total oil sales
 
1,218

 
1,626

 
2,230

 
2,045

NGL sales
 
115

 
120

 
253

 
272

NGL derivatives – realized gains (losses) (b)
 
—

 
(2
)
 
—

 
(9
)
NGL derivatives – unrealized gains (losses)
 
—

 
19

 
—

 
34

Total NGL sales
 
115

 
137

 
253

 
297

Total natural gas, oil and NGL sales
 
$
2,406

 
$
2,117

 
$
3,858

 
$
3,185

Average Sales Price (excluding gains (losses)
on derivatives):
 
 
 
 
 
 
 
 
Natural gas ($ per mcf)
 
$
2.81

 
$
1.22

 
$
2.45

 
$
1.49

Oil ($ per bbl)
 
$
92.53

 
$
89.49

 
$
93.79

 
$
93.49

NGL ($ per bbl)
 
$
24.22

 
$
26.40

 
$
26.26

 
$
30.68

Natural gas equivalent ($ per mcfe)
 
$
5.06

 
$
3.21

 
$
4.76

 
$
3.43

Average Sales Price (excluding unrealized gains (losses) on derivatives) (b) :
 
 
 
 
 
 
 
 
Natural gas ($ per mcf)
 
$
2.62

 
$
1.88

 
$
2.37

 
$
2.11

Oil ($ per bbl)
 
$
93.81

 
$
91.58

 
$
94.29

 
$
92.06

NGL ($ per bbl)
 
$
24.22

 
$
25.94

 
$
26.26

 
$
29.68

Natural gas equivalent ($ per mcfe)
 
$
4.96

 
$
3.77

 
$
4.71

 
$
3.89

Other Operating Income (c)  ($ in millions):
 
 
 
 
 
 
 
 
Marketing, gathering and compression net margin
 
$
29

 
$
17

 
$
66

 
$
36

Oilfield services net margin
 
$
35

 
$
50

 
$
70

 
$
89

Other Operating Income (c)  ($ per mcfe):
 
 
 
 
 
 
 
 
Marketing, gathering and compression net margin
 
$
0.08

 
$
0.05

 
$
0.09

 
$
0.05

Oilfield services net margin
 
$
0.09

 
$
0.14

 
$
0.10

 
$
0.13

 
 
 
 
 
 
 
 
 

66


 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
Expenses ($ per mcfe):
 
 
 
 
 
 
 
 
Natural gas, oil and NGL production
 
$
0.78

 
$
0.97

 
$
0.82

 
$
1.01

Production taxes
 
$
0.16

 
$
0.12

 
$
0.15

 
$
0.13

General and administrative expenses (d)
 
$
0.29

 
$
0.45

 
$
0.30

 
$
0.43

Natural gas, oil and NGL depreciation, depletion and
amortization
 
$
1.75

 
$
1.70

 
$
1.78

 
$
1.61

Depreciation and amortization of other assets
 
$
0.21

 
$
0.24

 
$
0.21

 
$
0.25

Interest expense (e)
 
$
0.14

 
$
0.06

 
$
0.09

 
$
0.04

Interest Expense ($ in millions):
 
 
 
 
 
 
 
 
Interest expense
 
$
54

 
$
21

 
$
70

 
$
28

Interest rate derivatives – realized (gains) losses
 
(1
)
 
(1
)
 
(3
)
 
—

Interest rate derivatives – unrealized (gains) losses
 
51

 
(6
)
 
57

 
(2
)
Total interest expense
 
$
104

 
$
14

 
$
124

 
$
26

___________________________________________
(a)
Natural gas equivalent is based on six mcf of natural gas to one barrel of oil or one barrel of NGL. This ratio reflects an energy content equivalency and not a price or revenue equivalency. Given recent natural gas, oil and NGL prices, the price for an mcf of natural gas is significantly less than the price for an mcfe of oil or NGL.
(b)
Includes settlements for commodity derivatives adjusted for option premiums. For derivatives closed early, settlements are reflected in the period of original contract expiration.
(c)
Includes revenue and operating costs and excludes depreciation and amortization and impairments. See Depreciation and Amortization of Other Assets and Impairments of Fixed Assets and Other under Results of Operations for details of the depreciation and amortization and impairments of assets associated with our marketing, gathering and compression and oilfield services operating segments.
(d)
Includes stock-based compensation.
(e)
Includes the effects of realized (gains) losses from interest rate derivatives, but excludes the effects of unrealized (gains) losses and is net of amounts capitalized.
Overview
We are currently the second-largest producer of natural gas, the eleventh-largest producer of liquids and the most active driller of onshore wells in the U.S. The Company has built a large resource base of onshore U.S. unconventional natural gas and liquids assets with leading positions in unconventional natural gas plays in the Haynesville/Bossier Shales in northwestern Louisiana and East Texas, the Marcellus Shale in the northern Appalachian Basin of West Virginia and Pennsylvania, and the Barnett Shale in the Fort Worth Basin of north-central Texas, and in unconventional liquids-rich plays in the Eagle Ford Shale in South Texas, the Utica Shale in Ohio, West Virginia and Pennsylvania, the Granite Wash/Hogshooter, Cleveland, Tonkawa and Mississippi Lime plays in the Anadarko Basin in northwestern Oklahoma, the Texas Panhandle and southern Kansas, and the Niobrara Shale in the Powder River Basin in Wyoming. We have also vertically integrated many of our operations and own substantial marketing, compression and oilfield services businesses.
Chesapeake is pursuing the following four strategic initiatives aimed at accelerating the value that can be realized from the resource base we have assembled over the years:
•
Strengthening Financial Discipline. Financial discipline is key to improving returns on capital, increasing capital allocated to drilling and completion activities, balancing capital expenditures with cash flow from operations, decreasing financial risk and complexity, effecting an overall reduction in costs and achieving investment grade metrics.
•
Developing and Evaluating Existing Assets. We are focusing our drilling on the core of the core of our leasehold positions, continuing to improve our liquids production mix, optimizing our portfolio by implementing

67


a capital allocation process to identify the highest quality projects for funding, and selling noncore assets and noncore affiliates that do not increase our competitive position over the long term.
•
Heightening Operational Excellence. Our operational excellence efforts are evidenced in faster spud-to-spud cycle times, process improvements and careful attention to safety, regulatory compliance and environmental stewardship measures.
•
Increasing Capital Efficiency. Gaining greater capital efficiency allows us to deliver attractive profit margins and financial returns through all phases of the commodity price cycle. We are seeing increased efficiencies through drilling on pre-existing pads and leveraging first-well investments.
We own interests in approximately 45,900 producing natural gas and oil wells that are currently producing approximately 4.0 bcfe per day, net to our interest. Our Current Quarter production of 369 bcfe consisted of 278 bcf of natural gas (75% on a natural gas equivalent basis), 10.5 mmbbls of oil (17% on a natural gas equivalent basis) and 4.8 mmbbls of NGL (8% on a natural gas equivalent basis). Liquids represented 25% of total production during the Current Quarter, up from 21% in the Prior Quarter. Our daily production for the Current Quarter averaged approximately 4.1 bcfe, an increase of 7% from the Prior Quarter and an increase of 2% from the 2013 first quarter. During the Current Quarter, average daily oil production increased 44% over the Prior Quarter and 12% over the 2013 first quarter, average daily NGL production increased 5% over the Prior Quarter and decreased 4% over the 2013 first quarter, and average daily natural gas production increased 1% over the Prior Quarter and 2013 first quarter.
In the Current Quarter, we operated an average of 76 rigs, a decrease of seven rigs compared to the 2013 first quarter, and invested approximately $1.6 billion in drilling and completion costs, bringing Current Period drilling and completion costs to approximately $3.1 billion. Drilling and completion costs were higher in the Current Quarter than the 2013 first quarter as Chesapeake drilled and completed more wells than in the 2013 first quarter. Based on planned activity levels for the second half of 2013, we project that 2013 full-year drilling and completion costs will be $5.7 - $6.0 billion.
Net expenditures for the acquisition of unproved properties were approximately $55 million during the Current Quarter and approximately $100 million for the Current Period. We are projecting to acquire $300 - $350 million of unproved properties for the 2013 full year, net of reimbursements from our joint venture partners. Other capital expenditures were approximately $190 million during the Current Quarter and approximately $535 million for the Current Period.
As a reflection of our focus on financial discipline, average production expenses during the Current Quarter decreased 20% from the Prior Quarter. General and administrative expenses (excluding stock-based compensation) decreased 36% from the Prior Quarter.
Recent Developments
Management and Board Changes
On June 17, 2013, Robert Douglas (Doug) Lawler, 46, joined Chesapeake as President and Chief Executive Officer (CEO) and a member of the Board of Directors. Mr. Lawler was previously employed for 25 years by Anadarko Petroleum Corporation (NYSE:APC) and Kerr-McGee Corporation, where he served in multiple engineering and leadership positions within a diverse geographic portfolio including U.S. onshore, deepwater Gulf of Mexico and international assets. His positions at Anadarko included Senior Vice President, International and Deepwater Operations and member of Anadarko's Executive Committee from July 2012 to May 2013; Vice President, International Operations from December 2011 to July 2012; Vice President, Operations for the Southern and Appalachia Region from March 2009 to July 2012; and Vice President, Corporate Planning from August 2008 to March 2009. He also held a variety of positions with increasing responsibility within Anadarko’s operations, business planning and analysis departments following Anadarko's acquisition of Kerr-McGee in August 2006. Mr. Lawler began his career in 1988 with Kerr-McGee.

Upon the commencement of Mr. Lawler's employment, Steven C. Dixon ceased serving as Acting CEO and the Office of the Chairman was discontinued. Archie W. Dunham, Mr. Dixon and Domenic J. Dell'Osso, Jr. continue to serve in their roles as non-executive Chairman of the Board, Executive Vice President of Operations and Geosciences and Chief Operating Officer, and Executive Vice President and Chief Financial Officer, respectively.

On May 3, 2013, the Board of Directors accepted the resignation of director Louis A. Simpson and appointed Thomas L. Ryan, President and CEO and a director of Service Corporation International (NYSE:SCI), to fill the vacancy and appointed Mr. Ryan to the Audit Committee. Mr. Ryan replaced R. Brad Martin on the Audit Committee and Mr. Martin was appointed chairman of the Nominating, Governance and Social Responsibility Committee.


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On April 1, 2013, Aubrey K. McClendon, the co-founder of the Company, ceased serving as President and CEO and as a director of the Company pursuant to his agreement with the Board of Directors announced on January 29, 2013. On April 18, 2013, Chesapeake and Mr. McClendon entered into a Founder Separation and Services Agreement, Founder Joint Operating Services Agreement and Map Sale Rescission Agreement, which govern certain aspects of Mr. McClendon's separation from the Company. See Note 13 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of the termination benefits received by Mr. McClendon.
Rescission of Map Sale
On July 26, 2013, the Company and Mr. McClendon rescinded the December 2008 sale of an antique map collection pursuant to the terms of a settlement agreement terminating pending shareholder litigation that was approved by the District Court of Oklahoma County, Oklahoma on January 30, 2012. On May 23, 2013, following appeals to the Oklahoma Supreme Court, the settlement was affirmed, the appeal of a related books and records action was dismissed and a petition for writ of certiorari was dismissed. The Company returned the subject maps to Mr. McClendon as provided in the Map Sale Rescission Agreement, and Mr. McClendon paid the Company $12 million plus interest. The Company had previously substantially complied with the requirements to adopt and/or implement a variety of corporate governance measures enumerated in the settlement agreement.
Senior Notes Offering; Tender Offers; Redemption of 6.775% Senior Notes due 2019; Retirement of 7.625% Senior Notes due 2013
On April 1, 2013, we issued $2.3 billion in aggregate principal amount of senior notes at par. The offering included three series of notes: $500 million in aggregate principal amount of 3.25% Senior Notes due 2016; $700 million in aggregate principal amount of 5.375% Senior Notes due 2021; and $1.1 billion in aggregate principal amount of 5.75% Senior Notes due 2023. We used a portion of the net proceeds of $2.274 billion to repay outstanding indebtedness under our corporate revolving bank credit facility and purchase certain senior notes. We purchased $217 million in aggregate principal amount of our 7.625% Senior Notes due 2013 for $221 million and $377 million in aggregate principal amount of our 6.875% Senior Notes due 2018 for $405 million pursuant to tender offers which expired on April 12, 2013. In addition, on May 13, 2013, we redeemed $1.3 billion in aggregate principal amount of our 6.775% Senior Notes due 2019 (the “2019 Notes”) at par pursuant to a notice of special early redemption. As described in the following paragraph, the notice has been the subject of recent litigation. On July 15, 2013, we retired at maturity the remaining $247 million aggregate principal amount outstanding of our 7.625% Senior Notes due 2013.

In March 2013, the Company brought suit in the U.S. District Court for the Southern District of New York against The Bank of New York Mellon Trust Company, N.A. (BNY Mellon), the indenture trustee for the 2019 Notes. The Company sought a declaration that the notice it issued on March 15, 2013 to redeem all of the 2019 Notes at par (plus accrued interest through the redemption date) was timely and effective pursuant to the special early redemption provision of the supplemental indenture governing the 2019 Notes. BNY Mellon asserted that the March 15, 2013 notice was not effective to redeem the 2019 Notes at par because it was not timely for that purpose and because of the specific phrasing in the notice that provided that it would not be effective unless the Court concluded it was timely. The Court conducted a trial on the matter in late April and on May 8, 2013, ruled in the Company's favor. On May 14, 2013, BNY Mellon filed an appeal of the decision with the United States Court of Appeals for the Second Circuit and the appeal is currently pending.
Recent Sales
An essential part of our business strategy in 2013 is using the proceeds from asset sales to fund the spending gap between cash flow from operations and our capital expenditures and to reduce our indebtedness. In 2013, through August 1, we sold natural gas and oil properties, midstream and other assets that we deemed were noncore or did not fit our long-term plans and we entered into a strategic joint venture for aggregate net proceeds of approximately $3.6 billion, approximately $2.4 billion of which we received in the Current Period. Also, see Note 8 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of the drilling carries we continue to receive through our prior strategic joint ventures.
On August 1, 2013, our wholly owned subsidiary, Chesapeake Midstream Development, L.L.C. (CMD), sold its wholly owned midstream subsidiary, Mid-America Midstream Gas Services, L.L.C. (MAMGS), to SemGas, L.P. (SemGas), a wholly owned subsidiary of SemGroup Corporation, for net proceeds of approximately $306 million, subject to post-closing adjustments. MAMGS owns certain gathering and processing assets located in the Mississippi

69


Lime play, and the transaction with SemGas included a new long-term fixed-fee gathering and processing agreement covering acreage dedication areas in the Mississippi Lime play.
On July 31, 2013, we sold assets in the northern Eagle Ford Shale to EXCO Operating Company, LP (EXCO) for net proceeds of approximately $617 million. Receipt of up to an additional $70 million of net proceeds is subject to customary post-closing contingencies. The assets sold included approximately 55,000 net acres in Zavala, Dimmit, La Salle and Frio counties, Texas, including approximately 120 producing wells with average net daily production of approximately 6,150 barrels of oil equivalent during June 2013.
On July 12, 2013, we sold assets in the Haynesville Shale to EXCO for net proceeds of approximately $257 million. Receipt of up to an additional $32 million of net proceeds is subject to customary post-closing contingencies. The assets sold included our operated and non-operated interests in approximately 9,600 net acres in DeSoto and Caddo parishes, Louisiana. Average net daily production from the Haynesville properties was approximately 90 mmcfe during June 2013.
On June 28, 2013, we completed a strategic joint venture with Sinopec International Petroleum Exploration and Production Corporation (“Sinopec”) in which Sinopec purchased a 50% undivided interest in approximately 850,000 acres in the Mississippi Lime play in northern Oklahoma (425,000 acres net to Sinopec). Total consideration for the transaction was approximately $1.110 billion in cash, of which $1.040 billion of net proceeds, or 94%, was received upon closing. Receipt of up to an additional $70 million of net proceeds is subject to customary post-closing contingencies. The assets conveyed to Sinopec produced approximately 9,600 barrels of liquids and 54 mmcf of natural gas per day during the 2013 first quarter. All future exploration and development costs in the joint venture will be shared proportionately between the parties with no drilling carries involved.
On May 8, 2013, CMD sold its wholly owned subsidiary, Granite Wash Midstream Gas Services, L.L.C. (GWMGS), to MarkWest Oklahoma Gas Company, L.L.C., a wholly owned subsidiary of MarkWest Energy Partners, L.P. (NYSE: MWE), for net proceeds of approximately $245 million, subject to post-closing adjustments. GWMGS owns certain midstream assets in the Anadarko Basin that service the Granite Wash and Hogshooter formations. The transaction with MWE included long-term fixed-fee agreements for gas gathering, compression, treating and processing services.
On March 8, 2013, CMD sold its interest in certain gathering system assets in Pennsylvania to Western Gas Partners, LP (NYSE:WES) for net proceeds of approximately $134 million.
Liquidity and Capital Resources
Liquidity Overview
As of June 30, 2013 , we had approximately $4.747 billion in cash availability (defined as unrestricted cash on hand plus borrowing capacity under our revolving bank credit facilities) compared to $4.338 billion as of December 31, 2012. During the Current Period, we increased our debt, net of unrestricted cash, by approximately $47 million, to $12.380 billion. As of June 30, 2013 , we had negative working capital of approximately $2.028 billion compared to negative working capital of approximately $3.318 billion as of December 31, 2012. Working capital deficits have historically existed because our capital spending generally has exceeded our cash flow from operations.
Our business is capital intensive. During the Current Period, our capital expenditures exceeded cash flow from operations, and we filled this spending gap with borrowings and proceeds from our Sinopec joint venture and sales of assets that we determined were noncore or did not fit our long-term plans. We project that our capital expenditures will continue to exceed our cash flow from operations in 2013, although we expect the gap in 2013 will be significantly smaller than in 2012 and will be fully covered by asset sales proceeds. In addition, as of June 30, 2013, we had full availability under our corporate revolving bank credit facility, providing significant additional liquidity if necessary.
To add certainty to future estimated cash flows, we currently have downside price protection, in the form of over-the-counter derivative contracts, on approximately 94% of our remaining forecasted 2013 natural gas, oil and NGL revenue, including downside price protection on approximately 79% of our remaining 2013 estimated natural gas production at an average price of $3.70 per mcf and 94% of our remaining 2013 estimated oil production at an average price of $95.64 per bbl . Our use of derivative contracts allows us to reduce the effect of price volatility on our cash flows and EBITDA (defined as earnings before interest, taxes, depreciation, depletion and amortization), but the amount of production subject to derivative contracts for any period depends on our outlook on future prices and risk assessment.

70


Based on our forecasted operating cash flow for 2013, which takes into account our current derivative contracts, and considering our 2013 forecasted capital expenditures, which are approximately 45% less than our 2012 capital expenditures, we are expecting a funding gap of approximately $3.5 billion for 2013. In 2013, through August 1, net proceeds of approximately $3.6 billion from asset sales have fully funded this gap, and proceeds from asset sales contemplated for later in the year may be used to reduce long-term debt and further enhance our financial liquidity.
As part of our asset sales planning and capital expenditure budgeting process, we closely monitor the resulting effects on the amounts and timing of our sources and uses of funds, particularly as they affect our ability to maintain compliance with the financial covenants of our corporate revolving bank credit facility. While asset sales enhance our ability to reduce debt, sales of producing natural gas and oil properties may adversely affect the amount of cash flow and EBITDA we generate and reduce the amount and value of collateral available to secure our obligations, both of which can be exacerbated by low prices for our production. In September 2012, we obtained an amendment to our corporate revolving bank credit facility agreement that increased the required 4.00 to 1.00 indebtedness to EBITDA ratio for the quarter ended September 30, 2012 and the four subsequent quarters. See Note 3 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for discussion of the terms of the amendment and the early termination of its provisions on June 28, 2013. Without the amendment, we would have been unable to reduce our indebtedness sufficiently as of September 30, 2012 to maintain our covenant compliance, primarily because the closing of certain asset sales transactions occurred in the 2012 fourth quarter and not in September 2012 as we had anticipated. At the end of each of the subsequent three quarters, including the quarter ended June 30, 2013 , our indebtedness to EBITDA ratio was less than 4.00 to 1.00, the ratio currently in effect and that existed prior to the amendment. Failure to maintain compliance with the covenants of our revolving bank credit facility agreement could result in the acceleration of outstanding indebtedness under the facility and lead to cross defaults under our senior note and contingent convertible senior note indentures, secured hedging facility, equipment master lease agreements and term loan.
Based upon our capital expenditure budget, our forecasted operating cash flow and projected levels of indebtedness, we are projecting that we will be in compliance with the financial maintenance covenants of our corporate revolving bank credit facility, and we will have adequate liquidity, over the next twelve months. Further, we expect to meet in the ordinary course of business other contractual cash commitments to third parties pursuant to various, agreements described in Contractual Obligations and Off-Balance Sheet Arrangements below and in Note 4 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report, recognizing that we may be required to meet such commitments even if our business plan assumptions were to change. We believe the assumptions underlying our budget for this period are reasonable and that we have adequate flexibility, including the ability to adjust discretionary capital expenditures and other spending, to adapt to potential negative developments if needed.

71


Sources of Funds
The following table presents the sources of our cash and cash equivalents for the Current Period and the Prior Period. See Recent Sales above and Notes 6, 8, 9 and 11 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of sales of natural gas and oil assets, other assets, investments, and preferred interests and noncontrolling interests in subsidiaries.
 
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
 
($ in millions)
Cash provided by operating activities
 
$
2,205

 
$
1,029

Sales of natural gas and oil assets:
 
 
 
 
Natural gas and oil properties
 
1,856

 
674

Volumetric production payment
 
—

 
744

Joint venture leasehold
 
39

 
137

Total sales of natural gas and oil assets
 
1,895

 
1,555

Other sources of cash and cash equivalents:
 
 
 
 
Sales of other property and equipment
 
459

 
79

Sale of preferred interest and ORRI in CHK C-T
 
—

 
1,250

Proceeds from long-term debt, net
 
2,274

 
5,052

Proceeds from sales of investments
 
102

 
2,000

Other
 
201

 
135

Total other sources of cash and cash equivalents
 
3,036

 
8,516

Total sources of cash and cash equivalents
 
$
7,136


$
11,100

Cash provided by operating activities is a source of liquidity we use to fund capital expenditures, pay dividends and repay debt. Cash provided by operating activities was $2.205 billion in the Current Period compared to $1.029 billion in the Prior Period. The increase in cash provided by operating activities is primarily the result of an increase in realized natural gas and oil prices (excluding the effect of unrealized gains or losses on derivatives and partially offset by lower NGL prices) from $3.89 per mcfe in the Prior Period to $4.71 per mcfe in the Current Period, an increase in sales volumes and decreases in certain of our operating expenses per unit. Changes in cash flow from operations are largely due to the same factors that affect our net income, excluding various non-cash items such as depreciation, depletion and amortization, impairments of natural gas and oil properties and other assets, deferred income taxes and mark-to-market changes in our derivative instruments. See the discussion below under Results of Operations .

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The following table reflects the proceeds received from issuances of debt in the Current Period and Prior Period. See Note 3 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion.
 
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
 
Principal Amount of
Debt Issued
 
Net
Proceeds
 
Principal Amount of
Debt Issued
 
Net
Proceeds
 
 
($ in millions)
Senior notes
 
$
2,300

 
$
2,274

 
$
1,300

 
$
1,263

Term loans
 
—

 
—

 
4,000

 
3,789

Total
 
$
2,300

 
$
2,274

 
$
5,300

 
$
5,052

Our $4.0 billion corporate revolving bank credit facility, our $500 million oilfield services revolving bank credit facility and cash and cash equivalents are other sources of liquidity. We use these revolving bank credit facilities and cash on hand to fund daily operating activities and capital expenditures as needed. We borrowed $6.559 billion and repaid $6.578 billion in the Current Period and borrowed $10.104 billion and repaid $11.592 billion in the Prior Period under our revolving bank credit facilities. Our corporate facility is secured by natural gas and oil proved reserves. A significant portion of our natural gas and oil reserves is currently unencumbered and therefore available to be pledged as additional collateral if needed to respond to borrowing base and collateral redeterminations our lenders might make in the future. We believe our borrowing capacity under this facility will not be reduced as a result of any such future redeterminations. Our oilfield services facility is secured by substantially all of our wholly owned oilfield services assets and is not subject to periodic borrowing base redeterminations. Prior to June 15, 2012, we also had a $600 million midstream revolving bank credit facility, which we terminated in June 2012. Our revolving bank credit facilities are described below under Bank Credit Facilities .

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Uses of Funds
The following table presents the uses of our cash and cash equivalents for the Current Period and the Prior Period:  
 
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
 
($ in millions)
Natural Gas and Oil Expenditures:
 
 
 
 
Drilling and completion costs (a)(b)
 
$
(3,131
)
 
$
(5,007
)
Acquisitions of proved properties
 
(13
)
 
(17
)
Acquisitions of unproved properties
 
(157
)
 
(1,452
)
Geological and geophysical costs (b)
 
(28
)
 
(113
)
Interest capitalized on unproved properties
 
(366
)
 
(326
)
Total natural gas and oil expenditures
 
(3,695
)
 
(6,915
)
Other Uses of Cash and Cash Equivalents:
 
 
 
 
Additions to other property and equipment
 
(506
)
 
(1,311
)
Payments on credit facility borrowings, net
 
(19
)
 
(1,488
)
Cash paid to purchase debt
 
(1,874
)
 
—

Cash paid for prepayment of mortgage
 
(55
)
 
—

Dividends paid
 
(202
)
 
(198
)
Cash paid to purchase preferred shares of subsidiary
 
(212
)
 
—

Distributions to noncontrolling interest owners
 
(111
)
 
(104
)
Cash paid for financing derivatives (c)
 
(25
)
 
(36
)
Additions to investments
 
(4
)
 
(128
)
Other
 
(43
)
 
(247
)
Total uses of cash and cash equivalents
 
$
(6,746
)
 
$
(10,427
)
___________________________________________
(a)
Net of $436 million and $518 million in drilling and completion carries received from our joint venture partners during the Current Period and the Prior Period, respectively.
(b)
Includes related capitalized interest.
(c)
Reflects derivatives deemed to contain, for accounting purposes, a significant financing element at contract inception.
Our primary use of funds is for capital expenditures related to exploration and development of natural gas and oil properties. During the Prior Period, our operated rig count was as high as 165 rigs as we were quickly ramping up our liquids-focused drilling while, at the same time, we were gradually ramping down drilling of natural gas wells. During the Current Period, our average rig count was 80 operated rigs, and as of August 1, 2013, our rig count was 71 operated rigs. Our natural gas drilling activities have been sharply reduced since 2012, from 50 rigs at the beginning of 2012 to an average of nine rigs in the Current Period. The Prior Period drilling and completion expenditures also reflected significant well completion costs for natural gas wells that had been drilled, but not completed, in prior periods. These completions, which represented approximately 90% of the natural gas wells we completed during the Prior Period, enabled us to hold by production the related leasehold according to the terms of our leases.
Our unproved property leasehold acquisition costs during the Prior Period were $1.452 billion, approximately 60% of which were focused on adding to our acreage in the Utica and Mississippi Lime plays to complete our leasehold acquisition strategies in connection with completed or planned joint ventures in those areas.
Capital expenditures related to additions to property and equipment associated with our midstream, oilfield services and other fixed assets of $1.311 billion during the Prior Period were primarily related to the expansion of our gathering systems and the growth of our oilfield services businesses, in particular our hydraulic fracturing business. The reduction of $805 million in the Current Period is primarily the result of our sale of substantially all of our midstream business in December 2012 and a reduction in capital expenditures for our oilfield services business.

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We paid dividends on our common stock of $116 million and $112 million in the Current Period and the Prior Period, respectively. We paid dividends on our preferred stock of $86 million in both the Current Period and the Prior Period, respectively.
In the Current Quarter, we purchased approximately 190,000 preferred shares of CHK Utica from existing investors for approximately $212 million, or approximately $1,115 per share plus accrued dividends, reducing the amount of outstanding preferred shares held by third-party investors by approximately 15%.
Bank Credit Facilities
During the Current Period, we used two revolving bank credit facilities as sources of liquidity.
 
 
Corporate
Credit Facility (a)
 
Oilfield Services
Credit Facility (b)
 
 
($ in millions)
Facility structure
 
Senior secured
revolving
 
Senior secured
revolving
Maturity date
 
December 2015
 
November 2016
Borrowing capacity
 
$
4,000

 
$
500

Amount outstanding as of June 30, 2013
 
$
—

 
$
399

Letters of credit outstanding as of June 30, 2013
 
$
31

 
$
—

___________________________________________
(a)
Co-borrowers are Chesapeake Exploration, L.L.C., Chesapeake Appalachia, L.L.C. and Chesapeake Louisiana, L.P.
(b)
Borrower is Chesapeake Oilfield Operating, L.L.C.
Our credit facilities do not contain material adverse change or adequate assurance covenants. Although the applicable interest rates under our corporate credit facility fluctuate slightly based on our long-term senior unsecured credit ratings, our credit facilities do not contain provisions which would trigger an acceleration of amounts due under the respective facilities or a requirement to post additional collateral in the event of a downgrade of our credit ratings.
Corporate Credit Facility. Our $4.0 billion syndicated revolving bank credit facility is used for general corporate purposes. Borrowings under the facility are secured by proved reserves and bear interest at a variable rate. We were in compliance with all covenants under the credit facility agreement as of June 30, 2013 . See Note 3 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of the terms of our corporate credit facility, including the terms of an amendment that increased the required indebtedness to EBITDA ratio as of September 30, 2012 and the subsequent two quarters.
Our indebtedness to EBITDA ratio as of June 30, 2013 was approximately 3.00 to 1.00. The ratio compares consolidated indebtedness to consolidated EBITDA, both non-GAAP financial measures that are defined in the credit facility agreement, for the 12-month period ending on the measurement date. Consolidated indebtedness consists of outstanding indebtedness, less the cash and cash equivalents of Chesapeake and certain of our subsidiaries. Consolidated EBITDA consists of the net income of Chesapeake and certain of our subsidiaries, excluding income from investments and non-cash income plus interest expense, taxes, depreciation, amortization expense and other non-cash expenses, and is calculated on a pro forma basis to give effect to any acquisitions, divestitures or other adjustments.
Oilfield Services Credit Facility. Our $500 million syndicated oilfield services revolving bank credit facility is used to fund capital expenditures and for general corporate purposes associated with our oilfield services operations. The facility may be expanded from $500 million to $900 million at COO’s option, subject to additional bank participation. Borrowings under the credit facility are secured by all of the equity interests and assets of COO and its wholly owned subsidiaries (the restricted subsidiaries for this facility, which are unrestricted subsidiaries under Chesapeake’s senior notes, contingent convertible senior notes, term loan, corporate revolving bank credit facility, secured hedging facility and equipment master lease agreements), and bear interest at a variable interest rate. For further discussion of the terms of our oilfield services credit facility, see Note 3 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report.


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Hedging Facility
We have a multi-counterparty secured hedging facility with 16 counterparties that have committed to provide approximately 6.2 tcfe of hedging capacity for natural gas, oil and NGL price derivatives and 6.2 tcfe for basis derivatives with an aggregate mark-to-market capacity of $16.5 billion under the terms of the facility. For further discussion of the terms of our hedging facility, see Note 7 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report.
Term Loan
In November 2012, we established an unsecured five-year term loan credit facility in an aggregate principal amount of $2.0 billion for net proceeds of $1.935 billion . Our obligations under the facility rank equally with our outstanding senior notes and contingent convertible senior notes and are unconditionally guaranteed on a joint and several basis by our direct and indirect wholly owned subsidiaries that are subsidiary guarantors under the indentures for such notes. Amounts borrowed under the facility bear interest at a variable rate and the facility may be voluntarily repaid at any time, subject to applicable premiums, as provided in the agreement. See Note 3 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion.
Senior Note Obligations
In addition to outstanding borrowings under our revolving bank credit facilities and the term loan discussed above, our long-term debt consisted of the following as of June 30, 2013 :  
 
 
June 30, 2013
 
 
($ in millions)    
7.625% senior notes due 2013 (a)
 
$
247

9.5% senior notes due 2015
 
1,265

3.25% senior notes due 2016
 
500

6.25% euro-denominated senior notes due 2017 (b)
 
447

6.5% senior notes due 2017
 
660

6.875% senior notes due 2018
 
97

7.25% senior notes due 2018
 
669

6.625% senior notes due 2019 (c)
 
650

6.625% senior notes due 2020
 
1,300

6.875% senior notes due 2020
 
500

6.125% senior notes due 2021
 
1,000

5.375% senior notes due 2021
 
700

5.75% senior notes due 2023
 
1,100

2.75% contingent convertible senior notes due 2035 (d)
 
396

2.5% contingent convertible senior notes due 2037 (d)
 
1,168

2.25% contingent convertible senior notes due 2038 (d)
 
347

Discount on senior notes (e)
 
(368
)
Interest rate derivatives (f)
 
16

Total senior notes, net
 
$
10,694

___________________________________________
(a)
See Note 18 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for discussion of the repayment of these notes subsequent to June 30, 2013 .
(b)
The principal amount shown is based on the exchange rate of $1.3010 to €1.00 as of June 30, 2013 . See Note 7 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for information on our related foreign currency derivatives.
(c)
Issuers are COO, an indirect wholly owned subsidiary of the Company, and Chesapeake Oilfield Finance, Inc. (COF), a wholly owned subsidiary of COO formed solely to facilitate the offering of the 6.625% Senior Notes due 2019. COF is nominally capitalized and has no operations or revenues. Chesapeake Energy Corporation is the issuer of all other senior notes and the contingent convertible senior notes.

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(d)
The holders of our contingent convertible senior notes may require us to repurchase, in cash, all or a portion of their notes at 100% of the principal amount of the notes on any of four dates that are five, ten, fifteen and twenty years before the maturity date. The notes are convertible, at the holder’s option, prior to maturity under certain circumstances into cash and, if applicable, shares of our common stock using a net share settlement process.
(e)
Included in this discount was $340 million as of June 30, 2013 associated with the equity component of our contingent convertible senior notes. This discount is amortized based on an effective yield method.
(f)
See Note 7 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for discussion related to these instruments.
For further discussion and details regarding our senior notes, contingent convertible senior notes and COO senior notes, see Note 3 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report.
Credit Risk
Derivative instruments that enable us to manage our exposure to natural gas, oil and NGL prices and interest rate volatility expose us to credit risk from our counterparties. To mitigate this risk, we enter into derivative contracts only with counterparties that are rated investment grade and deemed by management to be competent and competitive market makers, and we attempt to limit our exposure to non-performance by any single counterparty. During the more than 15 years we have engaged in derivative activities, we have experienced a counterparty default only once (Lehman Brothers in September 2008), and the total loss recorded in that instance was immaterial. As of June 30, 2013 , our natural gas, oil and interest rate derivative instruments were spread among 15 counterparties. Additionally, the counterparties under our multi-counterparty secured hedging facility are required to secure their obligations in excess of defined thresholds. We use this facility for substantially all of our natural gas, oil and NGL derivatives.
Our accounts receivable are primarily from purchasers of natural gas, oil and NGL ($1.571 billion as of June 30, 2013 ) and exploration and production companies that own interests in properties we operate ($678 million as of June 30, 2013 ). This industry concentration has the potential to impact our overall exposure to credit risk, either positively or negatively, in that our customers and joint working interest owners may be similarly affected by changes in economic, industry or other conditions. We generally require letters of credit or parent guarantees for receivables from parties which are judged to have sub-standard credit, unless the credit risk can otherwise be mitigated. During the Current Period and the Prior Period, we recognized nominal amounts of bad debt expense related to potentially uncollectible receivables.
Contractual Obligations and Off-Balance Sheet Arrangements
From time to time, we enter into arrangements and transactions that can give rise to off-balance sheet obligations. As of June 30, 2013 , these arrangements and transactions included (i) operating lease agreements, (ii) VPPs (to physically deliver and purchase volumes and pay related production expenses and taxes in the future), (iii) open purchase commitments, (iv) open delivery commitments, (v) open drilling commitments, (vi) undrawn letters of credit, (vii) open gathering and transportation commitments and (viii) various other commitments we enter into in the ordinary course of business that could result in a future cash obligation.
As the operator of the properties from which VPP volumes have been sold, we have the responsibility to bear the cost of producing the reserves attributable to such interests, which we include as a component of production expenses and production taxes in our condensed consolidated statements of operations in the periods such costs are incurred. As with all non-expense-bearing royalty interests, volumes conveyed in a VPP transaction are excluded from our estimated proved reserves; however, the estimated production expenses and taxes associated with VPP volumes expected to be delivered in future periods are included as a reduction of the future net cash flows attributable to our proved reserves for purposes of determining the cost center ceiling for impairment purposes and in determining our standardized measure. Our commitment to bear the costs on any future production of VPP volumes is not reflected as a liability on our balance sheet. The costs that will apply in the future will depend on the actual production volumes as well as the production costs and taxes in effect during the periods in which such production actually occurs, which could differ materially from our current and historical costs, and production may not occur at the times or in the quantities projected, or at all. We have committed to purchase natural gas and liquids associated with our VPP transactions. Production purchased under these arrangements is based on market prices at the time of production, and the purchased natural gas and liquids are resold at market prices.

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See Notes 4, 8 and 10 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of commitments, VPPs and VIEs, respectively.
Results of Operations - Three Months Ended June 30, 2013 vs. June 30, 2012
General . For the Current Quarter, Chesapeake had net income of $625 million , or $0.66 per diluted common share, on total revenues of $4.675 billion . This compares to net income of $1.037 billion , or $1.29 per diluted common share, on total revenues of $3.389 billion during the Prior Quarter.
Natural Gas, Oil and NGL Sales . During the Current Quarter, natural gas, oil and NGL sales were $2.406 billion compared to $2.117 billion in the Prior Quarter. In the Current Quarter, Chesapeake produced 369 bcfe at a weighted average price of $ 4.96 per mcfe, compared to 347 bcfe produced in the Prior Quarter at a weighted average price of $ 3.77 per mcfe (weighted average prices exclude the effect of unrealized gains on derivatives of $576 million and $810 million in the Current Quarter and the Prior Quarter, respectively). The increase in the price received per mcfe in the Current Quarter compared to the Prior Quarter resulted in an increase in revenues of $437 million and increased sales volumes resulted in an $86 million increase in revenues, for a total increase in revenues of $523 million (excluding unrealized gains or losses on natural gas, oil and NGL derivatives). The 7% increase in production from the Prior Quarter to the Current Quarter was primarily generated through the drillbit.
For the Current Quarter, we realized an average price per mcf of natural gas of $ 2.62 compared to $ 1.88 in the Prior Quarter (weighted average prices exclude the effect of unrealized gains or losses on derivatives). Oil prices realized per barrel (excluding unrealized gains or losses on derivatives) were $ 93.81 and $ 91.58 in the Current Quarter and the Prior Quarter, respectively. NGL prices realized per barrel (excluding unrealized gains or losses on derivatives) were $ 24.22 and $ 25.94 in the Current Quarter and the Prior Quarter, respectively. Realized gains and losses from our natural gas, oil and NGL derivatives resulted in a net decrease in natural gas, oil and NGL revenues of $39 million, or $0.10 per mcfe, in the Current Quarter and a net increase of $195 million, or $0.56 per mcfe, in the Prior Quarter. See Item 3 of Part I of this report for a complete listing of all of our derivative instruments as of June 30, 2013 .
A change in natural gas, oil and NGL prices has a significant impact on our revenues and cash flows. Assuming the Current Quarter production levels, an increase or decrease of $0.10 per mcf of natural gas sold would result in an increase or decrease in Current Quarter revenues and cash flows of approximately $28 million and $27 million, respectively, and an increase or decrease of $1.00 per barrel of liquids sold would result in an increase or decrease in Current Quarter revenues and cash flows of approximately $15 million without considering the effect of hedging activities.

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The following tables show our production and average sales prices received by operating division for the Current Quarter and the Prior Quarter:  
 
 
Three Months Ended
June 30, 2013
 
 
Natural Gas
 
Oil
 
NGL
 
Total
 
 
(bcf)
 
($/mcf) (a)  
 
(mmbbl)
 
($/bbl) (a)  
 
(mmbbl)
 
($/bbl) (a)  
 
(bcfe)
 
%
 
($/mcfe) (a)
Southern (b)
 
112.3

 
2.80

 
—

 
—

 
0.3

 
22.07

 
114.3

 
31

 
2.83

Northern (c)
 
58.9

 
2.94

 
4.8

 
89.34

 
2.5

 
28.80

 
102.4

 
28

 
6.57

Eastern (d)
 
94.8

 
3.17

 
0.5

 
85.32

 
0.8

 
29.09

 
102.6

 
28

 
3.58

Western (e)
 
11.6

 
(0.73
)
 
5.2

 
96.13

 
1.2

 
11.26

 
50.1

 
13

 
10.14

Total (f)
 
277.6

 
2.81

 
10.5

 
92.53

 
4.8

 
24.22

 
369.4

 
100
%
 
5.06

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
June 30, 2012
 
 
Natural Gas
 
Oil
 
NGL
 
Total
 
 
(bcf)
 
($/mcf) (a)
 
(mmbbl)
 
($/bbl) (a)
 
(mmbbl)
 
($/bbl) (a)
 
(bcfe)
 
%
 
($/mcfe) (a)
Southern (b)
 
147.6

 
1.06

 
—

 
—

 
0.3

 
27.53

 
149.7

 
43

 
1.13

Northern (c)
 
50.5

 
1.70

 
3.4

 
88.70

 
2.9

 
25.67

 
88.3

 
25

 
5.22

Eastern (d)
 
61.1

 
1.33

 
—

 
—

 
0.3

 
40.52

 
63.1

 
18

 
1.58

Western (e)
 
16.2

 
0.80

 
3.9

 
90.38

 
1.0

 
22.69

 
45.4

 
14

 
8.47

Total (f)
 
275.4

 
1.22

 
7.3

 
89.49

 
4.5

 
26.40

 
346.5

 
100
%
 
3.21

___________________________________________
(a)
The average sales price excludes gains (losses) on derivatives.
(b)
Our Barnett Shale production is concentrated in urban areas where the cost to develop the necessary infrastructure to gather and deliver the natural gas to intrastate pipelines significantly exceeds the cost of similar infrastructure in non-urban areas. Additionally, the rapid development of the Barnett Shale required the construction of new pipelines to provide an adequate market for these new gas reserves. In order to support the timely construction of these new pipelines, we entered into firm transportation contracts that have resulted in lower natural gas price realizations in the Barnett Shale than in our other major natural gas plays.
(c)
Our Northern Division primarily includes the Mississippi Lime, Granite Wash, Cleveland, Tonkawa and Hogshooter, and accounted for approximately 28% of our estimated proved reserves by volume as of December 31, 2012.  Through the development of these plays, we are continuing to see steady production growth in the aggregate, contributing an approximate 16% increase in production in the Current Quarter compared to the Prior Quarter.
(d)
Our Eastern division primarily includes the Marcellus Shale, which held approximately 23% of our estimated proved reserves by volume as of December 31, 2012 . Production for the Marcellus Shale for the Current Quarter and the Prior Quarter was 90.9 bcfe and 55.5 bcfe, respectively.
(e)
Our Western division primarily includes the Eagle Ford Shale, which held approximately 21% of our estimated proved reserves by volume as of December 31, 2012 . Production for the Eagle Ford Shale for the Current Quarter and the Prior Quarter was 48.5 bcfe and 23.7 bcfe, respectively. The Eagle Ford Shale continues to be a developing play with significant oil production along with associated natural gas production. As a result of the upfront investment to develop the gathering and processing infrastructure combined with the low natural gas throughput in the early stages of the play, we experienced negative natural gas price realizations in the Current Quarter and lower natural gas price realizations in the Prior Quarter. We anticipate these negative realizations will be eliminated in the future as the play matures and natural gas volumes increase.
(f)
Current Quarter and Prior Quarter production reflects various asset sales. See Note 8 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for information on our natural gas and oil property divestitures.

79


Our average daily production of 4.059 bcfe for the Current Quarter consisted of approximately 278 bcf of natural gas (75% on a natural gas equivalent basis) and approximately 168,000 bbls of liquids, consisting of approximately 116,000 bbls of oil (17% on a natural gas equivalent basis) and approximately 52,000 bbls of NGL (8% on a natural gas equivalent basis). Our year-over-year growth rate of natural gas production was 1%, our year-over-year growth rate of oil production was 44% and our year-over-year growth rate of NGL production was 5%.
Marketing, Gathering and Compression Sales and Expenses . Marketing, gathering and compression sales and expenses consist of third-party revenue and expenses related to our marketing, gathering and compression operations. Marketing, gathering and compression activities are performed by Chesapeake primarily for owners in Chesapeake-operated wells. Chesapeake recognized $2.057 billion in marketing, gathering and compression sales in the Current Quarter with corresponding expenses of $2.028 billion , for a net margin before depreciation of $29 million . See Depreciation and Amortization of Other Assets below for the depreciation and amortization recorded on our marketing, gathering and compression assets. This compares to sales of $1.113 billion , expenses of $1.096 billion and a net margin before depreciation of $17 million in the Prior Quarter. In the Current Quarter, Chesapeake realized an increase in marketing, gathering and compression sales and expenses primarily due to an increase in oil volumes marketed and an increase in compression services, offset by the loss of activity from the sale of substantially all of our gathering business in the 2012 fourth quarter. Our gathering business provided approximately $4 million and $12 million of the total marketing, gathering and compression net margin, or 14% and 69%, in the Current Quarter and the Prior Quarter, respectively.
Oilfield Services Revenues and Expenses . Oilfield services consist of third-party revenue and expenses related to our oilfield services operations. Chesapeake recognized $212 million in oilfield services revenues in the Current Quarter with corresponding expenses of $177 million , for a net margin before depreciation of $35 million . See Depreciation and Amortization of Other Assets below for the depreciation and amortization recorded on our oilfield services assets. This compares to revenue of $159 million , expenses of $109 million and a net margin before depreciation of $50 million in the Prior Quarter. Oilfield services revenues and expenses increased from the Prior Quarter to the Current Quarter primarily as a result of the growth in our hydraulic fracturing business; however, these increases were offset by a decrease in rates and the activity of our drilling subsidiary.
Natural Gas, Oil and NGL Production Expenses . Production expenses, which include lifting costs and ad valorem taxes, were $288 million in the Current Quarter, compared to $335 million in the Prior Quarter, respectively. On a unit-of-production basis, production expenses were $ 0.78 per mcfe in the Current Quarter compared to $ 0.97 per mcfe in the Prior Quarter. The per unit expense decrease in the Current Quarter was primarily the result of a general improvement in operating efficiencies across most of our operating areas as well as lower saltwater disposal costs and the divestiture in the 2012 fourth quarter of our Permian Basin assets, which had comparatively high operating costs per unit of production. Production expenses in the Current Quarter and the Prior Quarter included approximately $40 million and $58 million, or $0.11 and $0.17 per mcfe, respectively, associated with VPP production volumes.
Production Taxes . Production taxes were $59 million in the Current Quarter compared to $41 million in the Prior Quarter. On a unit-of-production basis, production taxes were $ 0.16 per mcfe in the Current Quarter compared to $ 0.12 per mcfe in the Prior Quarter. In general, production taxes are calculated using value-based formulas that produce higher per unit costs when natural gas, oil and NGL prices are higher. The $18 million increase in production taxes in the Current Quarter was primarily due to the increase in the unhedged price of our production from $3.21 per mcfe to $5.06 per mcfe, in addition to an increase in production of 23 bcfe. Production taxes in both the Current Quarter and the Prior Quarter included approximately $5 million, or $0.01 and $0.02 per mcfe, respectively, associated with VPP production volumes.
General and Administrative Expenses . General and administrative expenses, including stock-based compensation but excluding internal costs capitalized to our natural gas and oil properties and other property, plant and equipment, were $106 million in the Current Quarter and $155 million in the Prior Quarter, or $ 0.29 and $ 0.45 per mcfe, respectively. The per unit expense decrease in the Current Quarter was primarily due to our efforts to reduce our cost structure and increased emphasis on operational efficiencies, partially offset by an increase in legal expenses relating to various corporate matters. Included in general and administrative expenses is stock-based compensation of $15 million in the Current Quarter and $20 million in the Prior Quarter. See Note 6 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of our stock-based compensation.
Chesapeake follows the full cost method of accounting under which all costs associated with natural gas and oil property acquisition, drilling and completion activities are capitalized. We capitalize internal costs that can be directly identified with acquisition of leasehold and drilling and completion activities and do not include any costs related to

80


production, general corporate overhead or similar activities. In addition, we capitalize internal costs that can be identified with the construction of certain of our property, plant and equipment. We capitalized $81 million and $119 million of internal costs in the Current Quarter and the Prior Quarter, respectively, directly related to our natural gas and oil property acquisition, drilling and completion efforts and the construction of our property, plant and equipment. The decrease was primarily due to our cost structure initiative and increased emphasis on operational efficiencies.
Employee Retirement and Other Termination Benefits. We recorded $7 million of employee retirement and other termination benefits in the Current Quarter primarily related to our voluntary separation plan and senior management separations. See Note 13 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion.
Natural Gas, Oil and NGL Depreciation, Depletion and Amortization . Depreciation, depletion and amortization (DD&A) of natural gas, oil and NGL properties was $645 million and $588 million in the Current Quarter and the Prior Quarter, respectively. The $57 million increase in the Current Quarter is primarily the result of a 7% increase in production in the Current Quarter compared to the Prior Quarter. The average DD&A rate per mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $ 1.75 and $ 1.70 in the Current Quarter and the Prior Quarter, respectively.
Depreciation and Amortization of Other Assets . Depreciation and amortization of other assets was $76 million in the Current Quarter, compared to $83 million in the Prior Quarter. Depreciation and amortization of other assets was $ 0.21 and $ 0.24 per mcfe in the Current Quarter and the Prior Quarter, respectively. The per unit decrease in the Current Quarter is primarily due to higher production levels in the Current Quarter compared to the Prior Quarter and the sale of substantially all of our midstream business in December 2012, partially offset by additional depreciation on our oilfield services equipment during the Current Quarter. See Note 1 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for information regarding our assets held for sale.
Property and equipment costs are depreciated on a straight-line basis and are depreciated over the estimated useful lives of the assets. To the extent company-owned oilfield services equipment is used to drill and complete our wells, a substantial portion of the depreciation (i.e., the portion related to our utilization of the equipment) is capitalized in natural gas and oil properties as drilling and completion costs. The following table shows depreciation expense by asset class for the Current Quarter and Prior Quarter and the estimated useful life of our assets.
 
 
Three Months Ended
June 30,
 
Estimated
Useful
Life
 
 
2013
 
2012
 
 
 
($ in millions)
 
(in years)
Oilfield services equipment (a)
 
$
25

 
$
14

 
3 - 15
Natural gas gathering systems and treating plants (b)
 
3

 
21

 
20
Buildings and improvements
 
11

 
10

 
10 - 39
Natural gas compressors (b)
 
9

 
6

 
3 - 20
Computers and office equipment
 
11

 
11

 
3 - 7
Vehicles
 
9

 
14

 
0 - 5
Other
 
8

 
7

 
2 - 20
Total depreciation and amortization of other assets
 
$
76

 
$
83

 
 
___________________________________________
(a)
Included in our oilfield services operating segment.
(b)
Included in our marketing, gathering and compression operating segment.
Impairments of Fixed Assets and Other. In the Current Quarter and Prior Quarter, we recognized $231 million and $243 million , respectively, of impairment losses associated with fixed assets and other. Of the impairments, $213 million and $219 million were related to impairments of certain of our buildings and land in the Current Quarter and Prior Quarter, respectively. See Note 12 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of our impairments of fixed assets and other.
Net Gains on Sales of Fixed Assets. In the Current Quarter, net gains on sales of fixed assets were $109 million compared to immaterial net gains in the Prior Quarter. The Current Quarter gains primarily related to the sale of certain

81


of our midstream gathering systems. See Note 11 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of our net gains on sales of fixed assets.


Interest Expense . Interest expense was $104 million in the Current Quarter compared to $14 million in the Prior Quarter as follows:
 
 
Three Months Ended
June 30,
 
 
2013
 
2012
 
 
($ in millions)
Interest expense on senior notes
 
$
194

 
$
185

Interest expense on credit facilities
 
11

 
16

Interest expense on term loans
 
29

 
62

Realized (gains) losses on interest rate derivatives
 
(1
)
 
(1
)
Unrealized (gains) losses on interest rate derivatives
 
51

 
(6
)
Amortization of loan discount, issuance costs and other
 
30

 
42

Capitalized interest
 
(210
)
 
(284
)
Total interest expense
 
$
104

 
$
14

 
 
 
 
 
Average senior notes borrowings
 
$
11,657

 
$
10,650

Average term loan borrowings
 
$
2,000

 
$
2,198

Average credit facilities borrowings
 
$
907

 
$
2,170

Interest expense, excluding unrealized gains or losses on interest rate derivatives and net of amounts capitalized, was $ 0.14 per mcfe in the Current Quarter compared to $ 0.06 per mcfe in the Prior Quarter. The increase in interest expense is primarily due to a decrease in the amount of interest we are able to capitalize as a result of a decrease in the average balance of our unevaluated natural gas and oil properties.
Earnings (Losses) on Investments. Earnings on investments were $23 million in the Current Quarter, compared to losses on investments of $59 million in the Prior Quarter. The Current Quarter earnings primarily related to our equity in the net income of certain investments, primarily FTS International, Inc. (FTS). The Prior Quarter losses related to our equity in the net losses of certain investments, primarily FTS, offset by earnings related to our equity in the net income of ACMP. See Note 9 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of our investments.
Gains (Losses) on Sales of Investments. In the Current Quarter and Prior Quarter, we recorded a loss on sales of investments of $10 million and gains on sales of investments of $1.030 billion, respectively. In the Current Quarter, we recorded a $15 million pre-tax loss related to the sale of our Clean Energy convertible note investment. In addition, in the Current Quarter we sold a $1 million equity investment for cash proceeds of $6 million and recorded a $5 million pre-tax gain. In the Prior Quarter, we sold all of our common and subordinated units representing limited partner interests in Access Midstream Partners, L.P. (NYSE:ACMP), formerly named Chesapeake Midstream Partners, L.P., and all of our limited liability company interests in the sole member of its general partner to funds affiliated with Global Infrastructure Partners for cash proceeds of $2.0 billion. We recorded a $1.032 billion pre-tax gain associated with the transaction.
Losses on Purchases or Exchanges of Debt. In the Current Quarter, we purchased $217 million in aggregate principal amount of our 7.625% Senior Notes due 2013 for $221 million and $377 million in aggregate principal amount of our 6.875% Senior Notes due 2018 for $405 million pursuant to tender offers which expired on April 12, 2013. We recorded a loss of approximately $37 million associated with the tender offers, including $32 million in premiums and $5 million of unamortized deferred charges. In addition, in the Current Quarter, we redeemed $1.3 billion in aggregate principal amount of our 6.775% Senior Notes due 2019 at par pursuant to a notice of special early redemption. We recorded a loss of approximately $33 million associated with the redemption, including $19 million of unamortized deferred charges and $14 million of discount.

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Other Income . Other income of $3 million in the Current Quarter and $5 million in the Prior Quarter primarily consisted of miscellaneous income.
Income Tax Expense (Benefit). Chesapeake recorded income tax expense of $384 million in the Current Quarter compared to income tax expense of $663 million in the Prior Quarter. Our effective income tax rate was 38% in the Current Quarter and 39% in the Prior Quarter. Our effective tax rate can fluctuate as a result of the impact of state income taxes and permanent differences.
Net Income Attributable to Noncontrolling Interests. Chesapeake recorded $45 million and $65 million of net income attributable to noncontrolling interests in the Current Quarter and the Prior Quarter, respectively. The decrease in the Current Quarter is primarily related to a decrease in the net income from the Chesapeake Granite Wash Trust.
Results of Operations - Six Months Ended June 30, 2013 vs. June 30, 2012
General . For the Current Period, Chesapeake had net income of $728 million , or $0.72 per diluted common share, on total revenues of $8.098 billion . This compares to net income of $1.033 billion , or $1.25 per diluted common share, on total revenues of $5.807 billion during the Prior Period.
Natural Gas, Oil and NGL Sales . During the Current Period, natural gas, oil and NGL sales were $3.858 billion compared to $3.185 billion in the Prior Period. In the Current Period, Chesapeake produced 728 bcfe at a weighted average price of $4.71 per mcfe, compared to 679 bcfe produced in the Prior Period at a weighted average price of $3.89 per mcfe (weighted average prices exclude the effect of unrealized gains on derivatives of $429 million and $540 million in the Current Period and the Prior Period, respectively). The increase in the price received per mcfe in the Current Period compared to the Prior Period resulted in an increase in revenues of $588 million, and increased sales volumes resulted in a $188 million increase in revenues, for a total increase in revenues of $776 million (excluding unrealized gains or losses on natural gas, oil and NGL derivatives). The 7% increase in production from the Prior Period to the Current Period was primarily generated through the drillbit.
For the Current Period, we realized an average price per mcf of natural gas of $2.37 compared to $2.11 in the Prior Period (weighted average prices exclude the effect of unrealized gains or losses on derivatives). Oil prices realized per barrel (excluding unrealized gains or losses on derivatives) were $94.29 and $92.06 in the Current Period and the Prior Period, respectively. NGL prices realized per barrel (excluding unrealized gains or losses on derivatives) were $26.26 and $29.68 in the Current Period and the Prior Period, respectively. Realized gains and losses from our natural gas, oil and NGL derivatives resulted in a net decrease in natural gas, oil and NGL revenues of $35 million, or $0.05 per mcfe, in the Current Period and a net increase of $311 million, or $0.46 per mcfe, in the Prior Period. See Item 3 of Part I of this report for a complete listing of all of our derivative instruments as of June 30, 2013 .
A change in natural gas, oil and NGL prices has a significant impact on our revenues and cash flows. Assuming the Current Period production levels, an increase or decrease of $0.10 per mcf of natural gas sold would result in an increase or decrease in Current Period revenues and cash flows of approximately $55 million and $54 million, respectively, and an increase or decrease of $1.00 per barrel of liquids sold would result in an increase or decrease in Current Period revenues and cash flows of approximately $29 million and $28 million, respectively, without considering the effect of hedging activities.

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The following tables show our production and average sales prices received by operating division for the Current Period and the Prior Period:  
 
 
Six Months Ended
June 30, 2013
 
 
Natural Gas
 
Oil
 
NGL
 
Total
 
 
(bcf)
 
($/mcf) (a)  
 
(mmbbl)
 
($/bbl) (a)  
 
(mmbbl)
 
($/bbl) (a)  
 
(bcfe)
 
%
 
($/mcfe) (a)
Southern (b)
 
245.1

 
2.32

 
—

 
—

 
0.6

 
21.99

 
249.0

 
34

 
2.36

Northern (c)
 
108.6

 
2.71

 
9.2

 
89.79

 
5.1

 
30.59

 
195.0

 
27

 
6.58

Eastern (d)
 
175.2

 
2.81

 
0.8

 
84.40

 
1.5

 
33.75

 
188.7

 
26

 
3.23

Western (e)
 
21.9

 
(0.17
)
 
9.8

 
98.31

 
2.4

 
13.46

 
94.8

 
13

 
10.40

Total (f)
 
550.8

 
2.45

 
19.8

 
93.79

 
9.6

 
26.26

 
727.5

 
100
%
 
4.76

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
June 30, 2012
 
 
Natural Gas
 
Oil
 
NGL
 
Total
 
 
(bcf)
 
($/mcf) (a)
 
(mmbbl)
 
($/bbl) (a)
 
(mmbbl)
 
($/bbl) (a)
 
(bcfe)
 
%
 
($/mcfe) (a)
Southern (b)
 
294.3

 
1.33

 
0.1

 
99.21

 
0.7

 
30.00

 
299.1

 
44

 
1.42

Northern (c)
 
103.8

 
1.94

 
6.6

 
92.94

 
5.8

 
28.09

 
178.1

 
26

 
5.49

Eastern (d)
 
114.9

 
1.59

 
0.1

 
70.48

 
0.7

 
46.72

 
119.5

 
18

 
1.90

Western (e)
 
33.3

 
1.19

 
6.5

 
94.30

 
1.7

 
32.52

 
82.7

 
12

 
8.57

Total (f)
 
546.3

 
1.49

 
13.3

 
93.49

 
8.9

 
30.68

 
679.4

 
100
%
 
3.43

___________________________________________
(a)
The average sales price excludes gains (losses) on derivatives.
(b)
Our Barnett Shale production is concentrated in urban areas where the cost to develop the necessary infrastructure to gather and deliver the natural gas to intrastate pipelines significantly exceeds the cost of similar infrastructure in non-urban areas. Additionally, the rapid development of the Barnett Shale required the construction of new pipelines to provide an adequate market for these new gas reserves. In order to support the timely construction of these new pipelines, we entered into firm transportation contracts that have resulted in lower natural gas price realizations in the Barnett Shale than in our other major natural gas plays.
(c)
Our Northern Division primarily includes the Mississippi Lime, Granite Wash, Cleveland, Tonkawa and Hogshooter, and accounted for approximately 28% of our estimated proved reserves by volume as of December 31, 2012.  Through the development of these plays, we are continuing to see steady production growth in the aggregate, contributing an approximate 9% increase in production in the Current Period compared to the Prior Period.
(d)
Our Eastern division primarily includes the Marcellus Shale, which held approximately 23% of our estimated proved reserves by volume as of December 31, 2012 . Production for the Marcellus Shale for the Current Period and the Prior Period was 167.8 bcfe and 107.0 bcfe, respectively.
(e)
Our Western division primarily includes the Eagle Ford Shale, which held approximately 21% of our estimated proved reserves by volume as of December 31, 2012 . Production for the Eagle Ford Shale for the Current Period and the Prior Period was 89.3 bcfe and 39.2 bcfe, respectively. The Eagle Ford Shale continues to be a developing play with significant oil production along with associated natural gas production. As a result of the upfront investment to develop the gathering and processing infrastructure combined with the low natural gas throughput in the early stages of the play, we experienced negative natural gas price realizations in the Current Quarter and lower natural gas price realizations in the Prior Quarter. We anticipate these negative realizations will be eliminated in the future as the play matures and natural gas volumes increase.
(f)
Current Period and Prior Period production reflects various asset sales. See Note 8 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for information on our natural gas and oil property divestitures.

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Our average daily production of 4.019 bcfe for the Current Period consisted of approximately 3.043 bcf of natural gas (76% on a natural gas equivalent basis) and approximately 162,735 bbls of liquids, consisting of approximately 109,514 bbls of oil (16% on a natural gas equivalent basis) and approximately 53,221 bbls of NGL (8% on a natural gas equivalent basis). Our year-over-year growth rate of natural gas production was 1%, our year-over-year growth rate of oil production was 49% and our year-over-year growth rate of NGL production was 9%.
Marketing, Gathering and Compression Sales and Expenses . Marketing, gathering and compression sales and expenses consist of third-party revenue and expenses related to our marketing, gathering and compression operations. Marketing, gathering and compression activities are performed by Chesapeake primarily for owners in Chesapeake-operated wells. Chesapeake recognized $3.838 billion in marketing, gathering and compression sales in the Current Period with corresponding expenses of $3.772 billion , for a net margin before depreciation of $66 million . See Depreciation and Amortization of Other Assets below for the depreciation and amortization recorded on our marketing, gathering and compression assets. This compares to sales of $2.328 billion , expenses of $2.292 billion and a net margin before depreciation of $36 million in the Prior Period. In the Current Period, Chesapeake realized an increase in marketing, gathering and compression sales and expenses primarily due to an increase in oil volumes marketed and an increase in compression services, offset by the loss of activity from the sale of substantially all of our gathering business in the 2012 fourth quarter. Our gathering business provided approximately $9 million and $21 million of the total marketing, gathering and compression net margin, or 14% and 58% in the Current Period and the Prior Period, respectively.
Oilfield Services Revenues and Expenses . Oilfield services consist of third-party revenue and expenses related to our oilfield services operations. Chesapeake recognized $402 million in oilfield services revenues in the Current Period with corresponding expenses of $332 million , for a net margin before depreciation of $70 million . See Depreciation and Amortization of Other Assets below for the depreciation and amortization recorded on our oilfield services assets. This compares to revenue of $294 million , expenses of $205 million and a net margin before depreciation of $89 million in the Prior Period. Oilfield services revenues and expenses increased from the Prior Period to the Current Period primarily as a result of the growth in our hydraulic fracturing business; however, these increases were offset by a decrease in rates and activity of our drilling subsidiary.
Natural Gas, Oil and NGL Production Expenses . Production expenses, which include lifting costs and ad valorem taxes, were $595 million in the Current Period, compared to $685 million in the Prior Period. On a unit-of-production basis, production expenses were $0.82 per mcfe in the Current Period compared to $1.01 per mcfe in the Prior Period. The per unit expense decrease in the Current Period was primarily the result of a general improvement in operating efficiencies across most of our operating areas as well as lower saltwater disposal costs, the divestiture in the 2012 fourth quarter of our Permian Basin assets, which had comparatively high operating costs per unit of production, and a $15 million fee retroactively imposed in the Prior Period in Pennsylvania on drilled wells, which had a $0.05 per mcfe effect. Production expenses in the Current Period and the Prior Period included approximately $78 million and $117 million, or $0.11 and $0.17 per mcfe, respectively, associated with VPP production volumes.
Production Taxes . Production taxes were $112 million in the Current Period compared to $89 million in the Prior Period. On a unit-of-production basis, production taxes were $0.15 per mcfe in the Current Period compared to $0.13 per mcfe in the Prior Period. In general, production taxes are calculated using value-based formulas that produce higher per unit costs when natural gas, oil and NGL prices are higher. The $23 million increase in production taxes in the Current Period was primarily due to the increase in the unhedged price of our production from $3.43 per mcfe to $4.76 per mcfe, in addition to an increase in production of 48 bcfe. Production taxes in the Current Period and the Prior Period included approximately $10 million and $11 million, or $0.01 and $0.02 per mcfe, respectively, associated with VPP production volumes.
General and Administrative Expenses . General and administrative expenses, including stock-based compensation but excluding internal costs capitalized to our natural gas and oil properties and other property, plant and equipment, were $216 million in the Current Period and $291 million in the Prior Period, or $0.30 and $0.43 per mcfe, respectively. The per unit expense decrease in the Current Period was primarily due to our efforts to reduce our cost structure and increased emphasis on operational efficiencies, partially offset by an increase in legal expenses relating to various corporate matters. Included in general and administrative expenses is stock-based compensation of $35 million in the Current Period and $38 million in the Prior Period. See Note 6 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of our stock-based compensation.
Chesapeake follows the full cost method of accounting under which all costs associated with natural gas and oil property acquisition, drilling and completion activities are capitalized. We capitalize internal costs that can be directly

85


identified with acquisition of leasehold and drilling and completion activities and do not include any costs related to production, general corporate overhead or similar activities. In addition, we capitalize internal costs that can be identified with the construction of certain of our property, plant and equipment. We capitalized $172 million and $234 million of internal costs in the Current Period and the Prior Period, respectively, directly related to our natural gas and oil property acquisition, drilling and completion efforts and the construction of our property, plant and equipment. The decrease was primarily due to our cost structure initiative and increased emphasis on operational efficiencies.
Employee Retirement and Other Termination Benefits. We recorded $140 million of employee retirement and other termination benefits in the Current Period primarily related to our voluntary separation plan and senior management separations. See Note 13 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion.
Natural Gas, Oil and NGL Depreciation, Depletion and Amortization . Depreciation, depletion and amortization (DD&A) of natural gas, oil and NGL properties was $1.293 billion and $1.094 billion in the Current Period and the Prior Period, respectively. The $199 million increase in the Current Period is primarily the result of a 7% increase in production in the Current Period compared to the Prior Period. The average DD&A rate per mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $1.78 and $1.61 in the Current Period and the Prior Period, respectively.
Depreciation and Amortization of Other Assets . Depreciation and amortization of other assets was $154 million in the Current Period, compared to $166 million in the Prior Period. Depreciation and amortization of other assets was $0.21 and $0.25 per mcfe in the Current Period and the Prior Period, respectively. The per unit decrease in the Current Period is primarily due to higher production levels in the Current Period compared to the Prior Period and the sale of substantially all of our midstream business in December 2012, partially offset by additional depreciation of oilfield services equipment during the Current Period. See Note 1 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for information regarding our assets held for sale.
Property and equipment costs are depreciated on a straight-line basis and are depreciated over the estimated useful lives of the assets. To the extent company-owned oilfield services equipment is used to drill and complete our wells, a substantial portion of the depreciation (i.e., the portion related to our utilization of the equipment) is capitalized in natural gas and oil properties as drilling and completion costs. The following table shows depreciation expense by asset class for the Current Period and Prior Period and the estimated useful life of our assets.
 
 
Six Months Ended
June 30,
 
Estimated
Useful
Life
 
 
2013
 
2012
 
 
 
($ in millions)
 
(in years)
Oilfield services equipment (a)
 
$
49

 
$
27

 
3 - 15
Natural gas gathering systems and treating plants (b)
 
6

 
39

 
20
Buildings and improvements
 
25

 
20

 
10 - 39
Natural gas compressors (b)
 
18

 
11

 
3 - 20
Computers and office equipment
 
23

 
22

 
3 - 7
Vehicles
 
20

 
27

 
0 - 5
Other
 
13

 
20

 
2 - 20
Total depreciation and amortization of other assets
 
$
154

 
$
166

 
 
___________________________________________
(a)
Included in our oilfield services operating segment.
(b)
Included in our marketing, gathering and compression operating segment.
Impairments of Fixed Assets and Other. In the Current Period and the Prior Period, we recognized $258 million and $243 million , respectively, of impairment losses associated with fixed assets and other. Of the impairments, $239 million and $219 million were related to impairments of certain buildings and land in the Current Period and Prior Period, respectively. See Note 12 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of our impairments of fixed assets and other.
Net Gains on Sales of Fixed Assets. In the Current Period, net gains on sales of fixed assets were $158 million compared to net gains of $2 million in the Prior Period. The Current Period gains primarily related to sales of certain

86


of our midstream gathering systems. See Note 11 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of our net gains on sales of fixed assets.

Interest Expense . Interest expense was $124 million in the Current Period compared to $26 million in the Prior Period as follows:
 
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
 
($ in millions)
Interest expense on senior notes
 
$
380

 
$
359

Interest expense on credit facilities
 
22

 
37

Interest expense on term loans
 
58

 
62

Realized (gains) losses on interest rate derivatives
 
(3
)
 
—

Unrealized (gains) losses on interest rate derivatives
 
57

 
(2
)
Amortization of loan discount, issuance costs and other
 
48

 
42

Capitalized interest
 
(438
)
 
(472
)
Total interest expense
 
$
124

 
$
26

 
 
 
 
 
Average senior notes borrowings
 
$
11,156

 
$
10,322

Average term loan borrowings
 
$
2,000

 
$
1,099

Average credit facilities borrowings
 
$
998

 
$
2,884

Interest expense, excluding unrealized gains or losses on interest rate derivatives and net of amounts capitalized, was $0.09 per mcfe in the Current Period compared to $0.04 per mcfe in the Prior Period. The increase in interest expense is primarily due to a decrease in the amount of interest we are able to capitalize as a result of a decrease in the average balance of our unevaluated natural gas and oil properties.
Losses on Investments. Losses on investments were $4 million in the Current Period, compared to losses on investments of $64 million in the Prior Period. The Current Period loss related to our equity in the net loss of our Sundrop Fuels investment, offset by earnings from our FTS investment. The Prior Period losses related primarily to our equity in the net loss of FTS, offset by a gain related to our equity in the net income of ACMP.
Impairment of Investment. In the Current Period, we recorded a $10 million mark-to-market pre-tax impairment in accumulated other comprehensive income for our Gastar investment.
Gains (Losses) on Sales of Investments. In the Current Period and Prior Period, we recorded a loss on sales of investments of $10 million and gains on sales of investments of $1.030 billion, respectively. In the Current Period, we recorded a $15 million pre-tax loss related to the sale of our Clean Energy convertible note investment. In addition, in the Current Period we sold a $1 million equity investment for cash proceeds of $6 million and recorded a $5 million pre-tax gain. In the Prior Period, we sold all of our common and subordinated units representing limited partner interests in ACMP and all of our limited liability company interests in the sole member of its general partner to funds affiliated with Global Infrastructure Partners for cash proceeds of $2.0 billion. We recorded a $1.032 billion pre-tax gain associated with the transaction.
Losses on Purchases or Exchanges of Debt. In the Current Period, we purchased $217 million in aggregate principal amount of our 7.625% Senior Notes due 2013 for $221 million and $377 million in aggregate principal amount of our 6.875% Senior Notes due 2018 for $405 million pursuant to tender offers which expired on April 12, 2013. We recorded a loss of approximately $37 million associated with the tender offers, including $32 million in premiums and $5 million of unamortized deferred charges. In addition, in the Current Period, we redeemed $1.3 billion in aggregate principal amount of our 6.775% Senior Notes due 2019 at par pursuant to a notice of special early redemption. We recorded a loss of approximately $33 million associated with the redemption, including $19 million of unamortized deferred charges and $14 million of discount.
Other Income . Other income of $8 million in the Current Period and $11 million in the Prior Period primarily consisted of miscellaneous income.

87


Income Tax Expense (Benefit). Chesapeake recorded income tax expense of $446 million in the Current Period compared to income tax expense of $661 million in the Prior Period. Our effective income tax rate was 38% in the Current Period and 39% in the Prior Period. Our effective tax rate can fluctuate as a result of the impact of state income taxes and permanent differences.
Net Income Attributable to Noncontrolling Interests. Chesapeake recorded $89 million of net income attributable to noncontrolling interests in both the Current Period and the Prior Period.
Application of Critical Accounting Policies
We consider accounting policies related to natural gas and oil properties, derivatives, variable interest entities and income taxes to be critical policies. These policies are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2012 Form 10-K.
Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) recently issued the following standards:
Recently Adopted Accounting Standards
In February 2012, the FASB issued guidance changing the presentation requirements of significant reclassifications out of accumulated other comprehensive income in their entirety and their corresponding effect on net income. We adopted this standard in the first quarter of 2013 and it did not have a material impact on our financial statements.
In December 2011 and January 2013, the FASB issued guidance amending and expanding disclosure requirements about offsetting and related arrangements associated with derivatives. We adopted this standard in the first quarter of 2013 and it did not have a material impact on our financial statements.
Recently Issued Accounting Standards
In February 2013, the FASB issued guidance on the recognition, measurement and disclosure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. We will adopt this standard effective January 1, 2014. We do not expect the adoption to have a material impact on our financial statements.
Forward-Looking Statements
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements give our current expectations or forecasts of future events. They include expected natural gas, oil and NGL production and future expenses, estimated operating costs, assumptions regarding future natural gas, oil and NGL prices, planned drilling activity, estimates of future drilling and completion and other capital expenditures (including the use of joint venture drilling carries), and anticipated sales, as well as statements concerning anticipated cash flow and liquidity, covenant compliance, debt reduction, business strategy and other plans and objectives for future operations. Pending sales transactions are subject to closing conditions and may not be completed in the time frame anticipated. We do not have binding agreements for all of our planned asset sales. Our ability to consummate each of these transactions is subject to changes in market conditions and other factors. If one or more of the transactions is not completed in the anticipated time frame, or at all, or for less proceeds than anticipated, our ability to reduce our indebtedness as planned could be adversely affected. For sales transactions that have closed, we may not be able to satisfy all the requirements necessary to receive proceeds subject to post-closing contingencies. Disclosures concerning the fair values of derivative contracts and their estimated contribution to our future results of operations are based upon market information as of a specific date. These market prices are subject to significant volatility.
Although we believe the expectations and forecasts reflected in our forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that could cause actual results to differ materially from expected results are described under Risk Factors in Item 1A of our 2012 Form 10-K and include:
•
the volatility of natural gas, oil and NGL prices;
•
the limitations our level of indebtedness may have on our financial flexibility;
•
declines in the prices of natural gas and oil potentially resulting in a write-down of our asset carrying values;
•
the availability of capital on an economic basis, including through planned sales, to fund reserve replacement costs;
•
our ability to replace reserves and sustain production;

88


•
uncertainties inherent in estimating quantities of natural gas, oil and NGL reserves and projecting future rates of production and the amount and timing of development expenditures;
•
our ability to generate profits or achieve targeted results in drilling and well operations;
•
leasehold terms expiring before production can be established;
•
hedging activities resulting in lower prices realized on natural gas, oil and NGL sales;
•
the need to secure hedging liabilities and the inability of hedging counterparties to satisfy their obligations;
•
drilling and operating risks, including potential environmental liabilities;
•
legislative and regulatory changes adversely affecting our industry and our business, including initiatives related to hydraulic fracturing, air emissions and endangered species;
•
current worldwide economic uncertainty which may have a material adverse effect on our results of operations, liquidity and financial condition;
•
oilfield services shortages, gathering system and transportation capacity constraints and various transportation interruptions that could adversely affect our revenues and cash flow;
•
losses possible from pending or future litigation and regulatory investigations;
•
cyber attacks adversely impacting our operations; and
•
the loss of key operational personnel or inability to maintain our corporate culture.
We caution you not to place undue reliance on the forward-looking statements contained in this report, which speak only as of the filing date, and we undertake no obligation to update this information. We urge you to carefully review and consider the disclosures made in this report and our other filings with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
Natural Gas, Oil and NGL Derivatives
Our results of operations and cash flows are impacted by changes in market prices for natural gas, oil and NGL. To mitigate a portion of our exposure to adverse price changes, we have entered into various derivative instruments. These instruments allow us to predict with greater certainty the effective prices to be received for our production. We believe our derivative instruments continue to be highly effective in achieving our risk management objectives.
Our general strategy for attempting to mitigate exposure to adverse natural gas, oil and NGL price changes is to hedge into strengthening natural gas and oil futures markets when prices reach levels that management believes are either unsustainable for the long term, have material downside risk in the short term or provide reasonable rates of return on our invested capital. Information we consider in forming an opinion about future prices includes general economic conditions, industrial output levels and expectations, producer breakeven cost structures, liquefied natural gas trends, natural gas and oil storage inventory levels, industry decline rates for base production and weather trends.
We use a wide range of derivative instruments to achieve our risk management objectives, including swaps, options and swaptions. All of these are described in more detail below. We typically use swaps for a large portion of the natural gas and oil volume we hedge. Swaps are used when the price level is acceptable. We also sell calls, taking advantage of market volatility for a portion of our projected production volumes. We do this when we would be satisfied to sell our production at the price being capped by the call strike price or believe it would be more likely than not that the future natural gas or oil price will stay below the call strike price plus the premium we will receive. In the second half of 2011 and in 2012, we bought natural gas and oil calls to, in effect, lock in sold call positions. Due to lower natural gas, oil and NGL prices, we were able to achieve this at a low cost to us. We deferred the payment of the premium on these trades to the related month of production being hedged. At times, we have taken advantage of attractive strip prices in out-years and sold natural gas and oil call options and swaptions to our counterparties in exchange for near-term natural gas swaps with fixed prices above the then current market price. This effectively allowed us to sell out-year volatility through call options at terms acceptable to us in exchange for natural gas swaps with fixed prices in excess of the market price for natural gas at that time. Some of our derivatives are deemed to contain, for accounting purposes, a significant financing element at contract inception and the cash settlements associated with these instruments are classified as financing cash flows in the accompanying condensed consolidated statement of cash flows.

89


We determine the volume potentially subject to derivative contracts by reviewing our overall estimated future production levels, which are derived from extensive examination of existing producing reserve estimates and estimates of likely production (risked) from new drilling. Production forecasts are updated at least monthly and adjusted if necessary to actual results and activity levels. We do not enter into derivative contracts for more volumes than our forecasted production, and if production estimates are lowered for future periods and derivative instruments are already executed for some volume above the new production forecasts, the positions are reversed. The actual fixed price on our derivative instruments is derived from bidding and the reference NYMEX price, as reflected in current NYMEX trading. The pricing dates of our derivative contracts follow NYMEX futures. All of our derivative instruments are net settled based on the difference between the fixed price as stated in the contract and the floating-price payment, resulting in a net amount due to or from the counterparty.
We adjust our derivative positions in response to changes in prices and market conditions as part of an ongoing dynamic process. We review our derivative positions continuously and if future market conditions change and prices are at levels we believe could jeopardize the effectiveness of a position, we will mitigate such risk by either negotiating a cash settlement with our counterparty, restructuring the position or entering into a new trade that effectively reverses the current position. The factors we consider in closing or restructuring a position before the settlement date are identical to those we reviewed when deciding to enter into the original derivative position. Gains or losses related to closed positions will be realized in the month of related production based on the terms specified in the original contract.
We have determined the fair value of our derivative instruments utilizing established index prices, volatility curves and discount factors. These estimates are compared to our counterparty values for reasonableness. Derivative transactions are also subject to the risk that counterparties will be unable to meet their obligations. Such non-performance risk is considered in the valuation of our derivative instruments, but to date has not had a material impact on the values of our derivatives. Future risk related to counterparties not being able to meet their obligations has been partially mitigated under our secured hedging facility which requires counterparties to post collateral if their obligations to Chesapeake are in excess of defined thresholds. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. See Note 14 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of the fair value measurements associated with our derivatives.
As of June 30, 2013 , our natural gas and oil derivative instruments consisted of the following:
•
Swaps : Chesapeake receives a fixed price and pays a floating market price to the counterparty for the hedged commodity.
•
Options : Chesapeake sells, and occasionally buys, call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, Chesapeake pays the counterparty such excess on sold call options, and Chesapeake receives such excess on bought call options. If the market price settles below the fixed price of the call options, no payment is due from either party.
•
Swaptions: Chesapeake sells call swaptions in exchange for a premium that allows a counterparty, on a specific date, to enter into a fixed-price swap for a certain period of time.
•
Basis Protection Swaps : These instruments are arrangements that guarantee a price differential to NYMEX from a specified delivery point. Our natural gas basis protection swaps typically have negative differentials to NYMEX. Chesapeake receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract. Our oil basis protection swaps typically have positive differentials to NYMEX. Chesapeake receives a payment from the counterparty if the price differential is less than the stated terms of the contract and pays the counterparty if the price differential is greater than the stated terms of the contract.
•
Collars: These instruments contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, Chesapeake receives the fixed price and pays the market price. If the market price is between the put and the call strike price, no payments are due from either party. Three-way collars include an additional put option in exchange for a more favorable strike price on the collar. This eliminates the counterparty’s downside exposure below the second put option.

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As of June 30, 2013 , we had the following open natural gas and oil derivative instruments:  
 
 
 
Weighted Average Price
 
Fair Value
 
Volume
 
Fixed  
 
Call
 
Put
 
Differential
 
Asset (Liability)
 
(tbtu)
 
 
 
(per mmbtu)
 
 
 
 
 
($ in millions)
Natural Gas:
 
 
 
 
 
 
 
 
 
 
 
Swaps:
 
 
 
 
 
 
 
 
 
 
 
Q3 2013
196

 
$
3.73

 
$
—

 
$
—

 
$
—

 
$
23

Q4 2013
190

 
3.71

 
—

 
—

 
—

 
6

2014
133

 
4.39

 
—

 
—

 
—

 
65

Call Options (sold):
 
 
 
 
 
 
 
 
 
 
 
2013
136

 
—

 
6.39

 
—

 
—

 
—

2014
330

 
—

 
6.43

 
—

 
—

 
(6
)
2015
226

 
—

 
6.31

 
—

 
—

 
(14
)
2016
279

 
—

 
6.72

 
—

 
—

 
(40
)
2017 – 2020
114

 
—

 
10.92

 
—

 
—

 
(10
)
Call Options (bought) (a) :
 
 
 
 
 
 
 
 
 
 
 
2013
(136
)
 
—

 
6.39

 
—

 
—

 
(5
)
2014
(330
)
 
—

 
6.43

 
—

 
—

 
(35
)
2015
(226
)
 
—

 
6.31

 
—

 
—

 
(68
)
2016
(200
)
 
—

 
6.02

 
—

 
—

 
(49
)
Swaptions:
 
 
 
 
 
 
 
 
 
 
2014
12

 
4.80

 
—

 
—

 
—

 
(1
)
Basis Protection Swaps:
 
 
 
 
 
 
 
 
 
 
2013
22

 
—

 
—

 
—

 
(0.21
)
 
1

2014
28

 
—

 
—

 
—

 
(0.32
)
 
(2
)
2015 – 2022
40

 
—

 
—

 
—

 
(1.02
)
 
(6
)
3-Way Collars:
 
 
 
 
 
 
 
 
 
 
2013
37

 
—

 
4.03

 
3.03 / 3.55

 
—

 
1

2014
18

 
—

 
4.70

 
3.50 / 4.00

 
—

 
2

     Total Natural Gas
$
(138
)

91


 
 
 
Weighted Average Price
 
Fair Value
 
Volume
 
Fixed
 
Call
 
Put
 
Differential
 
Asset
(Liability)
 
(mmbbl)
 
 
 
(per bbl)
 
 
 
 
 
($ in millions)
Oil:
 
 
 
 
 
 
 
 
 
 
 
Swaps:
 
 
 
 
 
 
 
 
 
 
 
Q3 2013
8.6

 
$
95.46

 
$
—

 
$
—

 
$
—

 
$
(6
)
Q4 2013
8.9

 
95.36

 
—

 
—

 
—

 
11

2014 – 2015
19.3

 
93.47

 
—

 
—

 
—

 
70

Call Options (sold):
 
 
 
 
 
 
 
 
 
 
 
2013
8.6

 
—

 
94.04

 
—

 
—

 
(47
)
2014
16.9

 
—

 
96.92

 
—

 
—

 
(75
)
2015
24.7

 
—

 
100.45

 
—

 
—

 
(108
)
2016
18.9

 
—

 
104.71

 
—

 
—

 
(71
)
2017
5.3

 
—

 
83.50

 
—

 
—

 
(49
)
Call Options (bought) (b) :
 
 
 
 
 
 
 
 
 
 
 
2013
(4.6
)
 
—

 
90.80

 
—

 
—

 
(5
)
2014
(2.2
)
 
—

 
94.91

 
—

 
—

 
(8
)
Swaptions:
 
 
 
 
 
 
 
 
 
 
 
2014
2.9

 
106.69

 
—

 
—

 
—

 
(1
)
2015
2.4

 
106.61

 
—

 
—

 
—

 
(1
)
Basis Protection Swaps:
 
 
 
 
 
 
 
 
 
 
2013
0.7

 
—

 
—

 
—

 
10.07

 
3

                                      Total Oil
 
$
(287
)
                                      Total Natural Gas and Oil
 
$
(425
)
___________________________________________
(a)
Included in the fair value are deferred premiums of $5 million, $41 million, $82 million and $84 million which we will realize in 2013, 2014, 2015 and 2016, respectively.
(b)
Included in the fair value are deferred premiums of $41 million and $19 million which we will realize in 2013 and 2014, respectively.
In addition to the open derivative positions disclosed above, as of June 30, 2013 , we had $120 million of net hedging gains related to settled trades for future production periods that will be recorded within natural gas, oil and NGL sales as realized gains (losses) as they are transferred from either accumulated other comprehensive income or unrealized gains (losses) in the month of related production based on the terms specified in the original contract as noted below.  
 
 
June 30, 2013
 
 
($ in millions)
Q3 2013
 
$
31

Q4 2013
 
22

2014
 
(165
)
2015
 
216

2016 – 2022
 
16

Total
 
$
120


92


The table below reconciles the changes in fair value of our natural gas, oil and NGL derivatives during the Current Period. Of the $425 million fair value liability as of June 30, 2013 , $3 million related to contracts maturing in the next 12 months and $422 million related to contracts maturing after 12 months. All open derivative instruments as of June 30, 2013 are expected to mature by December 31, 2022.  
 
 
2013
 
 
($ in millions)
Fair value of contracts outstanding, as of January 1
 
$
(924
)
Change in fair value of contracts
 
413

Fair value of new contracts when entered into
 
—

Contracts realized or otherwise settled
 
86

Fair value of contracts when closed
 
—

Fair value of contracts outstanding, as of June 30
 
$
(425
)
The change in natural gas, oil and NGL prices during the Current Period decreased the liability related to our derivative instruments by $413 million. This unrealized gain is recorded in natural gas, oil and NGL sales. We settled contracts that were in a liability position for $86 million. The realized loss is recorded in natural gas, oil and NGL sales in the month of related production.
Pursuant to accounting guidance for derivatives and hedging, certain derivatives qualify for designation as cash flow hedges. Following these provisions, changes in the fair value of derivative instruments designated as cash flow hedges, to the extent they are effective in offsetting cash flows attributable to the hedged risk, are recorded in accumulated other comprehensive income until the hedged item is recognized in earnings as the physical transactions being hedged occur. Any change in fair value resulting from ineffectiveness is recognized in natural gas, oil and NGL sales as unrealized gains (losses). Realized gains (losses) consist of settled contracts related to the production periods being reported. Unrealized gains (losses) consist of both temporary fluctuations in the mark-to-market values and settled values related to future production periods of derivatives not designated as cash flow hedges. As of June 30, 2013 , we did not have any natural gas or oil derivatives that were designated as cash flow hedges.
The components of natural gas, oil and NGL sales for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period are presented below.  
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
($ in millions)
Natural gas, oil and NGL sales
 
$
1,869

 
$
1,112

 
$
3,464

 
$
2,334

Realized gains (losses) on natural gas, oil and NGL
derivatives
 
(39
)
 
195

 
(35
)
 
311

Unrealized gains (losses) on natural gas, oil and NGL
derivatives
 
576

 
810

 
429

 
540

Total natural gas, oil and NGL sales
 
$
2,406

 
$
2,117

 
$
3,858

 
$
3,185



93


Interest Rate Risk
The table below presents principal cash flows and related weighted average interest rates by expected maturity dates.
 
Years of Maturity
 
 
 
2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
 
Total
 
($ in millions)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt – fixed rate (a)
$
247

 
$
—

 
$
1,661

 
$
500

 
$
2,276

 
$
6,362

 
$
11,046

Average interest rate
7.63
%
 
—
%
 
7.89
%
 
3.25
%
 
4.40
%
 
6.11
%
 
5.93
%
Debt – variable rate (b)
$
—

 
$
—

 
$
—

 
$
399

 
$
2,000

 
$
—

 
$
2,399

Average interest rate
—
%
 
—
%
 
—
%
 
2.69
%
 
5.75
%
 
—
%
 
5.24
%
___________________________________________
(a)
This amount does not include the discount included in debt of $368 million and interest rate derivatives of $16 million.
(b)
This amount does not include the discount included in debt of $36 million.
Changes in interest rates affect the amount of interest we earn on our cash, cash equivalents and short-term investments and the interest rate we pay on borrowings under our revolving bank credit facilities. All of our other indebtedness is fixed rate and, therefore, does not expose us to the risk of fluctuations in earnings or cash flow due to changes in market interest rates. However, changes in interest rates do affect the fair value of our fixed-rate debt.
Interest Rate Derivatives
To mitigate a portion of our exposure to volatility in interest rates related to our senior notes and credit facilities, we enter into interest rate derivatives. Chesapeake enters into fixed-to-floating interest rate swaps (we receive a fixed interest rate and pay a floating market rate) to mitigate our exposure to changes in the fair value of our senior notes. We enter into floating-to-fixed interest rate swaps (we receive a floating market rate and a pay fixed interest rate) to manage our interest rate exposure related to our bank credit facility borrowings. As of June 30, 2013 , the following interest rate derivatives were outstanding:  
 
 
 
 
Weighted
Average Rate
 
 
 
Fair Value
 
 
Notional
Amount
Fixed
 
Floating (a)  
 
Fair Value
Hedge
Asset
(Liability)
 
 
($ in millions)
 
 
 
 
 
 
 
($ in millions)
Fixed to Floating:
 
 
 
 
 
 
 
 
 
 
Swaps
 
 
 
 
 
 
 
 
 
 
Mature 2020 – 2023
 
$
1,050

 
5.97
%
 
1 – 3 mL
429 bp
 
No
 
$
(65
)
 
 
 
 
 
 
 
 
 
 
 
Floating to Fixed:
 
 
 
 
 
 
 
 
 
 
Swaps
 
 
 
 
 
 
 
 
 
 
Mature 2014 – 2015
 
$
1,050

 
2.13
%
 
1 – 6 mL
 
No
 
(26
)
 
 
 
 
 
 
 
 
 
 
$
(91
)
___________________________________________
(a)
Month LIBOR has been abbreviated “mL” and basis points has been abbreviated “bp”.
In addition to the open derivative positions disclosed above, as of June 30, 2013 we had $69 million of net gains related to settled derivative contracts that will be recorded within interest expense as realized gains (losses) as they are transferred from either our senior note liability or unrealized interest expense gains (losses) over the next nine-year term of the related senior notes.

94


Realized and unrealized gains or losses from interest rate derivative transactions are reflected as adjustments to interest expense on the condensed consolidated statements of operations. The components of interest expense for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period are presented below.
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
($ in millions)
Interest expense on senior notes
 
$
194

 
$
185

 
$
380

 
$
359

Interest expense on credit facilities
 
11

 
16

 
22

 
37

Interest expense on term loans
 
29

 
62

 
58

 
62

Realized (gains) losses on interest rate derivatives
 
(1
)
 
(1
)
 
(3
)
 
—

Unrealized (gains) losses on interest rate derivatives
 
51

 
(6
)
 
57

 
(2
)
Amortization of loan discount, issuance costs and other
 
30

 
42

 
48

 
42

Capitalized interest
 
(210
)
 
(284
)
 
(438
)
 
(472
)
Total interest expense
 
$
104

 
$
14

 
$
124

 
$
26

Foreign Currency Derivatives
In December 2006, we issued €600 million  of 6.25% Euro-denominated Senior Notes due 2017. Concurrent with the issuance of the euro-denominated senior notes, we entered into cross currency swaps to mitigate our exposure to fluctuations in the euro relative to the dollar over the term of the notes. In May 2011, we purchased and subsequently retired €256 million in aggregate principal amount of these senior notes following a tender offer, and we simultaneously unwound the cross currency swaps for the same principal amount. Under the terms of the remaining cross currency swaps, on each semi-annual interest payment date, the counterparties pay us €11 million and we pay the counterparties $17 million, which yields an annual dollar-equivalent interest rate of 7.491%. Upon maturity of the notes, the counterparties will pay us €344 million and we will pay the counterparties $459 million. The terms of the cross currency swaps were based on the dollar/euro exchange rate on the issuance date of 1.3325 to € 1.00. Through the cross currency swaps, we have eliminated any potential variability in our expected cash flows related to changes in foreign exchange rates and therefore the swaps are designated as cash flow hedges. The fair values of the cross currency swaps are recorded on the condensed consolidated balance sheet as a liability of $27 million as of June 30, 2013 . The euro-denominated debt in long-term debt has been adjusted to $447 million as of June 30, 2013 using an exchange rate of $1.3010 to € 1.00.
ITEM 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Chesapeake’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2013 .
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during the period ended June 30, 2013 which materially affected, or was reasonably likely to materially affect, our internal control over financial reporting.

95


PART II. OTHER INFORMATION
ITEM 1.     Legal Proceedings
The Company is involved in a number of litigation and regulatory proceedings. Many of these proceedings are in early stages, and many of them seek an indeterminate amount of damages or penalties. See Litigation and Regulatory Proceedings and Environmental Risk in Note 4 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report, which information is incorporated herein by reference, for a description of matters arising during the Current Quarter and new developments in previously reported proceedings.
In addition, in 2011, the Office of Oil and Gas of the West Virginia Department of Environmental Protection (WVDEP) issued notices of violation (NOVs) against our wholly owned subsidiary Chesapeake Appalachia, L.L.C. (CALLC) related to a drill site in Marshall County, West Virginia. The NOVs alleged inadequate sediment and erosion control and the failure to prevent the flow of material into a stream of the state. Following remediation by CALLC in accordance with the requirements of the NOVs, the WVDEP issued notices of abatement for each NOV in 2012. CALLC is in discussions with the WVDEP regarding a civil penalty associated with the NOVs. While the amount of any such penalty is not known at this time, we reasonably believe that we may pay a civil penalty assessment in excess of $100,000 related to this drill site.
ITEM 1A.      Risk Factors
Our business has many risks. Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our common stock, preferred stock or senior notes are described under “Risk Factors” in Item 1A of our 2012 Form 10-K. This information should be considered carefully, together with other information in this report and other reports and materials we file with the SEC.
ITEM 2.     Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information about repurchases of our common stock during the quarter ended June 30, 2013 :
Period
 
Total
Number
of Shares
Purchased (a)
 
Average
Price
Paid
Per
Share (a)
 
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans
or Programs
 
Maximum
Number
of Shares
That May Yet
Be Purchased
Under the
Plans
or Programs (b)
April 1, 2013 through April 30, 2013
 
426,078

 
$
20.30

 
—

 
—

May 1, 2013 through May 31, 2013
 
181,364

 
$
19.50

 
—

 
—

June 1, 2013 through June 30, 2013
 
26,557

 
$
20.57

 
—

 
—

Total
 
633,999

 
$
20.82

 
—

 
—

___________________________________________
(a)
Reflects the surrender to the Company of shares of common stock to pay withholding taxes in connection with the vesting of employee restricted stock.
(b)
We make matching contributions to our 401(k) plan and deferred compensation plan using Chesapeake common stock that is held in treasury or is purchased by the respective plan trustees in the open market. The plans contain no limitation on the number of shares that may be purchased for purposes of Company contributions.
ITEM 3.     Defaults Upon Senior Securities
Not applicable.
ITEM 4.      Mine Safety Disclosures
Not applicable.
ITEM 5.
Other Information
Not applicable.

96


ITEM 6.
Exhibits and Financial Statement Schedules
The following exhibits are filed as a part of this report:
 
 
 
 
Incorporated by Reference
 
 
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
SEC File
Number
 
Exhibit
 
Filing Date
 
Filed
Herewith
 
Furnished
Herewith
3.1.1
 
Chesapeake’s Restated Certificate of Incorporation, as amended.
 
10-Q
 
001-13726
 
3.1.1
 
8/10/2009
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1.2
 
Certificate of Designation of 5% Cumulative Convertible Preferred Stock (Series 2005B), as amended.
 
10-Q
 
001-13726
 
3.1.4
 
11/10/2008
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1.3
 
Certificate of Designation of 4.5% Cumulative Convertible Preferred Stock, as amended.
 
10-Q
 
001-13726
 
3.1.6
 
8/11/2008
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1.4
 
Certificate of Designation of 5.75% Cumulative Non-Voting Convertible Preferred Stock (Series A).
 
8-K
 
001-13726
 
3.2
 
5/20/2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1.5
 
Certificate of Designation of 5.75% Cumulative Non-Voting Convertible Preferred Stock, as amended.
 
10-Q
 
001-13726
 
3.1.5
 
8/9/2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2
 
Chesapeake’s Amended and Restated Bylaws.
 
8-K
 
001-13726
 
3.2
 
6/8/2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1
 
Fifteenth Supplemental Indenture dated April 1, 2013 among Chesapeake Energy Corporation, the Subsidiary Guarantors named therein and Deutsche Bank Trust Company Americas, as Trustee, to Indenture dated August 2, 2010 with respect to 3.25% Senior Notes due 2016.
 
8-A
 
001-13726
 
4.2
 
4/8/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.2
 
Sixteenth Supplemental Indenture dated April 1, 2013 among Chesapeake Energy Corporation, the Subsidiary Guarantors named therein and Deutsche Bank Trust Company Americas, as Trustee, to Indenture dated as of August 2, 2010 with respect to 5.375% Senior Notes due 2021.
 
8-A
 
001-13726
 
4.3
 
4/8/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.3
 
Seventeenth Supplemental Indenture dated April 1, 2013 among Chesapeake Energy Corporation, the Subsidiary Guarantors named therein and Deutsche Bank Trust Company Americas, as Trustee, to Indenture dated as of August 2, 2010 with respect to 5.75% Senior Notes due 2023.
 
8-A
 
001-13726
 
4.4
 
4/8/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

97


 
 
 
 
Incorporated by Reference
 
 
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
SEC File
Number
 
Exhibit
 
Filing Date
 
Filed
Herewith
 
Furnished
Herewith
10.1
 
Founder Separation and Services Agreement effective January 29, 2013 between Chesapeake Energy Corporation and Aubrey K. McClendon.
 
8-K
 
001-13726
 
10.1
 
4/19/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.2
 
Founder Joint Operating Services Agreement effective January 29, 2013 among Chesapeake Energy Corporation, Aubrey K. McClendon, Arcadia Resources, L.P., Larchmont Resources, L.L.C., Jamestown Resources, L.L.C. and Pelican Energy, L.L.C.
 
8-K
 
001-13726
 
10.2
 
4/19/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.3
 
Map Sale Rescission Agreement, effective as of April 1, 2013, by and between Aubrey K. McClendon and Chesapeake Energy Corporation.
 
8-K
 
001-13726
 
10.3
 
4/19/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4
 
Employment Agreement between Chesapeake Energy Corporation and Robert D. Lawler dated as of May 20, 2013.
 
8-K
 
001-13726
 
10.1
 
5/23/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.5
 
Chesapeake Energy Corporation Amended and Restated Long Term Incentive Plan.
 
8-K
 
001-13726
 
10.1
 
6/20/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.6
 
Chesapeake Energy Corporation 2013 Annual Incentive Plan.
 
DEF 14A
 
001-13726
 
Exhibit G
 
5/3/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.7
 
Chesapeake Energy Corporation 2003 Stock Award Plan for Non-Employee Directors.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.8
 
Form of Restricted Stock Unit Award Agreement for Amended and Restated Long Term Incentive Plan.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.9
 
Form of Non-Employee Director Restricted Stock Unit Award Agreement for Amended and Restated Long Term Incentive Plan.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.10
 
Form of Pension and Equity Makeup Restricted Stock Award Agreement for Amended and Restated Long Term Incentive Plan - Lawler.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12
 
Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Dividends.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

98


 
 
 
 
Incorporated by Reference
 
 
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
SEC File
Number
 
Exhibit
 
Filing Date
 
Filed
Herewith
 
Furnished
Herewith
31.1
 
Robert D. Lawler, Chief Executive Officer, Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.2
 
Domenic J. Dell’Osso, Jr., Executive Vice President and Chief Financial Officer, Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1
 
Robert D. Lawler, Chief Executive Officer, Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32.2
 
Domenic J. Dell’Osso, Jr., Executive Vice President and Chief Financial Officer, Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
 
 
 
 
 
 
X
 
 


99



SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
CHESAPEAKE ENERGY CORPORATION
 
 
 
Date: August 6, 2013
By:  

/s/ ROBERT D. LAWLER
 
 

Robert D. Lawler ,
President and Chief Executive Officer
 
 
 
 
Date: August 6, 2013
By:  

/s/ DOMENIC J. DELL’OSSO, JR.
 
 

Domenic J. Dell’Osso, Jr.
Executive Vice President and
Chief Financial Officer





INDEX TO EXHIBITS

 
 
 
 
Incorporated by Reference
 
 
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
SEC File
Number
 
Exhibit
 
Filing Date
 
Filed
Herewith
 
Furnished
Herewith
3.1.1
 
Chesapeake’s Restated Certificate of Incorporation, as amended.
 
10-Q
 
001-13726
 
3.1.1
 
8/10/2009
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1.2
 
Certificate of Designation of 5% Cumulative Convertible Preferred Stock (Series 2005B), as amended.
 
10-Q
 
001-13726
 
3.1.4
 
11/10/2008
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1.3
 
Certificate of Designation of 4.5% Cumulative Convertible Preferred Stock, as amended.
 
10-Q
 
001-13726
 
3.1.6
 
8/11/2008
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1.4
 
Certificate of Designation of 5.75% Cumulative Non-Voting Convertible Preferred Stock (Series A).
 
8-K
 
001-13726
 
3.2
 
5/20/2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1.5
 
Certificate of Designation of 5.75% Cumulative Non-Voting Convertible Preferred Stock, as amended.
 
10-Q
 
001-13726
 
3.1.5
 
8/9/2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2
 
Chesapeake’s Amended and Restated Bylaws.
 
8-K
 
001-13726
 
3.2
 
6/8/2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1
 
Fifteenth Supplemental Indenture dated April 1, 2013 among Chesapeake Energy Corporation, the Subsidiary Guarantors named therein and Deutsche Bank Trust Company Americas, as Trustee, to Indenture dated August 2, 2010 with respect to 3.25% Senior Notes due 2016.
 
8-A
 
001-13726
 
4.2
 
4/8/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.2
 
Sixteenth Supplemental Indenture dated April 1, 2013 among Chesapeake Energy Corporation, the Subsidiary Guarantors named therein and Deutsche Bank Trust Company Americas, as Trustee, to Indenture dated as of August 2, 2010 with respect to 5.375% Senior Notes due 2021.
 
8-A
 
001-13726
 
4.3
 
4/8/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.3
 
Seventeenth Supplemental Indenture dated April 1, 2013 among Chesapeake Energy Corporation, the Subsidiary Guarantors named therein and Deutsche Bank Trust Company Americas, as Trustee, to Indenture dated as of August 2, 2010 with respect to 5.75% Senior Notes due 2023.
 
8-A
 
001-13726
 
4.4
 
4/8/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



10.1
 
Founder Separation and Services Agreement effective January 29, 2013 between Chesapeake Energy Corporation and Aubrey K. McClendon.
 
8-K
 
001-13726
 
10.1
 
4/19/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.2
 
Founder Joint Operating Services Agreement effective January 29, 2013 among Chesapeake Energy Corporation, Aubrey K. McClendon, Arcadia Resources, L.P., Larchmont Resources, L.L.C., Jamestown Resources, L.L.C. and Pelican Energy, L.L.C.
 
8-K
 
001-13726
 
10.2
 
4/19/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.3
 
Map Sale Rescission Agreement, effective as of April 1, 2013, by and between Aubrey K. McClendon and Chesapeake Energy Corporation.
 
8-K
 
001-13726
 
10.3
 
4/19/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4
 
Employment Agreement between Chesapeake Energy Corporation and Robert D. Lawler dated as of May 20, 2013.
 
8-K
 
001-13726
 
10.1
 
5/23/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.5
 
Chesapeake Energy Corporation Amended and Restated Long Term Incentive Plan.
 
8-K
 
001-13726
 
10.1
 
6/20/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.6
 
Chesapeake Energy Corporation 2013 Annual Incentive Plan.
 
DEF 14A
 
001-13726
 
Exhibit G
 
5/3/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.7
 
Chesapeake Energy Corporation 2003 Stock Award Plan for Non-Employee Directors.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.8
 
Form of Restricted Stock Unit Award Agreement for Amended and Restated Long Term Incentive Plan.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.9
 
Form of Non-Employee Director Restricted Stock Unit Award Agreement for Amended and Restated Long Term Incentive Plan.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.10
 
Form of Pension and Equity Makeup Restricted Stock Award Agreement for Amended and Restated Long Term Incentive Plan - Lawler.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12
 
Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Dividends.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



31.1
 
Robert D. Lawler, Chief Executive Officer, Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.2
 
Domenic J. Dell’Osso, Jr., Executive Vice President and Chief Financial Officer, Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1
 
Robert D. Lawler, Chief Executive Officer, Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32.2
 
Domenic J. Dell’Osso, Jr., Executive Vice President and Chief Financial Officer, Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document.
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
 
 
 
 
 
 
X
 
 


Exhibit 10.7

CHESAPEAKE ENERGY CORPORATION
2003 STOCK AWARD PLAN FOR NON-EMPLOYEE DIRECTORS
(as amended)

1.
Purposes of the Plan . This Plan is established by the Company to aid in attracting and retaining persons of outstanding competence to serve on the Board of Directors who are not employed by the Company. The Plan is intended to enable such persons to acquire or increase ownership interests in the Company on a basis that will encourage them to use their best efforts to promote the growth and profitability of the Company. Consistent with these objectives, the Plan provides for the award of Shares to Non-Employee Directors on the terms and subject to the conditions set forth in the Plan.
2.
Establishment . The Plan is effective as of January 3, 2003. Amendments to the Plan were approved by shareholders on June 8, 2007 and June 14, 2013.
3.
Definitions . As used herein, the following definitions shall apply:
(a)
“ Applicable Laws ” means the requirements of state corporate laws, United States federal and state securities laws, the Code, and any stock exchange or quotation system on which the Common Stock is listed or quoted.
(b)
“ Board ” means the Board of Directors of the Company.
(c)
“ Code ” means the Internal Revenue Code of 1986, as amended.
(d)
“ Common Stock ” means the Company’s common stock.
(e)
“ Company ” means Chesapeake Energy Corporation, an Oklahoma corporation, and any successor to the Company.
(f)
“ Director ” means a member of the Board.
(g)
“ Non-Employee Director ” means a Director who, as of the date first elected or appointed to the Board, is not an officer or otherwise employed by the Company or any of its subsidiaries.
(h)
“ Paragraph ” means a paragraph of the Plan.
(i)
“ Participant ” means a Non-Employee Director who has been awarded Shares under the Plan.
(j)
“ Plan ” means the Chesapeake Energy Corporation 2003 Stock Award Plan for Non-Employee Directors, as may be amended from time to time.
(k)
“ Share ” means a share of the Common Stock, as adjusted in accordance with Paragraph 7.
(l)
“ Shareholder Approval ” means approval by the holders of a majority of the outstanding shares of Common Stock, present or represented and entitled to vote at a meeting called for such purposes.
4.
Stock Subject to the Plan . Subject to the provisions of Paragraph 7, the maximum aggregate number of Shares that may be awarded under the Plan is 250,000 Shares.
5.
Administration of the Plan . The Plan shall be administered by the Board. Subject to the provisions of the Plan, the Board shall have the authority to prescribe, amend and rescind rules and regulations relating to the Plan and to construe and interpret the terms of the Plan and awards made pursuant to the Plan. All decisions, determinations and interpretations of the Board shall be final and binding on all Participants.




6.
Award of Shares .
(a)
Each individual who becomes a Non-Employee Director after the effective date of the Plan shall be awarded no greater than 10,000 shares on his or her first day of service as a Non‑Employee Director as determined by the Board.
(b)
In consideration for the Shares awarded under the Plan, each Participant shall pay the Company an amount equal to the aggregate par value of the Shares awarded (the “Share Consideration”). The Share Consideration shall be payable in cash, provided the Company shall withhold the Share Consideration from the first payment of director fees to be made by the Company to the Participant as a Non-Employee Director if the Share Consideration has not been earlier paid. A Participant must pay the amount of taxes required by law as a result of an award of Shares under the Plan.
(c)
Upon receipt of the Share Consideration and subject to Paragraph 9, the Company shall issue the Participant Shares either in certificate form or via D.W.A.C. (delivery/withdrawal at custodian) representing the Shares awarded to the Participant under the Plan.
7.
Adjustments Upon Changes in Capitalization . Subject to any required action by the shareholders of the Company, the number and type of Shares which have been authorized for issuance under the Plan but as to which no Shares have yet been awarded, shall be proportionately adjusted for any increase or decrease in the number or type of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company. The conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive.
8.
Amendment and Termination of the Plan . The Board may suspend or terminate the Plan at any time. In addition, the Board may, from time to time, amend the Plan in any manner, but may not adopt any amendment without Shareholder Approval if in the opinion of counsel to the Company, Shareholder Approval is required by any Applicable Laws.
9.
Conditions Upon Issuance of Shares .
(a)
Legal Compliance. Shares awarded pursuant to the Plan shall not be issued unless the issuance and delivery of such Shares comply with Applicable Laws. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue such Shares as to which such requisite authority shall not have been obtained.
(b)
Investment Representations. As a condition to the award of Shares under the Plan, the Board may require a Participant to represent and warrant at the time of the award that the Shares will be held only for investment and without any present intention to sell or distribute such Shares if, in the opinion of legal counsel to the Company, such a representation is necessary or appropriate.
10.
Reservation of Shares . The Company shall at all times reserve and keep available such number of authorized and unissued Shares or Shares in its reserve of treasury stock as shall be sufficient to satisfy the requirements of the Plan.
11.
Right to Continued Board Membership . Participation in the Plan shall not give any Participant any right to remain on the Board.

     2


12.
Construction . The titles and headings of the sections in the Plan are for the convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
13.
Governing Law . The Plan shall be governed by and construed in accordance with the laws of the State of Oklahoma, except as superseded by applicable federal law.

     3
Exhibit 10.8

RESTRICTED STOCK UNIT AWARD AGREEMENT FOR
CHESAPEAKE ENERGY CORPORATION
LONG TERM INCENTIVE PLAN
THIS RESTRICTED STOCK UNIT AWARD AGREEMENT (the “Agreement”) entered into as of the grant date set forth on the attached Notice of Grant of Restricted Stock Units and Award Agreement (the “Notice”), by and between Chesapeake Energy Corporation, an Oklahoma corporation (the “Company”), and the participant named on the Notice (the “Participant”);
W I T N E S S E T H:
WHEREAS, the Participant is an Employee or Consultant, and it is important to the Company that the Participant be encouraged to remain an Employee or Consultant; and
WHEREAS, the Company has previously adopted the Chesapeake Energy Corporation Amended and Restated Long Term Incentive Plan effective as of October 1, 2004, as amended from time to time (the “Plan”); and
WHEREAS, the Company has awarded the Participant Restricted Stock Units under the Plan, as set forth on the Notice, subject to the terms and conditions of this Agreement; and
NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants herein contained, the Participant and the Company agree as follows:
1.
The Plan . The Plan, a copy of which has been made available to the Participant, is hereby incorporated by reference herein and made a part hereof for all purposes, and when taken with this Agreement shall govern the rights of the Participant and the Company with respect to the Award (as defined below).  Any capitalized terms used but not defined in this Agreement have the same meanings given to them in the Plan.
2.
Grant of Award . The Company hereby awards to the Participant the number of Restricted Stock Units set forth in the Notice, on the terms and conditions set forth herein and in the Plan (the “Award”). Each Restricted Stock Unit granted pursuant to this Award gives the Participant the right to receive payment, upon satisfaction of the vesting conditions set forth in the Notice and this Agreement, of one share of Common Stock in the manner set forth in Section 5 below.
3.
Vesting and Forfeiture .
(a)
Vesting . The Restricted Stock Units will vest in accordance with the vesting schedule set forth in the Notice based on the Participant’s continuous employment with or service to the Company, a Subsidiary or an Affiliated Entity.
(b)
Forfeiture . In the event the Participant ceases to be an Employee or Consultant prior to all Restricted Stock Units becoming vested, then such unvested Restricted Stock Units, and any dividends related thereto, shall be absolutely forfeited on the date of termination of service and the Participant shall have no further interest therein of any kind whatsoever. Notwithstanding the foregoing, the Committee may, in its discretion, waive the vesting requirements or permit continued vesting of the Restricted Stock Units in the event of the Participant’s death, Disability or termination of service due to retirement or involuntary termination (as determined by the Committee in its sole discretion).
(c)
Fundamental Transaction; Change of Control . Notwithstanding the foregoing provisions in this Section 3, all unvested Restricted Stock Units shall be deemed to fully vest upon the occurrence of a Fundamental Transaction or a Change of Control in accordance with the terms of the Plan,




provided that, the Participant is an Employee or Consultant as of the date the Fundamental Transaction or Change of Control occurs.
4.
Nontransferability of Award . A Restricted Stock Unit is not transferable other than by will or the laws of descent and distribution.  Any attempted sale, assignment, transfer, pledge, hypothecation or other disposition of, or the levy of execution, attachment or similar process upon, a Restricted Stock Unit contrary to the provisions hereof shall be void and ineffective, shall give no right to any purported transferee, and may, at the sole discretion of the Committee, result in forfeiture of the Restricted Stock Unit(s) involved in such attempt.
5.
Payment . Payment shall be made in the form of a distribution to the Participant of shares of Common Stock equal to the number of vested Restricted Stock Units. Such distribution shall be made to the Participant with respect to a Restricted Stock Unit within sixty (60) days following the vesting date of such Restricted Stock Unit as set forth in the Notice. Provided, that, with respect to non-409A RSUs only, in the event of accelerated vesting in accordance with Section 3, distribution shall be made within sixty (60) days following such accelerated vesting date.
6.
Dividends . Subject to the forfeiture provisions in Section 3 herein, the Participant shall have the right to receive dividends on unvested Restricted Stock Units as though the Participant was a shareholder of an equivalent number of shares of Common Stock based on record dates that occur while the Restricted Stock Units remain unvested under this Agreement.  The Company will transmit such dividends, net of required taxes pursuant to Section 7, to or for the account of Participant in such manner as the Company determines; provided that the Participant is an Employee or Consultant as of the dividend payment date.
7.
Withholding . The Company may make such provision as it may deem appropriate for the withholding of any applicable federal, state or local taxes that it determines it may be obligated to withhold or pay in connection with the Restricted Stock Units.  Required withholding taxes as determined by the Company associated with this Award must be paid in cash. Provided, however, the Committee may require the Participant to pay such withholding taxes by directing the Company to withhold from the Award the number of shares of Common Stock having a Fair Market Value on the date of payment equal to the amount of required withholding taxes.  The Company in its sole discretion may also withhold any required taxes from dividends paid on the Restricted Stock Units.
8.
Amendments . This Award Agreement may be amended by a written agreement signed by the Company and the Participant; provided that the Committee may modify the terms of this Award Agreement without the consent of the Participant in any manner that is not adverse to the Participant.
9.
Securities Law Restrictions . Payment of this Award shall not be made in shares of Common Stock unless such issuance is in compliance with the Securities Act of 1933, as amended (the “Act”), and any other applicable securities law, or pursuant to an exemption therefrom.  If deemed necessary by the Company to comply with the Act or any applicable laws or regulations relating to the sale of securities, the Participant at the time of payment and as a condition imposed by the Company, shall represent, warrant and agree that the shares of Common Stock subject to the Award are being acquired for investment and not with any present intention to resell the same and without a view to distribution, and the Participant shall, upon the request of the Company, execute and deliver to the Company an agreement to such a fact.  The Participant acknowledges that any stock certificate representing Common Stock acquired under such circumstances will be issued with a restricted securities legend.
10.
Participant Misconduct; Compensation Recovery .
(a)
Notwithstanding anything in the Plan or this Agreement to the contrary, the Committee shall have the authority to determine that in the event of serious misconduct by the Participant (including violations of employment agreements, confidentiality or other proprietary matters) or any activity of the Participant in competition with the business of the Company or any Subsidiary

     2

or Affiliated Entity, the Award may be canceled, in whole or in part, whether or not vested. The determination of whether the Participant has engaged in a serious breach of conduct or any activity in competition with the business of the Company or any Subsidiary or Affiliated Entity shall be determined by the Committee in good faith and in its sole discretion. This paragraph 10 shall have no effect and be deleted from this Agreement following a Change of Control.
(b)
The Award made pursuant to this Agreement is subject to recovery pursuant to the Company’s compensation recovery policy then in effect. To the extent required by applicable laws, rules, regulations or securities exchange listing requirements and the Company’s compensation recovery policy then in effect, the Company shall have the right, and shall take all actions necessary, to recover cash or shares of Common Stock paid to the Participant pursuant to this Award.
11.
Notices . All notices or other communications relating to the Plan and this Agreement as it relates to the Participant shall be in electronic or written form.  If in writing, such notices shall be deemed to have been made (a) if personally delivered in return for a receipt, (b) if mailed, by regular U.S. mail, postage prepaid, by the Company to the Participant at his last known address evidenced on the payroll records of the Company or (c) if provided electronically, provided to Participant at his e-mail address specified in the Company’s or its Affiliated Entity’s records or as other specified pursuant to and in accordance with the Committee’s applicable administrative procedures.
12.
Binding Effect and Governing Law . This Agreement shall be (i) binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and assigns except as may be limited by the Plan and (ii) governed and construed under the laws of the State of Oklahoma.
13.
Captions . The captions of specific provisions of this Agreement are for convenience and reference only, and in no way define, describe, extend or limit the scope of this Agreement or the intent of any provision hereof.
14.
Counterparts . This Agreement may be executed in any number of identical counterparts, each of which shall be deemed an original for all purposes, but all of which taken together shall form but one agreement.
15.
Code Section 409A .
(a)
General . This Agreement and all Awards granted hereunder are intended to comply with, or otherwise be exempt from, Code Section 409A. The Agreement and all Awards shall be administered, interpreted, and construed in a manner consistent with Code Section 409A or an exemption therefrom. Should any provision of the Plan, the Agreement or any Award hereunder be found not to comply with, or otherwise be exempt from, the provisions of Code Section 409A, such provision shall be modified and given effect (retroactively if necessary), in the sole discretion of the Committee, and without the consent of the Participant, in such manner as the Committee determines to be necessary or appropriate to comply with, or to effectuate an exemption from, Code Section 409A. Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided under this Plan comply with Code Section 409A and in no event shall the Company be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by the Participant on account of non-compliance with Code Section 409A.
(b)
Restrictions on 409A RSUs . Other provisions of this Agreement notwithstanding, in the case of any Restricted Stock Units that constitute a “deferral of compensation” under Code Section 409A (“409A RSUs”), the following restrictions shall apply:
(i)
Separation from Service . Any payment in settlement of the 409A RSUs that is triggered by a termination of employment hereunder will occur only at such time as Participant has

     3

had a “separation from service” within the meaning of Treasury Regulation Section 1.409A-1(h).
(ii)
Six - Month Delay Rule . The “six-month delay rule” will apply to 409A RSUs if the following four conditions exist:
1.
The Participant has a separation from service (within the meaning of Treasury Regulation Section 1.409A-1(h));
2.
A payment is triggered by the separation from service (but not due to death);
3.
The Participant is a “specified employee” under Code Section 409A; and
4.
The payment in settlement of the 409A RSUs would otherwise occur within six months after the separation from service.
If the six-month delay rule applies, payment in settlement of 409A RSUs shall instead occur on the first business day after the date that is six months following the Participant's separation from service (or death, if earlier), with interest from the date such payment would otherwise have been made at the short-term applicable federal rate, compounded semi-annually, as determined under Section 1274 of the Code, for the month in which payment would have been made but for the delay in payment. During the six-month delay period, accelerated payment will be permitted in the event of the Participant’s death and for no other reason (including no acceleration upon a Change of Control or Fundamental Transaction) except to the extent permitted under Code Section 409A.
(iii)
Change of Control Rule . Any payment in settlement of 409A RSUs triggered by a Change of Control or Fundamental Transaction will be made only if, in connection with the Change of Control or Fundamental Transaction, there occurs a change in the ownership of the Company, a change in the effective control of the Company, or a change in ownership of a substantial portion of the assets of the Company as all such terms are defined in Treasury Regulation Section 1.409A-3(i)(5). In the event payment in settlement of 409A RSUs is not allowed by operation of this subparagraph (iii), the payment in settlement of the 409A RSUs will be made within sixty (60) days of the earlier to occur of (A) the applicable vesting date set forth in the Notice regardless of the fact that vesting has been accelerated under the Agreement as a result of the Fundamental Transaction or Change of Control, or (B) the occurrence of a permissible time or event that could trigger a payment without violating Code Section 409A.
(c)
Other Compliance Provisions . The following provisions apply to Restricted Stock Units (including, if so specified, non-409A RSUs):
(i)
The settlement of 409A RSUs may not be accelerated by the Company except to the extent permitted under Code Section 409A.
(ii)
Any restriction imposed on 409A RSUs hereunder or under the terms of other documents solely to ensure compliance with Code Section 409A shall not be applied to a Restricted Stock Unit that is not a “deferral of compensation” under Code Section 409A.
(iii)
If any mandatory term required for 409A RSUs or non-409A RSUs to avoid tax penalties under Code Section 409A is not otherwise explicitly provided under this document or other applicable documents, such term is hereby incorporated by reference and fully applicable as though set forth at length herein.
(iv)
Each vesting tranche of Restricted Stock Units set forth in the Notice shall be deemed a separate payment for purposes of Code Section 409A.

     4

Notice of Grant of Restricted Stock Units and Award Agreement

Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, OK 73118
ID: 73-1395733



<NAME>                                  Award Number:   _________
<ADDRESS>                                Plan:   LTIP
<ADDRESS>                                ID:   _________
Effective  <date> , you have been granted an award of  <number>  Restricted Stock Units.  These Restricted Stock Units will vest on the date(s) shown below.
The current total value of the award is $_____________.
The Award will vest in increments on the vesting date(s) shown.
 
Restricted Stock Units
Vesting Date
 
 

_____

mm/dd/yyyy
 
 
_____
mm/dd/yyyy
 
 
_____
mm/dd/yyyy
 
 
 
 
 
By your signature and the Company's signature below, you and the Company agree that this award is granted under and governed by the terms and conditions of the Company's Amended and Restated Long Term Incentive Plan as amended and the Award Agreement, all of which are attached and made a part of this document.

By: ________________________________      ________________________________
Chesapeake Energy Corporation     Participant
Date: ______________________________     Date: __________________________


     5
Exhibit 10.9

NON-EMPLOYEE DIRECTOR
RESTRICTED STOCK UNIT AWARD AGREEMENT FOR
CHESAPEAKE ENERGY CORPORATION
LONG TERM INCENTIVE PLAN
THIS RESTRICTED STOCK UNIT AWARD AGREEMENT (the “Agreement”) entered into as of the grant date set forth on the attached Notice of Grant of Restricted Stock Units and Award Agreement (the “Notice”), by and between Chesapeake Energy Corporation, an Oklahoma corporation (the “Company”), and the participant named on the Notice (the “Participant”);
W I T N E S S E T H:
WHEREAS, the Participant is a Non-Employee Director, and it is important to the Company that the Participant be encouraged to remain a director; and
WHEREAS, the Company has previously adopted the Chesapeake Energy Corporation Amended and Restated Long Term Incentive Plan effective as of October 1, 2004, as amended from time to time (the “Plan”); and
WHEREAS, the Company has awarded the Participant Restricted Stock Units under the Plan, as set forth on the Notice, subject to the terms and conditions of this Agreement; and
NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants herein contained, the Participant and the Company agree as follows:
1.
The Plan . The Plan, a copy of which has been made available to the Participant, is hereby incorporated by reference herein and made a part hereof for all purposes, and when taken with this Agreement shall govern the rights of the Participant and the Company with respect to the Award (as defined below).  Any capitalized terms used but not defined in this Agreement have the same meanings given to them in the Plan.
2.
Grant of Award . The Company hereby awards to the Participant the number of Restricted Stock Units set forth in the Notice, on the terms and conditions set forth herein and in the Plan (the “Award”). Each Restricted Stock Unit granted pursuant to this Award gives the Participant the right to receive payment of one share of Common Stock on the payment date set forth in the Notice and this Award Agreement.
3.
Nontransferability of Award . A Restricted Stock Unit is not transferable other than by will or the laws of descent and distribution.  Any attempted sale, assignment, transfer, pledge, hypothecation or other disposition of, or the levy of execution, attachment or similar process upon, a Restricted Stock Unit contrary to the provisions hereof shall be void and ineffective, shall give no right to any purported transferee, and may, at the sole discretion of the Committee, result in forfeiture of the Restricted Stock Unit(s) involved in such attempt.
4.
Vesting . The Restricted Stock Units will vest based on the Participant’s continuous service with the Company, in any capacity (including as a director, consultant or an employee), in accordance with the vesting schedule set forth in the Notice. Notwithstanding the foregoing, if (a) a Fundamental Transaction or Change of Control occurs or (b) a Participant ceases to be a director and is not employed by the Company, a Subsidiary or Affiliated Entity as an employee or consultant (either directly or indirectly), then the Participant will vest in all of his or her unvested Restricted Stock Units on the date of the applicable event, unless subject to forfeiture or recovery pursuant to Section 9.
5.
Payment . Payment shall be made in the form of a distribution of shares of Common Stock equal to the number of vested Restricted Stock Units. Such distribution shall be made to the Participant


on the payment date set forth in the Notice with respect to such Restricted Stock Unit. Notwithstanding the foregoing, if prior to the payment dates set forth in the Notice (a) a Fundamental Transaction or Change of Control occurs or (b) the Participant ceases to be a director and is not employed by the Company, a Subsidiary or Affiliated Entity as an employee or consultant (either directly or indirectly), then the Participant or the personal representative of the deceased Participant, will receive payment for all Restricted Stock Units that remain unpaid within sixty (60) days of the occurrence of such event, unless such Restricted Stock Units are subject to forfeiture or recovery pursuant to Section 9.
6.
Dividends . The Participant shall have the right to receive dividends on the unpaid Restricted Stock Units as though the Participant was a shareholder of an equivalent number of shares of Common Stock based on record dates that occur while the Restricted Stock Units remain unpaid under this Agreement.  The Company will transmit such dividends to or for the account of Participant in such manner as the Company determines; provided that the Participant is a director as of the dividend payment date.
7.
Amendments . This Award Agreement may be amended by a written agreement signed by the Company and the Participant; provided that the Committee may modify the terms of this Award Agreement without the consent of the Participant in any manner that is not adverse to the Participant.
8.
Securities Law Restrictions . Payment of this Award shall not be made in shares of Common Stock unless such issuance is in compliance with the Securities Act of 1933, as amended (the “Act”), and any other applicable securities law, or pursuant to an exemption therefrom.  If deemed necessary by the Company to comply with the Act or any applicable laws or regulations relating to the sale of securities, the Participant at the time of payment and as a condition imposed by the Company, shall represent, warrant and agree that the shares of Common Stock subject to the Award are being acquired for investment and not with any present intention to resell the same and without a view to distribution, and the Participant shall, upon the request of the Company, execute and deliver to the Company an agreement to such a fact.  The Participant acknowledges that any stock certificate representing Common Stock acquired under such circumstances will be issued with a restricted securities legend.
9.
Participant Misconduct; Compensation Recovery .
(a)
Notwithstanding anything in the Plan or this Agreement to the contrary, the Committee shall have the authority to determine that in the event of serious misconduct by the Participant (including violations of confidentiality or other proprietary matters) or any activity of the Participant in competition with the business of the Company or any Subsidiary or Affiliated Entity, the Award may be cancelled, in whole or in part, whether or not vested. The determination of whether the Participant has engaged in a serious breach of conduct or any activity in competition with the business of the Company or any Subsidiary or Affiliated Entity shall be determined by the Committee in good faith and in its sole discretion. This paragraph 9 shall have no effect and be deleted from this Agreement following a Change of Control.
(b)
The Award made pursuant to this Agreement is subject to recovery pursuant to the Company’s compensation recovery policy then in effect. To the extent required by applicable laws, rules, regulations or securities exchange listing requirements and the Company’s compensation recovery policy then in effect, the Company shall have the right, and shall take all actions necessary, to recover shares of the Common Stock paid to the Participant pursuant to this Award.
10.
Notices . All notices or other communications relating to the Plan and this Agreement as it relates to the Participant shall be in electronic or written form.  If in writing, such notices shall be deemed

     2

to have been made (a) if personally delivered in return for a receipt, (b) if mailed, by regular U.S. mail, postage prepaid, by the Company to the Participant at his last known address evidenced on the payroll records of the Company or (c) if provided electronically, provided to Participant at his e-mail address specified in the Company’s or its Affiliated Entity’s records or as other specified pursuant to and in accordance with the Committee’s applicable administrative procedures.
11.
Binding Effect and Governing Law . This Agreement shall be (i) binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and assigns except as may be limited by the Plan and (ii) governed and construed under the laws of the State of Oklahoma.
12.
Captions . The captions of specific provisions of this Agreement are for convenience and reference only, and in no way define, describe, extend or limit the scope of this Agreement or the intent of any provision hereof.
13.
Counterparts . This Agreement may be executed in any number of identical counterparts, each of which shall be deemed an original for all purposes, but all of which taken together shall form but one agreement.
14.
Code Section 409A .
(a)
General . This Agreement and all Awards granted hereunder are intended to comply with Code Section 409A. The Agreement and all Awards shall be administered, interpreted, and construed in a manner consistent with Code Section 409A. Should any provision of the Plan, the Agreement or any Award hereunder be found not to comply with the provisions of Code Section 409A, such provision shall be modified and given effect (retroactively if necessary), in the sole discretion of the Committee, and without the consent of the Participant, in such manner as the Committee determines to be necessary or appropriate to comply with Code Section 409A. Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided under this Plan comply with Code Section 409A and in no event shall the Company be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by the Participant on account of non-compliance with Code Section 409A.
(b)
Payment Restrictions . Other provisions of this Agreement notwithstanding, the following payment restrictions shall apply to Restricted Stock Units:
(i)
Separation from Service . Any payment in settlement of the Restricted Stock Units that is triggered by a separation of service hereunder will occur only at such time as Participant has had a “separation from service” within the meaning of Treasury Regulation Section 1.409A-1(h).
(ii)
Six - Month Delay Rule . The “six-month delay rule” will apply to 409A Restricted Stock Units if the following four conditions exist:
1.
The Participant has a separation from service (within the meaning of Treasury Regulation Section 1.409A-1(h));
2.
A payment is triggered by the separation from service (but not due to death);
3.
The Participant is a “specified employee” under Code Section 409A; and
4.
The payment in settlement of the Restricted Stock Units would otherwise occur within six months after the separation from service.

     3

If the six-month delay rule applies, payment in settlement of the Restricted Stock Units shall instead be made on the first business day after the date that is six months following the Participant's separation from service (or death, if earlier), with interest from the date such payment would otherwise have been made at the short-term applicable federal rate, compounded semi-annually, as determined under Section 1274 of the Code, for the month in which payment would have been made but for the delay in payment. During the six-month delay period, accelerated payment will be permitted in the event of the Participant’s death and for no other reason (including no acceleration upon a Change of Control or Fundamental Transaction) except to the extent permitted under Code Section 409A.
(iii)
Change of Control Rule . Any payment in settlement of Restricted Stock Units triggered by a Change of Control or Fundamental Transaction will be made only if, in connection with the Change of Control or Fundamental Transaction, there occurs a change in the ownership of the Company, a change in the effective control of the Company, or a change in ownership of a substantial portion of the assets of the Company as all such terms are defined in Treasury Regulation Section 1.409A-3(i)(5). In the event payment in settlement of Restricted Stock Units is not allowed by operation of this subparagraph (iii), the payment related to such Restricted Stock Units will be made within sixty (60) days of the earlier to occur of (A) the applicable payment date set forth in the Notice, death or separation from service regardless of the fact that vesting has been accelerated under the Agreement as a result of the Fundamental Transaction or Change of Control, or (B) the occurrence of a permissible time or event that could trigger a payment without violating Code Section 409A.
(c)
Other Compliance Provisions . The following provisions also apply to Restricted Stock Units:
(i)
The settlement of Restricted Stock Units may not be accelerated by the Company except to the extent permitted under Code Section 409A.
(ii)
If any mandatory term required to avoid tax penalties under Code Section 409A is not otherwise explicitly provided under this document or other applicable documents, such term is hereby incorporated by reference and fully applicable as though set forth at length herein.
(iii)
Each payment tranche of Restricted Stock Units set forth in the Notice shall be deemed a separate payment for purposes of Code Section 409A.

     4

Notice of Grant of Restricted Stock Units and Award Agreement
Non-Employee Director

Chesapeake Energy Corporation
6100 North Western Avenue
Oklahoma City, OK 73118
ID: 73-1395733



<NAME>                                  Award Number:   _________
<ADDRESS>                                Plan:   LTIP
<ADDRESS>                                ID:   _________
Effective  <date> , you have been granted an award of  <number>  Restricted Stock Units.  These Restricted Stock Units entitle you to receive payments in the form of shares of Common Stock equal to the number of Restricted Stock Units to be paid on the applicable payment date.
Payment shall be made on the payment dates set forth below. Notwithstanding the foregoing, if prior to the payment dates set forth below (a) a Fundamental Transaction or Change of Control occurs or (b) the Participant ceases to be a director and is not employed by the Company, a Subsidiary or Affiliated Entity as an employee or consultant (either directly or indirectly), then the Participant or the personal representative of the deceased Participant, will receive payment for all Restricted Stock Units that remain unpaid in the manner set forth in the Award Agreement.
The current total value of the award is $_____________.
The Restricted Stock Units will vest and be paid in increments on the payment date(s) shown below. [25% of the Award is paid immediately and remaining 75% of Award is paid in 3 equal annual installments]
 
Restricted Stock Units
Payment Date
 
 

_____

mm/dd/yyyy
 
 
_____
mm/dd/yyyy
 
 
_____
mm/dd/yyyy
 
 
_____
mm/dd/yyyy
 
By your signature and the Company's signature below, you and the Company agree that this award is granted under and governed by the terms and conditions of the Company's Amended and Restated Long Term Incentive Plan as amended and the Award Agreement, all of which are attached and made a part of this document.
By: ________________________________      ________________________________
Chesapeake Energy Corporation     Participant
Date: ______________________________     Date: __________________________


     5
Exhibit 10.10

FORM OF PENSION AND EQUITY MAKEUP
RESTRICTED STOCK AWARD AGREEMENT FOR
CHESAPEAKE ENERGY CORPORATION
LONG TERM INCENTIVE PLAN
THIS RESTRICTED STOCK AWARD AGREEMENT (the “Agreement”) entered into as of the grant date set forth on the attached Notice of Grant of Award and Award Agreement (the “Notice”), by and between Chesapeake Energy Corporation, an Oklahoma corporation (the “Company”), and Robert D. Lawler (the “Participant”);
W I T N E S S E T H:
WHEREAS, the Participant is an Employee, and it is important to the Company that the Participant be encouraged to remain an Employee; and
WHEREAS, the Company has previously adopted the Chesapeake Energy Corporation Amended and Restated Long Term Incentive Plan effective as of October 1, 2004, as amended from time to time (the “Plan”); and
WHEREAS, the Company has awarded the Participant shares of Common Stock under the Plan, as set forth on the Notice, subject to the terms and conditions of this Agreement; and
WHEREAS, the Company has entered into an employment agreement with Participant dated May 20, 2013 (the “Employment Agreement”).
NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants herein contained, the Participant and the Company agree as follows:
1.
The Plan .  The Plan, a copy of which has been made available to the Participant, is hereby incorporated by reference herein and made a part hereof for all purposes, and when taken with this Agreement shall govern the rights of the Participant and the Company with respect to the Award (as defined below).  Any capitalized terms used but not defined in this Agreement have the same meanings given to them in the Plan.
2.
Grant of Award .  The Company hereby awards to the Participant the number of shares of Common Stock set forth on the Notice, on the terms and conditions set forth herein and in the Plan (the “Award”).
3.
Terms of Award .
(a)
Escrow of Shares. A certificate, or book-entry equivalent representing the shares of Common Stock subject to the Award (the “Restricted Stock”) shall be issued in the name of the Participant and shall be escrowed with the Secretary of the Company (the “Escrow Agent”) subject to removal of the restrictions placed thereon or forfeiture pursuant to the terms of this Agreement.
(b)
Vesting. The shares of Restricted Stock will vest based on the Participant’s continuous employment with or service to the Company, a Subsidiary or Affiliated Entity in accordance with the vesting schedule set forth on the Notice. In the event the Participant’s employment terminates at or following the end of the Term (as defined in Section 5 of the Employment Agreement) following the Company giving the Participant a Notice of Non-Renewal (as defined in Section 5 of the Employment Agreement), under circumstances which would constitute a termination pursuant to Section 6.1.1, 6.1.2, 6.4 or 6.5 of the Employment Agreement were it in effect at that time, any unvested shares of Restricted Stock shall



become immediately vested. Once vested pursuant to the terms of this Agreement, the Restricted Stock shall be deemed “Vested Stock.”
(c)
Voting Rights and Dividends. Subject to the restrictions on transfer and forfeiture set forth in this Agreement, the Participant will have customary rights of a shareholder attributable to the shares of Restricted Stock issued in an Award pursuant to this Agreement, including the rights to vote and to receive dividends on the shares. Participant appoints the Company to be Participant’s agent to receive for Participant dividends on shares based on record dates that occur while the shares are subject to restriction under this Agreement. The Company will transmit such dividends, net of required taxes pursuant to section 7, to or for the account of Participant in such manner as the Company determines; provided that the Participant is an Employee as of the dividend payment date.
(d)
Vested Stock - Removal of Restrictions. Upon Restricted Stock becoming Vested Stock, all restrictions shall be removed from the Stock and the Secretary of the Company shall deliver to the Participant shares either in certificate form or via D.W.A.C. (delivery/withdrawal at custodian) representing such Vested Stock free and clear of all restrictions, except for any applicable securities laws restrictions or restrictions pursuant to the Company’s Insider Trading Policy.
(e)
Forfeiture. Restricted Stock that does not become Vested Stock pursuant to the terms of this Agreement shall be absolutely forfeited and the Participant shall have no future interest therein of any kind whatsoever.  Except as provided herein, in the event the Participant’s employment with or service to the Company, a Subsidiary or an Affiliated Entity terminates prior to all shares of Restricted Stock becoming Vested Stock, then such unvested shares of Restricted Stock shall be absolutely forfeited on the date of termination and the Participant shall have no further interest therein of any kind whatsoever. The Committee may, in its discretion, accelerate the vesting of the Restricted Stock in the event of the Participant’s death, Disability or termination due to special circumstances (as determined by the Committee in its sole discretion).
4.
Fundamental Transaction; Change of Control . In accordance with the terms of the Plan, all Restricted Stock that becomes Vested Stock upon the occurrence of a Fundamental Transaction or a Change of Control shall be delivered to the Participant in certificate form or via D.W.A.C. free and clear of all restrictions, except for any applicable securities law restrictions.
5.
Subsidiary Change of Control or Fundamental Transaction . If (a) the Participant is an employee of a Subsidiary or an Affiliated Entity (each a “CHK Entity”), upon the occurrence of a Fundamental Transaction or a Change of Control of such CHK Entity (as if the terms Fundamental Transaction or Change of Control defined under the Plan applied to such CHK Entity), and (b) immediately following and in connection with such Fundamental Transaction or Change of Control the Participant is not an employee of the Company or a CHK Entity (other than by reason of the Participant’s resignation, death or Disability), then all restrictions on outstanding Restricted Stock shall lapse and the provisions of Section 4 of this Agreement shall apply.
6.
Nontransferability of Award . Restricted Stock is not transferable other than by will or the laws of descent and distribution.  Any attempted sale, assignment, transfer, pledge, hypothecation or other disposition of, or the levy of execution, attachment or similar process upon, Restricted Stock contrary to the provisions hereof shall be void and ineffective, shall give no right to any purported transferee, any may, at the sole discretion of the Committee, result in forfeiture of the Restricted Stock involved in such attempt.
7.
Withholding . The Company may make such provision as it may deem appropriate for the withholding of any applicable federal, state or local taxes that it determines it may be obligated to withhold or pay in connection with the vesting of the Restricted Stock or any election made

     2

by the Participant.  Required withholding taxes as determined by the Company associated with this Award must be paid in cash unless the Committee requires the Participant to pay such withholding taxes by directing the Company to withhold from the Award the number of shares of Common Stock having a Fair Market Value on the date of vesting equal to the amount of required withholding taxes.  The Company in its sole discretion may also withhold any required taxes from dividends paid on the Restricted Stock.
8.
Notification of 83(b) Election . In the event the Participant elects to make an 83(b) election with respect to this Award, the Participant must provide the Company notice of such election at the same time the election is filed with the Internal Revenue Service.  The Participant must also tender to the Company payment of the required withholding taxes associated with such election.  In the event the Participant makes an 83(b) election without consulting with the Company as to the payment of required withholding taxes, the Company may withhold from other payments to the Participant amounts necessary to effect the required withholding.
9.
Amendments . This Award Agreement may be amended by a written agreement signed by the Company and the Participant; provided that the Committee may modify the terms of this Award Agreement without the consent of the Participant in any manner that is not adverse to the Participant.
10.
Securities Law Restrictions . This Award shall be vested and common stock issued only in compliance with the Securities Act of 1933, as amended (the “Act”), and any other applicable securities law, or pursuant to an exemption therefrom.  If deemed necessary by the Company to comply with the Act or any applicable laws or regulations relating to the sale of securities, the Participant at the time of vesting and as a condition imposed by the Company, shall represent, warrant and agree that the shares of Common Stock subject to the Award are being acquired for investment and not with any present intention to resell the same and without a view to distribution, and the Participant shall, upon the request of the Company, execute and deliver to the Company an agreement to such a fact.  The Participant acknowledges that any stock certificate representing Common Stock acquired under such circumstances will be issued with a restricted securities legend.
11.
Participant Misconduct; Compensation Recovery .
(a)
Notwithstanding anything in the Plan or this Agreement to the contrary, the Committee shall have the authority to determine that in the event of serious misconduct by the Participant (including violations of employment agreements, confidentiality or other proprietary matters) or any activity of a Participant in competition with the business of the Company or any Subsidiary or Affiliated Entity, the Award may be cancelled, in whole or in part, whether or not vested. The determination of whether a Participant has engaged in a serious breach of conduct or any activity in competition with the business of the Company or any Subsidiary or Affiliated Entity shall be determined by the Committee in good faith and in its sole discretion. This paragraph 11 shall have no effect and be deleted from this Agreement following a Change of Control.
(b)
The Award made pursuant to this Agreement is subject to recovery pursuant to the Company’s compensation recovery policy then in effect. To the extent required by applicable laws, rules, regulations or securities exchange listing requirements and the Company’s compensation recovery policy then in effect, the Company shall have the right, and shall take all actions necessary, to recover shares of the Company’s common stock awarded to the Participant pursuant to this Award.
12.
Notices . All notices or other communications relating to the Plan and this Agreement as it relates to the Participant shall be in electronic or written form.  If in writing, such notices shall be deemed to have been made (a) if personally delivered in return for a receipt, (b) if mailed, by regular U.S.

     3

mail, postage prepaid, by the Company to the Participant at his last known address evidenced on the payroll records of the Company or (c) if provided electronically, provided to Participant at his e-mail address specified in the Company’s or its Affiliated Entity’s records or as other specified pursuant to and in accordance with the Committee’s applicable administrative procedures.
13.
Binding Effect and Governing Law . This Agreement shall be (i) binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and assigns except as may be limited by the Plan and (ii) governed and construed under the laws of the State of Oklahoma.
14.
Captions . The captions of specific provisions of this Agreement are for convenience and reference only, and in no way define, describe, extend or limit the scope of this Agreement or the intent of any provision hereof.
15.
Counterparts . This Agreement may be executed in any number of identical counterparts, each of which shall be deemed an original for all purposes, but all of which taken together shall form but one agreement.


     4

 
 
 
Chesapeake Energy Corporation
 
Notice of Grant of Award
and Award Agreement
 
ID:   73-1395733
 
 
 
 
 
6100 N. Western Avenue
 
 
 
 
Oklahoma City, OK  73118
 
 
 
 
 
 
 
 
<NAME>
 
Award Number:
 
 
 
<ADDRESS>
 
Plan:
LTIP
 
 
<ADDRESS>
 
ID:
 
 
Effective  <date> , you have been granted an award of  <number>  shares of Chesapeake Energy Corporation (the Company) common stock.  These shares are restricted until the vest date(s) shown below.
The current total value of the award is $_____________.
The award will vest in increments on the date(s) shown.
 
Shares
 
Full Vest
 
 
 
 
mm/dd/yyyy
 
 
 
 
mm/dd/yyyy
 
 
 
 
mm/dd/yyyy
 
 
 
 
mm/dd/yyyy
 
By your signature and the Company's signature below, you and the Company agree that this award is granted under and governed by the terms and conditions of the Company's Award Plan as amended and the Award Agreement, all of which are attached and made a part of this document.
Chesapeake Energy Corporation
<NAME>
 
 
Date:
 




EXHIBIT 12
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
RATIOS OF EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES
AND PREFERRED DIVIDENDS
 
 
 
Years
Ended
December 31,
 
Six Months
Ended
June 30,
 
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
 
 
($ in millions)
EARNINGS:
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes and cumulative effect of accounting change
 
$
991

 
$
(9,288
)
 
$
2,884

 
$
2,880

 
$
(974
)
 
$
1,174

Interest expense (a)
 
225

 
237

 
122

 
94

 
142

 
94

(Gain)/loss on investment in equity investees in excess of distributed earnings
 
40

 
39

 
(232
)
 
(154
)
 
108

 
7

Amortization of capitalized interest
 
74

 
150

 
212

 
297

 
402

 
224

Loan cost amortization
 
19

 
26

 
25

 
28

 
43

 
19

Earnings
 
$
1,349

 
$
(8,836
)
 
$
3,011

 
$
3,145

 
$
(279
)
 
$
1,518

FIXED CHARGES:
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense
 
$
225

 
$
237

 
$
122

 
$
94

 
$
142

 
$
94

Capitalized interest
 
586

 
627

 
711

 
727

 
976

 
438

Loan cost amortization
 
19

 
26

 
25

 
28

 
43

 
19

Fixed Charges
 
$
830

 
$
890

 
$
858

 
$
849

 
$
1,161

 
$
551

PREFERRED STOCK DIVIDENDS:
 
 
 
 
 
 
 
 
 
 
 
 
Preferred dividend requirements
 
$
33

 
$
23

 
$
111

 
$
172

 
$
171

 
$
86

Ratio of income (loss) before provision for taxes to net income (loss) (b)
 
1.64

 
1.59

 
1.63

 
1.65

 
1.64

 
1.61

Preferred Dividends
 
$
54

 
$
37

 
$
181

 
$
284

 
$
280

 
$
138

COMBINED FIXED CHARGES AND REFERRED DIVIDENDS
 
$
884

 
$
927

 
$
1,039

 
$
1,131

 
$
1,441

 
$
689

RATIO OF EARNINGS TO FIXED CHARGES
 
1.6

 
(9.9
)
 
3.5

 
3.7

 
(0.2
)
 
2.8

INSUFFICIENT COVERAGE
 
$
—

 
$
9,726

 
$
—

 
$
—

 
$
1,440

 
$
—

RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
 
1.5

 
(9.5
)
 
2.9

 
2.8

 
(0.2
)
 
2.2

INSUFFICIENT COVERAGE
 
$
—

 
$
9,763

 
$
—

 
$
—

 
$
1,720

 
$
—

 
(a)
Excludes the effect of unrealized gains or losses on interest rate derivatives and includes amortization of bond discount.
(b)
Amounts of income (loss) before provision for taxes and of net income (loss) exclude the cumulative effect of accounting change.





Exhibit 31.1
CERTIFICATION
I, Robert D. Lawler, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Chesapeake Energy Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 6, 2013
By:
/s/ ROBERT D. LAWLER      
 
 
Robert D. Lawler
 
 
President and Chief Executive Officer




Exhibit 31.2
CERTIFICATION
I, Domenic J. Dell’Osso, Jr., certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Chesapeake Energy Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 6, 2013
By:
/s/ DOMENIC J. DELL’OSSO, JR.
 
 
Domenic J. Dell’Osso, Jr.
 
 
Executive Vice President and Chief Financial Officer




Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Chesapeake Energy Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert D. Lawler, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
August 6, 2013
By:
/s/ ROBERT D. LAWLER
 
 
   Robert D. Lawler    
   President and Chief Executive Officer





Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Chesapeake Energy Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Domenic J. Dell’Osso, Jr., Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
August 6, 2013
By:
/s/ DOMENIC J. DELL’OSSO, JR.        
 
 
Domenic J. Dell’Osso, Jr.
 
 
     Executive Vice President and
     Chief Financial Officer