Chesapeake Energy 2014 Annual Report Download - page 136

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
128
Glass Mountain Pipeline, LLC. In 2012, our wholly owned midstream subsidiary, Chesapeake Midstream
Development, L.L.C. (CMD), entered into an agreement with two other parties to form Glass Mountain Pipeline, LLC
to construct a 210 mile pipeline in western and north central Oklahoma in which CMD had a 50% ownership interest.
In 2012, CMD sold its interest for $99 million and recorded a gain of $62 million.
Other. In 2014, we sold an equity investment in a natural gas trading and management firm for cash proceeds
of $30 million and recorded a loss of $6 million associated with the transaction.
In 2013, we sold an equity investment for cash proceeds of $6 million and recorded a $5 million gain associated
with the transaction.
15. Variable Interest Entities
We consolidate the activities of VIEs for which we are the primary beneficiary. In order to determine whether we
own a variable interest in a VIE, we perform qualitative analysis of the entity’s design, organizational structure, primary
decision makers and relevant agreements.
Consolidated VIE
Chesapeake Granite Wash Trust. For a discussion of the formation, operations and presentation of the Trust,
see Noncontrolling Interests in Note 8. The Trust is considered a VIE due to the lack of voting or similar decision-
making rights by its equity holders regarding activities that have a significant effect on the economic success of the
Trust. Our ownership in the Trust and our obligations under the development agreement and related drilling support
lien constitute variable interests. We have determined that we are the primary beneficiary of the Trust because (i) we
have the power to direct the activities that most significantly impact the economic performance of the Trust via our
obligations to perform under the development agreement, and (ii) as a result of the subordination and incentive
thresholds applicable to the subordinated units we hold in the Trust, we have the obligation to absorb losses and the
right to receive residual returns that could potentially be significant to the Trust. As a result, we consolidate the Trust
in our financial statements, and the common units of the Trust owned by third parties are reflected as a noncontrolling
interest.
The Trust is a consolidated entity whose legal existence is separate from Chesapeake and our other consolidated
subsidiaries, and the Trust is not a guarantor of any of Chesapeake’s debt. The creditors or beneficial holders of the
Trust have no recourse to the general credit of Chesapeake; however, we have certain obligations to the Trust through
the development agreement that are secured by a drilling support lien on our retained interest in the development wells
up to a specified maximum amount recoverable by the Trust, which could result in the Trust acquiring all or a portion
of our retained interest in the undeveloped portion of an area of mutual interest, if we do not meet our drilling commitment.
In consolidation, as of December 31, 2014, $1 million of cash and cash equivalents, $16 million of short-term derivative
assets, $488 million of proved oil and natural gas properties, $251 million of accumulated depreciation, depletion and
amortization and $15 million of other current liabilities were attributable to the Trust. We have presented parenthetically
on the face of the consolidated balance sheets the assets of the Trust that can be used only to settle obligations of the
Trust and the liabilities of the Trust for which creditors do not have recourse to the general credit of Chesapeake.
Unconsolidated VIE
Mineral Acquisition Company I, L.P. In 2012, MAC-LP, L.L.C., a wholly owned non-guarantor unrestricted
subsidiary of Chesapeake, entered into a partnership agreement with KKR Royalty Aggregator LLC (KKR) to form
Mineral Acquisition Company I, L.P. The purpose of the partnership is to acquire mineral interests, or royalty interests
carved out of mineral interests, in oil and natural gas basins in the continental United States. We are committed to
acquire for our own account (outside the partnership) 10% of any acquisition agreed upon by the partnership up to a
maximum of $25 million, and the partnership will acquire the remaining 90% up to a maximum of $225 million, funded
entirely by KKR, making KKR the sole equity investor. We have significant influence over the decisions made by the
partnership, as we hold two of five seats on the board of directors. We will receive proportionate distributions from the
partnership of any cash received from royalties in excess of expenses paid, ranging from 7% to 22.5%. The partnership
is considered a VIE because KKR’s control over the partnership is disproportionate to its economic interest. This VIE
remains unconsolidated as the power to direct the activities of the partnership is shared between the Company and
KKR. We are using the equity method to account for this investment. The carrying value of our investment was $9
million as of December 31, 2014.