Chesapeake Energy 2012 Annual Report Download - page 123

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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Drilling Commitments
In December 2011, as part of our Utica joint venture development agreement with Total S.A. (Total) (see Note
11), we committed to spud no less than 90 cumulative Utica wells by December 31, 2012, 270 cumulative wells by
December 31, 2013 and 540 cumulative wells by December 31, 2014. Through December 31, 2012, we had spud 143
cumulative Utica wells and met our 2012 commitment. If we fail to meet the drilling commitment at any such year end
for any reason other than a force majeure event, the drilling carry percentage used to determine our promoted well
reimbursement will be reduced from 60% to 45% for a number of wells drilled in the following calendar year equal to
the number of wells we were short the drilling commitment. As such, any reduction would only affect the timing of the
receipt of the drilling carry but not the total drilling carry to be received.
We have also committed to drill wells in conjunction with our CHK Utica and CHK C-T financial transactions and
in conjunction with the formation of the Chesapeake Granite Wash Trust. See Note 8 for discussion of these transactions
and commitments.
In conjunction with the acceleration in October 2011 of the remaining drilling and completion carry owed to us by
Total in our Barnett Shale joint venture, we agreed to maintain our operated rig count at no less than 12 rigs in the
Barnett Shale through December 31, 2012. In January 2012, Chesapeake and Total agreed to reduce the minimum
rig count from 12 to six rigs. In May 2012, Chesapeake and Total agreed to further reduce the minimum rig count from
six to two rigs. We met this operated rig count commitment through December 31, 2012.
Property and Equipment Purchase Commitments
Much of the oilfield services equipment we purchase requires long production lead times. As a result, we have
outstanding orders and commitments for such equipment. As of December 31, 2012, we had $118 million of purchase
obligations related to future capital expenditures for drilling rigs and related equipment and hydraulic fracturing
equipment in 2013.
Natural Gas and Liquids Purchase Commitments
We regularly commit to purchase natural gas and liquids from other owners in the properties we operate, including
owners associated with our VPP transactions. Production purchased under these arrangements is based on market
prices at the time of production, and the purchased natural gas and liquids are resold at market prices. See Note 11
for further discussion of our VPP transactions.
Net Acreage Maintenance Commitments
Under the terms of our joint venture agreements with Statoil and Total (see Note 11), we are required to extend,
renew or replace certain expiring joint leasehold, at our cost, to ensure that the net acreage is maintained in certain
designated areas. We did not meet the net acreage maintenance commitment with Total under the terms of our Barnett
Shale joint venture agreement as of the December 31, 2012 measurement date. We had a net acreage shortfall of
approximately 13,000 net acres and will be required to make a cash payment of approximately $26 million to Total in
the first half of 2013. The charge was recorded in impairments of fixed assets and other on the consolidated statement
of operations. See Note 14 for further discussion of impairments.
Affiliate Commitments
Under our corporate revolving bank credit facility, certain of our subsidiaries, including our oilfield services
companies, are not guarantors of the credit facility debt. Certain agreements between us and our subsidiaries, as
described below, could affect the individual credit facility covenant calculations, but they would have no effect on the
consolidated financial statements because the subsidiaries are wholly owned and consolidated. A payment from us to
a non-guarantor subsidiary could affect our guarantor EBITDA, resulting in an impact to our corporate credit facility
covenant compliance calculation. See Note 3 for discussion of our covenant calculation.
In October 2011, we entered into a services agreement with our wholly owned subsidiary, COO, under which we
guarantee the utilization of a portion of COO's drilling rig and hydraulic fracturing fleets during the term of the agreement.
Through October 2016, we are subject to monetary penalties if we do not operate a specific number of COO's drilling
fleet or utilize a specific number of their hydraulic fracturing fleets. No payments were made pursuant to the services
agreement in 2012 or 2011. Any payments made in future periods will eliminate in consolidation.