Chesapeake Energy 2013 Annual Report Download - page 116

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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As of December 31, 2013 and 2012, $807 million and $950 million of noncontrolling interests on our consolidated
balance sheets, respectively, were attributable to CHK Utica. For 2013 and 2012, income of approximately $79 million
and $88 million, respectively, was attributable to the noncontrolling interests of CHK Utica. In 2013, we purchased
approximately 190,000 preferred shares of CHK Utica from existing investors for approximately $212 million, or
approximately $1,115 per share plus accrued dividends, reducing the amount of outstanding preferred shares held by
third-party investors by approximately 15%. The difference between the cash paid for the preferred shares and the
carrying value of the noncontrolling interest acquired of $69 million is reflected in retained earnings and as a reduction
to net income available to common stockholders for purposes of our EPS computations.
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
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, 2013 and 2012,
we had drilled or caused to be drilled approximately 82 and 55 development wells, respectively, as calculated under
the development agreement, and the maximum amount recoverable under the drilling support lien was approximately
$79 million and $140 million, respectively.
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. As detailed in the table below, the distribution made with respect to the subordinated units to Chesapeake
were either reduced or eliminated for each of the most recent six quarters of distributions paid. 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.