Chesapeake Energy 2014 Annual Report Download - page 113

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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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 17, 77 and 84 qualified net
wells were added in 2014, 2013 and 2012, respectively. Through December 31, 2014, we had met all current 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 are we required to 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 the remaining ORRIs. CHK C-T retains
the right to repurchase the investors’ right to receive ORRIs in the remaining net wells at the then-current fair market
value of the 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 oil and natural gas properties. We had met our ORRI conveyance commitment
as of December 31, 2013, but we did not meet the 2014 ORRI conveyance commitment as of December 31, 2014.
As of December 31, 2014 and 2013, $1.015 billion of noncontrolling interests on our consolidated balance sheets
were attributable to CHK C-T. For 2014, 2013 and 2012, income of $75 million, $75 million and $57 million, respectively,
was attributable to the noncontrolling interests of CHK C-T.
Utica Financial Transaction. We formed CHK Utica, L.L.C. (CHK Utica) in October 2011 to develop a portion of
our Utica Shale oil and natural gas assets. 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 investors contributed $1.25 billion in cash to CHK Utica in exchange for (i) 1.25 million
preferred shares, and (ii) our obligation to deliver a 3% ORRI in 1,500 net wells to be drilled on certain of our Utica
Shale leasehold.
In 2014, we repurchased all of the outstanding preferred shares of CHK Utica from third-party preferred
shareholders for approximately $1.254 billion, or approximately $1,189 per share including accrued dividends. The
$447 million difference between the cash paid for the preferred shares and the carrying value of the noncontrolling
interest acquired is reflected in retained earnings and as a reduction to net income available to common stockholders
for purposes of our EPS computations. Pursuant to the transaction, our obligation to pay quarterly dividends to third-
party preferred shareholders was eliminated. In addition, the development agreement was terminated pursuant to the
transaction, which eliminated our obligation to drill and complete a minimum number of wells within a specified period
for the benefit of CHK Utica. Our repurchase of the outstanding preferred shares in CHK Utica did not affect our
obligation to deliver a 3% ORRI in 1,500 net wells on certain Utica Shale leasehold.
The CHK Utica investors’ right to receive, proportionately, a 3% ORRI in the first 1,500 net wells drilled on our
Utica Shale leasehold is subject to an increase to 4% 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 2023. However, in no
event are we required to deliver to investors more than a total ORRI of 3% in 1,500 net wells. If at any time we hold
fewer net acres than would enable us to drill all then-remaining net wells on 150-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 the 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 the remaining ORRIs once we have drilled a minimum of 1,300 net
wells. The obligation to deliver future ORRIs has been recorded as a liability which will be settled through the future
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 oil and natural gas
properties. Because we did not meet our ORRI commitment in 2012, the ORRI increased to 4% for wells earned in
2013, and the ultimate number of wells in which we must assign an interest will be reduced accordingly. We met the
2013 ORRI conveyance commitment as of December 31, 2013 and met the 2014 ORRI conveyance commitment as
of December 31, 2014 associated with the CHK Utica transaction.