Chesapeake Energy 2015 Annual Report Download - page 114

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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Noncontrolling Interests
Cleveland Tonkawa Financial Transaction. We formed CHK C-T in March 2012 to continue development of a
portion of our oil and natural gas assets in our Cleveland and Tonkawa plays. In exchange for all of the common shares
of CHK C-T, we contributed to CHK C-T approximately 245,000 net acres of leasehold and the existing wells within an
area of mutual interest in the plays between the top of the Tonkawa and the top of the Big Lime formations covering
Ellis and Roger Mills counties in western Oklahoma. In March 2012, in a private placement, third-party investors
contributed $1.25 billion in cash to CHK C-T in exchange for (i) 1.25 million preferred shares, and (ii) our obligation to
deliver a 3.75% overriding royalty interest (ORRI) in the existing wells and up to 1,000 future net wells to be drilled on
the contributed play leasehold. We initially committed to drill and complete, for the benefit of CHK C-T in the area of
mutual interest, a minimum cumulative total of 300 net wells. We ultimately drilled and completed 190 net wells, and
the drilling commitment was suspended in January 2015.
During 2015, CHK C-T sold all of its oil and natural gas properties to FourPoint Energy, LLC (FourPoint) and
immediately used the consideration received, plus other cash it had on hand, to repurchase and cancel all of the
outstanding preferred shares in CHK C-T. Chesapeake is responsible for post-closing adjustments to the purchase
price and has certain indemnity obligations in connection with the sale to FourPoint. In connection with the repurchase
and cancellation of the CHK C-T preferred stock and related agreements with the CHK C-T investors, we eliminated
quarterly preferred dividend payments and all related future drilling and ORRI commitments attributable to CHK C-T.
The sale of the oil and natural gas properties was accounted for as a reduction of capitalized costs with no gain or loss
recognized.
As of December 31, 2014, $1.015 billion of noncontrolling interests on our consolidated balance sheets was
attributable to CHK C-T. For 2015, 2014 and 2013, income of $50 million, $75 million and $75 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 July 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 was 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 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. As of
December 31, 2015, we had drilled 499 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 was reduced
accordingly. We met our ORRI conveyance commitments as of December 31, 2013, 2014 and 2015.