Chesapeake Energy 2013 Annual Report Download - page 130

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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(b) Excludes closing and post-closing adjustments.
(c) As of December 31, 2013.
(d) Excludes $71 million of net proceeds (or 7% of the total transaction) expected to be received pursuant to certain
post-closing adjustments and approximately $90 million received at closing for closing adjustments.
(e) The Utica drilling carries cover 60% of our drilling and completion costs for Utica wells drilled and must be used
by December 2018. We expect to fully utilize these drilling carry commitments prior to expiration. See Note 4 for
further discussion of the Utica drilling carries.
(f) The Niobrara drilling carries cover 67% of our drilling and completion costs for Niobrara wells drilled and must be
used by December 2014. We expect to fully utilize these drilling carry commitments prior to expiration.
During 2013, 2012 and 2011, our drilling and completion costs included the benefit of approximately $884 million,
$784 million and $2.570 billion, respectively, in drilling and completion carries paid by our joint venture partners.
During 2013, 2012 and 2011, we sold interests in additional leasehold we acquired in the Marcellus, Barnett,
Utica, Haynesville, Eagle Ford, Mid-Continent and Niobrara Shale plays to our joint venture partners for approximately
$58 million, $272 million and $511 million, respectively.
Volumetric Production Payments
From time to time, we have sold certain of our producing assets which are located in more mature producing
regions through the sale of VPPs. A VPP is a limited-term overriding royalty interest in natural gas and oil reserves
that (i) entitles the purchaser to receive scheduled production volumes over a period of time from specific lease interests;
(ii) is free and clear of all associated future production costs and capital expenditures; (iii) is nonrecourse to the seller
(i.e., the purchaser’s only recourse is to the reserves acquired); (iv) transfers title of the reserves to the purchaser; and
(v) allows the seller to retain all production beyond the specified volumes, if any, after the scheduled production volumes
have been delivered. For all of our VPP transactions, we have novated hedges to each of the respective VPP buyers
and such hedges covered all VPP volumes sold. If contractually scheduled volumes exceed the actual volumes produced
from the VPP wellbores that are attributable to the ORRI conveyed, either the shortfall will be made up from future
production from these wellbores (or, at our option, from our retained interest in the wellbores) through an adjustment
mechanism or the initial term of the VPP will be extended until all scheduled volumes, to the extent produced, are
delivered from the VPP wellbores to the VPP buyer. We retain drilling rights on the properties below currently producing
intervals and outside of producing wellbores.
As the operator of the properties from which the VPP volumes have been sold, we bear the cost of producing
the reserves attributable to such interests, which we include as a component of production expenses and production
taxes in our consolidated statements of operations in the periods such costs are incurred. As with all non-expense-
bearing royalty interests, volumes conveyed in a VPP transaction are excluded from our estimated proved reserves;
however, the estimated production expenses and taxes associated with VPP volumes expected to be delivered in
future periods are included as a reduction of the future net cash flows attributable to our proved reserves for purposes
of determining our full cost ceiling test for impairment purposes and in determining our standardized measure. Pursuant
to SEC guidelines, the estimates used for purposes of determining the cost center ceiling and the standardized measure
are based on current costs. Our commitment to bear the costs on any future production of VPP volumes is not reflected
as a liability on our balance sheet. The costs that will apply in the future will depend on the actual production volumes
as well as the production costs and taxes in effect during the periods in which such production actually occurs, which
could differ materially from our current and historical costs, and production may not occur at the times or in the quantities
projected, or at all.