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, 2017
or
[  ]     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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [X] Accelerated Filer [ ] Non-accelerated Filer [ ] (Do not check if a smaller reporting company) Smaller Reporting Company [ ] Emerging Growth Company [ ]
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
 
 
 
 
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 July 31, 2017 , there were 908,339,499 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, 2017

 
Page
Item 1.
 
 
June 30, 2017 and December 31, 2016
 
Condensed Consolidated Statements of Operations  for the
Three and Six Months Ended June 30, 2017 and 2016
 
Condensed Consolidated Statements of Comprehensive Income (Loss)  for the
Three and Six Months Ended June 30, 2017 and 2016
 
Condensed Consolidated Statements of Cash Flows  for the
Six Months Ended June 30, 2017 and 2016
 
Condensed Consolidated Statements of Stockholders’ Equity  for the
Six Months Ended June 30, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION



ITEM 1.
Condensed Consolidated Financial Statements (Unaudited)
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
 
June 30,
2017
 
December 31,
2016
 
 
($ in millions)
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents ($1 and $1 attributable to our VIE)
 
$
13

 
$
882

Accounts receivable, net
 
1,019

 
1,057

Short-term derivative assets
 
71

 
—

Other current assets
 
144

 
203

Total Current Assets
 
1,247

 
2,142

PROPERTY AND EQUIPMENT:
 
 
 
 
Oil and natural gas properties, at cost based on full cost accounting:
 
 
 
 
Proved oil and natural gas properties
($488 and $488 attributable to our VIE)
 
67,419

 
66,451

Unproved properties
 
4,096

 
4,802

Other property and equipment
 
2,020

 
2,053

Total Property and Equipment, at Cost
 
73,535

 
73,306

Less: accumulated depreciation, depletion and amortization
(($459) and ($458) attributable to our VIE)
 
(63,138
)
 
(62,726
)
Property and equipment held for sale, net
 
21

 
29

Total Property and Equipment, Net
 
10,418

 
10,609

LONG-TERM ASSETS:
 
 
 
 
Long-term derivative assets
 
14

 
—

Other long-term assets
 
241

 
277

TOTAL ASSETS
 
$
11,920

 
$
13,028

 
 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
1
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS – (Continued)
(Unaudited)

 
 
June 30,
2017
 
December 31,
2016
 
 
($ in millions)
CURRENT LIABILITIES:
 
 
 
 
Accounts payable
 
$
718

 
$
672

Current maturities of long-term debt, net
 
3

 
503

Accrued interest
 
137

 
113

Short-term derivative liabilities
 
3

 
562

Other current liabilities ($4 and $3 attributable to our VIE)
 
1,297

 
1,798

Total Current Liabilities
 
2,158

 
3,648

LONG-TERM LIABILITIES:
 
 
 
 
Long-term debt, net
 
9,850

 
9,938

Long-term derivative liabilities
 
1

 
15

Asset retirement obligations, net of current portion
 
221

 
247

Other long-term liabilities
 
374

 
383

Total Long-Term Liabilities
 
10,446

 
10,583

CONTINGENCIES AND COMMITMENTS (Note 4)
 

 

EQUITY:
 
 
 
 
Chesapeake Stockholders’ Equity:
 
 
 
 
Preferred stock, $0.01 par value, 20,000,000 shares authorized:
5,603,458 and 5,839,506 shares outstanding
 
1,671

 
1,771

Common stock, $0.01 par value,
2,000,000,000 and 1,500,000,000 shares authorized:
907,977,114 and 896,279,353 shares issued
 
9

 
9

Additional paid-in capital
 
14,458

 
14,486

Accumulated deficit
 
(16,969
)
 
(17,603
)
Accumulated other comprehensive loss
 
(75
)
 
(96
)
Less: treasury stock, at cost;
2,336,327 and 1,220,504 common shares
 
(32
)
 
(27
)
Total Chesapeake Stockholders’ Equity (Deficit)
 
(938
)
 
(1,460
)
Noncontrolling interests
 
254

 
257

Total Equity (Deficit)
 
(684
)
 
(1,203
)
TOTAL LIABILITIES AND EQUITY
 
$
11,920

 
$
13,028


The accompanying notes are an integral part of these condensed consolidated financial statements.
2
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
  
 
($ in millions except per share data)
REVENUES:
 
 
 
 
 
 
 
 
Oil, natural gas and NGL
 
$
1,279

 
$
440

 
$
2,748

 
$
1,433

Marketing, gathering and compression
 
1,002

 
1,182

 
2,286

 
2,142

Total Revenues
 
2,281

 
1,622

 
5,034

 
3,575

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
Oil, natural gas and NGL production
 
140

 
182

 
275

 
388

Oil, natural gas and NGL gathering, processing and transportation
 
357

 
481

 
712

 
963

Production taxes
 
21

 
19

 
43

 
37

Marketing, gathering and compression
 
1,027

 
1,207

 
2,355

 
2,149

General and administrative
 
70

 
61

 
135

 
109

Restructuring and other termination costs
 
—

 
3

 
—

 
3

Provision for legal contingencies
 
17

 
71

 
15

 
104

Oil, natural gas and NGL depreciation, depletion and amortization
 
202

 
277

 
399

 
540

Depreciation and amortization of other assets
 
21

 
29

 
42

 
58

Impairment of oil and natural gas properties
 
—

 
1,070

 
—

 
2,067

Impairments of fixed assets and other
 
26

 
6

 
417

 
44

Net (gains) losses on sales of fixed assets
 
1

 
(1
)
 
1

 
(5
)
Total Operating Expenses
 
1,882

 
3,405

 
4,394

 
6,457

INCOME (LOSS) FROM OPERATIONS
 
399

 
(1,783
)
 
640

 
(2,882
)
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
Interest expense
 
(93
)
 
(62
)
 
(188
)
 
(124
)
Losses on investments
 
—

 
(2
)
 
—

 
(2
)
Loss on sale of investment
 
—

 
—

 
—

 
(10
)
Gains on purchases or exchanges of debt
 
191

 
68

 
184

 
168

Other income (expense)
 
(1
)
 
3

 
2

 
6

Total Other Income (Expense)
 
97

 
7

 
(2
)
 
38

INCOME (LOSS) BEFORE INCOME TAXES
 
496

 
(1,776
)
 
638

 
(2,844
)
Income Tax Expense
 
1

 
—

 
2

 
—

NET INCOME (LOSS)
 
495

 
(1,776
)
 
636

 
(2,844
)
Net income attributable to noncontrolling interests
 
(1
)
 
—

 
(2
)
 
—

NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE
 
494

 
(1,776
)
 
634

 
(2,844
)
Preferred stock dividends
 
(16
)
 
(42
)
 
(39
)
 
(85
)
Loss on exchange of preferred stock
 
—

 
—

 
(41
)
 
—

Earnings allocated to participating securities
 
(8
)
 
—

 
(7
)
 
—

NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
 
$
470

 
$
(1,818
)
 
$
547

 
$
(2,929
)
EARNINGS (LOSS) PER COMMON SHARE:
 
 
 
 
 
 
 
 
Basic
 
$
0.52

 
$
(2.51
)
 
$
0.60

 
$
(4.21
)
Diluted
 
$
0.47

 
$
(2.51
)
 
$
0.59

 
$
(4.21
)
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (in millions):
 
 
 
 
 
 
 
 
Basic
 
908

 
724

 
907

 
695

Diluted
 
1,114

 
724

 
1,053

 
695


The accompanying notes are an integral part of these condensed consolidated financial statements.
3
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)


 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
($ in millions)
NET INCOME (LOSS)
 
$
495

 
$
(1,776
)
 
$
636

 
$
(2,844
)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAX:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on derivative instruments,
net of income tax expense (benefit)
of $0, $2, $0 and ($1)
 
—

 
(15
)
 
4

 
(19
)
Reclassification of losses on settled derivative instruments, net of income tax expense (benefit)
of $0, ($4), $0 and $3
 
7

 
10

 
17

 
14

Other Comprehensive Income (Loss)
 
7

 
(5
)
 
21

 
(5
)
COMPREHENSIVE INCOME (LOSS)
 
502

 
(1,781
)
 
657

 
(2,849
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO
NONCONTROLLING INTERESTS
 
(1
)
 
—

 
(2
)
 
—

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE
 
$
501

 
$
(1,781
)
 
$
655

 
$
(2,849
)



The accompanying notes are an integral part of these condensed consolidated financial statements.
4
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)



 
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
 
($ in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
NET INCOME (LOSS)
 
$
636

 
$
(2,844
)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
 
 
 
 
Depreciation, depletion and amortization
 
441

 
598

Derivative (gains) losses, net
 
(522
)
 
278

Cash receipts (payments) on derivative settlements, net
 
(66
)
 
386

Stock-based compensation
 
27

 
25

Impairment of oil and natural gas properties
 
—

 
2,067

Net (gains) losses on sales of fixed assets
 
1

 
(5
)
Impairments of fixed assets and other
 
1

 
34

Losses on investments
 
—

 
2

Loss on sale of investment
 
—

 
10

Gains on purchases or exchanges of debt
 
(185
)
 
(168
)
Restructuring and other termination costs
 
—

 
3

Provision for legal contingencies
 
15

 
104

Other
 
(59
)
 
(51
)
Changes in assets and liabilities
 
(347
)
 
(765
)
Net Cash Used In Operating Activities
 
(58
)
 
(326
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Drilling and completion costs
 
(1,031
)
 
(609
)
Acquisitions of proved and unproved properties
 
(162
)
 
(426
)
Proceeds from divestitures of proved and unproved properties
 
951

 
964

Additions to other property and equipment
 
(7
)
 
(25
)
Proceeds from sales of other property and equipment
 
26

 
70

Cash paid for title defects
 
—

 
(69
)
Other
 
—

 
(4
)
Net Cash Used In Investing Activities
 
(223
)
 
(99
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from revolving credit facility borrowings
 
2,551

 
2,477

Payments on revolving credit facility borrowings
 
(1,976
)
 
(2,377
)
Proceeds from issuance of senior notes, net
 
742

 
—

Cash paid to purchase debt
 
(1,746
)
 
(472
)
Cash paid for preferred stock dividends
 
(137
)
 
—

Distributions to noncontrolling interest owners
 
(5
)
 
(6
)
Other
 
(17
)
 
(18
)
Net Cash Used In Financing Activities
 
(588
)
 
(396
)
Net decrease in cash and cash equivalents
 
(869
)
 
(821
)
Cash and cash equivalents, beginning of period
 
882

 
825

Cash and cash equivalents, end of period
 
$
13

 
$
4

 
 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
5
TABLE OF CONTENTS
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,
 
 
2017
 
2016
 
 
($ in millions)
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Interest paid, net of capitalized interest
 
$
217

 
$
154

Income tax refunds received, net
 
$
(14
)
 
$
(20
)
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Change in accrued drilling and completion costs
 
$
87

 
$
(13
)
Change in accrued acquisitions of proved and unproved properties
 
$
4

 
$
—

Change in divested proved and unproved properties
 
$
16

 
$
2

Debt exchanged for common stock
 
$
—

 
$
471



The accompanying notes are an integral part of these condensed consolidated financial statements.
6
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)



 
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
 
($ in millions)
PREFERRED STOCK:
 
 
 
 
Balance, beginning of period
 
$
1,771

 
$
3,062

Exchange/conversions of 236,048 and 25,802 shares of preferred stock for common stock
 
(100
)
 
(26
)
Balance, end of period
 
1,671

 
3,036

COMMON STOCK:
 
 
 
 
Balance, beginning of period
 
9

 
7

Exchange of senior notes and contingent convertible notes
 
—

 
1

Balance, end of period
 
9

 
8

ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
Balance, beginning of period
 
14,486

 
12,403

Stock-based compensation
 
29

 
31

Exchange of contingent convertible notes for 0 and 55,427,782 shares of common stock
 
—

 
241

Exchange of senior notes for 0 and 53,923,925 shares of common stock
 
—

 
229

Exchange/conversion of preferred stock for 9,965,835 and 1,021,506
shares of common stock
 
100

 
26

Equity component of contingent convertible notes repurchased
 
(20
)
 
—

Dividends on preferred stock
 
(137
)
 
—

Balance, end of period
 
14,458

 
12,930

RETAINED EARNINGS (ACCUMULATED DEFICIT):
 
 
 
 
Balance, beginning of period
 
(17,603
)
 
(13,202
)
Net income (loss) attributable to Chesapeake
 
634

 
(2,844
)
Balance, end of period
 
(16,969
)
 
(16,046
)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
Balance, beginning of period
 
(96
)
 
(99
)
Hedging activity
 
21

 
(5
)
Balance, end of period
 
(75
)
 
(104
)
TREASURY STOCK – COMMON:
 
 
 
 
Balance, beginning of period
 
(27
)
 
(33
)
Purchase of 1,189,813 and 22,810 shares for company benefit plans
 
(6
)
 
—

Release of 73,990 and 157,514 shares from company benefit plans
 
1

 
4

Balance, end of period
 
(32
)
 
(29
)
TOTAL CHESAPEAKE STOCKHOLDERS’ EQUITY (DEFICIT)
 
(938
)
 
(205
)
NONCONTROLLING INTERESTS:
 
 
 
 
Balance, beginning of period
 
257

 
259

Net income attributable to noncontrolling interests
 
2

 
—

Distributions to noncontrolling interest owners
 
(5
)
 
2

Balance, end of period
 
254

 
261

TOTAL EQUITY (DEFICIT)
 
$
(684
)
 
$
56


The accompanying notes are an integral part of these condensed consolidated financial statements.
7
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.
Basis of Presentation
The accompanying condensed consolidated financial statements of Chesapeake Energy Corporation (“Chesapeake” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of our direct and indirect wholly owned subsidiaries and entities in which Chesapeake has a controlling financial interest. Intercompany accounts and balances have been eliminated. These financial statements were prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with U.S. GAAP.
This Form 10-Q relates to the three and six months ended June 30, 2017 (the “Current Quarter” and the “Current Period, respectively) and the three and six months ended June 30, 2016 (the “Prior Quarter” and the “Prior Period”, respectively). Chesapeake’s annual report on Form 10-K for the year ended December 31, 2016 (“2016 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 statement of the results for the interim periods have been reflected. The results for the Current Quarter and the Current Period are not necessarily indicative of the results to be expected for the full year.
Risks and Uncertainties
Our ability to grow, make capital expenditures and service our debt depends primarily upon the prices we receive for the oil, natural gas and natural gas liquids (NGL) we produce and sell. Substantial expenditures are required to replace reserves, sustain production and fund our business plans. Historically, oil and natural gas prices have been very volatile, and may be subject to wide fluctuations in the future. The substantial decline in oil, natural gas and NGL prices from 2014 levels has negatively affected the amount of liquidity we have available for capital expenditures and debt service. A substantial or extended decline in oil, natural gas and NGL prices could have a material impact on our financial position, results of operations, cash flows and on the quantities of reserves that we may economically produce. Other risks and uncertainties that could affect us in a low commodity price environment include, but are not limited to, counterparty credit risk for our receivables, access to capital markets, regulatory risks and our ability to meet financial ratios and covenants in our financing agreements.

8
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Revision of Previously Reported Condensed Consolidated Financial Statements
During the fourth quarter of 2016, we identified certain errors to the basis price differentials used in calculating the impairment of oil and natural gas properties and oil, natural gas and NGL depreciation, depletion and amortization for each of the first three interim periods in 2016. As disclosed within our 2016 Form 10-K, it was determined that these errors were not material to our previously issued 2016 interim financial statements. Accordingly, the correction of these errors and another immaterial previously identified error was reflected in the quarterly unaudited financial data included within our 2016 Form 10-K. These revisions have been reflected in the comparative 2016 condensed consolidated financi al statements presented herein. See Evaluation of Disclosure Controls and Procedure s in Item 4 of this Form 10-Q. The following table reconciles the amounts as previously reported in the applicable financial statement to the corresponding revised amounts:
 
 
Three Months Ended June 30, 2016
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
 
As Previously
Reported
 
Revision
Adjustment
 
As
Revised
 
 
($ in millions except per share data)
Provision for legal contingencies
 
$
82

 
$
(11
)
 
$
71

Oil, natural gas and NGL depreciation, depletion and amortization
 
$
265

 
$
12

 
$
277

Impairment of oil and natural gas properties
 
$
1,045

 
$
25

 
$
1,070

Total operating expenses
 
$
3,379

 
$
26

 
$
3,405

Loss from operations
 
$
(1,757
)
 
$
(26
)
 
$
(1,783
)
Loss before income taxes
 
$
(1,750
)
 
$
(26
)
 
$
(1,776
)
Net loss
 
$
(1,750
)
 
$
(26
)
 
$
(1,776
)
Net loss attributable to Chesapeake
 
$
(1,750
)
 
$
(26
)
 
$
(1,776
)
Net loss available to common stockholders
 
$
(1,792
)
 
$
(26
)
 
$
(1,818
)
Earnings (loss) per common share basic
 
$
(2.48
)
 
$
(0.03
)
 
$
(2.51
)
Earnings (loss) per common share diluted
 
$
(2.48
)
 
$
(0.03
)
 
$
(2.51
)
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
 
As Previously
Reported
 
Revision
Adjustment
 
As
Revised
 
 
($ in millions except per share data)
Provision for legal contingencies
 
$
104

 
$
—

 
$
104

Oil, natural gas and NGL depreciation, depletion and amortization
 
$
536

 
$
4

 
$
540

Impairment of oil and natural gas properties
 
$
1,898

 
$
169

 
$
2,067

Total operating expenses
 
$
6,284

 
$
173

 
$
6,457

Loss from operations
 
$
(2,709
)
 
$
(173
)
 
$
(2,882
)
Loss before income taxes
 
$
(2,671
)
 
$
(173
)
 
$
(2,844
)
Net loss
 
$
(2,671
)
 
$
(173
)
 
$
(2,844
)
Net loss attributable to Chesapeake
 
$
(2,671
)
 
$
(173
)
 
$
(2,844
)
Net loss available to common stockholders
 
$
(2,756
)
 
$
(173
)
 
$
(2,929
)
Earnings (loss) per common share basic
 
$
(3.97
)
 
$
(0.24
)
 
$
(4.21
)
Earnings (loss) per common share diluted
 
$
(3.97
)
 
$
(0.24
)
 
$
(4.21
)

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

 
 
Three Months Ended June 30, 2016
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (LOSS)
 
As Previously
Reported
 
Revision
Adjustment
 
As
Revised
 
 
($ in millions)
Net loss
 
$
(1,750
)
 
$
(26
)
 
$
(1,776
)
Comprehensive loss
 
$
(1,755
)
 
$
(26
)
 
$
(1,781
)
Comprehensive loss attributable to Chesapeake
 
$
(1,755
)
 
$
(26
)
 
$
(1,781
)
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (LOSS)
 
As Previously
Reported
 
Revision
Adjustment
 
As
Revised
 
 
($ in millions)
Net loss
 
$
(2,671
)
 
$
(173
)
 
$
(2,844
)
Comprehensive loss
 
$
(2,676
)
 
$
(173
)
 
$
(2,849
)
Comprehensive loss attributable to Chesapeake
 
$
(2,676
)
 
$
(173
)
 
$
(2,849
)
 
 
Six Months Ended June 30, 2016
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
 
As Previously
Reported
 
Revision
Adjustment
 
As
Revised
 
 
($ in millions)
Net loss
 
$
(2,671
)
 
$
(173
)
 
$
(2,844
)
Depreciation, depletion and amortization
 
$
594

 
$
4

 
$
598

Impairment of oil and natural gas properties
 
$
1,898

 
$
169

 
$
2,067

Provision for legal contingencies
 
$
104

 
$
—

 
$
104

Net cash used in operating activities
 
$
(326
)
 
$
—

 
$
(326
)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

2.
Earnings Per Share
Basic earnings per share (EPS) is calculated using the weighted average number of common shares outstanding during the period and includes the effect of any participating securities as appropriate. Participating securities consist of unvested restricted stock issued to our employees and non-employee directors that provide dividend rights.
Diluted EPS is calculated assuming the issuance of common shares for all potentially dilutive securities, provided the effect is not antidilutive. For the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, our contingent convertible senior notes did not have a dilutive effect and therefore were excluded from the calculation of diluted EPS. See Note 3 for further discussion of our convertible senior notes and contingent convertible senior notes.
For the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, shares of common stock for the following dilutive securities were excluded from the calculation of diluted EPS as the effect was antidilutive.
 
 
Shares
 
 
(in millions)
Three Months Ended June 30, 2017
 
 
Participating securities
 
1

Three Months Ended June 30, 2016
 
 
Common stock equivalent of our preferred stock outstanding:
 
 
5.75% cumulative convertible preferred stock
 
58

5.75% cumulative convertible preferred stock (series A)
 
42

5.00% cumulative convertible preferred stock (series 2005B)
 
6

4.50% cumulative convertible preferred stock
 
6

Participating securities
 
1

Six Months Ended June 30, 2017
 
 
Common stock equivalent of our preferred stock outstanding:
 
 
5.75% cumulative convertible preferred stock
 
31

5.75% cumulative convertible preferred stock (series A)
 
18

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

4.50% cumulative convertible preferred stock
 
6

Participating securities
 
1

Common stock equivalent of our preferred stock outstanding prior to exchange:
 
 
5.75% cumulative convertible preferred stock exchanged
 
1

Six Months Ended June 30, 2016
 
 
Common stock equivalent of our preferred stock outstanding:
 
 
5.75% cumulative convertible preferred stock
 
58

5.75% cumulative convertible preferred stock (series A)
 
42

5.00% cumulative convertible preferred stock (series 2005B)
 
6

4.50% cumulative convertible preferred stock
 
6

Participating securities
 
1


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

For the Current Quarter and the Current Period, outstanding stock options were included in the calculation of diluted EPS. A reconciliation of basic EPS and diluted EPS is as follows:
 
 
Income (Numerator)
 
Weighted
Average
Shares
(Denominator)
 
Per
Share
Amount  
 
 
(in millions, except per share data)
Three Months Ended June 30, 2017
 
 
 
 
 
 
Basic EPS
 
$
470

 
908

 
$
0.52

Effect of Dilutive Securities:
 
 
 
 
 
 
5.75% cumulative convertible preferred stock
 
11

 
31

 
 
5.75% cumulative convertible preferred stock
(series A)
 
7

 
18

 
 
5.00% cumulative convertible preferred stock
(series 2005B)
 
2

 
5

 
 
4.50% cumulative convertible preferred stock
 
3

 
6

 
 
5.5% convertible senior notes due 2026
 
36

 
146

 
 
Diluted EPS
 
$
529

 
1,114

 
$
0.47

 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
Basic EPS
 
$
547

 
907

 
$
0.60

Effect of Dilutive Securities:
 
 
 
 
 
 
5.5% convertible senior notes due 2026
 
72

 
146

 
 
Diluted EPS
 
$
619

 
1,053

 
$
0.59



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

3.
Debt
Our long-term debt consisted of the following as of June 30, 2017 and December 31, 2016:
 
 
June 30, 2017
 
December 31, 2016
 
 
Principal
Amount
 
Carrying
Amount
 
Principal
Amount
 
Carrying
Amount
 
 
($ in millions)
Term loan due 2021
 
$
1,500

 
$
1,500

 
$
1,500

 
$
1,500

6.25% euro-denominated senior notes due 2017 (a)
 
—

 
—

 
258

 
258

6.5% senior notes due 2017
 
—

 
—

 
134

 
134

7.25% senior notes due 2018
 
46

 
46

 
64

 
64

Floating rate senior notes due 2019
 
380

 
380

 
380

 
380

6.625% senior notes due 2020
 
572

 
572

 
780

 
780

6.875% senior notes due 2020
 
279

 
279

 
279

 
279

6.125% senior notes due 2021
 
550

 
550

 
550

 
550

5.375% senior notes due 2021
 
270

 
270

 
270

 
270

4.875% senior notes due 2022
 
451

 
451

 
451

 
451

8.00% senior secured second lien notes due 2022 (b)
 
1,737

 
2,385

 
2,419

 
3,409

5.75% senior notes due 2023
 
338

 
338

 
338

 
338

8.00% senior notes due 2025
 
1,000

 
1,000

 
1,000

 
1,000

5.5% convertible senior notes due 2026 (c)(e)
 
1,250

 
824

 
1,250

 
811

8.00% senior notes due 2027
 
750

 
750

 
—

 
—

2.75% contingent convertible senior notes due 2035 (d)
 
2

 
2

 
2

 
2

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

 
1

 
114

 
112

2.25% contingent convertible senior notes due 2038 (d)(e)
 
9

 
8

 
200

 
180

Revolving credit facility
 
575

 
575

 
—

 
—

Debt issuance costs
 
—

 
(65
)
 
—

 
(64
)
Discount on senior notes
 
—

 
(15
)
 
—

 
(16
)
Interest rate derivatives (f)
 
—

 
2

 
—

 
3

Total debt, net
 
9,710

 
9,853

 
9,989

 
10,441

Less current maturities of long-term debt, net (g)
 
(3
)
 
(3
)
 
(506
)
 
(503
)
Total long-term debt, net
 
$
9,707

 
$
9,850

 
$
9,483

 
$
9,938

___________________________________________
(a)
The principal and carrying amounts shown are based on the exchange rate of $1.0517 to €1.00 as of December 31, 2016. See Foreign Currency Derivatives in Note 8 for information on our related foreign currency derivatives.
(b)
The carrying amounts as of June 30, 2017 and December 31, 2016, include premium amounts of $648 million and $990 million , respectively, associated with a troubled debt restructuring. The premium is being amortized based on the effective yield method.
(c)
The conversion and redemption provisions of our convertible senior notes are as follows:
Optional Conversion by Holders . Prior to maturity under certain circumstances and at the holder’s option, the notes are convertible into cash, our common stock, or a combination of cash and common stock, at our election. One triggering circumstance is when the price of our common stock exceeds a threshold amount during

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

a specified period in a fiscal quarter. Convertibility based on common stock price is measured quarterly. During the second quarter of 2017, the price of our common stock was below the threshold level and, as a result, the holders do not have the option to convert their notes in the third quarter of 2017 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. The notes were not convertible under this provision during the Current Quarter. Upon conversion of a convertible senior note, the holder will receive cash, common stock or a combination of cash and common stock, at our election, according to the conversion rate specified in the indenture.
The common stock price conversion threshold amount for the convertible senior notes is 130% of the conversion price.
Optional Redemption by the Company . We may redeem the convertible senior notes for cash on or after September 15, 2019 , if the price of our common stock exceeds 130% of the conversion price during a specified period at a redemption price of 100% of the principal amount of the notes.
Holders’ Demand Repurchase Rights. The holders of our 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 upon certain fundamental changes.
(d)
The repurchase, conversion, contingent interest and redemption provisions of our contingent convertible senior notes are as follows:
Holders’ Demand Repurchase Rights . 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 and upon certain fundamental changes.
Optional Conversion by Holders . At the holder’s option, prior to maturity under certain circumstances, the notes are convertible into cash and, if applicable, our common stock using a net share settlement process. One triggering circumstance is when the price of our common stock exceeds a threshold amount during a specified period within a fiscal quarter. Convertibility based on common stock price is measured quarterly. During the specified period in the Current Quarter, the price of our common stock was below the threshold level for each series of the contingent convertible senior notes and, as a result, the holders do not have the option to convert their notes into cash or common stock in the third quarter of 2017 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. The notes were not convertible under this provision during the Current Quarter and the Prior Quarter. 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 the principal amount.
Contingent Interest. We will pay contingent interest on the contingent convertible senior notes after they have been outstanding at least ten years during certain periods if the average trading price of the notes exceeds the threshold defined in the indenture.
The holders’ demand repurchase dates, the common stock price conversion threshold amounts (as adjusted to give effect to cash dividends on our common stock) 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    
 
Holders' Demand
Repurchase Dates
 
Common Stock
 Price Conversion 
Thresholds
 
 Contingent Interest
First Payable
(if applicable)
 
2.75% due 2035
 
November 15, 2020, 2025, 2030
 
$
45.02

 
May 14, 2016
 
2.5% due 2037
 
May 15, 2022, 2027, 2032
 
$
59.44

 
November 14, 2017
 
2.25% due 2038
 
December 15, 2018, 2023, 2028, 2033
 
$
100.20

 
June 14, 2019
Optional Redemption by the Company. We may redeem the contingent 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. In July 2017, we redeemed our remaining 2.75% Contingent Convertible Senior Notes due 2035 and our 2.5% Contingent Convertible Senior Notes due 2037.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

(e)
The carrying amounts as of June 30, 2017 and December 31, 2016, are reflected net of discounts of $427 million and $461 million , respectively, associated with the equity component of our convertible and contingent convertible senior notes. This amount is being amortized based on the effective yield method through the first demand repurchase date as applicable.
(f)
See Interest Rate Derivatives in Note 8 for further discussion related to these instruments.
(g)
As of June 30, 2017 , current maturities of long-term debt, net includes our 2.75% Contingent Convertible Senior Notes due 2035 and our 2.5% Contingent Convertible Senior Notes due 2037. As discussed in footnote (d) above, we redeemed both series of these notes in July 2017.
Term Loan Facility
We have a secured five -year term loan facility in an aggregate principal amount of $1.5 billion . Our obligations under the facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries that guarantee our revolving credit facility, second lien notes and senior notes and are secured by first-priority liens on the same collateral securing our revolving credit facility (with a position in the collateral proceeds waterfall junior to the revolving credit facility). The term loan bears interest at a rate of London Interbank Offered Rate (LIBOR) plus 7.50% per annum, subject to a 1.00% LIBOR floor, or the Alternative Base Rate (ABR) plus 6.50% per annum, subject to a 2.00% ABR floor, at our option. The term loan matures in August 2021 and voluntary prepayments are subject to a make-whole premium prior to the second anniversary of the closing of the term loan, a premium to par of 4.25% from the second anniversary until but excluding the third anniversary, a premium to par of 2.125% from the third anniversary until but excluding the fourth anniversary and at par beginning on the fourth anniversary. The term loan may be subject to mandatory prepayments and offers to purchase with net cash proceeds of certain issuances of debt, certain asset sales and other dispositions of collateral and upon a change of control.
Senior Secured Second Lien Notes
Our second lien notes are secured second lien obligations and are effectively junior to our current and future secured first lien indebtedness, including indebtedness incurred under our revolving credit facility and our term loan facility, to the extent of the value of the collateral securing such indebtedness, effectively senior to all of our existing and future unsecured indebtedness, including our outstanding senior notes, to the extent of the value of the collateral, and senior to any future subordinated indebtedness that we may incur. We have the option to redeem the second lien notes, in whole or in part, at specified make-whole or redemption prices. Our second lien notes are governed by an indenture containing covenants that may limit our ability and our subsidiaries’ ability to create liens securing certain indebtedness, enter into certain sale-leaseback transactions, consolidate, merge or transfer assets and dispose of certain collateral and use proceeds from dispositions of certain collateral. As a holding company, Chesapeake owns no operating assets and has no significant operations independent of its subsidiaries. Chesapeake’s obligations under the second lien notes are fully and unconditionally guaranteed, jointly and severally, by certain of our direct and indirect wholly owned subsidiaries.
In December 2015, certain of the existing notes that were exchanged for the second lien notes were accounted for as a troubled debt restructuring (TDR). For the exchanges classified as a TDR, if the future undiscounted cash flows of the newly issued debt are less than the net carrying value of the original debt, a gain is recorded for the difference and the carrying value of the newly issued debt is adjusted to the future undiscounted cash flow amount and no future interest expense is recorded. All future interest payments on the newly issued debt reduce the carrying value.
Senior Notes, Contingent Convertible Senior Notes and Convertible Senior Notes
Our obligations under our outstanding senior notes and convertible senior notes are fully and unconditionally guaranteed, jointly and severally, by certain of our 100% owned subsidiaries on a senior unsecured basis. Our non-guarantor subsidiaries are minor and, as such, we have not included condensed consolidating financial information in the notes to our condensed consolidated financial statements.
We are required to account for the liability and equity components of our convertible debt instruments separately and to reflect interest expense through the first demand repurchase date, as applicable, at the interest rate of similar nonconvertible debt at the time of issuance. The applicable rates for our 2.5% Contingent Convertible Senior Notes due 2037, our 2.25% Contingent Convertible Senior Notes due 2038 and our 5.5% Convertible Senior Notes due 2026 are 8.0% , 8.0% and 11.5% , respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

During the Current Quarter, we issued in a private placement $750 million aggregate principal amount of unsecured 8.00% Senior Notes due 2027 at par for net proceeds of approximately $742 million . Some or all of the notes may be redeemed at any time prior to June 15, 2022, subject to a make-whole premium. We also may redeem some or all of the notes at any time on or after June 15, 2022, at the applicable redemption price in accordance with the terms of the notes and the indenture and supplemental indenture governing the notes. In addition, subject to certain conditions, we may redeem up to 35% of the aggregate principal amount of the notes at any time prior to June 15, 2020 , at a price equal to 108% of the principal amount of the notes to be redeemed using the net proceeds of certain equity offerings.
In the Current Period, we retired $1.604 billion principal amount of our outstanding senior notes, senior secured second lien notes and contingent convertible notes through purchases in the open market, tender offers or repayment upon maturity for $1.746 billion . Included in these retirements is the maturity of our 6.25% Euro-denominated Senior Notes due 2017, which were carried at $258 million based on the December 31, 2016 exchange rate of $1.0517 to €1.00 and the corresponding cross currency swap. See Foreign Currency Derivatives in Note 8 for further information. For the open market repurchases and tender offers, we recorded aggregate gains of approximately $191 million and $184 million in the Current Quarter and the Current Period, respectively.
In the Prior Period, we retired $558 million principal amount of our outstanding senior notes and contingent convertible senior notes through purchases in the open market or repayment upon maturity for $472 million . Additionally, we privately negotiated an exchange of approximately $577 million principal amount of our outstanding senior notes and contingent convertible senior notes for 109,351,707 common shares. We recorded an aggregate gain of approximately $168 million associated with these repurchases and exchanges, including $68 million in the Prior Quarter.
Revolving Credit Facility
We have a senior secured revolving credit facility currently subject to a $3.8 billion borrowing base that matures in December 2019. Our borrowing base may be reduced in certain circumstances, including if we dispose of a certain percentage of the value of collateral securing the revolving credit facility. As of June 30, 2017 , we had outstanding borrowings of $575 million under the revolving credit facility and had used $100 million of the revolving credit facility for various letters of credit. The terms of the revolving credit facility include covenants limiting, among other things, our ability to incur additional indebtedness, make investments or loans, create liens, consummate mergers and similar fundamental changes, make restricted payments, make investments in unrestricted subsidiaries and enter into transactions with affiliates. We were in compliance with all applicable financial covenants under the agreement as of June 30, 2017 . As of June 30, 2017 , we were able to borrow the full availability under the revolving credit facility.
On June 15, 2017, we completed a scheduled borrowing base redetermination review and our lenders reaffirmed our $3.8 billion borrowing base. Our next scheduled borrowing base redetermination is scheduled for the second quarter of 2018. On May 19, 2017, we entered into the fourth amendment to our revolving credit facility. Among other things, the amendment removed the requirement that we must concurrently prepay, repurchase or redeem or otherwise defease at least an equal amount of other borrowed money indebtedness with a stated maturity prior to December 15, 2019, if we optionally prepay, repurchase or redeem or otherwise defease other borrowed money indebtedness with a stated maturity after December 15, 2019.
During 2016, we entered into the third amendment to our revolving credit facility. The amendment reaffirmed our borrowing base and granted temporary financial covenant relief, with the revolving credit facility’s existing first lien secured leverage ratio and net debt to capitalization ratio suspended until September 30, 2017 (at which point the maximum first lien secured leverage ratio will be 3.50 to 1.0 through the period ending December 31, 2017 and 3.00 to 1.0 thereafter and the maximum net debt to capitalization ratio for each period will be 65% ) and the interest coverage ratio maintenance covenant reduced as noted below. In addition, we agreed to grant liens and security interests on a majority of our assets, as well as maintain a minimum liquidity amount (defined as cash and cash equivalents and availability under our revolving credit facility) of $500 million until the suspension of the existing maintenance covenants ends.
The third amendment reduced the interest coverage ratio to 0.70 to 1.0 for the second quarter of 2017, after which it will increase to 1.2 to 1.0 for the third quarter of 2017 and 1.25 to 1.0 thereafter. The amendment also gives us the ability to incur up to $2.5 billion of first lien indebtedness secured on a pari passu basis with the existing obligations under the credit agreement, subject to a position in the collateral proceeds waterfall in favor of the revolving lenders and affiliated hedge providers and the other limitations on junior lien debt set forth in the credit agreement. After taking

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

into account the term loan, the amount of additional first lien indebtedness permitted by the revolving credit facility is $1.0 billion .
Fair Value of Debt
We estimate the fair value of our senior notes based on the market value of our publicly traded debt as determined based on the yield of our senior notes (Level 1). The fair value of all other debt is based on a market approach using estimates provided by an independent investment financial data services firm (Level 2). Fair value is compared to the carrying value, excluding the impact of interest rate derivatives, in the table below.  
 
 
June 30, 2017
 
December 31, 2016
 
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
 
 
 
($ in millions)
 
 
Short-term debt (Level 1)
 
$
3

 
$
3

 
$
503

 
$
511

Long-term debt (Level 1)
 
$
2,876

 
$
2,791

 
$
3,271

 
$
3,216

Long-term debt (Level 2)
 
$
6,972

 
$
6,890

 
$
6,664

 
$
6,654

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 or may seek damages and penalties, the amount of which is indeterminate. 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 accrued 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.
Regulatory and Related Proceedings. The Company has received, from the U.S. Department of Justice (DOJ) and certain state governmental agencies and authorities, subpoenas and demands for documents, information and testimony in connection with investigations into possible violations of federal and state antitrust laws relating to our purchase and lease of oil and natural gas rights in various states. The Company also has received DOJ, U.S. Postal Service and state subpoenas seeking information on the Company’s royalty payment practices. Chesapeake has engaged in discussions with the DOJ, U.S. Postal Service and state agency representatives and continues to respond to such subpoenas and demands.
In addition, the Company received a DOJ subpoena and a voluntary document request from the SEC seeking information on our accounting methodology for the acquisition and classification of oil and natural gas properties and related matters. On October 4, 2016, a securities class action was filed in the U.S. District Court for the Western District of Oklahoma against the Company and certain current directors and officers of the Company alleging, among other things, violations of federal securities laws for purported misstatements in the Company’s SEC filings and other public disclosures regarding the Company’s accounting for the acquisition and classification of oil and natural gas properties. On June 20, 2017, the DOJ orally advised Chesapeake that it was closing its investigation, and on July 17, 2017, the SEC indicated by letter that it had concluded its investigation and that it did not intend to recommend an enforcement action on the matter. The related securities class action was dismissed on March 14, 2017.
On July 10, 2017, Chesapeake, its Benefits Committee, its Investment Committee and certain employees were named as defendants in a purported Employee Retirement Income Security Act of 1974 (ERISA) class action filed in the United States District Court for the Western District of Oklahoma (the “ERISA Lawsuit”). The ERISA Lawsuit alleges violations of Sections 404, 405, 409 and 502 of ERISA with respect to the Company’s common stock held in its Savings and Incentive Stock Bonus Plan (the “Plan”). The plaintiffs seek to represent a class of persons who were participants in the Plan after June 1, 2014. The plaintiffs also seek damages, imposition of a constructive trust and other relief, including attorneys’ fees, based on allegations that the defendants breached their fiduciary duties by continuing to allow the Company’s common stock to remain as an investment option under the Plan during the class period.
Business Operations. Chesapeake is involved in various other lawsuits and disputes incidental to its business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions.
Regarding royalty claims, Chesapeake and other natural gas producers have been named in various lawsuits alleging royalty underpayment. The suits against us allege, among other things, that we used below-market prices, made improper deductions, used improper measurement techniques and/or entered into arrangements with affiliates that resulted in underpayment of royalties in connection with the production and sale of natural gas and NGL. Plaintiffs have varying royalty provisions in their respective leases, oil and gas law varies from state to state, and royalty owners and producers differ in their interpretation of the legal effect of lease provisions governing royalty calculations. The Company has resolved a number of these claims through negotiated settlements of past and future royalties and has prevailed in various other lawsuits. We are currently defending lawsuits seeking damages with respect to royalty underpayment in various states, including, but not limited to, Texas, Pennsylvania, Ohio, Oklahoma, Kentucky, Louisiana and Arkansas. These lawsuits include cases filed by individual royalty owners and putative class actions, some of which seek to certify a statewide class.
Chesapeake is defending numerous lawsuits filed by individual royalty owners alleging royalty underpayment with respect to properties in Texas. These lawsuits, organized for pre-trial proceedings with respect to the Barnett Shale and Eagle Ford Shale, respectively, generally allege that Chesapeake underpaid royalties by making improper deductions, using incorrect production volumes and similar theories. Chesapeake expects that additional lawsuits will continue to be pursued and that new plaintiffs will file other lawsuits making similar allegations.
On December 9, 2015, the Commonwealth of Pennsylvania, by the Office of Attorney General, filed a lawsuit in the Bradford County Court of Common Pleas related to royalty underpayment and lease acquisition and accounting practices with respect to properties in Pennsylvania. The lawsuit, which primarily relates to the Marcellus Shale and Utica Shale, alleges that Chesapeake violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL) by making improper deductions and entering into arrangements with affiliates that resulted in underpayment of royalties. The lawsuit includes other UTPCPL claims and antitrust claims, including that a joint exploration agreement to which Chesapeake is a party established unlawful market allocation for the acquisition of leases. The lawsuit seeks statutory restitution, civil penalties and costs, as well as temporary injunction from exploration and drilling activities in Pennsylvania until restitution, penalties and costs have been paid and permanent injunction from further violations of the UTPCPL.
Putative statewide class actions in Pennsylvania and Ohio and purported class arbitrations in Pennsylvania have been filed on behalf of royalty owners asserting various claims for damages related to alleged underpayment of royalties as a result of the Company’s divestiture of substantially all of its midstream business and most of its gathering assets in 2012 and 2013. These cases include claims for violation of and conspiracy to violate the federal Racketeer Influenced and Corrupt Organizations Act and for an unlawful market allocation agreement for mineral rights. One of the cases includes claims of intentional interference with contractual relations and violations of antitrust laws related to purported markets for gas mineral rights, operating rights and gas gathering sources.
We believe losses are reasonably possible in certain of the pending royalty cases for which we have not accrued a loss contingency, but we are currently unable to estimate an amount or range of loss or the impact the actions could have on our future results of operations or cash flows. Uncertainties in pending royalty cases generally include the complex nature of the claims and defenses, the potential size of the class in class actions, the scope and types of the properties and agreements involved, and the applicable production years.
The Company is also defending lawsuits alleging various violations of the Sherman Antitrust Act and state antitrust laws. In 2016, putative class action lawsuits were filed in the U.S. District Court for the Western District of Oklahoma and in Oklahoma state courts, and an individual lawsuit was filed in the U.S. District Court of Kansas, in each case against the Company and other defendants. The lawsuits generally allege that, since 2007 and continuing through April 2013, the defendants conspired to rig bids and depress the market for the purchases of oil and natural gas leasehold interests and properties in the Anadarko Basin containing producing oil and natural gas wells. The lawsuits seek damages, attorney’s fees, costs and interest, as well as enjoinment from adopting practices or plans that would restrain competition in a similar manner as alleged in the lawsuits.
Other Matters
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 future 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 Contingencies
The nature of the oil and gas business carries with it certain environmental risks for Chesapeake and its subsidiaries. Chesapeake has implemented various policies, programs, 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 established 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 address 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.
Commitments
Gathering, Processing and Transportation Agreements
We have contractual commitments with midstream service companies and pipeline carriers for future gathering, processing and transportation of oil, natural gas and NGL 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 as obligations in the accompanying condensed consolidated balance sheets.
The aggregate undiscounted commitments under our gathering, processing and transportation agreements, excluding any reimbursement from working interest and royalty interest owners, credits for third-party volumes or future costs under cost-of-service agreements, are presented below.
 
 
June 30,
2017
 
 
($ in millions)
2017
 
$
664

2018
 
1,096

2019
 
1,061

2020
 
990

2021
 
894

2022 – 2035
 
5,213

Total
 
$
9,918

In addition, we have entered into long-term agreements for certain natural gas gathering and related services within specified acreage dedication areas in exchange for cost-of-service based fees redetermined annually, or tiered fees based on volumes delivered relative to scheduled volumes. Future gathering fees vary with the applicable agreement.
Drilling Contracts
We have contracts with various drilling contractors to utilize drilling services at market-based pricing. These commitments are not recorded as obligations in the accompanying condensed consolidated balance sheets. As of June 30, 2017 , the aggregate undiscounted minimum future payments under these drilling service commitments were approximately $49 million .

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

Oil, Natural Gas and NGL Purchase Commitments
We commit to purchase oil, natural gas and NGL from other owners in the properties we operate, including owners associated with our volumetric production payment (VPP) transactions. Production purchases under these arrangements are based on market prices at the time of production, and the purchased oil, natural gas and NGL are resold at market prices. See Volumetric Production Payments in Note 9 for further discussion of our VPP transactions.
Net Acreage Maintenance Commitments
Under the terms of our Utica Shale joint venture agreements with Total S.A., we are obligated to extend, renew or replace certain expiring joint leasehold, at our cost, to ensure that the net acreage maintenance level is met as of the December 31, 2017 measurement date.
Other Commitments
As part of our normal course of business, we enter into various agreements providing, or otherwise arranging for, 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 acquisitions and 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 and/or other specified matters. 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 entering into or consummating a particular transaction. For divestitures of oil and natural gas properties, our purchase and sale agreements may require the return of a portion of the proceeds we receive as a result of uncured title defects.
Certain of our oil and natural gas 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 these interests have been created, we have the responsibility to bear the cost of developing and producing the reserves attributable to these interests. See Volumetric Production Payments in Note 9 for further discussion of our VPP transactions.
While executing our strategic priorities, we have incurred certain cash charges, including contract termination charges, financing extinguishment costs and charges for unused natural gas transportation and gathering capacity. As we continue to focus on our strategic priorities, we may take certain actions that reduce financial leverage and complexity, and we may incur additional cash and noncash charges.

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

5.
Other Liabilities
Other current liabilities as of June 30, 2017 and December 31, 2016 are detailed below.
 
 
June 30,
2017
 
December 31,
2016
 
 
($ in millions)
Revenues and royalties due others
 
$
481

 
$
543

Accrued drilling and production costs
 
259

 
169

Joint interest prepayments received
 
72

 
71

Accrued compensation and benefits
 
158

 
239

Other accrued taxes
 
58

 
32

Bank of New York Mellon legal accrual (a)
 
—

 
440

Other
 
269

 
304

Total other current liabilities
 
$
1,297

 
$
1,798

____________________________________________
(a)
In the Current Quarter, we received notice from the U.S. Supreme Court that it would not review our appeal of the decision by the U.S. District Court for the Southern District of New York regarding the redemption at par value of our 6.775% Senior Notes due 2019. As a result of the decision, we paid $441 million with cash on hand and borrowings under the credit facility, and the related supersedeas bond was released.
Other long-term liabilities as of June 30, 2017 and December 31, 2016 are detailed below.
 
 
June 30,
2017
 
December 31,
2016
 
 
($ in millions)
CHK Utica ORRI conveyance obligation (a)
 
$
164

 
$
160

Unrecognized tax benefits
 
98

 
97

Other
 
112

 
126

Total other long-term liabilities
 
$
374

 
$
383

____________________________________________
(a)
The CHK Utica L.L.C. investors’ right to receive proportionately a 3% overriding royalty interest (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 through 2023. The liability represents the obligation to deliver future ORRIs. As of June 30, 2017 , and December 31, 2016, approximately $30 million and $43 million of the total ORRI obligations are recorded in other current liabilities.

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

6.
Equity
Common Stock
A summary of the changes in our common shares issued for the Current Period and the Prior Period is detailed below.
 
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
 
(in thousands)
Shares issued as of January 1
 
896,279

 
664,796

Exchange of convertible notes
 
—

 
55,428

Exchange of senior notes
 
—

 
53,924

Exchange/conversion of preferred stock
 
9,966

 
1,021

Restricted stock issuances (net of forfeitures and cancellations)
 
1,732

 
1,529

Shares issued as of June 30
 
907,977


776,698

During the Current Quarter, our shareholders approved an amendment to our certificate of incorporation to increase our authorized common stock to 2,000,000,000 shares, par value $0.01 per share.
Preferred Stock
Outstanding shares of our preferred stock for the Current Period and the Prior Period are detailed below.
 
 
5.75%
 
5.75% (A)
 
4.50%
 
5.00%
(2005B)  
 
 
(in thousands)
Shares outstanding as of January 1, 2017
 
843

 
476

 
2,559

 
1,962

Preferred stock conversions/exchanges (a)
 
(73
)
 
(13
)
 
—

 
(151
)
Shares outstanding as of June 30, 2017
 
770

 
463

 
2,559

 
1,811

 
 
 
 
 
 
 
 
 
Shares outstanding as of January 1, 2016
 
1,497

 
1,100

 
2,559

 
2,096

Preferred stock conversions/exchanges (b)
 
(25
)
 
(1
)
 
—

 
—

Shares outstanding as of June 30, 2016
 
1,472

 
1,099

 
2,559

 
2,096

____________________________________________
(a)
In the Current Period, holders of our 5.75% Cumulative Convertible Preferred Stock exchanged 72,600 shares into 7,442,156 shares of common stock, holders of our 5.75% (Series A) Cumulative Convertible Preferred Stock exchanged 12,500 shares into 1,205,923 shares of common stock and holders of our 5.00% (Series 2005B) Cumulative Convertible Preferred Stock exchanged 150,948 shares into 1,317,756 shares of common stock. In connection with the exchanges, we recognized a loss equal to the excess of the fair value of all common stock issued in exchange for the preferred stock over the fair value of the common stock issuable pursuant to the original terms of the preferred stock. The loss of $41 million is reflected as a reduction to net income available to common stockholders for the purpose of calculating earnings per common share.
(b)
In the Prior Period, holders of our 5.75% Cumulative Convertible Preferred Stock converted 24,601 shares into 975,488 shares of common stock and holders of our 5.75% (Series A) Cumulative Convertible Preferred Stock converted 1,201 shares into 46,018 shares of common stock.

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

Dividends
Dividends declared on our preferred stock are reflected as adjustments to retained earnings to the extent a surplus of retained earnings exists after giving effect to the dividends. To the extent retained earnings are insufficient to fund the distributions, 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.
In the Prior Period, we suspended dividend payments on our convertible preferred stock to provide additional liquidity in the depressed commodity price environment. In the Current Period, we reinstated the payment of dividends on each series of our outstanding convertible preferred stock and paid our dividends in arrears.
Accumulated Other Comprehensive Income (Loss)
For the Current Period and the Prior Period, changes in accumulated other comprehensive income (loss) for cash flow hedges, net of tax, are detailed below.
 
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
 
($ in millions)
Balance, as of January 1
 
$
(96
)
 
$
(99
)
Other comprehensive income (loss) before reclassifications
 
4

 
(19
)
Amounts reclassified from accumulated other comprehensive income
 
17

 
14

Net other comprehensive income (loss)
 
21

 
(5
)
Balance, as of June 30
 
$
(75
)
 
$
(104
)
For the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, net losses on cash flow hedges for commodity contracts reclassified from accumulated other comprehensive income (loss), net of tax, to oil, natural gas and NGL revenues in the condensed consolidated statements of operations were $7 million , $10 million , $17 million and $14 million , respectively.

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

7.
Share-Based Compensation
Chesapeake’s share-based compensation program consists of restricted stock, stock options and performance share units (PSUs) granted to employees and restricted stock granted to non-employee directors under our long term incentive plans. The restricted stock and stock options are equity-classified awards and the PSUs are liability-classified awards.
Equity-Classified Awards
Restricted Stock. We grant restricted stock units to employees and non-employee directors. A summary of the changes in unvested restricted stock during the Current Period is presented below.
 
 
Shares of
Unvested
Restricted Stock
 
Weighted Average
Grant Date
Fair Value
 
 
(in thousands)
 
 
Unvested restricted stock as of January 1, 2017
 
9,092

 
$
11.39

Granted
 
9,457

 
$
5.46

Vested
 
(3,547
)
 
$
14.33

Forfeited
 
(737
)
 
$
9.38

Unvested restricted stock as of June 30, 2017
 
14,265

 
$
6.83

The aggregate intrinsic value of restricted stock that vested during the Current Period was approximately $21 million based on the stock price at the time of vesting.
As of June 30, 2017 , there was approximately $70 million of total unrecognized compensation expense related to unvested restricted stock. The expense is expected to be recognized over a weighted average period of approximately 2.09 years.
Stock Options. In the Current Period and the Prior Period, we granted members of management stock options that vest ratably over a three -year period. Each stock option award has an exercise price equal to the closing price of the Company’s common stock on the grant date. Outstanding options expire seven to ten years from the date of grant.
We utilize the Black-Scholes option pricing model to measure the fair value of stock options. The expected life of an option is determined using the simplified method. Volatility assumptions are estimated based on an average of historical volatility of Chesapeake stock over the expected life of an option. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the grant over the expected life of the option. The dividend yield is based on an annual dividend yield, taking into account the Company's dividend policy, over the expected life of the option. The Company used the following weighted average assumptions to estimate the grant date fair value of the stock options granted in the Current Period.
Expected option life – years
 
6.0

Volatility
 
62.42
%
Risk-free interest rate
 
2.17
%
Dividend yield
 
—
%

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

The following table provides information related to stock option activity in the Current Period. 
 
 
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 as of January 1, 2017
 
8,593

 
$
11.88

 
7.22
 
$
14

Granted
 
9,226

 
$
5.45

 
 
 
 
Exercised
 
—

 
$
—

 
 
 
$
—

Expired
 
(277
)
 
$
18.74

 
 
 
 
Forfeited
 
(806
)
 
$
10.45

 
 
 
 
Outstanding as of June 30, 2017
 
16,736

 
$
8.29

 
8.18
 
$
5

Exercisable as of June 30, 2017
 
4,738

 
$
15.37

 
5.44
 
$
2

___________________________________________
(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, 2017 , there was $29 million of total unrecognized compensation expense related to stock options. The expense is expected to be recognized over a weighted average period of approximately 2.50 years .
Restricted Stock and Stock Option Compensation. We recognized the following compensation costs related to restricted stock and stock options for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period.
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
($ in millions)
General and administrative expenses
 
$
12

 
$
10

 
$
20

 
$
18

Oil and natural gas properties
 
3

 
5

 
7

 
9

Oil, natural gas and NGL production expenses
 
4

 
3

 
7

 
6

Marketing, gathering and compression expenses
 
—

 
—

 
—

 
1

Total restricted stock and stock option compensation
 
$
19

 
$
18

 
$
34

 
$
34

Liability-Classified Awards
Performance Share Units. We have granted PSUs to senior management that vest ratably over a three -year term and are settled in cash on the third anniversary of the awards. The ultimate amount earned is based on achievement of performance metrics established by the Compensation Committee of the Board of Directors, which include total shareholder return (TSR) and, for certain of the awards, operational performance goals, such as finding and development costs and production levels.
For PSUs granted, the TSR component can range from 0% to 100% and the operational component can range from 0% to 100% , resulting in a maximum payout of 200% . Compensation expense associated with PSU grants is recognized over the service period based on the graded-vesting method. The value of the PSU awards at the end of each reporting period is dependent upon the Company’s estimates of the underlying performance measures. The payout percentage for all PSU grants is capped at 100% if the Company’s absolute TSR is less than zero . The Company utilized a Monte Carlo simulation for the TSR performance measure and the following assumptions to determine the grant date fair value of the PSUs.
Volatility
 
83.94
%
Risk-free interest rate
 
1.47
%
Dividend yield for value of awards
 
—
%

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

The following table presents a summary of our 2017, 2016 and 2015 PSU awards.
 
 
 
 
Grant Date
Fair Value
 
June 30, 2017
 
 
Units
 
 
Fair Value
 
Vested Liability
 
 
 
 
($ in millions)
 
($ in millions)
2017 Awards:
 
 
 
 
 
 
 
 
Payable 2020
 
1,217,774

 
$
8

 
$
7

 
$
2

2016 Awards:
 
 
 
 
 
 
 
 
Payable 2019
 
2,348,893

 
$
10

 
$
14

 
$
10

2015 Awards:
 
 
 
 
 
 
 
 
Payable 2018
 
629,694

 
$
13

 
$
2

 
$
1

PSU Compensation. We recognized the following compensation costs (credits) related to PSUs for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period.
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
($ in millions)
General and administrative expenses
 
$
—

 
$
1

 
$
(2
)
 
$
3

Restructuring and other termination costs
 
—

 
—

 
—

 
1

Total PSU compensation
 
$
—

 
$
1

 
$
(2
)
 
$
4


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

8.
Derivative and Hedging Activities
Chesapeake uses derivative instruments to secure attractive pricing and margins on its share of expected production, to reduce its exposure to fluctuations in future commodity prices and to protect its expected operating cash flow against significant market movements or volatility. Chesapeake also uses derivative instruments, when applicable, to mitigate a portion of its exposure to foreign currency exchange rate fluctuations. All of our commodity 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. None of our derivative instruments were designated for hedge accounting as of June 30, 2017 and December 31, 2016.
Oil, Natural Gas and NGL Derivatives
As of June 30, 2017 and December 31, 2016, our oil, natural gas and NGL 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 the excess on sold call options and Chesapeake receives the 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.
•
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 prices, no payments are due from either party.
•
Basis Protection Swaps : These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. Chesapeake receives the fixed price differential and pays the floating market price differential to the counterparty for the hedged commodity.
The estimated fair values of our oil, natural gas and NGL derivative instrument assets (liabilities) as of June 30, 2017 and December 31, 2016 are provided below. 
 
 
June 30, 2017
 
December 31, 2016
 
 
Volume
 
Fair Value
 
Volume
 
Fair Value
 
 
 
 
($ in millions)  
 
 
 
($ in millions)  
Oil (mmbbl):
 
 
 
 
 
 
 
 
Fixed-price swaps
 
13

 
$
45

 
23

 
$
(140
)
Call options
 
3

 
—

 
5

 
(1
)
Total oil
 
16

 
45

 
28

 
(141
)
Natural gas (tbtu):
 
 
 
 
 
 
 
 
Fixed-price swaps
 
704

 
28

 
719

 
(349
)
Collars
 
71

 
10

 
60

 
(9
)
Call options
 
90

 
—

 
114

 
—

Basis protection swaps
 
13

 
(2
)
 
31

 
(5
)
Total natural gas
 
878

 
36

 
924

 
(363
)
NGL (mmgal):
 
 
 
 
 
 
 
 
Fixed-price swaps
 
—

 
—

 
53

 
—

Total estimated fair value
 
 
 
$
81

 
 
 
$
(504
)
We have terminated certain commodity derivative contracts that were previously designated as cash flow hedges for which the hedged production is still expected to occur. See further discussion below under Effect of Derivative Instruments – Accumulated Other Comprehensive Income (Loss) .

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

Interest Rate Derivatives
As of June 30, 2017 and December 31, 2016, there were no interest rate derivatives outstanding.
We have terminated fair value hedges related to certain of our 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 three years , we will recognize $2 million in net gains related to these transactions.
Foreign Currency Derivatives
During the Current Period, both our 6.25% Euro-denominated Senior Notes due 2017 and cross currency swaps for the same principal amount matured. Upon maturity of the notes, t he counterparties paid us €246 million and we paid the counterparties $327 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. The swaps were designated as cash flow hedges and, because they were entirely effective in having eliminated any potential variability in our expected cash flows related to changes in foreign exchange rates, changes in their fair value did not impact earnings. The fair values of the cross currency swaps were recorded on the condensed consolidated balance sheet as a liability of $73 million as of December 31, 2016.
Supply Contract Derivatives

From time to time and in the normal course of business, our marketing subsidiary enters into supply contracts under which we commit to deliver a predetermined quantity of natural gas to certain counterparties in an attempt to earn attractive margins. Under certain contracts, we receive a sales price that is based on the price of a product other than natural gas, thereby creating an embedded derivative requiring bifurcation. The bifurcated derivative is measured at fair value on a quarterly basis and resulted in an unrealized loss of $37 million and $17 million in the Prior Quarter and the Prior Period, respectively. Both settlements and mark-to-market gains (losses) are included in marketing, gathering and compression revenues in our condensed consolidated statements of operations. This supply contract was sold in the third quarter of 2016.

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

Effect of Derivative Instruments – Condensed Consolidated Balance Sheets
The following table presents the fair value and location of each classification of derivative instrument included in the condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016 on a gross basis and after same-counterparty netting: 
Balance Sheet Classification
 
Gross
Fair Value
 
Amounts Netted
in the
Condensed
Consolidated
Balance Sheets
 
Net Fair Value
Presented in the
Condensed
Consolidated
Balance Sheet
 
 
($ in millions)
As of June 30, 2017
 
 
 
 
 
 
Commodity Contracts:
 
 
 
 
 
 
Short-term derivative asset
 
$
92

 
$
(21
)
 
$
71

Short-term derivative liability
 
(24
)
 
21

 
(3
)
Long-term derivative asset
 
14

 
—

 
14

Long-term derivative liability
 
(1
)
 
—

 
(1
)
Total commodity contracts
 
81

 
—

 
81

Total derivatives
 
$
81

 
$
—

 
$
81

 
 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
 
Commodity Contracts:
 
 
 
 
 
 
Short-term derivative asset
 
$
1

 
$
(1
)
 
$
—

Short-term derivative liability
 
(490
)
 
1

 
(489
)
Long-term derivative liability
 
(15
)
 
—

 
(15
)
Total commodity contracts
 
(504
)
 
—

 
(504
)
Foreign Currency Contracts: (a)
 
 
 
 
 
 
Short-term derivative liability
 
(73
)
 
—

 
(73
)
Total foreign currency contracts
 
(73
)
 
—

 
(73
)
Total derivatives
 
$
(577
)
 
$
—

 
$
(577
)
____________________________________________
(a)
Designated as cash flow hedging instruments.
As of June 30, 2017 and December 31, 2016, we did not have any cash collateral balances for these derivatives.

27
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Effect of Derivative Instruments – Condensed Consolidated Statements of Operations
The components of oil, natural gas and NGL revenues 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,
 
 
2017
 
2016
 
2017
 
2016
 
 
($ in millions)
Oil, natural gas and NGL revenues
 
$
1,079

 
$
884

 
$
2,226

 
$
1,696

Gains (losses) on undesignated oil, natural gas
and NGL derivatives
 
207

 
(438
)
 
539

 
(246
)
Losses on terminated cash flow hedges
 
(7
)
 
(6
)
 
(17
)
 
(17
)
Total oil, natural gas and NGL revenues
 
$
1,279

 
$
440

 
$
2,748

 
$
1,433

The components of marketing, gathering and compression revenues 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,
 
 
2017
 
2016
 
2017
 
2016
 
 
($ in millions)
Marketing, gathering and compression revenues
 
$
1,002

 
$
1,219

 
$
2,286

 
$
2,159

Losses on undesignated supply contract derivatives
 
—

 
(37
)
 
—

 
(17
)
Total marketing, gathering and compression revenues
 
$
1,002

 
$
1,182

 
$
2,286

 
$
2,142

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,
 
 
2017
 
2016
 
2017
 
2016
 
 
($ in millions)
Interest expense on senior notes
 
$
136

 
$
148

 
$
272

 
$
305

Interest expense on term loan
 
32

 
—

 
64

 
—

Amortization of loan discount, issuance costs and other
 
6

 
7

 
15

 
18

Amortization of premium associated with troubled debt restructuring
 
(42
)
 
(41
)
 
(83
)
 
(83
)
Interest expense on revolving credit facilities
 
8

 
12

 
17

 
17

Gains on terminated fair value hedges
 
—

 
(1
)
 
—

 
(1
)
(Gains) losses on undesignated interest rate derivatives
 
—

 
—

 
1

 
—

Capitalized interest
 
(47
)
 
(63
)
 
(98
)
 
(132
)
Total interest expense
 
$
93

 
$
62

 
$
188

 
$
124


28
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Effect of Derivative Instruments – Accumulated Other Comprehensive Income (Loss)
A reconciliation of the changes in accumulated other comprehensive income (loss) in our condensed consolidated statements of stockholders’ equity related to our cash flow hedges is presented below.  
 
 
Three Months Ended June 30,
 
 
2017
 
2016
 
 
Before 
Tax  
 
After 
Tax  
 
Before 
Tax  
 
After 
Tax  
 
 
($ in millions)
Balance, beginning of period
 
$
(139
)
 
$
(82
)
 
$
(156
)
 
$
(99
)
Net change in fair value
 
—

 
—

 
(13
)
 
(15
)
Losses reclassified to income
 
7

 
7

 
6

 
10

Balance, end of period
 
$
(132
)
 
$
(75
)
 
$
(163
)
 
$
(104
)
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
2017
 
2016
 
 
Before 
Tax  
 
After 
Tax  
 
Before 
Tax  
 
After 
Tax  
 
 
($ in millions)
Balance, beginning of period
 
$
(153
)
 
$
(96
)
 
$
(160
)
 
$
(99
)
Net change in fair value
 
4

 
4

 
(20
)
 
(19
)
Losses reclassified to income
 
17

 
17

 
17

 
14

Balance, end of period
 
$
(132
)
 
$
(75
)
 
$
(163
)
 
$
(104
)
The accumulated other comprehensive loss, as of June 30, 2017 , represents the net deferred loss associated with commodity derivative contracts that were previously designated as cash flow hedges for which the hedged production is still expected to occur. Deferred gain or loss amounts will be recognized in earnings in the month in which the originally forecasted hedged production occurs. As of June 30, 2017 , we expect to transfer approximately $20 million of net loss included in accumulated other comprehensive income to net income (loss) during the next 12 months. The remaining amounts will be transferred by December 31, 2022.
Credit Risk Considerations
Our derivative instruments expose us to our counterparties’ credit risk. 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, 2017 , our oil, natural gas and NGL derivative instruments were spread among 10 counterparties.
Hedging Arrangements
Certain of our hedging arrangements are with counterparties that are also lenders (or affiliates of lenders) under our revolving credit facility. The contracts entered into with these counterparties are secured by the same collateral that secures our revolving credit facility, which allows us to reduce any letters of credit posted as security with those counterparties. In addition, with other counterparties we enter into bilateral hedging agreements. The counterparties’ and our obligations under certain of the bilateral hedging agreements must be secured by cash or letters of credit to the extent that any mark-to-market amounts owed to us or by us exceed defined thresholds.

29
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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Fair Value
The fair value of our derivatives is based on third-party pricing models which utilize inputs that are either readily available in the public market, such as oil, natural gas and NGL forward curves and discount rates, or can be corroborated from active markets or broker quotes. These values are compared to the values given by our counterparties for reasonableness. Since oil, natural gas, NGL 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. 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.
The following table provides information for financial assets (liabilities) measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016:  
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
 
 
 
 
($ in millions)
 
 
As of June 30, 2017
 
 
 
 
 
 
 
 
Derivative Assets (Liabilities):
 
 
 
 
 
 
 
 
Commodity assets
 
$
—

 
$
97

 
$
10

 
$
107

Commodity liabilities
 
—

 
(26
)
 
—

 
(26
)
Total derivatives
 
$
—

 
$
71

 
$
10

 
$
81

 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
 
 
 
Derivative Assets (Liabilities):
 
 
 
 
 
 
 
 
Commodity assets
 
$
—

 
$
1

 
$
—

 
$
1

Commodity liabilities
 
—

 
(495
)
 
(10
)
 
(505
)
Foreign currency liabilities
 
—

 
(73
)
 
—

 
(73
)
Total derivatives
 
$
—

 
$
(567
)
 
$
(10
)
 
$
(577
)


30
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

A summary of the changes in the fair values of Chesapeake’s financial assets (liabilities) classified as Level 3 during the Current Period and the Prior Period is presented below.  
 
 
Commodity
Derivatives
 
Supply
Contracts
 
 
($ in millions)
Balance, as of January 1, 2017
 
$
(10
)
 
$
—

Total gains (losses) (realized/unrealized):
 
 
 
 
Included in earnings (a)
 
19

 
—

Total purchases, issuances, sales and settlements:
 
 
 
 
Settlements
 
1

 
—

Balance, as of June 30, 2017
 
$
10

 
$
—

 
 
 
 
 
Balance, as of January 1, 2016
 
$
(91
)
 
$
297

Total gains (losses) (realized/unrealized):
 
 
 
 
Included in earnings (a)
 
(8
)
 
13

Total purchases, issuances, sales and settlements:
 
 
 
 
Settlements
 
28

 
(30
)
Balance, as of June 30, 2016
 
$
(71
)
 
$
280

___________________________________________
(a)
 
 
Oil, Natural Gas
and NGL
Sales
 
Marketing, Gathering and Compression Revenue
 
 
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
($ in millions)
 
Total gains (losses) included in earnings for the period
 
$
19

 
$
(8
)
 
$
—

 
$
(17
)
 
Change in unrealized gains (losses) related to assets still held at reporting date
 
$
12

 
$
(20
)
 
$
—

 
$
(17
)
Qualitative and Quantitative 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, market volatility and credit risk of counterparties. Changes in these inputs impact the fair value measurement of our derivative contracts, which is based on an estimate derived from option models. For example, an increase or decrease in the forward prices and volatility of oil and natural gas prices decreases or increases the fair value of oil and natural gas derivatives, and adverse changes to our counterparties’ creditworthiness decreases the fair value of our derivatives. The following table presents quantitative information about Level 3 inputs used in the fair value measurement of our commodity derivative contracts at fair value as of June 30, 2017 :
Instrument
Type
 
Unobservable
Input
 
Range
 
Weighted
Average
 
Fair Value
June 30, 2017
 
 
 
 
 
 
 
 
($ in millions)
Oil trades
 
Oil price volatility curves
 
19.14% – 26.38%
 
24.85%
 
$
—

Natural gas trades
 
Natural gas price volatility
curves
 
20.78% – 56.51%
 
43.10%
 
$
10



31
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

9.
Oil and Natural Gas Property Transactions
Under full cost accounting rules, we accounted for the sales of oil and natural gas properties discussed below as adjustments to capitalized costs, with no recognition of gain or loss as the sales did not involve a significant change in proved reserves or significantly alter the relationship between costs and proved reserves.
In the Current Period, we sold portions of our acreage and producing properties in our Haynesville Shale operating area in northern Louisiana for approximately $915 million , subject to certain customary closing adjustments. Included in the sales were approximately 119,500 net acres and interests in 576 wells that were producing approximately 80 mmcf of gas per day at the time of closing.
Also in the Current Quarter and the Current Period, we received proceeds of $63 million and $83 million , respectively, for the sale of other oil and natural gas properties.
In the Prior Quarter and the Prior Period, we sold certain of our noncore oil and natural gas properties for net proceeds of approximately $833 million and $964 million , respectively, after post-closing adjustments. In conjunction with certain of these sales, we purchased oil and natural gas interests previously sold to third parties in connection with four of our VPP transactions for approximately $259 million . A majority of the acquired interests were part of the asset divestitures discussed above and we no longer have any further commitments or obligations related to these VPPs. The asset divestitures cover various operating areas.
Volumetric Production Payments
From time to time, we have sold certain of our producing assets located in more mature producing regions through the sale of VPPs. A VPP is a limited-term overriding royalty interest in oil and natural gas 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 non-recourse 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 novated to each of the respective VPP buyers hedges that 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 bear the cost of producing the reserves attributable to these interests, which we include as a component of production expenses and production taxes in our condensed consolidated statements of operations in the periods these 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 our full cost ceiling test 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. Future costs will depend on the actual production volumes as well as the production costs and taxes in effect during the periods in which the 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.
For accounting purposes, cash proceeds from the sale of VPPs were reflected as a reduction of oil and natural gas properties with no gain or loss recognized, and our proved reserves were reduced accordingly. We have also 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.

32
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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

As of June 30, 2017 , we had the following VPP outstanding:  
 
 
 
 
 
 
 
 
Volume Sold
VPP #
 
Date of VPP        
 
Location
 
Proceeds
 
Oil
 
Natural Gas
 
NGL
 
Total
 
 
 
 
 
 
($ in millions)
 
(mmbbl)
 
 (bcf)
 
(mmbbl)
 
(bcfe)
9
 
May 2011
 
Mid-Continent
 
$
853

 
1.7

 
138

 
4.8

 
177

The volumes produced on behalf of our VPP buyers during the Current Quarter, the Prior Quarter, the Current Period and the Prior Period were as follows:
Three Months Ended June 30, 2017
 
Three Months Ended June 30, 2016
VPP #
 
Oil
 
Natural Gas
 
NGL
 
Total
 
Oil
 
Natural Gas
 
NGL
 
Total
 
 
(mbbl)
 
 (bcf)
 
 (mbbl)
 
 (bcfe)
 
(mbbl)
 
 (bcf)
 
 (mbbl)
 
 (bcfe)
10 (a)
 
—

 
—

 
—

 
—

 
42.0

 
1.2

 
146.0

 
2.3

   9
 
35.2

 
3.0

 
81.3

 
3.7

 
38.5

 
3.3

 
87.6

 
4.1

   4 (a)
 
—

 
—

 
—

 
—

 
9.9

 
1.9

 
—

 
2.0

   3 (a)
 
—

 
—

 
—

 
—

 
—

 
1.0

 
—

 
1.0

   2 (a)
 
—

 
—

 
—

 
—

 
—

 
0.6

 
—

 
0.6

   1 (a)
 
—

 
—

 
—

 
—

 
—

 
3.1

 
—

 
3.1

 
 
35.2

 
3.0

 
81.3

 
3.7

 
90.4

 
11.1

 
233.6

 
13.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
Six Months Ended June 30, 2016
VPP #
 
Oil
 
Natural Gas
 
NGL
 
Total
 
Oil
 
Natural Gas
 
NGL
 
Total
 
 
(mbbl)
 
 (bcf)
 
 (mbbl)
 
 (bcfe)
 
(mbbl)
 
 (bcf)
 
 (mbbl)
 
 (bcfe)
10 (a)
 
—

 
—

 
—

 
—

 
108.0

 
3.0

 
368.7

 
5.8

   9
 
71.1

 
6.1

 
164.1

 
7.5

 
77.9

 
6.7

 
176.9

 
8.2

   4 (a)
 
—

 
—

 
—

 
—

 
20.0

 
3.8

 
—

 
3.9

   3 (a)
 
—

 
—

 
—

 
—

 
—

 
2.5

 
—

 
2.5

   2 (a)
 
—

 
—

 
—

 
—

 
—

 
1.5

 
—

 
1.5

   1 (a)
 
—

 
—

 
—

 
—

 
—

 
6.4

 
—

 
6.4

 
 
71.1

 
6.1

 
164.1

 
7.5

 
205.9

 
23.9

 
545.6

 
28.3

____________________________________________
(a)
In connection with certain asset divestitures in 2016, we purchased the remaining oil and natural gas interests previously sold in connection with VPP #10, VPP #4, VPP #3, VPP #2 and VPP #1. A majority of the oil and natural gas interests purchased were subsequently sold to the buyers of the assets.
The volumes remaining to be delivered on behalf of our VPP buyers as of June 30, 2017 were as follows:
 
 
 
 
Volume Remaining as of June 30, 2017
VPP #
 
Term Remaining
 
Oil
 
Natural Gas
 
NGL
 
Total
 
 
(in months)
 
 (mmbbl)
 
 (bcf)
 
 (mmbbl)
 
 (bcfe)
9
 
44
 
0.4

 
39.7

 
1.1

 
48.7


33
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

10.
Variable Interest Entities
We consolidate the activities of VIEs for which we are the primary beneficiary. To determine whether we own a variable interest in a VIE, we perform a qualitative analysis of the entity’s design, organizational structure, primary decision makers and relevant agreements.
Consolidated VIE
Chesapeake Granite Wash Trust (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 and because the royalty interest owners, other than Chesapeake, do not have the ability to exercise substantial liquidation rights. Our ownership in the Trust and our previous obligations under the development agreement constitute variable interests. On June 30 2017, the Trust’s subordinated units, all of which were held by Chesapeake, converted to common units. We continue to consolidate the activities of the Trust as 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 operation of the majority of the producing wells and the completed development wells, and (ii) we have the obligation to absorb losses that potentially could 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. As of June 30, 2017 and December 31, 2016 , we had $254 million and $257 million , respectively, of noncontrolling interests on our condensed consolidated balance sheets attributable to the Trust. In the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, we had $1 million , a nominal amount , $2 million and a nominal amount , respectively, of net income attributable to the Trust’s noncontrolling interests recorded in our condensed consolidated statements of operations.
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. In consolidation, as of June 30, 2017 , $1 million of cash and cash equivalents, $488 million of proved oil and natural gas properties, $459 million of accumulated depreciation, depletion and amortization and $4 million of other current liabilities were attributable to the Trust. We have presented parenthetically on the 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.

34
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

11.
Impairments
Impairments of Oil and Natural Gas Properties
Our proved oil and natural gas properties are subject to quarterly full cost ceiling tests. Under the ceiling test, capitalized costs, less accumulated amortization and related deferred income taxes, may not exceed an amount equal to the sum of the present value of estimated future net revenues (adjusted for cash flow hedges) less estimated future expenditures to be incurred in developing and producing the proved reserves, less any related income tax effects. Estimated future net revenues for the quarterly ceiling limit are calculated using the average of commodity prices on the first day of the month over the trailing 12-month period. In the Prior Quarter and the Prior Period, capitalized costs of oil and natural gas properties exceeded the ceiling, resulting in an impairment in the carrying value of our oil and natural gas properties of $1.070 billion and $2.067 billion , respectively.
Impairments of Fixed Assets and Other
We review our long-lived assets, other than oil and natural gas properties, for recoverability whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. We recognize an impairment 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 by asset class and other charges 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,
 
 
2017
 
2016
 
2017
 
2016
 
 
($ in millions)
Natural gas compressors
 
$
—

 
$
—

 
$
—

 
$
20

Buildings and land
 
2

 
—

 
2

 
7

Other
 
24

 
6

 
415

 
17

Total impairments of fixed assets and other
 
$
26

 
$
6

 
$
417

 
$
44

Other. In the Current Quarter and the Current Period, we terminated future natural gas transportation commitments related to divested assets for cash payments of $23 million and $126 million , respectively. In the Current Period, we also paid $290 million to assign an oil transportation agreement to a third party.
Nonrecurring Fair Value Measurements. Fair value measurements for certain of the impairments were based on recent sales information for comparable assets. As the fair value was estimated using the market approach based on recent prices from orderly sales transactions for comparable assets between market participants, these values were classified as Level 2 in the fair value hierarchy. Other inputs used were not observable in the market; these values were classified as Level 3 in the fair value hierarchy.

35
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

12.
Income Taxes
A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, and we consider the tax consequences in the jurisdiction where taxable income is generated, to determine whether a valuation allowance is required. The evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry.
Based on our estimated operating results for the subsequent quarters, we project being in a net deferred tax asset position as of December 31, 2017. We believe it is more likely than not that these deferred tax assets will not be realized. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. A significant piece of objective negative evidence evaluated is the projected cumulative loss incurred over the three-year period ending December 31, 2017. The objective negative evidence limits the ability to consider other subjective positive evidence, such as our projections for future growth. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income are increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence, such as future expected growth. A valuation allowance was recorded against our net deferred tax asset as of December 31, 2016 and June 30, 2017 .
13.
Fair Value Measurements
Recurring Fair Value Measurements
Other Current Assets. Assets related to Chesapeake’s 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.
Other Current 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.
Financial Assets (Liabilities) . The following table provides fair value measurement information for the above-noted financial assets (liabilities) measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 :  
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
 
 
($ in millions)
As of June 30, 2017
 
 
 
 
 
 
 
 
Financial Assets (Liabilities):
 
 
 
 
 
 
 
 
Other current assets
 
$
56

 
$
—

 
$
—

 
$
56

Other current liabilities
 
(56
)
 
—

 
—

 
(56
)
Total
 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
 
 
 
Financial Assets (Liabilities):
 
 
 
 
 
 
 
 
Other current assets
 
$
49

 
$
—

 
$
—

 
$
49

Other current liabilities
 
(51
)
 
—

 
—

 
(51
)
Total
 
$
(2
)
 
$
—

 
$
—

 
$
(2
)

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

See Note 3 for information regarding fair value measurement of our debt instruments. See Note 8 for information regarding fair value measurement of our derivatives.
Nonrecurring Fair Value Measurements
See Note 11 regarding nonrecurring fair value measurements.
14.
Segment Information
As of June 30, 2017 , we have two reportable operating segments, each of which is managed separately because of the nature of its operations. The exploration and production operating segment is responsible for finding and producing oil, natural gas and NGL. The marketing, gathering and compression operating segment is responsible for marketing, gathering and compression of oil, natural gas and NGL.
Management evaluates the performance of our segments based upon income (loss) before income taxes. Revenues from the sale of oil, natural gas and NGL related to Chesapeake’s ownership interests by our marketing, gathering and compression operating segment are reflected as revenues within our exploration and production operating segment. These amounts totaled $1.050 billion , $848 million , $2.170 billion and $1.631 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:
 
 
Exploration
and
Production
 
Marketing,
Gathering
and
Compression 
 
Other  
 
Intercompany
Eliminations
 
Consolidated 
Total
 
 
($ in millions)
Three Months Ended
June 30, 2017
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
1,279

 
$
2,052

 
$
—

 
$
(1,050
)
 
$
2,281

Intersegment revenues
 
—

 
(1,050
)
 
—

 
1,050

 
—

Total Revenues
 
$
1,279

 
$
1,002

 
$
—

 
$
—

 
$
2,281

Income (Loss) Before
Income Taxes
 
$
541

 
$
(61
)
 
$
(12
)
 
$
28

 
$
496

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
June 30, 2016
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
440

 
$
2,030

 
$
—

 
$
(848
)
 
$
1,622

Intersegment revenues
 
—

 
(848
)
 
—

 
848

 
—

Total Revenues
 
$
440

 
$
1,182

 
$
—

 
$
—

 
$
1,622

Income (Loss) Before
Income Taxes
(as previously reported)
 
$
(1,755
)
 
$
(44
)
 
$
(8
)
 
$
57

 
$
(1,750
)
Income (Loss) Before
Income Taxes
(as revised)
 
$
(1,781
)
 
$
(44
)
 
$
(8
)
 
$
57

 
$
(1,776
)
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
June 30, 2017
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
2,748

 
$
4,456

 
$
—

 
$
(2,170
)
 
$
5,034

Intersegment revenues
 
—

 
(2,170
)
 
—

 
2,170

 
—

Total Revenues
 
$
2,748

 
$
2,286

 
$
—

 
$
—

 
$
5,034

Income (Loss) Before
Income Taxes
 
$
1,108

 
$
(447
)
 
$
(22
)
 
$
(1
)
 
$
638

 
 
 
 
 
 
 
 
 
 
 

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

 
 
Exploration
and
Production
 
Marketing,
Gathering
and
Compression 
 
Other  
 
Intercompany
Eliminations
 
Consolidated 
Total
 
 
($ in millions)
Six Months Ended
June 30, 2016
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
1,433

 
$
3,773

 
$
—

 
$
(1,631
)
 
$
3,575

Intersegment revenues
 
—

 
(1,631
)
 
—

 
1,631

 
—

Total Revenues
 
$
1,433

 
$
2,142

 
$
—

 
$
—

 
$
3,575

Income (Loss) Before
Income Taxes
(as previously reported)
 
$
(2,650
)
 
$
(4
)
 
$
(17
)
 
$
—

 
$
(2,671
)
Income (Loss) Before
Income Taxes
(as revised)
 
$
(2,823
)
 
$
(4
)
 
$
(17
)
 
$
—

 
$
(2,844
)
 
 
 
 
 
 
 
 
 
 
 
As of
June 30, 2017
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
10,385

 
$
932

 
$
1,014

 
$
(411
)
 
$
11,920

As of
December 31, 2016
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
11,249

 
$
1,118

 
$
1,059

 
$
(398
)
 
$
13,028

15.
Recently Issued Accounting Standards
In May 2014, the FASB issued updated revenue recognition guidance to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and international financial reporting standards. The new standard requires the recognition of revenue to depict the transfer of promised goods to customers in an amount reflecting the consideration the company expects to receive in the exchange. In March 2016, the FASB issued an update clarifying the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued an update clarifying the identification of performance obligations and licensing implementations guidance. In May 2016, the FASB issued an update clarifying guidance in a few narrow areas and added some practical expedients to the guidance. The accounting standards update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early application permitted after December 31, 2016. The standard is required to be adopted using either the full retrospective approach or the modified retrospective approach. While early adoption is permitted, we plan to adopt this new standard in the first quarter of 2018 using the modified retrospective approach. Through June 30, 2017, we have made progress on contract reviews, drafting accounting policies and evaluating the new disclosure requirements. We expect that enhanced disclosures will be required under the new standard. Further analysis is planned in 2017 to complete our evaluation of the impact of the new standard.
In February 2016, the FASB issued updated lease accounting guidance requiring companies to recognize the assets and liabilities for the rights and obligations created by long-term leases of assets on the balance sheet. The accounting standards update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The standard will not apply to our leases of mineral rights. We are continuing to further evaluate the impact of this guidance on our consolidated financial statements and related disclosures.

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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, oil, natural gas and NGL sales, average sales prices received, and other operating income and expenses for the periods indicated:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Net Production:
 
 
 
 
 
 
 
 
Oil (mmbbl)
 
8

 
8

 
16

 
17

Natural gas (bcf)
 
209

 
269

 
420

 
546

NGL (mmbbl)
 
5

 
7

 
10

 
13

Oil equivalent (mmboe) (a)
 
48

 
60

 
96

 
121

 
 
 
 
 
 
 
 
 
Oil, Natural Gas and NGL Sales ($ in millions):
 
 
 
 
 
 
 
 
Oil sales
 
$
383

 
$
355

 
$
761

 
$
610

Oil derivatives – realized gains (losses) (b)
 
33

 
11

 
44

 
84

Oil derivatives – unrealized gains (losses) (b)
 
47

 
(168
)
 
141

 
(240
)
Total oil sales
 
463

 
198

 
946

 
454

Natural gas sales
 
601

 
440

 
1,254

 
923

Natural gas derivatives – realized gains (losses) (b)
 
(36
)
 
92

 
(52
)
 
242

Natural gas derivatives – unrealized gains (losses) (b)
 
156

 
(365
)
 
387

 
(335
)
Total natural gas sales
 
721

 
167

 
1,589

 
830

NGL sales
 
95

 
89

 
211

 
163

NGL derivatives – realized gains (losses) (b)
 
1

 
(3
)
 
2

 
(3
)
NGL derivatives – unrealized gains (losses) (b)
 
(1
)
 
(11
)
 
—

 
(11
)
Total NGL sales
 
95

 
75

 
213

 
149

Total oil, natural gas and NGL sales
 
$
1,279

 
$
440

 
$
2,748

 
$
1,433

 
 
 
 
 
 
 
 
 
Average Sales Price
(excluding gains (losses) on derivatives):
 
 
 
 
 
 
 
 
Oil ($ per bbl)
 
$
47.51

 
$
43.00

 
$
48.83

 
$
35.98

Natural gas ($ per mcf)
 
$
2.88

 
$
1.63

 
$
2.99

 
$
1.69

NGL ($ per bbl)
 
$
18.36

 
$
13.37

 
$
20.99

 
$
12.43

Oil equivalent ($ per boe)
 
$
22.46

 
$
14.76

 
$
23.29

 
$
14.01

 
 
 
 
 
 
 
 
 
Average Sales Price
(including realized gains (losses) on derivatives):
 
 
 
 
 
 
 
 
Oil ($ per bbl)
 
$
51.65

 
$
44.31

 
$
51.68

 
$
40.93

Natural gas ($ per mcf)
 
$
2.71

 
$
1.97

 
$
2.87

 
$
2.14

NGL ($ per bbl)
 
$
18.51

 
$
12.88

 
$
21.19

 
$
12.17

Oil equivalent ($ per boe)
 
$
22.42

 
$
16.43

 
$
23.23

 
$
16.68

 
 
 
 
 
 
 
 
 
Other Operating Income ($ in millions):
 
 
 
 
 
 
 
 
Marketing, gathering and compression net margin (c)(d)
 
$
(25
)
 
$
(25
)
 
$
(69
)
 
$
(7
)
 
 
 
 
 
 
 
 
 

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Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Expenses ($ per boe):
 
 
 
 
 
 
 
 
Oil, natural gas and NGL production
 
$
2.92

 
$
3.05

 
$
2.88

 
$
3.21

Oil, natural gas and NGL gathering, processing and transportation
 
$
7.44

 
$
8.04

 
$
7.45

 
$
7.96

Production taxes
 
$
0.42

 
$
0.32

 
$
0.45

 
$
0.31

General and administrative
 
$
1.45

 
$
1.02

 
$
1.40

 
$
0.90

Oil, natural gas and NGL depreciation, depletion and amortization
 
$
4.21

 
$
4.64

 
$
4.18

 
$
4.47

Depreciation and amortization of other assets
 
$
0.43

 
$
0.48

 
$
0.44

 
$
0.48

Interest expense (e)
 
$
1.92

 
$
1.00

 
$
1.94

 
$
0.99

 
 
 
 
 
 
 
 
 
Interest Expense ($ in millions):
 
 
 
 
 
 
 
 
Interest expense
 
$
93

 
$
63

 
$
187

 
$
125

Interest rate derivatives – realized (gains) losses (f)
 
(1
)
 
(3
)
 
(2
)
 
(6
)
Interest rate derivatives – unrealized (gains) losses (f)
 
1

 
2

 
3

 
5

Total interest expense
 
$
93

 
$
62

 
$
188

 
$
124

___________________________________________
(a)
Oil 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.
(b)
Realized gains (losses) include the following items: (i) settlements and accruals for settlements of undesignated derivatives related to current period production revenues, (ii) prior period settlements for option premiums and for early-terminated derivatives originally scheduled to settle against current period production revenues, and (iii) gains (losses) related to de-designated cash flow hedges originally designated to settle against current period production revenues. Unrealized gains (losses) include the change in fair value of open derivatives scheduled to settle against future period production revenues (including current period settlements for option premiums and early terminated derivatives) offset by amounts reclassified as realized gains (losses) during the period.
(c)
Includes revenue and operating costs. See Depreciation and Amortization of Other Assets under Results of Operations for details of the depreciation and amortization associated with our marketing, gathering and compression segment.
(d)
In the Prior Quarter and the Prior Period, we recorded unrealized losses of $37 million and $17 million , respectively, on the fair value of our supply contract derivative. See Note 8 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for discussion related to this instrument.
(e)
Includes the effects of realized (gains) losses from interest rate derivatives, excludes the effects of unrealized (gains) losses from interest rate derivatives and is shown net of amounts capitalized.
(f)
Realized (gains) losses include interest rate derivative settlements related to current period interest and the effect of (gains) losses on early-terminated trades. Settlements of early-terminated trades are reflected in realized (gains) losses over the original life of the hedged item. Unrealized (gains) losses include changes in the fair value of open interest rate derivatives offset by amounts reclassified to realized (gains) losses during the period.

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Overview
We own interests in approximately 20,500 oil and natural gas wells and produced an average of approximately 528 mboe per day in the Current Quarter, net to our interest. We have a large and geographically diverse resource base of onshore U.S. unconventional natural gas and liquids assets. We have leading positions in the liquids-rich resource plays of the Eagle Ford Shale in South Texas, the Utica Shale in Ohio, the Anadarko Basin in northwestern Oklahoma and the stacked pay in the Powder River Basin in Wyoming. Our natural gas resource plays are the Haynesville/Bossier Shales in northwestern Louisiana and East Texas and the Marcellus Shale in the northern Appalachian Basin in Pennsylvania. We also own oil and natural gas marketing and natural gas compression businesses.
Our Strategy
Chesapeake’s strategy is to create shareholder value through the development of our significant positions in premier U.S. onshore resource plays. In addition, we continue to focus our financial strategy on reducing debt and improving margins and returns on capital. We apply financial discipline to all aspects of our business with goals of increasing financial and operational flexibility. Our capital program is focused on investments that can improve our cash flow generating ability regardless of the commodity price environment. Our forecasted capital expenditures are higher in 2017 compared to 2016 as we focus on capturing high rate-of-return opportunities in our oil and natural gas portfolio. These opportunities are primarily the result of improved capital and operating efficiencies, including improved well performance. We expect our anticipated production increases in the 2017 second half and into 2018, combined with our cost leadership, to position us with the ability to balance capital expenditures and operating cash flow in 2018.
Our substantial inventory of hydrocarbon resources, including our significant undeveloped acreage position in each of our key basins, provides a strong foundation to create future value. Concentrated blocks of undeveloped acreage give us the opportunity to apply best in class well spacing analysis, completion techniques and lateral lengths to maximize capital efficiency. We have greatly improved our capital and operating efficiency metrics over the last several periods and today have a leading cost structure in each of our major operating basins. We believe our cost structure provides a significant competitive advantage in the current commodity price environment and it is our strategy to continue to seek capital and operating efficiencies to grow this advantage. Building on our strong and diverse asset base through increased production and cash flow and further delineating our emerging new development opportunities, we believe that our dedication to financial discipline, the flexibility and efficiency of our capital program and cost structure and our continued focus on safety and environmental stewardship will provide opportunities to create value for Chesapeake and its stakeholders.
Operating Results
Our Current Quarter production of 48 mmboe consisted of 8 mmbbls of oil ( 17% on an oil equivalent basis), 209 bcf of natural gas ( 72% on an oil equivalent basis), and 5 mmbbls of NGL ( 11% on an oil equivalent basis). Our daily production for the Current Quarter averaged approximately 528 mboe , a decrease of 20% from the Prior Quarter. Compared to the Prior Quarter, average daily oil production decreased by 2% , or approximately 2 mbbls per day; average daily natural gas production decreased by 23% , or approximately 667 mmcf per day; and average daily NGL production decreased by 22% , or approximately 16 mbbls per day. Our oil, natural gas and NGL production decreased primarily as a result of the sale of certain of our Mid-Continent and Barnett Shale assets in 2016 and the sale of certain of our Haynesville Shale assets in 2017. Adjusted for asset sales, our total daily production decreased 3% in the Current Quarter compared to the Prior Quarter. Our oil, natural gas and NGL revenues (excluding gains or losses on oil and natural gas derivatives) increased approximately $195 million to $1.079 billion in the Current Quarter compared to $884 million in the Prior Quarter, due to increases in the prices received for oil, natural gas and NGL sold, partially offset by the production decreases described above. See Results of Operations below for additional details.

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Our Current Period production of 96 mmboe consisted of 16 mmbbls of oil ( 16% on an oil equivalent basis), 420 bcf of natural gas ( 73% on an oil equivalent basis), and 10 mmbbls of NGL ( 11% on an oil equivalent basis). Our daily production for the Current Period averaged approximately 528 mboe , a decrease of 21% from the Prior Period. Compared to the Prior Period, average daily oil production decreased by 8% , or approximately 7 mbbls per day; average daily natural gas production decreased by 23% , or approximately 680 mmcf per day; and average daily NGL production decreased by 23% , or approximately 16 mbbls per day. Our oil, natural gas and NGL production decreased primarily as a result of the sale of certain of our Mid-Continent and Barnett Shale assets in 2016 and the sale of certain of our Haynesville Shale assets in 2017. Adjusted for asset sales, our total daily production decreased 3% in the Current Period compared to the Prior Period. Our oil, natural gas and NGL revenues (excluding gains or losses on oil and natural gas derivatives) increased approximately $530 million to $2.226 billion in the Current Period compared to $1.696 billion in the Prior Period, due to increases in the prices received for oil, natural gas and NGL sold, partially offset by the production decreases described above. See Results of Operations below for additional details.
Capital Expenditures
Our drilling and completion capital expenditures during the Current Quarter were approximately $596 million and capital expenditures for the acquisition of unproved properties, geological and geophysical costs and other property and equipment were approximately $24 million , for a total of approximately $620 million . In the Current Quarter, we operated an average of 19 rigs, an increase of 10 rigs, or 111% , compared to the Prior Quarter. As a result of higher drilling and completion activity, drilling and completion expenditures increased approximately $259 million in the Current Quarter compared to the Prior Quarter. The level of capital expenditures for the acquisition of unproved properties, geological and geophysical costs and other property and equipment decreased approximately $32 million compared to the Prior Quarter.
Our capitalized interest was approximately $47 million and $63 million in the Current Quarter and the Prior Quarter, respectively. The decrease in capitalized interest resulted from a lower average balance of our unproved oil and natural gas properties, the primary asset on which interest is capitalized. Including capitalized interest, total capital investments were approximately $667 million in the Current Quarter compared to $456 million for the Prior Quarter, an increase of 46% .
Our drilling and completion capital expenditures during the Current Period were approximately $1.102 billion and capital expenditures for the acquisition of unproved properties, geological and geophysical costs and other property and equipment were approximately $43 million , for a total of approximately $1.145 billion . In the Current Period, we operated an average of 18 rigs, an increase of nine rigs, or 100% , compared to the Prior Period. As a result of higher drilling and completion activity, drilling and completion expenditures increased approximately $484 million in the Current Period compared to the Prior Period. The level of capital expenditures for the acquisition of unproved properties, geological and geophysical costs and other property and equipment decreased approximately $27 million compared to the Prior Period.
Our capitalized interest was approximately $98 million and $132 million in the Current Period and the Prior Period, respectively. The decrease in capitalized interest resulted from a lower average balance of our unproved oil and natural gas properties, the primary asset on which interest is capitalized. Including capitalized interest, total capital investments were approximately $1.243 billion in the Current Period compared to $820 million for the Prior Period, an increase of 52% .
Based on planned activity levels for the remainder of 2017, we project that 2017 capital expenditures for drilling and completions, leasehold, geological and geophysical and other property and equipment will be $2.1 – $2.5 billion , inclusive of capitalized interest, as compared to $1.7 billion of capital expenditures in 2016. See Liquidity and Capital Resources for additional information on how we plan to fund our capital budget.

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Strategic Developments
Debt Retirements
In the Current Period, we retired $1.604 billion principal amount of our outstanding senior notes, senior secured second lien notes and contingent convertible notes through purchases in the open market, tender offers or repayment upon maturity for $1.746 billion . Retirements included (i) the maturity of our 6.25% Euro-denominated Senior Notes due 2017 and corresponding cross currency swap, (ii) our tender offer for our 2.5% contingent convertible senior notes due 2037 at the option of the holders of the notes pursuant to the terms of the notes and (iii) our tender offer for up to $750 million aggregate purchase price of certain series of our senior secured second lien notes.
Debt Offering
On June 6, 2017, we issued $750 million aggregate principal amount of unsecured 8.00% Senior Notes due 2027 in a private placement for net proceeds of $742 million.
Preferred Stock Exchanges
In the Current Period, we completed private exchanges of an aggregate of approximately 10.0 million shares of our common stock for (i) 72,600 shares of 5.75% Cumulative Convertible Preferred Stock, (ii) 12,500 shares of 5.75% Cumulative Convertible Preferred Stock (Series A) and (iii) 150,948 shares of 5.00% Cumulative Convertible Preferred Stock (Series 2005B). The preferred stock exchanged represents approximately $100 million of liquidation value. These exchanges eliminated approximately $6 million of annual dividend obligations.
Divestitures
In the Current Period, we sold portions of our acreage and producing properties in our Haynesville Shale operating area in northern Louisiana for approximately $915 million , subject to certain customary closing adjustments. Included in the sales were approximately 119,500 net acres and interests in 576 wells that were producing approximately 80 mmcf of gas per day at the time of closing.
In the Current Period and through August 2, 2017, we have signed or closed approximately $360 million of additional assets divestitures, primarily in our Mid-Continent area.
Gathering, Processing and Transportation Agreements
In the Current Quarter and the Current Period, we terminated future natural gas transportation commitments related to divested assets for cash payments of $23 million and $126 million , respectively. In the Current Period, we also paid $290 million to assign an oil transportation agreement to a third party.

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Liquidity and Capital Resources
Liquidity Overview
Our ability to grow, make capital expenditures and service our debt depends primarily upon the prices we receive for the oil, natural gas and NGL we sell. Substantial expenditures are required to replace reserves, sustain production and fund our business plans. Historically, oil and natural gas prices have been very volatile, and may be subject to wide fluctuations in the future. The substantial decline in oil, natural gas and NGL prices from 2014 levels has negatively affected the amount of cash we generate and have available for capital expenditures and debt service. A substantial or extended decline in oil, natural gas and NGL prices could have a material impact on our financial position, results of operations, cash flows and on the quantities of reserves that we may economically produce. Other risks and uncertainties that could affect our liquidity include, but are not limited to, counterparty credit risk for our receivables, access to capital markets, regulatory risks and our ability to meet financial ratios and covenants in our financing agreements.
As of June 30, 2017 , we had a cash balance of $13 million compared to $882 million as of December 31, 2016, and we had a net working capital deficit of $911 million , compared to a net working capital deficit of $1.506 billion as of December 31, 2016. Based on our cash balance, forecasted cash flows from operating activities and availability under our revolving credit facility, we expect to be able to fund our planned capital expenditures, meet our debt service requirements and fund our other commitments and obligations for the next 12 months. As of June 30, 2017 , we had $3.110 billion of borrowing capacity available under our revolving credit facility, with outstanding borrowings of $575 million and $100 million utilized for various letters of credit. 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 our debt obligations, including principal and carrying amounts of our notes.
In the Current Period and through August 2, 2017, we took the following measures to improve our near-term liquidity:
•
issued $750 million aggregate principal amount of unsecured 8.00% Senior Notes due 2027 and used the proceeds to repurchase a portion of our senior secured second lien notes;
•
reaffirmed the borrowing base on our revolving credit facility at $3.8 billon;
•
exchanged approximately 10.0 million shares of common stock for approximately $100 million of liquidation value of our preferred stock, eliminating approximately $6 million of annual dividend obligations; and
•
signed or closed on approximately $1.3 billion of asset divestitures that did not fit our strategic priorities.
Even though we have taken measures, as outlined above, to mitigate the liquidity concerns facing us for the next 12 months, there can be no assurance that these measures will satisfy our needs. We may continue to access the capital markets or otherwise incur debt to refin ance a portion of our outstanding indebtedness and improve our li q uidity.
As operator of a substantial portion of our oil and natural gas properties under development, we have significant control and flexibility over the timing and execution of our development plan, enabling us to reduce our capital spending as needed. Our forecasted 2017 capital expenditures, inclusive of capitalized interest, are $2.1 – $2.5 billion compared to our 2016 capital spending level of $1.7 billion. W e had liquidity (calculated as cash on hand and availability under our revolving credit facility), of approximately $3.1 billion as of July 31, 2017. We expect to generate additional liquidity with proceeds from future sales of assets that we determine do not fit our strategic priorities. Management continues to review operational plans for the remainder of 2017 and beyond, which could result in changes to projected capital expenditures and projected revenues from sales of oil, natural gas and NGL. We closely monitor 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 revolving credit facility.

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Some of our counterparties have requested or required us to post collateral as financial assurance of our performance under certain contractual arrangements, such as gathering, processing, transportation and hedging agreements. As of July 31, 2017, we have received requests and posted approximately $133 million in collateral under such arrangements. We may be requested or required by other counterparties to post additional collateral in an aggregate amount of approximately $480 million, which may be in the form of additional letters of credit, cash or other acceptable collateral. However, we have substantial long-term business relationships with each of these counterparties, and we may be able to mitigate any collateral requests through ongoing business arrangements and by offsetting amounts that the counterparty owes us. Any posting of collateral consisting of cash or letters of credit reduces availability under our revolving credit facility and negatively impacts our liquidity.
In the Current Period , we repurchased $1.604 billion principal amount of outstanding debt in the open market and through tender offers and exchanged approximately 10.0 million shares of common stock for approximately $100 million of liquidation value of our outstanding preferred stock. Pursuant to the provisions of our 2.5% Contingent Convertible Senior Notes due 2037, we repurchased $14 million of the outstanding notes in the Current Quarter. In July 2017, we redeemed our remaining 2.75% Contingent Convertible Senior Notes due 2035 and our 2.5% Contingent Convertible Senior Notes due 2037 for an aggregate repurchase price of $3 million. We may continue to use a combination of cash, borrowings and issuances of our common stock or other securities to retire our outstanding debt and preferred stock through privately negotiated transactions, open market repurchases, redemptions, tender offers or otherwise, but we are under no obligation to do so.
To add more certainty to our future estimated cash flows by mitigating our downside exposure to lower commodity prices, as of July 31, 2017, we have downside price protection, through open swaps, on approximately 60% of our remaining projected 2017 oil production at an average price of $50.32 per bbl. We also have downside price protection, through open swaps and collars, on approximately 74% of our remaining projected 2017 natural gas production at an average price of $3.09 p er mcf, of which 6% is hedged under two-way collar arrangements based on an average bought put NYMEX price of $3.25 per mcf. We also have downside price protection, through open swaps, on approximately 4% of our remaining projected 2017 NGL production at an average price of $0.66 per gallon of propane. In addition, we have downside price protection, through open swaps on 2.7 mmbbls of our 2018 oil production at an average price of $51.78 per bbl and under three-way collar arrangements based on an average bought put NYMEX price of $47.00 per bbl and exposure below an average sold put NYMEX price of $39.15 per bbl. We also have downside price protection, through open swaps and collars on 535 bcf of our 2018 gas production at an average price of $3.09 per mcf.
As highlighted above, we have taken measures to mitigate the liquidity concerns facing us for the remainder of 2017 and beyond, but there can be no assurance that such measures will satisfy our needs. Further, our ability to generate operating cash flow in the current commodity price environment, sell assets, access capital markets or take any other action to improve our liquidity and manage our debt is subject to the risks discussed above and the other risks and uncertainties that exist in our industry, some of which we may not be able to anticipate at this time or control.

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Sources of Funds
The following table presents the sources of our cash and cash equivalents for the Current Period and the Prior Period . See Note 9 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of divestitures of oil and natural gas assets.
 
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
 
($ in millions)
Cash used in operating activities
 
$
(58
)
 
$
(326
)
Proceeds from credit facility borrowings, net
 
575

 
100

Proceeds from issuance of senior notes, net
 
742

 
—

Divestitures of proved and unproved properties
 
951

 
964

Sales of other property and equipment
 
26

 
70

Total sources of cash and cash equivalents
 
$
2,236

 
$
808

Cash used in operating activities was $58 million in the Current Period compared to $326 million in the Prior Period . The decrease is primarily the result of higher realized prices for the oil, natural gas and NGL we sold, offset by lower volumes of oil, natural gas and NGL sold, the payment related to the litigation on our 6.775% Senior Notes due 2019 and payments for terminations of transportation contracts. 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, gains or losses on sales of fixed assets, deferred income taxes and mark-to-market changes in our derivative instruments. See further discussion below under Results of Operations .
We currently plan to use cash flow from operations, cash on hand and our revolving credit facility to fund our capital expenditures for the remainder of 2017. We expect to generate additional liquidity with proceeds from future sales of assets that we determine do not fit our strategic priorities. Under our revolving credit facilities, we borrowed $2.551 billion and repaid $1.976 billion in the Current Period and we borrowed $2.477 billion and repaid $2.377 billion in the Prior Period .

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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,
 
 
2017
 
2016
 
 
($ in millions)
Oil and Natural Gas Expenditures:
 
 
 
 
Drilling and completion costs
 
$
1,031

 
$
609

Acquisitions of proved and unproved properties
 
69

 
302

Interest capitalized on unproved leasehold
 
93

 
124

Total oil and natural gas expenditures
 
1,193

 
1,035

Other Uses of Cash and Cash Equivalents:
 
 
 
 
Cash paid to repurchase debt
 
1,746

 
472

Cash paid for title defects
 
—

 
69

Additions to other property and equipment
 
7

 
25

Dividends paid
 
137

 
—

Other
 
22

 
28

Total other uses of cash and cash equivalents
 
1,912

 
594

Total uses of cash and cash equivalents
 
$
3,105

 
$
1,629

Our drilling and completion costs increased in the Current Period compared to the Prior Period primarily as a result of increased activity. During the Current Period , our average operated rig count was 18 rigs compared to an average operated rig count of nine rigs in the Prior Period and we completed 206 operated wells in the Current Period compared to 185 in the Prior Period .
In the Current Period , we used $1.746 billion of cash to repurchase $1.604 billion principal amount of debt. In the Prior Period , we used $472 million of cash to repurchase $558 million principal amount of debt.
We paid dividends of  $137 million  on our preferred stock during the Current Period , including $92 million of dividends in arrears that had been suspended throughout 2016. We did not pay dividends on our preferred stock in the Prior Period .

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Term Loan Facility
We have a secured five -year term loan facility in an aggregate principal amount of $1.5 billion . Our obligations under the facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries that guarantee our revolving credit facility, second lien notes and senior notes and are secured by first-priority liens on the same collateral securing our revolving credit facility (with a position in the collateral proceeds waterfall junior to the revolving credit facility). The term loan bears interest at a rate of London Interbank Offered Rate (LIBOR) plus 7.50% per annum, subject to a 1.00% LIBOR floor, or the Alternative Base Rate (ABR) plus 6.50% per annum, subject to a 2.00% ABR floor, at our option. The term loan matures in August 2021 and voluntary prepayments are subject to a make-whole premium prior to the second anniversary of the closing of the term loan, a premium to par of 4.25% from the second anniversary until but excluding the third anniversary, a premium to par of 2.125% from the third anniversary until but excluding the fourth anniversary and at par beginning on the fourth anniversary. The term loan may be subject to mandatory prepayments and offers to purchase with net cash proceeds of certain issuances of debt, certain asset sales and other dispositions of collateral and upon a change of control. 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 term loan facility.
Revolving Credit Facility
We have a senior secured revolving credit facility currently subject to a $3.8 billion borrowing base that matures in December 2019. As of June 30, 2017 , we had outstanding borrowings of $575 million under the revolving credit facility and had used $100 million of the revolving credit facility for various letters of credit. See Liquidity Overview above for additional information on our collateral postings. Borrowings under the facility bear interest at a variable rate. We are required to secure our obligations under the facility with liens on certain of our oil and natural gas properties, with the liens to be released upon the satisfaction of specific conditions. The applicable interest rates under the facility fluctuate based on the percentage of the borrowing base used. In the Current Quarter, our borrowing base was reaffirmed at $3.8 billion. Our next borrowing base redetermination is scheduled for the second quarter of 2018. 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 the revolving credit facility, as amended. As of June 30, 2017 , our interest coverage ratio was approximately 1.78 to 1.00, and we were in compliance with all applicable financial covenants under the credit agreement.
On May 19, 2017, we entered into the fourth amendment to our revolving credit facility. Among other things, the amendment removed the requirement that we must concurrently prepay, repurchase or redeem or otherwise defease at least an equal amount of other borrowed money indebtedness with a stated maturity prior to December 15, 2019, if we optionally prepay, repurchase or redeem or otherwise defease other borrowed money indebtedness with a stated maturity after December 15, 2019.
Hedging Arrangements
Certain of our hedging arrangements are with counterparties that are also lenders (or affiliates of lenders) under our revolving credit facility. The contracts entered into with these counterparties are secured by the same collateral that secures our revolving credit facility which allows us to reduce any letters of credit posted as security with those counterparties. In addition, with other counterparties we enter into bilateral hedging agreements. The counterparties’ and our obligations under certain of the bilateral hedging agreements must be secured by cash or letters of credit to the extent that any mark-to-market amounts owed to us or by us exceed defined thresholds.

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Senior Note Obligations
Our senior note obligations consisted of the following as of June 30, 2017 :  
 
 
June 30, 2017
 
 
Principal
Amount
 
Carrying
Amount
 
 
($ in millions)    
7.25% senior notes due 2018
 
$
46

 
$
46

Floating rate senior notes due 2019
 
380

 
380

6.625% senior notes due 2020
 
572

 
572

6.875% senior notes due 2020
 
279

 
279

6.125% senior notes due 2021
 
550

 
550

5.375% senior notes due 2021
 
270

 
270

4.875% senior notes due 2022
 
451

 
451

8.00% senior secured second lien notes due 2022 (a)
 
1,737

 
2,385

5.75% senior notes due 2023
 
338

 
338

8.00% senior notes due 2025
 
1,000

 
1,000

5.5% convertible senior notes due 2026 (b)(c)
 
1,250

 
824

8.00% senior notes due 2027
 
750

 
750

2.75% contingent convertible senior notes due 2035 (d)
 
2

 
2

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

 
1

2.25% contingent convertible senior notes due 2038 (c)(d)
 
9

 
8

Debt issuance costs
 
—

 
44

Discount on senior notes
 
—

 
(15
)
Interest rate derivatives (e)
 
—

 
2

Total senior notes, net
 
7,635

 
7,887

Less current maturities of senior notes, net (f)
 
(3
)
 
(3
)
Total long-term senior notes, net
 
$
7,632

 
$
7,884

___________________________________________
(a)
The carrying amount as of June 30, 2017 , includes a premium of $648 million associated with a troubled debt restructuring. The premium is being amortized based on an effective yield method.
(b)
The notes are convertible, at the holder’s option, prior to maturity under certain circumstances into cash, common stock or a combination of cash and common stock, at our election. The holders of our convertible senior notes may require us to repurchase the principal amount of the notes upon certain fundamental changes.
(c)
The carrying amount as of June 30, 2017 , is reflected net of a discount associated with the equity component of our convertible and contingent convertible senior notes of $427 million .
(d)
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. 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 and upon certain fundamental changes. In July 2017, we redeemed our remaining 2.75% Contingent Convertible Senior Notes due 2035 and our 2.5% Contingent Convertible Senior Notes due 2037.
(e)
See Note 8 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.
(f)
As of June 30, 2017 , current maturities of senior notes, net includes our 2.75% Contingent Convertible Notes due 2035 and our 2.5% Contingent Convertible Notes due 2037. As discussed above, we redeemed both series of these notes in July 2017.
For further discussion and details regarding our senior notes and convertible senior notes, 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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Credit Risk
Derivative instruments that enable us to manage our exposure to oil, natural gas and NGL prices, as well as to foreign currency 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, 2017 , our oil, natural gas and NGL derivative instruments were spread among 10 counterparties. Additionally, the counterparties under our commodity hedging arrangements are required to secure their obligations in excess of defined thresholds.
Our accounts receivable are primarily from purchasers of oil, natural gas and NGL ($732 million as of June 30, 2017 ) and exploration and production companies that own interests in properties we operate ($208 million as of June 30, 2017 ). 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 that are judged to have sub-standard credit, unless the credit risk can otherwise be mitigated. During the Current Quarter, the Prior Quarter, the Current Period and the Prior Period , we recognized $6 million, $3 million, $6 million and $4 million, respectively, 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 contractual obligations and off-balance sheet commitments. As of June 30, 2017 , these arrangements and transactions included (i) operating lease agreements, (ii) a volumetric production payment (VPP) (to purchase production 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. See Notes 4 and 9 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of commitments and VPPs, respectively.

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Results of Operations – Three Months Ended June 30, 2017 vs June 30, 2016
General . For the Current Quarter, Chesapeake had net income of $495 million , or $0.47 per diluted common share, on total revenues of $2.281 billion . This compares to a net loss of $1.776 billion , or $2.51 per diluted common share, on total revenues of $1.622 billion for the Prior Quarter. The increase in net income in the Current Quarter is attributable to an increase in the average realized prices we received for oil, natural gas and NGL production. The net loss in the Prior Quarter was primarily driven by non-cash impairments of oil and natural gas properties. See Impairment of Oil and Natural Gas Properties below.
Oil, Natural Gas and NGL Sales . During the Current Quarter, oil, natural gas and NGL sales were $1.279 billion compared to $440 million in the Prior Quarter. In the Current Quarter, Chesapeake sold 48 mmboe for $1.079 billion at a weighted average price of $22.46 per boe (excluding the effect of derivatives), compared to 60 mmboe sold in the Prior Quarter for $884 million at a weighted average price of $14.76 per boe (excluding the effect of derivatives). The increase in the price received per boe in the Current Quarter compared to the Prior Quarter resulted in a $369 million increase in revenues, and decreased sales volumes resulted in a $174 million decrease in revenues, for a total increase in revenues of $195 million (excluding the effect of derivatives).
For the Current Quarter, our average price received per barrel of oil (excluding the effect of derivatives) was $47.51 , compared to $43.00 in the Prior Quarter. Natural gas prices received per mcf (excluding the effect of derivatives) were $2.88 and $1.63 in the Current Quarter and the Prior Quarter, respectively. NGL prices received per barrel (excluding the price of derivatives) were $18.36 in the Current Quarter and $13.37 in the Prior Quarter.
Gains (losses) from our oil, natural gas and NGL derivatives resulted in a net increase in oil, natural gas and NGL revenues of $200 million in the Current Quarter and a net decrease of $444 million in the Prior Quarter, respectively. See Item 3. Quantitative and Qualitative Disclosures About Market Risk in Part I of this report for a listing of all of our derivative instruments as of June 30, 2017 .
A change in oil, natural gas and NGL prices has a significant impact on our revenues and cash flows. Assuming our Current Quarter production levels and without considering the effect of derivatives, an increase or decrease of $1.00 per barrel of oil sold would result in an increase or decrease in Current Quarter revenues and cash flows of approximately $8 million, 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 $21 million, and an increase or decrease of $1.00 per barrel of NGL sold would result in an increase or decrease in Current Quarter revenues and cash flows of approximately $5 million.

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The following tables show production and average sales prices received by our operating divisions for the Current Quarter and the Prior Quarter:
 
 
Three Months Ended June 30, 2017
 
 
Oil
 
Natural Gas
 
NGL
 
Total
 
 
(mmbbl)
 
($/bbl) (a)
 
(bcf)
 
($/mcf) (a)  
 
(mmbbl)
 
($/bbl) (a)  
 
(mmboe)
 
%
 
($/boe) (a)
Marcellus
 
—

 
—

 
74

 
2.54

 
—

 
—

 
13

 
26

 
15.25

Haynesville
 
—

 
—

 
66

 
2.97

 
—

 
—

 
11

 
23

 
17.89

Eagle Ford
 
5

 
48.28

 
14

 
3.44

 
2

 
19.40

 
9

 
19

 
36.27

Utica
 
1

 
42.47

 
34

 
3.20

 
2

 
16.96

 
9

 
18

 
20.59

Mid-Continent
 
1

 
47.16

 
18

 
2.90

 
1

 
19.22

 
5

 
11

 
25.68

Powder River Basin
 
1

 
47.90

 
3

 
2.99

 
—

 
—

 
1

 
3

 
31.30

Other (b)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
 
8

 
47.51

 
209

 
2.88

 
5

 
18.36

 
48

 
100
%
 
22.46

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
 
Oil
 
Natural Gas
 
NGL
 
Total
 
 
(mmbbl)
 
($/bbl) (a)
 
(bcf)
 
($/mcf) (a)  
 
(mmbbl)
 
($/bbl) (a)
 
(mmboe)
 
%
 
($/boe) (a)
Marcellus
 
—

 
—

 
73

 
1.22

 
—

 
—

 
12

 
20

 
7.30

Haynesville
 
—

 
—

 
69

 
1.85

 
—

 
—

 
12

 
20

 
11.13

Eagle Ford
 
5

 
44.84

 
12

 
2.04

 
2

 
13.79

 
9

 
14

 
31.22

Utica
 
1

 
37.20

 
47

 
1.86

 
4

 
11.52

 
13

 
21

 
14.06

Mid-Continent
 
1

 
42.57

 
25

 
1.53

 
1

 
16.55

 
7

 
12

 
17.62

Powder River Basin
 
1

 
43.31

 
4

 
1.95

 
—

 
—

 
1

 
2

 
25.48

Other (b)
 
—

 
—

 
39

 
1.64

 
—

 
—

 
6

 
11

 
10.06

Total
 
8

 
43.00

 
269

 
1.63

 
7

 
13.37

 
60

 
100
%
 
14.76

___________________________________________
(a)
Average sales prices exclude gains and/or losses on derivatives.
(b)
Includes Central Texas and Devonian Shale.
Our average daily production of 528 mboe for the Current Quarter consisted of approximately 88 mbbls of oil ( 17% on an oil equivalent basis), approximately 2.3 bcf of natural gas ( 72% on an oil equivalent basis) and approximately 57 mbbls of NGL ( 11% on an oil equivalent basis). Oil production decreased by 2%, natural gas production decreased by 23% and NGL production decreased by 22% year over year primarily as a result of the sale of certain of our Barnett and Mid-Continent assets in 2016 and the sale of certain of our Haynesville Shale assets in 2017.
Excluding the impact of derivatives, our percentage of revenues from oil, natural gas and NGL is shown in the following table:
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Oil
 
35

 
40

Natural gas
 
56

 
50

NGL
 
9

 
10

  Total
 
100
%
 
100
%

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Marketing, Gathering and Compression Revenues and Expenses . Marketing, gathering and compression revenues consist of third-party revenues as well as fair value adjustments on our supply contract derivatives (see Note 8 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for additional information on our supply contract derivatives). Expenses related to our marketing, gathering and compression operations consist of third-party expenses and exclude depreciation and amortization, general and administrative expenses, impairments of fixed assets and other, net gains or losses on sales of fixed assets and interest expense. See Depreciation and Amortization of Other Assets below for the depreciation and amortization recorded on our marketing, gathering and compression assets. We recognized $1.002 billion in marketing, gathering and compression revenues in the Current Quarter with corresponding expenses of $1.027 billion , for a net loss of $25 million . This compares to revenues of $1.182 billion , of which $37 million related to unrealized losses on the fair value of our supply contract derivative, with corresponding expenses of $1.207 billion , for a net loss of $25 million in the Prior Quarter. Although higher oil, natural gas and NGL prices were paid and received in our marketing operations, revenues and expenses decreased in the Current Quarter compared to the Prior Quarter primarily as a result of contract assignments and terminations.
Oil, Natural Gas and NGL Production Expenses . Production expenses, which include lifting costs and ad valorem taxes, were $140 million in the Current Quarter, compared to $182 million in the Prior Quarter. On a unit-of-production basis, production expenses were $2.92 per boe in the Current Quarter compared to $3.05 per boe in the Prior Quarter. The absolute and per unit decrease in the Current Quarter was the result of operating efficiencies across most of our operating areas, as well as the sale of certain oil and natural gas properties in 2016. Production expenses in the Current Quarter and the Prior Quarter included approximately $5 million and $15 million, or $0.10 and $0.25 per boe, respectively, associated with VPP production volumes. In connection with certain 2016 divestitures, we purchased the remaining oil and natural gas interests previously sold in connection with five of our VPPs, and a majority of these repurchased oil and natural gas interests were subsequently sold. We anticipate a continued decrease in production expenses associated with VPP production volumes as the contractually scheduled volumes under our remaining VPP agreement decrease and operating efficiencies generally improve.
Oil, Natural Gas, and NGL Gathering, Processing and Transportation Expenses. Oil, natural gas and NGL gathering, processing and transportation expenses were $357 million in the Current Quarter compared to $481 million in the Prior Quarter. On a unit-of-production basis, gathering, processing and transportation expenses were $7.44 per boe in the Current Quarter compared to $8.04 per boe in the Prior Quarter. The absolute and per unit decrease primarily related to divestitures in 2016. A summary of oil, natural gas and NGL gathering, processing and transportation expenses by product is shown below.
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
Oil ($ per bbl)
 
$
3.70

 
$
3.64

Natural gas ($ per mcf)
 
$
1.37

 
$
1.48

NGL ($ per bbl)
 
$
7.87

 
$
7.61

Production Taxes . Production taxes were $21 million in the Current Quarter compared to $19 million in the Prior Quarter. On a unit-of-production basis, production taxes were $0.42 per boe in the Current Quarter compared to $0.32 per boe in the Prior Quarter. In general, production taxes are calculated using value-based formulas that produce higher per unit costs when oil, natural gas and NGL prices are higher. The absolute and per unit increase in production taxes in the Current Quarter was primarily due to higher prices received for our oil, natural gas and NGL production. Production taxes in both the Current Quarter and the Prior Quarter included approximately $1 million, or $0.02 per boe, associated with VPP production volumes.
General and Administrative Expenses . General and administrative expenses were $70 million in the Current Quarter and $61 million in the Prior Quarter, or $1.45 and $1.02 per boe, respectively. The absolute and per unit expense increase in the Current Quarter was primarily due to less overhead reflected as oil, natural gas and NGL production expenses, as well as less overhead billed to third party working interest owners, resulting from certain divestitures in 2016 and 2017.

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Chesapeake follows the full cost method of accounting under which all costs associated with oil and natural gas property acquisition, drilling and completion activities are capitalized. We capitalize internal costs that can be directly identified with the acquisition of leasehold, as well as drilling and completion activities, and do not include any costs related to production, general corporate overhead or similar activities. We capitalized $31 million and $35 million of internal costs in the Current Quarter and the Prior Quarter, respectively, directly related to our leasehold acquisition and drilling and completion efforts.
Restructuring and Other Termination Costs. We recorded expense of $3 million in the Prior Quarter for restructuring and other termination costs primarily related to the reduction in workforce in connection with the restructuring of our compressor manufacturing subsidiary and approximately $1 million related to PSU fair value adjustments.
Provision for Legal Contingencies. In the Current Quarter and the Prior Quarter, we recorded expense of $17 million and $71 million , respectively, for legal contingencies. Both the Current Quarter and the Prior Quarter provisions consist of adjustments for loss contingencies primarily related to royalty claims. See Note 4 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of royalty claims.
Oil, Natural Gas and NGL Depreciation, Depletion and Amortization . Depreciation, depletion and amortization (DD&A) of oil, natural gas and NGL properties was $202 million and $277 million in the Current Quarter and the Prior Quarter, respectively. The average DD&A rate per boe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $4.21 and $4.64 in the Current Quarter and the Prior Quarter, respectively. The decrease in the Current Quarter was primarily the result of decreased production as a result of the sale of certain of our Barnett and Mid-Continent assets in 2016 and the sale of certain of our Haynesville Shale assets in 2017.
Depreciation and Amortization of Other Assets . Depreciation and amortization of other assets was $21 million in the Current Quarter compared to $29 million in the Prior Quarter. On a unit-of-production basis, depreciation and amortization of other assets was $0.43 per boe in the Current Quarter compared to $0.48 per boe in the Prior Quarter. Property and equipment costs are depreciated on a straight-line basis over the estimated useful lives of the assets. The following table shows depreciation expense by asset class for the Current Quarter and the Prior Quarter and the estimated useful lives of these assets.
 
 
Three Months Ended
June 30,
 
Estimated
Useful
Life
 
 
2017
 
2016
 
 
 
($ in millions)
 
(in years)
Buildings and improvements
 
$
9

 
$
10

 
10 – 39
Computers and office equipment
 
5

 
5

 
5 – 7
Natural gas compressors (a)
 
4

 
7

 
3 – 20
Vehicles
 
1

 
1

 
5
Natural gas gathering systems and treating plants (a)
 
—

 
3

 
20
Other
 
2

 
3

 
5 – 12
Total depreciation and amortization of other assets
 
$
21

 
$
29

 
 
___________________________________________
(a)
Included in our marketing, gathering and compression operating segment.
Impairment of Oil and Natural Gas Properties. Our oil and natural gas properties are subject to quarterly full cost ceiling tests. Under the ceiling test, capitalized costs, less accumulated amortization and related deferred income taxes, may not exceed a ceiling amount equal to the sum of the present value of estimated future net revenues (adjusted for cash flow hedges) less estimated future expenditures to be incurred in developing and producing the proved reserves, less any related income tax effects. In the Current Quarter, capitalized costs of oil and natural gas properties did not exceed the ceiling. For the Prior Quarter, capitalized costs of oil and natural gas properties exceeded the ceiling, resulting in an impairment of the carrying value of our oil and natural gas properties of $1.070 billion .


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Impairments of Fixed Assets and Other. In the Current Quarter and the Prior Quarter, we recognized $26 million and $6 million , respectively, of fixed asset impairment losses and other charges. In the Current Quarter, we terminated future natural gas transportation commitments related to divested assets for a cash payment of $23 million . The Prior Quarter amount primarily related to charges incurred for terminating drilling contracts as a result of the decline in oil and natural gas prices.
Net (Gains) Losses on Sales of Fixed Assets. In the Current Quarter, net losses on sales of fixed assets were $1 million compared to net gains of $1 million in the Prior Quarter. The Current Quarter amounts primarily related to the sale of compressors. The Prior Quarter amounts primarily related to the sale of buildings, land and other property and equipment.
Interest Expense . Interest expense was $93 million in the Current Quarter compared to $62 million in the Prior Quarter as follows:
 
 
Three Months Ended
June 30,
 
 
2017
 
2016
 
 
($ in millions)
Interest expense on senior notes
 
$
136

 
$
148

Interest expense on term loan
 
32

 
—

Amortization of loan discount, issuance costs and other
 
6

 
7

Amortization of premium associated with troubled debt restructuring
 
(42
)
 
(41
)
Interest expense on revolving credit facilities
 
8

 
12

Realized gains on interest rate derivatives (a)
 
(1
)
 
(3
)
Unrealized (gains) losses on interest rate derivatives (b)
 
1

 
2

Capitalized interest
 
(47
)
 
(63
)
Total interest expense
 
$
93

 
$
62

 
 
 
 
 
Average senior notes borrowings
 
$
7,600

 
$
8,926

Average credit facilities borrowings
 
$
351

 
$
457

Average term loan borrowings
 
$
1,500

 
$
—

___________________________________________
(a)
Includes settlements related to the interest accrual for the period and the effect of (gains) losses on early-terminated trades. Settlements of early-terminated trades are reflected in realized (gains) losses over the original life of the hedged item.
(b)
Includes changes in the fair value of interest rate derivatives offset by amounts reclassified to realized (gains) losses during the period.
The decrease in interest expense on senior notes is due to the decrease in the average outstanding principal amount of senior notes. The decrease in capitalized interest resulted from lower average balances of unproved oil and natural gas properties, the primary asset on which interest is capitalized. Interest expense, excluding unrealized gains or losses on interest rate derivatives and net of amounts capitalized, was $1.92 per boe in the Current Quarter compared to $1.00 per boe in the Prior Quarter.
Losses on Investments. Losses on investments of $2 million in the Prior Quarter were related to our equity investment in Sundrop Fuels, Inc.
Gains (Losses) on Purchases or Exchanges of Debt . In the Current Quarter, we retired $682 million principal amount of our outstanding senior secured second lien notes through a tender offer for $750 million. We recorded an aggregate gain of approximately $191 million associated with the transaction.
In the Prior Quarter, we privately negotiated exchanges of approximately $472 million principal amount of our outstanding senior notes and contingent convertible senior notes for 92,096,360 common shares. We recorded an aggregate gain of approximately $68 million associated with these debt exchanges.

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Other Income (Expense) . Chesapeake recorded $1 million other expense in the Current Quarter and $3 million of other income in the Prior Quarter. The Current Quarter other expense consisted primarily of miscellaneous expenses. The Prior Quarter other income consisted of miscellaneous income.
Income Tax Expense (Benefit). Chesapeake recorded an income tax expense of $1 million in the Current Quarter. Our effective income tax rate was 0.2% in the Current Quarter and 0.0% in the Prior Quarter. The increase in the effective income tax rate from the Prior Quarter to the Current Quarter is primarily due to the accrual of current state income tax expenses in the Current Quarter. Further, our effective tax rate can fluctuate as a result of the impact of state income taxes and permanent differences. 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 income tax expense (benefit).
Net Income Attributable to Noncontrolling Interests . Chesapeake recorded net income attributable to noncontrolling interests of  $1 million and a nominal amount  in the Current Quarter and the Prior Quarter, respectively. In both quarters, activity was attributable to the Chesapeake Granite Wash Trust.
Results of Operations – Six Months Ended June 30, 2017 vs June 30, 2016
General . For the Current Period, Chesapeake had net income of $636 million , or $0.59 per diluted common share, on total revenues of $5.034 billion . This compares to a net loss of $2.844 billion , or $4.21 per diluted common share, on total revenues of $3.575 billion for the Prior Period. The increase in net income in the Current Period is attributable to an increase in the average realized prices we received for oil, natural gas and NGL production, partially offset by charges for terminating certain natural gas and oil transportation commitments. See Impairments of Fixed Assets and Other below. The net loss in the Prior Period was primarily driven by non-cash impairments of oil and natural gas properties. See Impairment of Oil and Natural Gas Properties below.
Oil, Natural Gas and NGL Sales . During the Current Period, oil, natural gas and NGL sales were $2.748 billion compared to $1.433 billion in the Prior Period. In the Current Period, Chesapeake sold 96 mmboe for $2.226 billion at a weighted average price of $23.29 per boe (excluding the effect of derivatives), compared to 121 mmboe sold in the Prior Period for $1.696 billion at a weighted average price of $14.01 per boe (excluding the effect of derivatives). The increase in the price received per boe in the Current Period compared to the Prior Period resulted in an $887 million increase in revenues, and decreased sales volumes resulted in a $357 million decrease in revenues, for a total increase in revenues of $530 million (excluding the effect of derivatives).
For the Current Period, our average price received per barrel of oil (excluding the effect of derivatives) was $48.83 , compared to $35.98 in the Prior Period. Natural gas prices received per mcf (excluding the effect of derivatives) were $2.99 and $1.69 in the Current Period and the Prior Period, respectively. NGL prices received per barrel (excluding the effect of derivatives) were $20.99 and $12.43 in the Current Period and the Prior Period, respectively.
Gains from our oil, natural gas and NGL derivatives resulted in a net increase in oil, natural gas and NGL revenues of $522 million in the Current Period and a net decrease of $263 million in the Prior Period, respectively. See Item 3. Quantitative and Qualitative Disclosures About Market Risk in Part I of this report for a listing of all of our derivative instruments as of June 30, 2017 .
A change in oil, natural gas and NGL prices has a significant impact on our revenues and cash flows. Assuming our Current Period production levels and without considering the effect of derivatives, an increase or decrease of $1.00 per barrel of oil sold would result in an increase or decrease in Current Period revenues and cash flows of approximately $16 million and $15 million, respectively, 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 $42 million, and an increase or decrease of $1.00 per barrel of NGL sold would result in an increase or decrease in Current Period revenues and cash flows of approximately $10 million.

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The following tables show production and average sales prices received by our operating divisions for the Current Period and the Prior Period:
 
 
Six Months Ended June 30, 2017
 
 
Oil
 
Natural Gas
 
NGL
 
Total
 
 
(mmbbl)
 
($/bbl) (a)
 
(bcf)
 
($/mcf) (a)  
 
(mmbbl)
 
($/bbl) (a)  
 
(mmboe)
 
%
 
($/boe) (a)
Marcellus
 
—

 
—

 
153

 
2.76

 
—

 
—

 
25

 
26

 
16.59

Haynesville
 
—

 
—

 
131

 
2.98

 
—

 
—

 
22

 
22

 
17.92

Eagle Ford
 
10

 
49.58

 
26

 
3.42

 
3

 
20.37

 
18

 
19

 
37.37

Utica
 
2

 
43.88

 
68

 
3.35

 
5

 
21.20

 
17

 
19

 
22.35

Mid-Continent
 
3

 
48.69

 
36

 
2.95

 
2

 
20.96

 
11

 
11

 
26.41

Powder River Basin
 
1

 
48.62

 
6

 
3.14

 
—

 
—

 
3

 
3

 
31.87

Other (b)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 


 
—

Total
 
16

 
48.83

 
420

 
2.99

 
10

 
20.99

 
96

 
100
%
 
23.29

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
 
Oil
 
Natural Gas
 
NGL
 
Total
 
 
(mmbbl)
 
($/bbl) (a)
 
(bcf)
 
($/mcf) (a)  
 
(mmbbl)
 
($/bbl) (a)
 
(mmboe)
 
%
 
($/boe) (a)
Marcellus
 
—

 
—

 
152

 
1.33

 
—

 
—

 
25

 
21

 
7.96

Haynesville
 
—

 
—

 
130

 
1.86

 
—

 
—

 
22

 
18

 
11.16

Eagle Ford
 
10

 
37.44

 
25

 
2.08

 
3

 
12.33

 
17

 
14

 
26.79

Utica
 
3

 
30.51

 
95

 
1.92

 
6

 
12.01

 
25

 
21

 
13.79

Mid-Continent
 
3

 
36.20

 
58

 
1.67

 
3

 
13.20

 
16

 
13

 
16.11

Powder River Basin
 
1

 
36.73

 
7

 
2.00

 
1

 
15.51

 
3

 
2

 
22.92

Other (b)
 
—

 
—

 
79

 
1.70

 
—

 
—

 
13

 
11

 
10.28

Total
 
17

 
35.98

 
546

 
1.69

 
13

 
12.43

 
121

 
100
%
 
14.01

___________________________________________
(a)
Average sales prices exclude gains and/or losses on derivatives.
(b)
Includes Central Texas and Devonian Shale.
Our average daily production of 528 mboe for the Current Period consisted of approximately 86 mbbls of oil ( 16% on an oil equivalent basis), approximately 2.3 bcf of natural gas ( 73% on an oil equivalent basis) and approximately 55 mbbls of NGL ( 11% on an oil equivalent basis). Oil production decreased by 8%, natural gas production decreased by 23% and NGL production decreased by 23% year over year primarily as a result of the sale of certain of our Barnett and Mid-Continent assets in 2016 and the sale of certain of our Haynesville Shale assets in 2017.
Excluding the impact of derivatives, our percentage of revenues from oil, natural gas and NGL is shown in the following table:
 
 
Six Months Ended
June 30,
 
 
2017
 
2016
Oil
 
34

 
36

Natural gas
 
57

 
54

NGL
 
9

 
10

  Total
 
100
%
 
100
%

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Marketing, Gathering and Compression Revenues and Expenses . Marketing, gathering and compression revenues consist of third-party revenues as well as fair value adjustments on our supply contract derivatives (see Note 8 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for additional information on our supply contract derivatives). Expenses related to our marketing, gathering and compression operations consist of third-party expenses and exclude depreciation and amortization, general and administrative expenses, impairments of fixed assets and other, net gains or losses on sales of fixed assets and interest expense. See Depreciation and Amortization of Other Assets below for the depreciation and amortization recorded on our marketing, gathering and compression assets. We recognized $2.286 billion in marketing, gathering and compression revenues in the Current Period with corresponding expenses of $2.355 billion , for a net loss of $69 million . This compares to revenues of $2.142 billion , of which $17 million related to unrealized losses on the fair value of our supply contract derivative, with corresponding expenses of $2.149 billion , for a net loss of $7 million in the Prior Period. Revenues and expenses increased in the Current Period compared to the Prior Period primarily as a result of higher oil, natural gas and NGL prices paid and received in our marketing operations. The margin decrease in the Current Period as compared to the Prior Period was primarily the result of the sale of a significant portion of our gathering and compression assets, concurrently with the associated upstream assets. Additionally, the Current Period includes losses on certain transportation contracts with third parties associated with assets divested in the fourth quarter of 2016.
Oil, Natural Gas and NGL Production Expenses . Production expenses, which include lifting costs and ad valorem taxes, were $275 million in the Current Period, compared to $388 million in the Prior Period. On a unit-of-production basis, production expenses were $2.88 per boe in the Current Period compared to $3.21 per boe in the Prior Period. The absolute and per unit decrease in the Current Period was the result of operating efficiencies across most of our operating areas, as well as the sale of certain oil and natural gas properties in 2016. Production expenses in the Current Period and the Prior Period included approximately $11 million and $28 million, or $0.11 and $0.23 per boe, respectively, associated with VPP production volumes. In connection with certain 2016 divestitures, we purchased the remaining oil and natural gas interests previously sold in connection with five of our VPPs, and a majority of these repurchased oil and natural gas interests were subsequently sold. We anticipate a continued decrease in production expenses associated with VPP production volumes as the contractually scheduled volumes under our remaining VPP agreement decrease and operating efficiencies generally improve.
Oil, Natural Gas, and NGL Gathering, Processing and Transportation Expenses. Oil, natural gas and NGL gathering, processing and transportation expenses were $712 million in the Current Period compared to $963 million in the Prior Period. On a unit-of-production basis, gathering, processing and transportation expenses were $7.45 per boe in the Current Period compared to $7.96 per boe in the Prior Period. The absolute and per unit decrease primarily related to divestitures in 2016. A summary of oil, natural gas and NGL gathering, processing and transportation expenses by product is shown below.
 
 
Six Months Ended
June 30,
 
 
2017
 
2016
Oil ($ per bbl)
 
$
3.77

 
$
3.46

Natural gas ($ per mcf)
 
$
1.36

 
$
1.47

NGL ($ per bbl)
 
$
8.16

 
$
7.60

Production Taxes . Production taxes were $43 million in the Current Period compared to $37 million in the Prior Period. On a unit-of-production basis, production taxes were $0.45 per boe in the Current Period compared to $0.31 per boe in the Prior Period. In general, production taxes are calculated using value-based formulas that produce higher per unit costs when oil, natural gas and NGL prices are higher. The absolute and per unit increase in production taxes in the Current Period was primarily due to higher prices received for our oil, natural gas and NGL production. Production taxes in the Prior Period included $2 million, $0.02 per boe associated with VPP production volumes.
General and Administrative Expenses . General and administrative expenses were $135 million in the Current Period and $109 million in the Prior Period, or $1.40 and $0.90 per boe, respectively. The absolute and per unit expense increase in the Current Period was primarily due to less overhead reflected as oil, natural gas and NGL production expenses, as well as less overhead billed to third party working interest owners, resulting from certain divestitures in 2016 and 2017.

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Chesapeake follows the full cost method of accounting under which all costs associated with oil and natural gas property acquisition, drilling and completion activities are capitalized. We capitalize internal costs that can be directly identified with the acquisition of leasehold, as well as drilling and completion activities, and do not include any costs related to production, general corporate overhead or similar activities. We capitalized $67 million and $72 million of internal costs in the Current Period and the Prior Period, respectively, directly related to our leasehold acquisition and drilling and completion efforts.
Restructuring and Other Termination Costs. We recorded an expense of $3 million in the Prior Period for restructuring and other termination costs primarily related to the reduction in workforce in connection with the restructuring of our compressor manufacturing subsidiary and approximately $1 million related to PSU fair value adjustments.
Provision for Legal Contingencies. In the Current Period and the Prior Period, we recorded expense of $15 million and $104 million , respectively, for legal contingencies. Both the Current Period and the Prior Period provisions consist of adjustments for loss contingencies primarily related to royalty claims. See Note 4 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for further discussion of royalty claims.
Oil, Natural Gas and NGL Depreciation, Depletion and Amortization . Depreciation, depletion and amortization (DD&A) of oil, natural gas and NGL properties was $399 million and $540 million in the Current Period and the Prior Period, respectively. The average DD&A rate per boe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $4.18 and $4.47 in the Current Period and the Prior Period, respectively. The decrease in the Current Period was primarily the result of decreased production as a result of the sale of certain of our Barnett and Mid-Continent assets in 2016 and the sale of certain of our Haynesville Shale assets in 2017.
Depreciation and Amortization of Other Assets . Depreciation and amortization of other assets was $42 million in the Current Period compared to $58 million in the Prior Period. On a unit-of-production basis, depreciation and amortization of other assets was $0.44 per boe in the Current Period compared to $0.48 per boe in the Prior Period. Property and equipment costs are depreciated on a straight-line basis over the estimated useful lives of the assets. The following table shows depreciation expense by asset class for the Current Period and the Prior Period and the estimated useful lives of these assets.
 
 
Six Months Ended
June 30,
 
Estimated
Useful
Life
 
 
2017
 
2016
 
 
 
($ in millions)
 
(in years)
Buildings and improvements
 
$
18

 
$
20

 
10 – 39
Computers and office equipment
 
10

 
9

 
5 – 7
Natural gas compressors (a)
 
8

 
15

 
3 – 20
Vehicles
 
1

 
2

 
5
Natural gas gathering systems and treating plants (a)
 
—

 
5

 
20
Other
 
5

 
7

 
5 – 12
Total depreciation and amortization of other assets
 
$
42

 
$
58

 
 
___________________________________________
(a)
Included in our marketing, gathering and compression operating segment.
Impairment of Oil and Natural Gas Properties. Our oil and natural gas properties are subject to quarterly full cost ceiling tests. Under the ceiling test, capitalized costs, less accumulated amortization and related deferred income taxes, may not exceed a ceiling amount equal to the sum of the present value of estimated future net revenues (adjusted for cash flow hedges) less estimated future expenditures to be incurred in developing and producing the proved reserves, less any related income tax effects. In the Current Period, capitalized costs of oil and natural gas properties did not exceed the ceiling. For the Prior Period, capitalized costs of oil and natural gas properties exceeded the ceiling, resulting in an impairment of the carrying value of our oil and natural gas properties of $2.067 billion .


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Impairments of Fixed Assets and Other. In the Current Period and the Prior Period, we recognized $417 million and $44 million , respectively, of fixed asset impairment losses and other charges. In the Current Period, we paid $290 million to assign an oil transportation agreement to a third party. In addition, we terminated future natural gas transportation commitments related to divested assets for a cash payment of $126 million . The Prior Period amount primarily related to impairments of certain of our buildings, land and compressors as well as charges incurred for terminating drilling contracts as a result of the decline in oil and natural gas prices.
Net (Gains) Losses on Sales of Fixed Assets. In the Current Period, net losses on sales of fixed assets were $1 million compared to net gains of $5 million in the Prior Period. The Current Period and the Prior Period amounts primarily related to the sale of buildings, land and other property and equipment.
Interest Expense . Interest expense was $188 million in the Current Period compared to $124 million in the Prior Period as follows:
 
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
 
($ in millions)
Interest expense on senior notes
 
$
272

 
$
305

Interest expense on term loan
 
64

 
—

Amortization of loan discount, issuance costs and other
 
15

 
18

Amortization of premium associated with troubled debt restructuring
 
(83
)
 
(83
)
Interest expense on revolving credit facilities
 
17

 
17

Realized gains on interest rate derivatives (a)
 
(2
)
 
(6
)
Unrealized losses on interest rate derivatives (b)
 
3

 
5

Capitalized interest
 
(98
)
 
(132
)
Total interest expense
 
$
188

 
$
124

 
 
 
 
 
Average senior notes borrowings
 
$
7,644

 
$
9,246

Average credit facilities borrowings
 
$
176

 
$
263

Average term loan borrowings
 
$
1,500

 
$
—

___________________________________________
(a)
Includes settlements related to the interest accrual for the period and the effect of (gains) losses on early-terminated trades. Settlements of early-terminated trades are reflected in realized (gains) losses over the original life of the hedged item.
(b)
Includes changes in the fair value of interest rate derivatives offset by amounts reclassified to realized (gains) losses during the period.
The decrease in interest expense on senior notes is due to the decrease in the average outstanding principal amount of senior notes. The decrease in capitalized interest resulted from lower average balances of unproved oil and natural gas properties, the primary asset on which interest is capitalized. Interest expense, excluding unrealized gains or losses on interest rate derivatives and net of amounts capitalized, was $1.94 per boe in the Current Period compared to $0.99 per boe in the Prior Period.
Losses on Investments. Losses on investments of $2 million in the Prior Period were related to our equity investment in Sundrop Fuels, Inc.
Loss on Sale of Investment . In the Prior Period, we sold certain of our mineral interests and assigned our partnership interest in Mineral Acquisition Company I, L.P. to KKR Royalty Aggregator LLC. As a result of the transaction, we wrote off our equity investment and recognized a $10 million loss .

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Gains (Losses) on Purchases or Exchanges of Debt . In the Current Period, we retired $1.604 billion principal amount of our outstanding senior notes, senior secured second lien notes and contingent convertible notes through purchases in the open market, tender offers or repayment upon maturity for $1.746 billion , which included the maturity of our 6.25% Euro-denominated Senior Notes due 2017 and the corresponding cross currency swap. We recorded an aggregate gain of approximately $184 million associated with the repurchases and tender offers.
In the Prior Period, we retired $558 million principal amount of our outstanding senior notes and contingent convertible senior notes through purchases in the open market, tender offers or repayment upon maturity for $472 million . Additionally, we privately negotiated an exchange of approximately $577 million principal amount of our outstanding senior notes and contingent convertible senior notes for 109,351,707 common shares. We recorded an aggregate gain of approximately $168 million associated with the repurchases and exchanges.
Other Income . Other income was $2 million and $6 million in the Current Period and the Prior Period, respectively. The Current Period other income consisted primarily of miscellaneous income. The Prior Period other income consisted of $1 million of interest income and $5 million of miscellaneous income.
Income Tax Expense (Benefit). Chesapeake recorded an income tax expense of $2 million in the Current Period. Our effective income tax rate was 0.3% in the Current Period and 0.0% in the Prior Period. The increase in the effective income tax rate from the Prior Period to the Current Period is primarily due to the accrual of current state income tax expenses in the Current Period. Further, our effective tax rate can fluctuate as a result of the impact of state income taxes and permanent differences. 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 income tax expense (benefit).
Net Income Attributable to Noncontrolling Interests . Chesapeake recorded net income attributable to noncontrolling interests of  $2 million and a nominal amount  in the Current Period and the Prior Period, respectively. In both periods, activity was attributable to the Chesapeake Granite Wash Trust.
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 oil, natural gas and NGL production and future expenses, estimated operating costs, assumptions regarding future oil, natural gas and NGL prices, planned drilling activity, estimates of future drilling and completion and other capital expenditures (including the use of joint venture drilling carries), potential future write-downs of our oil and natural gas assets, anticipated sales, and the adequacy of our provisions for legal contingencies, as well as statements concerning anticipated cash flow and liquidity, ability to fund planned capital expenditures and debt service requirements and comply with financial maintenance covenants, meet contractual cash commitments to third parties, debt repurchases, operating and capital efficiencies, business strategy, the effect of our remediation plan for a material weakness, and other plans and objectives for future operations. 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 annual report on Form 10-K for the year ended December 31, 2016 (2016 Form 10-K) and include:
•
the volatility of oil, natural gas and NGL prices;
•
the limitations our level of indebtedness may have on our financial flexibility;
•
our inability to access the capital markets on favorable terms;
•
the availability of cash flows from operations and other funds to finance reserve replacement costs or satisfy our debt obligations;
•
our credit rating requiring us to post more collateral under certain commercial arrangements;
•
write-downs of our oil and natural gas asset carrying values due to low commodity prices;
•
our ability to replace reserves and sustain production;

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•
uncertainties inherent in estimating quantities of oil, natural gas 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;
•
commodity derivative activities resulting in lower prices realized on oil, natural gas and NGL sales;
•
the need to secure derivative liabilities and the inability of counterparties to satisfy their obligations;
•
adverse developments or losses from pending or future litigation and regulatory proceedings, including royalty claims;
•
charges incurred in response to market conditions and in connection with our ongoing actions to reduce financial leverage and complexity;
•
drilling and operating risks and resulting liabilities;
•
effects of environmental protection laws and regulation on our business;
•
legislative and regulatory initiatives further regulating hydraulic fracturing;
•
our need to secure adequate supplies of water for our drilling operations and to dispose of or recycle the water used;
•
impacts of potential legislative and regulatory actions addressing climate change;
•
federal and state tax proposals affecting our industry;
•
potential OTC derivatives regulation limiting our ability to hedge against commodity price fluctuations;
•
competition in the oil and gas exploration and production industry;
•
a deterioration in general economic, business or industry conditions;
•
negative public perceptions of our industry;
•
limited control over properties we do not operate;
•
pipeline and gathering system capacity constraints and transportation interruptions;
•
terrorist activities and/or cyber-attacks adversely impacting our operations;
•
potential challenges by SSE’s former creditors of our spin-off of in connection with SSE’s recently completed bankruptcy under Chapter 11 of the U.S. Bankruptcy Code;
•
an interruption in operations at our headquarters due to a catastrophic event;
•
the continuation of suspended dividend payments on our common stock;
•
the effectiveness of our remediation plan for a material weakness;
•
certain anti-takeover provisions that affect shareholder rights; and
•
our inability to increase or maintain our liquidity through debt repurchases, capital exchanges, asset sales, joint ventures, farmouts or other means.
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 except as required by applicable law. We urge you to carefully review and consider the disclosures 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
Oil, Natural Gas and NGL Derivatives
Our results of operations and cash flows are impacted by changes in market prices for oil, natural gas 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 share of production. We believe our derivative instruments continue to be highly effective in achieving our risk management objectives.

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Our general strategy for protecting short-term cash flow and attempting to mitigate exposure to adverse oil, natural gas and NGL price changes is to hedge into strengthening oil and natural gas futures markets when prices reach levels that management believes are 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, oil and natural gas storage inventory levels, industry decline rates for base production and weather trends.
We use derivative instruments to achieve our risk management objectives, including swaps, collars and options. All of these are described in more detail below. We typically use swaps and collars for a large portion of the oil and natural gas price risk we hedge. We have also sold calls, taking advantage of premiums associated with market price volatility.
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 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 volumes in excess of our share of forecasted production, and if production estimates were lowered for future periods and derivative instruments are already executed for some volume above the new production forecasts, the positions would be reversed. The actual fixed price on our derivative instruments is derived from the reference NYMEX price, as reflected in current NYMEX trading. The pricing dates of our derivative contracts follow NYMEX futures. All of our commodity derivative instruments are net settled based on the difference between the fixed price as stated in the contract and the floating-price, resulting in a net amount due to or from the counterparty.
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 this 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 review when deciding to enter into the original derivative position. Gains or losses related to closed positions will be recognized 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 counterparty valuations for reasonableness. Derivative transactions are also subject to the risk that counterparties will be unable to meet their obligations. This 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 commodity hedging arrangements that require 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 8 of the notes to our 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, 2017 , our oil, natural gas and NGL 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 the excess on sold call options, and Chesapeake receives the 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.
•
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 prices, no payments are due from either party.
•
Basis Protection Swaps : These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. Chesapeake receives the fixed price differential and pays the floating market price differential to the counterparty for the hedged commodity.

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As of June 30, 2017 , we had the following open oil and natural gas derivative instruments:
 
 
 
 
Weighted Average Price
 
Fair Value
 
 
Volume
 
Fixed
 
Call
 
Put
 
Differential
 
Asset
(Liability)
 
 
(mmbbl)
 
($ per bbl)
 
($ in millions)
Oil:
 
 
 
 
 
 
 
 
 
 
 
 
Swaps:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term
 
12

 
$
50.40

 
$
—

 
$
—

 
$
—

 
$
43

Long-term
 
1

 
$
51.43

 
$
—

 
$
—

 
$
—

 
2

Call Options (sold):
 
 
 
 
 
 
 
 
 
 
 
 
Short-term
 
3

 
$
—

 
$
83.50

 
$
—

 
$
—

 
—

Total Oil
 
45

 
 
(tbtu)
 
($ per mmbtu)
 

Natural Gas:
 
 
 
 
 
 
 
 
 
 
 
 
Swaps:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term
 
540

 
$
3.16

 
$
—

 
$
—

 
$
—

 
21

Long-term
 
164

 
$
2.95

 
$
—

 
$
—

 
$
—

 
7

Collars:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term
 
47

 
$
—

 
$
3.46

 
$
3.13

 
$
—

 
6

Long-term
 
24

 
$
—

 
$
3.25

 
$
3.00

 
$
—

 
4

Call Options (sold):
 
 
 
 
 
 
 
 
 
 
 
 
Short-term
 
35

 
$
—

 
$
10.23

 
$
—

 
$
—

 
—

Long-term
 
55

 
$
—

 
$
12.00

 
$
—

 
$
—

 
—

Basis Protection Swaps:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term
 
13

 
$
—

 
$
—

 
$
—

 
$
(0.51
)
 
(2
)
Total Natural Gas
 
36

Total Estimated Fair Value
 
$
81

In addition to the open derivative positions disclosed above, as of June 30, 2017 , we had $39 million of net derivative losses related to settled contracts for future production periods that will be recorded within oil, natural gas and NGL sales as realized gains (losses) on derivatives once they are transferred from either accumulated other comprehensive income or unrealized gains (losses) on derivatives in the month of related production, based on the terms specified in the original contract as noted below.  
 
 
June 30,
2017
 
 
($ in millions)
Short-term
 
$
30

Long-term
 
(69
)
Total
 
$
(39
)

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The table below reconciles the changes in fair value of our oil and natural gas derivatives during the Current Period . Of the $81 million fair value asset as of June 30, 2017 , a $68 million asset relates to contracts maturing in the next 12 months and a $13 million asset relates to contracts maturing after 12 months. All open derivative instruments as of June 30, 2017 are expected to mature by December 31, 2020.
 
 
June 30,
2017
 
 
($ in millions)
Fair value of contracts outstanding, as of January 1, 2017
 
$
(504
)
Change in fair value of contracts
 
540

Contracts realized or otherwise settled
 
45

Fair value of contracts outstanding, as of June 30, 2017
 
$
81

The change in oil and natural gas prices during the Current Period decreased the liability related to our derivative instruments by $540 million . This unrealized gain is recorded in oil, natural gas and NGL sales. We settled contracts in the Current Period that were in a liability position for $45 million . Realized gains and losses will be recorded in oil, natural gas and NGL sales in the month of related production.
Interest Rate Derivatives
The table below presents principal cash flows and related weighted average interest rates by expected maturity dates, using the earliest demand repurchase date for contingent convertible senior notes. As of June 30, 2017 , we had total debt of $9.710 billion , including $7.255 billion of fixed rate debt at interest rates averaging 6.87% and $2.455 billion of floating rate debt at an interest rate of 6.72% .
 
Years of Maturity
 
 
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
($ in millions)
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt – fixed rate (a)
$
1

 
$
55

 
$
—

 
$
853

 
$
820

 
$
5,526

 
$
7,255

Average interest rate
2.50
%
 
6.45
%
 
—
%
 
6.70
%
 
5.88
%
 
7.04
%
 
6.87
%
Debt – variable rate
$
—

 
$
—

 
$
955

 
$
—

 
$
1,500

 
$
—

 
$
2,455

Average interest rate
—
%
 
—
%
 
3.92
%
 
—
%
 
8.50
%
 
—
%
 
6.72
%
___________________________________________
(a)
This amount excludes the premium, discount and deferred financing costs included in debt of $141 million and interest rate derivatives of $2 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 credit facility, term loan and our floating rate senior notes. 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.
From time to time, we enter into interest rate derivatives, including 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 and 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 revolving credit facility borrowings. As of June 30, 2017 , there were no interest rate derivatives outstanding.
As of June 30, 2017 , we had $10 million of net gains related to settled derivative contracts that will be recorded within interest expense as realized gains or losses once they are transferred from our senior note liability or within interest expense as unrealized gains or losses over the remaining six-year term of our related senior notes.
Realized and unrealized (gains) or losses from interest rate derivative transactions are reflected as adjustments to interest expense on the consolidated statements of operations.

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Foreign Currency Derivatives
During the Current Period, both our 6.25% Euro-denominated Senior Notes due 2017 and cross currency swaps for the same principal amount matured. Upon maturity of the notes, t he counterparties paid us €246 million and we paid the counterparties $327 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. The swaps were designated as cash flow hedges and, because they were entirely effective in having eliminated any potential variability in our expected cash flows related to changes in foreign exchange rates, changes in their fair value did not impact earnings. The fair values of the cross currency swaps were recorded on the condensed consolidated balance sheet as a liability of $73 million as of December 31, 2016.
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 on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2017, because of the material weakness in our internal control over financial reporting described in Management’s Report on Internal Control Over Financial Reporting appearing under Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2016.
Remediation Plan for the Material Weakness
Our management is actively engaged in remediation efforts to address the material weakness identified. Specifically, our management is in the process of implementing a control related to reviewing the configuration of the basis price differential calculations, including a control activity to verify any subsequent changes are appropriately reviewed and that the interface control is designed to validate the data at an appropriately disaggregated level. Our management believes that these actions will remediate the material weakness in internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2017 , which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
ITEM 1.
Legal Proceedings
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 or may seek damages and penalties, the amount of which is currently indeterminate. See Note 4 of the notes to our condensed consolidated financial statements included in Item 1 of Part I of this report for information regarding our estimation and provision for potential losses related to litigation and regulatory proceedings.
Regulatory and Related Proceedings. The Company has received, from the U.S. Department of Justice (DOJ) and certain state governmental agencies and authorities, subpoenas and demands for documents, information and testimony in connection with investigations into possible violations of federal and state antitrust laws relating to our purchase and lease of oil and natural gas rights in various states. The Company also has received DOJ, U.S. Postal Service and state subpoenas seeking information on the Company’s royalty payment practices. Chesapeake has engaged in discussions with the DOJ, U.S. Postal Service and state agency representatives and continues to respond to such subpoenas and demands.
In addition, the Company received a DOJ subpoena and a voluntary document request from the SEC seeking information on our accounting methodology for the acquisition and classification of oil and natural gas properties and related matters. On October 4, 2016, a securities class action was filed in the U.S. District Court for the Western District of Oklahoma against the Company and certain current directors and officers of the Company alleging, among other things, violations of federal securities laws for purported misstatements in the Company’s SEC filings and other public disclosures regarding the Company’s accounting for the acquisition and classification of oil and natural gas properties. On June 20, 2017, the DOJ orally advised Chesapeake that it was closing its investigation, and on July 17, 2017, the SEC indicated by letter that it had concluded its investigation and that it did not intend to recommend an enforcement action on the matter. The related securities class action was dismissed on March 14, 2017.
On July 10, 2017, Chesapeake, its Benefits Committee, its Investment Committee and certain employees were named as defendants in a purported Employee Retirement Income Security Act of 1974 (ERISA) class action filed in the United States District Court for the Western District of Oklahoma (the “ERISA Lawsuit”). The ERISA Lawsuit alleges violations of Sections 404, 405, 409 and 502 of ERISA with respect to the Company’s common stock held in its Savings and Incentive Stock Bonus Plan (the “Plan”). The plaintiffs seek to represent a class of persons who were participants in the Plan after June 1, 2014. The plaintiffs also seek damages, imposition of a constructive trust and other relief, including attorneys’ fees, based on allegations that the defendants breached their fiduciary duties by continuing to allow the Company’s common stock to remain as an investment option under the Plan during the class period.
Business Operations. Chesapeake is involved in various other lawsuits and disputes incidental to its business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions.
Regarding royalty claims, Chesapeake and other natural gas producers have been named in various lawsuits alleging royalty underpayment. The suits against us allege, among other things, that we used below-market prices, made improper deductions, used improper measurement techniques and/or entered into arrangements with affiliates that resulted in underpayment of royalties in connection with the production and sale of natural gas and NGL. Plaintiffs have varying royalty provisions in their respective leases. Oil and gas law varies from state to state, and royalty owners and producers differ in their interpretation of the legal effect of lease provisions governing royalty calculations. The Company has resolved a number of these claims through negotiated settlements of past and future royalties and has prevailed in various other lawsuits. We are currently defending lawsuits seeking damages with respect to royalty underpayment in various states, including, but not limited to, Texas, Pennsylvania, Ohio, Oklahoma, Kentucky, Louisiana and Arkansas. These lawsuits include cases filed by individual royalty owners and putative class actions, some of which seek to certify a statewide class.

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Chesapeake is defending numerous lawsuits filed by individual royalty owners alleging royalty underpayment with respect to properties in Texas. These lawsuits, organized for pre-trial proceedings with respect to the Barnett Shale and Eagle Ford Shale, respectively, generally allege that Chesapeake underpaid royalties by making improper deductions, using incorrect production volumes and similar theories. Chesapeake expects that additional lawsuits will continue to be pursued and that new plaintiffs will file other lawsuits making similar allegations.
On December 9, 2015, the Commonwealth of Pennsylvania, by the Office of Attorney General, filed a lawsuit in the Bradford County Court of Common Pleas related to royalty underpayment and lease acquisition and accounting practices with respect to properties in Pennsylvania. The lawsuit, which primarily relates to the Marcellus Shale and Utica Shale, alleges that Chesapeake violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL) by making improper deductions and entering into arrangements with affiliates that resulted in underpayment of royalties. The lawsuit includes other UTPCPL claims and antitrust claims, including that a joint exploration agreement to which Chesapeake is a party established unlawful market allocation for the acquisition of leases. The lawsuit seeks statutory restitution, civil penalties and costs, as well as temporary injunction from exploration and drilling activities in Pennsylvania until restitution, penalties and costs have been paid and a permanent injunction from further violations of the UTPCPL.
Putative statewide class actions in Pennsylvania and Ohio and purported class arbitrations in Pennsylvania have been filed on behalf of royalty owners asserting various claims for damages related to alleged underpayment of royalties as a result of the Company’s divestiture of substantially all of its midstream business and most of its gathering assets in 2012 and 2013. These cases include claims for violation of and conspiracy to violate the federal Racketeer Influenced and Corrupt Organizations Act and for an unlawful market allocation agreement for mineral rights. One of the cases includes claims of intentional interference with contractual relations and violations of antitrust laws related to purported markets for gas mineral rights, operating rights and gas gathering sources.
The Company is also defending lawsuits alleging various violations of the Sherman Antitrust Act and state antitrust laws. In 2016, putative class action lawsuits have been filed in the U.S. District Court for the Western District of Oklahoma and in Oklahoma state courts, and an individual lawsuit was filed in the U.S. District Court of Kansas, in each case against the Company and other defendants. The lawsuits generally allege that, since 2007 and continuing through April 2013, the defendants conspired to rig bids and depress the market for the purchases of oil and natural gas leasehold interests and properties in the Anadarko Basin containing producing oil and natural gas wells. The lawsuits seek damages, attorney’s fees, costs and interest, as well as enjoinment from adopting practices or plans that would restrain competition in a similar manner as alleged in the lawsuits.
Environmental Proceedings
Our subsidiary Chesapeake Appalachia, LLC (CALLC) is engaged in discussions with the EPA, the U.S. Army Corps of Engineers and the Pennsylvania Department of Environmental Protection (PADEP) regarding potential violations of the permitting requirements of the federal Clean Water Act, the Pennsylvania Clean Streams Law and the Pennsylvania Dam Safety and Encroachments Act in connection with the placement of dredge and fill material during construction of certain sites in Pennsylvania. CALLC identified the potential violations in connection with an internal review of its facilities siting and construction processes and voluntarily reported them to the regulatory agencies. Resolution of the matter may result in monetary sanctions of more than $100,000.
On December 27, 2016, we received a Finding of Violation from the EPA alleging violations of the Clean Air Act at a number of locations in Ohio. We have exchanged information with the EPA and are engaged in discussions aimed at resolving the allegations. Resolution of the matter may result in monetary sanctions of more than $100,000.
We are named as a defendant in a number of putative class actions in Oklahoma alleging that we and several other companies have engaged in activities that have caused earthquakes. These actions seek, among other things, compensation for injury to real property, reimbursement of insurance premiums, and punitive damages.
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 2016 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.

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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, 2017 :
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
Approximate
Dollar Value
of Shares
That May Yet
Be Purchased
Under
the Plans
or Programs (b)
 
 
 
 
 
 
 
 
($ in millions)
April 1, 2017 through April 30, 2017
 
6,089

 
$
5.86

 
—

 
$
—

May 1, 2017 through May 31, 2017
 
1,385

 
$
5.06

 
—

 
$
—

June 1, 2017 through June 30, 2017
 
128,009

 
$
5.10

 
—

 
$
—

Total
 
135,483

 
$
5.13

 
—

 
 
___________________________________________
(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. Also includes shares of common stock purchased on behalf of Chesapeake’s deferred compensation plan related to participant deferrals and Company matching contributions.
(b)
In December 2014, Chesapeake’s Board of Directors authorized the repurchase of up to $1 billion of our common stock from time to time. The repurchase program does not have an expiration date. As of June 30, 2017, there have been no repurchases under the program.
ITEM 3.
Defaults Upon Senior Securities
Not applicable.
ITEM 4.
Mine Safety Disclosures
Not applicable.
ITEM 5.
Other Information
On August 2, the Board of Directors appointed Domenic J. Dell’Osso, who has served as the Company’s Executive Vice President and Chief Financial Officer since November 2010, to serve as interim principal accounting officer.

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ITEM 6.
Exhibits
The exhibits listed below in the Index of Exhibits are filed, furnished or incorporated by reference pursuant to the requirements of Item 601 of Regulation S-K.
INDEX OF EXHIBITS
 
 
 
 
Incorporated by Reference
 
  Filed or Furnished
Herewith
Exhibit
Number
 
Exhibit Description
 
Form
 
SEC File
Number
 
Exhibit
 
Filing Date
 
3.1.1
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1.2
 
 
10-Q
 
001-13726
 
3.1.4
 
11/10/2008
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1.3
 
 
10-Q
 
001-13726
 
3.1.6
 
8/11/2008
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1.4
 
 
8-K
 
001-13726
 
3.2
 
5/20/2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1.5
 
 
10-Q
 
001-13726
 
3.1.5
 
8/9/2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2
 
 
8-K
 
001-13726
 
3.2
 
6/19/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1
 
 
8-K
 
001-13726
 
4.1
 
4/29/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.2
 
 
8-K
 
001-13726
 
4.2
 
6/7/2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.3
 
 
8-K
 
001-13726
 
4.4
 
6/7/2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.4
 
 
8-K
 
001-13726
 
10.1
 
5/22/2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
12
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 

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Incorporated by Reference
 
  Filed or Furnished
Herewith
Exhibit
Number
 
Exhibit Description
 
Form
 
SEC File
Number
 
Exhibit
 
Filing Date
 
31.1
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
31.2
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
32.2
 
 
 
 
 
 
 
 
 
 
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



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SIGNATURES
Pursuant to the requirements 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 3, 2017
By:  
 
/s/ ROBERT D. LAWLER 
 
 
 
Robert D. Lawler ,
President and Chief Executive Officer
 
 
 
 
Date: August 3, 2017
By:  
 
/s/ DOMENIC J. DELL’OSSO, JR.
 
 
 
Domenic J. Dell’Osso, Jr.
Executive Vice President and
Chief Financial Officer



Exhibit 3.1.1
RESTATED CERTIFICATE OF INCORPORATION
OF
CHESAPEAKE ENERGY CORPORATION
The undersigned, James R. Webb, hereby certifies that:
A. The name of the corporation is Chesapeake Energy Corporation (the “ Corporation ”).
B. He is the duly elected and acting Executive Vice President ‑ General Counsel and Corporate Secretary of the Corporation.
C. The Corporation was incorporated on November 19, 1996, under the name “Chesapeake Oklahoma Corporation” upon the filing with the Secretary of State of Oklahoma of its original Certificate of Incorporation (as amended and restated, the “ Certificate of Incorporation ”).
D. This Restated Certificate of Incorporation was duly adopted in accordance with Section 1080 of the Oklahoma General Corporation Act (the “ Act ”) by the Board of Directors of the Corporation, and merely restates and integrates and does not further amend the Certificate of Incorporation as currently amended or supplemented, and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation.
E. The following, as amended through this date and as they may be subsequently amended, remain in full force and effect: (a) the Certificate of Designation of 4.5% Cumulative Convertible Preferred Stock, filed with the Secretary of State of Oklahoma on September 13, 2005; (b) the Certificate of Designation of 5% Cumulative Convertible Preferred Stock (Series 2005B), filed with the Secretary of State of Oklahoma on November 7, 2005; (c) the Certificate of Designations of 5.75% Cumulative Non-Voting Convertible Preferred Stock (Series A), filed with the Secretary of State of Oklahoma on May 14, 2010; and (d) the Certificate of Designations of 5.75% Cumulative Non-Voting Convertible Preferred Stock, filed with the Secretary of State of Oklahoma on May 14, 2010.
F. This Restated Certificate of Incorporation is restated in its entirety to read as follows:
ARTICLE I
NAME
The name of the Corporation is:
CHESAPEAKE ENERGY CORPORATION
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the Corporation’s registered office in the State of Oklahoma is 1833 South Morgan Road, Oklahoma City, Oklahoma 73128. The Corporation’s registered agent at such address is The Corporation Company.



ARTICLE III
PURPOSES
The nature of the business and the purpose of the Corporation shall be to engage in any lawful act or activity and to pursue any lawful purpose for which a corporation may be formed under the Oklahoma General Corporation Act (the “Act”). The Corporation is authorized to exercise and enjoy all powers, rights and privileges which corporations organized under the Act may have as in force from time to time, including, without limitation, all powers, rights and privileges necessary or convenient to carry out the purposes of the Corporation.
ARTICLE IV
CAPITAL STOCK
The total number of shares of capital stock which the Corporation shall have authority to issue is Two Billion Twenty Million (2,020,000,000) shares consisting of Twenty Million (20,000,000) shares of Preferred Stock, par value $0.01 per share, and Two Billion (2,000,000,000) shares of Common Stock, par value $0.01 per share. The preferences, qualifications, limitations, restrictions and the special or relative rights in respect of the shares of each class are as follows:
1.     Preferred Stock . The Preferred Stock may be issued from time to time in one or more series. All shares of Preferred Stock shall be of equal rank and shall be identical, except in respect of the matters that may be fixed and determined by the Board of Directors as hereinafter provided, and each share of each series shall be identical with all other shares of such series, except as to the date from which dividends are cumulative. The Board of Directors hereby is authorized to cause such shares to be issued in one or more series and with respect to each such series prior to the issuance thereof to fix and determine the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following:
(a) The number of shares constituting a series, the distinctive designation of a series and the stated value of the series, if different from the par value;
(b) Whether the shares of a series are entitled to any fixed or determinable dividends, the dividend rate (if any) on the shares, whether the dividends are cumulative and the relative rights of priority of dividends on shares of that series;
(c) Whether a series has voting rights in addition to the voting rights provided by law and the terms and conditions of such voting rights;
(d) Whether a series will have or receive conversion or exchange privileges and the terms and conditions of such conversion or exchange privileges;
(e) Whether or not the shares of a series are redeemable and the terms and conditions of such redemption, including, without limitation, the manner of selecting shares for redemption if less than all shares are to be redeemed, the date or dates on or after which the shares in the series will be redeemable and the amount payable in case of redemption;
(f) Whether a series will have a sinking fund for the redemption or purchase of the shares in the series and the terms and the amount of such sinking fund;

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(g) The right of a series to the benefit of conditions and restrictions on the creation of indebtedness of the Corporation or any subsidiary; on the issuance of any additional capital stock (including additional shares of such series or any other series), on the payment of dividends or the making of other distributions on any outstanding stock of the Corporation and the purchase, redemption or other acquisition by the Corporation, or any subsidiary, of any outstanding stock of the Corporation;
(h) The rights of a series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation and the relative rights of priority of payment of a series; and
(i) Any other relative, participating, optional or other special rights, qualifications, limitations or restrictions of such series.
Dividends on outstanding shares of Preferred Stock shall be paid or set apart for payment before any dividends shall be paid or declared or set apart for payment on the common shares with respect to the same dividend period.
If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto.
2.     Common Stock . The Common Stock shall be subject to the express terms of the Preferred Stock and any series thereof. Each share of Common Stock shall be equal to every other share of Common Stock. The holders of shares of Common Stock shall be entitled to one vote for each share of such stock upon all matters presented to the shareholders. Shares of Common Stock authorized hereby shall not be subject to preemptive rights. The holders of shares of Common Stock now or hereafter outstanding shall have no preemptive right to purchase or have offered to them for purchase any of such authorized but unissued shares. The holders of shares of Common Stock now or hereafter outstanding shall have no preemptive right to purchase or have offered to them for purchase any shares of Preferred Stock, Common Stock or other equity securities issued or to be issued by the Corporation.
Subject to the preferential and other dividend rights applicable to the Preferred Stock, the holders of shares of Common Stock shall be entitled to receive such dividends (payable in cash, stock or otherwise) as may be declared on the Common Stock by the Board of Directors at any time or from time to time out of any funds legally available therefor.
In the event of any voluntary or involuntary liquidation, distribution or winding up of the Corporation, after distribution in full of the preferential and/or other amounts to be distributed to the holders of shares of Preferred Stock, the holders of shares of Common Stock shall be entitled to receive all of the remaining assets of the Corporation available for distribution to its shareholders, ratably in proportion to the number of shares of Common Stock held by them.

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ARTICLE V
LIMITATION OF DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the Corporation or its shareholders for damages for breach of fiduciary duty as a director, except for personal liability for: (a) acts or omissions by such director not in good faith or which involve intentional misconduct or a knowing violation of law; (b) the payment of dividends or the redemption or purchase of stock in violation of Section 1053 of the Act; (c) any breach of such director’s duty of loyalty to the Corporation or its shareholders; or (d) any transaction from which such director derived an improper personal benefit.
ARTICLE VI
CERTAIN STOCK PURCHASES
1.     Certain Definitions . For the purposes of this Article VI:
“Continuing Director” means any member of the Board of Directors of the Corporation (the “Board”) who is unaffiliated with the Interested Shareholder and was a member of the Board prior to the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Continuing Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board.
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
“Fair Market Value” means in the case of stock, the highest closing sale price during the 30-day period ending on the date in question of a share of such stock on a principal United States securities exchange registered under the Exchange Act on which such stock is listed or in the national market system maintained by the National Association of Securities Dealers, Inc., or, if the stock is not listed on any such exchange or designated as a national market system security, the highest closing bid quotation with respect to a share of such stock during the 30-day period ending on the date in question on the National Association of Securities Dealers, Inc. Automated Quotations system or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board in good faith.
“Interested Shareholder” shall have the meaning ascribed to such term under Section 1090.3 of the Act.
2.     Vote Required for Certain Stock Purchases.
(a) Any direct or indirect purchase by the Corporation, or any subsidiary of the Corporation, of any capital stock from a person or persons known by a majority of the Continuing Directors of the Corporation to be an Interested Shareholder who has beneficially owned such capital stock for less than three years prior to the date of such purchase, or any agreement in respect thereof, at a price in excess of the Fair Market Value shall require the affirmative vote of no less than 66 ⅔% of the votes cast by the holders, voting together as a single class, of all then outstanding shares of capital stock, excluding for this purpose the votes by the Interested Shareholder, unless a greater vote shall be required by law.
(b) Such affirmative vote shall not be required for a purchase or other acquisition of securities of the same class made on substantially the same terms to all holders of such securities

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and complying with the applicable requirements of the Exchange Act, and the rules and regulations thereunder (or any subsequent provisions replacing the Exchange Act, rules or regulations). Furthermore, such affirmative vote shall not be required for any purchase effected on the open market and not the result of a privately-negotiated transaction.
3.     Powers of Continuing Directors . The Continuing Directors of the Corporation shall have the power and duty to determine for the purposes of this Article VI, on the basis of information known to them after reasonable inquiry, whether a person is an Interested Shareholder, and the number of shares of capital stock owned beneficially by any person.
ARTICLE VII
BOARD OF DIRECTORS
1.     Management by Board of Directors . The business and affairs of the Corporation shall be under the direction of the Board of Directors.
2.     Number of Directors . Subject to the addition of any directors elected by a class of preferred stock as provided in Section 3 of this Article VII, the number of directors which shall constitute the whole board shall not be less than three nor more than ten, and shall be determined by resolution adopted by a vote of two-thirds (2/3) of the entire board, or at an annual or special meeting of shareholders by the affirmative vote of at least a majority of the outstanding stock entitled to vote. No reduction in number shall have the effect of removing any director prior to the expiration of his term.’
3.     Election of Directors by Shareholders; Vacancies . All directors of the Corporation shall be elected annually. Each director shall hold office for a term ending at the next succeeding annual meeting beginning with the annual meeting held in 2015 and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office notwithstanding that any director may have been elected for a term that extended beyond the date of the annual meeting. Newly created directorships resulting from an increase in the authorized number of directors, or any other vacancy on the Board of Directors, however resulting, may be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Any director elected or appointed to fill a vacancy shall hold office for a term to expire at the next annual meeting of shareholders following such director’s election or appointment. No reduction of the number of directorships shall remove or shorten the term of any director in office. No election of directors need be by written ballot.
Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of shareholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of the Certificate of Designation attributable to such Preferred Stock or the resolution or resolutions adopted by the Board of Directors pursuant to Section 2 of this Article VII applicable thereto.
ARTICLE VIII
INDEMNITY
1.     Third Party Claims . The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or

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proceeding whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture or other enterprise against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the Corporation and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.
2.     Derivative Claims . The Corporation shall indemnify any person who was or is· a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the court in which such action or suit was brought shall determine, upon application, that despite the adjudication of liability, but in the view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper.
3.     Expenses . Expenses, including fees and expenses of counsel, incurred in defending a civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized herein.
4.     Insurance . The Corporation may purchase (upon resolution duly adopted by the Board of Directors) and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability.
5.     Reimbursement . To the extent that a director, officer, employee or agent of, or any other person entitled to indemnity hereunder by, the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to herein or in defense of any

6


claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.
6.     Enforcement . Every such person shall be entitled, without demand by him upon the Corporation or any action by the Corporation, to enforce his right to such indemnity in an action at law against the Corporation. The right of indemnification and advancement of expenses hereinabove provided shall not be deemed exclusive of any rights to which any such person may now or hereafter be otherwise entitled and specifically, without limiting the generality of the foregoing, shall not be deemed exclusive of any rights pursuant to statute or otherwise, of any such person in any such action, suit or proceeding to have assessed or allowed in his favor against the Corporation or otherwise, his costs and expenses incurred therein or in connection therewith or any part hereof.
ARTICLE IX
AMENDMENTS; BYLAWS; CONTROL SHARES ACT; WRITTEN CONSENT
l.     Amendments to Certificate of Incorporation . Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least a majority of the issued and outstanding stock having voting power, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with Articles V, VI, VII, VIII and this Article IX of this Certificate of Incorporation; provided, however, that any amendment to or repeal of Article VI shall be made in a manner not inconsistent with the Oklahoma General Corporation Act.
2.     Bylaws . Prior to the receipt of any payment for any of the Corporation’s stock, the Bylaws of the Corporation shall be adopted, amended or repealed by the Incorporator. Thereafter, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to adopt, repeal, alter, amend or rescind the Bylaws of the Corporation. In addition, the Bylaws of the Corporation may be adopted, repealed, altered, amended or rescinded by the affirmative vote of the holders of at least a majority of the outstanding stock of the Corporation entitled to vote thereon.
3.     Control Shares Act . The Corporation shall not be subject to the Oklahoma Control Shares Act as codified at Sections 1145-1155 of the Act. This election shall be effective on the date of filing this Certificate.
4.     Action by Written Consent . Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes which would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall be given to those shareholders who have not consented in writing.
This Restated Certificate of Incorporation has been duly adopted by the Corporation’s Board of Directors, and is executed by the Executive Vice President ‑ General Counsel and Corporate Secretary of the Corporation this 2 nd day of August, 2017.


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CHESAPEAKE ENERGY CORPORATION,
an Oklahoma corporation
 
 
 
 
By:
/s/ JAMES R. WEBB
 
James R. Webb
Executive Vice President – General Counsel & Corporate Secretary

ATTEST:

/s/ J. DAVID HERSHBERGER
J. David Hershberger, Assistant Corporate Secretary

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Exhibit 10.1
CHESAPEAKE ENERGY CORPORATION 2014
LONG TERM INCENTIVE PLAN
(amended and restated effective as of May 18, 2017) 1  

1.
PURPOSE
Section 1.1 Purpose . This Long Term Incentive Plan is established by Chesapeake Energy Corporation (the “Company”) to foster and promote the sustained progress, growth and profitability of the Company by:
(a)    attracting, retaining and motivating Employees and Non-Employee Directors;
(b)    allowing Employees and Non-Employee Directors to acquire a proprietary and vested interest in the growth and performance of the Company;
(c)    providing incentives and rewards to Employees and Non-Employee Directors who are in a position to contribute materially to the success and long-term objectives of the Company; and
(d)    aligning the financial interests of Employees and Non-Employee Directors with those of the Company’s shareholders.
Section 1.2 Effective Date. The Plan is effective as of June 13, 2014. The Plan is subject to the 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 purpose. No Awards may be granted under the Plan prior to the receipt of shareholder approval. The authority to issue Awards under the Plan will terminate at 11:59 p.m. Central Time on June 12, 2024 and the remaining terms of the Plan will continue in effect thereafter until all matters relating to the exercise and settlement of Awards and administration of the Plan have been completed.
2.
DEFINITIONS
Section 2.1 “Affiliated Entity” means any partnership or limited liability company in which at least 50% of voting power thereof is owned or controlled, directly or indirectly, by the Company or one or more of its Subsidiaries or Affiliated Entities or a combination thereof.
Section 2.2 “Appreciation” means, with respect to a SAR (as hereafter defined), the amount by which the Fair Market Value of a share of Common Stock on the date of exercise of the SAR exceeds the Fair Market Value of a share of Common Stock on the Date of Grant of the SAR.
Section 2.3 “ Award” means, individually or collectively, any Option, SAR, Performance Share, Restricted Stock, Restricted Stock Unit or Other Stock Award granted under the Plan to an Eligible Person pursuant to such terms, conditions, restrictions, and/or limitations, if any, as the applicable Committee may establish by the Award Agreement or otherwise.

______________________________________________
1 The Plan was initially adopted on June 13, 2014 and was subsequently amended on May 20, 2016 and May 19, 2017.

CHESAPEAKE ENERGY CORPORATION 1


Section 2.4 “Award Agreement” means any written or electronic instrument that establishes the terms, conditions, restrictions, and/or limitations applicable to an Award in addition to those established by this Plan and by the Committee’s exercise of its administrative powers.
Section 2.5 “Board” means the Board of Directors of the Company.
Section 2.6 “Cause” means the occurrence of either of the following:
(i)    the willful and continued failure of the Participant to perform substantially the Participant’s duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Participant by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Participant has not substantially performed the Participant’s duties, or
(ii) the willful engaging by the Participant in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act, or failure to act, on the part of the Participant shall be considered “willful” unless it is done, or omitted to be done, by the Participant in bad faith or without reasonable belief that the Participant’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Participant in good faith and in the best interests of the Company.
Section 2.7 “Change of Control” means the occurrence of any of the following:
(i)    the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (A) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”). For purposes of this Section 2.6 the following acquisitions by a Person will not constitute a Change of Control: (1) any acquisition by the Company; (2) any redemption, share acquisition or other purchase of shares directly or indirectly by the Company; (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of paragraph (iii) below;
(ii)    during any period of not more than 24 months, the individuals who constitute the board of directors (the “Incumbent Board”) of the Company as of the beginning of such 24 month period cease for any reason to constitute at least a majority of the board of directors. Any individual becoming a director whose election, or nomination for election by the Company’s shareholders, is approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered a member of the Incumbent Board, but any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Incumbent Board will not be deemed a member of the Incumbent Board;
(iii)    the consummation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), unless following such Business Combination: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common

CHESAPEAKE ENERGY CORPORATION 2


Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
(iv)     the approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.
Section 2.8 “Change of Control Period” means the 24-month period commencing on the effective date of a Change of Control.
Section 2.9 “Code” means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any Section of the Code shall be deemed to include any amendments or successor provisions to such Section and any regulations under such Section.
Section 2.10 “Committee” means the Compensation Committee of the Board (or any successor committee) or any other committee designated by the Board.
Section 2.11 “Common Stock” means the common stock, par value $.01 per share, of the Company and, after substitution, such other stock as shall be substituted therefor as provided in Section 3.3(b) of the Plan.
Section 2.12 “Date of Grant” means the date on which the grant of an Award is made by the Committee.
Section 2.13 “Disability” has the meaning set forth in Section 409(A)(a)(2)(C) of the Code.
Section 2.14 “Eligible Person” means any Employee or Non-Employee Director.
Section 2.15 “Employee” means any employee of the Company, a Subsidiary or an Affiliated Entity or any person to whom an offer of employment with the Company, a Subsidiary or an Affiliated Entity is extended, as determined by the Committee.
Section 2.16 “Exchange Act” means the Securities Exchange Act of 1934, as amended.
Section 2.17 “Executive Officer Participants” means Participants who are subject to the provisions of Section 16 of the Exchange Act with respect to the Common Stock.
Section 2.18 “Fair Market Value” means, as of any day, the closing price of the Common Stock on such day (or on the next preceding business day, if such day is not a business day or if no trading occurred on such day) as reported on the New York Stock Exchange or on such other securities exchange or reporting system as may be designated by the Committee. In the event

CHESAPEAKE ENERGY CORPORATION 3


that the price of a share of Common Stock shall not be so reported, the Fair Market Value of a share of Common Stock shall be determined by the Committee in its absolute discretion.
Section 2.19 “ Full Value Award” means an Award other than of Options or Stock Appreciation Rights, which is settled by the issuance of Common Stock.
Section 2.20 “Good Reason” during a Change of Control Period shall mean the occurrence of one of the events set forth below:
(i) elimination of the Participant's job position or material reduction in duties and/or reassignment of the Participant to a new position of materially less authority;
(ii) a reduction in the Participant’s base salary in effect immediately prior to the effective date of a Change of Control; or
(iii) a requirement that the Participant relocate to a location outside of a fifty (50) mile radius of the location of his/her office or principal base of operation immediately prior to the effective date of a Change of Control.
A Participant shall provide the Company written notice within ninety (90) days of an event that constitutes Good Reason, of his/her intent to resign for Good Reason and allows a thirty (30) day period for the Company to cure the Good Reason event. If the Company fails to cure the Good Reason event within the thirty (30) day cure period, the Participant may terminate and it will be deemed to be a termination for Good Reason, provided the termination of employment occurs within one hundred and eighty (180) days after the initial existence of the Good Reason event specified in the notice. The failure of a Participant to exercise his/her right to resign due to one event which qualifies as Good Reason shall not waive his/her rights within ninety (90) days of another, subsequent event that also qualifies as a Good Reason event during the Change of Control Period.
Section 2.21 “Incentive Stock Option” means an Option within the meaning of Section 422 of the Code.
Section 2.22 “Non-Executive Officer Participants” means Participants who are not subject to the provisions of Section 16 of the Exchange Act.
Section 2.23 “Non-Employee Director” shall have the meaning set forth in Rule 16b-3, or any successor rule, promulgated under Section 16 of the Exchange Act.
Section 2.24 “Nonqualified Stock Option” means an Option to purchase shares of Common Stock which is not an Incentive Stock Option within the meaning of Section 422(b) of the Code.
Section 2.25 “Option” means an Incentive Stock Option or Nonqualified Stock Option.
Section 2.26 “Other Stock Award” means any right granted to a Participant by the Committee under Section 8 of the Plan.
Section 2.27 “Participant” means an Eligible Person to whom an Award has been granted by the Committee under the Plan.
Section 2.28 “Performance Award” means any award of Performance Shares granted by the Committee under Section 7 of the Plan.
Section 2.29 “Performance Measures” means the Company’s achievement of target levels of aggregate earnings, earnings per share, share price, net income, operating income, gross revenue, cash flows, reserve additions or replacements, progress toward debt reduction goals, credit rating upgrades, production volume, meeting geographic expansion goals, objectively identified project milestones, market share, expense levels, finding costs, operating costs, overhead

CHESAPEAKE ENERGY CORPORATION 4


or other costs, drilling results, new discoveries, development or use of new technology, acquisitions and divestitures, risk management activities, asset monetization strategies, environmental compliance and safety and accident rates, return on equity, return on invested capital, total or comparative shareholder return, changes in capital structure, a combination of or interrelationship among any of the foregoing, as determined by the Committee.
Section 2.30 “Performance Share” means the Common Stock or a unit having a value equivalent to the value of a share of Common Stock subject to a Performance Award granted under Section 7 of the Plan, which may be delivered or, with respect to a unit, the value of which may be delivered, to the Participant upon the achievement of such performance goals during the Performance Period as specified by the Committee.
Section 2.31 “Plan” means the Chesapeake Energy Corporation 2014 Long Term Incentive Plan.
Section 2.32 “Restricted Stock” means the Common Stock issued under Section 5 which is subject to any restrictions that the Committee, in its discretion, may impose.
Section 2.33 “Restricted Stock Unit” means the right granted under Section 6 of the Plan to receive shares of Common Stock (or the equivalent value in cash if the Committee so provides) in the future, which is subject to certain restrictions and to risk of forfeiture.
Section 2.34 “SAR” means a Stock Appreciation Right.
Section 2.35 “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.
Section 2.36 “Stock Appreciation Right” means a right, granted under Section 4, to an amount equal to any increase in the Fair Market Value of the Common Stock between the date on which the Stock Appreciation Right is granted and the date on which the right is exercised.
Section 2.37 “Subsidiary” shall have the same meaning set forth in Section 424(f) of the Code.
3.
ADMINISTRATION
Section 3.1 Administration of the Plan; the Committee . The Compensation Committee shall have overall authority to administer the Plan. The Board may designate another committee or committees to administer the Plan with respect to Non-Executive Officer Participants, subject to any terms or conditions established by the Committee. Hereafter, “Committee” shall mean the Compensation Committee, except when used in reference to Awards granted to Non-Executive Officer Participants, “Committee” shall mean any applicable committee designated by the Board.
Unless otherwise provided in the bylaws of the Company or resolutions adopted from time to time by the Board establishing the Committee, the Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, however caused, shall be filled by the Board. The Committee shall hold meetings at such times and places as it may determine. A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present shall be the valid acts of the Committee. Any action which may be taken at a meeting of the Committee may be taken without a meeting if all the members of the Committee consent to the action in writing. Although the Committee is generally responsible for the administration of the Plan, the Board in its sole discretion may take any action under the Plan that would otherwise be the responsibility of the Committee, except as such action pertains to the administration of Awards to Non-Employee Directors.

CHESAPEAKE ENERGY CORPORATION 5


Subject to the provisions of the Plan, the Committee shall have the authority to:
(a)    Select the Eligible Persons to participate in the Plan.
(b)    Determine the time or times when Awards will be granted.
(c)    Determine the form of Award, the number of shares of Common Stock subject to any Award, all the terms, conditions (including performance requirements), restrictions and/or limitations, if any, of an Award, including the time and conditions of exercise or vesting, and the terms of any Award Agreement, which may include the waiver or amendment of prior terms and conditions or acceleration of the vesting or exercise of an Award under certain circumstances determined by the Committee (subject to Article 9 of the Plan). However, nothing in this Section 3.1 shall be construed to permit the repricing of any outstanding Award in violation of Section 4.3.
(d)    Determine whether Awards will be granted singly or in combination.
(e)    Determine whether, to what extent and under what circumstances Awards may be settled in cash or Common Stock.
(f)    Determine whether any conditions applicable to an Award have been met and whether an Award will be paid at the end of a Performance Period.
(g)    Employ attorneys, consultants, accountants and other advisors as deemed necessary or appropriate by the Committee.
(h)    Take any and all other action it deems necessary or advisable for the proper operation or administration of the Plan.
Section 3.2 Committee to Make Rules and Interpret Plan. The Committee in its sole discretion shall have the authority, subject to the provisions of the Plan, to establish, adopt, or revise such rules and regulations and to make all such determinations relating to the Plan as it may deem necessary or advisable for the administration of the Plan. The Committee’s interpretation of the Plan or any Awards granted pursuant hereto and all decisions and determinations by the Committee with respect to the Plan shall be final, binding, and conclusive on all parties, unless otherwise determined by the Board.
Section 3.3 Shares Subject to the Plan. Subject to adjustment as provided in paragraphs (b), (c) and (d) below, the aggregate number of shares of Common Stock which may be issued pursuant to Awards under the Plan will not exceed 71,600,000 shares, which number is the sum of (i) 36,600,000 shares that were originally approved at the Company’s 2014 Annual Meeting of Shareholders and (ii) an additional 35,000,000 shares that were approved at the Company’s 2016 Annual Meeting of Shareholders. Upon shareholder approval of this Plan, no new Awards will be granted under the Company’s Amended and Restated Long-Term Incentive Plan approved by shareholders on June 10, 2005 (the “Prior Plan”). Any of the authorized shares of Common Stock may be used for any of the types of Awards described in the Plan. To the extent that a share of Common Stock is issued pursuant to the grant or exercise of a Full Value Award, it shall reduce the shares available under the Plan by 2.12 shares of Common Stock and to the extent a share of Common Stock is issued pursuant to the grant or exercise of an Award that is not a Full Value Award, it shall reduce the shares available under the Plan by one (1) share of Common Stock. No more than 3,000,000 shares of Common Stock may be issued pursuant to Incentive Stock Options. Common Stock delivered pursuant to an Award under the Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares. The Committee, in its sole discretion, shall determine the manner in which fractional shares arising under this Plan are treated. Additional restrictions or adjustments with respect to shares subject to the Plan are as follows:

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(a)    Subject to (b) below, the aggregate number of shares of Common Stock pursuant to Options and SARs granted to any Employee or Non-Employee Director in any calendar year under this Plan may not exceed 1,000,000 shares; the aggregate number of shares of Common Stock pursuant to Restricted Stock, Restricted Stock Unit and Other Stock Awards granted to any Employee or Non‑Employee Director in any calendar year may not exceed 1,000,000 shares and the maximum grant to any Employee or Non-Employee Director pursuant to a Performance Award in any calendar year shall not exceed 3,000,000 shares of Common Stock or the value of 3,000,000 shares (at the time of settlement) of Common Stock if settled in cash.
(b)    In the event that the shares of Common Stock, as presently constituted, shall be changed into or exchanged for a different number or kind or shares of stock or other securities of the Company or of another corporation (whether by reason of merger, consolidation, recapitalization, reclassification, stock split, combination of shares or other corporate event of similar nature), or if the number of such shares of Common Stock shall be increased through the payment of a stock dividend, then there shall be substituted for or added to each share available under and subject to the Plan as provided herein, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged or to which each such share shall be entitled, as the case may be, to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Common Stock to preclude, to the extent practicable, the enlargement or dilution of rights under such Awards. In the event there shall be any other change in the number or kind of the outstanding shares of Common Stock, or any stock or other securities into which the Common Stock shall have been changed or for which it shall have been exchanged, then if the Committee shall, in its sole discretion, determine that such change equitably requires an adjustment in the shares available under and subject to the Plan, or in any Award theretofore granted or which may be granted under the Plan, such adjustments shall be made in accordance with such determination.
No fractional shares of Common Stock or units of other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share.
(c)    If (i) any shares of Common Stock subject to an Award are forfeited, an Award expires or an Award is settled for cash (in whole or in part), or (ii) after June 13, 2014 any shares of Common Stock subject to an award under the Prior Plan are forfeited, an award under the Prior Plan expires or an award under the Prior Plan is settled for cash (in whole or in part), the shares of Common Stock subject to such Award or award under the Prior Plan shall, to the extent of such forfeiture, expiration or cash settlement, again be available for grant under the Plan, in accordance with Section 3.3(d) below. In the event that withholding tax liabilities arising from a Full Value Award or, after June 13, 2014, an award other than an option or stock appreciation right under the Prior Plan are satisfied by tendering of shares of Common Stock (either actually or by attestation) or by withholding of shares of Common Stock by the Company, the shares of Common Stock so tendered or withheld shall be added to the shares of Common Stock available for Awards under the Plan in accordance with Section 3.3(d) below. Notwithstanding anything to the contrary contained herein, the following shares of Common Stock shall not be added to the shares of Common Stock authorized for grant under Section 3.3: (i) shares of Common Stock tendered by the Participant or withheld by the Company in payment of the purchase price of an Option, or after June 13, 2014 an option under the Prior Plan, or to satisfy any tax withholding obligation with respect to an Option or Stock Appreciation Right, or after June 13, 2014 an option or stock appreciation right under the Prior Plan (ii) shares of Common Stock subject to a Stock Appreciation Right that are not issued in connection with the stock settlement of the Stock Appreciation Right on exercise thereof, or after June 13, 2014 a stock appreciation right under the Prior Plan and (iii) shares of Common Stock reacquired by the Company on the open market or otherwise using cash proceeds from the exercise

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of Options or, after June 13, 2014, options granted under the Prior Plan. Shares of Common Stock related to Performance Awards or Other Stock Awards that are payable exclusively in cash as provided in the Award Agreement will not be counted against the aggregate number of shares of Common Stock available for grant under the Plan.
(d)    Any shares of Common Stock that again become available for grant pursuant to this Section 3.3 shall be added back as (i) one (1) share of Common Stock for every one (1) share of Common Stock subject to Options or Stock Appreciation Rights granted under the Plan or options or stock appreciation rights granted under the Prior Plan, and (ii) 2.12 shares of Common Stock for every one (1) share of Common Stock subject to a Full Value Award granted under the Plan or awards other than options or stock appreciation rights granted under the Prior Plan.
4.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
Section 4.1 Grant of Options and SARs. The Committee may, from time to time, subject to the provisions of the Plan and such other terms and conditions as it may determine, grant Nonqualified Stock Options and Stock Appreciation Rights (SARs) to Eligible Persons and Incentive Stock Options to Employees. Each grant of an Option or SAR shall be evidenced by an Award Agreement and shall contain such terms and conditions and be in such form as the Committee may from time to time approve, subject to the requirements of Section 4.2 .
Section 4.2 Conditions of Options and SARs . Each Option and SAR so granted shall be subject to the following conditions:
(a)     Exercise Price. As limited by Section 4.2(e) below, the Award Agreement for each Option and SAR shall state the exercise price set by the Committee on the Date of Grant. No Option or SAR shall be granted at an exercise price which is less than the Fair Market Value of the Common Stock on the Date of Grant.
(b)     Exercise of Options and SARs. Options and SARs granted under the Plan shall be exercisable, in whole or in such installments and at such times, and shall expire at such time, as shall be provided by the Committee in the Award Agreement.
(c)     Form of Payment. The payment of the exercise price of an Option by the Participant shall be made in cash, shares of Common Stock, a combination thereof or in such other manner as the Committee may specify in the applicable Award Agreement. The payment of the Appreciation associated with the exercise of a SAR shall be made by the Company in shares of Common Stock or cash as determined by the Committee.
(d)     Term of Option or SAR. The term of an Option or SAR shall be determined by the Committee and specified in the applicable Award Agreement, except that no Option or SAR shall be exercisable after the expiration of ten years from the Date of Grant.
(e)     Special Restrictions Relating to Incentive Stock Options . Options issued in the form of Incentive Stock Options shall only be granted to Employees of the Company or a Subsidiary and not to Employees of an Affiliated Entity unless such entity is classified as a “disregarded entity” of the Company or the applicable Subsidiary under the Code. In addition to being subject to all applicable terms, conditions, restrictions and/or limitations established by the Committee, Options issued in the form of Incentive Stock Options shall comply with the requirements of Section 422 of the Code (or any successor Section thereto), including, without limitation, the requirement that the exercise price of an Incentive Stock Option not be less than 100% of the Fair Market Value of the Common Stock on the Date of Grant, the requirement that each Incentive Stock Option, unless sooner exercised, terminated or canceled, expire no later than ten years from its Date of Grant, and the requirement that the aggregate Fair Market Value (determined on the Date of Grant) of the Common Stock with respect to which Incentive Stock

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Options are exercisable for the first time by a Participant during any calendar year (under this Plan or any other plan of the Company or any Subsidiary) not exceed $100,000. Incentive Stock Options which are in excess of the applicable $100,000 limitation will be automatically recharacterized as Nonqualified Stock Options. No Incentive Stock Options shall be granted to any Employee if, immediately before the grant of an Incentive Stock Option, such Employee owns more than 10% of the total combined voting power of all classes of stock of the Company or its Subsidiaries (as determined in accordance with the stock attribution rules contained in Sections 422 and 424(d) of the Code) unless the exercise price is at least 110% of the Fair Market Value of the Common Stock subject to the Incentive Stock Option, and such Incentive Stock Option by its terms is exercisable no more than five years from the date such Incentive Stock Option is granted.
(f)     Shareholder Rights . No Participant shall have any rights as a shareholder with respect to any share of Common Stock subject to an Option or SAR prior to the purchase or receipt of such share of Common Stock by exercise of the Option or SAR. In addition, no Option or SAR granted under the Plan shall include any dividend equivalents.
Section 4.3 No Repricing. Except for adjustments made pursuant to Section 3.3(b), in no event will the Committee, without first obtaining Shareholder Approval, (i) decrease the exercise price of an Option or SAR after the Date of Grant; (ii) accept for surrender to the Company any outstanding Option or SAR granted under the Plan as consideration for the grant of a new Option or SAR with a lower exercise price; or (iii) repurchase from Participants any outstanding Options or SARs that have an exercise price per share higher than the then current Fair Market Value of a share of Common Stock.
5.
RESTRICTED STOCK AWARDS
Section 5.1 Grant of Restricted Stock. The Committee may, from time to time, subject to the provisions of the Plan and such other terms and conditions as it may determine, grant Restricted Stock to any Eligible Person. Restricted Stock shall be awarded in such number, for such purchase price (if any) and at such times during the term of the Plan as the Committee shall determine. Each grant of Restricted Stock shall be evidenced by an Award Agreement and shall contain such terms and conditions and be in such form as the Committee may from time to time approve, subject to the requirements of Section 5.2. Restricted Stock issued pursuant to a Restricted Stock Award may be evidenced in such manner as the Committee deems appropriate, including, without limitation, a book-entry registration or issuance of a stock certificate or certificates into escrow until the restrictions associated with such Award are satisfied.
Section 5.2 Conditions of Restricted Stock Awards The grant of Restricted Stock shall be subject to the following:
(a)     Restriction Period. Each Restricted Stock Award shall require the holder to remain in the employment or otherwise be classified as an Eligible Person (or in the case of a Non-Employee Director, remain a director of the Company, a Subsidiary, or an Affiliated Entity for a prescribed period (the “Restriction Period”). The Committee shall determine the Restriction Period or Periods that shall apply to the shares of Common Stock covered by each Award or portion thereof. In addition to any time vesting conditions determined by the Committee, Restricted Stock may be subject to the achievement by the Company of specified Performance Measures or other individual criteria as determined by the Committee. At the end of the Restriction Period, assuming the fulfillment of any other specified vesting conditions, the restrictions imposed by the Committee shall lapse with respect to the shares of Common Stock covered by the Award or portion thereof.
(b)      Code Section 162(m). If the Committee intends for a Restricted Stock Award to be granted and administered in a manner designed to preserve the deductibility of the resulting

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compensation in accordance with Section 162(m) of the Code, then Performance Measures applicable to such Award shall be established in writing by the Committee no later than the earlier of (i) 90 days after the commencement of the relevant Performance Period and (ii) the date as of which 25% of the Performance Period has elapsed. The Committee’s discretion to modify or waive the Performance Measures related to the vesting of the Award may be restricted in order to comply with Section 162(m).
(c)     Forfeiture. Except as otherwise determined by the Committee, upon termination of service or employment during the Restriction Period, all shares of Restricted Stock still subject to forfeiture shall be forfeited by the Participant and any purchase price paid by the Participant shall be returned to such Participant.
(d)     Shareholder Rights. During any Restriction Period, the Committee may, in its discretion, grant to or withhold from the holder of Restricted Stock all or any of the rights of a shareholder with respect to the shares, including, but not by way of limitation, the right to vote such shares or to receive dividends. If any dividends or other distributions are paid in shares of Common Stock and distributed to the holder of Restricted Stock, all such shares shall be subject to the same restrictions on transferability as the shares of Common Stock subject to the Award with respect to which they were paid.
(e)     Minimum Vesting Condition. The minimum Restriction Period applicable to any Restricted Stock granted to an Employee that is not subject to performance criteria restricting the vesting of the Award shall be three years from the Date of Grant (subject to the provisions of Article 9).
6.
RESTRICTED STOCK UNITS
Section 6.1 Grant of Restricted Stock Units. The Committee may, from time to time, subject to the provisions of the Plan and such other terms and conditions as it may determine, grant Restricted Stock Units to any Eligible Person. Restricted Stock Units shall be awarded in such number and at such times during the term of the Plan as the Committee shall determine. Each grant of Restricted Stock Units shall be evidenced by an Award Agreement and shall contain such terms and conditions and be in such form as the Committee may from time to time approve, subject to the requirements of Section 6.2.
Section 6.2 Conditions of Restricted Stock Unit Awards The grant of Restricted Stock Units shall be subject to the following:
(a)     Restriction Period. Each Restricted Stock Unit Award shall require the holder to remain in the employment or otherwise be classified as an Eligible Person (or in the case of a Non-Employee Director, remain a director of the Company, a Subsidiary, or an Affiliated Entity for the Restriction Period. The Committee shall determine the Restriction Period or Periods that shall apply to each Award. In addition to any time vesting conditions determined by the Committee, Restricted Stock Units may be subject to the achievement by the Company of specified Performance Measures or other individual criteria as determined by the Committee.
(b)      Code Section 162(m). If the Committee intends for a Restricted Stock Unit Award to be granted and administered in a manner designed to preserve the deductibility of the resulting compensation in accordance with Section 162(m) of the Code, then Performance Measures applicable to such Award shall be established in writing by the Committee no later than the earlier of (i) 90 days after the commencement of the relevant Performance Period and (ii) the date as of which 25% of the Performance Period has elapsed. The Committee’s discretion to modify or waive the Performance Measures related to the vesting of the Award may be restricted in order to comply with Section 162(m).

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(c)     Forfeiture. Except as otherwise determined by the Committee, upon termination of service or employment during the Restriction Period, all Restricted Stock Units still subject to forfeiture shall be forfeited by the Participant.
(d)     Shareholder Rights. Restricted Stock Units shall not entitle a Participant to any of the rights of a shareholder with respect to the shares. Provided, however, the Committee may grant dividend equivalents with respect to Restricted Stock Units granted hereunder.
(e)     Minimum Vesting Condition. The minimum Restriction Period applicable to any Restricted Stock Unit granted to an Employee that is not subject to performance criteria restricting the vesting of the Award shall be three years from the Date of Grant (subject to the provisions of Article 9).
7.
PERFORMANCE AWARDS
Section 7.1 Grant of Performance Shares . The Committee may, from time to time, subject to the provisions of the Plan and such other terms and conditions as it may determine, grant Performance Shares to any Eligible Person. Performance Shares shall be awarded in such number and at such times during the term of the Plan as the Committee shall determine. Each Performance Award shall be evidenced by an Award Agreement and shall contain such terms and conditions and be in such form as the Committee may from time to time approve, subject to the requirements of Section 7.2.
Section 7.2 Conditions of Performance Awards. The grant of Performance Shares shall be subject to the following:
(a)     Performance Period. Performance Shares will be subject to the achievement of one or more performance goals by the Company or the Participant individually, measured for a prescribed period (the “Performance Period”), as specified by the Committee, such Performance Period to be not less than one year in duration. Such performance goals may be based upon the Company’s achievement of Performance Measures or other individual criteria.
(b)     Code Section 162(m). If the Committee intends for a Performance Award to be granted and administered in a manner designed to preserve the deductibility of the resulting compensation in accordance with Section 162(m) of the Code, then the Performance Measures applicable to such Award shall be established in writing by the Committee no later than the earlier of (i) 90 days after the commencement of the relevant Performance Period and (ii) the date as of which 25% of the Performance Period has elapsed. The Committee’s discretion to modify or waive the Performance Measures to the vesting of the Award may be restricted in order to comply with Section 162(m).
(c)     Payment Respecting Performance Shares . Performance Shares shall be earned to the extent that their terms and conditions are met, as certified by the Committee. The form and timing of payment for Performance Shares earned shall be determined by the Committee and specified in the Award Agreement.
(d)     Termination of Employment. The Committee, in its sole discretion, may (i) permit a Participant who ceases to be an Eligible Person before the end of any Performance Period, or the personal representative of a deceased Participant, to continue to be subject to a Performance Award relative to the current Performance Period until such Awards are forfeited or earned pursuant to their terms and conditions or (ii) authorize the payment to such Participant, or the personal representative of a deceased Participant, of the Performance Shares which would have been paid to the Participant had the Participant remained an Eligible Person to the end of the Performance Period. In the absence of such permission by the Committee, any unvested Performance Shares shall be forfeited when a Participant ceases to be an Eligible Person.

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8.
OTHER STOCK AWARDS
Section 8.1 Grant of Other Stock Awards . The Committee may, from time to time, subject to the provisions of the Plan and such other terms and conditions as it may determine, specify the terms and provisions of other forms of equity-based or equity-related awards not described above which the Committee determines to be consistent with the purpose of the Plan and the interests of the Company, which awards may provide for cash payments based in whole or in part on the value or future value of Common Stock, for the acquisition or future acquisition of Common Stock, or any combination thereof. Each Other Stock Award shall be evidenced by an Award Agreement and shall contain such terms and conditions and be in such form as the Committee may from time to time approve, subject to the requirements of Section 8.2.
Section 8.2 Minimum Vesting Condition. Other Stock Awards subject to performance criteria shall not vest in less than one year and Other Stock Awards which are subject to time vesting shall not fully vest in less than three years from the Date of Grant (subject to the provisions of Article 9).
9.
TREATMENT OF AWARDS UPON CERTAIN EVENTS
Section 9.1 Change of Control.
(a)     Awards not Assumed or Substituted by Surviving Entity . Upon the occurrence of a Change of Control, and except with respect to any Awards assumed by the surviving entity or otherwise equitably converted or substituted in connection with a Change of Control in a manner approved by the Committee, then notwithstanding any other provisions of the Plan, (i) all outstanding Options and SARs shall be fully exercisable; (ii) restrictions on outstanding Restricted Stock, Restricted Stock Units, Other Stock Awards and Performance Awards shall lapse; and (iii) each outstanding Performance Award shall be deemed to have achieved a level of performance as specified by the Committee in the Award Agreement governing such Performance Award.
(b)     Awards Assumed or Substituted by Surviving Entity . With respect any Awards assumed by the surviving entity or otherwise equitably converted or substituted in connection with a Change of Control in a manner approved by the Committee, if during the Change of Control Period a Participant’s employment is terminated without Cause or for Good Reason, (i) the Participant’s outstanding Options and SARs shall be fully exercisable and vested; (ii)  any restrictions on outstanding Restricted Stock, Restricted Stock Units, Other Stock Awards and Performance Awards held by the Participant shall lapse; and (iii) each outstanding Performance Award held by the Participant shall be deemed to have achieved a level of performance as specified by the Committee in the Award Agreement governing such Performance Award.
(c)     Committee Discretion to Accelerate Upon Change of Control. Regardless of whether an event has occurred as described in paragraphs (a) and (b) above, the Committee may, in its sole discretion, determine that upon the occurrence of a Change of Control: (i) all or a portion of the outstanding Options and SARs shall be fully exercisable; (ii) restrictions on all or a portion of the outstanding Restricted Stock, Restricted Stock Units, Other Stock Awards and Performance Awards shall lapse; and (iii) all or a portion of the outstanding Performance Award shall be deemed to have achieved a level of performance as specified by the Committee
Section 9.2 Disability, Death, Retirement or Involuntary Termination. With respect to (i) a Participant who ceases to be an Eligible Person due to a Disability, (ii) the personal representative of a deceased Participant, or (iii) any other Participant who ceases to be an Eligible Person due to the Participant’s retirement or involuntary termination (as defined by the Committee), the Committee, in its sole discretion, may permit the purchase of all or any part of the shares subject to any unvested Option or waive the vesting requirements or permit the continued vesting of any

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Award on the date the Participant ceases to be an Eligible Person due to Disability or death, or, except to the extent that such action would cause an Award intended to qualify as performance-based compensation for purposes of Section 162(m) of the Code to not so qualify, retirement or involuntary termination. With respect to Options which have already vested at such date or the vesting of which is accelerated by the Committee in accordance with the foregoing provision, the Participant or the personal representative of a deceased Participant shall have the right to exercise such vested Options within such period(s) as the Committee shall determine.
10.
GENERAL
Section 10.1 Amendment or Termination of 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 (i) Shareholder Approval is necessary or desirable to qualify or comply with any tax or regulatory requirement for which or with which the Board deems it necessary or desirable to qualify or comply, or (ii) in the opinion of counsel to the Company, Shareholder Approval is required by any federal or state laws or regulations or the rules of any stock exchange on which the common stock may be listed.
Section 10.2 Withholding Taxes . Unless prohibited by the terms of an Award Agreement, the Company may, in its sole discretion, satisfy any federal, state or local tax withholding obligation relating to an Award by any of the following means or by a combination of such means: (i) causing the Participant to tender a cash payment; (ii) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to the Participant in connection with the Stock Award; (iii) withholding cash from an Award settled in cash; (iv) withholding payment from any amounts otherwise payable to the Participant; or (v) by such other method as may be set forth in the Award Agreement.
Section 10.3 Code Section 83(b) Elections. The Company, its Subsidiaries and Affiliated Entities have no responsibility for a Participant’s election, attempt to elect or failure to elect to include the value of an Award subject to Section 83 in the Participant’s gross income for the year of grant pursuant to Section 83(b) of the Code. Any Participant who makes an election pursuant to Section 83(b) will promptly provide the Committee with a copy of the election form.
Section 10.4 Code Section 162(m). To the extent that an Award is intended to qualify as performance-based compensation under Section 162(m) of the Code, any ambiguities or inconsistencies in construction of the Plan shall be interpreted to give effect to such intention.
Section 10.5 Code Section 409A. The Plan 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, any Award hereunder, or any other agreement or arrangement contemplated by the Plan be found not to comply with, or otherwise be exempt from, the provisions of the 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. Without limiting the foregoing and notwithstanding anything contained herein to the contrary, to the extent required in order to avoid accelerated taxation or tax penalties under Section 409A, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to this Plan during the six-month period immediately following the Participant’s separation from service shall instead be paid on the first business day after the date that is six months following the Participant’s termination date (or death, if earlier), with interest from the date such amounts would otherwise have been paid 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

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required to avoid the imposition of an additional rate of tax on the Participant under Section 409A. In the event an Award is subject to Section 409A, any payments to be made under this Plan upon a termination of employment shall only be made if such termination of employment constitutes a “separation from service” under Section 409A. Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided under this Plan comply with 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 Employee on account of non-compliance with Section 409A.
Section 10.6 Non-Transferability. Subject to other provisions of the Plan and any applicable Award Agreement, Awards are not transferable other than by will or the laws of descent and distribution. Any attempted sale, transfer, assignment, pledge, hypothecation or other disposition of, or the levy of execution, attachment or similar process upon, any Award 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 Award involved in such attempt. The Committee shall impose such other restrictions and conditions on any shares of Common Stock covered by an Award as it may deem advisable including, without limitation, restrictions under applicable Federal or state securities laws, and may legend the certificates representing the shares of Common Stock subject to the Award to give appropriate notice of such restrictions.
Section 10.7 Committee Discretion. The Committee’s determinations under the Plan, including without limitation, (i) the determination of the Eligible Persons to receive Awards, (ii) the form, amount and timing of such Awards, (iii) the terms and provisions of such Awards, (iv) minimum employment or service periods, and (v) agreements evidencing the same, need not be uniform and, subject to any restrictions set forth in the Plan, may be made by the Committee selectively among Participants who receive, or who are eligible to receive, Awards under the Plan, whether or not such Participants are similarly situated.
Section 10.8 Leaves of Absence, Suspensions. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any suspension of employment or leave of absence from the Company granted to a Participant whether such suspension or leave is paid or unpaid and whether due to a Disability or otherwise. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (i) whether or not any such suspension or leave of absence shall be treated as if the Participant ceased to be an employee of the Company and (ii) the impact, if any, of any such suspension or leave of absence on Awards under the Plan.
Section 10.9 Participant Misconduct. Notwithstanding anything in the Plan to the contrary, the Committee shall have the authority under the Plan 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, any outstanding Award granted to such Participant 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 Section 10.09 shall have no effect and be deleted from the Plan following a Change of Control.
Section 10.10 Regulatory Approval and Listings . The Company shall use its best efforts to file with the Securities and Exchange Commission as soon as practicable following the date this Plan is effective, and keep continuously effective and usable, a Registration Statement on Form S-8 with respect to shares of Common Stock subject to Awards hereunder. Notwithstanding

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anything contained in this Plan to the contrary, the Company shall have no obligation to issue or deliver certificates representing shares of Common Stock evidencing Awards prior to:
(a)    the obtaining of any approval from, or satisfaction of any waiting period or other condition imposed by, any governmental agency which the Committee shall, in its sole discretion, determine to be necessary or advisable;
(b)    the listing of such shares on any exchange on which the Common Stock may be listed; and
(c)    the completion of any registration or other qualification of such shares under any state or federal law or regulation of any governmental body which the Committee shall, in its sole discretion, determine to be necessary or advisable.
Section 10.11 Right to Continued Employment or Board Membership. Participation in the Plan shall not give any Participant any right to remain in the employ of the Company, a Subsidiary or an Affiliated Entity or any right to remain on the Board of the Company. Further, the adoption of this Plan shall not be deemed to give any Employee or Non-Employee Director or any other individual any right to be granted an Award.
Section 10.12 Other Compensation Programs. The existence and terms of the Plan shall not limit the authority of the Board in compensating Employees and Non-Employee Directors in such other forms and amounts, including compensation pursuant to any other plans as may be currently in effect or adopted in the future, as it may determine from time to time.
Section 10.13 Reliance on Reports. Each member of the Committee and each member of the Board shall be fully justified in relying or acting in good faith upon any report made by the independent public accountants of the Company and its Subsidiaries and upon any other information furnished in connection with the Plan by any person or persons other than the Committee or Board member. In no event shall any person who is or shall have been a member of the Committee or the Board be liable for any determination made or other action taken or any omission to act in reliance upon any such report or information, including the furnishing of information, or failure to act, if in good faith.
Section 10.14 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.
Section 10.15 Governing Law, Severability . 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. If any provision of the Plan is held unlawful or otherwise invalid or unenforceable in whole or in part, the unlawfulness, invalidity or unenforceability will not affect any other parts of the Plan, which will remain in full force and effect.


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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,
 
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
EARNINGS (LOSS):
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes and cumulative effect of accounting change
 
$
(974
)
 
$
1,442

 
$
3,200

 
$
(19,098
)
 
$
(4,589
)
 
$
638

Interest expense (a)
 
142

 
207

 
172

 
322

 
275

 
186

Loss on investment in equity investees in excess of distributed earnings
 
108

 
219

 
75

 
96

 
8

 
—

Amortization of capitalized interest
 
402

 
440

 
438

 
483

 
729

 
240

Loan cost amortization
 
43

 
37

 
32

 
31

 
24

 
12

Earnings (Loss)
 
$
(279
)
 
$
2,345

 
$
3,917

 
$
(18,166
)
 
$
(3,553
)
 
$
1,076

FIXED CHARGES:
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense
 
$
142

 
$
207

 
$
172

 
$
322

 
$
275

 
$
186

Capitalized interest
 
976

 
815

 
604

 
410

 
242

 
97

Loan cost amortization
 
43

 
37

 
32

 
31

 
24

 
12

Fixed Charges
 
$
1,161

 
$
1,059

 
$
808

 
$
763

 
$
541

 
$
295

PREFERRED STOCK DIVIDENDS:
 
 
 
 
 
 
 
 
 
 
 
 
Preferred dividend requirements
 
$
171

 
$
171

 
$
171

 
$
171

 
$
97

 
$
39

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

 
1.61

 
1.56

 
1.30

 
1.04

 
1.00

Preferred Dividends
 
$
280

 
$
275

 
$
266

 
$
222

 
$
101

 
$
39

COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
 
$
1,441

 
$
1,334

 
$
1,074

 
$
985

 
$
642

 
$
334

RATIO OF EARNINGS TO FIXED CHARGES
 
(0.2
)
 
2.2

 
4.8

 
(23.8
)
 
(6.6
)
 
3.6

INSUFFICIENT COVERAGE
 
$
1,440

 
$
—

 
$
—

 
$
18,929

 
$
4,094

 
$
—

RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
 
(0.2
)
 
1.8

 
3.6

 
(18.4
)
 
(5.5
)
 
3.2

INSUFFICIENT COVERAGE
 
$
1,720

 
$
—

 
$
—

 
$
19,151

 
$
4,195

 
$
—

___________________________________________ 
(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 3, 2017
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 3, 2017
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, 2017 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 3, 2017
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, 2017 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 3, 2017
By:
/s/ DOMENIC J. DELL’OSSO, JR.
 
 
Domenic J. Dell’Osso, Jr.
 
 
     Executive Vice President and
     Chief Financial Officer