Chesapeake Energy 2012 Annual Report Download - page 124

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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Other Commitments
In April 2011, we entered into a master frac service agreement with our equity affiliate, FTS International, Inc.
(FTS), which expires on December 31, 2014. Pursuant to this agreement, we are committed to enter into a
predetermined number of backstop contracts, providing at least a 10% gross margin to FTS, if utilization of FTS fleets
falls below a certain level. To date, we have not entered into any backstop contracts and, since we use fracing services
continuously, we do not anticipate any material payments under this commitment.
In July 2011, we agreed to invest $150 million in newly issued convertible promissory notes of Clean Energy
Fuels Corp. (Nasdaq:CLNE), based in Seal Beach, California. The investment is being made in three equal $50 million
promissory notes, the first two of which were issued in July 2011 and July 2012, with the remaining note scheduled to
be issued in June 2013. See Note 12 for further discussion of this investment.
In July 2011, we agreed to invest $155 million in preferred equity securities of Sundrop Fuels, Inc., a privately
held cellulosic biofuels company based in Longmont, Colorado. As of December 31, 2012, we had funded $115 million
of our commitment. The remaining tranches of preferred equity investment will be scheduled around certain funding
and operational milestones that are expected to be reached by July 2013. See Note 12 for further discussion of this
investment.
In December 2011, we sold Appalachia Midstream Services, L.L.C., a wholly owned subsidiary of our wholly
owned subsidiary, Chesapeake Midstream Development, L.L.C. (CMD), to Chesapeake Midstream Partners, L.P. (now
named Access Midstream Partners, L.P. (NYSE:ACMP)) for total consideration of $884 million. In addition, CMD has
committed to pay ACMP for any quarterly shortfall between the actual adjusted EBITDA from the assets sold and
specified quarterly targets, which total $100 million in 2012 and $150 million in 2013. We recorded this guarantee at
an estimated fair value of $27 million at the time of the sale. No payment was required for 2012, and we recognized
$8 million of gain associated with the release of the liability related to the quarterly targets achieved in 2012. The
remaining $19 million fair value is included in other current liabilities on our consolidated balance sheet as of
December 31, 2012. We will release this liability during 2013. To the extent CMD is required to make payments under
the guarantee, we will record the differences between the liability and the associated payments in earnings.
As part of our normal course of business, we enter into various agreements providing, or otherwise arranging,
financial or performance assurances to third parties on behalf of our wholly owned guarantor subsidiaries. These
agreements may include future payment obligations or commitments regarding operational performance that effectively
guarantee our subsidiaries’ future performance.
In connection with divestitures, our purchase and sale agreements generally provide indemnification to the
counterparty for liabilities incurred as a result of a breach of a representation or warranty by the indemnifying party or
in regards to perfecting title to property. These indemnifications generally have a discrete term and are intended to
protect the parties against risks that are difficult to predict or cannot be quantified at the time of the consummation of
a particular transaction.
Certain of our natural gas and oil properties are burdened by non-operating interests such as royalty and overriding
royalty interests, including overriding royalty interests sold through our VPP transactions. As the holder of the working
interest from which such interests have been created, we have the responsibility to bear the cost of developing and
producing the reserves attributable to such interests. See Note 11 for further discussion of our VPP transactions.
5. Income Taxes
The components of the income tax provision (benefit) for each of the periods presented below are as follows:
Years Ended December 31,
2012 2011 2010
($ in millions)
Current ..................................................................................................... $ 47 $ 13 $ —
Deferred ................................................................................................... (427) 1,110 1,110
Total ................................................................................................... $ (380) $ 1,123 $ 1,110