Chesapeake Energy 2012 Annual Report Download - page 138

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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are obligated to drill, or cause to be drilled, the development wells at our own expense prior to June 30, 2016, and the
Trust will not be responsible for any costs related to the drilling of the development wells or any other operating or
capital costs of the Trust properties. In addition, we granted to the Trust a lien on our remaining interests in the
undeveloped properties that are subject to the development agreement in order to secure our drilling obligation to the
Trust, although the maximum amount that may be recovered by the Trust under such lien could not exceed $263 million
initially and is proportionately reduced as we fulfill our drilling obligation over time. As of December 31, 2012, we had
drilled or caused to be drilled 55 development wells, as calculated under the development agreement, and the maximum
amount recoverable under the drilling support lien was approximately $140 million.
The subordinated units we hold in the Trust are entitled to receive pro rata distributions from the Trust each quarter
if and to the extent there is sufficient cash to provide a cash distribution on the common units that is not less than the
applicable subordination threshold for such quarter. If there is not sufficient cash to fund such a distribution on all of
the Trust units, the distribution to be made with respect to the subordinated units will be reduced or eliminated for such
quarter in order to make a distribution, to the extent possible, of up to the subordination threshold amount on the
common units. In exchange for agreeing to subordinate a portion of our Trust units, and in order to provide additional
financial incentive to us to satisfy our drilling obligation and perform operations on the underlying properties in an
efficient and cost-effective manner, Chesapeake is entitled to receive incentive distributions equal to 50% of the amount
by which the cash available for distribution on the Trust units in any quarter exceeds the applicable incentive threshold
for such quarter. The remaining 50% of cash available for distribution in excess of the applicable incentive threshold
will be paid to Trust unitholders, including Chesapeake, on a pro rata basis. At the end of the fourth full calendar quarter
following our satisfaction of our drilling obligation with respect to the development wells, the subordinated units will
automatically convert into common units on a one-for-one basis and our right to receive incentive distributions will
terminate. After such time, the common units will no longer have the protection of the subordination threshold, and all
Trust unitholders will share in the Trust’s distributions on a pro rata basis.
On November 7, 2012, the Trust declared a cash distribution of $0.63 per common unit and $0.22 per subordinated
unit for the three-month period ended September 30, 2012 and covering production for the period from June 1, 2012
to August 31, 2012. The distribution paid to third-party unitholders on November 29, 2012 was approximately $15
million.
On August 10, 2012, the Trust declared a cash distribution of $0.61 per common unit and $0.48 per subordinated
unit for the three-month period ended June 30, 2012 and covering production for the period from March 1, 2012 to
May 31, 2012. The distribution paid to third-party unitholders on August 30, 2012 was approximately $14 million.
On May 10, 2012, the Trust declared a cash distribution of $0.66 per unit for the three-month period ended March
31, 2012 and covering production for the period from December 1, 2011 to February 29, 2012. The distribution paid
to third-party unitholders on May 31, 2012 was approximately $15 million.
On February 8, 2012, the Trust declared a cash distribution of $0.73 per unit for the three-month period ended
December 31, 2011 and covering production for the period from September 1, 2011 to November 30, 2011. The
distribution paid to third-party unitholders on March 1, 2012 was approximately $17 million.
We have determined that the Trust constitutes a VIE and that Chesapeake is the primary beneficiary. As a result,
the Trust is included in our consolidated financial statements. As of December 31, 2012 and 2011, $356 million and
$381 million, respectively, were recorded as noncontrolling interests on our consolidated balance sheets representing
the public unitholders’ investment in common units of the Trust. For 2012 and 2011, approximately $35 million and $5
million of income was attributable to the Trust’s noncontrolling interests in our consolidated statement of operations.
See Note 13 for further discussion of VIEs.
Cardinal Gas Services, L.L.C. Cardinal Gas Services, L.L.C. (Cardinal), an unrestricted, non-guarantor
consolidated subsidiary, was formed in December 2011 to acquire, develop, operate and own midstream assets in the
Utica Shale. In exchange for the contribution of approximately $14 million in midstream assets to Cardinal, we received
66% of the outstanding membership units of Cardinal. In exchange for approximately $5 million, Total E&P USA, Inc.
(Total) received 25% of the outstanding membership units and in exchange for approximately $2 million, CGAS
Properties, L.P. (CGAS), an affiliate of EnerVest, Ltd., received 9% of the membership units. Each member was
responsible for its proportionate share of capital costs. We determined that Cardinal constituted a VIE and that
Chesapeake was the primary beneficiary. As a result, Cardinal was included in our consolidated financial statements
until December 2012, and the contributions from Total and CGAS were recorded as noncontrolling interests. In
December 2012, we sold our interest in this consolidated entity in connection with the sale of CMO. See Note 11. As