Chesapeake Energy 2015 Annual Report Download - page 115

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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In 2014 and 2013, income of approximately $43 million and $79 million, respectively, was attributable to the
noncontrolling interests of CHK Utica.
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 Trust’s initial public offering, 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 then-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 and complete, or cause to be drilled and completed, the development wells at our own expense
prior to June 30, 2016, and the Trust is not responsible for any costs related to the drilling and completion 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 recoverable by the Trust under the lien
was limited to $263 million initially and is proportionately reduced as we fulfill our drilling obligation over time. As of
December 31, 2015, we had drilled and completed or caused to be drilled and completed approximately 106
development wells, as calculated under the development agreement, and the maximum amount recoverable under
the drilling support lien was approximately $27 million.
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 the quarter. If there is not sufficient cash to fund a distribution on all of the Trust
units, the distribution to be made with respect to the subordinated units is reduced or eliminated for the quarter in order
to make a distribution, to the extent possible, of up to the subordination threshold amount on the common units. The
distribution made with respect to the subordinated units to Chesapeake was either reduced or eliminated for each of
the most recent 14 quarters. 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 the quarter. The remaining 50% of cash available for distribution in excess of the applicable incentive
threshold is to be paid to Trust unitholders, including Chesapeake, on a pro rata basis. Through December 31, 2015,
no incentive distributions had been made. 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 this 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.