Chesapeake Energy 2012 Annual Report Download - page 137

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
127
Dividends on the preferred shares are payable on a quarterly basis at a rate of 7% per annum based on $1,000
per share. This dividend rate is subject to increase in limited circumstances in the event that, and only for so long as,
any dividend amount is not paid in full for any quarter. If we fail to meet the then-current drilling commitment in any
year, we must pay CHK Utica $5 million for each well we are short of such drilling commitment. As the managing
member of CHK Utica, we may, at our sole discretion and election at any time after December 31, 2013, distribute
certain excess cash of CHK Utica, as determined in accordance with the CHK Utica LLC Agreement. Any such optional
distribution of excess cash is allocated 70% to the preferred shares (which is applied toward redemption of the preferred
shares) and 30% to the common shares unless we have not met our drilling commitment during a liquidated damages
period, in which case an optional distribution would be allocated 100% to the preferred shares (and applied toward
redemption thereof). We may also, at our sole discretion and election, in accordance with the CHK Utica LLC Agreement,
cause CHK Utica to redeem the CHK Utica preferred shares for cash, in whole or in part. The preferred shares will be
redeemed at a valuation equal to the greater of a 10% internal rate of return or a return on investment of 1.4x, in each
case inclusive of dividends paid at the rate of 7% per annum and optional distributions made through the applicable
redemption date. In the event that redemption does not occur on or prior to October 31, 2018, the optional redemption
valuation will increase to the greater of a 17.5% internal rate of return or a return on investment of 2.0x. The preferred
shares are redeemed on a pro-rata basis in accordance with the then-applicable redemption valuation formula. As of
December 31, 2012, the redemption price and the liquidation preference were each approximately $1,322 per preferred
share.
We have committed to drill, for the benefit of CHK Utica in the area of mutual interest, a minimum of 50 net wells
per year from 2012 through 2016, up to a minimum cumulative total of 250 net wells. CHK Utica is responsible for all
capital and operating costs of the wells drilled for the benefit of the entity. CHK Utica also receives its proportionate
share of the benefit of the drilling carry associated with our joint venture with Total in the Utica Shale. See Note 11 for
further discussion of the joint venture.
The CHK Utica investors’ right to receive, proportionately, a 3% ORRI in the first 1,500 net wells drilled on our
Utica Shale leasehold is subject to an increase to 4% on net wells drilled in any year following a year in which we do
not meet our commitment to drill the wells subject to the ORRI obligation, which runs from 2012 through 2023. However,
in no event would we deliver to investors more than a total ORRI of 3% in 1,500 net wells. If at any time we hold fewer
net acres than would enable us to drill all then-remaining net wells on 150-acre spacing, the investors have the right
to require us to repurchase their right to receive ORRIs in the remaining net wells at the then-current fair market value
of such remaining net wells. We retain the right to repurchase the investors’ right to receive ORRIs in the remaining
net wells at the then-current fair market value of such remaining net wells once we have drilled a minimum of 1,300
net wells. The obligation to deliver future ORRIs has been recorded as a liability which will be settled through the future
conveyance of the underlying ORRIs to the investors on a net-well basis, at which time the associated liability will be
reversed and the sale of the ORRIs reflected as an adjustment to the capitalized cost of our natural gas and oil
properties.
As of December 31, 2012 and 2011, $950 million was recorded as noncontrolling interests on our consolidated
balance sheets representing the third-party investments in CHK Utica. For 2012 and 2011, income of approximately
$88 million and $10 million was attributable to the noncontrolling interests of CHK Utica. Under the development
agreement, approximately 66 qualified net wells were added in 2012. Under the ORRI obligation, we delivered an
ORRI in approximately 34 new net wells. For 2012, we met our drilling commitment associated with the CHK Utica
transaction, but did not meet our ORRI commitment. The ORRI will increase to 4% for wells drilled in 2013, and the
ultimate number of wells in which we must assign an interest will be reduced accordingly.
Chesapeake Granite Wash Trust. In November 2011, Chesapeake Granite Wash Trust (the Trust) sold 23,000,000
common units representing beneficial interests in the Trust at a price of $19.00 per common unit in its initial public
offering. The common units are listed on the New York Stock Exchange and trade under the symbol “CHKR”. We own
12,062,500 common units and 11,687,500 subordinated units, which in the aggregate represent an approximate 51%
beneficial interest in the Trust. The Trust has a total of 46,750,000 units outstanding.
In connection with the initial public offering of the Trust, we conveyed royalty interests to the Trust that entitle the
Trust to receive (i) 90% of the proceeds (after deducting certain post-production expenses and any applicable taxes)
that we receive from the production of hydrocarbons from 69 producing wells, and, (ii) 50% of the proceeds (after
deducting certain post-production expenses and any applicable taxes) in 118 development wells that have been or will
be drilled on approximately 45,400 gross acres (29,000 net acres) in the Colony Granite Wash play in Washita County
in the Anadarko Basin of western Oklahoma. Pursuant to the terms of a development agreement with the Trust, we