Chesapeake Energy 2013 Annual Report Download - page 114

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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Dividends on the preferred shares are payable on a quarterly basis at a rate of 6% 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. As the managing member of CHK C-T, we may, at our sole
discretion and election at any time after March 31, 2014, distribute certain excess cash of CHK C-T, as determined in
accordance with the CHK C-T LLC Agreement. Any such optional distribution of excess cash is allocated 75% to the
preferred shares (which is applied toward redemption of the preferred shares) and 25% to the common shares unless
we have not met our drilling commitment at such time, 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 C-T LLC Agreement, cause CHK C-T to redeem all or a portion of the CHK C-T preferred
shares for cash. The preferred shares may be redeemed at a valuation equal to the greater of a 9% internal rate of
return or a return on investment of 1.35x, in each case inclusive of dividends paid through redemption at the rate of
6% per annum and optional distributions made through the applicable redemption date. In the event that redemption
does not occur on or prior to March 31, 2019, the optional redemption valuation will increase to provide a 15% internal
rate of return to the investors. The preferred shares can be redeemed on a pro-rata basis in accordance with the then-
applicable redemption valuation formula. As of December 31, 2013 and 2012, the redemption price and the liquidation
preference were each approximately $1,245 and $1,305, respectively, per preferred share.
We have committed to drill and complete, for the benefit of CHK C-T in the area of mutual interest, a minimum
of 37.5 net wells per six-month period through 2013, inclusive of wells drilled in 2012, and 25 net wells per six-month
period in 2014 through 2016, up to a minimum cumulative total of 300 net wells. If we fail to meet the then-current
cumulative drilling commitment in any six-month period, any optional cash distributions would be distributed 100% to
the investors. If we fail to meet the then-current cumulative drilling commitment in two consecutive six-month periods,
the then-applicable internal rate of return to investors at redemption would increase by 3% per annum. In addition, if
we fail to meet the then-current cumulative drilling commitment in four consecutive six-month periods, the then-
applicable internal rate of return to investors at redemption would be increased by an additional 3% per annum. Any
such increase in the internal rate of return would be effective only until the end of the first succeeding six-month period
in which we have met our then-current cumulative drilling commitment. CHK C-T is responsible for all capital and
operating costs of the wells drilled for the benefit of the entity. Under the development agreement, approximately 75
and 85 qualified net wells were added in 2013 and 2012, respectively. Through December 31, 2013, we had met the
drilling commitments associated with the CHK C-T transaction.
The CHK C-T investors’ right to receive, proportionately, a 3.75% ORRI in the contributed wells and up to 1,000
future net wells on our contributed leasehold is subject to an increase to 5% on net wells earned in any year following
a year in which we do not meet our net well commitment under the ORRI obligation, which runs from 2012 through
the first quarter of 2025. However, in no event would we deliver to investors more than a total ORRI of 3.75% in existing
wells and 1,000 future net wells. If at any time CHK C-T holds fewer net acres than would enable us to drill all then-
remaining net wells on 160-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 ORRIs. 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 ORRIs once we have drilled a minimum of 867 net wells. The obligation to deliver future ORRIs has
been recorded as a liability which will be settled through the 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. Under the ORRI obligation, we delivered an
ORRI in approximately 84 net wells in 2013 and 77 net wells in 2012. While operations began on April 1, 2012, all
wells completed since January 1, 2012 are credited to the ORRI obligation of 1,000 future net wells. Through
December 31, 2013, we were on target to meet the ORRI conveyance commitments associated with the CHK C-T
transaction.
As of December 31, 2013 and 2012, $1.015 billion of noncontrolling interests on our consolidated balance sheets
was attributable to CHK C-T. For 2013 and 2012, income of $75 million and $57 million, respectively, was attributable
to the noncontrolling interests of CHK C-T.
Utica Financial Transaction. We formed CHK Utica in October 2011 to develop a portion of our Utica Shale natural
gas and oil assets. CHK Utica is an unrestricted subsidiary under our corporate credit facility agreement and is not a
guarantor of, or otherwise liable for, any of our indebtedness or other liabilities, including indebtedness under our
indentures. In exchange for all of the common shares of CHK Utica, we contributed to CHK Utica approximately 700,000
net acres of leasehold and the existing wells within an area of mutual interest in the Utica Shale play covering 13
counties located primarily in eastern Ohio. During November and December 2011, in private placements, third-party