Chesapeake Energy 2013 Annual Report Download - page 105

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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In December 2013, we terminated a drilling contract prior to the end of its term and recognized a $15 million
charge that is included in impairments of fixed assets and other in our consolidated statement of operations.
Drilling Commitments
In December 2011, as part of our Utica joint venture development agreement with Total S.A. (Total) (see Note
12), 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 July 31, 2015. Through December 31, 2013, we had spud 423
cumulative Utica wells and had met our 2012 and 2013 commitments. If we fail to meet the drilling commitment at July
31, 2015 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 the number of wells drilled in the subsequent 12-month period
represented by the shortfall versus our 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.
Property and Equipment Purchase Commitments
Much of the oilfield services and other equipment we purchase requires long production lead times. As a result,
we have outstanding orders and commitments for such equipment. As of December 31, 2013, we had $30 million of
purchase commitments related to future inventory and capital expenditures for oilfield services and other equipment.
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 12
for further discussion of our VPP transactions.
Net Acreage Maintenance Commitments
Under the terms of our joint venture agreements with Statoil, Total and Sinopec (see Note 12), 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. To date, we have satisfied our replacement commitments under the Statoil and Sinopec
agreements. We had an estimated shortfall of approximately 13,000 net acres pursuant to our net acreage maintenance
commitment with Total under the terms of our Barnett Shale joint venture agreement as of the December 31, 2012
measurement date and recorded a $26 million charge in impairments of fixed assets and other in our consolidated
statement of operations. We revised our estimate of the net acreage shortfall to be approximately 14,000 net acres as
of December 31, 2013 and recorded an additional $2 million charge in 2013. Total has disputed our estimate of the
shortfall, however, and the cash payment we ultimately make to Total could exceed amounts we have accrued.
Affiliate Commitments
Under the terms of our corporate revolving bank credit facility, certain of our subsidiaries, including our oilfield
services companies, are not guarantors of the credit facility debt. Transactions between us and our non-guarantor
subsidiaries may affect our EBITDA or indebtedness for purposes of our credit facility covenant calculations, but they
would have no effect on the consolidated financial statements because the transactions would be eliminated through
consolidation. See Note 3 for discussion of our covenant calculations.
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
rigs or utilize a specific number of its hydraulic fracturing fleets. As of December 31, 2013, we had recognized a nominal
amount for non-utilization pursuant to the agreement and eliminated its impact in consolidation.